Entrepreneurs’ Relief

Entrepreneurs’ relief explained (ER)

There are many entrepreneurs who wish to sell or give away their business due to several reasons. Some simply do not have time to manage their well-established business while others are not satisfied with their company or business. Irrespective of what the reason may be, entrepreneurs may gain benefits by selling or giving away their business at a reduced tax rate. This benefit is called entrepreneurs’ relief.

Entrepreneurs may sell or give away their business and claim entrepreneurs’ relief. Entrepreneurs’ relief is available for up to £10,000,000 lifetime gains. This certain amount of money is called entrepreneurs’ relief for a reason. Entrepreneurs gain tax relief at a reduced rate of 10%.

ER is available to:

Entrepreneurs’ relief is available to sole traders or partners selling or giving away whole or a certain part of their business. It is also available to company directors and employees having 5% or more shareholding.

Formulation of Entrepreneurs’ Relief

The need of entrepreneurs’ relief was felt long before when many entrepreneurs started to feel the need to sell their business or give away their business. There are many entrepreneurs who wish to sell whole or a part of their company and gain maximum benefit from it.

Increase in Entrepreneurs’ Relief since 2008

Entrepreneurs’ relief reduced the amount of Capital Gains Tax paid on business assets on or after April 2008. So the entrepreneurs’ relief began in the year 2008. Today, in the United Kingdom entrepreneurs selling or giving away their business can obtain entrepreneurs’ relief which is an allowance of £10,000,000. However, this is the modern day amount. During and after the year 2008 there have been several changes in the amount.

  • In March 2010, the entrepreneurs’ relief was up to £2 million.
  • Three months later, it was raised to £5 million.
  • In March 2011, the budget was then raised to £10 million.

Conditions and requirements for Entrepreneurs’ Relief

Entrepreneur’s relief may be considered as one of the most attractive tax benefits any entrepreneur may obtain. By taking appropriate steps, entrepreneurs may gain maximum benefit from entrepreneurs’ relief. There are some measures that need to be taken care of to gain maximum benefit from entrepreneurs’ relief. If the requirements for availing entrepreneurs’ relief are fulfilled appropriately, then any entrepreneur selling or giving away their business may gain a lot of benefits and the entrepreneurs’ relief may prove to be quite useful.

  • The first and the most important thing to keep in mind is that all the conditions for entrepreneur’s relief must be met for at least 12 months. This means that any entrepreneur claiming entrepreneurs’’ relief must keep the business appropriate for the relief at all times.
  • Today, the limit of entrepreneurs’ relief is £10 million per person. It is a considerable sum and any entrepreneur selling or giving away their business can be entitled to have this money.
  • Any start-up business that is unhappy or unsatisfied with the outcome can gain benefit from the entrepreneurs’ relief. By earning this amount of money, any entrepreneur may gain insight and acquire resources to start from scratch.

Since 2008, when entrepreneurs’ relief was first introduced several entrepreneurs have gained benefit from entrepreneurs’ relief.

Recent changes in Entrepreneurs’ Relief

In the past couple of years, laws and policies concerning entrepreneurs’ relief have been significantly modified, as a consequence of the UK Government’s initiative and attempts to rectify the loopholes in the system. These changes are mainly related to capital gains tax.

One of the major concerns that the UK Government has been trying to resolve is the establishment of a workable policy and machinery to provide greater tax relief on an individual’s business assets than that on his personal or investment assets. The introduction of the policy that led to the reduction and elimination of tax payments in direct proportion to the period for which the assets are being held is one of the government’s attempts to extend increased support towards entrepreneurs’ relief.

Capital gains tax

In addition to the previously stated initiative, the government also introduced a policy of reduced capital gains tax rate on all gains. Under this policy, the capital gains tax, as an attempt to facilitate entrepreneurs’ relief, was decreased to a rate of 18%, on all gains acquired through the sale of a business entity.

However, capital gains tax, as an integral part of entrepreneurs’ relief policy, by the government has been subjected to further alteration. The government has applied changes to the payment of capital gains tax, mainly on the basis of higher rate threshold defined for capital gains and standard rate band. Entrepreneurs whose capital gains exceeded the higher rate thresholds were required to pay a capital gains tax at a rate of 28%, while those whose capital gains were within the stated limits of standard rate band were liable to make a capital gains tax payment at a rate of 18%.

These initiative, concerning the reduction and tapering of capital gains tax are primarily focused on encouraging entrepreneurial initiative and ensuring the prospective entrepreneurs do not feel reluctant to lay down the foundation of a new business setup, as a result of their concerns surrounding the payment of a considerable amount on account of capital gains tax, if ever in the future a business needs to be sold. It is believed that through facilitating entrepreneurs, entrepreneurial culture is to be given a boost which will eventually contribute towards the creation of more job opportunities and acceleration of economic growth.

As the significance of entrepreneurs’ relief for supporting economic growth has been widely acknowledged, the government has taken the initiative to provide further support to entrepreneurs under this policy. The rate of capital gains tax has been reduced to 10%, for lifetime capital gains that are within the limit of £5 million. This modification in the policy has particularly benefitted established entrepreneurs, who now wish to explore new pastures or are thinking about retiring.

Challenges faced while availing Entrepreneurs’ Relief

The recent changes concerning entrepreneurs’ relief though have largely benefitted the majority, but there are some sections which may suffer as a consequence of newly introduced changes.

Sale of loan notes

The first major impact of these changes concerns the eventual CGT position of loan note holders. Those entrepreneurs, who might have exchanged their shares that qualified for entrepreneurs’ relief, for business loans, are advised to re-examine their CGT positions at the eventual sale of their loan notes. There are chances that if the loan note holders proceed to sell these possessions, they may be liable to pay CGT at an increased rate, rather than the expected rate of 10%.

Qualification criteria

Also, with the recent development concerning the entrepreneurs’ relief policy and its increasing popularity, it is expected that HMRC might introduce some modifications in the policy. It is believed that these changed are mainly to be concerned with the qualification criteria for entrepreneurs’ relief. Hence, under the changing circumstances, entrepreneurs need to be wary and aware of their statuses for qualifying for entrepreneurs ‘relief.

Impact on shareholders

Since entrepreneurs’ relief policy has also been subjected to changes concerning the qualification of shareholders, shareholders may find themselves surrounded in ambiguity, with respect to their qualification for availing the facilities offered through entrepreneurs’ relief. To be sure of their current position, shareholders today need to study and understand all the recent changes incorporated into the entrepreneurs’ relief policy.

Partnerships

Perhaps, the impacts of the recent changes in the entrepreneurs’ relief policy are to be most deeply felt by sole traders and those entrepreneurs who are working in partnerships. The recent changes are to render significant negative impacts on the sale of shared business assets, which may be proposed to be sold separately.

Structural shortcomings

Furthermore, questions are being raised ion the structural development of entrepreneurs’ relief policy by various experts. Many have pointed towards the need to modify the structure of the policy to ensure that the extension of entrepreneurs’ relief support is extended to individuals who have owned considerable shares in business but fail to qualify for entrepreneurs’ relief due to unfulfilled technical requirements. The major issue in this area is associated with the requirement for entrepreneurs to own business assets for a prescribed period of time in order to qualify to be facilitated through entrepreneurs’ relief.

Record-keeping requirements under GDPR

GDPR is now in full effect and it contains explicit rules about how you process and secure data. Diana Bruce of the CIPP explains the ins-and-outs.

On 23 May 2018 the General Data Protection Regulation (GDPR) was effectively integrated into the new Data Protection Act (DPA) 2018. There were significant changes within GDPR which moved the emphasis away from the “best practice” approach of DPA 1988 to a “requirements” approach under GDPR. The documentation of processing activities is a new requirement under GDPR.

GDPR contains explicit provisions about documenting your processing activities. You must maintain records on several things such as processing purposes, data sharing and retention. You may be required to make the records available on request to the Information Commissioner’s Office (ICO) or other appropriate authority for the purposes of an investigation.

The record-keeping obligation applies to both controllers and processors employing 250 people or more. Processing activities of internal records must be maintained and the following information as a minimum must be recorded:

  • Name and details of the organisation (and where applicable, of other controllers and the data protection officer)

  • Purpose(s) of the processing

  • Description of the categories of individuals

  • Description of the categories of personal data

  • Categories of recipients of personal data

  • Details of transfers to third countries or international organisations including documentation of the transfer mechanism safeguards in place

  • Retention schedules

  • Description of technical and organisational security measures

There is a limited exemption for small and medium-sized organisations so if you have fewer than 250 employees, you only need to document processing activities that:

  • Are not occasional

  • Could result in a risk to the rights and freedoms of individuals

  • Involve the processing of special categories of data or criminal conviction and offence data

Even if you are not obliged to keep records, doing so can only increase the effectiveness of your GDPR compliance processes.

All organisations have to provide comprehensive, clear and transparent data privacy policies.

As part of your record of processing activities, it can be useful to document (or link to documentation of) other aspects of your compliance with GDPR and the UK’s Data Protection Bill. Such documentation may include information required for privacy notices, such as:

  • The lawful basis for the processing

  • The legitimate interests for the processing

  • Individuals’ rights

  • The existence of automated decision-making, including profiling

  • The source of the personal data

  • Records of consent

  • Controller-processor contracts

  • The location of personal data

  • Data Protection Impact Assessment reports

  • Records of personal data breaches

  • Information required for processing special category data or criminal conviction and offence data under the Data Protection Bill, covering: the condition for processing in the Data Protection Bill, the lawful basis for the processing in GDPR and your retention and erasure policy document.

Doing an information audit or data-mapping exercise can help you find out what personal data your organisation holds and where it is. You can find out why personal data is used, who it is shared with and how long it is kept by distributing questionnaires to relevant areas of your organisation, meeting directly with key business functions, and reviewing policies, procedures, contracts and agreements.

Records of your processing activities must be kept in writing and this can include an electronic format – the information must be documented in a granular and meaningful way. It may well depend on the size of your business and the volume of processing activities as to whether a spreadsheet format would suffice or whether you need to consider a bespoke package to be tailored to your specific business needs.

The ICO has developed some basic templates to help you document your processing activities.

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HMRC Update – Making Tax Digital (MTD)

What is MTD?
MTD is a key part of the government’s plans to make it easier for businesses to get
their tax right and keep on top of their tax affairs. HMRC’s ambition is to be one of
the most digitally-advanced tax administrations in the world, modernising the tax
system to make it more effective, more efficient and easier for customers to comply.
Keeping digital records and providing updates to HMRC directly through
MTD-compatible software will help reduce errors, cost, uncertainty and worry.
This streamlined digital experience will integrate tax into day-to-day business
record-keeping, so that businesses can view their tax position in-year and be confident
that they have got their taxes right.

When is this due to happen?

You can sign up a client to MTD for Income Tax now, although the service will
remain voluntary until 2020 at the earliest.

From April 2019, MTD for VAT will be mandatory for businesses whose turnover
is above the VAT registration threshold (currently £85,000). This means that those
businesses will have to keep records digitally and use MTD-compatible software
to submit their VAT Returns to HMRC.
It will remain voluntary for VAT-registered businesses below the VAT threshold
until 2020, at the earliest.

 

Company cars What’s new for 2018/19?

Despite year-on-year tax rises, company cars remain a popular benefit. While the tax cost of expensive high-emission cars can be eye-watering, by choosing carefully it’s possible to enjoy the convenience that comes with a company car for a relatively low tax cost. So, as the new tax year gathers steam, what’s changed for 2018/19?

The tax charge
Company cars are taxed as a percentage of the list price, which is essentially the  manufacturer’s valuation of the car when new. It doesn’t matter how much was actually paid for the car, or whether it was bought second-hand.
It’s the list price that is used to work out the taxable amount and,
where optional accessories are added, the list price is adjusted to
reflect these.
The percentage charged to tax (the appropriate percentage) depends on the level of the car’s carbon dioxide (CO2) emissions. This increases each year, and 2018/19 is no exception. For 2018/19, the appropriate percentage for a car with CO2 emissions of 50g/km or less is 13% (up from 9% for 2017/18), whereas for cars with CO2 emissions in the range of 51 to 75g/km it is 16% – up from 13% – for 2018/19.

For cars with CO2 emissions of more than 76g/km, the charge for 2018/19 is two percentage points higher than in 2017/18 at 19% for cars in the 76 to 94g/km band.
This increases thereafter by 1% for each 5g/km rise in CO2 emission, although there is a maximum charge of 37% which applies to cars with CO2 emissions of more than 180g/km in 2018/19.

The increase in the appropriate percentage means a company car driver will pay more tax on the same company car in 2018/19. When calculating the charge, the list price is reduced for any capital contributions made by the employee (capped at £5,000), while the benefit is reduced to reflect any payments for the private use of the car. If the car is unavailable for part of the tax year, the benefit is proportionately reduced.

Example 1
Tony has a company car worth £30,000 with CO2 emissions of 150g/km, which was available throughout 2017/18. He isn’t due to change his car until July 2019 and pays tax at 40%.
For 2017/18, the appropriate percentage is 29% and the cash equivalent value of the car, on which Tony is taxed, is £8,700. As a higher rate taxpayer, the associated tax bill is £3,480 (£8,700 @ 40%).
For 2018/19, the appropriate percentage has increased to 31%. The taxable amount rises to £9,300 (31% of £30,000) and the associated tax to £3,720 (40% of £9,300).
Although he has the same car, even if it is a year older, Tony pays £240 more in tax as a result of the increase in the appropriate percentage.

 

Diesel cars
Diesel cars attract a supplement but the nature of that supplement has changed for 2018/19 and beyond.
For 2017/18 and earlier tax years, the supplement was 3%. This increased the appropriate percentage by 3%, compared to that for a petrol car with the same emissions level.

The diesel supplement cannot take the charge above the maximum of 37%. For 2018/19, the diesel supplement increased from 3% to 4% for all cars that aren’t certified to the Real Driving Emissions 2 (RDE2) standard.
The supplement applies to cars registered on or after 1 January 1998, which don’t have a registered nitrogen oxide (NOx) emissions value, and also to cars registered on or after that date which have a registered NOx emissions value that exceeds the RDE2 standard.
While the appropriate percentage is set by reference to CO2 emissions, the new-look diesel supplement is dependent on NOx emissions level.
Under the new rules, diesel cars certified to the RDE2 standard are not subject to the diesel supplement.
In practice, it is unlikely cars on the market before 6 April 2018 will meet the RDE2 standard, with the effect that most diesel cars will be subject to the higher supplement.
Taking into account the increases in appropriate percentages as well, diesel car drivers will suffer a higher tax hike in 2018/19.

 

Example 2
Maria has a diesel-fuelled company car with a list price of £30,000 and CO2 emissions of 150g/km. Her car doesn’t meet the RDE2 standard but it’s available throughout 2017/18 and 2018/19, and like Tony, Maria is a higher rate taxpayer.
In 2017/18, the appropriate percentage is 32% (normal 29% plus diesel supplement of  3%). This makes the taxable value £9,600 (32% of £30,000) and the tax owed is £3,840 (40% of £9,600).
In 2018/19, the appropriate percentage has increased to 31% and the diesel supplement to 4% – a total of 35%. As a result, the taxable value is £10,500 (35% of £30,000) and the tax bill is £4,200.
The combined effect of the rise in the appropriate percentage and the increase in the diesel supplement means Maria’s taxed £360 more in 2018/19 than in 2017/18 – £120 more than the tax rise suffered by Tony on his petrol car.

Going green
Drivers choosing lower-emission cars are rewarded with lower tax bills.
In the earlier example, Tony paid tax of £3,720 on his company car based on a CO2  emission of 150g/km.
If he had chosen a car of the same value but with CO2 emissions of 40g/km, he would’ve paid tax of £1,560 in 2018/19 (40% (£30,000 @ 13%)) – saving £2,160 a year and £180 a month.
Going electric
Electric cars with zero emissions are charged at the same percentage as cars with CO2 emissions of 50g/km and below – 13% for 2018/19.

However, from 2020/21 new emission bands will apply to cars with CO2 emissions of 50g/km or less based on the electric range of the car.
This is the maximum distance the car can travel without recharging the battery or using the combustion engine of the plug-in vehicle.  Under the new bands, the cars with the greatest range have the lowest appropriate percentage.
The rates for the new bands, which will apply for 2020/21, are shown in the table below. The appropriate percentage is set at 2% for zero-emission cars.

electricpercent

It will pay to go electric, and the opportunity to benefit from a lower tax bill for an  electric car should be taken into account when choosing a new company car.

Fuel
A separate fuel scale charge applies where fuel is provided for private mileage in a company car.
This is found by applying the appropriate percentage (as used in working out the taxable benefit of the car) to a set amount. For 2018/19, this is £23,400 – up from £22,600 in 2017/18.
This means that for a car with CO2 emissions of 150g/km, the fuel charge is £7,006 for 2018/19, costing a higher rate taxpayer £2,802.40 in tax – or £233 a month.
Unless private mileage is very high, private fuel is rarely a tax-efficient benefit and where the cost of the car is below the appropriate amount (£23,400 for 2018/19), more tax will be payable on the fuel than on the car.
By contrast, no fuel charge arises if the employer provides electricity for an electric car.

Choosing wisely
The company car tax rules reward those who choose greener cars.
The tax charge on a cheaper, low-emission car is considerably less than an expensive car with high CO2 emissions.

Looking ahead, choosing an electric car will lower the bills still further with a taxable amount as low as 2% of the list price.

 

MTD: CIOT webinar explains how it should work

Rebecca Cave listened to the CIOT webinar on MTD, which provided some useful insights on how HMRC will apply the MTD for VAT regulations, and where the other aspects of the MTD project have got to.

The webinar was presented by Richard Wild and Margaret Curran of the CIOT technical team, alongside Adrian Rudd of PwC, who chairs the CIOT digitalisation and agent strategy working group. The CIOT team has amassed a huge pool of knowledge about MTD as they have been in close contact with HMRC at all stages of this project.

The webinar covered these areas of MTD:

  • VAT
  • Income Tax pilots
  • MTD for individuals
  • Tax agents
  • Companies and complex businesses

I have picked out some key points to report, but I recommend listening to the entire 90-minute webinar, which can be streamed for free, and rerun multiple times so you can share it with your staff.

VAT notice

HMRC is expected to issue its definitive guidance on MTD for VAT in the form of a VAT notice, in the very near future. This notice will set out how a business will be able to claim an exemption from MTD filing on the grounds of religious believes, insolvency procedure or not reasonably practical. Once HMRC has accept the business is exempt from MTD for VAT reporting, it should also be exempt from income tax reporting for MTD.

Who is drawn into MTD?

All VAT registered businesses with UK taxable turnover over the VAT registration threshold (currently £85,000) will be required to comply with the MTD recording keeping and reporting requirements for the VAT periods which begin on and after 1 April 2019. VAT periods will not be split, so if the VAT period ends on 30 April, the business will enter the MTD regime from 1 May 2019.

Where a business is VAT registered but has turnover under £85,000 at April 2019, it is not required to enter the MTD regime in April 2019. However, those businesses will have to monitor their turnover on a rolling 12-month basis, and if the turnover breaches the VAT registration threshold, the business will have to enter the MTD regime from the beginning of the next VAT period.

Once a business is within the MTD regime, it can’t opt out even if its turnover drops below £85,000. The only way out of the MTD for VAT regime will be to deregister for VAT.

Any business which registers for VAT on or after 1 April 2019 will be required to enter the MTD regime from the start of their first VAT period, unless the business has registered voluntarily, in which case MTD reporting will not be mandatory.

Charities with trading subsidiaries, and landlords who let VAT-opted property, will fall within the MTD regime on the same terms as other businesses.

VAT returns under MTD

HMRC is committed to supporting parallel means for voluntarily registered businesses to submit VAT returns, ie by way of the current online interactive VAT form, but only until April 2020. It is possible that all VAT registered businesses will be mandated into MTD for VAT from April 2020.

All VAT returns for businesses which are mandated into MTD will have to be submitted via MTD-compatible software which uses an API to transmit data to HMRC.

What to record

As a tax agent you will be permitted to maintain the digital records required for MTD on behalf of your clients. The digital records for the quarter need to be completed by the earlier of:

  • The due date of the VAT return
  • The date on which the VAT return is actually submitted

All VAT records need to be retained for six years, but HMRC won’t require the digital records to be held in the accounting software in which they were recorded. That data can be downloaded and retained in some other form.

The webinar went into some detail about what exactly will have to be digitally recorded for each transaction, as the MTD rules are more onerous than the current rules for recording sales and purchases for VAT purposes.

Retail business and those using certain special schemes won’t have to digitally record every transaction. Those relaxations from the VAT regulations will be set out in the forthcoming VAT Notice on MTD.

How data will be transferred

The webinar contained several examples of how the VAT data may be transferred to HMRC from the software or spreadsheet where it was recorded. These examples will be contained in the VAT notice in a similar form.

From April 2019 the relevant totals for the VAT return plus any voluntary supplementary data must be submitted to HMRC via an API from the MTD-compatible software.

However, HMRC realises that businesses use combinations of software and spreadsheets, so data needs to be transferred between these different elements. For the first year of MTD, those transfers between software or spreadsheets need not be made digitally, but from 2020 such transfers must be done via a digital link.

Manual adjustments to the VAT data will be permitted to the VAT account, say for partial exemption calculations. There will be more information on this in the VAT notice.

Software availability

There is a timing issue for software production as we are only nine months away from the go live date. Currently there are very small numbers of businesses and software companies testing MTD-compatible software in the MTD for VAT trial.

Richard Wilde commented that its going be a “very tight timetable” to get MTD software ready on time. Once the software products are adequately tested, the detail of how to obtains those products will be listed on HMRC pages of gov.uk.

Adrian Rudd commented that PwC are building API-enabled spreadsheets and other MTD software. PwC has made an offer that the API-enabled spreadsheets will be available free of charge to charities to use.

Penalties

A new penalty points system for MTD will be introduced, and the draft legislation to enable this is expected to be issued this summer.

During the first 12 months of the MTD regime HMRC will not generally impose penalties for non-compliance, but this soft-landing approach will only apply to businesses who make a real effort to comply. Those businesses who make no attempt to meet the MTD requirements should expect penalties to be imposed.

Publicising MTD

HMRC’s attitude to non-compliant businesses seems a bit unfair as it has made very little effort to communicate the changes to the business community at large.

The CIOT have been urging HMRC to start telling businesses that MTD is coming in 2019. HMRC is apparently developing a communication plan, but the CIOT have not seen a draft.

Income tax reporting

As for MTD for VAT there will be a de-minimus turnover limit for MTD income tax reporting, below which MTD reporting will be voluntary. This threshold is expected to be £10,000 for income tax, but as HMRC hasn’t confirmed this figure, it could be set at a higher level in regulations.

However, we do know the threshold will be set per taxpayer not per business, as for VAT. For example, an individual with £6,000 rental income and £6,000 of trading income will fall within the MTD income tax regime, as his total turnover of £12,000 will exceed the expected £10,000 minimum threshold.

Adrian Rudd said the quarterly reporting of the raw trading results to HMRC for income tax will serve no purpose other than prove to HMRC that the business is keeping digital records.

The quarterly data won’t be adjusted for tax matters such as disallowable deductions, or for accounting adjustments such as accruals, as those adjustments will be made in the final report for the year. As such the MTD quarterly reports can’t be “wrong”, and the figures will not be enquired into.

Each business (not taxpayer) will have to do an MTD return for income tax, whereas for VAT the reporting it will be per VAT registration. The reporting deadlines for income tax and VAT will be different and separate, even if the VAT quarters align with the accounting period, as the VAT reporting period has an extra seven days.

It is possible that MTD for income tax will be mandated as early as April 2020, but the CIOT expect this implementation date to be later.

Companies and complex businesses

Partnerships will not be within MTD for income tax if their turnover is greater than £10 million.

HMRC appears to have no settled policy on MTD for corporation tax. CIOT has been told that will be a formal consultation on MTD for corporation tax “later in Spring 2018”. In theory MTD for corporation tax could be mandated as early as 2020, but that seems unlikely.

 

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Advisory fuel rates for company cars

New company car advisory fuel rates have been published which take effect from 1 June 2018. The guidance states: ‘You can use the previous rates for up to one month from the date the new rates apply’.

The rates only apply to employees using a company car.

The advisory fuel rates for journeys undertaken on or after 1 June 2018 are:

Engine size Petrol
1400cc or less 11p
1401cc – 2000cc 14p
Over 2000cc 22p
Engine size LPG
1400cc or less 7p
1401cc – 2000cc 9p
Over 2000cc 14p
Engine size Diesel
1600cc or less 10p
1601cc – 2000cc 11p
Over 2000cc 13p

The guidance states that the rates only apply when you either:

  • reimburse employees for business travel in their company cars
  • require employees to repay the cost of fuel used for private travel

You must not use these rates in any other circumstances.

If you would like to discuss your car policy, please contact us.

Internet link: GOV.UK AFR

Entrepreneurs’ Relief is a capital gains tax relief available to those selling or giving away their business.

Entrepreneurs’ Relief reduced the amount of CGT paid on a disposal of qualifying business assets on or after 6 April 2008.

This relief will be available to:

Sole traders and partners selling or gifting the whole or part of their business
Company directors and employees holding at least 5% of ordinary shares and voting rights in a qualifying company who will share or gift all or part of their shareholding
In 2010, the relief changed to qualifying gains arising from 23 June 2010 being taxed at a flat rate of 10%, with the previous need to reduce the gain by 4/9ths being removed.

Conditions for relief

To claim relief, you have to satisfy a number of conditions through the qualifying period, which depend on the type of business disposal you’ve made.

Relief is available where there is either:

Material disposal of business assets
Disposal associated with a material disposal
Disposal of trust business assets
Disposal of a material asset

If the person is only selling part of a business, this part must be capable of being carried on as a going concern.

According to Tolley’s guidance, the disposal of assets which don’t constitute a sale of business capable of being carried on in its own right won’t qualify for the relief.

The definition of a material disposal depends on the type of asset sold:

In the case of a sale or gift of whole or part of a sole trade or partnership business, it must have been owned by the vendor throughout the year ending on the date of the disposal or cessation
It must have been owned by the taxpayer for one year prior to cessation and must be sold within three years of cessation
In the case of the sale or gift of shares or securities in a company, the disposal is material if throughout one year prior to the disposal of shares or date company ceased trading:

The company is a trading company
The company is the taxpayer’s personal company
The taxpayer is an officer or employee of the company or another company in the same group
Entrepreneurs’ Relief is only given in respect of relevant business assets, i.e. assets used for business purposes such as premises.

This means businesses can’t get relief for chargeable assets bought within the year, as long as they are brought into use in the business.

There is no relevant business assets requirement for the sale of shares or securities, meaning there is no need to prorate the relief in accordance with underlying investments held by the company.

Tolley advises using HMRC’s CGT for land and buildings toolkit when calculating the capital gain or loss on the disposal of land or buildings.

Definition of a trading company

According to Tolley Guidance, this is a company carrying on trading activities which does not include to a substantial extent activities other than trading activities.

HMRC says “substantial extent” means more than 20%. However, 20% of what?

Tolley says the test is applied to criteria such as:

Turnover
Asset base or balance sheet
Expenses
Directors’ time
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HMRC won’t apply the test if the company had a particularly poor trading period. Without this, according to Tolley, a company with seasonal trading fluctations, for example, might not be considered a trading company.

It’s suggested that the taxpayer might consider making a non-statutory business clearance application to HMRC for a trading status ruling, which would be separate to tax compliance from the shareholder.

Associated disposals

A disposal made after material disposal of business assets can qualify for Entrepreneurs’ Relief it it’s associated with it.

How it can be associated:

The individual makes a material disposal of the whole or part of their interest in a partnership or shares or securities in their personal trading company
The material disposal is made as part of the withdrawal of participation in the business
The asset sold after material disposal had been used in that business throughout one year ending with either the disposal or cessation of the partnership or company
Tolley said these conclusions flagged a few points, including:

The associated disposal rules don’t apply to sole traders
These rules don’t apply to isolated disposals of assets
The material disposal must happen first
HMRC says there should not be a significant interval between the material disposal and associated disposal.

Time-frames for associated disposal are:

Within one year of cessation
Within three years of cessation if the asset hasn’t been leased or used for any other purpose after the business ceased
Where the business hasn’t ceased, within there years of the material disposal provided the asset hasn’t been used for any purpose other than that of the business
There are also restrictions of relief on an associated disposal: If the asset is used in the business for only part of the ownership period, is only partly used in the business, or if the individual isn’t involved in the business throughout the period or if the asset was rented to the business.

How to claim and report Entrepreneurs’ Relief

It must be claimed by the first anniversary of the 31 January following the tax year of the disposal.

The gains are reported via usual channels on the CG summary supplementary pages in accordance with the type of asset sold. Calculations of the gains must be attached and submitted with the tax return.

The relief is claimed by crossing boxes 20, 26 and 34 based on the type of asset and including details in the white space on page CG2.

 

Entrepreneurs’ Relief

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