Background

Once it has been decided that the UK is the correct location to establish a business, the next key decision is how this should be structured. One of the most popular structures is a limited company.

Recruiting high quality staff is also a priority and the availability and tax efficient nature of UK share option schemes can help achieve this objective.

Situations Where a Limited Company is Most Appropriate

Limited companies can offer a number of advantages.

They can be of particular benefit where:

• The business is being set-up with other people;
• There is a wish to incentivise staff though share schemes;
• The company will be receiving external funding;
• The company will be claiming Research and Development tax relief (R&D).

Forming a Company in England & Wales

The company formation process is relatively quick and easy.

All you need to start a company is an address within England & Wales for the registered office, at least one shareholder and at least one director (these two may be the same person). There is no minimum initial cash investment and the company can be formed in a matter of hours.

Why Use a Limited Company?

The main benefit of a limited company is the limited liability of the company’s officers and shareholders. This means that unlike the situation of a ‘sole trader’ or ‘partnership’ personal assets are not at risk in the event of a failure of the business.

Other considerations are:

• The company has a legal existence separate from its management and its members (the shareholders).
• The company’s name is protected.
• The company continues despite the death, resignation or bankruptcy of the management and/or members.
• The interests and obligations of management are defined.
• Appointment, retirement or removal of directors is straightforward.
• It is an easy process to gain new shareholders and investors.
• Employees can acquire shares.
• Companies are often perceived as more robust and more business-like than sole traders.
• Companies can provide tax advantages such as lower tax rates, R&D incentives, extraction of profits via dividends, etc.

Recruiting and/or Incentivising Employees Using Share Schemes

Finding the right calibre of staff is vital to the success of a business, wherever it is located.

Employers in the UK often use share schemes to recruit important members of staff and as a way of incentivising employees to work hard and remain with the business for the medium to long term.

There are a number of ways to do this, as detailed below. The most popular is the Enterprise Management Incentive (EMI) share option scheme as it is particularly tax efficient:

Enterprise Management Incentive (EMI)

Eligible companies frequently use an EMI share scheme, because the tax advantages are attractive. The EMI share option scheme is Government approved, tax beneficial and a very flexible way of incentivising staff.

Under the EMI scheme, options are issued over an agreed number of shares. No tax is paid when the option is granted. When the option is exercised, which means converted into shares, there is no tax to pay provided that the agreed exercise price is no lower than the market value of the shares on the day that the option was granted.

When the shares are sold, the capital gain is usually taxed at 10% in situations where ‘Business Asset Disposal Relief’ (previously known as Entrepreneurs Relief) is available.

Growth Share Scheme

Where companies cannot use EMI, a growth share scheme is often used instead. This type of scheme is not appropriate for a start-up, it is only relevant to an established company.

Under this share scheme, on the sale of a company employees benefit only from the growth in the value of the shares, not the historic value built up until the date of the share issue. This is achieved by valuing the company and then issuing shares of a different class, which only benefit from value generated above an agreed threshold.

For example, if the company is worth £10m, a growth share scheme may allow holders to share in the proceeds, only if they exceed £12m. The value of the growth share, on issue, would be low because it would not have the ‘right’ to any of the value built up previously. Income tax charged on acquisition of the shares would consequently be low.

Phantom Share Scheme

A phantom share scheme is essentially a cash bonus scheme.

This arrangement allows an individual to receive a cash payment equal to the value of shares, or the increase in value of shares, above a notional exercise price. No actual shares or share options are issued. The idea is that individuals are incentivised because the level of any payment is linked to an increase in the value of the company’s shares.

Additional Information

If you would like additional information regarding setting up a company in the UK and using a share scheme to recruit or incentivise staff, please speak to Paul Webb or Sarah Gardner at the Dixcart office in the UK: advice.uk@dixcart.com

The Dixcart office in the UK has extensive expertise in forming UK companies, establishing the most appropriate corporate structure and meeting all relevant compliance obligations. Dixcart UK is also experienced in building EMI schemes to meet specific needs and liaising with the UK tax authorities (HMRC), to gain advance approval and for the drafting of relevant share option agreements.

We are seeing an increasing number of cases where individuals are unaware of the new reporting regime for capital gains on property disposals as it seems that estate agents and solicitors are failing to alert them to the new requirement.

What has changed?

The change came in on 6 April 2020 and means that where the disposal of a residential property results in a gain, this must be reported to HMRC within 30 days following the date of completion and the tax due must be paid over by the same date.

This is purely a timing difference, as the gain would otherwise have been reported on an annual tax return and the tax paid over to HMRC by 31 January following the tax year in which the disposal occurred. The law has not changed any of the rules in relation to which gains are taxable or the rate of tax that is payable. The only difference is that the deadline has been brought closer.

However, if the deadline for filing the capital gains tax UK property disposals return is missed, an automatic £100 penalty will be charged. Further penalties of £10 per day are applied if the return is still outstanding after three months.

What disposals are caught?

The new reporting regime catches any disposals of UK residential properties that result in a gain. Therefore, disposals of overseas residential properties are not caught (although there may be requirements in the overseas jurisdiction) and neither are UK residential property disposals that result in a loss. Instead, these disposals are to be reported on an annual tax return as normal.

This also means that if the gain is fully covered by a capital gains tax relief, it is not caught. An example of this might be a disposal of an individual’s main home, which is fully covered by principal private residence relief.

However, it would apply to the disposal of a UK second home or a UK-let property, whether or not an individual lived in that property at some point.

It is important to understand that the rules do not just apply to sales of property, they apply equally if someone were to gift a property (e.g. to an adult child) even though no money may have been received in exchange.

What should you do?

If you have disposed of a property which is caught by these rules and have not submitted the necessary filings to HMRC, please contact us immediately so we can help resolve this matter for you.

If you are in the process of disposing of a property or considering this, then as the deadline is tight, please do let us know so that we can ensure that all of the information can be gathered in time to ensure that any reporting requirements are met.

Please see a PDF regarding the new capital allowances which were announced at the Budget.

Click here for your 2020/21 Year-End Strategy Guide which contains practical guidance and ideas to implement before 5 April 2021.

With the end of the tax year fast approaching, now is a good time to review your business and personal finances to ensure that they are as tax-efficient as possible. With our useful tips and expert assistance in our 2020/21 Year-End Strategy Guide, we can help you and your business to increase your profitability and minimise the tax burden.

Inside this giude:

• Reduced rates of stamp duty
• Tax planning – a family affair
• Tax cashflow: your next steps
• Funding a comfortable retirement
• preserving profit
• reducing your inheritance tax liabilities
• Year-End checklist

Dixcart UK are here to keep you up to date with all of the latest news and to help you with your business planning. We aim to ensure that all of our clients are making the most of the tax-saving opportunities available to them, helping to make their business and personal finances as tax-efficient as possible. 

If you require more copies of the guide to pass on to others, we will be delighted to send them to you.

For further advice or information on any of the issues covered in the guide, please get in touch: hello@dixcartuk.com. Alternatively you can call us: 0333 122 0000. We would be delighted to talk to you.

From 1 March 2021 HMRC will finally introduce the domestic reverse charge. The charge may be relevant for businesses supplying or purchasing building and construction services.

If supplying services, you will need to apply the reverse charge if the following statements are true:

• your customer is registered for VAT in the UK,
• payment for the supply is reported within the Construction Industry Scheme (CIS),
• the services you supply are standard or reduced rated,
• you are not an employment business, supplying either staff or workers, or both,
• your customer has not given written confirmation that they are an end user or intermediary supplier.

If purchasing building and construction services, you will need to apply the reverse charge if the following statements are true:

• payment for the supply is reported within the Construction Industry Scheme (CIS),
• the supply is standard or reduced rated,
• you are not hiring either staff or workers, or both,
• you are not using the end user or intermediary exclusions.

HMRC have confirmed that they will apply a “light touch” in dealing with any errors made in the first 6 months of the new legislation, to allow for difficulties faced while implementing the scheme.

For additional information, please contact Paul Webb: hello@dixcartuk.com.