Courtesy of the general election it looks highly likely that we will have two Budgets this year. If Labour were to be returned to power there may be some additional measures they would need to take while if the Conservatives were to win they would wish to implement their own policies as soon as possible. A hung Parliament would almost certainly mean a dilution of either party's plans to appease their power-sharing colleagues. It brings to mind Robert F Kennedy's speech - "There is a Chinese curse which says, '"May he live in interesting times." Like it or not, we live in interesting times..."

So where does all of the speculation leave us in terms of tax planning?

We know the tax rates for this year almost certainly - we are confident of this at least until Budget Day (24th March). For next year we know the likely income tax rates if Labour win the election and, as yet, there is no indication that the Conservatives would seek to reverse personal tax increases. On that basis the advice would still seem to be if you are planning a dividend or bonus over the next few months and can pay it before 5 April - it may well be sensible so to do.

Just a word of caution - remember the impact of higher income on pensions.

There seems to be widespread belief that capital gains tax will have to go up from the current 18%. Again if you have an asset for sale it may be worth bringing this forward to the current tax year if this is commercially possible.

To be honest - the only we can guarantee is that any new Government needs more money and spending cuts alone are unlikely to be enough so taxes look almost certain to go up. The next few months could prove very interesting!

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.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

 

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So at last we have a date for this year's Budget - 24 March 2010. But will it be worth the wait? With Easter at the beginning of April, and a general election to follow shortly after, there is little prospect of any serious measures being enacted before a new government takes power. It seems likely therefore that the Finance Bill will contain only the basic measures required to keep the tax collection system in motion for 2010/11, and a few previously announced technical changes that need no more debate. The real, more 'interesting', budget will surely be the one in June or July this year.

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.

Rachel Haddow is a tax adviser and a manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Rachel you can call her on 01727 869141.

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The Treasury has recently issued a 'Tax framework for business' document. 

I am wholly in agreement with the principles outlined – competitive rates, fairness, simplicity, stability and certainty. Where I have a problem is on delivery – our tax code is the longest in Europe; HMRC has just introduced legislation backdated to 2007, and the Courts have ruled that HMRC guidance cannot be relied on – and that’s without taking time to think.

The document requests comments – I would urge you to do so before our tax system becomes so complex and uncertain it becomes unworkable.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

 

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Most tax advisers can tell clients about the tax relief potentially available if they have suffered losses on unquoted trading company shares for which they subscribed (ie new shares issued by the company).

Under very specific rules, these losses can be set against the client’s income for the year of the loss and for the prior year. From 6 April, this could give tax relief at 50% of the amount paid – not perfect but better than the tax relief normally available for losses suffered on share investments. But our recent experience suggests that some investors do not know the full story, a view borne out by a recent tax case involving an individual who spent £400,000 in buying new shares in his company. The company, which owned a ship moored on the Thames, went into administration and the investor Mr Harper, tried to set off his losses against his other income. Had he succeeded, his overall loss might have been reduced to £240,000.

But HMRC opposed this, on the grounds that the shares were never worth anything (Mr Harper invested to stop the company and perhaps the ship going under sooner) and that he had lost nothing on the shares. The tribunal supported HMRC on this point, meaning that he got no tax relief at all and lost the whole £400,000. Before subscribing for new shares, people need to consider this; if the company is worthless after the investment, it cannot have increased in value.

There might be a better (ie more tax efficient) way of investing the money – please, please, please, take advice!

David Mansell is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with David you can call him on 01604 669330.

 

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As the end of the tax year approaches there are many issues to consider when it comes to pension planning. It is important to remember that although the end of the tax year may be 5 April, some providers will have deadlines prior to this. Therefore I would encourage you to complete your planning and contributions by the 31 March 2010.

Pensions – paying in

The key points to note are as follows:

• For those with earnings over £130,000 (don’t forget this includes everything – dividends, bank interest, rental income etc) ensure your special annual allowance contribution of £20,000 is paid (this is £30,000 in some cases – check with your adviser if unsure).
• If pension payments of up to £20,000 bring relevant income below the £130,000 threshold, consider higher pension contributions. 
• If gift aid payments can be combined with pension contributions to bring relevant income below the £130,000 threshold, consider a higher pension contribution. 
• If you pay a pension contribution of £3,600 gross (£2,880 net) for any non working spouses/civil partners, children, grandchildren. They will receive 20% tax relief. The following link can give you an estimate of the value of such a contribution. 
• If you have earned under £130,000 you can pay personal pension contributions of up to 100% of earned income. If you can benefit from an employer contribution, this could be up to £245,000. For example, I am currently dealing with a client who is contributing c£200,000 into a SIPP via their company. If you are interested in pursing this I would be happy to assist. This reduces the company’s liability to corporation tax as the employer would receive corporation tax relief on pensions contributions provided that payments are made ‘wholly and exclusively’ for the purposes of trade.
• If you have an investment bond that you have chargeable gains on, you can offset it with a pension contribution. 
• Consider using a salary sacrifice where employee and employer national insurance savings can be applied to pension contributions (check with your employer if offered) – particularly applicable for those earning above £40,040 in the current tax year.

Pensions – drawing benefits

It is worth considering the following points:

• If you are aged between 50 - 55 and wish to take benefits before the changes to the minimum pension age from April 6 2010, you need to make sure you’ve processed your decisions before the end of the tax year.
• Recycle excess income as a pension contribution. You can make further pension contributions and this will build a further tax free fund.  
• Look at withdrawal levels before the end of the tax year to take stock .

Anne McClean is a senior Financial Adviser at Nightingale Associates. The views given in this blog are personal to the author.  If you would like to discuss the contents of this post with Anne you can call her on 020 7353 1597.

M&H LLP trading as Nightingale Associates is authorised and regulated by the Financial Services Authority.

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For rental properties, particularly with the higher rates of tax next year, joint ownership may be more tax beneficial.

So how can this be done? One way is to transfer both the legal and beneficial title to a spouse.  Another option is to simply transfer only the beneficial ownership by executing a declaration of trust. The latter may well be simpler.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552. 
 

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The 50% rate of tax on income over £150,000 being introduced on 6 April 2010 is encouraging employers to consider bringing forward bonus payments into this tax year. This reduces the income tax that high earning employees will be required to pay on all or part of these bonuses from 50% down to 40%, which seems like a good plan.

This can, however, raise other issues where this advanced bonus – potentially their second bonus paid in a single tax year - would take employees over the £130,000 threshold. If this were to be the case, employees could be subjected to the anti-forestalling tax measures in relation to their pension contributions. If these applied the tax cost, potentially 20% on lump sum contributions could outweigh the other saving.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. If you would like to discuss the contents of this post with Cathy you can call her on 01908 605552. 
 

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The Chancellor ‘promised’ a paper on the reform of the Controlled Foreign Companies regime early next year.  This is the system whereby the UK collects tax on the profits of subsidiary companies in low tax jurisdictions.  The change is not expected to be good news for business.

The Chancellor has also promised some amendments to the legislation due to be introduced from 1 January 2010 on the world-wide debt cap.  This applies to larger international groups and seeks to reduce tax relief in the UK where the UK company bears a larger proportion of the interest than its proportion of total debt.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. If you would like to discuss the contents of this post with Cathy you can call her on 01908 605552. 
 

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The Chancellor confirmed that the assistance provided by the Business Support Unit in setting up time to pay arrangements will continue. Sadly he made no commitments on user-friendliness nor of any leniency on defaults.

Rachel Haddow is a tax adviser and a manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Rachel you can call her on 01727 869141.

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The Small Business Research Initiative is a scheme which aims to use government procurement to drive innovation. Government procurement accounts for a sizable proportion of GDP, and the rationale is that technology projects can be supported through the stages of feasibility and prototyping which are typically hard to fund.  The NHS and MOD have been particularly active with the SBRI scheme, but the Highways Agency and the Department for Communities are among a number of others to get involved.

The scheme allows early stage high-tech companies to develop and demonstrate technology, supported by a customer, and to enter the field of government procurement. There are two phases – the first involves preliminary Research & Development (R&D) which will contribute to the scientific, technical and commercial feasibility of a project. The second phase is to fund a prototype, the logic being that this will then be manufactured and purchased by the relevant government department. The intellectual property rights will be held by the company (if rights of usage are granted to the funding authority).

There appear to be no size limits on companies that can submit applications to the scheme, but it is likely that SME businesses will be favoured. 

Click here for a list of the current applications.

The SBRI appears to have several successes since its inception earlier this year, and I hope that central government continues to support it. For those involved in R&D, it is also worth remembering the R&D tax credits that may be available (which can create a significant reduction in tax payments).

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.

We will be blogging on

SME Plus Blog and Tax Plus Blog on Pre-Budget Report day.  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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It appears that the Institute of Directors has said that the UK tax system is not as business-friendly as it could be.

Among other things it felt that policy changes need to be considered more carefully and that a lack of consultation on new obligations means that the government has imposed onerous new burdens. Personally, I think truly simplifying the law would substantially reduce compliance costs.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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The Government recently announced action to counter tax planning that relies on using loss relief.

The new rules will prevent loss relief and capital gains relief from being given for a loss from a trade, profession or vocation where the loss arises from tax avoidance arrangements. The legislation will be included in the Finance Bill 2010 but will be effective from 21 October 2009.

This measure seeks to target those who enter into arrangement for the purpose of obtaining a reduction in tax liability by means of loss relief but should not impact on those who make losses but have not entered into avoidance arrangements.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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Press reports indicated HMRC has rejected more than 6,000 time-to-pay appeals over the last 12 months.

This is a small proportion of the 220,000 arrangements put in place but does represent a real problem for a lot of businesses.

HMRC has, however, warned action would be taken against businesses that default on payment plans. Such businesses 'should expect HMRC to take firm action to recover the debt.'

I think that counts as 'you have been warned'!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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HMRC is, perhaps understandably, not in favour of UK companies seeking to minimise tax bills by locating abroad. It appears that HMRC are planning to keep a watchful eye for years to come to be sure that senior management decisions have genuinely relocated.

Whilst it is crucial that board meetings are held outside Britain among non-resident directors, the problem is that a company could be deemed UK-resident if evidence – potentially including travel schedules, emails, diary entries and notes of phone calls – suggested key decisions were taken in the UK.

Emigrating companies will need to keep meticulous evidence to support their assertion that their 'central management and control' has moved outside the UK. Even if their records are exemplary, any investigation into whether a company has genuinely moved its residence could lead to exhaustive and time consuming scrutiny.

In reality there was always an expectation that HMRC would take a tough approach, but now this has been confirmed.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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In the period since our previous blog on tax relief on childcare vouchers there has been little press coverage. However thing seems to have heated up again today according to the BBC. We cannot predict what the government will do but if you think tax exempt childcare vouchers could be attractive to your staff this may well be your last chance to do anything.

More information will hopefully be made public in the Pre-Budget Report which we now know will be on 9 December 2009.

We will be blogging on SME Plus Blog and Tax Plus Blog on Pre-Budget Report day.  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.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

 

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Chancellor Alistair Darling has confirmed that he will make his Pre-Budget Report statement on Wednesday 9 December 2009. We will be providing full analysis of Pre-Budget Report announcements on the day.

We will be blogging on SME Plus Blog and Tax Plus Blog on Pre-Budget Report day.  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.

Cathy Corns is a partner at Mercer & Hole. If you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

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HMRC has said it will look to crack down on people who seek to avoid the new 50% rate of income tax which comes into effect next year by the use of tax planning schemes that purport to convert income into capital. The problem that HMRC has is that the 32% anticipated disparity in rates (income tax at 50% and capital gains tax at 18%) is very appealing.

One real problem that I can foresee is that too much hype on planning at this stage could just lead to an increase in the capital gains tax rate to avoid the problem. If this were to be announced in the pre-Budget report it would certainly stop a lot of the current speculation.

We will be blogging on SME Plus Blog and Tax Plus Blog on Pre-Budget Report day.  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.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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I have to say that trying to predict what is likely to happen in the Pre-Budget report due in the next few weeks, I have some sympathy with Alastair Darling. Sitting on a fence may be uncomfortable, but coming down on either side could be disastrous.

The problem really is whether to announce legislation to be introduced in next year’s Finance Bill, when a different Government may be in power; to introduce legislation with immediate effect and risk the wrath of the electorate, or actually to do very little but promise a lot if re-elected.

In reality, whichever Government is elected it will need to raise substantial sums of money in addition to cutting public expenditure. Raising money will almost certainly be done by way of tax and National Insurance (unless you already count NIC as a tax). It seems somewhat unlikely that income tax would rise above 50% but the differential between income and Capital Gains Tax is an obvious target. Similarly, at 17.5% (from January) the UK’s VAT rate is one of the lowest in Europe.

Judging by recent press comment about 'tax cheats' I think we are also fairly safe in assuming there will be a lot of anti-avoidance legislation, probably with immediate effect, some of which has already been announced and some of which will undoubtedly follow.

We will be blogging on SME Plus Blog and Tax Plus Blog on Pre-Budget Report day.  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.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

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It appears that during the Labour Party Conference the Prime Minister announced that tax relief for childcare vouchers was being abolished. No further papers have been seen on this but it appears that existing users of vouchers will be protected for the next five years. This may, therefore, be the time to consider signing up to the childcare voucher scheme. Of course, any policy at the moment is subject to the outcome of the general election and is by no means certain!

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Further to the recent coverage in The Telegraph - I do have a concern that the position may not be quite as simple as the article suggests.  Bringing forward dividends to avoid the 50% rate of tax from April 2010 may be sensible in many situations. However, shareholders with income just under £150,000 should be aware of the impact that this may have on their tax position this year. The same would apply to directors taking larger bonuses this year for the same reason.

If their income exceeds £150,000 they will fall within the new rules that restrict tax relief on personal pension contributions or impose a charge to personal tax on employer contributions. Potentially the rules can start to bite where total (personal and company) contributions exceed £20,000.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

Continue Reading...

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UK law provides that companies are resident for tax purposes if they are:

• incorporated in the UK; or
• incorporated elsewhere but managed and controlled in the UK.A recent case - Laerstate BV – concerned the residence of a Netherlands incorporated company. The owner moved to the UK. HMRC contended that the company was resident in the UK for tax purposes. The directors stated that acts of central management and control were carried out outside the UK. HMRC argued that the decisions were not made at board meetings; one dominant director, who was at all times the 100% shareholder, made all the decisions. That director was resident in the UK and so that was the place of effective management.

The judges found that the place of effective management (the real management of the company) was in the UK. The owner’s activities were concerned with policy, strategic and management matters throughout the time when he was a director of the appellant and also after he ceased to be a director. As his activities constituted real top level management of the company and the board’s activities were limited to signing documents when told to do so and dealing with routine matters such as account. Accordingly the company was resident in the UK.

It may not be (indeed may never have been) enough to have board meetings outside the UK ratifying decisions that are already made. HMRC are increasingly looking at what 'really' happens.

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Unfortunately pay in lieu of notice is frequently a problem area for tax. HMRC often claims it as taxable while businesses and employees believe it to be tax free.

There are two areas to consider in this:

• contractual pay in lieu of notice is treated as normal earnings and subject to PAYE and NI. Make sure, therefore, that employment contracts do not state you can pay an employee instead of giving them notice
• custom – in HMRC’s view even if pay in lieu of notice is not formally contracted for, if you habitually pay it then it is taxable. Make sure you do not fall into the trap of always giving pay in lieu as an 'easy' option.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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A protocol has been agreed between Switzerland and the UK for exchange of information. This covers UK taxes of all kinds.

The full text of the agreement can be found here.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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Where you personally own the premises your business trades from, it has historically always been considered sensible to charge rent to avoid national insurance. However, on ultimate exit from the business there may be a tax issue on entrepreneurs’ relief. This is only a problem if the sale of the business itself does not generate a gain of at least £1 million.

You can claim relief on the sale of the business premises if this is linked to a sale of the business, but if full rent has been charged on the property, no relief is due.

The good news is that rents received prior to April 2008 can be ignored.

Furthermore, if full market rent has not been charged, relief is still allowed but in proportion to the discount from market rent. If this is likely to be an issue, this may be a good time to review the position.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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Following the changes in capital allowances earlier this year, if your capital spend exceeds the annual investment allowance (£50,000) it could take over ten years for a business to get tax relief for most of the costs of equipment used in its business.

However, if you buy assets that you expect to be used for less than four years from the end of the current accounting period, you can make an election and keep the asset separate. Tax relief will be given at the usual 20% rate but when the asset is sold or scrapped relief for all the remaining value will be allowed in that year.

This is definitely worth looking at, particularly for unincorporated businesses, bearing in mind the new 50% tax rate.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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The 50% rate is now less than 6 months away and the need for planning is becoming more urgent.

Some points to consider may include:

• paying bonuses and dividends before 6 April 2010
• paying, salary and bonus in advance to employees with a loan back to the employer
• making interest free loans which may be written off when tax rates reduce.

All of the above are possible but need careful consideration and the paperwork has to be right.
Nonetheless, you should look at your options while you can. 

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

 

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50% tax comes in on 6 April 2010, so you may wish to consider maximising the amount of profit taxable before then.

For unincorporated business with a year end date in the first half of 2009/10, could you consider the possibility of having a short accounting period to, say, 31 March 2010 in order to maximise the amount of profit which falls into 2009/10 rather than 2010/11?

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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It appears that the Government is about to step up its campaign against tax 'cheats' and plans to highlight the issue in its Pre-Budget Report.

Press reports indicate that the Financial Secretary, Stephen Timms, recently described tax avoidance as "morally wrong” and said the government aims to “tilt the game back towards honest, hard-working taxpayers”.

I still have a problem with ministers not seeming to grasp the difference between legal planning (do they not remember the second home flip?) and illegal evasion. There is no moral obligation to pay more tax than is legally due.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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HMRC has issued an update on the new rules that will apply to late PAYE payments with effect form May of next year. Essentially if more than one payment a year is late a penalty will be charged at graduated rates depending on how late the payment is and how many other late payments have been made in the same year. It will be important to manage payments and contact HMRC in advance if any cash-flow issues arise.

For full details see - http://www.hmrc.gov.uk/employers-bulletin/bulletin33/paye-ontime.htm

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HMRC originally launched the Tax Evasion Hotline back in 2005 to provide an easy method for the public to report their suspicions about individuals or businesses which may be evading their tax obligations. As well as the phone, freepost and fax, the methods of reporting now include email.

The email form may be accessed at http://www.hmrc.gov.uk/tax-evasion/hotline.htm

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According to the press, a number of big names at the BBC have set up companies to channel their 'earnings', saving them from paying the 50% tax rate on salaries over £150,000.
Such arrangements could also save the BBC substantial amounts of employer’s national insurance payments, currently charged at 12.8% of salaries.

Service companies pay a corporation tax of between 21% and28% on their profits, which can then be paid to the presenter as a dividend, taxed, from next April, at a maximum effective rate of 36.11%.

It also sounds too good to be true – the problem is it may not be true. HMRC has law and regulations (IR35) that apply where individuals, who would otherwise be regarded as employees, contract for their services through a company. If the law applies, 95% of the company’s income has to be paid out (or is taxed as if it had been) as remuneration or pension contributions, meaning no real saving.

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The total tax take in 2008/09 was £439,093 million, down from £451,053 million in 2007/08. The tax take for the first seven months of the current year is £349,208 million. For 2008/09 the main contributory tax was again income tax at £147,856 million, followed by national insurance at £96,882 million.

Looking at the detail it seems odd that taxes such as inheritance tax, that make up such a small amount of the overall tax take (0.65% in 2008/09), should generate so much political interest as compared to national insurance.

Incidentally capital gains tax, which also seems to get a fair bit of coverage, accounted for only 1.8% of total taxes. It actually raised less than stamp duties.

Full details can be found at http://www.hmrc.gov.uk/stats/tax_receipts/menu.htm.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The Finance Act introduced detailed requirements for financial officers of certain companies and HMRC has now issued detailed guidance on this which may be found here.

Just to reassure you, the new provisions only apply to UK incorporated companies that in its preceding financial year, either alone or in aggregate with other UK companies in its group, has turnover of more than £200 million, or balance sheet totals of more than £2 billion. This is unlikely to affect many businesses but where it does apply the requirements are stringent.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The Tax Tribunal has now allowed, in principle, Marks and Spencer’s claim for group relief in respect of the losses of its Belgian and German subsidiaries. The tribunal held that in March 2007, when the taxpayer made valid claims, the losses could not have been taken into account in Belgium or Germany. (Marks & Spencer plc v Revenue & Customs Comrs TC00005).

This is not exactly a breakthrough but does clarify the position.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The UK has signed another Tax Information Exchange Agreement (TIEA), this time with Gibraltar, which will help to ensure that those liable to tax in the UK pay the right tax on investments in Gibraltar and on supplies of goods and services into and out of the UK.

The text of the TIEA can be accessed on the internet here.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Mobile phones provided by an employer are tax-free. This is subject to one condition – the contract has to be with the employer. A personal contract paid by an employer is taxable.

In this instance, getting the detail right can make a big difference.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The Enterprise Management Incentive (EMI) Share Option Plan has obtained State Aid approval from the European Commission (EC).

Apparently, the government has convinced the EC that the tax incentive on share options provided under EMI is important in enabling small firms to recruit and retain highly skilled employees.

As part of this there has been a change in the rules.  Currently, a qualifying company’s activities must be 'wholly or mainly' in the UK. Going forward, probably from next year, a company is only required to have a 'permanent establishment' in the UK. This change will enable companies based in the UK with considerable overseas activity to use EMI options.

The EC approval will last until 2018.

Currently low share prices and the widening of the eligibility criteria, is expected to encourage take-up amongst high growth firms.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Sadly the use of losses to reduce corporation tax is becoming more common in the current climate.

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Company vans used privately incur a benefit in kind of only £3,000, and private fuel provided for the van is taxed at only a flat £500.

This is significantly cheaper than a car – if it is practically possible.

For further details see here.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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You should know that the deadlines to send in any claims are changing from six to four years.

The deadlines are particularly urgent if you are a Self Assessment taxpayer and have a claim for the 2004-05 or 2005-06 years that you have not yet made, such as pension contributions or Gift Aid.

The new deadlines are:

Tax year                                             Deadline

2003-04 year                                       31 January 2010

2004-05 year                                       31 March 2010

2005-06 year                                       5 April 2010

2006-07 year                                       5 April 2011

2007-08 year                                       5 April 2012

2008-09 year                                       5 April 2013

This is not good news for taxpayers, particularly when times are tight. It is important, therefore, to make sure everything is up to date.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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It appears that the UK and Ireland are among countries rushing to sign tax information agreements before the next G20 meeting in September.

There appears to be a concerted attempt to bring relationships with tax havens up to date before the spotlight comes back on the subject later this month.

The subject of tackling tax evasion will be part of the agenda at the September G20 meeting in the US. Those countries which by then have signed 12 of these agreements with other countries will have crossed what the OECD (Organisation for Economic Co-operation and Development) describes as 'the threshold for being considered to have substantially implemented the internationally agreed standard in this area'.

The usefulness of these agreements is not at all certain. However, one point that is certain is that the tolerance for tax havens is decreasing.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC has made a deal to exchange information on UK taxpayers with Liechtenstein bank accounts.

British investors with accounts in Liechtenstein will have these accounts closed and HMRC will be advised if they seek to open new accounts, unless they choose to disclose now.
However, HMRC is offering generous terms to these investors, more so than for the general amnesty. Specifically, tax has to be paid on only the last ten years (normally 20) and penalties will be capped at 10%.

This is good news if you had an account in Liechtenstein, but presumably irritating if your account was in Jersey instead!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Clearly linked in with the announced tax amnesty HMRC has succeeded in obtaining authority to force over 300 banks to provide information about customers with offshore accounts.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Recent reports in the press indicate that the fact that a business has deferred payment of tax with HMRC's Business Support Unit because of cash-flow problems will not appear on any credit checks. This is almost certainly good news if you are such a business. The flip side though is that you have no way of knowing if your customers are having such cash-flow issues.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC has introduced a new minimum interest rate on tax repayments of 0.5%. This means that interest will be payable even when the Bank of England base rate falls below 1.5%.

Earlier this year the Government said that it would introduce legislation to harmonise interest rates on interest charged and paid by HMRC. From now on, subject to the above, interest charged on tax paid will be based on and move with the Bank of England rate. Interest on tax paid late will be that base rate plus 2.5% and for interest on tax overpaid the rate will be the base rate minus 1%.

I am not sure that a differential of 3.5% is quite what I understood by harmonisation but at least the position is now clear.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The Finance Act introduced new rules on worldwide debt caps for accounting periods beginning on or after 1 January 2010. These apply where the UK debt:

• is £3 million or more
• exceeds 75% of the gross worldwide debt.

If you do fall within the provisions you are required, broadly, to calculate the proportion of total worldwide interest attributable to the UK as a proportion of UK:worldwide debt.

If the actual interest paid in the UK exceeds the calculated amount there is a disallowance.

Again this is complicated. It also means that calculating the current year’s tax, eg for the purposes of instalments, is virtually impossible unless you have total knowledge of overseas companies’ plans and activities.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Recent press reports indicate that HMRC have over-collected millions of pounds as around 4.5 million taxpayers have incorrect tax codes.

Apparently there were 20 million queries on tax codes in March 2009, up from around 16 million last year.

I have to say this does not inspire confidence in the system, and if you consider new complexities, eg withdrawal of higher rate relief on pensions, it looks as if things will only get worse!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

 

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This year’s Finance Act provides exemption from UK tax on overseas dividends with effect from 1 July 2009. The position is complicated, with different exemptions and pre-conditions plus the inevitable anti-avoidance legislation. One key point is that the exemption does not extend to branch profits. Going forward, therefore, the structure for new ventures will need careful consideration to reduce UK tax.

There are different regimes for small and large companies (large companies are defined as having more than 250 employees and turnover or balance sheet value of more than £10 million). Broadly, most 'normal' dividends will be exempt.

The provisions are welcome but do they need to be so complicated!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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It appears HMRC has been reassured that its tax deferral scheme for businesses may continue, despite concerns raised by insolvency practitioners that it encourages companies to continue trading while insolvent.

There remains concern that the process may put other businesses at risk as there is no obvious way for third parties to identify such struggling businesses.

HMRC’s opinion appears to be that it assesses and monitors the risks and enters into realistic arrangements to give viable businesses time to pay. 

Where a business is not viable, HMRC will take the appropriate action to recover as much of the debt as possible.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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In today’s climate many business owners have taken out personal loans to try and keep their business running. If all goes according to plan tax relief is available on the interest and the loan is repaid as business improves. If interest is charged to the business this is taxable on receipt.

If the worst happens and the business fails then there should be a capital loss. This may be of limited use, but it is probably better than nothing.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Bad debts between associated companies are now relatively simple in tax terms, thanks to this year’s budget.

No tax relief is due on a provision for intra-group debt; this represents no change from where we were before the budget.

But, on a formal release of the debt (i.e. under deed) there is no tax relief for the loss but equally there is now no tax charge for the company that has been released from the debt.

This position applies from 22 April 2009.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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No-one likes losing money but in today’s economy bad debts are a common issue. We can’t help you recover your money but we can help you make sure you don’t pay tax on money you don’t have.

UK tax legislation provides relief for normal trade debts to the extent that they are, or there is a reasonable expectation that they will become, irrecoverable. One keyword is normal - for debts to associated companies (i.e. under common ownership) you need to show you have operated on normal trade terms. If not, relief may be denied.

Bad debts within a group are different again and I will cover this in a future blog.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Apparently the Government has put forward proposed new rules that would force accountants to reveal the names and addresses of clients who take up 'schemes' to avoid paying the 50% rate of income tax that comes into effect from April next year.

HMRC is seeking a 'new specialist information power' that would allow it to require accountants to release the details of all such individuals.

The current disclosure rules require accountants to tell HMRC about schemes and, where a scheme is registered, the scheme number has to be put on the return. Apparently this does not go far enough.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC formally provided details of its second tax amnesty on Tuesday of this week. After all of the leaks there are few surprises, the key points are:

• Notification of intent to disclose has to be made within the window 1 September to 30 November 2009
• Full disclosure then has to be made by 31 January 2010 for paper (very bad timing bearing in mind the tax return deadline) or 12 March 2010 for on-line disclosure
• The penalty rate is generally 10% unless you were written to in 2007 and could have taken advantage of the then amnesty in which case the penalty will rise to 20%
• Late disclosure will attract a much higher penalty between 30% and 100%
• HMRC is offering no guarantees on prosecution but has stated that so far no-one who came forward in 2007 has been prosecuted but that those who could declare by 12 March next year and do not do so face a risk of prosecution.

Full details can be found by logging on to www.hmrc.gov.uk and following the link from the home page.

I would stress that the deadlines are tight particularly when combined with the personal tax pressures in December and January. If you think you may have anything to disclose and need some help please contact us as soon as possible for a free, no-obligation and confidential phone call - 01908 605552. It seems unlikely that HMRC will provide further disclosure opportunities, so this may represent your last chance to take advantage of the lower penalties.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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If you have a view on this, now is your opportunity to say so. HMRC has invited people to complete an on-line questionnaire (by 31 July) so the department can continue its review of the merits of collecting tax and NICs on benefits through the payroll rather than through the current Form P11D procedure. The questionnaires are available at www.hmrc.gov.uk/employers-bulletin/payrolling.htm.

If this is an issue that may affect you, I would urge you to take a few minutes to complete the questionnaire. If enough people respond, HMRC may take notice; if everyone ignores it I suspect they will do whatever is easiest for them, as opposed to you.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Jersey has recently concluded its 14^th Tax Information Exchange Agreement. 

Tax Information Exchange Agreements (TIEAs) allow governments to enforce domestic tax laws by exchanging, on request, information that they consider relevant for tax assessment and compliance purposes. TIEAs are based on the principles of transparency and exchange of information developed by the Organisation for Economic Co-operation and Development (OECD) and endorsed by the G20.

Jersey has now signed TIEAs with Australia, Denmark, The Faro Islands, Finland, France, Germany, Greenland, Iceland, Ireland, Netherlands, Norway, Sweden, the UK and the USA.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

 

 

 

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In a recent High Court case (HMRC Commissioners v. Banerjee) the Court held that training costs incurred by a consultant dermatologist were an allowable cost for tax purposes. In order for this to be the case, the dermatologist needed to show that she had incurred the costs wholly, exclusively and necessarily in the performance of the duties of her employment. 

In this instance it was held that the training was an intrinsic part of the job that she was paid to perform and was, in fact, required under the terms of her contract of employment in that she would not have been allowed to continue in employment had she failed to attend the external training sessions, and her compliance at these was monitored. 

I have to say that this did not stop HMRC contending that expenditure incurred in performing the duties of a training contract could not be expenditure incurred in performance of the duties of employment!

The good news, however, is that they lost. On this basis it may be worth having another look at costs incurred.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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In these difficult economic times, it is easy to forget that good housekeeping can improve VAT cash flow. If debtors are increasing and cash flow is an issue, it is easy to overlook the bad debt relief which is available.

If you have debtors of more than six months old, you can adjust the VAT already paid to HMRC, subject to certain conditions.

The main conditions are:

• The VAT has been paid to HMRC
• The debt has been written off in the accounts (eg refund for VAT bad debts account which can be outside of the main accounts)
• The debt is more than six months old (later of time of supply and due date for payment).

Claims are made by including the VAT on the outstanding amount in the VAT return for the period when entitlement arises. The VAT is adjusted by including it in Box 4 of the return.

In the event that the debt is subsequently paid by the customer, the VAT claimed under these rules, will have to be repaid to HMRC.

Claims must be made within four years (from 1 April 2009) and six months from the later of:

• Date of the supply; and
• The date the amount became due and payable.

But you should not forget that if you have unpaid supplier invoices which are more than six months old (excluding any time allowed for payment), you are required to repay the VAT claimed on your VAT return. You adjust for this by entering a negative figure in Box 4 of the VAT return in the period in which the six month period has passed.

Another way to mitigate VAT debts is to consider whether you can use the Cash Accounting Scheme. Businesses with an annual turnover of less than £1.35 million and with a good VAT compliance history can use the scheme. Under the scheme, VAT is accounted for on a cash receipts basis rather than on an invoice basis. This provides automatic bad debt relief.

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

Jane Stacey is a VAT Manager at Mercer & Hole.

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The 50% tax rate on income over £150,000 will be with us in just over 8 months. You cannot change the inevitable, but it is worth looking at what you can do to mitigate the impact, for example:

• the maximum rate of tax in a company is only 28%. Incorporation planning is only sensible if cash in the company can be accumulated and extracted as capital on cessation.
• investing for capital growth, taxed at 18%, rather than for income.
• consider the timing of payments.
• claim any available losses.
• unincorporated businesses may already be earning income taxable at 50% (due to the way the basis periods work). Should you change your accounting period end?

It may be possible to plan to mitigate the increase in higher rate of tax but action should be considered now.

If you need any help please contact us.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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In the current economic climate, late payers are commonplace. When late payers turn into bad debts, it can put huge financial stress on a business.  I have talked in previous blogs about how to spot potential bad debt, and how to manage debtors more effectively to free cashflow. 

If a debt does become unrecoverable, tax relief is obtained for bad debt when it is deducted against the trading profits of a business. A reduced profit produces a lower tax bill, and it is important that businesses are aware of the point at which bad debts can be recognised in their accounts.

There is no specific accounting standard covering bad debt. The treatment of bad debt provisions is covered by the ‘Statement of Principles for Financial Reporting’. A debtor should be recognised if it will yield 'economic benefit' ie an inflow of cash.  The following paragraph (4.14) is of relevance for bad debts:

This future economic benefit need not, however, be certain. Indeed, there is always some uncertainty whether expected future economic benefits will be obtained either to the extent expected or at all. In some cases, that uncertainty is so great that the asset is not recognised.

Taken from ‘Statement of Principles for Financial Reporting’, Accounting Standards Board

The key consideration when considering debtor recoverability is the financial/commercial position of the customer. If a customer is simply late with a payment, this does not necessarily mean the debt is not recoverable. If the customer is going through formal insolvency procedures – a CVA, bankruptcy or similar – then clearly a provision would be required (you would typically factor in the amount that the administrator expects to return to creditors – if any). Between a ‘late payer’ and an ‘insolvent customer’, there is a grey area where judgement is required. The customers circumstances – their level of debt, sector, management strength etc should all be considered, if available.

The accounting standard FRS21 ‘Events after the balance sheet date’ provides some guidance on the adjustments that can be made for bad debts that arise from information received after the year end. In simple terms, any new information which indicates that an asset was impaired at the balance sheet date is an adjusting event. For example, if a customer becomes bankrupt one month after the year end, then it seems likely that their financial circumstances were such that the debt was unlikely to be recoverable at the year end – and therefore a provision should be made in the accounts. Using a further example, if a customer loses its major contract three months after the year end, and subsequently enters an insolvency procedure without paying the ‘year end debtor’, then it could be argued that the asset was not impaired at the year end, and a provision should not be made in the year end balance sheet.

The recognition of bad debts can be subjective and should be discussed with your accountants/auditors.

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.

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One of the less well publicised items in the Budget was on error or mistake claims. Currently, if you discover a mistake on your tax return and have overpaid tax as a result, individuals have five years and ten months (and companies six years) in which to make a claim to have the tax repaid. This time limit reduces to four years with effect from April 2010.

Now would be a good time to have a look at the past.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC has now confirmed the dates for the second tax amnesty and is launching a national advertising campaign to persuade people, particularly those with offshore bank accounts, to come forward and declare any previously undisclosed income.

The amnesty will begin on 1 September for paper disclosures and 1 October for online disclosures. The deadline is still set at 31 March 2010 for paper disclosures but only 31 January for online.

The penalty is set at a flat rate 20% plus interest on unpaid tax.

HMRC say that this is a real last chance and certainly the penalty is lower than could otherwise be expected, although higher than the 10% offered on the first amnesty.

If you do have anything you need to declare, now is probably the time to start talking to an adviser so you have time to sort everything out sensibly rather than pushing deadlines.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC has recently issued draft guidance on its new powers to collect tax debts under PAYE.
Currently HMRC, with your agreement, can collect small underpayments of tax by an adjustment to your PAYE tax code.

Under the proposed legislation HMRC will be able to collect other small debts by an adjustment to the tax code. The sum to be coded out may be made up of several small sums not exceeding £2,000 in total.

Where debts have not been paid within say, six months of the due date, HMRC may issue a note imposing the coding change. You may not be asked to agree but you have a right to appeal!
This may save HMRC some administration time but is likely to create additional hassle for taxpayers and their advisers.

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 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 have provided further information regarding this year's 'New Disclosure Opportunity (NDO).’

Whilst most people using the NDO to disclose details of income and profits derived from foreign assets are likely to face a penalty of 10%, customers of the high street banks who received letters under the 2007 Offshore Disclosure Facility, but chose not to contact HMRC, will face a 20% penalty if they now use the NDO to make a disclosure.

The advice in our previous blog holds good; if you think this may affect you, take professional advice as soon as possible. 

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

David Mansell is a Tax partner at Mercer & Hole.

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The news on pension contributions just seems to get worse. We already have a 20% tax charge on ‘irregular’ contributions above a £20,000 annual allowance for individuals earning over £150,000 (to prevent them topping up their pensions before the new rules come totally into force in 2011).

However, it now transpires that individuals who change pension providers (almost certainly those who change employers) will have their contribution history wiped out. As a result they will face the full 20% tax on all their contributions over £20,000, even if they have a history of paying regular contributions of well above that amount.

I know it is legal – but is it fair? 

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 moral is – to use a cliché – the devil is in the details. Make sure yours are right.
It seems odd that for couples who borrow funds in joint names tax relief is usually available for the interest paid by the spouse using the loan for a qualifying purpose HMRC normally accept an entitlement to full relief for the interest paid, even if the interest is paid out of a joint account (see HMRC’s Savings & Investment Manual 10040).

However, where one spouse takes out the loan, which is then used in a joint qualifying investment, HMRC’s view is that income tax relief would only be available to the spouse who took out the loan, and only then in proportion to the amount of qualifying investment by that spouse.

The moral is – to use a cliché – the devil is in the details. Make sure yours are right.

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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...but says it will now appeal to the House of Lords.

Essentially Vodafone is arguing that UK rules on the taxation of profits of foreign subsidiaries (Controlled Foreign Company rules) are incompatible with European Union law. However, the Court of Appeal ruled that CFC rules apply to companies operating outside the European Economic Area and also to EEA companies without genuine economic activities.

The UK tax legislation is designed to stop UK companies avoiding tax by diverting income to subsidiaries in low-tax countries.

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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If you were concerned about the recent article in the press that effectively said manufacturing companies no longer qualify for Research & Development (R&D) this is a note to reassure you.

We have confirmed with HMRC that for the majority of owner-managed business there is not an issue. For those exceptional cases that may be affected, in any case, earlier years will remain untouched.

Going forward, it appears that the only area for debate will be on consumables ie the cost of the parts used in the manufacture of test products. The costs for salaries, light, heat etc should still qualify for R&D relief as before.

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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In 2007, HM Revenue & Customs announced the introduction of an Offshore Disclosure Facility (ODF) under which taxpayers with undisclosed overseas income and accounts had a limited period within which they could disclose details of this income and these accounts - and be subject to a much lower penalty (10%) than would normally be applied.

For months, we have been promised a further opportunity to make similar disclosures - but the period during which it will apply and the penalties that will be imposed have not been announced, until now.

We still do not know when the new facility will apply but HMRC announced this week that the penalty for disclosures under its New Disclosure Opportunity (NDO) will be set at 10%. This is much lower than most commentators expected and is clearly at a level which HMRC expects will encourage taxpayers to come forward.

It is unlikely that accounts at HSBC, HBOS, LloydsTSB, RBS, NatWest and Barclays will be covered by the NDO. Accountholders with these banks were given the chance to make a disclosure under the ODF and it seems likely that the chance of a 10% penalty has gone for these people.

If the NDO runs along similar lines to the ODF, the reduced penalty will be available to all disclosures - not just those relating to offshore accounts. Taxpayers who have a disclosure to make are likely to face penalties much lower than those which they would otherwise face; under the current penalty regime, taxpayers who have deliberately concealed business takings or income (either through the use of offshore accounts or other methods) can expect a penalty of at least 50% (and perhaps as much as 100%).

If you think the NDO may be relevant to you, or you know someone who may benefit from the lower penalty on offer, our advice would be to contact your tax adviser as soon as possible.

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

David Mansell 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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A recent case (Wilson v Revenue & Customs Commissioners SpC 724) caught my eye purely because it triggered an instinctive response of “but that’s not fair!”

The taxpayer submitted his 2004/05 self assessment tax return including a claim for a capital loss of £2m. HMRC entered the figures manually on the computer and then lost the return. The taxpayer failed to produce a copy of the return when HMRC asked for this and HMRC issued a notice requiring him to deliver a copy, followed by a summons for a penalty for failure to comply with the notice, and requested the maximum penalty of £300.

The Special Commissioner determined the penalty on the basis that the return contained information relevant to the taxpayer’s tax liability and the default had continued for a year. The maximum penalty was very small compared with the amount of the loss. The fact that HMRC received the original return did not prevent it from requiring a copy!

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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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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The last few days have seen a number of issues of draft legislation that will be confirmed in the Budget and included in the Finance Bill but taking effect well before the Act is passed.  These include:

• Business cars - changes to the first draft legislation - http://www.hmrc.gov.uk/briefs/company-tax/brief2009.htm.
• Anti-avoidance on life policies - http://www.hmrc.gov.uk/offshorefunds/statement-finance-sec.htm.
• Anti-avoidance on employment income - http://www.hmrc.gov.uk/news/pta-announcement.htm.

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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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If only life were that simple.

The question is being asked a lot more recently as the national and local media are, quite rightly, giving a lot of coverage to the state of the job market with a particular focus on job losses. The real problem is that making cuts in staff numbers is very difficult; not only emotionally but also in terms of employment and tax law. The costs of getting things wrong can make an already difficult situation almost impossible to cope with.

Employment law is outside the scope of advice my firm gives, so this blog looks only at tax issues.
Basically payments made to an employee in connection with the termination of his employment will fall into one of two categories:

• Earnings that are subject to tax in the normal way from employment; or 
• Some form of compensation for the loss of rights in respect of his employment, crucially for these payments the first £30,000 is tax free and only any excess is taxable.

The “fact” that the first £30,000 can be paid tax free when there is a cessation of employment is standard and much-believed “golf club” type advice.

Let’s look at a few different situations:

Resignation – where an employee resigns he will not normally be entitled to any compensation. The problems arise over notice periods. If an employee works his notice he will be paid and taxed as normal. If, however, for whatever reason he is asked to leave earlier he will be paid in lieu of notice. Where contracts provide for pay in lieu of notice rather than serving a notice period such payments are not tax free. In fact even if there is no contractual right to the payment HMRC will seek to tax the payment if pay in lieu of notice is “habitually” paid.

Dismissal – if this results in an employee leaving and receiving a payment in lieu of notice the tax treatment is the same as above.

Redundancy – certainly the most topical – where a legal redundancy has occurred a redundancy payment may be made (either statutory or non-statutory). Statutory redundancy payments are not taxable, subject to the £30,000 cap; payments in respect of restrictive covenants, holidays, etc. are taxable.

Payments to pension schemes are tax exempt which can be useful in certain circumstances.
 

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Tax Avoidance Schemes

Although a dividend may fall within one of the exempt classes, it would still be taxable if it forms part of one of the following prescribed tax avoidance schemes which has a main purpose of achieving a more than minimal tax advantage.

• Quasi-preference shares
• Payments for distributions
• Payments not on arm’s-length terms
• Manipulation of controlled company rules
• Schemes in the nature of loan relationships

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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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Consultation is ongoing, but it would appear that the Government is proceeding with the introduction of the above exemption as part of the Finance Bill 2009. The new system represents a move towards a territorial basis of taxation as opposed to the current regime, where foreign profits can be taxed either under the controlled foreign companies (CFC) rules (which continue to apply in the medium term), or on repatriation, with credit for foreign taxes.

This is a significant change to the UK tax system.

The new rules will apply to large and medium-sized UK companies and UK permanent establishments of large and medium-sized foreign companies receiving foreign dividends. They do not apply to small companies (EC definition). Broadly the following dividends should fall within this exemption:-

• Dividends from companies controlled by the recipient
• Distributions in respect of non-redeemable ordinary shares
• Distributions from portfolio holdings
• Dividends derived from transactions not designed to reduce tax
• Dividends in respect of shares accounted for as liabilities.

Other taxable dividends

Existing UK credit rules will still apply to taxable dividends.

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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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In certain circumstances a PAYE liability can arise on the exercise of share options in a company. The initial liability falls on the employing company, but there is a fixed period from the date on which the payment is deemed to have been made, within which the employee can make good the tax due. If this is not done then the tax is effectively treated as a benefit in kind and assessed to income tax.

A recent case of the Special Commissioners (Chilcott and Others v. Revenue & Customs Commissioners SPC727) related to a case where, rather than reimbursing the company, the individuals declared the options on their returns and paid the tax. HMRC then sought to repay that tax and assess them instead on the benefit in kind of the company payment. 

The Special Commissioner did find for the Revenue but expressed concern about the legislation in that, in his opinion:

1.      The liability could be an additional imposition on an employee who reimbursed the employer after the 30 day period had expired. In those circumstances the overall tax burden could be as high as 56%. That appeared to put employees who chose not to reimburse their employer in a better overall position, which made no sense.

2.      The legislation takes no account of the length of time between the expiry of the 30 day period and the date on which reimbursement occurred. The tax charges are exactly the same if an employee is a day late as opposed to a year late.

Despite the sympathy and concern, one has to say the taxpayer still lost. The facts of this case pre-dated a change in the legislation and the period for making good was extended to 90 days. It was clearly recognised that 30 days was too short, but too late to help Mr Chilcott and colleagues.  

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The government has been urged to regulate the activities of accounting firms in a House of Commons motion accusing firms of devising ‘aggressive’ tax avoidance schemes that cost the Treasury billions of pounds in revenues. A number of MPs have signed this motion. Additionally, some MPs have signed a motion accusing banks of using havens to avoid tax.

In reality, these motions have no chance of being debated. They do, however, reflect growing concern among MPs about tax avoidance.

The MPs claim that tax avoidance schemes deprive the Treasury of billions of pounds of tax revenues, which in turn forces the government to curtail social investment and shift the tax burden on to ordinary taxpayers.

It is a difficult area. A significant number of large companies have moved their Head Office outside the UK to reduce the impact of taxation. Should the UK encourage lower taxes or seek to “squeeze”?

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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 European Commission has adopted proposals for new directives aimed at improving co-operation between member states to help combat tax evasion and fraud.

We understand that one of the key proposals is that member states would no longer be able use bank secrecy to reject cross border co-operation.

The new proposal is much wider in scope than the existing rules as it apparently covers all taxes except those that are dealt with under a specific European Community legislation, such as VAT and Excise duties. Read the full story:
http://www.tax-news.com/asp/story/EC_Adopts_Mutual_Assistance_Proposals_xxxx34892.html

 

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The agreement by Guernsey to share tax information with HM Revenue & Customs could see a significant shift in power to the UK authorities in their drive to crack down on offshore tax evasion.

Last week Guernsey announced that it had signed up to a Tax Information Exchange Agreement with the UK HMRC.

The action could be taken as a sign that the UK authorities are becoming more aggressive in their pursuit of offshore tax evaders. The agreement is a significant piece of legislation.

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Do you have a view on how the Revenue should behave and how it should treat you? Then this is your chance. The Revenue has issued an update on its taxpayers' charter that is currently open for consultation. You can find the full details online at: http://charterconsultation.hmrc.gov.uk  
 

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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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John Morton was Lord Chancellor for Henry VII.

As Chancellor, charged with raising revenue, Morton visited nobles to ‘assess’ their ability to pay tax. If the entertainment afforded to him was lavish, he deduced that the owner had plenty of money and could obviously afford to pay a higher revenue. On the other hand, if the entertainment was frugal, this meant that the noble was saving all of his money and could therefore afford ...
 

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AstraZeneca, the FTSE 100 UK drug-maker, expects to settle a long-running tax dispute over transfer pricing with HM Revenue & Customs before the Special Commissioners.

The case, which has been deferred until April 2010, is likely to set a precedent for other companies which transfer goods and services between countries.

It seems a long time to wait but some further clarity would be welcomed.
 

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Every day, ten men go out for dinner. The bill for all ten comes to £1,000.

If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay £10.

The sixth would pay £30.

The seventh £70.

The eighth £120.

The ninth £180.

The tenth man (the richest) would pay £590.

So, that's what they decided to do. The ten men ate dinner in the restaurant every day and stayed with the same arrangement - until one day, when the owner gave them a discount of £200 a day. 

So, now dinner for the ten only cost £800.  The group still wanted to pay their bill the way we pay tax.

So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they share the windfall so that everyone would get his 'fair share'?

The six men realized that £200 divided by six is £33.33, but if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being 'PAID' to eat their meal.

The restaurant owner suggested that it would be fairer to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid £20 instead of £30 (33% savings).

The seventh now paid £50 instead of £70 (28% savings).

The eighth now paid £90 instead of £120 (25% savings).

The ninth now paid £140 instead of £180 (22% savings).

The tenth now paid £490 instead of £590 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
"I only got £10 out of the £200," declared the sixth man. He pointed to the tenth man "but he got £100!"

"That's right," exclaimed the fifth man. "I only saved £10, too. It's unfair that he got ten times more than me!"

"That's true!!" shouted the seventh man. "Why should he get £100 back when I got only £20? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"   The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill.

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H M Revenue & Customs have announced that the bonus rates paid on SAYE Sharesave Schemes have been reduced in line with other interest rates.

The Early Leavers’ Rate, paid where employees’ SAYE contracts are cancelled before the agreed date, has been reduced, from 3% to 2%.

These changes took effect from 27 December 2008.

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According to new research by Creditsafe, a business information company, SMEs are spending an average of 15.7% of their total expenditure costs in fulfilling tax obligations.

Tax ranks third in the league table of total business expenditure for SMEs, with wages accounting for almost a third (29%) of total expenditure and investment in stock and materials running at 17.5%. Fuel costs now account for 10% of overall costs. This does seem to put the cost of fuel into perspective!

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...does not appear to be achievable in the short to medium term. Just a quick note for the future, here is a table of the currently anticipated marginal tax rates for 2010/2011:

Income/gains from £	Income/gains to £	Self-employment income %	Unearned income £	Dividend income (gross) %	Capital gains tax %
9,600	43,875	28.00	20.00	0.00	18
43,876	100,000	41.00	40.00	32.50	18
100,001	106,475	61.00	60.00	43.75	18
106,476	140,000	41.00	40.00	32.50	18
140,001	146,475	61.00	60.00	43.75	18
146,476	150,000	41.00	40.00	32.50	18
>£150,000		46.00	45.00	37.50	18

We need to look carefully at this well before the start of the 2010/2011 tax year.

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I have spoken in the past about the ongoing importance of a financial due diligence process, even when buying/investing in a business for what is ostensibly a ‘bargain’ price. The contraction of the credit markets, and the inevitable trading recession which will follow, will create a number of distressed transactions in the SME sector. These transactions are vital to ensure continuity of employment for a large number of people across the UK.

The focus in such circumstances differs from typical financial due diligence investigations. In my experience the major risk areas are:

•  If you are buying a company, you inherit its assets and its liabilities. Distressed companies inevitably have substantial liabilities, not all of which appear on the balance sheet. It is very important to be aware of the extent of these liabilities, and also to understand the agreed terms of payment.
• In many cases a company will sell one (or more) divisions separately, rather than offloading its entire business. In these situations the business being sold will be ‘carved out’ from the existing company. As part of the process, a separate P&L is usually prepared for the division, and ensuring that the extracted P&L is accurate & maintainable is fundamental in distressed sales. This will not only prevent over-paying for the business, it will also allow more accurate projections to be prepared by the acquirer / investor.  The treatment of shared costs is always an ambiguous area, and can lead to the overstatement of profits.
• In the current climate it is particularly important to focus on working capital requirements. The traditionally used method of looking at old balance sheets and payment terms will need to evolve to cover the affects of a post credit crunch environment.
• Customer health. A feature of the post credit crunch economy is the precarious circumstances all customers find themselves in. It is crucial that an acquirer / investor understands how profitable different customers are. The financial health of the key customers should be undertaken, and this can be extended to the fundamental suppliers of the business.

Financial Due Diligence is still as important as it has ever been. The only difference is a change in emphasis, and with ‘distressed transactions’ the need for all advisors to move quickly is paramount to successful completion.

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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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With effect from 9 December 2008 taxpayers can settle their self-assessment tax bills by credit card (for an extra fee of 1.25%).

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Given the current state of our national finances, there will be a number of businesses in distress which will either raise funds via the sale of a proportion of equity or even be forced to sell entirely. Avoiding business failure and successfully completing a ‘distressed transaction’ is important for the economy - by maintaining employment directly for the business and its supply chain.

2009 will see standard SME valuation methods abandoned. Not only will earnings multiples reduce – as buyers become wary of uncertainty – but the profits used to value businesses will be slashed. In the midst of falling asset prices, astute investors will identify ‘needy’ SME businesses that are significantly undervalued. We will see companies buying competitors, customers and suppliers as the liquidity problems bite.

If businesses can be acquired using comparatively low valuations, is it still worthwhile undertaking a formal Financial Due Diligence process? 

There are three principal reasons why I believe it is still a fundamental part of the investment process:

• Whilst an acquisition may be at a comparatively low valuation - if the underlying business is defective, then the investor will still lose money (even if it is less than would have been lost in 2007!)
• The acquisition process uses the most valuable resource of all – time. If potential problems are identified early on it prevents the acquirer wasting time chasing a deal which will never complete.
• Deal structure is still crucial – particularly from a tax perspective – and professional advice on this is necessary to maximise long term shareholder value. For corporate acquisitions it is important that the structure is organised so that the financial health of the acquired business does not threaten existing operations.

I will write another blog in the near future on the areas of financial due diligence to focus on for distressed acquisitions.

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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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When buying property abroad it is often necessary to set up a company to own that property – either because non-residents are not allowed to own property in a particular country, or to avoid unwelcome inheritance issues.

In the past this has often given rise to additional tax. The owner was likely to be a director, or deemed to be a shadow director, of the company and so taxable under the benefits-in-kind rules on accommodation. Sometimes it was possible to argue that the company was holding the property only as nominee for the individual and effectively “look through” the company, but this was generally more difficult if the property was being let out to other people for part of the year.

The legislation was changed this year to prevent a tax charge arising in certain circumstances. It is important, however, to check that your situation is specifically covered by the new legislation:

• The company must be owned by individuals.
• The company must, broadly, have owned the property all the time since the individuals acquired the company. 
• The property must be the main or only asset of the company.
• The activities of the company must relate almost wholly to the ownership of that property. 
• The company can be the subsidiary of another company as long as the holding company does nothing other than own the subsidiary.

The legislation was, unusually, wholly retrospective in effect so if you need to revise a return for an earlier year you will need to act quickly. The deadline for amending a 2006/07 return expires on 31 January 2009.
 

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Apparently MPs are considering offering buy-to-let landlords the chance to make up for evading taxes by paying in full during an amnesty rather than facing financial penalties or legal action from the Revenue. If this were to happen, the amnesty would coincide with an information campaign, explaining to by-to-let landlords why paying taxes is crucial and outlining the consequences they face if they fail to submit a complete return.

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Whilst it seems a little unusual to think of depositing money with HMRC rather than with a bank, if you do have spare cash this may be something worth considering.

Just to put matters in perspective, for companies that overpay “ordinary” tax, interest is paid thereon at 2% and for tax paid early or for over-paid quarterly instalments the Revenue are paying at 2.75%, both of these are taxable.

For individuals who have overpaid tax the Revenue are paying 1.5% interest on a tax-free basis. 

Interest is not accrued if you choose to pay your income or capital gains tax early.

However, for individuals, there is the possibility of using Certificates of Tax Deposit. These were very popular some years ago but fell out of favour in times of rising interest rates. Regrettably they cannot be used for corporate tax, PAYE or VAT. Essentially deposits are purchased and the rate of interest, which is taxable, varies as to whether the certificate is cashed or applied against tax payments. The current rates are as follows:-

Deposit of under	Applied for tax	Cashed
£100,000 or less	1.75%	0.75%
£100,000 or over:
Months held
(a) under 1	1.75%	0.75%
(b) 1 but less than 3	4.50%	2.25%
(c) 3 but less than 6	4.25%	2.00%
(d) 6 but less than 9	4.25%	2.00%
(e) 9 to 12 months	4.00%	2.00%

If these rates are better than you would get from putting your money elsewhere, this may be something that is worth considering.

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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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The High Court has ruled (for BAT) that it is unlawful for the UK to tax dividends from subsidiaries in other EU countries. The time limit for back claims is not yet clear, it has been referred to the ECJ. However if you may be affected you should review the position and at least lodge a provisional claim.

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Just a quick reminder that there is one area where employers can increase the amount included in a dispensation without needing to go back to HMRC. Under the heading “Annual increase in amounts included in a dispensation” HMRC’s manual states:

“Where expense payments included within a dispensation are set at a particular amount (e.g. scale rate payments…), the amount may be uprated annually by the employer without the need to seek HMRC’s agreement, as long as the annual increase is equal to or less than the annual increase in the Retail Prices Index (RPI) for the same period).

It would probably be sensible to keep a permanent record of this but it could still save some time.

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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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On the same day as the Chancellor announced short term 'enhanced support' for businesses experiencing cash flow problems, HM Revenue & Customs issued a Consultation Document looking at a longer term approach to late paid tax.

In the short term at least, the Revenue is expected to adopt a softer approach towards businesses unable to pay their taxes on time, though how this will actually be played out in some offices remains to be seen!

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A number of changes to the taxation of foreign profits have been proposed:-

• an exemption for foreign dividends received by large and medium sized groups will be introduced in next year's Finance Bill;
• the Government will consult on options to reform the UK's Controlled Foreign Companies (CFC) rules so that profits genuinely earned by overseas subsidiaries are not taxed in the UK; and
• there will be a worldwide debt cap on interest, so that tax deductions for interest claimed by UK members of multinational groups will be restricted by reference to a group's consolidated net external finance costs.

Thanks to Sarah Withers for submitting this blog.

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The Chancellor has given a one year relief with the aim of helping smaller businesses manage short term pressures in the property market.

For Finance Year 2009/10, empty business properties with a rateable value of less than £15,000 will be exempt from business rates .

This is expected to apply to 70% of empty business properties.

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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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At the moment, trading losses suffered by businesses may be set against profits in two ways:

• carried back up to one year, to set against profits in the previous year; or
• carried forward against future trading profits from the same trade.

The Chancellor has announced that, for trading losses suffered during periods ending in the current tax year (ie to 5 April 2009) up to £50,000 of the loss 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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From 10 November 2008 the Revenue will send penalty notices where their records show that 2007-08 form P11D(b) Class 1A National Insurance contributions Annual returns have not been received.

These returns were due by 6 July 2008. The penalty will be £100 per 50 employees for each month the return is outstanding, from 7 July 2008 to 6 November 2008, i.e. four months.

If you have not sent your return I would recommend that you do so as soon as possible.
If you need any help please let us know.
 

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It has been generally accepted for some time that individuals were able to pass on interests in furnished holiday let properties and caravan sites, free from inheritance tax, provided that:

•  the lettings were short-term; and
•  the owner played a significant role in managing or overseeing the lettings.

HM Revenue & Customs have just announced that this is potentially not their view going forward and that some cases which qualified in the past might not do so in future.

Little further guidance is supplied; when it is, we will provide details and our thoughts on the Revenue’s change of view.

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HM Revenue & Customs have announced that they will offer another “amnesty” to UK taxpayers who failed to disclose offshore bank accounts under last year’s facility.

The 2007 “amnesty” was a limited success; although it has raised around £400 million to date, the original expectation was for a much higher figure. The Revenue have decided, therefore, to offer taxpayers a further chance to disclose details and suffer a far lower penalty than they might otherwise pay.

Details are sparse at the moment; we will provide further information when it becomes available but would be happy to discuss this matter if you feel it may be relevant to you.

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The Pre Budget report will be on 24 November at 3:30pm according to the Treasury website.

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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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The European commission has sent the United Kingdom a formal request properly to implement the European Court of Justice judgement on cross border loss offset in the Marks & Spencer case.

In that case the Court ruled that the UK ban on cross border loss relief was disproportionate, in so far as it denied loss relief where a non-resident subsidiary had exhausted all possibilities for relief in its state of establishment. Following this ruling, the UK should in principle grant relief for definitive losses of a subsidiary established in another Member State.

In the legislation meant to implement the ruling, the UK imposed conditions on cross border group relief which make it virtually impossible for tax payers to benefit from the relief. The Commission consider that this is contrary to the EC Treaty.
 

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The government has made significant changes to the way in which some life assurance policies are taxed.

In certain circumstances, the new rules will require companies which hold a life policy with any investment element (i.e. any policies other than those paying a fixed sum on the individual’s death) to consider the value of the policy each year and potentially to have to tax any increase in value over the previous year.

The number of cases where this will happen is not expected to be high but it is important to clarify the position, as soon as possible.

Please contact us if you think you may be affected by these new rules.
 

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The Treasury is concerned that certain structures are “abusing” the rules for tax relief on travel at a cost to the exchequer of around £300m.

A Treasury consultation paper reveals that losses may significantly increase if it does not clamp down.

Let’s hope this time the solution does not penalise businesses who are not looking to avoid tax.
 

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The good news is – you can now pay your tax bill on your credit card.

The bad news is – this will cost you an extra 0.91%.

 

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From 1 August the rate available for qualifying small and medium-sized enterprises (SMEs) investing in R&D will increase from 150% to 175%.

The size of company that can qualify for tax relief will also increase, from 250 employees to up to 500, with the associated limits on balance sheet value and turnover also doubling.
 

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The Ministry of Justice has announced that married couples and civil partners whose spouse or civil partner dies without leaving a will are to benefit from an increase in the statutory legacy from the current £125,000 where the deceased leaves a spouse and children or £200,000 where the deceased leaves a spouse and parents or siblings but no children. From 1 February 2009 the levels will increase to £250,000 and £450,000.

A word of caution though – if you want to properly provide for your family – make a will!
 

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HMRC has acknowledged that the tax code changes for the new 2008-09 personal allowance due to be processed in September may cause some cash-flow problems.

HMRC has stated that initially employers should net any refunds against other PAYE deductions in September but, where these are insufficient to cover the refunds, employers may apply to HMRC for funding to cover the balance.

Full details of how to make a claim are given on http://www.hmrc.gov.uk/employers/payefunding.htm.
 

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Most shareholders in private trading companies know that these shares will be exempt from inheritance tax (“IHT”) when they die.

Many of them are also parties to what are known as shareholders’ agreements – in simple terms, private but legally enforceable agreements between shareholders on such matters as dividends policy, share transfers and what happens when an employee shareholder leaves the company.

In our experience, many shareholders’ agreements include a provision that, if a shareholder dies, his (or her) personal representatives must sell the shares – and the other shareholders must buy them.

The Revenue’s view (which they hold very strongly and will take as far as they need to) is that this provision represents a legally binding contract at the point of death – so the exemption is not available and, as a result, IHT is due.

We have been told of a number of cases where the Revenue have enquired whether shareholders’ agreements existed – and then tried to charge 40% IHT when they reviewed the agreement.

This is a problem which is straightforward to put right, but costly to ignore. If you would like to discuss this in more detail, please contact Cathy Corns or me.
 

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HM Revenue & Customs (“HMRC”) have published guidance on the impact of salary sacrifices on statutory payments.

A salary sacrifice arrangement allows employees to give up taxable earnings in return for benefits or payments that are not taxed or subject to national insurance. In the right circumstances, it can yield large savings for employees (and sometimes employers).

The guidance, issued in the form of a number of questions and answers, covers a range of issues including:

• what is needed to make a salary sacrifice successful;
• when changes can be made to agreed arrangements; and
• the effect on SMP, SSP and pension contributions and the interaction with minimum wage legislation.

The guidance is available at http://www.hmrc.gov.uk/specialist/sal-sac-question-and-answers.htm; if you would like to discuss how salary sacrifice might work for you, please contact Cathy Corns or me.
 

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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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I suspect that no-one apart from tax professionals has actually bothered to look at HMRC's new consultation on a charter for “HMRC and its customers”. Since the publication starts by suggesting what roles the charter would play and in any case it will not have any legal force, the cynic would say there seems little point.

However, there are some interesting points about seeking a broad range of views in respect of the way HMRC interacts with its “customers” and it would appear that the charter will, as a minimum, fulfil the following:

• provide users with “headlines” about their rights and responsibilities;
• set out a statement of some of the broader values of HMRC with regard to its relationship with customers; and
• establish the standards of service that customers can expect from the organisation.

Apparently it will cover broad principles such as treating customers courteously, dealing with issues promptly, being fair and professional, etc.

I have to say I still find the term “customers” a tad irritating when actually one has no choice about whether or not to interact with HMRC. My personal view aside, however, if you do have strong views about HMRC’s current stance with regard to the way it acts, the way it deals with you, etc., this is your opportunity for your voice to be heard.

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HMRC is updating its rights and powers.

Some of the reforms make perfect sense (though in my opinion not all). My concern, which is growing, is that taxpayers’ rights are not being correspondingly updated.

Currently HRMC’s “customers” have: 

• No automatic right of appeal against every new power;
• No right to the independent scrutiny of a tribunal; and 
• No automatic right to compensation if it all goes wrong.

HMRC’s solution to this is the Charter which has no statutory rights.

This is not satisfactory at all. Now might be a good time to start lobbying your MP.

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Seems to be very popular for UK companies at the moment. It is important to remember, however, that moving the Head Office to a lower tax jurisdiction does not remove UK activities from the UK tax net. Furthermore, companies whose activities or customers are primarily in the UK are unlikely to want to emigrate, the potential savings could well be outweighed by additional costs.

However, where significant profits arise outside the UK the position should, at least, be considered.

It is, in reality, not difficult (from a tax perspective at least) for companies to move outside the UK at the moment.

For shareholders an exchange of shares in a UK company for shares in a non-UK holding company is unlikely to trigger a tax liability.

Additionally, the sale of non-UK subsidiaries to a new non-UK holding company may qualify for the Substantial Shareholdings Exemption and so, again, be tax free. It seems odd that one of the Government’s policies to enhance the UK’s competitiveness should be used as a means for exit. That’s tax for you!

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Using private cars for business travel is hurting drivers by potentially hundreds of pounds a year due to HMRC's refusal to increase mileage rates.

The tax free mileage rate that private car drivers can claim has not moved at all over the last five years despite the increasing cost of petrol.

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HMRC have recently published a consultation document on interest, titled “Interest – Working Towards a Harmonised Regime”

The document explains the rationale for charging and paying interest, sets out the principles underpinning the regime, looks at the anomalies of the current system, and outlines and invites comments on the new proposals.

The document is quite long. Having read through it, there are some significant points:

•  “the purpose of interest is to reinforce the fact that particular taxes are due for payment on particular dates, and to bring a degree of fairness into the system where those payment dates are not met by some taxpayers but are by others.”
  

This should be contrasted to the statement in the next paragraph:

• “interest is not intended to be a penalty for late payment”
  

and very shortly after

• “interest is not designed to influence behaviour in the way that penalties are, and there is no consideration of the reason for late or overpayment. It is simply recompense for not having use of the money, measured by reference to the amount and time. It is for this reason that an appeal right against an interest charge is not appropriate.”

The document supports the view that if HMRC has financially disadvantaged someone by charging interest because of HMRC’s own mistake or unreasonable delay, it should cancel the charge.
One other key point is the discussion on whether or not interest charged and paid should be on a compound rather than a simple basis – this could be very significant.

Again, if you have a comment, this is your chance to make it.

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A report by a working group for the conservatives is recommending that the next conservative government should make radical changes to the way new tax legislation is drawn up and scrutinised - with a view to simplifying the UK’s tax code.

It proposes setting up an Office of Tax Simplification (OTS) to examine the existing law and practise and make proposals for simplification. As well as being staffed by HMRC and academics, it should also include individuals from the tax professions to provide both expertise and a fresh perspective.
The group also proposed setting up a new Select Committee on Taxation with membership drawn from both Houses. This committee should improve the scrutiny of government initiatives and proposals, and review proposals presented to it by the OTS.

Finally, the conservatives would look to re-establish the Pre-Budget Report as the time to propose technical changes in advance of the full Budget and Finance Bill. The thought is that this would have avoided many of the recent problems of badly thought through proposals, produced with little consultation and last minute legislation rushed through Parliament without sufficient scrutiny.

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Below is a blog written by my colleague Barry Hallam - author of our sister blog Tax Plus...

Included in the Finance Act 2008 was a provision to enable HM Revenue & Customs to charge a fee for certain methods of payment of tax liabilities. This has enabled a Statutory Instrument be issued which introduces a charge of 0.91% for tax payments made by credit card. The regulation comes into force on 13 August and only relates to credit card payments made by telephone. This may be extended to other methods of payment in due course.

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Below is a blog written by my colleague Barry Hallam who contributes to our sister blog Tax Plus blog...

HM Revenue & Customs (HMRC) have warned of a number e-mail scams inviting people to provide credit card details in order that a tax refund can be sent to them. The latest example includes an official looking form requesting full details of a credit card with the instruction that it must be returned within 2 days or the tax refund will be declined!

It even covers the situation where you do not have a credit card by inviting you to provide details of a nominee.

As HMRC say on their website:

HMRC would not inform customers of a tax rebate via email, or invite them to complete an online form to receive a rebate of tax.

Do not visit the website contained within the email or disclose any personal or payment information.

Email addresses used to distribute the tax rebate emails include:

service@hmrc.gsi.gov.uk
claims@hmrc.direct.gov.uk
notice@hmrc.gov.uk
hmrc@hmrc.gov.uk
admin@hmrc.gsi.gov.uk
info@hmrc.gsi.gov.uk
no-reply@hmrc.gsi.gov.uk

HM Revenue & Customs (HMRC) does not send out emails using these email addresses.

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Following the merger of the Revenue and Customs a review of all existing powers needed to be undertaken; the merged Department had different rules for direct and indirect taxes and some of the powers were out of date.

The problem is we are not entirely happy with the results. The principle of matching a power with an appropriate safeguard is not being consistently followed. Some of the powers in the Finance Bill 2008 are likely to give rise to problems for a lot of people if they become law as they stand. New powers are being introduced without any right of appeal included in the law. Safeguards have no statutory force and can be changed without any independent scrutiny. This cannot be right. As an example, HMRC have the power to see statutory records but there is no right of appeal if you believe the request is unreasonable or irrelevant.

This is just a brief indication of the position. I think you will agree we are right to be wary.

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One easily missed proposed change in HMRC’s powers is that allowing HMRC to set-off sums payable to a taxpayer against sums owed to HMRC by the same taxpayer. This could cause financial problems, particularly as set-off is to be entirely within HMRC’s power and exercisable at its discretion.

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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 Law Commission is considering duty of care provisions to protect taxpayers, as it believes the current position is unsatisfactory. Specifically it is considering the need for more redress against public sector bodies such as the Revenue when they act wrongfully.

The commission’s paper, which asks: ‘what mechanisms should be available for citizens to receive redress against public sector bodies?’ (not a catchy phrase I admit) is currently out for comment.

The full report can be found at http://www.lawcom.gov.uk/docs/cp187_web.pdf  

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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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