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Tony Wickenden: Do not overlook clients’ business needs

A greater focus on wealth management means planners are often missing basic requirements of business-owner clients

One-person companies have been in the news a bit over the past few years. The main reason for their publicity has been HM Revenue & Customs action against off-payroll working arrangements; in particular, through so-called personal service companies.

HMRC’s concern is that employments are being dressed up in a corporate structure, meaning less tax and National Insurance flows to the Treasury.

Self-evidently, rewards for work paid to a company (even a one-person company) will avoid the deduction of tax by the payer under PAYE and escape NI contributions altogether.

The amounts paid will constitute business income for the company.  Allowable expenses can then be deducted under the “wholly and exclusively” test, as opposed to the more rigorous “wholly, exclusively and necessarily” test for employees. The net result will broadly represent taxable profit.

Tony Wickenden: Do clients know enough about IHT reliefs?

Of course, opportunities may exist to reduce this through deductible pension contributions, subject to the usual limitations.

Profits would be taxed at 19 per cent and post-tax profit would be available for NIC-free withdrawal by way of dividend. Dividends above the £2,000 allowance for 2018/19 (£5,000 for 2017/8) would then be taxed at 7.5 per cent, 32.5 per cent and/or 38.1 per cent as appropriate.

You can understand the appeal – but also HMRC’s desire to look carefully at the substance of the labour supply to see if an employer/employee relationship can be established.

This is clearly a big issue for the Treasury. We have already seen the action against personal service companies supplying the public sector (shifting the responsibility for determining status to the paying body) and we are likely to see a similar move in relation to the private sector following November’s Budget.

We have also had the Taylor Report on employment practices, which, while not tax driven, could well have a tax implication. For example, any re-categorisation of “gig-economy” workers as employees will have tax and employment law implications.

Tony Wickenden: Tax avoidance rules back in the spotlight

Recently, a sole director/shareholder case has raised a different issue around one-person companies.

The case in question was Kings Court Trust Limited & Ors v Lancashire Cleaning Services Ltd [2017] EWHC 1096 (Ch). Mr P was the sole director of Lancashire Cleaning Services Ltd. While he appointed executors to his estate in his will, he did not update the company’s Articles of Association to allow the executors to make decisions on behalf of the company, such as appointing a new director.

It should be noted that private companies which have adopted the default Model Articles under the Companies Act 2006 will already have the necessary provisions to allow personal representatives to appoint directors. However, the old Table A Articles from the Companies Act 1985 do not have such provisions.

Following Mr P’s death, the company’s assets were frozen by the bank and employees could not be paid as the executors were powerless to act.  The executors had to apply to the Court to rectify the register of shareholders by removing the deceased’s name and replacing it with the names of the executors.

Such an application was made under section 125 of the 2006 Act. In this case, given the urgency of the situation, the Court was very helpful and granted the application even before the executors obtained a grant of probate.

The above serves as a worthwhile reminder of a couple of key points for financial planners:

1. One-person companies may still have business succession needs to plan for and, where the owner has family/dependants, will almost certainly have protection needs.

2. Multi-owner businesses are likely to have both the needs referenced above and without an appropriate business will (also known as share purchase agreement) are likely to suffer the unwelcome results of a business intestacy.

With so much emphasis these days on wealth management, basic but incredibly important business protection needs often get missed.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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