Tax relief reforms call for “mindset change”

Tax relief is no longer as clear-cut as it was.

With the UK budget deficit rising, despite austerity measures, and HMRC clamping down on the ways that businesses can claim tax relief, accountants must work harder to meet their clients’ tax needs. “It’s a mindset change for the profession,” says Stephanie Churchill, tax specialist at Churchill Taxation and speaker at the 2016 AAT Annual Conference. “Accountants must make sure clients are fully aware of all the risks. If there is an opportunity for HMRC to challenge, you must let the client know, and they can decide whether to claim the relief or not.”

Given the changes coming through – the dividend tax and the clampdown on various avoidance schemes – accountants will need to offer more advice on a client-by-client basis. This could be a good thing, says Churchill: “It’s a great opportunity for accountants to talk to their clients. If you’re talking about their dividend strategy, for example, you can guarantee something else will come out of the woodwork.”

Dividend of the line

The dividend tax in particular marks a sea change in the way accountants work with small business clients. Previously, dividends were an almost ‘one size fits all’ solution for small to medium-sized enterprises, and there was no real alternative with the same benefits. The dividend tax is levelling the playing field. What works for one business may no longer work for another. “It’s a case of revisiting each client’s strategy and asking if it’s going to be the most efficient one in future, and whether there is an opportunity to get the most out of dividends this year,” says Churchill.

“You should also look at it sooner rather than later; once we’re past 5 April, there’s not much we can do.” Most practices will have clients whose dividends strategy will need to be scrutinised, says Churchill. For example, some family-run businesses have lots of family members as shareholders, with each taking small amounts as dividends. In that case, it might be easier to convert those dividends into salaries – companies will get corporation tax relief on salaries, but pay tax on dividends. This is less applicable where more is being paid out in dividends, however. In short, accountants will need to spend more time working with their clients to determine the best solution. “It’s a great opportunity to offer higher-value advice,” says Churchill. “There’s genuine work now needed to put different scenarios to the client, and the client will have to choose what’s best for them, because the differences aren’t as marked as before.”

Tax reliefs

Small businesses have also lost out on several bonafide tax reliefs. But there are still options, such as entrepreneurs’ relief, relief from capital gains tax (CGT), business property relief and research and development (R&D) relief. “R&D relief is really generous,” says Churchill. “The capital allowances, the annual investment allowance and so on are still very good. So small businesses need an advisor who, first, understands their business and what it does, and, two, understands what reliefs are available, so that they can marry the two together.”

Small businesses should take advantage of these reliefs while they last – the deficit continues to rise and, with the government running out of things to cut, the next logical step is to bring in more tax. “I suspect there is a lot of potential for the tightening up of relief across the board. One of the taxes they haven’t committed to protecting is CGT, so that’s an obvious one for them to start messing around with,” says Churchill. “There have also been claims that entrepreneurs’ relief is being used too much, which is hysterical – surely that’s the point of a relief?” HMRC’s first move is likely to be a crackdown on companies engineering eligibility for a tax relief, rather than automatically qualifying for it. “I suspect there will be a bigger clampdown on entrepreneurs’ relief and business property relief,” notes Churchill. “Private residence relief is a massive one for HMRC, and it’s really important to clients. We will get more challenges.”

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.