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Entrepreneurs’ Relief changes fail to meet up to the test

During the last Budget, the Government announced new conditions to entrepreneurs’ relief that would take immediate effect to change the definition of a “personal company” for shareholders who claim entrepreneurs’ relief.

By introducing these changes, they hope to restrict shareholders relief to those with a genuine material stake of at least five per cent in a company.

For gains arising from shares, or assets used by the company, the company has to be their “personal company”, which requires them to be an employee or officer of that business or one within the same trading group.

In order to obtain relief shareholders would, therefore, have to meet four conditions:

  • hold five per cent of the ordinary share capital
  • control five per cent of the voting rights
  • have a right to at least five per cent interest in the distributable profits
  • have a right to at least five per cent of the net assets on a winding-up of the company.

However, the last two points are proving difficult to codify into law, due to the fact that they appear to rely on provisions relating to companies, intended to prevent the abuse of corporation tax group relief.

This has resulted in the tests referring back to definitions of a company receiving a distribution from another company, rather than looking at this issue at an individual shareholder level.

The point regarding distributable profits also creates issues as such entitlement, usually in the form of dividends, is not given until a dividend resolution is passed by all the eligible shareholders.

Following these issues, HMRC has tabled an amendment that will create an alternative test for a “personal company” based on the shareholder’s entitlement to proceeds in the event of a hypothetical sale of the whole company.

This will ensure that it will be easier to estimate the value of the whole company on a single day, rather than changing shareholder’s rights and dividend entitlements over the entire qualifying period.

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Businesses get to grips with new employment costs

Employers across the UK are starting April with a sudden increase in employment costs following a rise in workplace pension contributions and minimum wage costs.

The sharp increase in expenditure on staff couldn’t come at a worse time for business who are experiencing growing uncertainty over the UK and wider global economy.

Minimum contributions for workplace pensions have risen to eight per cent this month, with a minimum contribution of three per cent from employers.

The five per cent gap between minimum employer contributions and the minimum overall contributions must be made up by contributions from the employee. However, employers can increase their contribution to reduce the impact on employees, should they wish.

The minimum contribution only applies to employees earning £10,000 a year or more and percentage contributions are calculated using only the employee’s earnings between £6,136 and £50,000. This is an increase from 2018’s income threshold of £6,032 to £46,350.

Meanwhile, many employers will also see wage costs increase with the introduction of new statutory wage levels. As of 6 April 2019, employers must pay the following hourly rates for staff on the minimum or national living wage:

  • 25 and over (national living wage) – £8.21
  • 21 to 24 – £7.70
  • 18 to 20 – £6.15
  • Under 18 – £4.35
  • Apprentice – £3.90

In some cases, the increase in the statutory minimum wage could push up the additional amount that employers are required to pay towards workplace pensions, meaning that employers with a large number of minimum wage workers, will be hit harder.

Link: National Minimum Wage and National Living Wage rates & Workplace pensions

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