Our Virtual Tax Partner practical tax conference ran this week and the first session concentrated on ‘How to run the most tax-efficient accounting practice…ever!'. Speaker, Nichola Ross Martin CTA (fellow) FCA, looked at ways that an accountant can 'Preach what you practice!'

An example scenario assumed that you can start a new practice from scratch by buying out a block of fees from a retiring accountant. What kind of profit do you need to support a truly tax-efficient owner's remuneration package, yet, at the same time keep things as simple as possible?

It turns out that you can produce a 'superprofit' (i.e. a profit before the business owners' remuneration) in excess of £150,000 as a sole company owner. With careful use of benefits and allowances, you can structure your business to pay less than 6.4% tax in the first year of trading and 11.17% in the second year. What would be the cost if you structure the business as a sole trader? That would be nearer 20.1% in year one and 32.96% in year two.

It's real proof, if it were ever needed, that trading via a company can bring significant tax advantages when you aim to 'max out' the different tax reliefs available. 

The 'Most efficient accounting practice...ever' model is only a model but the talk provided ample materials to allow advisers to really add a lot of extra value when they are advising Startups.

The session also generated some interesting questions from the audience.

Q. On this model, if things did not go so well and you knew that were going to be making a loss in the first year, would it be better to set up as a sole trader so that you can use opening year loss reliefs?

A. Yes, that might be an idea. Opening year Loss relief allows a carryback against earned income of the previous three years. If you were previously in employment and paying tax then a carryback would be effective.

Also, it’s worth pointing out that if you have no income to offset against, then the losses would just carry forward. Once you are carrying them forward, they would be more valuable to offset against your income as a sole trader because that (in this model) pays higher taxes than the company model.

Q. If you are charging your company rent, plus a service charge, can you make the service charge flexible (thinking about the forecast rise in energy prices)?

A. Yes of course you can. If you are making a Rental agreement for use of a home as an office as a director, go and check out typical commercial serviced office agreements. Those often bill by use of certain resources, be that telephone, power or other services.

Q. Does HMRC ever challenge the amount of wages paid to spouses?

A. Yes, that is the sort of thing that does come up from time to time in enquiries. I think that the problem for HMRC is that people rarely create an employment contract for their spouse and so during an enquiry a tax investigator has to ask a lot of questions to work out who is doing what.

Q. This one is also about spouses. Can you give your spouse different classes of share as I remember that this was something that was a problem in the past?

A. You can use different share classes and pay different dividends but you need to ensure that this process does not deprive other shareholders of income. We have detailed guides to Shifting your Income and the anti-avoidance Settlement provisions and they look at this complicated subject in more detail.

Q. Company profits are £40k and salary £6k. Can a company pay £34k into a pension fund for the director and claim a CT deduction

A. Yes, employer-made Pension Contributions are not restricted by net relevant earnings in the way that employee personal contributions are. The company is free to contribute this amount into the pension fund and a CT deduction should not be denied by HMRC.

Q. Is the Benefits In Kind charge still 2% if the company pays the director's car insurance as well?

A. No. Where the car is a Company Car the company pays the insurance anyway as the owner/lessor of the vehicle so this is not an additional benefit taxable on the director. If the director is using their own car and the company pays their insurance this will be a benefit valued at the cost of the insurance. If the company pays directly rather than reimbursing the director it will be settling a pecuniary liability and will have to apply PAYE and National Insurance Contributions (NICs) via the payroll.

Q. What's your thoughts on the wholly and exclusive rule being applied to 'excessive' pension contributions?

A. This is not something we typically see HMRC take the point on. They see pensions as part of the remuneration package and of course, they are taxable when drawn so they do not usually challenge the amounts being contributed.

Q. Is it considered reasonable to have more than one company car which is used by family members?

A. Yes but remember that the cars will be taxable on the employee, even if only used by other family members and the employer has to pay NIC’s. Of course, if the family are all provided with electric cars then the Benefit In Kind tax will be minimal for the next few years.

The Virtual Tax Partner practical tax conference ran on 12-13 October 2021.

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