HMRC may be prepared to help. It has recently issued guidance on the implementation of managed payment plans (plans). These plans allow tax liabilities to be paid by equal monthly instalments over a period of up to 12 months spaced equally, either side of the normal due date(s).

The plans will provide protection from interest and penalties. They are available for income tax, capital gains tax payable and corporation tax. However, large companies are not eligible.

Plans are voluntary. You have to send a proposal to pay to HMRC who will accept it provided certain conditions are met. These currently include:

• you must have filed your return for the year
• you must have paid all previous tax due or have set up a separate arrangement to pay
• payments must be made, by Direct Debit or Standing Order, by equal monthly instalments on the fifteenth day of each month, spread equally either side of the due date.

This may not be a perfect system and it certainly needs planning in advance which makes it of little use for this July. But if cash is tight this may help come next January, provided you take action now.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole.  

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HMRC has now issued some guidance notes on the taxation on company cars and vans, including calculators to provide an indication of benefits.

Company cars - the link to HMRC’s website is http://www.hmrc.gov.uk/cars/company-cars-factsheet.pdf. 

Company vans - the link on HMRC’s website is http://www.hmrc.gov.uk/vans/vans-info.pdf.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole. 

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The Chancellor announced a further deferral of the proposed ‘income shifting’ legislation in the Budget. However, the ‘settlements’ anti-avoidance provisions are still very much in force and the Revenue is applying them.

In a recent case (Buck v Revenue and Customs Commissioners [2008] SpC 716) Mr Buck owned 9,999 shares and Mrs Buck 1 share in a company. Mr Buck waived the dividends on his shares, which enabled enhanced dividends to be paid on his wife’s share. HMRC argued and won that the dividend waivers constituted a ‘settlement’, and assessed Mr Buck on the enhanced dividends.
The main problem was that there were insufficient reserves to cover the dividend if the waiver had not been made.

In another case (Mr and Mrs Bird v Revenue and Customs Commissioners [2008]), Mr and Mrs Bird were the initial shareholders of a company, owning one share each. The company issued a further 98 shares at par, 19 shares each to Mr and Mrs Bird, and 20 shares to each of their three daughters. Dividends were paid to all shareholders. HMRC argued, and again won, that the dividends paid to the daughters (until they reached age 18) constituted income arising under a ‘settlement’, which should be treated as Mr and Mrs Bird’s income.

Any tax planning of this nature will need to be considered carefully if it is to be effective.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole.  
 

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HMRC has now issued its 2009/10 Business Plan setting out its vision and strategic objectives. These include:

• improving customers experience of HMRC
• improving professionalism

It is an interesting read but I will be watching the delivery.

For further information see http://www.hmrc.gov.uk/about/business-plan.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

 

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There has been surprisingly little publicity over the Budget’s “name and shame” proposals. Essentially any taxpayer individual, business or company who is penalised for deliberately understating tax due, (or overstating claims or losses), of more than £25,000 will have their name and details (address and trade or profession) published on quarterly lists which will remain in the public domain for one year from publication.

The impact of this could be significant in terms of:

will it affect new employment opportunities?

will it affect credit rating? 

what about due diligence on a deal? 

I could go on.

Time will tell but I hope HMRC makes no mistakes.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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The UK’s three tax-based Venture Capital Schemes, the Enterprise Investment Scheme, Venture Capital Trusts and the Corporate Venturing Scheme, have each received formal state aid approval from the EC subject to four final changes. Of these, the most significant is a relaxation of the rules relating to the location of small companies’ qualifying activity. The relaxation allows companies to receive investment under the schemes while enjoying greater opportunities to expand internationally.

The Government has stated that legislation implementing these changes will be introduced in Finance Bill 2010, to provide time for consultation with industry over the detail.

The four changes required to secure approval are:

• relaxation in territorial rules – the current rule requires at least 50% of a company’s qualifying activities to be in the UK. This will be relaxed so that a company is only required to have a “permanent establishment” in the UK.
• exclusion of “enterprises in difficulty” – to bring the schemes in line with the Risk Capital Guidelines, “enterprises in difficulty” will not be eligible for investment under the schemes. Government will consult on the details.
• in addition, for Venture Capital Trusts (VCTs) only, two further changes will apply:
  • change in minimum equity requirement – the current requirement is for at least 21% of total funds to be in ‘ordinary shares’ as defined.  For future fundraising VCTs will be required to hold at least 49% of total funds in ‘equity’. Legislation will introduce a new definition of ‘equity’, allowing a wider range of eligible investments than at present. Government will consult on the details.
  • relaxation of listing requirement of VCTs – the Government will relax the current rule, which requires VCTs to be listed in the UK. Instead, listing will be allowed on any “European Union Regulated Market”.

Comment on this blog in the space provided below, or visit my profilefor details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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Having seen the Chancellor announce the introduction of new 50% (and, in some cases, 60%) tax rates, the Treasury have admitted that legitimate tax avoidance is expected to reduce their impact by nearly 70%.

This would reduce the additional tax collected by something like £2.5billion, annually.

The reduction in tax relief for pension contributions made by those earning £150,000 or more will cut this tax leakage from 2011 on but it seems likely that people taking steps to lessen the impact of the new rates will keep the extra money available to the Treasury to a minimum.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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HM Revenue & Customs (HMRC) have announced that 25% of their £4billion budget will be devoted to attacking tax avoidance and evasion, this year.

This represents a significant shift in emphasis and follows a lengthy 'litigation and settlement review', which has led to HMRC promising to prosecute far more often than it has done in the past. If the HMRC stay true to their word, the days of taxpayers cutting a deal over the amount of tax due in contentious cases could well be over - instead, the matter will be decided in court, with the decision setting a precedent for similar cases.

The expected return for this investment is £2.4billion, far less than HMRC might normally expect to receive for such an outlay.

It is unclear exactly what will be challenged at the moment; what does seem certain is that we can expect HMRC to undertake more frequent investigations and enquiries, especially where they feel reliance has been placed on the letter (as opposed to the spirit) of the law.

As their new Chief Executive, Lesley Strathie put it, “In the current difficult economic climate, it is more important than ever that HMRC helps and supports customers fulfil these obligations while relentlessly pursuing those who bend or break the rules.”

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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There appears to be no getting away from the news regarding the current credit crises. If you feel that this has started to adversely affect your business profits then we may be able to help.

The taxation rules under which your business profits are taxed may have entitled you to overlap relief. This relief is normally claimed when you cease in business. However, relief can be brought forward by changing your accounting period. In times of reduced profits the relief can be a valuable tool to reduce your tax bill.

This will not always be beneficial, for example if your current profit levels are higher than when your overlap arose. The sums must be done to ensure that an advantage, and not a disadvantage, is obtained.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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I was horrified this morning to hear on the radio a reference to tax evasion over the fact that MPs are making capital gains tax elections on their second homes and so not paying tax on the sale. A number of issues crossed my mind:

• if it is legal it is not evasion - avoidance possibly, but that is not a crime (whatever people say)
• an individual (or married couple) may have only one principal private residence. If they elect for this to be their second home in London, then for that period, their other home falls within the capital gain regime and on sale of that property some tax will be payable
• many individuals with two homes are using the law to defer tax until the second property is sold. This is proper planning and to be honest, any competent adviser would have at least considered this aspect
• should a change in a long-standing law be undertaken on a whim just to penalise MPs. Any change in the law will hit a lot of ordinary people who have done nothing wrong.

Whatever the rights and wrongs of MPs' expenses, accusing them of tax evasion is a step too far. Knee-jerk reactions to this type of headline will hurt many people, not just the MPs.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole.

 

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Rent-a-room relief - the basic principle is that an individual may receive rent of up to £4,250 a year tax-free by letting a room in his (or her) private residence. This rent may or may not include additional services such as food, cleaning and laundry.

The relief is available to qualifying individuals (not to companies or partnerships) and applies to the individual’s main residence. 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole.

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HMRC has now published details of the tax effects of the part nationalisation of the society to assist people with their returns for this year.  The details can be found at http://www.hmrc.gov.uk/briefs/cgt/brief1609.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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HMRC has now introduced an advisory system of 'benchmark' scale rates which employers can use to make subsistence payments to employees free of tax and NICs. The new advisory system was implemented from 6 April 2009.

The system only covers scale rates for day subsistence payments. There are detailed requirements on notifications and conditions but once set up the following tax payments can be paid, tax free and with no P11D reporting obligations:

Breakfast rate for irregular early starters up to £5.00 per day

One meal (5 hour) rate - up to £5.00 may be paid

Two meal (10 hour) rate – up to £10.00 may be paid

For further details see www.hmrc.gov.uk/briefs/income-tax/brief2409.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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The new penalty regime introduced by HM Revenue & Customs took effect from 1 April 2009. Essentially the regime attempts to reward good and punish bad behaviour and applies a measure of reasonable care. If reasonable care has not been taken the imposition of a penalty is almost inevitable. HMRC has published a leaflet entitled “Take Care to Avoid A Penalty” which provides some guidance on their views. 

This can be found at http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf.

You can comment on the new penalty regime in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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With effect from Budget Day (22 April 2009), companies may release debts owed to them by connected companies (often, those under common ownership) without triggering a tax charge. Until now, a company that was released from a trading debt owed to a connected company would be taxed on this release – but the other company would not benefit from tax relief for granting the release. If the companies are not connected, the existing rules will continue to apply - the company that owes the trading debt will be taxed (unless the release is part of a statutory insolvency arrangement) and the creditor will continue to get tax relief.

For accounting periods beginning on or after 1 April 2009, the rule that only allows a company a tax deduction for interest payable to a connected company outside the loan relationship rules (normally when the lender is not resident in the UK) when it is paid, will be changed. In future, this will remain the case only where the lender is resident in a ‘non-qualifying territory’ (broadly, a tax haven).

Tax deductions for other interest will be granted on an accruals basis (ie they will follow the treatment in the accounts).

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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Currently interest paid by individuals on loans used to invest in certain companies or in partnerships may qualify for income tax relief.

However, HMRC believe that this relief is being exploited and so relief is being withdrawn where the loan and investment are part of an arrangement that eliminates any real commercial risk.

This may cause a problem for people who have invested in tax saving schemes in the past as the restriction applies to interest paid on or after 19 March 2009 irrespective of when the loan was taken out. 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Cathy Corns is a Corporate Tax Partner at Mercer & Hole.

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A client company has a subsidiary which will shortly cease trading and will eventually be wound up. The holding company will realise a capital loss which we want to set against a capital gain arising in another subsidiary. However, there is a problem – the rules which permit a group to 'deem' an asset to have been transferred within the group only apply to actual disposals of assets to someone outside the group. They do not therefore apply to liquidations or negligible value claims, etc and we were having to consider whether we needed to make actual transfers of assets to ensure that the gains and losses were both realised within one company.

Our problem may now be solved. With effect from the date that the Finance Bill 2009 receives Royal Assent (expected late July 2009) the rules governing group capital gains and losses will be changed to allow the gains and losses to be transferred. The former restrictions on transactions not involving disposals to third parties will no longer apply. This should make it much easier to ensure that capital gains and losses within groups can be matched.

 

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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UK companies that are members of groups may see their tax position affected by a number of changes announced in this year’s Budget. The new measures are:

• Dividends and other distributions received from foreign companies will largely be exempt from corporation tax (CT) in the same way as distributions from UK companies currently are. (This will also apply in many cases to UK companies that are not members of groups but receive dividends or other distributions).
• Tax deductions for finance expenses (largely interest) incurred by UK members of a group will be subject to a cap, unless all group members meet the definition of a small or medium sized company.
• Changes to the controlled foreign company (CFC) regime for companies with interests in overseas companies.
• The rules that require companies to obtain approval from HM Treasury before undertaking certain transactions involving subsidiaries not resident in the UK will be repealed and replaced by a need to file a post-transaction  report – and then only for foreign investment transactions of £100 million or more.

The changes will take effect from different dates:

1. The changes to the taxation of distributions will apply to dividends and other distributions received on or after 1 July 2009. 
2. The debt cap applies to finance expense payable in accounting periods beginning on or after 1 January 2010.
3. The changes to the CFC regime have effect for accounting periods starting on or after 1 July 2009, though provision will be made for companies with accounting periods that straddle this date. Transitional rules will apply in some circumstances, until 1 July 2011.
4. The new reporting requirement will apply to transactions undertaken on or after 1 July 2009.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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The Budget has seen the temporary re-introduction of first year allowances (FYAs) for purchases of qualifying plant and machinery. Allowances of 40% will be available to companies, partnerships and individuals carrying on qualifying activities (which includes trades and ‘normal’ property businesses) in excess of the annual investment allowance (see below) subject to the following:

• the expenditure must be incurred in the year to 31 March 2010 (for companies) and 5 April 2010 (partnerships and individuals).
• must not relate to specific proscribed assets, including for example, long life assets, cars and assets for leasing.

Unusually, there appears to be no restriction on the amount of the expenditure or the size of business incurring the costs.

The annual investment allowance (AIA), introduced last year, allows businesses (or groups, where related businesses carry on similar activities) to claim a 100% deduction from taxable profits for £50,000 of expenditure on eligible plant and machinery. 

Confusingly, the definition of eligible plant and machinery for AIA purposes differs quite significantly from that for qualifying plant and machinery for FYAs.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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The normal rule for company trading losses is that they can be carried back and set off against the profits of the previous year. With the onset of the recession many companies did not have sufficient profits to make use of their losses in this way. In the Pre-budget Report last year it was therefore announced that losses of up to £50,000 could be carried back for three years. However, this only applied to losses made in accounting periods ending in the period 24 November 2008 to 23 November 2009.

The three year carry back is to be extended for a further year, to accounting periods ending in the period 24 November 2009 to 23 November 2010. The extension will again be limited to £50,000, giving a total of £100,000 over two accounting periods. The losses will be offset against later years first.

Equivalent changes will be made to the carry back rules for sole traders and partnerships for losses in the tax years 2008/09 and 2009/10.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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Investors in small, relatively high-risk, trading companies may be eligible for special tax reliefs under the Enterprise Investment Scheme (EIS) or the Venture Capital Trust (VCT) scheme. The equivalent scheme for companies is the Corporate Venturing Scheme (CVS). Some welcome changes to these reliefs have been announced today.

Previously it was necessary for 80% of the money to be used by the company for a qualifying purpose within 12 months of the investment and the remaining 20% to be used within 24 months. This rule has been relaxed and, for investments made on or after 22 April 2009, it will simply be necessary for 100% of the money to be used within 24 months.

For individual EIS investors, an even more useful change is made to the ability to claim relief in the previous tax year. Subject to there being sufficient income in charge to tax, the individual can claim for the income tax relief (20% of the amount subscribed) to be given in the tax year prior to the year of investment. This was previously limited to shares issued before 6 October and to half of EIS subscriptions up to an overall limit of £50,000 subscribed. For 2009/10 these restrictions are lifted, allowing the relief for the total EIS investment (limited to £500,000 subscribed) to be carried back.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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On the individual capital gains tax exemption - this has been set at £10,100 for 2009/10.

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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In theory, greater cooperation should be a good idea. My only reservation is over how it will work in practice.

Two proposals have been adopted by the EC with the aim of improving assistance between the tax authorities of Member States. In addition to providing clearer and common rules on procedures, forms, etc it will grant tax officials equal powers of inspection in administration enquiries carried out in another State.

Another element of the proposals is aimed at tackling the question of bank secrecy. A Member State will not be able to refuse to supply information concerning a taxpayer solely because this information is held by a bank or other financial institution.

With a second HM Revenue & Customs amnesty on offshore accounts soon to be announced, these proposals certainly add to their arsenal of weapons for tackling tax avoidance.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

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A while ago now HMRC moved responsibility for deciding which taxpayers would have their tax returns subjected to an enquiry away from local inspectors to Risk Intelligence Assessment Teams (RIATs).

RIATs have information and statistics available on a country-wide basis. This allows RIATs to spot trends, compare income, expenses, profit ratios, etc. with similar businesses on a nationwide basis. 

RIATs do not, for obvious reasons, publicise all of the possible triggers, but here are some of them:

• Recurring late submission of accounts/tax returns overdue in recent years
• Significant fluctuation in income or expenses
• Significant errors including no adjustments for private use element
• Low income compared with outgoings.

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HMRC has issued taxpayers warnings on being targeted by fraudsters.

A growing number of telephone and email scams involve fraudsters posing as tax officials arranging repayments, attempting to obtain personal information after 31 January, when many people will be expecting refunds.

The emails tell the recipient they are due a tax refund and ask for bank or credit card details. Recipients are advised not to click on web links contained in suspicious emails and not to open attachments.

HMRC advised that any email that appeared to originate from HMRC and offered a tax refund should be forwarded unopened to phishing@hmrc.gsi.gov.uk. HMRC does not undertake to reply to every email sent, but said the information would be used to help reduce online fraud.

For further details visit the following link on the HMRC website. 
 

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Looking at the newspapers recently - broadsheet, as well as tabloid - you could be forgiven for thinking that any attempt to reduce your tax bill is considered a crime and should be subject to heinous penalties.

I have news for you - IT'S NOT!

A long time ago, way back in 1936, Lord Tomlin stated (IRC v Duke of Westminster) that every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

That made perfect sense then - and it still does. You are not obliged to arrange your private or business affairs to maximise the tax take to the Government. That's not to say you shouldn't follow the rules.

Does the law permit a company to set up a subsidiary in a low-tax jurisdiction and generate profits with a lower rate than in the UK? Yes, it does. At worst, you may have to bring the profits back after two years, but if the profits are high enough, that deferment can be worth having. Is it permissible to remortgage a let property and obtain relief for the interest against the rents - whatever you spend the money on? Yes it can be. Is it legal to rearrange shareholdings so within a couple both may obtain the £80,000 benefit of entrepreneurs relief? Of course it is! I could go on, but you probably get the picture.

It is commercially sensible not to pay more tax than you are legally obliged to do so and I for one do not feel guilty about planning to ensure this is the case. When I want to help out a needy cause, I choose to give my spare cash to charity, not the Chancellor - and I make sure I claim gift aid relief when I do!

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As mentioned in earlier blogs, this year’s Budget will be given by the Chancellor on 22 April 2009 – it has been delayed until after the G20 summit, which is then immediately followed by the Easter recess.

At this time of year many tax professionals try to second-guess what the Chancellor may announce in his Budget. Turmoil in the world’s markets makes these predictions harder than ever – he needs to increase the tax take, but will higher taxes cripple an already weakened economy?

We do know that the rate of VAT is set to revert to 17.5% on 1 January 2010. There are already cries for the 15% to be retained, but if it does go up next year would he be tempted to fix the rate at 20%?

Scrapping higher rate tax relief on pension contributions has often been put forward as something the Chancellor might consider – will this be the year that it happens?

As usual, we will just have to wait and see! 

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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It was in his Pre-budget report last November that the Chancellor, Alistair Darling, announced the creation of the Business Payment Support Service (BPSS). This is a telephone helpline (0845 302 1435) that companies and business owners can ring to negotiate extra time to pay tax.

As the January deadline for paying self-assessment income tax approached, several of our clients made use of this service and were able to agree 3, 6 or sometimes more than 12 months in which to settle their tax bills. The whole process took only a few minutes.

It would appear, however, that this initial burst of enthusiasm at HM Revenue & Customs has worn off and it is now much harder to agree more than a 3 month delay on the telephone. Anything longer than that is likely to be passed to a local manager for review and may also require more detailed information such as cash-flow forecasts and management accounts.
 

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HM Revenue & Customs (HMRC) has announced the latest interest rates charged on late payments of and paid on overpayments of tax.

The reduced rates that cover quarterly instalment payments of Corporation Tax take effect from 16 March 2009. The rates for all other direct and indirect taxes, including National Insurance contributions paid, take effect from 24 March 2009. The rate of interest:

• On late payments of Income Tax, National Insurance contributions, Capital Gains Tax, Stamp Duty, etc. changes from 3.5% to 2.5%, while on overpayments of these taxes interest remains at 0%.
• On late payments or repayments of Inheritance Tax changes from 1% to 0%.
• On underpaid instalment payments of Corporation Tax changes from 2% to 1.5 % while on overpaid instalment payments of Corporation Tax, and on Corporation Tax paid early (but not due by instalments) the rate changes from 0.75% to 0.25%.
• On unpaid Corporation Tax changes from 3.5% to 2.5% and on overpaid corporation tax remains at 0%.
• On under-declared or over-repayments of VAT, Air Passenger Duty, Insurance Premium Tax, Landfill Tax, Climate Change Levy, Aggregates Levy changes from 3.5%to 2.5%.

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The Finance Act 2008 has introduced a number of changes to compliance which will take effect from 1 April 2009.

The main changes are:

• HMRC will have one set of powers covering PAYE, VAT, Income Tax, Corporation Tax, Capital Gains Tax and Construction Industry Scheme to visit and inspect businesses and records and to request information and documents
• Greater flexibility in setting record keeping requirements
• New time limits
• Safeguards for taxpayers

For VAT, the time limits for assessments and claims will be increased from three to four years. The legislation ensures that claims that are already out of time are not brought back into time.

HMRC has published an e-learning package on its website. This sets out the new framework in more detail.
 

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The ‘annual investment allowance’ (AIA) was introduced from April 2008 (1 April for corporation tax and 6 April for income tax) to provide a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars). It replaced the first-year allowances regime for small and medium-sized enterprises. 

What lessons can be learned so far? 

The real problem is that for accounting periods straddling April the position is complicated! The key issues are:

1.      When was the expenditure incurred?

2.      What amount of AIA is available on a time basis?

3.      Against which assets should the AIA be claimed?

4.      What about the interaction with short-life assets?

Is it equitable that identical transactions can be taxed very differently according not only to the date expenditure is incurred but also because of different accounting dates?

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HMRC has announced a cut in their interest rates, both those charged on late payments and those paid on tax overpaid.

The reduced rates for accounting periods ending on or after 1 July 1999, take effect from 19 January 2009:

• The rate of interest charged on underpaid instalment payments of corporation tax changes from 3% to 2.5%.
• The rate of interest on overpaid instalment payments of corporation tax, and on corporation tax paid early (but not due by instalments) changes from 1.75% to 1.25%.
• The rate of interest on overpaid corporation tax reduces to 0%!
• The rate of interest on unpaid corporation tax changes from 4.5% to 3.5%.

The reduced rates that cover all other direct and indirect taxes, including national insurance contributions, take effect from 27 January 2009.

• The rate of interest charged on late payments of income tax, national insurance contributions, capital gains tax, stamp duty, stamp duty land tax and stamp duty reserve tax reduces from 4.5% to 3.5%.
• The rate of interest on overpaid income tax, national insurance contributions, capital gains tax, stamp duty, stamp duty land tax and stamp duty reserve tax reduces from 0.75% to 0%!
• The rate of interest for late payments or repayments of inheritance tax, capital transfer tax and estate duty changes from 2% to 1%.

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HM Revenue & Customs has been providing business owners with its view of the availability of inheritance tax business property relief, where there was a significant commercial issue or transaction of the business itself, for a 6 month trial period from 1 May 2008.

HMRC recently announced that the inheritance tax business property relief clearance service for business owners will continue, and will also include an extension to the scope of the service.

Under the extension, HMRC will also provide its view of the tax consequences of a transfer of value that involves a change of ownership of a business where this transfer, leaving aside the application of business property relief, would result in an immediate inheritance tax charge, and provided that the other existing conditions are met. Clearances in these change of ownership cases will remain valid for a limited period of 6 months.

Individuals who had previously had their application rejected because it fell outside the scope of the trial service, but would be included under the extended service, may request a review of the original application.
 

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The Chancellor will make his Budget statement on Wednesday 22 April 2009.  We will be providing analysis of Budget announcements on the day.
 

 

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HMRC has established its new Business Payment Support Service, for businesses with cashflow problems, to arrange instalment payments on ‘all business taxes’ that are overdue.

This unit promises to give most businesses a response in ‘about 10 minutes’ if they ring its helpline. The help-line – 0845 302 1435 – is open 8am to 8pm Monday to Friday, and 8am to 4pm at weekends. We understand that no ‘additional penalties or surcharges on the tax’ will be imposed on businesses that are granted an instalment plan by HMRC.
 

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HM Revenue & Customs have announced that more than £2 billion is lost every year as a result of tax evasion – and accepted that they have little chance of catching the fraudsters.

Up to two million people are believed to be involved, of whom only a very small minority are ever caught and punished.

The Revenue’s new penalty regime includes provisions to increase the amounts payable by people who deliberately evade tax – and most people would not object to this. It is a shame, though, that in order to punish the more serious cases more severely, other (innocent) mistakes will also be hit.
 

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HM Revenue & Customs have released details of the amounts that employers may reimburse to employees provided with ‘company’ cars, for business travel. For journeys on or after 1 January 2009, the amounts payable per mile are as follows:

Engine size (cc)	Petrol	Diesel	LPG
1400 or less	10p	11p	7p
1401 to 2000	12p	11p	9p
Over 2000	17p	14p	12p

Any amounts paid up to the appropriate figures above will not be taxed.

These are only advisory rates; where employers can show that the costs exceed these amounts, it should be possible to pay the higher amount. Employers doing so can, however, expect to be asked to demonstrate why the costs are higher than the Revenue’s.

In the case of both petrol and diesel engines, the rates are lower than the previous amounts and reflect the lower costs of those fuels since the last review, in June 2008.

These figures will next be reviewed in June 2009.

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If you own a company and run it out of your home it can be tax efficient to charge the company a rent. However, this does need to be structured correctly to avoid jeopardising your capital gains tax (“CGT”) exemption.

If the company has exclusive use of any part of your home then that part ceases to be your “principal private residence” and some of the gain on the sale of the house could be chargeable to CGT. To avoid this outcome the agreement should make it clear that the company only has use of the space at certain times of the working week and that, for the rest of the time, the room is free for use by the whole family.
 

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According to the Daily Telegraph more than 2,200 small businesses have asked HMRC for more time to pay their tax bills, and some have been given several months to pay off their bills.

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Whilst the provision of medical insurance is a taxable benefit in kind, you may be interested to know that employer provided health screening and medical check ups can be exempt from tax, provided the screening and/or check ups are available to all employees on similar terms.

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There have been a lot of cases recently, the most well-known being Dragonfly, and the question as to whether or not individuals are employed or not now seems to be even less clear cut.

There are several key aspects to consider, including:

1. Is there a formal contract in place? Does it set out who is responsible for what, reporting to whom, and at what price?
2. Does the engager actually want the specific worker with whom the contract is entered into? If any person with the right skill set would do, that may be a different position.
3. Who controls what is happening? The key area tends to be whether there is control over what is being done as opposed to how it is being done.
4. Factors that point to non-employment include matters such as commercial risks, investment in equipment, fixed price contracting and reparation for unsatisfactory work.
    

If you are a contractor or you have contracted staff and you are concerned that this may be an issue, it may be worth having a health check undertaken in some way, shape or form. If not, the cost could be significant.
 

 

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The Special Commissioners have found that a dividend waiver by a husband, which resulted in his wife receiving all of the distribution from the company was a "bounteous settlement" the net effect of which was to treat the income as his. It is not clear at the moment precisely which factor was conclusive in this case but the following points may have been relevant:

1. The husband held 9,999 of the 10,000 shares issued.
2. The waiver took place two years in succession.
3. The dividends paid to the wife were very similar to the company's distributable reserves - so the same amount per share could not have been paid on each share.

The Special Commissioner made a number of interesting observations, including saying that there was no commercial purpose for either of the waivers and that neither would have taken place on an arm's length basis.

So it seems that dividend waivers can still be used - but it is probably safe to assume that the Revenue will want to challenge situations similar to those in this case.

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HM Revenue’s change of view regarding research and development (“R&D”) allowances available to companies that become large after the end of this month also applies to companies claiming Vaccine Research Relief (“VRR”).

Though VRR is less commonly used than R&D allowances, it can be a valuable relief to those companies eligible to claim it.

If you would like to discuss how the Revenue’s change of heart might affect you, please contact Cathy Corns or me.

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The Chancellor delivered his Pre-Budget Report on 24th November 2008. Our Partners and Managers posted a number of blogs in relation to the 2008 Budget announcement – on both SME Plus blog and Tax Plus blog.

For concise, up-to-date and easy to digest Pre-Budget information please find below a list of the respective blogs posted: 

SME Plus 

Pre-Budget Report 2008 - VAT

Pre-Budget Report 2008 - Plant and machinery leasing

Pre-Budget Report 2008 - Income tax...relief for trading losses

Pre-Budget Report 2008 - Tax relief for business expenditure on cars

Pre-Budget Report 2008 - Corporation tax...small companies rate

Pre-Budget Report 2008 - Corporation tax...tax relief for trading losses

Pre-Budget Report 2008 - Empty property relief

Pre-Budget Report 2008 - Taxation of foreign profits

Pre-Budget Report 2008 - HMRC Business Payment Support

Tax Plus 

Pre-Budget Report 2008 - Non doms update

Pre-Budget Report 2008 - Income Shifting Rules...the dog that didn't bark!

Pre-Budget Report 2008 - Top rate of income tax to be increased to 45%

Pre-Budget Report 2008 - National Insurance to be increased

Pre-Budget Report 2008 - Consultation documents

Pre-Budget Report 2008 - VAT

Pre-Budget Report 2008 - Compensation for the loss of 10% band made permanent

Pre-Budget Report 2008 - Tax rate for trusts to be increased

Pre-Budget Report 2008 - Pension tax telief...freeze on limits

Pre-Budget Report 2008 - Changes to trusts...trust Darling!

Pre-Budget Report 2008 - Penalties for late tax returns

To receive our blogs direct to your inbox visit http://www.mercerhole.co.uk/news, click on the blog of your interest and follow a few simple subscription directions.

 

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At present, companies making losses from trading activities are allowed to carry those losses back up to twelve months and set them against profits made in the previous year or to carry them forward indefinitely to set against profits from the same trade.

The Chancellor has announced that, for accounting periods that end between today and 23 November 2009, up to £50,000 of trading losses may be carried back up to three years.

There is no restriction on the amount of the loss that can be carried back twelve months, or carried forward against profits from the same trade.

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The previously announced increase in the small companies' rate of corporation tax, from 21% to 22%, has been deferred for twelve months and will now come into effect on 1 April 2010.
 

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As expected, the rules for capital allowances on cars are to change from April 2009 (1st April for companies and 6th April for unincorporated businesses). The rate of capital allowances will be determined by the CO2 emissions figure for the car rather than its cost. Cars with emissions up to 160g/km will be added to the main capital allowances pool and attract writing down allowances of 20% per annum on a reducing balance basis. Cars with emissions over 160g/km will go into the special rate pool with only 10% writing down allowances.

The relief for the cost of hiring or leasing cars is also set to change. At present the leasing costs are restricted if the original price of the car exceeds £12,000, with the amount of restriction increasing as the price of the car increases. From April 2009 the disallowance will be a flat 15% of the leasing costs for cars with emissions over 160g/km. For less polluting cars there will no restriction regardless of the price of the car.

The new rules give rise to a potential planning point for unincorporated businesses, which should ensure that all 'company' cars have some element of private use. By doing so, the cars will not fall within the pools mentioned above and balancing allowances will be available when the cars are sold - this is likely to accelerate the tax relief available.

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As my colleague Barry Hallam blogged earlier today on our sister blog Tax Plus, the Pre-Budget Report may well be announced this week.  Below is the blog which he posted on Tax Plus blog this morning...

It is being reported by the BBC that Gordon Brown has stated that the Pre Budget Report will be “in a few days”. On GMTV today the Prime Minister increased the speculation that the Chancellor Alistair Darling is considering tax cuts to help people through the down turn.

If Mr Darling does present his Pre-Budget Report this week, we will of course be blogging on SME Plus Blog and Tax Plus Blog, providing analysis on the key highlights. 

If you do not already subscribe to our blogs click here for SME Plus Blog or here for Tax Plus Blog to ensure you get our comment and analysis as and when it happens.

Watch this space for details as announcements are made.

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Private landlords need to make sure they keep their information up-to-date, as the Revenue is looking to enforce a tax clampdown on the sector.

Apparently, the Revenue plans to ‘data match’ information from local authorities, the Stamp Office and letting agents on rental income and property sale revenues with its own tax filing records.
 

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The good news is that for expenditure incurred on or after 1 April 2008, for companies, and 6 April 2008 for sole traders, partnerships and some landlords, plant and machinery allowances are extended to cover expenditure on the addition of thermal insulation to all existing buildings used for trading purposes or let as commercial property.

Residential property businesses may instead qualify for the £1,500 per dwelling-house, landlord’s energy saving allowance to cover cavity wall, loft, solid wall, hot water system, draft proofing and floor insulation.

The allowance on insulation is restricted to the 10% rate but it is better than nothing.
 

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Further to our previous blog HMRC have decided to defer the implementation of the new PAYE system from October 2008. No new implementation date has yet been set.

Apparently it is more complicated than was first thought! Watch this space.

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New advisory fuel rates for company cars will apply to all journeys made on or after 1 June 2008:

Engine Size	Petrol	Diesel	LPG
1400cc or less	12p	13p	7p
1401cc to 2000cc	15p	13p	9p
Over 2000cc	21p	17p	13p

HMRC say:  “The recent fuel price increases which justify these AFR changes have happened very rapidly …  Consequently, where employers are able to do so, HMRC is content for the new rates to be implemented immediate, i.e. from 1 June.”

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HMRC have recently issued a factsheet to help you decide whether you are employed or self-employed for tax and National Insurance purposes. The leaflet covers issues such as:

• Is your employment status right?
• The special rules that apply to certain occupations and jobs 
• Working through a Company or partnership 
• Checking your employment status 
• Employment Status Indicator (ESI) tool 
• Your position if you have more than one job
• Why employment status is important 
• Your entitlement to benefits and employment rights
  

It gives links to other relevant information and provides helpline numbers.

The sheet can be found at http://www.hmrc.gov.uk/leaflets/es-fs1.pdf.  

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Just so you know, HMRC is planning to unveil the “biggest change to the way we process PAYE records in 25 years” in October of this year.

Under the scheme, the PAYE Service will bring together a dozen different databases covering information about individuals and, in theory, will be able to see at a glance what each person’s tax position is. At the moment, records are held with reference to employers so if, for example, someone has two jobs, their tax position is immediately complicated. HMRC says: “As a result of the change we will have a more comprehensive view of the individual’s PAYE and you will benefit from having fewer queries from both HMRC and your employees”.

The new system (called National Insurance Recording System 2) aims to make administration simpler – watch this space.

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The Times recently reported that the Treasury is to delay legislation on proposed changes to the taxation of companies’ foreign profits until 2010.

The discussion document published in June 2007 referred to implementation of the measures in 2009.

The complaints from, and emigration of some multinational companies over recent UK business taxation measures, appear to have convinced the Treasury that further discussions are needed before further progress can be made.

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The Employment Appeals Tribunal recently ruled in HM Revenue & Customs’ favour by supporting current National Minimum Wage legislation relating to tips.

This means that employers have to pay their staff at least the National Minimum Wage regardless of any tips, gratuities, service or cover charge unless the tips are paid directly through the employer’s payroll.

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Just to confirm that the amount payable tax free to employees working from home, without the need to keep receipts, had risen from £2 to £3 from 6 April 2008.

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The Revenue have recently issued a number of documents regarding their procedures and rights on PAYE inspections, together with some details on their obligations, what you can do, etc. You can find full details at www.hmrc.gov.uk/leaflets/c6.htm.

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The changes in the Finance Bill will preclude many companies that currently qualify for EMI from benefiting in the future. This will not apply to options granted prior to the date of Royal Assent. As this change is likely to take effect from mid-July, this is a one-off opportunity that should not be missed.

After Royal Assent, companies (or groups) will not be able to grant options unless, on the date of grant, they have fewer than 250 employees.

Companies affected by this change who want an EMI scheme, or want to issue further options under an existing scheme, must take speedy action to ensure that they are not too late.

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It is probably fair to say that one of the best known parts of our tax legislation allows employees being made redundant to receive up to £30,000 compensation, free of both tax and national insurance.

It is equally fair to say that the Revenue are far from keen on this and will find any legitimate reason they can to charge income tax on the payment. One of their main weapons in this is the so-called pay in lieu of notice (“PILON”) clause in an employment contract; if an employee is entitled to receive pay in lieu of notice, this payment is contractual (and hence taxable) rather than compensation (which would be exempt from tax up to £30,000).

Unlike the rest of us, MPs have been entitled to receive termination payments free of tax, even if the payments are made in accordance with a PILON clause in their contract, for some years.

This year’s Budget has extended this exemption to the Mayor of London and members of the Greater London Assembly.

So, when Ken Livingstone handed over the keys to City Hall to Boris Johnson at least he had the consolation of knowing that his pay off would not suffer tax.

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The latest Finance Bill aims to counteract the use of “artificial” arrangements on trade losses by restricting loss relief to £25,000 if an individual “trades” in a non-active capacity (i.e. spends an average of under 10 hours a week on the commercial activities of that trade). It therefore seems a good time to look at what other loss relief is allowable.

Commerciality test
As a basic test, a tax loss is not available for relief unless the trade is carried on on a commercial basis, with a view to the realisation of profit, and the trader must now prove that he is active on the trade for 10 hours a week. The following assumes this is the case.

Losses in early years
Losses incurred in the early years of a trade (i.e. the year in which the trade started, or in the next three years) may be carried back against total income for the preceding three years (earlier years first).

Pre-trading expenditure is relieved as if it has been incurred on first day of trading.

Offset trading loss against capital gain
Any trading loss that is potentially allowable against total income can also be offset against a capital gain where the loss exceeds your total income for the year.

Property losses
An excess of property expenses over rents creates property losses. These losses can be offset against current or future property income.

Capital losses
Capital losses can be used against capital gains of the same year or carried forward.
Losses can only be carried back on death, when a three-year carry back is allowed.

Disposal to a connected person
Where a capital tax loss arises on such a disposal, it can only be offset against gains on disposals to the same connected person.

Negligible value
If an asset has become negligible in value, a claim can be made such that the asset is treated as having been sold and immediately reacquired thus generating a loss. “Negligible” is not defined by statute but HMRC’s view is that the term means “worth next to nothing”.

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In her blog on 14 April 2008 Cathy Corns highlighted the risk that some businesses could lose their gross payment status if they are not fully up to date with all their tax compliance. We are now starting to see the results of HMRC’s review of the first 12 months of the new CIS and they appear be applying their rules quite ruthlessly.

HMRC said they would not impose penalties for late returns provided all returns for the first 6 months of the new scheme were submitted by 19 October 2007. Some people may have interpreted this to mean that there was a general amnesty for this first 6 month period and, provided businesses kept up to date after that, they would not risk losing their gross payment status. This is not the case. Our understanding is that HMRC’s amnesty (if it can be called that) applied only to the first 3 months and any late returns made after June 2007 will result in the business being transferred to a net payment status. This could have a disastrous effect on cash flow, especially if the tax deducted cannot be recovered in full until after the end of the tax year.

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Under the old rules, where an individual acquired shares on more than one date, the legislation specified which shares were treated as sold for CGT purposes on a part disposal. Shares were generally matched on a ‘last in, first out’ basis, (with exceptions for “bed and breakfasting” within 30 days).

As part of the simplification of CGT, the rules for disposals after 5 April 2008 have changed and could produce some unfortunate results. From that date the cost of all shares in any one company will be averaged.

Assuming an increasing share price over the period in which shares have been acquired, the taxable gain on the first disposals made after 5 April 2008 could be considerably higher than would have been the case under the previous legislation.

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HMRC has recently increased the guideline rate for tax and NIC free payments to employees who work at home. This is the amount the employers can pay without the employees keeping records. From 6 April 2008 the rate is increased from £2 to £3 per week.

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HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm  

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HMRC has stated that businesses that can demonstrate good management and accounting systems will be viewed as low risk, giving them more time to spend on higher risk businesses.

Family businesses are often regarded by HMRC as a higher risk because of the overlap between business and family.

So what can you do to reduce the risk of an investigation?

1. Loans to family members constitute a taxable benefit (and can create a charge on the company) and should be declared. 
2. Expenses that are not wholly and exclusively for the purposes of the business need to be clearly identified and the tax treatment clarified. 
3. Entertaining expenditure (other than staff) is not allowable. 
4. Salaries paid to family must be wholly and exclusively for business purposes. 
5. Benefits provided for family members must be declared. 
6. Tax planning is high on HMRC’s agenda and aggressive planning is likely to cause an enquiry. Careful implementation and documentation is crucial. 
7. Acquisition and sale of business assets should be properly recorded. 
8. Ownership of assets such as yachts and aircraft often cause problems when these are used by family members. 
9. Overseas companies which are part of the group, with UK-based decision makers, are likely to face a company residence challenge from HMRC.

HMRC is carrying out a full review of tax systems and processes for companies which it considers to be high risk; especially where there is a history of mis-declaration. Some time spent now to tidy things up could save a lot of problems later.

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The shortage of skilled staff is encouraging businesses to incentivise their workforce by giving greater control over the make-up of their remuneration package – “flexible benefits”.

The employees’ participation in a flexible benefits scheme is usually funded by agreeing to reduce salary in return for a non-cash benefit.

Savings can be realised where the benefit provided to staff is tax and/or NIC free. Typical examples include employer’s pension contributions; employer-provided childcare arrangements; and ‘bikes for work’, as well as alternative options, such as a reduction of pay in return for increased holiday entitlement, All of these need to be implemented correctly for the sacrifice to be effective.

Generally, salary sacrifice arrangements are effective where the contractual right to cash is reduced, and the employee is not freely able to revert to their original higher salary in place of the benefit being provided. It is important that the employee’s contractual entitlement to future pay must be relinquished before the point at which it is treated as received for both income tax and NIC purposes. The revised contractual arrangement must also genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.

Usually, HMRC’s approach will be that in cases where there is a variation to the contract, lasting for a minimum period of a year, it will accept the position. However, if the agreed period is less than twelve months, the risk of HMRC challenging the arrangement is considerably higher. In a worst case the sacrifice is ineffective and tax and NIC is charged on the gross amount.

It is worth taking time to get this right but done correctly both employer and employees can be winners.

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The way the new rules work it is likely that a number of businesses may be moved from gross to net under CIS. There is a reason to be worried.

One of the key aims of the new CIS scheme was to improve compliance in the construction industry.

Under the new scheme, HMRC may raise a determination transferring a subcontractor from gross to net payment status at any time if HMRC believes that were the subcontractor to apply for registration for gross payment at that time this would be refused.

From last year HMRC has a programme for businesses to review their tax compliance over the previous 12 months. If there are unacceptable breaches the businesses receive a determination moving them to net status and notice of right of appeal. This is a rolling programme to ensure every business is checked once a year.

To pass the compliance test, the trader and any business partners (or the company and each of its directors) must, during the 12 months up to the date of the application, have done all of the following subject to some small margins for error.

• Completed and returned all tax returns sent. 
• Supplied any information to do with the tax that may have been requested. 
• Paid by the due dates 
  • all tax due personally or by the business
  • all National Insurance contributions (NICs)
  • any PAYE tax and NICs due as an employer
  • any deductions due as a contractor in the construction industry.

This is likely to be a real problem for businesses.

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The CBI recently published a paper setting out their view on why the UK corporate tax system is uncompetitive.

Basically the CBI has four areas of concern:

• The rising tax burden
• The increasing level of complexity 
• Growing uncertainty 
• Threat to revenues.

In the CBI’s opinion the key principles for a corporate tax system are: 

• Simplicity and clarity 
• Certainty and stability 
• Flexibility
• Neutrality, i.e. tax should not distort business decisions.

In their view the rapid legislative change coupled with inadequate scrutiny and consultation has added to uncertainty for all taxpayers. At present, looking at the position for individuals on capital gains tax and on the changes for those not domiciled in the UK, it is hard to argue with their view.

If you would like to read more, you can find the full document at http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/c9f94d05d0d0975b80257403003c66a6?OpenDocument.  

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Under the draft legislation there appears to be a problem for shareholders in companies or groups participating in joint ventures. Activity carried on with a view to acquiring an interest of 10% or more in a joint venture company is trading activity under the legislation but actually holding shares in a joint venture company appears not to be. This means that a company or group can fail the trading tests if the shareholding in the joint venture is substantial in relation to the overall activity.

If this were to be the case, entrepreneurs relief would not be available.

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Historically, the government’s response to an avoidance “scheme” has been to block it (and then block scheme mark 2, et seq). Look at national insurance (NIC). I am (sadly) old enough to remember when employees were paid bonuses in gold coins to save NIC. Gold coins were of course blocked, so the market moved on to platinum sponge, fine wine and, as I recall, carpets. It took a long time to introduce legislation to stop all similar schemes.

From the Treasury’s perspective principles-based avoidance legislation makes perfect sense.

There has been a lot of sophisticated planning around interest income and HMRC and the Treasury are seeking to change the rules of the tax planning “game” with the introduction of a principle. The consultative document states: ‘A return designed to be economically equivalent to interest is to be taxed in the same way as interest.’ (Regrettably the ensuing draft legislation is nowhere near as succinct).

If this principle based approach is successful in this area, we have to ask – what will be the next step?

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This is a perennial question – should I take additional income from my private company in the form of a bonus or a dividend? From 1 April 2008 the answer to this question may have changed for some people.

Prior to 1 April 2008 it was preferable to declare a dividend if the company was paying tax at the small company rate or at the full rate of corporation tax. If profits fell into the marginal rate band then a bonus was more cost effective. On 1 April the marginal rate fell to 29.75% and so, from a tax perspective alone, dividends will now be preferred regardless of the level of company profits. There may of course be other factors to consider, such as pension contributions and minimum wage legislation but, provided these are factored in, paying dividends is likely to give a lower overall tax bill.

Companies with accounting periods straddling 1 April will have to calculate their own marginal tax rate for that period but, as a general rule of thumb, if the rate is 30% or lower then dividends will be the answer.

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For most self-employed people there is usually some use of their home for business purposes. You are then entitled to a tax deduction for the proportion of household expenditure relevant to the business use.

The Revenue has recently issued guidance to “clarify” the calculation of deductions. This suggests that the costs should be apportioned on the bases of:

• area of the total property used in the business;
• usage;
• time the area is used for business use as opposed to any other use.
  

However, where this will not work the Revenue should accept claims made on any reasonable basis.

So how do you apportion home costs?

The Revenue gives several examples of the approach it recommends.

Mortgage interest: The interest may be split where there is a substantial use of part of the property for business purposes.

Insurance: An apportionment of the total premium calculated for usage and area, etc.
Repairs and maintenance: General household repairs are allowable in line with the proportion of business use.

Telecoms/internet broadband, etc: The Revenue’s previous view was that line rental was not allowable. This has now changed, and a proportion of rental and calls is allowed on a reasonable basis; this should be supported by itemised bills.

The guidance includes a number of specific examples, which can be found by clicking here.

One thing to remember is that an individual’s main residence is exempt from capital gains tax on disposal provided it has been used as the main residence throughout ownership. Provided that no room is used exclusively for business purposes, there should be no restriction on the availability of the main residence exemption from CGT.

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HM Revenue & Customs’ campaign of compliance checks into property income, announced last month, appears to have begun in earnest. We have been told of a number of people who have received letters from the Revenue.

At first glance the letters look innocuous; a straight forward enquiry, asking whether tax returns might have omitted rental income in error.

It would be wrong to underestimate the gravity of these letters on a number of grounds, including:

• in our experience, the Revenue will have done their homework. Though they may have made mistakes in compiling their lists, shaking them from their belief that their information is perfect will not be easy; and 
• though their letter may not look threatening, they will undoubtedly be treating this as a serious issue. In addition to collecting the tax due (and interest where it has been paid late), the Revenue will look to apply penalties, which could theoretically double the tax payable.
  

Finding information relating to rental income, interest payments and other expenditure from a number of years ago will be a difficult task; without it – and the goodwill of the Revenue – the amounts payable could escalate.

If this is an issue potentially of concern to you, please contact Cathy Corns or me. We have helped a large number of clients in dealing with Revenue enquiries and might be able to provide practical and timely advice and assistance.

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Over the last 24 hours there have been a number of blogs posted in relation to the 2008 Budget announcement – on both SME Plus blog and our sister blog Tax Plus blog.

For your reference and convenience please find below a list of the respective blogs posted:

SME Plus

Budget 2008 - Pension Tax Relief
Budget 2008 - Capital Allowances
Budget 2008 - Enterprise management incentives ("EMI") share options
Budget 2008 - VAT
Budget 2008 - Trade losses for individuals...
Budget 2008 - Pensions
Budget 2008 - Associated companies
Budget 2008 - ISAs
Budget 2008 - Income shifting
Budget 2008 - Corporation tax simplification...
Budget 2008 - Enterprise Investment Scheme
Budget 2008 - Previously announced

Tax Plus

Budget 2008 - All Settled Offshore?
Budget 2008 - The Remittance Basis - Offshore Mortgages
Budget 2008 - Non Doms and Capital Losses
Budget 2008 - Personal allowances and the remittance basis
Budget 2008 - Non Doms and the £30,000 charge for the remittance basis
Budget 2008 - VAT
Budget 2008 - Changes to taxation of foreign dividends
Budget 2008 - Relaxation on Residence Test and Day Counting Rules

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The previously announced reduction in basic rate income tax from 22% to 20% from 6th April created concerns for 2 sectors.

Firstly, charities were concerned that they would lose out because Gift Aid donations would only benefit from 20% income tax relief with a resulting reduction in the gross donation.

Secondly individuals making personal pension contributions would only benefit from 20% tax relief at source instead of 22%. For instance a personal pension contribution of £78 would be worth £100 after basic rate tax relief in 2007/08. After 6th April the same £78 contribution becomes £97.50 after basic rate tax relief. This represents a small but significant reduction in your pension fund. Higher rate tax payers can claim back a further 20% through self assessment, increased from the previous 18% but the gross pension premium is still reduced for the same initial investment.

It was pleasing to see the Chancellor act on the concerns of charities and add 2% relief to Gift Aid donations for a transitional period.

It was a shame that the same generosity was not extended to the millions of us trying to save for our retirement.

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Although most of the changes on capital allowances have been known about for several months, there are a couple of minor tweaks announced today.

• The 100% first year allowance on cars with very low CO2 emissions will continue for an additional five years, until 31 March 2013, but the qualifying emissions threshold will be reduced from 120g/km to 110g/km driven 
•  Small balances left on capital allowances pools will be able to be written off where the balance has been reduced to £1,000
  

In addition, there is confirmation of new rules to allow companies (not unincorporated businesses) to surrender losses in return for a cash repayment from HMRC. This will apply to losses created by claims to 100% first year allowances on certain energy-saving or environmentally-beneficial plant & machinery, It will not be available where those losses could be used in some other way, for example against other taxable income or surrendered as group relief.

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Companies thinking of offering EMI share options to employees will have three new factors to consider: 

•  the market value (at the date of grant) of the shares covered by the option is to increase to £120,000; 
• the company offering the option must have fewer than 250 employees; and
• new restrictions are being placed on the company’s activities.
  

The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.

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The main VAT changes announced in the Budget today are;

1. With effect from 1 April 2008, the annual VAT Registration/deregistration limits have
   increased to £67,000/£65,000 respectively. 
2. Revised fuel scale charges will apply for VAT return periods beginning after 1 May 2008.
3. A transitional period has been announced for VAT refund claims to 31 March 2009. This follows recent litigation relating to the three year capping rules introduced in 1996/7.
4. Withdrawal of the staff hire concession with effect from 1 April 2009.
5. A package of simplification measures for the option to tax.
6. Extension of the VAT exemption for fund management services.
7. The limits for correcting errors on VAT returns have increased from £2,000 to the greater of £10,000 and 1% of turnover.
   
   Full details of these changes will be contained in our Budget Tax Bulletin to be issued shortly.
   
   

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... are being restricted for tax purposes. At present an individual who carries on a trade, on however part-time a basis, can, subject to certain detailed restrictions, set this loss off against other income and gains. Anti-avoidance legislation introduced in the 2007 Finance Act restricted the offset of tax losses for non-active or limited partners. In the Revenue’s view this merely resulted in individuals entering into loss-making trades on a sole trader basis purely for the tax relief on the losses. As a result this legislation is being introduced with effect from 12 March 2008 for individuals who spend less than ten hours a week on a sole trader activity; for existing trades the loss relief is restricted to £25,000 pa and for new trades, where tax avoidance is a motive, offset relief is abolished.

This is clearly designed to counter the sale of certain investment products that relied on tax losses as part-funding. However, they may well affect other genuine arrangements that “just happen” to meet the tests.

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When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.

With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.

Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.

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The budget confirmed previously announced increases to ISA allowances for 2008/09.  From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.

Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.

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Legislation and consequently its introduction is being delayed for 12 months – party time!

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…but don’t hold your breath; the proposals, when formulated, will only apply to companies with less than 10 employees and turnover under £750,000. This may not be quite what most SMEs were hoping for.

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The Chancellor has today announced an increase in the individual investor limit from £400,000 to £500,000 – subject to EU State Aid approval. The detailed tests for companies and investors otherwise appear to remain unchanged.

Whilst this is good news for companies seeking to raise funds – one word of warning. State Aid approval can take a long time to come through.

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Much of what will be included in this year’s Finance Bill was known long before the Chancellor stood up to make his Budget speech. The main items of relevance to businesses are summarised here, with links to earlier postings:-

• Corporation Tax – from 1 April 2008 the main rate will be reduced from 30% to 28% and the small companies’ rate increased from 20% to 21%. 
• Homes abroad owned through a company – removal of a benefit in kind tax charge where the company is owned by individuals and the sole activity of the company is to hold an overseas property for occupation by the individuals and/or letting. 
• Loss Relief – restriction of loss relief for interest payments made on certain qualifying loans in a partnership or a small company. Effective from 9 October 2007 this measure tackles a tax avoidance scheme which sought to advance the time at which relief could be claimed.
• CGT reform for individuals & trusts (not for companies) – abolition of indexation allowances and taper relief, and introduction of a flat rate of 18%, (subject to new entrepreneurs’ relief) from 6 April 2008.
• Research & Development – extension of SME tax relief schemes to include mid-sized companies with fewer than 500 employees.
• Company gains on life policies – to be brought within the loan relationship legislation.
• Capital Allowances – a range of new measures, including the reduction of annual writing down allowances to 20%, introduction of an Annual Investment Allowance of £50,000 and the reduction in the rate of allowances available for integral fixtures.
• Leased plant & machinery – changes to bring the proceeds of sale from finance leaseback arrangement into charge to tax, and other anti-avoidance changes to long funding lease rules.
  

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Companies tend to take out life policies for one of three main reasons:-

• Key man cover;
• Security on loan repayment (endowment); or
• Investment, e.g. into a single premium bond.

On key man policies the rules are generally quite straight forward; the company can obtain relief on the premiums paid and, if it does so, will be taxed on the proceeds. An alterative, possible treatment is to disallow the premiums and seek to agree with the Revenue that on this basis the proceeds will not taxed.

On the other policies, the key question with regard to deductibility of premiums is whether or not the policies are “trading”. For policies taken out to provide security for loans to buy business premises, historically there has been a special treatment in that premiums were allowed for tax purposes but, where the proceeds were used wholly to repay the loan, those proceeds were not taxable. In practice the Revenue tended to tax only the excess over the debt repayment.

For other policies the final payment on the “investment” tended to be treated as a chargeable gain.

However, the pre-budget report changed this. Under the new rules the key changes will be:- 

• The proceeds of the policy will no longer be treated as a chargeable event;
• The policies will be brought within the loan relationship rules with effect from 1 April 2008.
• There will then be a deemed surrender and taxation as a chargeable gain at that date and thereafter any gain accruing under the policy will be taxed under the loan relationship rules.

If you do have such a policy it is important to contact someone for detailed advice on the implications for you.

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... is expected to take effect for periods starting after 31 March 2008 where the return is filed after 31 March 2009.

The new system distinguishes between different types of tax “offence” for example, heavy penalties for evasion, but an acknowledgement that genuine errors happen.

HMRC appears to want to encourage compliance and sees penalties as an essential element in enforcement.

The result is that the new penalties will apply to returns for income tax, corporation tax, pay as you earn, national insurance contributions and VAT.

The new regime seeks to grade the penalty to match the ‘offence’. There are effectively four categories:

• Innocent mistake; 
• Careless conduct; 
• Deliberate action, but not concealed; and 
• Deliberate action with concealment.
  

Innocent mistakes will no longer attract a penalty. The penalties for the other three conducts are laid down with prescribed reductions for disclosure (differentiating between prompted and unprompted). The proposed penalties range from 15% to 30%, for a prompted disclosure for ‘failure to take reasonable care’, to 100% of the tax due for a ‘deliberate understatement with concealment’.

It will be “interesting” to see how HMRC will distinguish between innocent mistakes and a ‘failure to take reasonable care’. This is likely to be an area for debate, dispute and potential litigation.
You should be aware that unprompted disclosures will reduce penalties to nil for potentially minor offences.

Additionally, in cases of ‘failure to take reasonable care’, HMRC has the discretion to apply a suspended penalty. If the correct procedure is implemented and adhered to, the penalty could be cancelled.

One thing that is clear is that a lot of businesses and individuals will be affected.

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As you are only too well aware by now, the Chancellor announced a major reform of the capital gains tax (CGT) regime by setting a single flat rate of 18% from April 2008. Following a major outcry, the new entrepreneurs’ relief has been announced; this relief will reduce gains liable to CGT by 4/9ths, resulting in an effective rate of 10% on gains of up to £1m on disposals of a business by an individual.

But while business owners may be relieved by the introduction of a 10% rate of CGT on the first £1m of gain, their employees are likely to be far less happy as holdings of less than 5% will not qualify for relief.

The Government have encouraged companies to reward and motivate employees with shares but now exclude such employees from the new entrepreneurs’ relief.

There must be some logic – my problem is I just can’t see it!

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The Government has recently published its response to consultations on changes to the way in which relief will be given for expenditure on plant and machinery.

This is just a brief reminder of the anomalies in 2008 of the new ‘annual investment allowance’ (AIA). This will be introduced in April to provide for a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars) and replace the existing first-year allowances for small and medium-sized enterprises.

Continue Reading...

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There was a very interesting tax case (T M Collins and the Commissioner of HMRC) recently. Very briefly, two individuals sold their shares; one for cash and one partly for cash and partly for a contribution to his pension fund. HMRC argued that the contribution was taxable as part of the consideration – and lost.

This opens up some interesting possibilities going forward.

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HM Revenue & Customs released findings from research on the tax advantaged “EMI” share option schemes, earlier this month (more details are available at http://www.hmrc.gov.uk/research/report41-summary.pdf).

The research followed discussions with employers and employees where EMI schemes have been introduced and it is no great surprise that the majority of people questioned were aware of some of the benefits of offering EMI options to key employees. Or that nearly all of them regarded EMI options as a key element in keeping their most valuable employees.

Even with the proposed abolition of taper relief, EMI options remain an important means of recruiting, rewarding and retaining key members of staff. We have spoken with a number of new clients who, with the benefit of hindsight, would have offered senior staff the opportunity of a relatively small stake in their companies but who had lost those employees – and with them a substantial part of their business.

If you could be in a similar position and your company is one for which EMI might be possible, EMI share options are well worth considering. Please contact us to discuss whether they might be the right option for you.

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Please find below Lisa Spearman's latest blog on the Non-Doms issues, highlighted in our sister blog Tax Plus...

Following my blog of yesterday it now appears that the Chancellor has retreated on some of his proposals for the taxation of Non-Doms. Dave Hartnett, the Acting Chairman of HM Revenue and Customs has posted a letter on the Revenue website to clarify the Government’s intention in four areas where concerns have been raised.

According to the letter Hartnett wants….

“to make clear that the Government’s intention – which will be set out in legislation to be brought forward – has always been to ensure that:

• those using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances;
• there will be no retrospection in the treatment of trusts and the tax changes will not apply to gains accrued or realised prior to the changes coming into effect;
• money brought into the UK to pay the £30,000 charge will not itself be taxable;
  
  and
  
  
• it will continue to be possible to bring art works into the UK for public display without incurring a charge to tax.
  
  In addition, we will continue to discuss with the US authorities how the £30,000 charge can become creditable against US tax.”
  
  
  

The full text of Hartnett’s letter can be found here.

This clarification is being interpreted as a retreat or a climb down by the Chancellor. However, a Treasury spokesman has been quoted as saying that the intentions have not changed it is just that the draft legislation has gone “slightly awry”. There are still a number of issues to be resolved and I expect we will have to wait until the Budget on 12 March to get further details.

Keep on watching this space.

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As the Chancellor’s proposals on taxing the so-called “non doms” (people born overseas or with foreign parentage) become clearer, it is apparent that his £30,000 annual levy is the tip of what could be a very large iceberg.

Media coverage over the past few days has highlighted the very real prospect of many non doms leaving the UK, as the potential impact of some of Mr Darling’s other ideas hit home.

 

Continue Reading...

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A recent decision in the case of Livewire Telecom LON/06/1365 has demonstrated the complexity of VAT fraud cases involving carousel fraud.

The appellant was a wholesale broker (exporter) of mainly new mobile phones. In the course of selling such phones, the company made the relevant checks on both suppliers and customers and the unique phone reference numbers “IMEI”. However, in 2006, HMRC refused to make a significant repayment of input tax on the basis that it suspected that the business was knowingly involved in “contra trading” in respect of 14 transactions. “Contra Trading” involves two separate supply chains, one “clean”, the other “dirty”. The dirty chain will include a “missing trader”. In this case, the appellant was part of the clean chain but HMRC claimed that it was knowingly involved in a carousel fraud.

The tribunal decided, on the evidence available, that the due diligence process of the business appeared to be flawed. However, the appellant could not have (nor ought to have) known of the fraud at the time the transactions took place. Interestingly the tribunal was also critical of the way HMRC presented its evidence and made suggestions as to how this could be improved for future cases.

Other businesses which have had input tax claims refused may now seek millions of pounds of VAT refunds.

HMRC are considering whether to appeal the decision.

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R&D is a wide ranging and generous tax relief. In our experience many businesses are not claiming the relief to which they are entitled because they do not recognise that they are actually undertaking any qualifying research and development activities, e.g. product development, improvement, etc. The DBERR (formerly DTI) website http://www.berr.gov.uk/files/file36112.pdf gives examples of businesses that have qualified – the range of qualifying trades is amazing.

R&D tax relief has recently become much more accessible to businesses; the set up of the new specialist units with Inspectors who state their brief is to give money away makes claiming relief simpler. However, to complicate matters the Revenue have introduced a restriction on claims: from 31 March 2008 claims may only be made for the last two years rather than the potential six as is currently the case.

R&D is a valuable relief:

• 100% capital allowances
• 125% on qualifying costs for large companies and sub-contractor costs
• 150% for direct costs of SMEs.
  
  

The rates on the latter two should increase to 150% and 175% from April this year, subject to EU State Aid approval.

Time is running out – if you think you may have a claim we need to act quickly.

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A members' voluntary liquidation ("MVL") can be a tax efficient exit option for the shareholders of a solvent company.

Under current legislation shareholders receiving a distribution through an MVL or, where appropriate, using Extra Statutory Concession C16, may benefit from the business asset taper relief provisions.

The government has recently announced (http://www.hmrc.gov.uk/cgt/disposal.htm) that as from 6 April 2008 all capital gains will be taxed at a flat rate of 18% irrespective of the marginal income tax rate of the taxpayer concerned; and also that the current systems of taper relief and of indexation allowance will be abolished. Alongside these reforms the government will introduce a tax relief for many entrepreneurs that will deliver a 10% tax rate for up to the first £1 million of lifetime capital gains.

Continue Reading...

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Just to remind you, for company cars the benefit is calculated by multiplying the list price (not the cost price) by the ‘appropriate percentage’.

The appropriate percentage is based on the car’s CO2 emissions figure, with some adjustments to take account of different fuels.

The calculation of the appropriate percentage changes in three ways with effect from 6 April 2008:

•  the lower threshold, the CO2 emissions figure which determines the appropriate percentage for all cars, is reduced from 140 to 135.
• A new ’10 percent band’ is introduced for cars with CO2 emissions figure of exactly 120 g/km or lower.
• There is a new 2 percent reduction for cars manufactured to be able to run on E85 fuel, a mixture of 85 percent bio-ethanol and 15 percent unleaded petrol.
  

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Last week, the Chancellor announced details of his so called “Entrepreneurs’ Relief”, the replacement for taper relief, for business owners facing an increase of more than 80% from 6 April 2008.

It would be easy, given all the hype surrounding this new relief, to forget the position for people holding assets that would never have qualified as “business assets” and the 10% capital gains tax rate. By this, I mean assets such as shares in investment companies, residential “buy to let” properties and others not used in trading businesses.

In some respects, their position is more complicated, as the reduction in capital gains tax rates will be offset by the abolition of indexation allowance (the effect of inflation before 1998) and the decision as to the best time to sell may not be so obvious. It is certainly not as simple as saying that the headline rate falls to 18% so matters are automatically better after the changes come into force.

You may think it is now too late to sell before 6 April 2008 – but this is not necessarily the question that needs to be answered.

If you would like to discuss how the new rules might affect you and what you might be able to do to ameliorate any negative effects, please contact Cathy Corns or me.

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HMRC has recently confirmed one very important point on assets that have been owned for a number of years. Such assets will have accrued a substantial amount of indexation relief (over 100% to date on assets held on 31 March 1982). Where an individual owns such assets on 5 April 2008 the indexation relief is irretrievably lost.

However HMRC have now confirmed (http://www.hmrc.gov.uk/cgt/faqs-cgt-reform.htm) that where an asset is transferred to a spouse or civil partner on a no-gain no-loss transfer the indexation relief is captured as part of the new owner’s base cost for tax purposes. This is an important planning possibility.

Regrettably though life in tax is never 100% straightforward – if the original owner would qualify for the new entrepreneurs relief and the new owner would not then the value of the historic indexation has to be compared with the value of the new relief before any transfer is made.

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The Chancellor’s announcement of the new “Entrepreneurs’ Relief” from 6 April 2008 appears to herald a marked change in the tax position of owners of commercial property.

Though the details have yet to be formalised, it seems that unless the property is let to the owner’s business – or to a company in which the owner has at least a 5% shareholding – the minimum tax rate on selling that property will increase to 18%.

Since 2000, anyone owning a commercial property used by an unquoted trading company would qualify for the higher rate of taper relief and could potentially pay only 10% capital gains tax on selling the property after two years.

It seems unlikely that this change will create a false market in such property before 6 April 2008 but there may be steps that can be taken to negate some of the impact of this effective tax increase in the time available.

If you would like to discuss what might be possible, please contact Cathy Corns or me.

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As we reported last week, Alistair Darling has released details of what he and HM Revenue & Customs are calling “Entrepreneurs’ Relief” (which probably sounds better than the U-turn that many consider it to be).

Under this new relief, which is set to become law from 6 April 2008, the self-employed, employees and directors will qualify for a 10% tax rate on selling their interest in the trading business or company for which they work.

 

Continue Reading...

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The Chancellor has just announced a new capital gains tax relief for entrepreneurs to ameliorate the effect of the new 18% flat rate that comes into force from 6 April.

The relief will be targeted to the owners of small businesses as well as employees and directors who, very broadly, hold at least 5% of the shares in a trading company. The relief is said to apply on the sale of the shares.

The relief reduces the tax rate on the first £1 million gains but as a lifetime limit. For gains over £1 million the standard rate of 18% will apply.

Further details are promised but at the time of writing this are still not available. The details so far available can be seen in full at http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2008/press_05_08.cfm  

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Is a key issue for most business particularly where tax is concerned. But did you know that HMRC run a committee just to look at the issue. (The question of another layer of administration reducing administration can be left for now I think). The last minutes were interesting reading – in particular –

Continue Reading...

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According to the Financial Times - there is a meeting today finally to decide on the much heralded (and on which the details are long awaited).

We will report on the changes once they are eventually published – watch this space.

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There is a possibility that, as currently drafted, the new income shifting provision could affect an individual who transfers ownership of half of a property together with the rent generated to a spouse or partner. If so, for tax purposes, all the rent will be taxed on the first individual. Under the new provisions the status of the couple is irrelevant. Continue Reading...

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A group of UK companies is considering appealing to the European Court of Justice (ECJ) against tax charges imposed on UK businesses that relocate their tax residence to another EU member state on the grounds that this is a breach of European Community Law. The ECJ has already indicated that taxation of capital gains on assets transferred to another Member State infringes the principle of freedom of establishment (de Lasteyrie du Saillant v Ministere de l’Economie, des Finances et de l’Industrie (Case C-9/02) [2005] STC 1722). The ECJ has further suggested that taxpayers are discriminated against by being subject to immediate taxation in their Member State of origin on capital gains not yet realised, if no such taxation occurs in similar domestic situations. Continue Reading...

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Given the Revenue’s dummy spitting response to the House of Lords’ judgement in the Jones v Garnett (Arctic Systems Limited) case, it was a safe bet that any attempt to stop husband-and-wife businesses shifting income between spouses would be hard hitting and wide ranging. Continue Reading...

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I am sure you already know this – but just in case – HMRC allows companies to spend £150 per head per year on staff parties, tax-free for the employees. This total should not only cover food and drink, but also accommodation and transport if the employer pays for these, plus VAT, divided by the total number of guests. The number of guests should include non-employees.

A few important points to remember:

• The limit applies for a tax year, so if you give a Summer and a Christmas party that together cost less than £150 per head, both will be tax free for employees
• The £150 is per head not per employee – which helps if partners are invited
• But the £150 is the total cost including not only food and drink but also travel and accommodation.
  
  

Have fun!

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Below is another blog from by colleague Barry Hallam, who writes for our sister blog Tax Plus...

It is being reported by the Daily Telegraph that the Government is considering a number of options relating to concessions on the new capital gains tax regime. One of these seems to be the ability to “opt for a deemed sale” before 5 April 2008 to lock into the favourable business taper and indexation relief. Presumably this would be a way of crystallising a gain without resorting to such devices as trusts.

Continue Reading...

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I wanted to draw your attention to a blog posted by my colleague Barry Hallam on our sister blog Tax Plus blog...

It is being reported that Chancellor Alastair Darling will not be able to announce his revised proposals in the three weeks that had been promised. He told MPs today:

"It is not now going to be possible to conclude that process until the New Year,"

This is because he needed more time to study various, differing representations.

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An ECJ ruling on Dutch tax law could affect the Treasury’s on-going review of the UK corporation tax system on foreign income.

The ECJ has ruled (Amurta SGPS v Inspecteur van de Belastingdienst/ Amsterdam) that the Dutch system of dividend withholding taxes is contrary to EU law.
Continue Reading...

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Income protection insurance (IPI) (previously known as permanent health insurance) is designed to provide regular sums to an insured individual in the event that he is unable to work through accident or sickness. The insurance can be taken out by employees or self employed individuals who wish to protect against the costs of being unable to work, and by employers who wish to limit their exposure to the payment of ongoing sick pay. Continue Reading...

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A leading business consultancy has warned that a lot of law firms could have trouble with HMRC over the next few months. Advisers are predicting an increase in tax investigations into returns for legal firms (and other professional practices). Continue Reading...

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Just in case you’re not sure if you have one or not – an earn-out arises when a business is sold and part of the purchase price is deferred, usually until the results of the current, and sometimes some of the future, trading periods are known. In many cases, the amount finally payable will vary according to the business’ results. Continue Reading...

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In his address to the CBI conference earlier this week Alistair Darling announced that he does listen to businesses and intends to publish his final capital gains tax proposals "in the next three weeks". Continue Reading...

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According to The Times the Government are looking to mitigate the changes proposed in the Pre Budget Statement three weeks ago. Apparently the plan is to introduce a form of retirement relief of £100,000, aimed to assist small businessmen who are selling up and retiring. As of the time this was posted the HMRC website had no details on this and so we do not know if it is accurate and, if so what is meant by small or retiring or what tests have to be met to qualify.

Any mitigation of the tax is welcome and I will be in touch again when more details are available.

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Companies pay corporation tax at 20% on the first £300,000, right? Wrong! A company pays at 20% of the first £300,000 divided equally between it and its associates.

Companies are associated where:

·         one of the companies has control of the other, or

·         both of the companies are under the control of the same person(s).

A person controls a company if he is entitled to >50% of:

·         the share capital, or votes;

·         the distributions to shareholders;

·         the assets on winding up (this includes loan creditors).

The problem is that when looking at control you have to take account of a person’s associates. These are:

·         spouse (includes separated, but not divorced) and civil partner

·         parents, grand parents and remoter forebear

·         brother or sister, including half siblings (but not step, aunts, uncles or cousins)

·         partner (as in a business partnership)

·         settlements and will trust associates; - trustees are associated where the individual, or any living or dead relative is or was the settler; and where the individual is interested in a settlement, then beneficiaries, remainder men and trustees are associates.

Under self-assessment it is your responsibility to make sure your company pays the right amount of tax.

So – are you sure you know all your company’s associates?

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If you are concerned about the proposed change to a new flat Capital Gains Tax rate of 18% you may be interested to know that a petition has been opened on the Downing Street website.
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A number of regulatory changes are to come into effect on the back of Companies Act 2006. The most interesting issues, that are being implemented with effect this month, are outlined below.

• Directors’ duties are in statute now

If you are a company director you will need to know and adhere to your obligations under company law. Previously a recommended practice, your obligations to prepare financial statements, safeguard assets, implement controls etc are now part of the law! Of course you are likely to undertake these as part of your day to day running of the company, but you should be aware of the change in status of these obligations.

• No need for company AGM’s (part 13)

There is no longer a legal requirement for private companies to hold an AGM. For most owner managed business this is a welcome move, the benefits rarely exceed the costs. However note that 10% (5% in some circumstances) of the shareholders can demand an AGM. As a result of no longer requiring an audit, there are a few ‘knock on changes such as the automatic re-appointment of auditors in private companies.

• The business review (S417)

Of late the ASB has encouraged a more ‘chatty’ approach to the Business review in the directors’ report, emphasising more commentary on non financial factors, including KPIs, internal management processes, and industry performance (small entities are exempt). The ASB have further iterated the importance of the business review, and the director’s accountability to the company’s shareholders. There is a reluctance for directors to get too ‘close and personal’ with the Business review, as they are ever cautious about divulging information in an increasingly competitive business environment. The key is balance… the business review needs to meet its objective of informing the readers of the annual accounts, of the financial performance and position of the company. Despite the reluctance of many directors, you must remember you are not the only one out there facing the same dilemma!

For more information on the new companies act 2006, follow the links below…

http://www.berr.gov.uk/bbf/co-act-2006/index.html

ICAEW

alternatively please feel free to contact us directly.

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Below is a brief update on the Arctic Systems case from Lisa Spearman, Mercer & Hole Partner and Tax Plus Blog contributor.

An announcement has been widely expected and commented on in this and other blogs following on from the Revenue’s defeat in the House of Lords. This is a case of the dog that didn’t bark or at least not yet.

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The timing of the Pre Budget Report this year has meant that there wasn’t time for the Government to reach its conclusions on a number of on-going consultations. Notable for their absence are... Continue Reading...

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From April 2008 the fixed figure on which individuals will be taxed is increased to £16,900 (previously £14,400) – an extra £1,000 a year in tax. You really need to review the cost benefit of having fuel provided by your employer.

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From 6 April 2008 there is to be a dramatic change in the calculation of Capital Gains Tax (CGT). Essentially there will be a flat rate of tax of 18% based on the difference between sale proceeds and cost. This applies irrespective of the type of asset held; the length of time held; removes relief for indexation totally (effectively halving the tax base cost for assets held pre March 1982) and removes a few other mitigation measures. Continue Reading...

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Having listened to the Chancellor speak for just over 30 minutes I was unpleasantly unsurprised to discover the ream of paper supporting his speech. The devil is certainly in the detail and it is becoming increasingly apparent why – to use an analogy – in Peter Pan the same person who plays Mr Darling also plays Captain Hook.

The tax implications and complications are potentially horrendous. Watch this space for further details...

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The Chancellor of the Exchequer, Alistair Darling, will be presenting his 2007 Pre-Budget Report and the outcome of the Comprehensive Spending Review on the afternoon of Tuesday 9th October.

I will post details of important announcements here shortly after the end of his speech.

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Following the original article on the BBC website and covered  by my colleague Lisa Spearman on  Tax Plus Blog.

A bigger picture is being uncovered with many more articles appearing on the Internet and you can read a selection of other professional opinions by clicking on the links below.

 

http://www.accountancyage.com/accountancyage/news/2199454/hmrc-considers-plan-access

 

http://ifaonline.co.uk/public/showPage.html?page=ifa2006_articleimport&tempPageName=469687

 

http://www.ft.com/cms/s/0/f2cb6c44-6bc9-11dc-863b-0000779fd2ac.html

 

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The Institute of Directors recently unveiled a policy paper ‘The SME Glass Ceiling – Growth Obstacles in 2007’, which identified a series of priority issues for government action.

Apparently regulation, taxation and education are (and were) of concern to businesses of all sizes. The report identifies five issues that are highlighted specifically by small and medium-sized enterprises (SMEs).

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There has been a lot of press speculation recently that, following the calls for a shake up in the tax breaks enjoyed by the private equity industry, the Chancellor may change capital gains tax for everyone. Continue Reading...

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Now that all the hassle is over I took some time to reflect on the pressures applied to business by the Revenue. I know the returns of benefits (forms P11d) have been around for years but so has the old “higher-paid” limit of £8,500. So employers have to fill a form in for anyone paid the minimum wage who receives any benefit at all.

Sure dispensations can help but actually getting one out of the Revenue is not always as easy as one would hope.

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The House of Lords issued their judgement in the case of Jones v Garnett (also known as the “Arctic Systems Ltd” case) on 25 July 2007. To much rejoicing the case was decided in favour of Mr and Mrs Jones. However, the Revenue is a bad loser.

On 26 July a written Ministerial statement was issued by the Exchequer Secretary to the Treasury, announcing the intention to change the law.

Using the standard “the Government is committed to maintaining fairness in the tax system” statement the Government now believes it needs to do something to “ensure that there is greater clarity in the law regarding its position on the tax treatment of income splitting”. Actually, in my opinion, the law is now clear – it may not say what the Revenue wants it to, but that is unfortunate (for them) rather than unclear.

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The long awaited decision on Arctic Systems

This all seems to have been going on for so long you may need reminding of what all the fuss is about; so

- Mr and Mrs Jones ran a small IT company of which Mr Jones was the sole director. They each owned one share in the company took a small salary and extracted the majority of their required funds by way of dividend. These, of course, were paid in line with the shareholdings, on a 50:50 basis.

Nothing out of the ordinary there so what was the problem? It seems to be that Mr Jones paid tax at higher rates and Mrs Jones did not. HM Revenue & Customs (HMRC) argued that the settlements legislation should apply to the dividends paid to Mrs Jones such that they should actually be taxed (at the higher rate) on Mr Jones.

The Special Commissioners and the High Court (April 2005) agreed with HMRC, however the Court of Appeal (December 2005) rejected HMRC’s argument.

The result of all this is that there has been significant doubt about the correct tax treatment and obligations to report income and dividends in such circumstances.

The House of Lords unanimously decided in favour of the taxpayer. The key issue appears to be that an ordinary share is not “wholly … a right to income” and therefore the dividends are not caught by the settlements legislation.

This represents a resounding success for taxpayers and gives them back the right properly to plan their affairs in companies and partnerships.

If you were waiting for this judgement to instigate any planning or indeed need help on amending returns for earlier years, please contact any member of our tax team

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You will recall that currently the transfer pricing regulations apply mainly to large businesses (more than 250 employees and either turnover >in excess of euro 50m or assets in excess of euro 43m) on a UK to UK as well as UK to overseas basis.HMRC retain the right to challenge transactions in medium sized business but not small ones (small being less than 50 employees and either turnover or assets less than euro 10 million). Continue Reading...

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I appreciate that salary sacrifices have been around for a long time but, in view of the current state of the economy, it may be worth looking at the areas where these can still be useful.

Basically, ‘salary sacrifice’ is the term used to describe the position when an employee gives up the right to future remuneration in return for their employer paying the money to an alternative source for their benefit. Some key areas for this at the moment are childcare vouchers, parking permits, etc.

Using childcare vouchers as an example, typically the employee gives up income of, say, £55 a week gross, (for higher rate tax payers £32 per week net), and instead receives £55 worth of childcare vouchers which are tax free. There is an obvious saving for him (or her) of £23 per week. For the employer the saving comes in the form of national insurance at around £7 per week which should cover the cost of the administration. If not there is obviously a deal to be done.

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Whilst outlining the Government’s draft legislative programme for the next Parliamentary session to the House of Commons recently, Gordon Brown indicated that the Planning Gain Supplement Bill may be dropped! 

In his statement the Prime Minister said:

 

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HMRC has recently set out its strategy on tax litigation and settlement - what does this mean for your business?

Following the merger of HM Revenue & Customs, the old Inland Revenue appears keen to get its hands on the extra powers previously enjoyed by Customs and Excise. This is clear from HMRC’s latest guidance on its “Settlements and Litigation Strategy”.

This sets out the principles HMRC aims to follow for avoiding tax disputes and

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I have been reading the latest batch of consultative documents and finally reached the stage of deciding enough is enough. The paper that tipped the scales was the Discussion Document on the Taxation of Foreign Profits (comments on this will follow separately). Ignoring the “use” of English worthy of Big Brother (the original not Channel 4 version!) the content is also unhelpful.

The introduction was, shall I say, interesting – it referred to the Budget 2007 reforms and other proposed measures as “refocusing the tax system’s support for small businesses.” Forgive me, but how does increasing the rate of corporation tax for small companies and decreasing capital allowance rates show support? Is it that the support is being refocused away from small business?
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After the media reports that around a million people are paying the wrong amount of tax this may not be the perfect time for HMRC to propose they are given an automatic right to collect unpaid (in their opinion!) tax by various measures including offset from other tax credits or repayments; direct from bank accounts; or by set off from salary - all without the need for any court order. Apparently, they say, this will reduce collection costs and bring forward payment dates. I have to say I believe that statement is accurate. I do also have to say that without a hearing you – the taxpayer – will have no right to defend your position.

Are HMRC always correct in the amounts of tax they request? Patently not, but if the tax is forcibly extracted from you how hard will it actually be to get it back? I accept that legally possession is not really 9/10ths of the law but in practise possession is, even if only temporarily, 100% entitlement! HMRC say that they will employ their powers responsibly; I am tempted to point out that they would say that or they may not get them.

Just imagine Continue Reading...

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H M Revenue & Customs have announced new advisory fuel rates which can be used by businesses to reclaim VAT on employees mileage allowances for business travel.

The new rates which apply to all journeys on or after 1 August 2007 are as follows:-
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The “white van man” may be a menace, or a saviour (depending on your opinion) on the roads in the UK, but he has received quite favourable treatment from the taxman. This changed from 6 April 2007.

It is quite common for work vans to be taken home at night – this enables the employee to start work immediately in the mornings without having to go to a central depot to pick up their vehicle. If they are prohibited from using the vehicle for any other journeys, and there is no personal use of the van, then no taxable benefit arises.

However, if the van is made available for personal use, either in the evenings or at weekends, then that use is taxable.

Historically van drivers have been treated as receiving a benefit-in-kind of £500 to cover this personal use. For a basic rate taxpayer this was a tax cost of only £110 – reducing to £77 if the van was more than 4 years old.

For 2007/08 the taxable benefit will increase by 700% to £3,500 – a tax cost of £770 at a basic rate of 22%. If fuel is provided for private use there will be an additional benefit of £500.

Employers will also face increased costs as they have to pay 12.8% Class 1A National Insurance on all benefits provided to employees. To reduce costs, employers therefore need to review their company van policies and, if not already done, issue clear guidelines and restrictions on how and when those vehicles are to be used.

 

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Do you remember “the lump”?

The lump was made up of casual labour, working for cash in hand, often migrant workers who would take the money home without paying any UK tax. In an attempt to combat this avoidance the first Construction Industry Scheme (“CIS”) was created in 1972.

CIS2 followed in 1999 with a tightening up of the rules on who could register to be paid gross under the scheme. This scheme required contractors and sub-contractors to register with HM Revenue & Customs (HMRC) and obtain CIS registration cards. These cards were then used to prove to the contractor whether payments could be made gross or under deduction of tax.

A new CIS scheme will start on 6 April 2007 to bring CIS into the internet age. From this date the old system of CIS cards, certificates and vouchers will cease. Subcontractors will still need to be registered with HMRC but they will not need a plastic card to evidence this – instead the contractor will “verify” them with HMRC, either online or by telephone. HMRC will tell the contractor whether they can pay the sub-contractor gross, or under deduction of tax.

Contractors will have to make monthly returns to HMRC either on paper or via the internet. Nil returns will have to be submitted when there are no payments in any month and there will be a system of penalties for failing to submit any returns.

The monthly return is no longer just a report of money paid and tax deducted with the deadlines imposed and penalties for non-compliance that, in itself, would be onerous. Much more worryingly, by signing the form a contractor is confirming that they have considered the status of all workers paid within CIS and that none of them is an employee. Once again, failure to correctly identify employees may give rise to penalties in addition to having to pay the tax and NI that should have been deducted from payments made.

This is potentially a major problem.

It is vital that all contractors review the terms on which sub-contractors work for them. The Revenue have developed an Employment Status Indicator for employers to use and this can be found on their website at:

www.hmrc.gov.uk/calcs/esi.htm

 
Further information on New CIS can also be found at their website at:

 
www.hmrc.gov.uk/new-cis

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Working shareholders want to extract the profits from their company in the most tax efficient manner. Typically this will be a decision between paying a higher salary/bonus or voting a dividend.

For several years there have been two headline rates of tax for companies – 19% “small companies rate” for profits below £300,000 and a 30% full rate for profits over £1,500,000 (these thresholds are divided by the number of companies which are associated with one another by reason of common ownership).

Where profits fall between the lower and upper thresholds there is a “marginal relief” that gives a smoothing effect between the small company rate and the full rate – generally the effect of this marginal relief is to tax the profits falling in this range at 32.75%.
Until now, the decision to pay a salary or dividend has been as follows:-

 

Profits	Shareholder is a Higher-rate taxpayer	Shareholder is a Basic-rate taxpayer
profits taxable at 19%	Dividend	Dividend
profits taxable at 32.75%	Salary/Bonus	Dividend
profits taxable at 30%	Dividend	Dividend

 
Changes in the rates of corporation tax were announced in the Budget in March 2007. The full rate will be reduced to 28% in 2009, and the small company rate will be increased gradually until it reaches 22% in 2010. The rates, including the marginal rate, in the next four years will therefore be:-

Year starting 1 April	2007	2008	2009	2010
Small Companies Rate	19%	20%	21%	22%
Full rate of corporation tax	30%	30%	28%	28%
Marginal rate	32.75%	30%	28.75	29.50%

What is the impact of these new rates on the dividend versus salary question? ¬The simple answer is that from 2009 onwards, when the marginal rate falls below 30%, dividends will be most tax efficient in all cases. This seems to go against the concerns of the Chancellor that too many people are using companies to avoid tax, particularly National Insurance. However, the opportunity is still there, at least for now.

This analysis does, of course, ignore numerous other factors which might be relevant, such as whether it is appropriate to pay the same dividend to other shareholders who are not active in the business.

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The 2007 Budget continued a trend that started in 1997 with Gordon Brown’s first Budget that targeted property investment by increasing stamp duty.  This time round, in his eleventh budget, he has taken away and/or reduced capital allowances on industrial hotel and agricultural buildings as well as on plant and machinery and on fixtures integral to buildings.

Property investors will have to cope with the financial impact of the changes together with the proposed 2009 introduction of Planning Gain Supplement.

These changes will impact all UK businesses that own property – if you are interested and want to know more

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