Insurance World

Taxation has been woven into the fabric of our society since the first city states flourished in Ancient Sumer. Whilst salaried workers can often do nothing about their tax liabilities, business owners can exercise choice in the way they extract wealth to minimise their tax liabilities.

What follows is a summary of a fantastic 2,500 word pdf with graphs that expands upon the issues outlined mentioned below. Visit our website for this and much more.

Director's loan

A director could use a loan to extract wealth from the business and either repay it in full or may be able to use multiple loans & repayments to build up a balance over time without tax. However, if its not done correctly 25% of tax may be due on the outstanding loan balance. Also, if the director's loan is written off, it'll be taxable as dividend income and is likely to attract class 1 NI, so isn't very efficient to write off.

Salary vs dividends

Salary costs more in tax than using dividends, mainly as dividends don't involve national insurance contributions. This is true at all levels, but especially between the £30k - £50k profit level for proportion of profits spent on tax.

It may also be possible to use different share classes to pay dividends in different ratios to the actual shareholdings. Although need to consider if shares will need voting/capital rights, e.g. to shift income to spouse.

To get the full tax benefits for either salary or dividends there are a number of key points to note. These include paying salary within 9 months of the year end and ensuring adequate paperwork is in place to support the salary. Dividends require a sufficient level of profits to avoid being illegal and require board resolution and minutes.

Salary and dividend strategies should be reviewed prior to the company's year end and also before the tax year end of 5 April, to perform tax planning and to get the right paperwork in place in time.

Management fees / overseas

Rather than using wages or dividends it may possible for the owners to charge management fees to another loss making UK company.

If the owners are domiciled overseas they may also be able to shift income by paying management fees to an overseas company in a low tax jurisdiction.

Care needs to be taken to ensure the fees are justifiable and that any overseas company is managed and controlled overseas and be able to provide HMRC with supporting evidence such as email/call logs & passport stamps.

Capital route

Rather than extracting too much wealth in the short term, the profits could be re-invested in the business with the aim of increasing its value in the long term to make a bigger profit on exit. Capital gains tax of 10% would be lower than either salary or dividends for the first £10m of capital gains in a lifetime if the criteria for Entrepreneurs Relief are met. It also needs a genuine disposal transaction with a commercial justification.

Other points

A director could also use benefits such as medical insurance or company cars to extract wealth. This could potentially save on employee's NI compared to salary, but need to check the calculations for the tax efficiency of a particular benefit due to differences in how they're calculated.

Pensions are a complicated area and there are many other investment considerations, but from a tax perspective, pensions are highly tax efficient as a director could obtain tax relief at the full marginal rate on contributions up to £50k.

The above discussion has simplified things to enable comparisons. However, it should be noted that profit is not the same as cash and a company could make lots of profit but be cash poor. So a company should keep sufficient cash in the business to fulfil its working capital requirements and a contingency should also be kept for a "rainy day".

Disclaimer

The above is not intended to constitute legal, financial, tax or other advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. We shall accept no responsibility for any errors, omissions or misleading statements in the above, or for any loss which may arise from reliance on materials contained in the above.

Mohammed is a business advisor and tax expert who has worked with everyone from startups to AIM Listed plcs to multinational £150m+ businesses in a variety of sectors from manufacturing to online gaming.

MAH, Chartered Accountants focus on providing a quality service that not only achieves compliance with financial laws and regulations, but also explores opportunities for growth, tax savings and keeping the business healthy.

Visit our website http://www.mah.uk.com/ for full details and a 2,500 word pdf with graphs that expands upon the summary outlined mentioned below.

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This is the second article in the three article series on how to negotiate with the IRS on tax liabilities. The first article detailed how the taxpayer could use the option of Effective Tax Administration (ETA) in addressing any tax liabilities owed to the IRS. This article will explain how the taxpayer can use what is called Collateral Agreements to address their tax liabilities.

Sometimes in dealing with the IRS a taxpayer can reach an impasse which will make it more difficult to reach an agreement over the liability owed. When this happens the taxpayer can look to offer terms and other stipulations that are not in a typical negotiation with the IRS. The use of collateral agreements can be used to make a more attractive offer to the IRS along with other stipulations that may, sometimes, include a non-cash payment options.

The collateral agreement, in context of an OIC, may arise in several situations when dealing with the IRS. Most often this happens when the IRS believes that the taxpayer's income will increase in the future allowing for payment of the liability. However, the taxpayer may disagree with how long this increase may last e.g., overtime hours, bonuses, and the like. If the taxpayer is working extra hours at their place of employment then a collateral agreement may be feasible to ensure that the liability can be procured. This option would be based upon the future-income potential of the taxpayer to allow for a fixed percentage of the annual income, over a certain base-level amount, to be paid in addition to any original amount that has been previously offered.

The use of future-income collateral agreements are monitored annually during the five-year future compliance term for income fluctuations. Sadly, though future-income collateral agreements are not widely offered by the IRS and are not known by taxpayer's, due to Form 2261 not being readily available at http://www.irs.gov. If you believe that the use of a collateral agreement is appropriate and necessary, as the taxpayer should ask that the IRS begin to prepare it.

A taxpayer can also use a collateral agreement to break through a negotiating roadblock in installment agreement negotiations. Additionally, the agreement can be a useful tool in negotiating the deferral or forbearance of filing a notice of federal tax lien, as the IRM instructs IRS employees to withhold filing a federal tax lien if a taxpayer's has entered into a collateral agreement. This would be useful, by the taxpayer, to allow for more time to obtain the money to settle the liability. A collateral agreement does not provide additional consideration to prompt acceptance of collection alternatives, but rather calls for some performance by the taxpayer that is ensured by collateral security. This security can be in the form of marketable stocks, bonds and letters of credit, which are generally acceptable as collateral security for an agreement to prevent a notice of federal tax lien filing.

As a taxpayer, this is one of several options that you may use to compromise your liability with the IRS. By working with the IRS, with the methods that are available for use, the taxpayer can remedy their liability in a manner that is acceptable to the IRS, without incurring additional fines, fees, and penalties for failing to address the liability amount owed.

For more information, or assistance, in representing yourself in your legal matter please contact DRWelchGroup, LLC to receive the information to protect your legal interest.

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BySuzanne Glasser

One of the worst mistakes that businesses and individuals alike can make is that they will only review their financial situation once every so often, however the smart ones review investment strategies on an ongoing basis. In this manner, the best efforts can always be assured and your portfolio will likely always look the way you want it to, which is up.

What's Going On?

One of the first things that anyone should review is what is happening in the world. This means more than taking a simple look at the events of America, but also looking around the globe in an effort to see what events overseas may be shaping the financial markets over here. This can range from troubles with currencies all the way to civil unrest. However, it must all be looked at all the time.

Steady as She Goes

Too many people want to jump in on or into the latest craze when it comes to investing. However, this type of investment strategy is nothing more than an uncalculated gamble with your own money. When you review your investment strategies you should do so with the notion that what needs to be invested in may not be the most glamorous thing in the world, but it will help you reach your financial freedom. After all, would you rather be in the 'hot tip' of the month or be on course to living the American Dream?

Consistency is King

Of course reviews of any financial matter would be nothing without consistency. Without being constant and thorough in reviewing investment strategies each and every time you do so there really is no point. What might be the right investment strategy for you this year may very well be the wrong investment strategy for you in a month from now; maybe even a week from now. With investing it's all about being consistent.

Right the Ship

The good news is that it is never too late to start being consistent and reviewing your financial freedom progress. The best way to go about it is to sit down and have an honest look at what you may be doing right and what you may think you are doing wrong. Once it is all out on the table, the necessary adjustments can be made. Then you will see for yourself that if your financial independence will come, it will take a good amount of dedication and likely many ongoing reviews.

Suzanne Glasser is a freelance finance writer specializing in financial reviews and portfolio adjustments. Click for more information on ISMAmerica Reviews or visit http://www.ismamerica.com.

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