HMRC is being given the power to set out what records should be kept and preserved. For these purposes, the records extend to include supporting documents such as vouchers and receipts, and the list can be extended to items specified in any notice published by HMRC.

However, HMRC has stated it does not want to introduce mandatory record keeping requirements that impose extra burdens on business. Additionally, HMRC has the power to look at records in ‘real time’, i.e. before a return has been filed. This seems a particularly wide-ranging power and could waste a lot of time.

There has been some consultation on standardising time limits. The downside is that this is being introduced without any transitional provisions and as, generally, the time limits for claims are being reduced this may lead to missed opportunities.

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HMRC has now published its Freedom of Information guidance setting out what you can (and cannot) ask them for. Interesting!

The details are available at http://www.hmrc.gov.uk/freedom/foi-index.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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Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).

Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.

There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.

Remember also to Class 1A NIC liability which will arise on the benefit of the loan.

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There was general rejoicing when the Chancellor announced that the Income Shifting provisions would not be introduced from 6 April. However, at least for the moment this is a postponement and not a cancellation. The Red Book shows that the Government intends to raise significant amounts of revenue from income shifting legislation from 2009 onwards. This is unlikely to go away so we must make the best of the opportunity that we have been given and sort things out over the next year.

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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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The Government has recently announced the annual increase to the National Minimum Wage to apply from 1 October 2008:

The proposed increases to the current rates are as follows: 

	CURRENT	PROPOSED
ADULT	£5.52	£5.73
18-21 year olds	£4.60	£4.77
16-17 year olds	£3.40	£3.53

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

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The 2008 budget included possible incentives for individual savers and investors at two opposite extremes of the market.

Firstly the announcement of more consultation on the Savings Gateway to encourage lower income individuals to save regularly in deposit accounts. This was originally consulted on in 2001 and has been trialed since. We shall wait and see whether a scheme whereby the government matches an individuals savings will actually be implemented.

Secondly the governments want to simplify the Enterprise Investment Scheme (EIS) to encourage investment in smaller, high-risk trading companies. These schemes allow an investor to benefit from 20% income tax relief as well as CGT deferral for reinvestments and gains free of CGT where income tax relief has applied. The government wants to increase the limit for income tax relief from £400,000 to £500,000 for 2008/09. This will be subject to State aid approval. In addition a consultation to try to encourage more investment is to be undertaken. This consultation will focus on various matters but will include how to increase awareness of these schemes amongst investors as well as the possibility of carrying back tax relief being extended to carry forward.

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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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HMRC has the power to arrest, and as of this month is now also able to intercept phone calls, emails and letters, and “bug” residential premises and private vehicles.

The powers were granted to HMRC in the Serious Crime Act, which gained Royal Assent in October, but did not come into force until the relevant statutory instrument was issued earlier this month.

Basically Customs officers had these powers because of their criminal investigations into drugs and smuggling, but now they have been granted across the board for HMRC.
The question is – what will happen in practice?

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Chancellor Alistair Darling will deliver his first full Budget on Wednesday 12 March 2008. The 2008 Budget comes amid the gloomiest economic situation for more than a decade, with volatile financial markets, a credit crunch and falling house prices.

Mr Darling will present the Budget to the House of Commons at 12.30pm and we will of course be blogging on SME Plus Blog and Tax Plus Blog during the course of the afternoon, 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.

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The Times online had a somewhat worrying story ; it appears that HMRC have allegedly paid a substantial sum of money to an ex-employee for stolen information on UK residents with foreign bank accounts. I do feel this raises some interesting ethical questions about ways of obtaining information but also sets a bench mark for potential informants in terms of price for value! It may well be of course that a number of the individuals with the bank accounts have nothing to hide and have made proper returns. What is certain though is that they are now going to have to prove it. This will almost certainly be a case of guilty until proven innocent. Continue Reading...

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The Revenue has won the case against music agent Lee Barrett, who was claiming that he was not liable for tax on income received in a year when he was not UK resident. Continue Reading...

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In the Pre-Budget Report the Chancellor announced that the Planning Gain Supplement (PGS) would no longer be introduced. Instead local authorities are to be given the power to apply a new planning charge, the Community Infrastructure Levy (CIL). Continue Reading...

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In his Spring 2007 Budget, the Chancellor (who at that point was still Gordon Brown) announced changes to the capital allowances regime, without giving more than the most rudimentary detail.

A lengthy consultation period followed and it is only now that HM Revenue & Customs have published draft legislation. The document runs to 91 pages(!) with the most important changes being:

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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Now that the dust has settled over the pre-budget report, it is an ideal time to consider the implication it will have on company sales in the SME market. 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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The Court of Appeal has found that HM Revenue and Customs owes a duty of care to a taxpayer if they make mistakes. Following the decision in Neil Martin v Commissioners for HMRC [2007] EWCA Civ 1041, it appears that, in certain circumstances, taxpayers can sue HMRC for damages. Continue Reading...

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Client A recently asked me for advice on this...

A planned to set up a company, A Ltd. The company is being set up specifically to undertake a property development. The anticipated profit is £200,000. A is a higher rate taxpayer and would have paid £82,000 tax and NIC on the profits arising had he undertaken the development personally. By using A Ltd the tax on the profit reduces to £40,000. If this is reinvested in the next project that is a tax saving at this stage of £42,000. However, if the funds are extracted as capital (by way of, say, a liquidation) this will, after April next year, be taxed at an effective rate of 18% (rather than 10%). The overall tax charge, through the use of the company rises to around 37%. There is still a tax advantage in using a company but the overall costs need to be weighed up as well as the commercial considerations.
Continue Reading...

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Do you use business assets for private or non business purposes (e.g. a yacht/aircraft/computer)? Are you aware that you have a choice as to how the VAT paid on the purchase of such assets is treated? Continue Reading...

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Some years ago I was involved, in a minor way, in the writing of a Government report on the merging of PAYE and National Insurance. If my memory serves, the report highlighted 5 major (i.e. politically sensitive) hurdles to the merger of these two “taxes”. Continue Reading...

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Below is an article I wrote for Tax Plus Blog (for which I also contribute) and thought would be of interest...

As the 26 November deadline for making disclosures under the Offshore Disclosure Facility approaches it has was reported last week that HM Revenue & Customs are considering a second “tax amnesty”. An HMRC spokesperson has confirmed that plans are being put in place to repeat the ‘amnesty’ that was carried out earlier in the year.

Continue Reading...

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Audit and independent examinations

The audit threshold for unincorporated charities has increased!
Continue Reading...

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In the Queen’s Speech this week - Gordon Brown's first as Prime Minister - the government has promised a new bill to reduce the regulatory burden on businesses (a new Regulatory enforcement and sanctions bill – which actually sounds quite daunting itself!).

Worryingly bearing in mind its aim, it is apparently one of 22 Bills and seven draft bills in the legislative programme.

Continue Reading...

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Charitable Incorporated Organisations

Did you know incorporated charities have to comply with the requirements of both the Charities Commission and Companies House?

Continue Reading...

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Extended exemptions for certain medium-sized companies

With the accounting environment currently buzzing with talk of deregulation, the new Companies Act 2006 and lower compliance costs, the European Commission have also joined the band-wagon.
Continue Reading...

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This blog follows on from my last post.

As companies move between SME accounting thresholds, the reporting structure and contents of financial statements changes.
Continue Reading...

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The European Commission have recently published some documentation that is aimed to significantly simplify the business environment that EU companies face. They revolve around reducing reporting and auditing requirements for SMEs, simplifying disclosure requirements, and convergence. Continue Reading...

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There are some important changes to the Construction Industry Scheme (CIS) starting this month:- Continue Reading...

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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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Are you involved in sales promotion schemes? If so, you may be interested to hear of two recent Court of Appeal decisions which will affect the VAT treatment. These cases are the latest in a long line of cases dealing with business promotion schemes. Continue Reading...

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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