With the annual tax compliance process nearly over, for a majority of our clients it is an opportune time to reflect on the lessons learnt. There are certainly tax advantages to be obtained by a little forethought and careful consideration before filing your tax return.
The annual investment allowance (AIA) has dropped to £25,000 per annum with effect from 1 April 2012 but there is still an advantage in obtaining an accelerated deduction if you are able to utilise it.
To obtain AIA the assets must be:
- qualifying assets (computers, office furniture and equipment), not leasehold improvements, art or antiques);
- used in a trade;
- owned by the taxpayer; and
- acquired in either a corporate entity or an LLP which has only individuals as members.
In order to maximise this relief you should consider your structure and which entity should acquire the assets.
Partnership profit/loss allocations
Profits of an LLP for tax purposes must be allocated in full to the members of the LLP for the taxable period in which they were members in accordance with the profit sharing arrangements in force during the period. For tax purposes, it is not possible to retain earnings in an LLP to be allocated in future periods, although it is possible to allocate profits but not permit members to take drawings against these profits if additional working capital is required. There are several factors to be considered in allocating profits:
- If an unforecast allocation is made to a corporate entity it may push the level of the corporate entity’s taxable income into the bracket for which quarterly instalment payments were required to have been made. This will result in interest being charged on the underpayments together with possible penalties;
- If the LLP Agreement is prescriptive about the method of allocation of profits, it must be followed and profits allocated accordingly. If there is discretion in the LLP Agreement then flexibility can be applied in allocating profits which can be desirable;
- Sunset or trail provisions following retirement can cause problems if the member is entitled to receive profits for taxable periods after they have ceased to be a member. Continuing to retain them as a member with no rights other than profit allocations can resolve this problem.
If your business has made losses in a period, it is equally important to consider how to best utilise these. The LLP Agreement usually prescribes how losses are to be allocated amongst the members. There are several ways that losses can be utilised for tax purposes:
- Offset against other sources of income or against capital gains in the same tax year;
- Carried back by individuals to the preceding tax year and used against other profits on which tax has been paid resulting in a tax refund. In the first four years of an individual becoming a member this is extended to the three preceding tax years;
- Carried forward and used against future LLP profits;
- If the loss arises in the last year of trade it can be carried back three years against LLP income arising in those earlier periods;
- Allocated to a corporate partner and used to offset current year profits, carried forward against future anticipated profits or claimed against prior year profits.
HMRC are particularly focused on the tax advantages obtained by using losses and there are restrictions and anti avoidance legislation that should be carefully considered before making loss allocation decisions.
Corporation tax payments
Corporate entities pay tax at either 24% or 20% depending on the threshold of profits. The thresholds are reduced depending on the number of associated corporate entities within the group which can significantly increase the amount of tax paid. US LLCs and general partners of fund vehicles, if they are owned within the group, may be associated entities.
It is therefore important to review the group structure and, where possible, avoid unnecessary entities within the structure.
Expenses of an entity are only deductible if they are wholly and exclusively incurred for the purposes of trade and are not excluded expenses. Items that are typically not deductible are client entertainment, non qualifying gifts, legal fees relating to matters that
are capital in nature and expenses incurred on
behalf of members.
It is vital that you have considered your transfer pricing position when completing your annual tax returns. If you have understated your income, HMRC may impose a transfer pricing adjustment resulting in an increased tax liability, interest and penalties. Whilst HMRC will not require a subsequent adjustment, it is important not to unnecessarily overstate your income.
Within three months of starting a trade it is necessary to inform HMRC that trade has started, both for corporate entities and new members of LLPs. Tax reference numbers must be sought and if a tax agent is used they must be authorised to act on behalf of the taxpayer. This can take some time for HMRC to process and may result, if not done promptly, in missed deadlines and penalties.
HMRC requires all corporate tax returns to be accompanied by financial statements converted into iXBRL. This has increased the compliance burden on corporate partner entities that must use either the services of their agent, acquire specific software or grapple with the clumsy but free HMRC version.
For further information please contact Marie Barber.
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