The Employment Appeals Tribunal recently ruled in HM Revenue & Customs’ favour by supporting current National Minimum Wage legislation relating to tips.
This means that employers have to pay their staff at least the National Minimum Wage regardless of any tips, gratuities, service or cover charge unless the tips are paid directly through the employer’s payroll.
Just to confirm that the amount payable tax free to employees working from home, without the need to keep receipts, had risen from £2 to £3 from 6 April 2008.
The Revenue have recently issued a number of documents regarding their procedures and rights on PAYE inspections, together with some details on their obligations, what you can do, etc. You can find full details at www.hmrc.gov.uk/leaflets/c6.htm.
The changes in the Finance Bill will preclude many companies that currently qualify for EMI from benefiting in the future. This will not apply to options granted prior to the date of Royal Assent. As this change is likely to take effect from mid-July, this is a one-off opportunity that should not be missed.
After Royal Assent, companies (or groups) will not be able to grant options unless, on the date of grant, they have fewer than 250 employees.
Companies affected by this change who want an EMI scheme, or want to issue further options under an existing scheme, must take speedy action to ensure that they are not too late.
A proposed change in tax law in this year’s Finance Bill could leave many taxpayers disadvantaged.
Currently when HM Revenue & Customs (HMRC) makes an error or mistake in an individual’s tax affairs he can claim back taxes (with interest added) for the last 6 years. HMRC now wants to cut the time limit so it is only liable for repayments for the previous 4 years. This cannot be good news - not when HMRC can go back to collect tax for up to 20 years.
As you are probably aware, you can claim interest relief on let properties. The mortgage interest on your let properties is set against any rental income received to reduce the taxable amount.
It is possible to increase the borrowings on let property, up to the market value of the property when it was first let, and continue to obtain relief for interest against the rents. There is no requirement for the funds raised to be used for the property – you can buy a car, pay off debts, whatever.
The tax saving may be significant.
Many employers reimburse subsistence expenses by way of scale rate payments.
HMRC has now agreed that employers may use the benchmark rates published by the Foreign and Commonwealth Office when paying accommodation and subsistence expenses to employees who travel abroad on business without the need for the employees to produce expenses receipts. The rates can be found at http://www.hmrc.gov.uk/employers/wwsr-april08-revisions.pdf.
Accommodation and subsistence payments at or below the published rates will not be liable for Income Tax or National Insurance contributions and employers need not include them on forms P11D. However, if an employer decides to pay less than the published rates its employees are not automatically entitled to tax relief for the shortfall. They can only claim expenses supported by receipts, less any amounts paid by their employer.
These tax/NIC free amounts are in addition to the incidental overnight expenses that employers may reimburse tax/NIC free (http://www.hmrc.gov.uk/manuals/eimanual/EIM02710.htm).
When commercial property is acquired, capital allowances may be claimed on the part of the purchase price attributable to plant and machinery, whether fixtures or moveable chattels.
Historically the way of ascertaining the amount to be allocated to plant, a “just and reasonable apportionment”, involved a specialist valuation of the various components of a purchase (land, building and plant) relating the results to the actual price paid.
The amount claimable on this basis is generally higher than buyers expectation.
However, in 1997 an alternative procedure was introduced under which the buyer and seller could jointly elect to set a figure to be treated by both parties as the disposal sale proceeds and purchase price for the fixtures. This figure is binding on HMRC and any subsequent purchaser of the property.
The main problem with the election is that it tends to benefit one party over the other.
It is generally better for the seller to put a low value in the contract – the historical allowances over this figure are then retained by him. This means that the buyer then has minimal allowances. Conversely, the buyer wants as high a figure as possible while this may have tax implications for the seller. The only answer is to negotiate – and probably compromise.
The key thing though is to understand what you are being asked to sign and to know what previous owners have signed too.
The basic rate tax cut would reduce pension value.
The change in the income tax basic rate from 22% to 20% means that a saver investing a typical £200 a month now needs to pay an extra £48 a year to end up with the same value in the pension fund.
Yesterday, the Chancellor announced changes to the personal tax system in response to the furore over the abolition of the 10p rate of tax. Gordon Brown's "prudence" concept seems to have been abandoned as, in his new role, he has to balance the polls rather than the books. The government is apparently borrowing £2.7 billion to fund a tax cut that is much broader in scope than simply addressing those affected by the loss of the 10p rate.
The personal allowance for the current is being increased by £600 to £6,035. So far so good - but then the basic rate band is being correspondingly reduced by £1,200 to £34,800. This means that anyone paying tax at the higher rate will no see no difference whatsoever in the amount of tax they pay. Individuals paying tax at basic rate will receive an extra £120 pa.
The full text of the Chancellor’s announcement is available on HM Treasury’s website
What is concerning is the lack of comment on national insurance bearing in mind the government's stated policy of aligning income tax and NIC payment rates. Watch this space.
It is probably fair to say that one of the best known parts of our tax legislation allows employees being made redundant to receive up to £30,000 compensation, free of both tax and national insurance.
It is equally fair to say that the Revenue are far from keen on this and will find any legitimate reason they can to charge income tax on the payment. One of their main weapons in this is the so-called pay in lieu of notice (“PILON”) clause in an employment contract; if an employee is entitled to receive pay in lieu of notice, this payment is contractual (and hence taxable) rather than compensation (which would be exempt from tax up to £30,000).
Unlike the rest of us, MPs have been entitled to receive termination payments free of tax, even if the payments are made in accordance with a PILON clause in their contract, for some years.
This year’s Budget has extended this exemption to the Mayor of London and members of the Greater London Assembly.
So, when Ken Livingstone handed over the keys to City Hall to Boris Johnson at least he had the consolation of knowing that his pay off would not suffer tax.
The latest Finance Bill aims to counteract the use of “artificial” arrangements on trade losses by restricting loss relief to £25,000 if an individual “trades” in a non-active capacity (i.e. spends an average of under 10 hours a week on the commercial activities of that trade). It therefore seems a good time to look at what other loss relief is allowable.
Commerciality test
As a basic test, a tax loss is not available for relief unless the trade is carried on on a commercial basis, with a view to the realisation of profit, and the trader must now prove that he is active on the trade for 10 hours a week. The following assumes this is the case.
Losses in early years
Losses incurred in the early years of a trade (i.e. the year in which the trade started, or in the next three years) may be carried back against total income for the preceding three years (earlier years first).
Pre-trading expenditure is relieved as if it has been incurred on first day of trading.
Offset trading loss against capital gain
Any trading loss that is potentially allowable against total income can also be offset against a capital gain where the loss exceeds your total income for the year.
Property losses
An excess of property expenses over rents creates property losses. These losses can be offset against current or future property income.
Capital losses
Capital losses can be used against capital gains of the same year or carried forward.
Losses can only be carried back on death, when a three-year carry back is allowed.
Disposal to a connected person
Where a capital tax loss arises on such a disposal, it can only be offset against gains on disposals to the same connected person.
Negligible value
If an asset has become negligible in value, a claim can be made such that the asset is treated as having been sold and immediately reacquired thus generating a loss. “Negligible” is not defined by statute but HMRC’s view is that the term means “worth next to nothing”.
Under the old rules, where an individual acquired shares on more than one date, the legislation specified which shares were treated as sold for CGT purposes on a part disposal. Shares were generally matched on a ‘last in, first out’ basis, (with exceptions for “bed and breakfasting” within 30 days).
As part of the simplification of CGT, the rules for disposals after 5 April 2008 have changed and could produce some unfortunate results. From that date the cost of all shares in any one company will be averaged.
Assuming an increasing share price over the period in which shares have been acquired, the taxable gain on the first disposals made after 5 April 2008 could be considerably higher than would have been the case under the previous legislation.
Apparently, such arrangements do not meet the new requirements that are being introduced from 6 April 2008.
HMRC is aware that over the years some employers have reached agreements with their local tax office, for example with regard to:
These local agreements are now being ended and may lead to the rejection of the information submitted.
HMRC is reviewing all local arrangements with a view to terminating them and any affected business should urgently conduct a similar review to avoid having your data rejected.
HMRC has published new guidance on the new penalty provisions that will apply from April 2008.
HMRC states that it has designed the new penalties so that:
The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.
Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm
HMRC has stated that businesses that can demonstrate good management and accounting systems will be viewed as low risk, giving them more time to spend on higher risk businesses.
Family businesses are often regarded by HMRC as a higher risk because of the overlap between business and family.
So what can you do to reduce the risk of an investigation?
HMRC is carrying out a full review of tax systems and processes for companies which it considers to be high risk; especially where there is a history of mis-declaration. Some time spent now to tidy things up could save a lot of problems later.
The shortage of skilled staff is encouraging businesses to incentivise their workforce by giving greater control over the make-up of their remuneration package – “flexible benefits”.
The employees’ participation in a flexible benefits scheme is usually funded by agreeing to reduce salary in return for a non-cash benefit.
Savings can be realised where the benefit provided to staff is tax and/or NIC free. Typical examples include employer’s pension contributions; employer-provided childcare arrangements; and ‘bikes for work’, as well as alternative options, such as a reduction of pay in return for increased holiday entitlement, All of these need to be implemented correctly for the sacrifice to be effective.
Generally, salary sacrifice arrangements are effective where the contractual right to cash is reduced, and the employee is not freely able to revert to their original higher salary in place of the benefit being provided. It is important that the employee’s contractual entitlement to future pay must be relinquished before the point at which it is treated as received for both income tax and NIC purposes. The revised contractual arrangement must also genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.
Usually, HMRC’s approach will be that in cases where there is a variation to the contract, lasting for a minimum period of a year, it will accept the position. However, if the agreed period is less than twelve months, the risk of HMRC challenging the arrangement is considerably higher. In a worst case the sacrifice is ineffective and tax and NIC is charged on the gross amount.
It is worth taking time to get this right but done correctly both employer and employees can be winners.
The way the new rules work it is likely that a number of businesses may be moved from gross to net under CIS. There is a reason to be worried.
One of the key aims of the new CIS scheme was to improve compliance in the construction industry.
Under the new scheme, HMRC may raise a determination transferring a subcontractor from gross to net payment status at any time if HMRC believes that were the subcontractor to apply for registration for gross payment at that time this would be refused.
From last year HMRC has a programme for businesses to review their tax compliance over the previous 12 months. If there are unacceptable breaches the businesses receive a determination moving them to net status and notice of right of appeal. This is a rolling programme to ensure every business is checked once a year.
To pass the compliance test, the trader and any business partners (or the company and each of its directors) must, during the 12 months up to the date of the application, have done all of the following subject to some small margins for error.
This is likely to be a real problem for businesses.
The CBI recently published a paper setting out their view on why the UK corporate tax system is uncompetitive.
Basically the CBI has four areas of concern:
In the CBI’s opinion the key principles for a corporate tax system are:
In their view the rapid legislative change coupled with inadequate scrutiny and consultation has added to uncertainty for all taxpayers. At present, looking at the position for individuals on capital gains tax and on the changes for those not domiciled in the UK, it is hard to argue with their view.
If you would like to read more, you can find the full document at http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/c9f94d05d0d0975b80257403003c66a6?OpenDocument.
Under the draft legislation there appears to be a problem for shareholders in companies or groups participating in joint ventures. Activity carried on with a view to acquiring an interest of 10% or more in a joint venture company is trading activity under the legislation but actually holding shares in a joint venture company appears not to be. This means that a company or group can fail the trading tests if the shareholding in the joint venture is substantial in relation to the overall activity.
If this were to be the case, entrepreneurs relief would not be available.
Historically, the government’s response to an avoidance “scheme” has been to block it (and then block scheme mark 2, et seq). Look at national insurance (NIC). I am (sadly) old enough to remember when employees were paid bonuses in gold coins to save NIC. Gold coins were of course blocked, so the market moved on to platinum sponge, fine wine and, as I recall, carpets. It took a long time to introduce legislation to stop all similar schemes.
From the Treasury’s perspective principles-based avoidance legislation makes perfect sense.
There has been a lot of sophisticated planning around interest income and HMRC and the Treasury are seeking to change the rules of the tax planning “game” with the introduction of a principle. The consultative document states: ‘A return designed to be economically equivalent to interest is to be taxed in the same way as interest.’ (Regrettably the ensuing draft legislation is nowhere near as succinct).
If this principle based approach is successful in this area, we have to ask – what will be the next step?
This is a perennial question – should I take additional income from my private company in the form of a bonus or a dividend? From 1 April 2008 the answer to this question may have changed for some people.
Prior to 1 April 2008 it was preferable to declare a dividend if the company was paying tax at the small company rate or at the full rate of corporation tax. If profits fell into the marginal rate band then a bonus was more cost effective. On 1 April the marginal rate fell to 29.75% and so, from a tax perspective alone, dividends will now be preferred regardless of the level of company profits. There may of course be other factors to consider, such as pension contributions and minimum wage legislation but, provided these are factored in, paying dividends is likely to give a lower overall tax bill.
Companies with accounting periods straddling 1 April will have to calculate their own marginal tax rate for that period but, as a general rule of thumb, if the rate is 30% or lower then dividends will be the answer.
Over the last 24 hours there have been a number of blogs posted in relation to the 2008 Budget announcement – on both SME Plus blog and our sister blog Tax Plus blog.
For your reference and convenience please find below a list of the respective blogs posted:
SME Plus
Budget 2008 - Pension Tax Relief
Budget 2008 - Capital Allowances
Budget 2008 - Enterprise management incentives ("EMI") share options
Budget 2008 - VAT
Budget 2008 - Trade losses for individuals...
Budget 2008 - Pensions
Budget 2008 - Associated companies
Budget 2008 - ISAs
Budget 2008 - Income shifting
Budget 2008 - Corporation tax simplification...
Budget 2008 - Enterprise Investment Scheme
Budget 2008 - Previously announced
Tax Plus
Budget 2008 - All Settled Offshore?
Budget 2008 - The Remittance Basis - Offshore Mortgages
Budget 2008 - Non Doms and Capital Losses
Budget 2008 - Personal allowances and the remittance basis
Budget 2008 - Non Doms and the £30,000 charge for the remittance basis
Budget 2008 - VAT
Budget 2008 - Changes to taxation of foreign dividends
Budget 2008 - Relaxation on Residence Test and Day Counting Rules
The previously announced reduction in basic rate income tax from 22% to 20% from 6th April created concerns for 2 sectors.
Firstly, charities were concerned that they would lose out because Gift Aid donations would only benefit from 20% income tax relief with a resulting reduction in the gross donation.
Secondly individuals making personal pension contributions would only benefit from 20% tax relief at source instead of 22%. For instance a personal pension contribution of £78 would be worth £100 after basic rate tax relief in 2007/08. After 6th April the same £78 contribution becomes £97.50 after basic rate tax relief. This represents a small but significant reduction in your pension fund. Higher rate tax payers can claim back a further 20% through self assessment, increased from the previous 18% but the gross pension premium is still reduced for the same initial investment.
It was pleasing to see the Chancellor act on the concerns of charities and add 2% relief to Gift Aid donations for a transitional period.
It was a shame that the same generosity was not extended to the millions of us trying to save for our retirement.
Although most of the changes on capital allowances have been known about for several months, there are a couple of minor tweaks announced today.
In addition, there is confirmation of new rules to allow companies (not unincorporated businesses) to surrender losses in return for a cash repayment from HMRC. This will apply to losses created by claims to 100% first year allowances on certain energy-saving or environmentally-beneficial plant & machinery, It will not be available where those losses could be used in some other way, for example against other taxable income or surrendered as group relief.
Companies thinking of offering EMI share options to employees will have three new factors to consider:
The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.
The main VAT changes announced in the Budget today are;
... are being restricted for tax purposes. At present an individual who carries on a trade, on however part-time a basis, can, subject to certain detailed restrictions, set this loss off against other income and gains. Anti-avoidance legislation introduced in the 2007 Finance Act restricted the offset of tax losses for non-active or limited partners. In the Revenue’s view this merely resulted in individuals entering into loss-making trades on a sole trader basis purely for the tax relief on the losses. As a result this legislation is being introduced with effect from 12 March 2008 for individuals who spend less than ten hours a week on a sole trader activity; for existing trades the loss relief is restricted to £25,000 pa and for new trades, where tax avoidance is a motive, offset relief is abolished.
This is clearly designed to counter the sale of certain investment products that relied on tax losses as part-funding. However, they may well affect other genuine arrangements that “just happen” to meet the tests.
When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.
With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.
Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.
The budget confirmed previously announced increases to ISA allowances for 2008/09. From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.
Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.
Legislation and consequently its introduction is being delayed for 12 months – party time!
The Chancellor has today announced an increase in the individual investor limit from £400,000 to £500,000 – subject to EU State Aid approval. The detailed tests for companies and investors otherwise appear to remain unchanged.
Whilst this is good news for companies seeking to raise funds – one word of warning. State Aid approval can take a long time to come through.
Much of what will be included in this year’s Finance Bill was known long before the Chancellor stood up to make his Budget speech. The main items of relevance to businesses are summarised here, with links to earlier postings:-
Chancellor Alistair Darling will deliver his first full Budget on Wednesday 12 March 2008. The 2008 Budget comes amid the gloomiest economic situation for more than a decade, with volatile financial markets, a credit crunch and falling house prices.
Mr Darling will present the Budget to the House of Commons at 12.30pm and we will of course be blogging on SME Plus Blog and Tax Plus Blog during the course of the afternoon, providing analysis on the key highlights.
If you do not already subscribe to our blogs click here for SME Plus Blog or here for Tax Plus Blog to ensure you get our comment and analysis as and when it happens.
From 6 April 2008 there is to be a dramatic change in the calculation of Capital Gains Tax (CGT). Essentially there will be a flat rate of tax of 18% based on the difference between sale proceeds and cost. This applies irrespective of the type of asset held; the length of time held; removes relief for indexation totally (effectively halving the tax base cost for assets held pre March 1982) and removes a few other mitigation measures.
Continue Reading...Having listened to the Chancellor speak for just over 30 minutes I was unpleasantly unsurprised to discover the ream of paper supporting his speech. The devil is certainly in the detail and it is becoming increasingly apparent why – to use an analogy – in Peter Pan the same person who plays Mr Darling also plays Captain Hook.
The tax implications and complications are potentially horrendous. Watch this space for further details...
The Chancellor of the Exchequer, Alistair Darling, will be presenting his 2007 Pre-Budget Report and the outcome of the Comprehensive Spending Review on the afternoon of Tuesday 9th October.
I will post details of important announcements here shortly after the end of his speech.
There has been a lot of press speculation recently that, following the calls for a shake up in the tax breaks enjoyed by the private equity industry, the Chancellor may change capital gains tax for everyone.
Continue Reading...Now that all the hassle is over I took some time to reflect on the pressures applied to business by the Revenue. I know the returns of benefits (forms P11d) have been around for years but so has the old “higher-paid” limit of £8,500. So employers have to fill a form in for anyone paid the minimum wage who receives any benefit at all.
Sure dispensations can help but actually getting one out of the Revenue is not always as easy as one would hope.
Continue Reading...
