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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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.

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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.

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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).  

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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.

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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.

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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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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:

• Using substitute forms P46. 
• Not following the P46 procedures where forms P45 not received. 
• Not using tax code BR (Basic Rate) as the form P46 default tax code. 
• Sending data on CD-ROMs.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is likely to be a real problem for businesses.

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

Basically the CBI has four areas of concern:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SME Plus

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

Tax Plus

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

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

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

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

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

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

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

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

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

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