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Raising business finance ― loans

Raising business finance ― loansOne of the most pressing issues for most types of business is the raising of sufficient finance to commence, continue or expand activities. However this is done, the business ought to consider the tax implications of the various options. In addition, there are specific tax reliefs which investors may actively seek or encourage a business to adopt. Tax advice at an early stage can maximise the effect of existing investment as well as encourage external investors.For unincorporated businesses the starting point for raising finance is often through capital provided by the business owners, either the sole trader or the partners in the partnership, or possibly by way of bank borrowings. This guidance note looks at the tax implications of loans within an unincorporated business and also within an OMB company. For more details on raising finance through share capital, see the Raising business finance ― share capital guidance note.Treatment of loans in the businessMost businesses will have to take out a loan of some sort and the tax implications will differ depending on the business entity which is borrowing, the terms of the loan and who it is from.Sole tradersFor a sole trader, provided the loan is taken out for a trading purpose (eg to buy stock, pay staff wages or buy an asset to be used in the trade), interest payments will be allowable revenue expenses for tax purposes whatever the nature of the loan. This will include overdraft interest (providing the account is

Corporate debt ― overview

Corporate debt ― overviewThis guidance note provides an introduction to the provisions governing the taxation of debt for UK companies and also provides links to more detailed guidance notes dealing with those provisions.The taxation of corporate debt in the UK is complex. There are several different sets of rules governing the amount and timing of tax deductions available for interest and other amounts relating to corporate debt. These include:•the loan relationships regime•the corporate interest restriction (CIR) rules•transfer pricing and thin capitalisation requirements•a range of associated anti-avoidance measures ― it should be noted that there are regime anti-avoidance rules (RAARs) in CTA 2009, ss 455B–455D and related sections for loan relationships and in TIOPA 2010, s 461 applicable to the CIRIt should also be remembered that payments of interest by a UK company on all liabilities capable of remaining outstanding for more than one year are subject to withholding tax, unless they are expressly exempt or qualify for relief.Loan relationshipsIn most instances, a company’s financing costs and income are taxed or relieved under the loan relationships regime. Relief is only available where the cost attaches to the company’s own loan relationships or a balance which is deemed to be a loan relationship for tax purposes. See the What is a loan relationship? guidance note.A loan relationship exists where a company stands in the position of debtor or creditor in respect of a money debt that arises from a transaction for the lending of money. Although, it

Corporation tax return ― compliance toolkit

Corporation tax return ― compliance toolkitApproach when preparing a corporation tax returnTax law has become increasingly complex in recent years and there is often a myriad of issues to keep in mind when preparing the corporation tax return. Coupled with this, the tax compliance process is typically highly pressured because of the somewhat competing priorities of having to finalise the tax return quickly but at the same time accurately and to a high standard. This toolkit is aimed at supporting tax advisers that prepare or review corporation tax returns in delivering high-quality and accurate returns by providing guidance on the most common areas in a set of financial statements that give rise to tax adjustments. The toolkit focuses on the issues typically encountered by a UK trading company, but many of the issues will also be relevant to non-trading companies such as property investment companies or holding companies. The accounting areas discussed below follow the typical order of a standard set of financial statements. The list is not exhaustive, but covers the more frequently encountered tax issues in reviewing a set of financial statements and preparing the tax return. An explanation of the relevant issue for each area is provided, together with practical points to be aware of and links to additional information so that more detailed research can be carried out. Initial considerations when starting the corporation tax compliance reviewThere are several sources of information which can prove extremely useful when starting the compliance review process. These can

Connected party relationships ― late interest

Connected party relationships ― late interestOverview of rulesGenerally, debits and credits arising on loan relationships are taxed and relieved as they are recognised in the accounts, ie generally on an accruals basis. However, for:•loans made by a close company participator, or•loans made by an occupational pension schemewhere interest on such a loan relationship is not paid within 12 months of the end of the accounting period in which it accrues, no relief is given for corporation tax purposes until it has actually been paid (ie a debit for that interest will not be allowed until it has actually been paid). These provisions are known as the late interest rules.CTA 2009, ss 372–379 (Pt 5, Ch 8); CFM35810The late interest legislation is essentially a set of anti-avoidance measures. It seeks to prevent companies from taking advantage of an interest mismatch that would otherwise arise if the borrower obtained relief for accrued interest which is not paid for some time, and the lender is outside the loan relationship rules (or is completely outside the UK tax net) and only taxed on that interest when it is received.It is important to note that this anti-avoidance measure only applies to interest, and not to other charges and financing costs which may arise on the loan.It is important to give detailed consideration to whether the rules apply when preparing a company’s tax computation so that the relevant debits to the profit and loss account are treated correctly. The rules will apply most

New businesses and registering for tax

New businesses and registering for taxBusiness must consider both their one-off compliance obligations when the business commences, and their ongoing requirements. The extent of a business’s tax compliance obligations depends on many factors, including:•the type of entity•the size of the business•how many employees (if any)•in some circumstances, the type of work undertaken, eg construction•the type of assets in the business•existence of any share reward schemesThis guidance note summarises the main tax compliance obligations for new businesses. For checklists of compliance requirements which can be used at client visits, see the Starting the business ― overview guidance note.Self assessment and NIC for self-employed individualsA sole trader must notify HMRC that they have started in business, as soon as the business commences, at File your Self Assessment tax return online.Self-employed businesses and landlords with annual business or property turnover above £50,000 will need to follow the rules for Making Tax Digital for income tax (MTD ITSA) from 6 April 2026, as announced on 19 December 2022 in a statement by the Treasury Secretary and an HMRC Press Release. These reset the timetable and income thresholds for entry to MTD ITSA. Previously, business with gross income over £10,000 were due to join MTD ITSA from 6 April 2024. Businesses with gross income over £30,000 will join from 6 April 2027, and there will be further consultation regarding businesses with gross income of £30,00 or less. Voluntary sign-up to MTD is also available for UK residents who

Accounting for income tax

Accounting for income taxObligation to withhold income tax from certain paymentsWhen companies make certain payments to specified types of recipient, they are required to deduct income tax at source and pay it to HMRC. In doing so, they act as a collector of tax. The liability to the tax is borne by the recipient of the related income who should usually be able to claim relief for the tax suffered at source.The main instances where companies may have to deduct income tax at source are:•payments of interest which are not to companies•payments of interest overseas•payments of interest to partnerships (unless all the partners / members are companies), and•royalty paymentsITA 2007, ss 874, 946Tax is deducted at the rate of 20% in respect of interest and royalties.A common example of the payment of interest by a company to an individual, is where a director has made a loan to a company. A commercial rate of interest may be paid by the company on the director’s loan account, as one way of extracting funds for the director. The interest is an allowable deduction for the company, provided the loan money is used within the company’s business, and not for an ‘unallowable purpose’. Income tax sufferedCompanies do not suffer income tax on amounts received from other UK companies and, likewise, they do not withhold tax on payments to other UK companies.However, if companies receive patent royalties from individuals they are deemed to have received the income net of

Withholding tax on payments of interest

Withholding tax on payments of interestThis guidance note explains the main scenarios where UK companies (other than financial institutions, etc) must withhold tax at source on payments of interest and how this is dealt with in practice.Obligation to withhold income tax from certain paymentsWhen UK companies, or partnerships of which a company is a member, make certain types of payment, they are required to deduct income tax (at the basic rate) at source and pay it over to HMRC. In doing so they act as a collector of the UK tax that may be due from the recipient of the related income. The recipient will usually be able to claim relief against its UK or overseas tax liability for the tax suffered at source, as long as they are not based in a tax haven.Income tax is only deductible from payments of yearly interest with a UK source when paid.Yearly interest has no statutory definition but is accepted to be interest on loans capable of lasting more than 12 months. Short interest payable on loans in place for a period of less than 12 months is generally outside the scope of the rules, as is a discount. What constitutes a UK source is determined by case law and depends on the facts of the particular case and how the transactions are carried out. HMRC consider the residence of the debtor is the most important factor, along with the location of the assets held by the debtor as these factors

Notification of uncertain tax treatment ― overview

Notification of uncertain tax treatment ― overviewIntroductionFor returns due on or after 1 April 2022, certain large companies and partnerships are required to notify HMRC where they adopt an uncertain tax treatment for corporation tax, VAT or income tax (both self assessment and amounts collected via PAYE). The stated aim of the notification regime is to ensure that HMRC is aware of all cases where a large business has adopted a treatment that is contrary to HMRC’s known position and to bring forward the point at which discussions occur in relation to the tax treatment, thereby reducing what the Government refers to as the ‘legal interpretation tax gap’. The notification requirement is one part of a series of measures aimed at improving the transparency in the approach large businesses take towards taxation, such as the sanctions for uncooperative behaviours and the requirement to publish tax strategies. For commentary on these, see the What activity is targeted? and Publication of tax strategies by large businesses guidance notes.The regime applies to large (as defined) companies, partnerships and LLPs including both UK resident entities and non-UK resident entities that have a UK presence (for example, an overseas company with a UK permanent establishment).Broadly, a large business is one with turnover above £200m and / or a gross balance sheet total above £2 billion in the previous financial year. For non-resident companies, the turnover and balance sheet amounts relate only to the UK presence of the business and there are specific provisions around

Financing the company ― overview

Financing the company ― overviewHow to raise sufficient finance to commence and continue operating is one of the most important considerations for most types of business.There are some fairly obvious sources of financing, such as bank finance, however there are also several types of tax efficient financing available, such as the enterprise investment scheme (EIS) and venture capital trusts (VCT). Obtaining tax advice at an early stage to ensure that these reliefs are available can help attract and retain suitable investors. This guidance note explores some of the options available and the relevant tax considerations for each one.LoansMost businesses will have to take out a loan of some sort and the tax implications will differ depending on the terms of the loan and the identity of the lender. Generally, the loan relationships regime applies. See the Corporate debt ― overview guidance note and associated notes for information on the tax implications of corporate debt.Bank loans and overdraftsInterest arising on bank loans and overdrafts is usually allowable when it is accrued in the accounts. Certain costs of arranging loan finance are also allowable under the loan relationships rules. For further information, see the Taxation of loan relationships guidance note.Shareholder loansLate interest rulesIf a company enters into a loan arrangement with an entity other than a bank, there may be additional tax implications. For example, loans between certain connected parties are subject to anti-avoidance provisions known as the ‘late interest’ rules. The relevant legislation is set out in CTA 2009, Part

Extraction of funds following incorporation

Extraction of funds following incorporationThis guidance summarises some of the different methods of extracting funds from a newly formed company following incorporation of a sole trade or partnership. Detailed guidance on extracting profits from owner-managed companies can be found in the Effective profit extraction ― overview guidance note.SalarySalaries can be paid to the directors, either as regular sums or as more infrequent bonuses, and are tax-deductible for the company. If the director has an explicit employment contract, they will receive the national minimum wage (NMW) in respect of work carried out under that contract, so it would not be possible to pay such a director solely by way of dividends. The requirements of real time information (RTI) have made the payment of salary very rigid, and payments must be reported when made. There is also additional administration under this system that may negate any tax benefit from paying a nominal salary. This should be assessed on individual circumstances.A salary / bonus is subject to income tax in the hands of the directors.In addition to the Class 1 NIC payable by the directors / employees, the company will have to pay Class 1 secondary NIC on the gross salary /