Make the most out of tax opportunities that are AVAILABLE NOW!

Planning for an upturn

The headlines can make it feel as though hanging on for dear life is the only thing left to do in this economy. However, the same economic cycle that's brought us to this point will eventually take us through and out to an upturn. Some planning now can put you in the best position to take advantage of the upturn when it comes. Over the next few weeks, Wragge & Co's Tax team will be exploring ideas and strategies to help businesses make the most out of tax opportunities that are available now.

Shares, not cash

Now is the time to think about introducing, or expanding, share-based incentives for employees: with share prices low, the cost of providing these incentives can be substantially reduced and the potential benefits increased. This can be a straightforward, cost-effective way to provide incentives to key employees who you want to make sure stay with you.

Two particularly useful ways to use shares to reward employees are:

Enterprise Management Incentive (EMI) options
These are tax-advantaged options available to most smaller independent companies (less than 250 employees, less than £30 million in gross assets). An option gives an employee the opportunity to buy shares later, at a fixed cost. Normally, there's tax to pay on the difference between that fixed cost and the actual market value of the shares when the shares are acquired by exercising the option - EMI options are usually tax free. As the exercise price is set at the current market value of the shares, which is likely to be low in the current economy, there's an opportunity for greater gains when the upturn comes – tax free. The key benefits are bigger gains for employees who stay on through to an upturn, no tax for the employee on the gain on exercise and no national insurance costs for the company.

If the company doesn't qualify to grant EMI options, consider giving:

Free or part-paid shares
Employees receiving shares for which they pay less than market value (or get for free) are taxed as if they've got a tax-free loan from the company for the difference between the shares' market value and what they paid for the shares. HM Revenue & Customs treats tax-free loans as though there's a benefit in kind of the commercial rate of interest that would be charged on a similar loan: only that deemed interest is subject to tax. At the current rates of HMRC interest, the shares only cost the employee about 2% of their value in tax each year. That value would be fixed at the current low market values. The key benefits are more flexibility and a low-cost way for employees to get shares in a company.

HMRC cashback

The headlines can make it feel as though hanging on for dear life is the only thing left to do in this economy. However, the same economic cycle that's brought us to this point can bring up some useful opportunities for those that spot them.
Some planning now can put you in the best position to take advantage of these possibilities and perhaps help while hanging on now. This is the second in a series of alerts and action points in which we consider ideas and strategies for making the most of tax opportunities that are available now. The first concerns introducing, or expanding, share-based incentives for employees.

Getting HMRC to fund part of your purchases

Capital expenditure has been cut back across the board. Sometimes you don't have a choice – critical equipment does not respect the economy, things simply break down or wear out.
Perhaps you are in a position to make careful investment in new technology in a market that is producing increasingly attractive deals for those that have funds to buy.
HMRC may be prepared to contribute towards the cost: either by allowing a full write-off of the cost against tax, cutting the cost by 21-28%, or – in a couple of cases – by giving you money back for making the investment.

Cutting the cost

The Government has been steadily expanding the range of assets which qualify for 100% capital allowances in the year of purchase. Capital allowances are the tax form of depreciation in the accounts. It normally takes 20 years before a business recovers the cost of a purchase through capital allowances. The 100% capital allowances accelerate that substantially, to enable a business to recover the entire cost in the year of purchase: an effective discount of up to 28% for tax paying companies.

The assets that qualify for this include:

• energy-saving equipment: lighting, insulation, boilers, refrigeration, combined heat and power, heat pumps, solar thermal systems, ventilation and air conditioning. Not all equipment automatically qualifies - it should have a 'certificate of energy certificate' from the Government
• low CO2 cars: these are cars which are solely electrically powered (such as the G-Wiz, not hybrids like the Prius) or cars which have a 'EC certificate of conformity' or a 'UK approval certificate' which shows carbon dioxide emissions of less than 110 grams per kilometre driven
• environmentally-beneficial equipment: as with energy-saving equipment, particularly water-related, this covers equipment specifically approved by the Government and includes efficient toilets, efficient taps, rainwater harvesting equipment, and water reuse systems (among others)
• research and development: equipment used in carrying out qualifying R&D – including the cost of building physical premises on which R&D is carried out (but not the cost of the land on which the premises are built)
• business premises renovation: for those taking the opportunity to negotiate a good deal with a contractor, the costs of converting or renovating certain buildings in disadvantages areas into business premises

Cashback from HMRC

In two cases, HMRC will actually pay back money to loss-making small and medium-sized companies (SMEs) which incur costs in two areas: R&D and energy-saving or environmentally-beneficial equipment.
SMEs are companies with fewer than 250 employees and less than €50 million in turnover or less than €86 million in gross assets (taking any group companies into account).
For R&D, expenditure on staff costs, materials and subcontractor will qualify. The company can get up 24.5% of that expenditure back from HMRC.
For energy-saving or environmentally-beneficial equipment, a company can get back up to 19% of the cost of equipment back from HMRC.

Wragge & Co. can help you decide whether these – and other – opportunities are right for your business, and work with you to put the best opportunities for your business in place. Contact Kevin Lowe (kevin_lowe@wragge.com) or Anne Fairpo (anne_fairpo@wragge.com) (or your usual Wragge & Co contact) to discuss this further.