Category: HMRC

Issuing more shares

Diluting your shareholding?

There may be good reasons for issuing more shares in your UK limited company, but you may unwittingly be running the risk of a capital gains tax bill. Read on . . .

The typical situation is a small company headed by Fred Flintstone and Barney Rubble who each own 50 Ordinary shares. Fred and Barney then decide to admit Mr Stone as a third director to Dinosaur Ltd and want to give him a small share of the company. The aim is to split the shares in a 40:40:20 ratio. There are two ways to do this:

  • The simplest thing would be for Fred and Barney to sell or transfer 10 shares each.
  • Or, Dinosaur Ltd could issue a further 25 Ordinary shares from the unissued share capital.

In either case the desired ratio of 40:40:20 is achieved, and in either case a potential gain arises in the hands of Fred and Barney. This happens whether or not money (or other consideration) changes hands. The gain arises, because Fred and Barney have given up a chargeable asset. Whichever way you look at it, they have surrendered 10% each of Dinosaur Ltd to Mr Stone.

The capital gains tax calculation depends on many factors, particularly in the case of small, close companies (and you should take professional advice)! In it’s simplest form, look at it this way . . .

Let’s say that Dinosaur Ltd is worth £1M. That was the value of the company on the balance sheet when last year’s accounts were done. Let’s also assume that the year end was yesterday and that the accounts were completed this morning, and so that figure is a valid current market value. Let’s also assume that Mr Stone paid nothing for the shares and was given them only on account of his important status.

Fred put in £50 on day one of the company and has just given away shares which originally cost him just £10. Because Dinosaur Ltd is now worth £1M he has made a disposal to the value of £100,000. His capital gain is £99,990 and he has and annual exemption of (say) £9,990. That leaves £90,000 chargeable to tax at the prevailing rate.

  • In 2009/10 the CGT rate is 18%
  • So 90,000 x 18% = 16,200

Amazing isn’t it? Fred has to pay a tax bill of £16,200 even though he received nothing but Mr Stone’s important status in exchange for a 10% share of Dinosaur Ltd. Ditto Barney! There are narrow, specialised rules which may allow some form of tax relief from that gain. However, does this story have implications for any share transactions you are considering? If your proposed arrangement means that your percentage holding in a company is going to change then you should seek professional advice.

And even if your holding is going up, there are implications for (a) your next share transaction and for (b) whoever has a diluted share in the company as a result.

Statutory Maternity Pay

The rules on SMP are subject to change every year and this article sets out only the general principles. The timing of notifications and claims is critical. For a precise overview of the current rules and rates, please refer to the HMRC Guide.

Generally, in order to qualify for SMP an employee must have been with the employer for at least 26 weeks and have been paid a minimum level of salary during that time – that’s usually at the threshold for tax or NI, so it’s not particularly high.

The claim for SMP can only be prepared after a form MAT B1 is received, and the GP is not permitted to issue that until week 20 of a pregnancy.

An SMP claim to HMRC must be submitted no later than 6 weeks before the expected due date.

Do not wait for week 20, notify us as soon as you are aware of a pregnancy. There are planning opportunities that can only be implemented in the period spanning week 4 to week 16 of a pregnancy. Talk to us about this at the earliest opportunity.

Once an employer has a copy of the form MAT B1, and is satisfied that the conditions have been met, SMP can be paid. The full amounts of SMP and a degree of compensation can be recovered from the Government. Normally this is done by restricting the monthly PAYE remittance of all income tax and NI arising from the other employees. Where there are no other employees, then this recovery has to be made by a funding application to HMRC.

If you are a small employer and need the funding up front, we can complete the relevant claim for you, for a small fee. That’s normally £350 plus VAT. A separate fee may also be charged if week 4/16 planning can be implemented. The SMP compensation paid to an employer is usually enough to cover the professional fees charged by Proactive, and sometimes it’s much more.

Tax Returns and IR Marks

These days, both personal tax returns and corporation tax returns are generated by us using software which has been approved by HMRC. The process includes the creation of a unique IR Mark which is established by applying a formula to the data in the return. This means that every tax return has a totally unique IR Mark.

We ask clients to check tax returns carefully to ensure that all income has been declared and that all allowances have been claimed. When you are satisfied that the return is correct and complete, HM Revenue & Customs will accept authorisation electronically.

We are permitted to file electronic tax returns only when we are satisfied that the IR Mark on our digital file is the same as the one on the document that you have approved. If any amendment is required to a tax return, then a fresh document needs to be prepared and sent out again for approval. That’s because the IR Mark changes after even the most elementary revision.

The Self Assessment tax return deadline normally falls ten months after the tax year ended, and you need to ensure it is submitted by 31 Jan. Please remember that in law, the responsibility for filing a tax return on time and for paying tax lies with you the taxpayer.

There are automatic penalties for late tax returns, so we encourage clients to approve them as soon as possible. Once submitted, we can provide details of the electronic proof of receipt.