Ensuring a high score with games tax relief
18th July 2016
For several years there has been a generally accepted strategy for the most tax efficient remuneration for owner managed businesses. This includes paying a salary to the director of approximately £8,000 per annum and topping their income up with dividends, paid to them as a shareholder of their company. Previously this income would enable the owner to withdraw circa £38,000 per annum tax free from their company. However, as a result of the introduction of the changes to tax on dividends, a similar method of remuneration from the tax year 2016/17 will result in a personal tax liability of around £1,700 per annum.
April 2014 saw the introduction of Video Games Tax Relief (VGTR). This generous relief enables developers to obtain an additional deduction of qualifying expenditure against their taxable profits providing corporation tax relief. Where the deduction creates a loss, this can be surrendered for a repayable tax credit.
The qualifying expenditure for VGTR includes salary, but does not include dividends. As a result, the value of the tax relief is diminished where directors pay a small salary. Developers should therefore be asking their accountants to consider whether a higher salary would be more beneficial. It can be shown in many circumstances that with VGTR a higher salary and lower dividends could be paid, which maintains the same net take home for the director, but increases the net value of the company overall.
The increased salary will attract National Insurance liabilities, but where a company has more than one active employee, up to £3,000 of this could be offset against the Employers Allowance. There will of course still be employee’s national insurance and income tax liabilities, which will need to be considered.
Some developers may not want to pay a greater salary because they want to retain cash in the business for working capital. However, it should be noted that they do not need to actually draw all of this extra salary, but could instead credit this to their directors’ current account and draw tax free at a later date. This also opens up another possible opportunity to charge the company interest for borrowing your capital, potentially increasing the VGTR and providing further tax efficient remuneration, especially as a result of the recent changes to tax on interest.
If your accountant isn’t discussing this with you, they should be. If you want to discuss this with me, don’t hesitate to get in touch!
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