Category: HMRC

Employment Allowance: Group / Connected Companies

Employment allowance in group companies can only be claimed by any one company.

An employer gets £3,000 off their Class 1A (Secondary) National Insurance in each tax year.

The question arises – can two or more companies in a group claim £3,000 each.

The answer is No, only one of the group companies can claim employment allowance. Tax payer decides which company gets it.

I would highly recommend a read through the technical guidance link given below:

a) HMRC even includes unincorporated businesses in connected businesses.

b) Besides share-holding and control as under Corporation Tax Act 2010, HMRC has included within connected businesses – economically interdependent businesses as well.

Technical guidance in this case is highly readable with lots of examples.

Sources:

Basics

Technical guidance: Connected companies

PS – I came across this little gem of information among audience questions today on HMRC Webinar: Employers – what’s new for 2018. I will highly recommend subscribing to these webinars. They are free !

October 2019

HMRC’s latest Agent Update Issue 74 informs that from 6 April 2020 Employment Allowance will be restricted to employers with NICs liabilities of under £100,000.

That is employers will need to look at their last tax year’s Employer NIC expense and if its over £100k they cannot claim £3k Employment Allowance.

If employer is part of a group Class 1 NICs liabilities of all companies, and/or PAYE schemes, needs to be added together to assess eligibility for Employment Allowance.

May 2023

If one group company cannot claim full balance, balance cannot be transferred to another company.

Sep 2024

The Employment Allowance can only be used against your employer Class 1 NICs liability. It can not be used against Class 1A or Class 1B NICs liabilities.
Source : Claiming Employment Allowance: further employer guidance.

Overview of taxes in United Kingdom

Below is a very brief summary of taxes in the UK but gives an idea to a businessman who is planning to start a business.

Ongoing Taxes

NameDetailRate
Corporation taxTax on profit the company makesCurrent rate 19% going up to 25% from April 2023 for profits over £250k
Dividend taxTax on dividends received by individual shareholdersFirst £2k tax free then between 7.5% to 38.1%
Payroll (PAYE) tax    Taxes on becoming an employer 
Income taxEmployee paysFirst £12,570 is tax free then between 20% to 45%.
Employee national insuranceEmployee paysFirst £8,840 tax free then 12%
Employer national insuranceEmployer paysFirst 9,568 tax free then 13.8%.

Employment allowance £4k
Value added taxSales tax when turnover crosses £85,000Usually 20%
Business rates          Municipal taxUsually, half of rent


One off taxes

NameDetailRate
Capital Gains TaxTax on the profit when you sell something that is increased in value.First £12,300 tax free then 10% or 20% depending on your income. Tax on sale of residential property is higher.
Inheritance TaxTax on the estate of someone who died.40% over £325,000

Other matters

NameDetailRate
InsuranceMinimum legal requirementEmployer’s Liability Insurance.   Certificate needs to be kept for 40 years. Requirement now removed.
Minimum WageLegal minimum wageOver 23 years: £8.91 per hour. Lower for younger people

Matters specific to restaurant industry.  

NameDetailRate
Premises LicensePermit to sell alcoholNew license can be a long process. Transfer is usually free and annual fee less than £1k p.a.
Music LicensePermit to play background musicAnnual fee under £1k p.a.

Example:

Suppose you start a restaurant and after few years it starts making some profits, you will find that you have a new partner to share in your good fortune – Her Majesty’s Revenue and Customs (HMRC)

I have given below what an owner will make and what his new partner HMRC will capture.

Owner’s share:
Sales                                                   £2,000,000
Net Profits                                        £400,000             say 20%              
Corporation Tax                              £100,000             25% rate from April 2023
Distributable Profits                       £300,000
Personal/Dividend tax                   £100,000            
Net in hand                                      £200,000

I have taken net profits at 20% this is achievable in a well-run high end central London restaurant. This profit percentage is after paying payroll taxes, VAT and Business Rates.

HMRC’s share:
Business Rate                                   £100,000             Fixed not dependent on sales
VAT                                                     £400,000            
Payroll Taxes                                    £60,000              
Corporation Tax                              £100,000            
Personal/Dividend tax                   £100,000            
Total                                                   £760,000

Above figures have been estimated and rounded off to make them easier to understand but on the whole close to reality.

In case you decide sell or just drop dead, you will meet new characters from the `Book of the Taxes` called Capital Gains tax and Inheritance tax but don’t worry, not today.

Set up a business – GOV.UK (www.gov.uk)

Providing medical insurance or life cover to employees?

When giving medical and insurance benefits to staff employer should arrange and pay the provider directly.

Medical Insurance

Step 1: Ascertain whether benefit employer wishes to provide is exempt or not.

Which benefits are exempt? Click here for answer

Step2: If benefits are not exempt, we need to report them to HMRC and deduct tax and NIC but it depends on who pays for the benefit.

Who PaysWho pays What
Employer arranges and pay directly to insurance companyEmployer Class 1A NIC via P11d

Employee – income tax via Self-assessment but pays no NIC.
Employee arranges but employer pays to insurance companyEmployer Class 1A via P11d  


Employee – income tax via Self-assessment   Employee pays NIC via payroll by adding value of benefit to employee’s earning.
Employer reimburses employeeEmployer pays Class1A and employee pay
Class1 NIC and Tax. All collected via payroll.

Conclusion: Best option is employer to arrange and pay provider directly. Please note cost of insurance and class 1A NIC will be tax deductible for employer as an expense.

Source:

Expenses and benefits: medical or dental treatment and insurance – GOV.UK (www.gov.uk)

Life Cover

No liability to income tax arises if the employer arranges and pays for a `retirement or death benefit`.

Retirement or death benefit – means a pension, annuity, lump sum, gratuity or other similar benefit which will be paid in the event of the employee’s retirement or death.

Smaller companies can think about Relevant life cover.

Source
Section 307 ITEPA 2003

National Minimum Wage is increasing from 1st April 2022

Every year all employers should check payroll records to ensure they donot fall foul of NMW regualtions

National Minimum Wage (NMW) is increasing from £8.91 to £9.50 from 1st April 2022.

More information on NMW as individuals younger than 23 years get lower pay.

Please review your payroll records to ensure that you are not paying any staff less than NMW.

Method to check

  1. Fixed Pay – Annual Pay divided by number of hours worked in a year.

Example an employee works for £24,000 per annum for 35 hours per week.

Annual hours worked 35 x 52 = 1820 hours.

Hourly rate = 24,000 divided by 1820 = £13.19. This is more than NMW

  1. Variable pay – this is simpler just ensure basic hourly rate is £9.50 or more from 1st April 2022.

Gov.uk calculator to check if you are paying NMW

Taxation of investments in Indian Mutual Funds in the UK

Gains made on disposal of Indian mutual funds are taxed at highest marginal rate of taxation

HMRC has classified overseas mutual funds as `reporting` and `non-reporting`.

Reporting means mutual funds which provided certain data to HMRC on periodic basis. HMRC publishes a list of these funds monthly. In case your mutual fund is such a fund your gain will be taxed as Capital Gains.

Non-reporting means any mutual funds which do not comply with these requirements.

Recently funds in India have started registering with HMRC and have become reporting funds so we recommend you check HMRC list before tax calculation. For a list of reporting offshore funds click here.

When you dispose offshore non-reporting mutual funds

Any gain on disposal of investments in Offshore non-reporting mutual funds (i.e., any fund based outside UK) will be taxed at the highest marginal rate of income tax and not as capital gains.

Double whammy – in case of loss, the loss is only allowed to be set-off against capital gains and not against income .

Lastly, annual capital exemption is also not available to such gains.

Conclusion: From a tax perspective, if you wish to invest in Indian stock market better invest directly in stock and shares and not via a Mutual fund.

Bonus:

  1. An article with an example.
  2. This is a complex area of law; further information can be seen at HMRC Investment Funds Manual – IFM12000 and IFM13000.
  3. Offshore gain is treated for tax purposes as miscellaneous income – [see Tolley Income tax annual 50.3] to be mentioned in SA106 2023 in Box 41.

Further reading:
1. HS265 Offshore Funds
2. Visit our Worldwide Disclosure blog.
3. To know about taxation of UK mutual funds.