The normal starting point for a Tax Healthcheck is the Personal Tax Return.
For the purpose of this article, I wanted to focus on the Corporate Balance Sheet as a vehicle for conducting a Tax Healthcheck. Let’s look at some of the issues which might arise.
A look at the fixed asset grid reminds me to check on capital expenditure plans and the fact that from 1 January 2019 to 31 December 2020, the annual investment allowance has been uplifted from £200,000 to £1 million, so there is an opportunity to maximise allowances in this window – although the commercial imperative must dictate the level of capital expenditure. Nevertheless it is just being smart to incur necessary expenditure just prior to rather than just after the year end to accelerate capital allowances.
I then look at cash. Does the company have substantial cash reserves? Is there too much cash?
If a shareholder were to die, then we tend to naturally think that the shares will qualify for 100% Business Property Relief (BPR). I always like to check that this is the case. HMRC might seek to argue that there is too much cash on the balance sheet, i.e. not all the cash is needed to run the business and provide the working capital, with the top slice of cash really an investment.
I might argue that a business cannot have too much cash, but one does need to be aware of the risk and take steps to nullify any potential HMRC thrust in this area. Some sensible calibration of the balance sheet and narrative can strengthen the defence.
Status of Company
The company has to be a trading company to qualify for BPR. I always want to check that HMRC could not argue that the company is actually an investment company, if it has substantial non-trading income from a property portfolio or an investment portfolio. The test is all or nothing. If 50% plus of the overall business relates to trade, then BPR is available. If the trading element is less than 50% then there is no BPR. I suppose it is a bit like Brexit. If there is a risk to trading status, then I can advise on necessary corrective action so as not to lose this potentially valuable relief.
I also like to check that Entrepreneurs Relief would be available for all principal players, particularly if the company could potentially be sold in the not too distant future. Despite the intentions of the owner/managers, a predator could come in unexpectedly so it is worth being in a state of readiness. This is particularly the case where the shareholder has to be an officer or employee of the company for at least two years prior to the date of disposal.
The benefit of being able to successfully claim Entrepreneurs Relief is that the capital gains tax rate is 10% rather than potentially 20% so it is a valuable relief that should not be spurned.
I should always check that the share qualification (normally 5% of the share capital) is met.
Directors Loan Account
I also focus on the director’s loan account, particularly where it is positive, i.e. it is financing the company. A directors loan account is not a qualifying asset for IHT purposes for the individual. There is no BPR on this. There can be a misconception that, because it is for a business purpose, and is on the balance sheet that it qualifies for relief. That is not the case. The role of the directors loan account within the dynamics of the balance sheet should be considered. It may be that that action could be taken to secure business property relief and also strengthen the balance sheet. It could be that the directors loan account is not actually needed for financing purposes. It could then be an excellent product for longer term capital tax planning, involving the family.
Very often, though, it is the case that the directors loan account is actually overdrawn. Here the challenge is to make sure that the directors loan account is cleared within 9 months of the accounting period to avoid triggering a Section 455 tax charge, where the company has to pay out 32.5% of the loan outstanding at the balance sheet date and not repaid at that date 9 months further on. This tax is recoverable when the loan is repaid, but only 9 months after the end of the accounting period in which the loan is eventually repaid. Section 455 tax should never be unnecessarily incurred but the circumstances could exist whereby it does actually make good tax planning sense to suffer the Section 455 tax. This is rare though.
PAYE and VAT
It is always worth seeing that the client is up to date with their payment of PAYE and VAT. If I look at creditors and see that the PAYE liability is more than a quarter or the VAT liability outstanding is more than a quarter and it is clear that the client is moving into arrears, then this sends a warning sign of cashflow problems and potential action by HMRC to recover crown debt.
The review of the corporate balance sheet during a Tax Healthcheck could always trigger other points where corrective action is needed and I will then advise my clients accordingly. The above list should not be regarded as exhaustive.
If you think that your finances might be in need of a little TLC, get in touch with our team to arrange a Tax Healthcheck.
Posted by Paul Short
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.