Extracting funds from a family company without retained profits

Many family companies have struggled as a result of the COVID-19 pandemic and may no longer have any retained profits. Where this is the case, they may need to rethink how they extract funds from their company to meet their personal bills.

Dividend problem

A popular and tax-efficient strategy is to pay family members a salary equal to the primary threshold, set at £9,500 for 2020/21, or, if the employment allowance is available, a salary equal to the personal allowance of £12,500, and to extract further profits as dividends.

Requirement to pay dividends from retained profits

Under company law, dividends can only be paid from retained profits. This means that if a company lacks sufficient retained profits to pay a proposed dividend, they will not be able to pay that dividend legally. The ability to pay a dividend is constrained by the available retained profits.

Dividends must also be paid in proportion to shareholdings; however, the use of an alphabet share structure can provide flexibility.

Other options

Despite not having any retained profits, your company may have money in the bank. This may provide options for taking funds from the company where dividends are not an option.

Unlike dividends, salaries and bonus payments can be made where the company lacks profits, even if this results in a loss. Funds can also be extracted in the form of benefits in kind or, if the business is run from home, rent.

This will not always be ideal, from a tax perspective, but may be necessary. However, the directors must be wary of inadvertently trading while insolvent.

The company could also consider making a loan to the director. This can be a useful short-term option and it is possible for a director to borrow up to £10,000 for up to 21 months tax-free. However, there will be tax implications if the loan remains outstanding nine months and one day after the end of the accounting period in which it was made.

Talk to us

We can discuss ways to navigate the COVID-19 pandemic and extract funds from an unprofitable family company.

Back to the office – what about homeworking equipment?

When your employees return to the office, they may no longer need the homeworking equipment that enabled them to continue to work during lockdown and beyond. Are there any tax implications if they return the equipment or if they keep it?

Employer provided the homeworking equipment

If you provided equipment to enable your employees to work from home, as long as you retained ownership of that equipment, there are no tax implications if the employee returns the equipment to you when they come back to the office.

For many, the experience of working from home has highlighted the benefits of flexible working. You may want your employees to be able to continue to work from home on a more flexible basis once the office is open, and for them to keep their homeworking equipment to enable them to do so. As long as you have not transferred ownership of the equipment to the employee, and the equipment continues to be provided predominantly to enable them to work from home, the provision remains tax-free – there is no taxable benefit and nothing to report to HMRC.

Should your employees no longer need to work from home and you let them keep the homeworking equipment for personal use, a tax charge will arise. The employee is taxed on the market value of the equipment, less anything that they pay for it. The benefit must be notified to HMRC on the employee’s P11D. However, if the employee buys the equipment from you for at least its current market value, there is no taxable benefit and nothing to report to HMRC.

Employer reimbursed homeworking equipment

The requirement to work from home where possible was implemented at very short notice. Consequently, it may not have been feasible for you to provide your employees with the equipment that they needed to work from home.

If, instead, your employees purchased homeworking equipment and you reimbursed them, there is no tax for them to pay on the reimbursed amount, as long as the equipment was purchased to enable them to work from home. Unless you required the employee to transfer ownership of the equipment to you, the equipment remains the employee’s equipment. Consequently, there is no tax charge if they keep it for personal use once they return to the office.

Employee buys the homeworking equipment

It may have been the case that your employees bought whatever they needed to be able to work from home and you did not meet the costs. In this situation, the equipment belongs to the employee and this remains the case if they keep it for personal use when they return to the office. There are no tax implications of employees keeping their own equipment.

Guidance on the tax treatment of homeworking equipment can be found on the Gov.uk website.

Speak to us

We can help you to determine the tax implications surrounding the future of homeworking equipment once your employees return to the office.

Off-payroll working back on the horizon

The extension to the off-payroll working rules was put on hold as a result of the COVID-19 pandemic. However, the legislation has now been implemented and the new rules will come into effect from April 2021 – one year later than originally planned. As the Coronavirus Job Retention Scheme draws to a close and businesses assess their future staffing requirements, the impact of the off-payroll working rules cannot be overlooked.

Scope

The extended off-payroll working rules only apply to ‘medium’ and ‘large’ private sector organisations. The definitions are taken from the Companies Act 2006.

An organisation is medium or large for these purposes if at least two of the following apply:

• annual turnover of more than £10.2 million;
• balance sheet total of more than £5.1 million;
• more than 50 employees.

A simplified turnover test applies to organisations which are not a company, a limited liability partnership, an unregistered company or an overseas company. Such organisations are within the rules if their turnover is more than £10.2 million.

Obligations under the rules

The new rules impose a number of obligations on medium and large private sector organisations that engage workers who provide their services through a personal service company or other intermediary.

If you fall within this category, from 6 April 2021, you must determine whether the off-payroll working rules apply. This is the case where the worker would be an employee if they provided their services to you directly, rather than through an intermediary. You can use HMRC’s Check Employment Status for Tax (CEST) tool to check a worker’s status.

Once you have reached your determination, you must give a copy of it to the worker, and to any other parties in the chain. You must also provide them with the reasons for reaching the decision that you reached. Giving the worker a copy of the CEST output will tick this box. You must also keep a copy of the determination and the reasons for reaching it for your records.

If your worker does not agree with the determination, you must consider their reasons for this. If, after reconsideration, you feel that the original determination is correct, you must let the worker know. If, on reflection, you feel that the original determination was incorrect, you must issue a new determination.

It is important that you make a determination of the worker’s status and give it to the worker. If you fail to make a determination, you will be liable for tax and National Insurance on payments made to the worker’s intermediary, even if the engagement is one that would fall outside the off-payroll working rules.

Off-payroll working rules apply

If the determination is that the worker would be an employee if they provide their services to you directly, the off-payroll working rules apply. Where this is the case, you (or the fee payer if this is different) must:

• calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract;
• deduct income tax and employee’s National Insurance contributions from the payment to the worker’s intermediary;
• pay employer’s National Insurance contributions;
• report the payments and associated tax and National Insurance to HMRC under real time information; and
• apply the apprenticeship levy and make any payments necessary.

Off-payroll working rules do not apply

If the determination is that the off-payroll working rules do not apply, you can continue to make payments to the worker’s intermediary gross, without deducting tax and National Insurance.

Small private sector organisations

The extended off-payroll working rules do not apply to small private sector organisations. Consequently, if you are an organisation that is categorised as small, and you engage workers who provide their services via a personal service company, you do not need undertake a status determination. Instead, you continue to pay the worker’s intermediary gross without deducting tax and National Insurance.

In this situation, the IR35 rules continue to apply; the worker’s intermediary is responsible for deciding whether the rules apply, calculating the deemed payment and accounting for tax and National Insurance if they do.

Plan ahead

Speak to us to find out what you need to do to ensure that you are ready for the extended rules when they come into force in April 2021.

Benefit-in-kind charge on electric vans

A tax charge arises under the benefit-in-kind rules where an employee enjoys unrestricted private use of a company van. The taxable amount is a set amount, with a reduced charge applying to electric vans. However, the charge for zero-emission vans is to be reduced to zero from 6 April 2021.

Taxation of company vans

Employees who enjoy the private use of a company van are taxed for the privilege. For 2020/21, the standard charge is set at £3,490. The charge does not apply where the ‘restricted private use’ condition is met. This is the case where private use, other than home to work travel, is insignificant.

A lower charge applies to electric vans.

The charge is reduced to reflect periods of unavailability and payments for private use.

Electric vans

Since 2015/16, the charge for a zero-emission van has been a percentage of the full charge. That percentage has been steadily increasing. For 2015/16, zero-emission vans were charged at 20% of the standard charge; by 2020/21 it had reached 80% of the standard charge and was due to increase to 90% for 2021/22 before being aligned with the standard charge from 2022/23.

For 2020/21, the benefit-in-kind charge for an electric van is £2,782 (80% of £3,490). By contrast, an employee can enjoy the benefit of an electric company car tax-free.

At the time of the 2020 Budget, it was announced that the tax charge for zero-emission vans would be reduced to zero from 6 April 2021 to encourage employers to move to using electric vans. This change has now been enacted.

A move to electric vans will benefit your employees, who from 2021/22 will not pay any tax if the van is available for private use. You will also benefit as there will be no employer’s Class 1A National Insurance to pay either.

Is it a car or is it a van?

For the purposes of the benefit-in-kind legislation, a vehicle is a ‘van’ if it is a mechanically propelled road vehicle which is a goods vehicle and which has a design weight not exceeding 3,500 kilograms, and which is not a motorcycle.

However, as the long-running Coca-Cola case has demonstrated, just because something looks like a van does not mean that it is, at least for tax purposes. The Court of Appeal have held that modified crew-cab vehicles are cars rather than vans for the purposes of the benefit-in-kind legislation, and as such the taxable benefit should be worked out using the company car rules rather than van benefit rules. In this case, the vans in question were panel vans with a second row of seats behind the driver’s seat.

Separate charge for fuel

If an employer meets the costs of fuel for private journeys in a company van, a separate fuel benefit charge arises. The benefit is valued at £666 for 2020/21.

However, HMRC do not regard the provision of electricity as a ‘fuel’ for these purposes. Consequently, no tax charge arises if the employer meets the cost of electricity for the private use of an electric van.

Help and advice

We can help you work out the benefit-in-kind charge on company vans and plan ahead for the changes to come.