The advent of the Companies Act 2006 has brought about a number of changes for companies. One such change is that from 6 April 2008 private companies can choose whether or not to have a company secretary.
In this blog, we outline the company secretarial matters which need to be dealt with by your company under the Companies Act 2006, whether you have officially appointed a company secretary or not.
The company secretary and Companies House
Company legislation requires that a minimum amount of information about a company must be publicly available, including, for example, annual accounts, the registered office address and details of directors, the secretary (if there is one) and members.
A company secretary, or in the case of a private company, the person responsible for company secretarial duties, will have regular dealings with Companies House, as this is where public records about the company are held.
The status and liability of the company secretary
The company secretary is an officer of the company. This means that they may be criminally liable for company defaults, for example, failure to file a document in the time allowed, or to submit the company’s annual return.
Do all companies need a company secretary?
There is no longer a requirement for all companies to have a company secretary.
From 6 April 2008, private companies (Ltd) were no longer required to appoint a company secretary although the option to appoint one remains.
Even after 6 April 2008 public limited companies (plc) must have a company secretary with specialist up to date knowledge of company law.
If your private company does not want to have a company secretary
Where a private company chooses not to have a company secretary, any item that would normally be sent to the company secretary is treated as being sent to the company. Any duties which would normally be the responsibility of the company secretary will be carried out either by a director or a person authorised by the directors.
If a private company decides not to have a company secretary it will need to inform Companies House of the resignation of any existing company secretary. The company should also check its’ Articles of Association to make sure that its’ own regulations do not require it to appoint a company secretary.
If you choose to have one, how should the company secretary be appointed?
Any changes to the particulars of company officers - directors or secretary, (for example, new appointments, resignations, or changes to names or addresses) must be notified to Companies House using a standard form.
Company secretarial duties
Private company without an appointed company secretary
The duties of the person responsible for company secretarial matters are not defined specifically within company law, but may be divided generally into three main areas:
maintaining statutory registers (keeping the company’s records up to date)
completing and filing statutory forms (keeping the public record up to date)
meetings and resolutions (making sure the company abides by both its internal regulations and the law).
Maintaining statutory registers
All companies must maintain up to date registers of their key details, which include:
a register of members
a register of directors
a register of charges.
The details in these registers include, for example, names, addresses, dates of appointment and resignation (for directors) and for members, the number and type of shares held. This is not an exhaustive list.
These registers must be made available for inspection by the general public at the company’s registered office or at an alternative location which must be registered with Companies House.
A company may choose to keep its directors’ residential addresses private and to record a service address for them. If so it will need to keep an additional register showing the directors’ residential addresses.
Completing and filing statutory forms
The company must ensure that its’ record at Companies House is always up to date, and contains current details of various statutory matters.
Companies House issues a series of statutory forms to help companies do this. Until October 2009 these forms will continue to be known by the section of the 1985 Act under which the duty arises, but from 1 October a new series of forms, grouped by the type of information to be submitted, will be substituted. Draft versions of these forms are already available on the Companies House website, but cannot be used before October. (New form references are shown in bold below.)
Here the company secretarial duties would extend to ensuring that, for example:
the annual accounts are filed on time at Companies House. For a private limited company, under normal circumstances, this must be within 9 months of the end of the accounting year.
the annual return (form 363s / AR01) is completed and filed. (This is a snapshot of general information about the company, which must be checked closely and amended if necessary, signed and dated and returned to Companies House within 28 days of the date shown on the form. If this is returned late or not returned at all, the company, its director(s) and secretary (if appointed) may be prosecuted)
all the required forms are filed at Companies House. These are potentially over 200 forms! The most common might include:
changes in directors, secretaries and their particulars (288 / AP01 / TM01 / CH01)
a change of accounting reference date (225 / AA01)
a change of registered office (287 / AD01)
allotments of shares (88(2) / SH01).
the current version of the company’s Articles of Association are filed, whenever a change is made.
Often, these forms have to be filed at Companies House within a specified deadline following the change.
Many of the more common forms that have to be, or may have to be filed, can be completed and submitted on line by first registering at www.companieshouse.gov.uk.
Meetings and resolutions
Company law sets out procedures for conducting certain aspects of company business through formal meetings, where resolutions will be passed. When resolutions are passed, the company is bound by them. (A resolution is an agreement or a decision taken by the members.)
Here the company secretarial role would be to ensure that proper notice of meetings is given to those who are entitled to attend and to ensure that copies of resolutions which affect the way the company is run, are sent to Companies House within the relevant time frame.
Notice of company meetings
Members and auditors are entitled to notice of company meetings. For a private limited company a general meeting notice of at least 14 days is needed. Notice can be in writing, by email or by means of a website (if certain conditions are met). However a private company is no longer required to hold an Annual General Meeting (AGM), unless the articles of the company make express provisions for holding AGMs.
If an existing company with an existing express provision for an AGM wishes to abolish this requirement, it will need to change its articles by special resolution.
Resolutions
There are two types of resolution that may be passed, ordinary resolutions (passed by a simple majority of the members) or special resolutions (passed by a 75% majority of the members).
Private companies can take most decisions by written resolution. Such a resolution does not require a hard copy, and can be passed by e-mail. Decisions can also be taken at general meetings for private companies and for public companies at both general meetings and AGMs.
Public company or private company with an appointed company secretary
If your company has a company secretary appointed, the company secretary will also need to keep a register of company secretaries and inform Companies House whenever a change takes place.
Keeping your public record safe
Companies House has recently reported increasing levels of fraudulent filing of information. A favourite ploy is to change the company’s registered office by submitting the appropriate form to Companies House. Once this has been accepted the fraudsters can change directors or file false accounts without the company having any idea that they have been hijacked! They can then buy goods or obtain credit based on this false information.
Companies House are keen that companies file their information on-line, which can be a very secure method, particularly if the company signs up for the enhanced security arrangements offered by their PROOF system.
How we can help
If you would like to discuss any of the issues raised above please do contact us. We are able to provide comprehensive assistance with company secretarial matters such as:
the maintenance and safekeeping of the company registers
the processing and filing of minutes
the preparation and filing of resolutions
the completion and filing of statutory forms
the filing of the annual accounts
filing on-line.
Even though the need to appoint a company secretary in a private company has been abolished, there will be a number of statutory procedures that companies must continue to comply with. We would be pleased to discuss these with you.
Friday, 19 March 2010
Companies Tax Saving Opportunities
Due to the ever changing tax legislation and commercial factors affecting your company, it is advisable to carry out an annual review of your company's tax position.
Pre-year end tax planning is important as the current year's results can normally be predicted with some accuracy and time still exists to carry out any appropriate action.
We outline below some of the areas where advance planning may produce tax savings.
For further advice please do not hesitate to contact us.
Corporation tax
Advancing expenditure
Expenditure incurred before the company's accounts year end may reduce the current year's tax liability.
In situations where expenditure is planned for early in the next accounting year the decision to bring forward this expenditure by just a few weeks can advance the related tax relief by a full 12 months.
Examples of the type of expenditure to consider bringing forward include:
building repairs and redecorating
advertising and marketing campaigns
redundancy and closure costs.
Note that payments into company pension schemes are only allowable for tax purposes when the payments are actually made as opposed to when they are charged in the company's accounts.
Capital allowances
Consideration should also be given to the timing of capital expenditure on which capital allowances are available to obtain the optimum reliefs.
From 1 April 2008, single companies irrespective of size are able to claim an annual investment allowance of £50,000, which will provide 100% relief on expenditure on plant and machinery (excluding cars). Groups of companies have to share the allowance. Additional capital allowances are to be available for expenditure incurred by a qualifying activity in the 12 month period commencing 1 April 2009. Expenditure on qualifying plant and machinery not covered by the AIA will be eligible for a temporary first year allowance (FYA) of 40% instead of 20% Writing Down Allowance (WDA). The FYA will not apply for expenditure on integral features, cars, long life assets and assets for leasing.
100% allowances on designated energy saving technologies continue to be available in addition to the annual Investment allowance. Details can be found at www.eca.gov.uk .
Limited allowances are also available for investments in certain types of building.
Trading losses
Companies incurring tax losses have three main options to consider in utilising these losses:
they can be set against any other income (for example bank interest) or capital gains arising in the current year
they can be carried forward and set against trading profits arising in future years
they can generally be carried back for up to one year and set against total profits*.
*A proposed revision will apply for two years and will extend the period that current trading losses from businesses can be carried back against previous profits to a period of three years with losses being carried back against later years first.
The amount of losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximum of £50,000 (per 12 month accounting period) of the balance of unused losses is then available for carry back to the earlier two years.
The measure will have effect for company accounting periods ending in the period 24 November 2008 to 23 November 2010.
Extracting profits
Directors/shareholders of family companies may wish to consider extracting profits in the form of dividends rather than as increased salaries or bonus payments.
This can lead to substantial savings in national insurance contributions.
Note however that company profits extracted as a dividend remain chargeable to corporation tax at a minimum of 21% from 1 April 2008.
Dividends
From the company’s point of view timing of payment is not critical, but from the individual shareholder’s perspective, timing can be an important issue. If the shareholder is a higher rate taxpayer, a dividend payment which is delayed until after the tax year ending on 5 April may give the shareholder an extra year to pay any further tax due.
The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact us for detailed advice.
Loans to directors and shareholders
If a 'close' company (broadly, one controlled by its directors or by five or fewer shareholders) makes a loan to a shareholder, this can give rise to a tax liability for the company.
If the loan is not settled within nine months of the end of the accounting period, the company is required to make a payment equal to 25% of the loan to HMRC. The money is not repaid to the company until nine months after the end of the accounting period in which the loan is repaid by the shareholder.
A loan to a director may also give rise to a tax liability for the director on the benefit of a loan provided at less than the market rate of interest.
Rates of tax
For the 2009 financial year:
If annual taxable profits do not exceed £300,000, they are charged at the small company rate of 21%.
If the profits exceed £1,500,000, the full rate of 28% applies.
If profits fall between these limits, marginal relief is given. All the profits are charged to tax at a rate between 21% and 28%.
Self assessment
Under the self assessment regime most companies must pay their tax liabilities nine months and one day after the year end.
Companies which pay (or expect to pay) tax at the main rate (28%) are required to pay tax under the quarterly accounting system. If you require any further information on the quarterly accounting system, we have a factsheet which summarises the system.
Corporation tax returns must be submitted within twelve months after the year end. In cases of delay or inaccuracies interest and penalties will be charged.
Capital gains
Companies are chargeable to corporation tax on their capital gains less allowable capital losses.
Indexation allowance
In order to counteract the effects of inflation inherent in the calculation of a capital gain, an indexation allowance is given. However the allowance is not allowed to increase or create a capital loss.
Planning of disposals
Consideration should be given to the timing of any chargeable disposals to ensure advantage is taken where possible of minimising the tax liability at small companies rate (currently 21%) rather than full rate (currently 28%). This could be achieved depending on circumstances by accelerating or delaying sales. The availability of losses or the feasibility of rollover relief (see below) should also be considered.
Purchase of new assets
It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.
The replacement asset must be acquired in the four year period beginning one year before the disposal and only certain trading tangible assets qualify for relief.
How we can help
Tax savings can only be achieved if an appropriate course of action is planned in advance. It is therefore vital that professional advice is sought at an early stage. We would welcome the chance to tailor a plan to your specific circumstances.
Pre-year end tax planning is important as the current year's results can normally be predicted with some accuracy and time still exists to carry out any appropriate action.
We outline below some of the areas where advance planning may produce tax savings.
For further advice please do not hesitate to contact us.
Corporation tax
Advancing expenditure
Expenditure incurred before the company's accounts year end may reduce the current year's tax liability.
In situations where expenditure is planned for early in the next accounting year the decision to bring forward this expenditure by just a few weeks can advance the related tax relief by a full 12 months.
Examples of the type of expenditure to consider bringing forward include:
building repairs and redecorating
advertising and marketing campaigns
redundancy and closure costs.
Note that payments into company pension schemes are only allowable for tax purposes when the payments are actually made as opposed to when they are charged in the company's accounts.
Capital allowances
Consideration should also be given to the timing of capital expenditure on which capital allowances are available to obtain the optimum reliefs.
From 1 April 2008, single companies irrespective of size are able to claim an annual investment allowance of £50,000, which will provide 100% relief on expenditure on plant and machinery (excluding cars). Groups of companies have to share the allowance. Additional capital allowances are to be available for expenditure incurred by a qualifying activity in the 12 month period commencing 1 April 2009. Expenditure on qualifying plant and machinery not covered by the AIA will be eligible for a temporary first year allowance (FYA) of 40% instead of 20% Writing Down Allowance (WDA). The FYA will not apply for expenditure on integral features, cars, long life assets and assets for leasing.
100% allowances on designated energy saving technologies continue to be available in addition to the annual Investment allowance. Details can be found at www.eca.gov.uk .
Limited allowances are also available for investments in certain types of building.
Trading losses
Companies incurring tax losses have three main options to consider in utilising these losses:
they can be set against any other income (for example bank interest) or capital gains arising in the current year
they can be carried forward and set against trading profits arising in future years
they can generally be carried back for up to one year and set against total profits*.
*A proposed revision will apply for two years and will extend the period that current trading losses from businesses can be carried back against previous profits to a period of three years with losses being carried back against later years first.
The amount of losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximum of £50,000 (per 12 month accounting period) of the balance of unused losses is then available for carry back to the earlier two years.
The measure will have effect for company accounting periods ending in the period 24 November 2008 to 23 November 2010.
Extracting profits
Directors/shareholders of family companies may wish to consider extracting profits in the form of dividends rather than as increased salaries or bonus payments.
This can lead to substantial savings in national insurance contributions.
Note however that company profits extracted as a dividend remain chargeable to corporation tax at a minimum of 21% from 1 April 2008.
Dividends
From the company’s point of view timing of payment is not critical, but from the individual shareholder’s perspective, timing can be an important issue. If the shareholder is a higher rate taxpayer, a dividend payment which is delayed until after the tax year ending on 5 April may give the shareholder an extra year to pay any further tax due.
The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact us for detailed advice.
Loans to directors and shareholders
If a 'close' company (broadly, one controlled by its directors or by five or fewer shareholders) makes a loan to a shareholder, this can give rise to a tax liability for the company.
If the loan is not settled within nine months of the end of the accounting period, the company is required to make a payment equal to 25% of the loan to HMRC. The money is not repaid to the company until nine months after the end of the accounting period in which the loan is repaid by the shareholder.
A loan to a director may also give rise to a tax liability for the director on the benefit of a loan provided at less than the market rate of interest.
Rates of tax
For the 2009 financial year:
If annual taxable profits do not exceed £300,000, they are charged at the small company rate of 21%.
If the profits exceed £1,500,000, the full rate of 28% applies.
If profits fall between these limits, marginal relief is given. All the profits are charged to tax at a rate between 21% and 28%.
Self assessment
Under the self assessment regime most companies must pay their tax liabilities nine months and one day after the year end.
Companies which pay (or expect to pay) tax at the main rate (28%) are required to pay tax under the quarterly accounting system. If you require any further information on the quarterly accounting system, we have a factsheet which summarises the system.
Corporation tax returns must be submitted within twelve months after the year end. In cases of delay or inaccuracies interest and penalties will be charged.
Capital gains
Companies are chargeable to corporation tax on their capital gains less allowable capital losses.
Indexation allowance
In order to counteract the effects of inflation inherent in the calculation of a capital gain, an indexation allowance is given. However the allowance is not allowed to increase or create a capital loss.
Planning of disposals
Consideration should be given to the timing of any chargeable disposals to ensure advantage is taken where possible of minimising the tax liability at small companies rate (currently 21%) rather than full rate (currently 28%). This could be achieved depending on circumstances by accelerating or delaying sales. The availability of losses or the feasibility of rollover relief (see below) should also be considered.
Purchase of new assets
It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.
The replacement asset must be acquired in the four year period beginning one year before the disposal and only certain trading tangible assets qualify for relief.
How we can help
Tax savings can only be achieved if an appropriate course of action is planned in advance. It is therefore vital that professional advice is sought at an early stage. We would welcome the chance to tailor a plan to your specific circumstances.
Capital Gains Tax on the Family Home
The capital gains tax (CGT) exemption for gains made on the sale of your home is one of the most valuable reliefs from which many people benefit during their lifetime. The relief is well known: CGT exemption whatever the level of the capital gain on the sale of any property that has been your main residence. In this factsheet we look at the operation of the relief and consider factors that may cause it to be restricted.
Several Important Basic Points
Only a property occupied as a residence can qualify for the exemption. An investment property in which you have never lived would not qualify.
The term ‘residence’ can include outbuildings separate from the main property but this is a difficult area. Please talk to us if this is likely to be relevant to you.
‘Occupying’ as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to work.
The exemption includes land that is for ‘occupation and enjoyment with the residence as its garden or grounds up to the permitted area’. The permitted area is half a hectare including the site of the property which equates to about 1.25 acres in old money! Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it. This can be a difficult test. In a court case the exemption was not given on land of 7.5 hectares attaching to a property. The owner said he needed that land to enjoy the property because he was keen on horses and riding. The courts decided that the owner’s subjective liking for horses was irrelevant and, applying an objective test, the land was not needed for the reasonable enjoyment of the property.
Selling Land Separately
What if you want to sell off some of your garden for someone else to build on? Will the exemption apply? In simple terms it will if you continue to own the property with the rest of the garden and the total original area was within the half a hectare limit.
Where the total area exceeds half a hectare and some is sold then you would have to show that the part sold was needed for the reasonable enjoyment of the property and this can clearly be difficult if you were prepared to sell it off.
What if on the other hand you sell your house and part of the garden and then at a later date sell the rest of the garden off separately, say for development? Then you will not get the benefit of the exemption on the second sale because the land is no longer part of your main residence at the point of sale.
More Than One Residence
It is increasingly common for people to own more than one residence. However an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple (or civil partnership), there can only be one main residence for both. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although foreign tax implications may then need to be brought into the equation.
The election must normally be made within two years of the change in the number of residences and the potential consequences of failure to elect are shown in the case study that follows. Furthermore the case study demonstrates the beneficial rule that allows CGT exemption for the last three years of ownership of a property that has at some time been the main residence.
Case study
Wayne, a 40% taxpayer, acquired a home in 2000 in which he lived full-time. In 2004 he bought a second home and divided his time between the two properties.
Either property may qualify for the exemption as Wayne spends time at each - ie they both count as ‘residences’.
Choosing which property should benefit is not always easy since it depends on which is the more likely to be sold and which is the more likely to show a significant gain. Some crystal ball gazing may be needed!
The choice of property needs to be made by election to HMRC within two years of acquiring the second home. Missing this time limit means that HMRC will decide on any future sale which property was, as a question of fact, the main residence.
Wayne elects for the second home to be treated as his main residence for CGT purposes. In 2010 he sells both properties realising a gain of £100,000 on the first property and £150,000 on the second property.
The gain on the second property is CGT-free because of the election.
Part of the gain on the first property is exempt. Namely that relating to:
the four years before the second property was acquired (when the first property was the only residence) and
the last three years of ownership which will always qualify providing the property has been the main residence at some time.
In other words out of the ten years of ownership, a total of seven qualify for the exemption. Therefore 3/10ths of the gain - ie £30,000 will be taxable. Not bad on total gains of £250,000.
Without the election, and the first property being treated as the main residence throughout, Wayne would have found the gain on the first property wholly exempt and the gain on the second property wholly chargeable. Failure to make an election can be an expensive mistake.
Business Use
More and more people work from home these days. Does working from home affect the CGT exemption on sale? The answer is simple - it may do!
Rather more helpfully the basic rule is that the exemption will be denied to the extent that part of your home is used exclusively for business purposes. In many cases of course the business use is not exclusive, your office doubling as a spare bedroom for guests for example, in which case there is not a problem.
Where there is exclusive business use then part of the gain on sale will be chargeable rather than exempt. However, it may well be that you plan to acquire a further property, also with part for business use, in which case the business use element of the gain can be deferred by ‘rolling over’ the gain against the cost of the new property.
Residential Letting
A further relief is given if your main residence has been let as residential accommodation during the period of ownership. The case study below best demonstrates the operation of this.
The letting exemption can be very valuable but is only available on a property that has been your main residence. It is not available on a ‘buy to let’ property in which you never live.
Case study
Frank bought a property in 1994 and lived in it as his main residence for eight years until 2002. Then he bought a second property which immediately became his main residence and the first property was let from then until its sale in 2009.
The gain on sale of the first property amounted to £210,000.
Exempt as main residence
1994-2002 8 years (actual occupation)
2006-2009 3 years (last 3 years of ownership)
11 years
Gain exempt - 11/15 x £210,000 = £154,000
The balance of the gain (£56,000) relates to the period from 2002 to 2006. The property was let during this period and had previously been Frank’s main residence so that the letting exemption is available. Although the gain relating to this period amounts to £56,000 the exemption for letting is limited to a maximum of £40,000.
Overall £194,000 of Frank’s gain is exempt leaving £16,000 chargeable to tax and this is subject to the annual exemption so that any CGT bill will be minimal.
Periods of Absence
Certain other periods of absence from your main residence may also qualify for CGT relief if say you have to leave your property to go and work elsewhere in the UK or abroad. The availability of the exemption depends on your circumstances and length of period of absence. Please talk to us if this is relevant for you. We would be delighted to set out the rules as they apply to your particular situation.
Trusts
The exemption is also available where a property is owned by trustees and occupied by one of the beneficiaries as their main residence.
Until December 2003 it was possible to transfer a property you owned but which was not eligible for CGT main residence relief into a trust for say the benefit of your adult children. Any gain could be deferred using the gift relief provisions. One of your children could then live in the property as their main residence and on sale the exemption would have covered the entire gain.
HMRC decided that this technique was being used as a mechanism to avoid CGT and so blocked the possibility of combining gift relief with the main residence exemption in these circumstances.
How We Can Help
The main residence exemption continues to be one of the most valuable CGT reliefs. However the operation of the relief is not always straightforward nor its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief. We can help with this. Please contact us if you have any questions arising from this factsheet or would like specific advice relevant to your personal circumstances.
Several Important Basic Points
Only a property occupied as a residence can qualify for the exemption. An investment property in which you have never lived would not qualify.
The term ‘residence’ can include outbuildings separate from the main property but this is a difficult area. Please talk to us if this is likely to be relevant to you.
‘Occupying’ as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to work.
The exemption includes land that is for ‘occupation and enjoyment with the residence as its garden or grounds up to the permitted area’. The permitted area is half a hectare including the site of the property which equates to about 1.25 acres in old money! Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it. This can be a difficult test. In a court case the exemption was not given on land of 7.5 hectares attaching to a property. The owner said he needed that land to enjoy the property because he was keen on horses and riding. The courts decided that the owner’s subjective liking for horses was irrelevant and, applying an objective test, the land was not needed for the reasonable enjoyment of the property.
Selling Land Separately
What if you want to sell off some of your garden for someone else to build on? Will the exemption apply? In simple terms it will if you continue to own the property with the rest of the garden and the total original area was within the half a hectare limit.
Where the total area exceeds half a hectare and some is sold then you would have to show that the part sold was needed for the reasonable enjoyment of the property and this can clearly be difficult if you were prepared to sell it off.
What if on the other hand you sell your house and part of the garden and then at a later date sell the rest of the garden off separately, say for development? Then you will not get the benefit of the exemption on the second sale because the land is no longer part of your main residence at the point of sale.
More Than One Residence
It is increasingly common for people to own more than one residence. However an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple (or civil partnership), there can only be one main residence for both. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although foreign tax implications may then need to be brought into the equation.
The election must normally be made within two years of the change in the number of residences and the potential consequences of failure to elect are shown in the case study that follows. Furthermore the case study demonstrates the beneficial rule that allows CGT exemption for the last three years of ownership of a property that has at some time been the main residence.
Case study
Wayne, a 40% taxpayer, acquired a home in 2000 in which he lived full-time. In 2004 he bought a second home and divided his time between the two properties.
Either property may qualify for the exemption as Wayne spends time at each - ie they both count as ‘residences’.
Choosing which property should benefit is not always easy since it depends on which is the more likely to be sold and which is the more likely to show a significant gain. Some crystal ball gazing may be needed!
The choice of property needs to be made by election to HMRC within two years of acquiring the second home. Missing this time limit means that HMRC will decide on any future sale which property was, as a question of fact, the main residence.
Wayne elects for the second home to be treated as his main residence for CGT purposes. In 2010 he sells both properties realising a gain of £100,000 on the first property and £150,000 on the second property.
The gain on the second property is CGT-free because of the election.
Part of the gain on the first property is exempt. Namely that relating to:
the four years before the second property was acquired (when the first property was the only residence) and
the last three years of ownership which will always qualify providing the property has been the main residence at some time.
In other words out of the ten years of ownership, a total of seven qualify for the exemption. Therefore 3/10ths of the gain - ie £30,000 will be taxable. Not bad on total gains of £250,000.
Without the election, and the first property being treated as the main residence throughout, Wayne would have found the gain on the first property wholly exempt and the gain on the second property wholly chargeable. Failure to make an election can be an expensive mistake.
Business Use
More and more people work from home these days. Does working from home affect the CGT exemption on sale? The answer is simple - it may do!
Rather more helpfully the basic rule is that the exemption will be denied to the extent that part of your home is used exclusively for business purposes. In many cases of course the business use is not exclusive, your office doubling as a spare bedroom for guests for example, in which case there is not a problem.
Where there is exclusive business use then part of the gain on sale will be chargeable rather than exempt. However, it may well be that you plan to acquire a further property, also with part for business use, in which case the business use element of the gain can be deferred by ‘rolling over’ the gain against the cost of the new property.
Residential Letting
A further relief is given if your main residence has been let as residential accommodation during the period of ownership. The case study below best demonstrates the operation of this.
The letting exemption can be very valuable but is only available on a property that has been your main residence. It is not available on a ‘buy to let’ property in which you never live.
Case study
Frank bought a property in 1994 and lived in it as his main residence for eight years until 2002. Then he bought a second property which immediately became his main residence and the first property was let from then until its sale in 2009.
The gain on sale of the first property amounted to £210,000.
Exempt as main residence
1994-2002 8 years (actual occupation)
2006-2009 3 years (last 3 years of ownership)
11 years
Gain exempt - 11/15 x £210,000 = £154,000
The balance of the gain (£56,000) relates to the period from 2002 to 2006. The property was let during this period and had previously been Frank’s main residence so that the letting exemption is available. Although the gain relating to this period amounts to £56,000 the exemption for letting is limited to a maximum of £40,000.
Overall £194,000 of Frank’s gain is exempt leaving £16,000 chargeable to tax and this is subject to the annual exemption so that any CGT bill will be minimal.
Periods of Absence
Certain other periods of absence from your main residence may also qualify for CGT relief if say you have to leave your property to go and work elsewhere in the UK or abroad. The availability of the exemption depends on your circumstances and length of period of absence. Please talk to us if this is relevant for you. We would be delighted to set out the rules as they apply to your particular situation.
Trusts
The exemption is also available where a property is owned by trustees and occupied by one of the beneficiaries as their main residence.
Until December 2003 it was possible to transfer a property you owned but which was not eligible for CGT main residence relief into a trust for say the benefit of your adult children. Any gain could be deferred using the gift relief provisions. One of your children could then live in the property as their main residence and on sale the exemption would have covered the entire gain.
HMRC decided that this technique was being used as a mechanism to avoid CGT and so blocked the possibility of combining gift relief with the main residence exemption in these circumstances.
How We Can Help
The main residence exemption continues to be one of the most valuable CGT reliefs. However the operation of the relief is not always straightforward nor its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief. We can help with this. Please contact us if you have any questions arising from this factsheet or would like specific advice relevant to your personal circumstances.
Buy to Let Property
In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.
The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.
Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.
However, the gross return from buy to let properties - ie the rent received less costs such as letting fees, maintenance, service charges and insurance - is no longer as attractive as it once was. Investors need to take a view on the likelihood of capital appreciation exceeding inflation.
Factors to consider
Do - think of your investment as medium to long-term
- research the local market
- do your sums carefully
- consider decorating to a high standard to attract tenants quickly.
Don’t - purchase anything with serious maintenance problems
- think that friends and relatives can look after the letting for you - you’re probably better off with a full management service
- cut corners with tenancy agreements and other legal documentation.
Which property?
Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links? An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.
Agents
Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.
Tenancy agreements
This important document will ensure that the legal position is clear.
Taxation
When buying to let, taxation aspects must be considered.
Tax on rental income
Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent’s letting fees and an allowance for furnishings.
Tax on sale
Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. This gain may be further reduced by any annual exemption available and is then subject to a flat rate of CGT of 18%.
Student lettings
Buy to let may make sense if you have children at college or university. It is important that the arrangement is structured correctly. The student should purchase the property (with the parent acting as guarantor on the mortgage). There are several advantages to this arrangement.
Advantages
This is a cost effective way of providing your child with somewhere decent to live.
Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.
As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.
The amount of rental income chargeable to income tax is reduced by a deduction known as ‘rent a room relief’. This is £4,250 each year. In this situation no expenses are tax deductible. Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.
Furnished holiday lettings
Furnished holiday letting is another type of investment that could be considered. This form of letting is short holiday lets as opposed to letting for the residential market. It has some advantages but it has other disadvantages which should also be considered.
Advantages
You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.
Generally however the rules for allowable expenditure are more generous.
The income is regarded as ‘trading income’ for tax purposes and is treated as earnings for pension contribution purposes.
For capital gains tax purposes, ‘furnished holiday letting’ assets are treated as business assets. This means any gains should be eligible for Entrepreneurs’ relief, which can reduce gains of up to £1 million by 4/9. The gains alternatively could be deferred using holdover relief on a gift or rollover relief where the asset is sold and another ‘trading’ asset is acquired. If further details on capital gains tax reliefs are required please see the factsheet on Capital Gains Tax or contact us.
Disadvantages
Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees (for example more regular cleaning).
Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.
Changes to the rules
As can be seen from the above furnished holiday lettings are treated as a trade for certain taxation purposes, which is generally more preferential in terms of loss reliefs and CGT reliefs. A key condition for property to qualify as furnished holiday lettings is that it is situated in the UK. Due to the possible incompatibility of the rules with European law, two significant announcements have been made. The current law is to be repealed with effect from 2010/11 but until then furnished holiday lettings situated in the European Economic Area (EEA) are qualifying furnished holiday lettings provided they meet the other conditions.
How we can help
Whilst some generalisations can be made about buy to let properties it is always necessary to tailor any advice to your personal situation. Any plan must take into account your circumstances and aspirations.
Whilst a successful buy to let cannot be guaranteed, professional advice can help to sort out some of the potential problems and structure the investment correctly.
We would be happy to discuss buy to let further with you.
The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.
Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.
However, the gross return from buy to let properties - ie the rent received less costs such as letting fees, maintenance, service charges and insurance - is no longer as attractive as it once was. Investors need to take a view on the likelihood of capital appreciation exceeding inflation.
Factors to consider
Do - think of your investment as medium to long-term
- research the local market
- do your sums carefully
- consider decorating to a high standard to attract tenants quickly.
Don’t - purchase anything with serious maintenance problems
- think that friends and relatives can look after the letting for you - you’re probably better off with a full management service
- cut corners with tenancy agreements and other legal documentation.
Which property?
Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links? An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.
Agents
Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.
Tenancy agreements
This important document will ensure that the legal position is clear.
Taxation
When buying to let, taxation aspects must be considered.
Tax on rental income
Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent’s letting fees and an allowance for furnishings.
Tax on sale
Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. This gain may be further reduced by any annual exemption available and is then subject to a flat rate of CGT of 18%.
Student lettings
Buy to let may make sense if you have children at college or university. It is important that the arrangement is structured correctly. The student should purchase the property (with the parent acting as guarantor on the mortgage). There are several advantages to this arrangement.
Advantages
This is a cost effective way of providing your child with somewhere decent to live.
Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.
As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.
The amount of rental income chargeable to income tax is reduced by a deduction known as ‘rent a room relief’. This is £4,250 each year. In this situation no expenses are tax deductible. Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.
Furnished holiday lettings
Furnished holiday letting is another type of investment that could be considered. This form of letting is short holiday lets as opposed to letting for the residential market. It has some advantages but it has other disadvantages which should also be considered.
Advantages
You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.
Generally however the rules for allowable expenditure are more generous.
The income is regarded as ‘trading income’ for tax purposes and is treated as earnings for pension contribution purposes.
For capital gains tax purposes, ‘furnished holiday letting’ assets are treated as business assets. This means any gains should be eligible for Entrepreneurs’ relief, which can reduce gains of up to £1 million by 4/9. The gains alternatively could be deferred using holdover relief on a gift or rollover relief where the asset is sold and another ‘trading’ asset is acquired. If further details on capital gains tax reliefs are required please see the factsheet on Capital Gains Tax or contact us.
Disadvantages
Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees (for example more regular cleaning).
Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.
Changes to the rules
As can be seen from the above furnished holiday lettings are treated as a trade for certain taxation purposes, which is generally more preferential in terms of loss reliefs and CGT reliefs. A key condition for property to qualify as furnished holiday lettings is that it is situated in the UK. Due to the possible incompatibility of the rules with European law, two significant announcements have been made. The current law is to be repealed with effect from 2010/11 but until then furnished holiday lettings situated in the European Economic Area (EEA) are qualifying furnished holiday lettings provided they meet the other conditions.
How we can help
Whilst some generalisations can be made about buy to let properties it is always necessary to tailor any advice to your personal situation. Any plan must take into account your circumstances and aspirations.
Whilst a successful buy to let cannot be guaranteed, professional advice can help to sort out some of the potential problems and structure the investment correctly.
We would be happy to discuss buy to let further with you.
Business Structures - Which to Choose
Having made the decision to be your own boss, it is important to decide the best legal and taxation structure for your enterprise. The most suitable structure for you will depend on your personal situation and your future plans. The decision you make will have repercussions on the way you are taxed, your exposure to creditors and other matters.
The possible options you have are as follows.
Sole trader
This is the simplest way of trading. There are only a few formalities to trading this way, the most important of which is informing HMRC. You are required to keep business records in order to calculate profits each year and they will form the basis of how you pay your tax and national insurance. Any profits generated in this medium are automatically yours. The business of a sole trader is not distinguished from the proprietor’s personal affairs so that if there are any debts, you are legally liable to pay those debts down to your last worldly possession.
Partnership
A partnership is an extension of being a sole trader. Here, a group of two or more people will come together, pool their talents, clients and business contacts so that, collectively, they can build a more successful business than they would individually. The partners will agree to share the joint profits in pre-determined percentages. It is advisable to draw up a Partnership Agreement which sets the rules of how the partners will work together. Partners are taxed in the same way as sole traders, but only on their own share of the partnership profits. As with sole traders, the partners are legally liable to pay the debts of the business. Each partner is ‘jointly and severally’ liable for the partnership debts, so that if certain partners are unable to pay their share of the partnership debts then those debts can fall on the other partners.
Limited company
A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability. Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.
There are many advantages as well as disadvantages to operating through a limited company. We have a separate factsheet on ‘Incorporation’ which considers the relative merits as well as the downsides of operating as a company.
New companies can be purchased relatively cheaply in a ready-made form - usually referred to as ‘off the shelf’ companies. There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. A big advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.
Limited liability partnership
A limited liability partnership is legally similar to a company. It is administered like a company in all aspects except its taxation. In this, it is treated like a partnership. Therefore you have the limited liability, administrative and statutory obligations of a company but not the taxation and national insurance flexibility. They are particularly suitable for medium and large-sized partnerships.
Co-operative
A co-operative is a mutual organisation owned by its employees. One example of such an organisation is the John Lewis Partnership. These structures need specialist advice.
How we can help
We will be happy to discuss your plans and the most appropriate business structure with you. The most appropriate structure will depend on a number of factors including consideration of taxation implications, the legal entity, ownership and liability.
The possible options you have are as follows.
Sole trader
This is the simplest way of trading. There are only a few formalities to trading this way, the most important of which is informing HMRC. You are required to keep business records in order to calculate profits each year and they will form the basis of how you pay your tax and national insurance. Any profits generated in this medium are automatically yours. The business of a sole trader is not distinguished from the proprietor’s personal affairs so that if there are any debts, you are legally liable to pay those debts down to your last worldly possession.
Partnership
A partnership is an extension of being a sole trader. Here, a group of two or more people will come together, pool their talents, clients and business contacts so that, collectively, they can build a more successful business than they would individually. The partners will agree to share the joint profits in pre-determined percentages. It is advisable to draw up a Partnership Agreement which sets the rules of how the partners will work together. Partners are taxed in the same way as sole traders, but only on their own share of the partnership profits. As with sole traders, the partners are legally liable to pay the debts of the business. Each partner is ‘jointly and severally’ liable for the partnership debts, so that if certain partners are unable to pay their share of the partnership debts then those debts can fall on the other partners.
Limited company
A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability. Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.
There are many advantages as well as disadvantages to operating through a limited company. We have a separate factsheet on ‘Incorporation’ which considers the relative merits as well as the downsides of operating as a company.
New companies can be purchased relatively cheaply in a ready-made form - usually referred to as ‘off the shelf’ companies. There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. A big advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.
Limited liability partnership
A limited liability partnership is legally similar to a company. It is administered like a company in all aspects except its taxation. In this, it is treated like a partnership. Therefore you have the limited liability, administrative and statutory obligations of a company but not the taxation and national insurance flexibility. They are particularly suitable for medium and large-sized partnerships.
Co-operative
A co-operative is a mutual organisation owned by its employees. One example of such an organisation is the John Lewis Partnership. These structures need specialist advice.
How we can help
We will be happy to discuss your plans and the most appropriate business structure with you. The most appropriate structure will depend on a number of factors including consideration of taxation implications, the legal entity, ownership and liability.
Thursday, 18 March 2010
Business Plans
Every new business should have a business plan. It is the key to success. If you need finance, no bank manager will lend money without a considered plan.
It is one of the most important aspects of starting a new business. Your plan should provide a thorough examination of the way in which the business will commence and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.
Why does a business need a plan?
Preparing a business plan will help you to set clear objectives for your business and clarify your thinking. It will also help to set targets for future performance and monitor finances and profitability. It should help to provide early warning for when you might need to reconsider the plan.
Always bear in mind that anyone reading the plan will need to understand the essentials of your business quickly and easily.
Contents
The business plan should cover the following areas.
Overview. An overview of your plans for the business and how you propose to put them into action. This is the section most likely to be read by people unfamiliar with your business so try to avoid technical jargon.
Description. A description of the business, your objectives for it and how you plan to achieve them. Include details of the background to your business for example how long you have been developing the business idea and the work you have carried out to date.
Personnel. Details of the key personnel including you and any external consultants. You should highlight the skills and expertise that these people have and outline how you intend to deal with any weaknesses.
Product. Details of your product or service and your Unique Selling Point. This is exactly what its name suggests, something that the competition does not offer. You should also outline your pricing policy.
Marketing. Details of your target markets and your marketing plan. This may form the basis for a separate, more detailed, plan. You should also include an overview of your competitors and your likely market share together with details of the potential for growth. This is usually a very important part of the plan as it gives a good indication of the likely chance of success.
Practices. You will need to include information on your proposed operating practices and production methods as well as premises and equipment requirements.
Financial forecasts. The plan should cover your projected financial performance and the assumptions made in your projections. This part of the plan converts what you have already said about the business into numbers. It will include a cash flow forecast which shows how much money you expect to flow in and out of the business as well as profit and loss predictions and a balance sheet. Detailed financial forecasts will normally be included as an appendix to the plan. As financial advisers we are particularly well placed to help with this part of the plan.
Financial requirements. The cash flow forecast referred to above will show how much finance your business needs. The plan should state how much finance you want and in what form. You should also say what the finance will be used for and show that you will have the resources to make the necessary repayments. You may also give details of any security you can offer.
The future
Putting together a business plan is often seen as a one-off exercise undertaken when a new business is starting up.
However the plan should be updated on a regular basis. It can then be used as a tool against which performance can be monitored and measured as part of the corporate planning process. There is much merit in this as used properly it keeps the business focused on objectives and inspires a discipline to achieve them.
How we can help
We can look forward with you to help you put together your best possible plan for the future.
It is one of the most important aspects of starting a new business. Your plan should provide a thorough examination of the way in which the business will commence and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.
Why does a business need a plan?
Preparing a business plan will help you to set clear objectives for your business and clarify your thinking. It will also help to set targets for future performance and monitor finances and profitability. It should help to provide early warning for when you might need to reconsider the plan.
Always bear in mind that anyone reading the plan will need to understand the essentials of your business quickly and easily.
Contents
The business plan should cover the following areas.
Overview. An overview of your plans for the business and how you propose to put them into action. This is the section most likely to be read by people unfamiliar with your business so try to avoid technical jargon.
Description. A description of the business, your objectives for it and how you plan to achieve them. Include details of the background to your business for example how long you have been developing the business idea and the work you have carried out to date.
Personnel. Details of the key personnel including you and any external consultants. You should highlight the skills and expertise that these people have and outline how you intend to deal with any weaknesses.
Product. Details of your product or service and your Unique Selling Point. This is exactly what its name suggests, something that the competition does not offer. You should also outline your pricing policy.
Marketing. Details of your target markets and your marketing plan. This may form the basis for a separate, more detailed, plan. You should also include an overview of your competitors and your likely market share together with details of the potential for growth. This is usually a very important part of the plan as it gives a good indication of the likely chance of success.
Practices. You will need to include information on your proposed operating practices and production methods as well as premises and equipment requirements.
Financial forecasts. The plan should cover your projected financial performance and the assumptions made in your projections. This part of the plan converts what you have already said about the business into numbers. It will include a cash flow forecast which shows how much money you expect to flow in and out of the business as well as profit and loss predictions and a balance sheet. Detailed financial forecasts will normally be included as an appendix to the plan. As financial advisers we are particularly well placed to help with this part of the plan.
Financial requirements. The cash flow forecast referred to above will show how much finance your business needs. The plan should state how much finance you want and in what form. You should also say what the finance will be used for and show that you will have the resources to make the necessary repayments. You may also give details of any security you can offer.
The future
Putting together a business plan is often seen as a one-off exercise undertaken when a new business is starting up.
However the plan should be updated on a regular basis. It can then be used as a tool against which performance can be monitored and measured as part of the corporate planning process. There is much merit in this as used properly it keeps the business focused on objectives and inspires a discipline to achieve them.
How we can help
We can look forward with you to help you put together your best possible plan for the future.
Annual Leave
Under the Working Time Regulations 1998 workers are entitled to paid statutory annual leave and prior to 1 October 2007 a worker was entitled to 4 weeks’ statutory paid leave. As a result of amended regulations statutory paid leave was increased to 4.8 weeks annually (or 24 days for an employee working 5 days per week) from 1 October 2007 and increased to 5.6 weeks from 1 April 2009. This increase will move more UK workers’ annual leave entitlement closer to that of workers in other European countries, where holiday allowance is typically more generous. Workers in Ireland are entitled to 29 days; the highest minimum entitlement is in Austria at 38 days.
This of course is good news for workers but not so good for employers who have got the task of trying to work out the various ramifications of the transitional arrangements.
The effect of the new regulations
For a leave year on or after 1 April 2009 the new minimum annual entitlement will be capped at 5.6 weeks or 28 days if the employee works five days a week. As the additional entitlement has been introduced in stages unless the annual leave year starts on or after 1 April 2009 then the statutory minimum entitlement will depend on the date of commencement of the leave year. For instance, a worker whose annual leave begins after 1 April 2008 but before 1 April 2009 will be entitled to receive 4.8 weeks’ statutory leave, as well as a proportion of a further additional 0.8 weeks, depending on what proportion of the leave year is after 1 April 2009. This basic entitlement is inclusive of bank holidays. If employees receive paid time off for bank holidays in addition to the 4 weeks entitlement then the holiday entitlement has not been increased.
Payment for annual leave
A worker is entitled to be paid in respect of any period of annual leave for which they are entitled, at a rate of one week’s pay for each week’s leave. For employees with normal working hours a week’s pay is the pay due for the basic hours the employee is contracted to work. Any regular contractual bonuses or allowances (except expense allowances) which do not vary with the amount of work done are also included. Voluntary overtime and commission payments are excluded.
Under the Regulations any statutory annual leave may not be replaced by a payment in lieu, except on termination of employment. In such cases, a payment can be made for any untaken leave in the leave year that termination occurs, although no payments can be made for any untaken leave with regard to previous leave years
However, between 1 October 2007 and 1 April 2009 employers can pay in lieu of the extra 0.8 week. This was a temporary measure to help employers manage transitional arrangements such as recruiting extra staff or providing extra training. After 1 April 2009 payment in lieu of accrued untaken statutory holiday can only be made on termination.
Rolled up leave
The ECJ has ruled that it is unlawful for employers to roll up workers’ annual leave payments. In accordance with this it is recommended that employers renegotiate contracts involving such pay for existing workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken.
Requesting leave
Employees should be allowed to choose when they take some of their leave although many employers do set certain conditions, for example that only a certain number of workers may take leave at the same time or that workers may not take more than a certain number of consecutive working days off in one go.
It is common for employers to have a procedure in place for these instances and it should include the procedure for notification. If this is excluded then the legal position is that an employee requesting a period of leave must give notice of at least twice the period of leave to his or her employer. A similar arrangement of notice must be given by the employer if they are requesting the employee to take leave at specific times.
First year of employment
Workers accrue their annual leave entitlement on a pro rata basis during their first year of employment. This is calculated in relation to the proportion of the employment year worked. Therefore, the annual leave entitlement will accrue over the course of the worker’s first year of employment at the rate of 1/12 of the annual entitlement starting on the first day of each month. If the calculation does not result in an exact number of days then the figure will be rounded up to the nearest half day.
Annual leave and part time employees
Under the Regulations time off for bank holidays should be pro rated. Part time workers are currently entitled to 5.6 weeks’ holiday, based on the hours a week that they work, regardless of whether they work on days on which bank holidays fall.
Contractual annual leave entitlement
An employer can increase a worker’s statutory annual leave entitlement via a contractual arrangement. In such cases any unused additional annual leave may be carried over to the next leave year. This is often a matter of employer discretion and will depend on the terms of the contract.
It is recommended to review any contractual documentation and handbooks to take into account the recent developments.
Annual leave and maternity
An employee continues to accrue their statutory annual leave entitlement of 5.6 weeks throughout both ordinary maternity leave (OML) and additional maternity leave (AML).
In addition, from October 2008, contractual annual leave entitlement - ie any holiday entitlement over and above the statutory minimum – also continues to accrue during OML and AML.
How we can help
We will be more than happy to provide you with assistance or any additional information required.
This of course is good news for workers but not so good for employers who have got the task of trying to work out the various ramifications of the transitional arrangements.
The effect of the new regulations
For a leave year on or after 1 April 2009 the new minimum annual entitlement will be capped at 5.6 weeks or 28 days if the employee works five days a week. As the additional entitlement has been introduced in stages unless the annual leave year starts on or after 1 April 2009 then the statutory minimum entitlement will depend on the date of commencement of the leave year. For instance, a worker whose annual leave begins after 1 April 2008 but before 1 April 2009 will be entitled to receive 4.8 weeks’ statutory leave, as well as a proportion of a further additional 0.8 weeks, depending on what proportion of the leave year is after 1 April 2009. This basic entitlement is inclusive of bank holidays. If employees receive paid time off for bank holidays in addition to the 4 weeks entitlement then the holiday entitlement has not been increased.
Payment for annual leave
A worker is entitled to be paid in respect of any period of annual leave for which they are entitled, at a rate of one week’s pay for each week’s leave. For employees with normal working hours a week’s pay is the pay due for the basic hours the employee is contracted to work. Any regular contractual bonuses or allowances (except expense allowances) which do not vary with the amount of work done are also included. Voluntary overtime and commission payments are excluded.
Under the Regulations any statutory annual leave may not be replaced by a payment in lieu, except on termination of employment. In such cases, a payment can be made for any untaken leave in the leave year that termination occurs, although no payments can be made for any untaken leave with regard to previous leave years
However, between 1 October 2007 and 1 April 2009 employers can pay in lieu of the extra 0.8 week. This was a temporary measure to help employers manage transitional arrangements such as recruiting extra staff or providing extra training. After 1 April 2009 payment in lieu of accrued untaken statutory holiday can only be made on termination.
Rolled up leave
The ECJ has ruled that it is unlawful for employers to roll up workers’ annual leave payments. In accordance with this it is recommended that employers renegotiate contracts involving such pay for existing workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken.
Requesting leave
Employees should be allowed to choose when they take some of their leave although many employers do set certain conditions, for example that only a certain number of workers may take leave at the same time or that workers may not take more than a certain number of consecutive working days off in one go.
It is common for employers to have a procedure in place for these instances and it should include the procedure for notification. If this is excluded then the legal position is that an employee requesting a period of leave must give notice of at least twice the period of leave to his or her employer. A similar arrangement of notice must be given by the employer if they are requesting the employee to take leave at specific times.
First year of employment
Workers accrue their annual leave entitlement on a pro rata basis during their first year of employment. This is calculated in relation to the proportion of the employment year worked. Therefore, the annual leave entitlement will accrue over the course of the worker’s first year of employment at the rate of 1/12 of the annual entitlement starting on the first day of each month. If the calculation does not result in an exact number of days then the figure will be rounded up to the nearest half day.
Annual leave and part time employees
Under the Regulations time off for bank holidays should be pro rated. Part time workers are currently entitled to 5.6 weeks’ holiday, based on the hours a week that they work, regardless of whether they work on days on which bank holidays fall.
Contractual annual leave entitlement
An employer can increase a worker’s statutory annual leave entitlement via a contractual arrangement. In such cases any unused additional annual leave may be carried over to the next leave year. This is often a matter of employer discretion and will depend on the terms of the contract.
It is recommended to review any contractual documentation and handbooks to take into account the recent developments.
Annual leave and maternity
An employee continues to accrue their statutory annual leave entitlement of 5.6 weeks throughout both ordinary maternity leave (OML) and additional maternity leave (AML).
In addition, from October 2008, contractual annual leave entitlement - ie any holiday entitlement over and above the statutory minimum – also continues to accrue during OML and AML.
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