Originally published at: Investing as a business: 5 things to be aware of – InvestEngine Insights
Investing your company’s spare cash can be a great option to generate a return rather than leaving it sitting in a bank account, probably earning very little.
But to make the most of investing as a company it’s important to have an awareness of the relevant accounting and tax rules. Arming yourself with the details can help to make your company’s investments as tax-efficient as possible.
So, here are 5 topics to be aware of when investing your company’s cash in the UK. These are general rules and principles – tax is down to individual company circumstances so if in doubt, speak to a qualified accountant.
Recording company investments
Many businesses are likely to invest their cash in the markets to earn an income (dividends) and capital appreciation (investment gains) rather than keeping it in low-yielding bank accounts.
When investing in investment products, such as ETFs, you’ll need to make sure these are recorded in your company accounts.
Most investments in listed equities or ETFs would be recorded as an asset classified as Fair Value Through Profit or Loss (FVTPL). It’s a simple transaction where one asset (cash) is reduced and a new asset (investments) is created for the same amount and usually includes any transaction costs.
At the end of each accounting period, any investments held would need to be re-measured at their fair value (typically their market price). Any gain would be an increase in the asset from a balance sheet perspective and a corresponding credit to the income statement – but it would not be subject to corporation tax until the investment is actually disposed of.
If investments are held for the long term, subject to certain criteria, they can instead be recorded as Fair Value Through Other Comprehensive Income (FVOCI). Unrealised gains and losses are recorded in a revaluation reserve instead of through the income statement. As with FVTPL, corporation tax becomes due when the investments are disposed of.
Tax treatment of dividends and interest
When investing as a company it’s important to understand how any income received through dividends or interest is taxed.
Dividends
In the UK, there is a broad corporation tax exemption for dividends received by a company from investments in equities where there is no controlling interest (S.931A – Corporation Tax Act 2009).
So, dividend income from an investment in ETFs would be recorded in the accounts as non-trading income but would not be subject to corporation tax. This is another incentive for companies to put their spare cash to work in dividend-yielding investments.
Interest
Interest income may arise if a company invests in bonds, or ETFs which invest in bonds. If a company receives interest income, it’s recorded as non-trading income and is typically subject to corporation tax at the usual rate.
Tax treatment of capital gains
As an individual investor, if the value of your investments goes up and you sell those investments, you will have made a capital gain. If you hold those investments in an ISA, you typically won’t have to pay capital gains tax when the investment is sold (subject to individual circumstances).
Unfortunately there’s no straightforward equivalent of an ISA for a company. When a company sells an asset, such as an ETF, a chargeable gain usually arises if the asset’s value has increased beyond its cost.
Chargeable gains are typically subject to corporation tax. So, if you start investing your business’ cash and make gains on your investments, you should be prepared for them to be subject to corporation tax on disposal.
Note that gains in certain funds, such as those which invest 60% or more in bonds, may be subject to the ‘loan relationship’ rules rather than chargeable gains. This means corporation tax may be due on unrealised gains annually rather than when the investment is disposed of. Micro-entities may be exempt from this when using the historic cost method. You should speak to your accountant if unsure.
Timing of disposals
Understanding your company’s potential gain on any investments can help with tax planning.
For example, if your company is close to the lower limit for marginal relief (taxable profits of £50,000) you may want to delay any investment disposals which trigger a chargeable gain until the next financial period to avoid pushing the company into a higher rate of tax.
You may also want to consider whether you can offset any potential chargeable gains in the year against allowable losses on other disposals. In this way, you can take the gain on investments and set off any allowable losses on disposals of other assets to reduce your corporation tax bill.
Good record keeping and planning is required to make sure you (and your accountant) can make the best use of any gains or losses on disposals.
Capital losses
Investments can go down in value as well as up, so you should be aware of how losses on investments work for a company.
If your company disposes of its investments and makes a loss, this loss is automatically set off against chargeable gains in the same period. Note that they cannot be used to offset trading income or other sources of taxable income.
Any remaining loss can be carried forward into future periods to set off against future capital gains. Alternatively, capital losses can be carried back to set against the previous year.
Note that HMRC has anti-avoidance ‘share matching’ rules in place in the case of ‘bed and breakfasting’ for companies. This is where an investment is sold at a capital loss and the same investment is quickly bought again with the intention of using the loss relief on the initial disposal to reduce corporation tax liabilities on other chargeable gains.
Key takeaways
Investing your company’s spare cash can be a great way to get a decent return compared to leaving it in a bank account. But it’s important to familiarise yourself with the accounting and tax rules around these types of investment.
Understanding tax positions and treatments can ensure you maximise any gains in the most tax-efficient way possible and help with cash flow planning. Having an awareness of the relevant accounting and tax rules is good practice and most major accounting software will be able to help with record keeping.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.