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

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

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

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

So how do you apportion home costs?

The Revenue gives several examples of the approach it recommends.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The European Court of Justice recently decided a case, Theodor Jager v Finanzamt Kusel-Landstuhl, regarding tax reliefs on inheritance tax. The Court held that making such relief was made subject to the condition that the asset acquired by inheritance be situated in the national territory constituted a restriction on the free movement of capital contrary to EU law.

This may well have an impact on the UK’s inheritance tax framework. The fact that agricultural property relief only applies to land in the UK, the Channel Islands and the Isle of Man is almost certainly now contrary to European law.

Whilst everyone hopes the government amends the law to ensure that relief applies to land anywhere in the European Free Trade Area, this is obviously not guaranteed. In the meantime, anyone faced with this situation should probably be advised to complete the relevant IHT forms on the basis that relief should be due.

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Below is a blog which you might find of interest from my colleague and fellow partner Lisa Spearman who contributes to our sister blog Tax Plus blog.

After some considerable wait HM Revenue & Customs and customs have finally published the draft legislation covering changes to rules for taxing UK residents who are not domiciled in the UK.

These are more wide ranging than expected and will have a significant impact on not only Non Doms but also beneficiaries and settlors of offshore trusts whether or not they are Non Doms.

There is a significant amount of new legislation to be considered and it may be amended before (or after!) 5 April 2008. Some points that are proposed are.

• Non Doms who have been here for seven years (out of ten) will have to pay £30,000 a year to elect for the Remittance Basis.
• All Non Doms claiming the remittance basis will lose personal allowances and capital gains tax annual exemptions. Subject to a de minimis limit of £1,000 of overseas income / gains.
• Bringing non cash items to the UK such as works of art, cars, furniture, and jewellery will be treated as a remittance after 5 April 2008. If those items were purchased with overseas income or gains then the remittance could be taxable in the UK. If such items have already been brought into the UK and are used after 5 April 2008 the legislation as presently drafted, indicates that there will be a remittance which will be taxable.
• Beneficiaries of offshore trusts who receive capital payments may be taxable on capital gains arising in the trust that have arisen as far back as 17 March 1998 (yes ten years ago!) or gains made at some point in the future.
  
  

There is much more to consider but if you are Non Domiciled or have an interest in an offshore trust it would be sensible to contact your accountant now. There are only a few weeks before the new rules become effective.

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In response to the comments made on the consultation on Taxpayers’ Safeguards, HMRC has announced that it will start working on the development of a Taxpayers’ Charter, which will set out both taxpayer rights and responsibilities in one single accessible document.
Dave Hartnett, HMRC Acting Chairman, said:

“Making sure that taxpayers’ rights are properly protected, whilst providing HMRC with the powers needed to ensure that today’s tax system is properly administered, are key HMRC commitments. This is what the Review of Powers consultation, together with the Taxpayers’ Charter, are about and I urge all interested parties to help us get that balance right by participating fully in the consultation.”

If you would like to read further, click here.

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Below is a blog which may be of interest, written by my colleague Barry Hallam for our sister blog Tax Plus...

Following reports of further meetings with business leaders it now seems that Mr Darling’s long delayed announcement regarding the capital gains tax regime will not now appear until next week according to the FT.

We are also still waiting for the draft legislation for the new Residence and Domicile rules. In a little over 10 weeks both sets of new rules are due to take effect and the uncertainty makes it very difficulty to plan.

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HMRC has recently published three further consultations on its Powers, Deterrents and the accompanying Safeguards.

• Penalties Reform – proposals to extend the new framework for penalties on incorrect returns and the introduction of a new penalty for failure to notify HMRC of taxable activities.
• A New Approach to Compliance Checks – proposals on a framework for HMRC to check that taxpayers are paying the correct amount of tax.
• Payments, Repayments and Debt – changes in the way that HMRC collects tax debt.
  

These documents herald some potentially significant changes. If you would like further information all the documents are available on the HMRC website at www.hmrc.gov.uk/consultations/index.htm.

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Below is a piece written by my colleague Barry Hallam on our sister blog Tax Plus.

Although January is traditionally the busiest time of year for tax professionals we are eagerly awaiting further details on the proposed changes in the rules for Residence, Domicile and Capital Gains which are rumoured to be available next week.

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

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

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You may well recall that the Chancellor announced some changes to personal tax from April next year, the main one being the reduction in the basic rate from 22% to 20%. Whilst the latter may seem to be nothing but good news there is unfortunately a knock-on effect on charities. At present if you are a higher rate taxpayer and give £100 to a charity it can reclaim basic rate tax at 22/78 increasing the value of your gift to £128 in its hands. The cost to you, after higher rate tax relief, will reduce to £77.

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

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Further to my post earlier today the Chancellor of the Exchequer, Alistair Darling, has now made his statement to MPs about a “major operational problem” at HM Revenue & Customs.

In his statement he confirms the loss of personal details relating to 25 million individuals not 15 million as reported earlier.

A full report of the Chancellor’s statement can be found here.

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The BBC are reporting that the Chancellor of the Exchequer, Alistair Darling, is to make a Statement to MPs about a “major operational problem” at HM Revenue & Customs later today.

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

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

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

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

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

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

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

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

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Every business aims to achieve maximum tax relief on borrowings.

There is a difference between the rules for tax relief on loans between income and corporation tax and inheritance tax (IHT). For income and corporation tax, relief is given for interest paid on borrowings incurred for the purpose of a trade including a rental business. Accordingly, relief on interest is given based on the purpose of the loan. However, for IHT purposes, a loan relates to the value of the assets on which it is secured or charged.

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

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

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

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The long awaited decision on Arctic Systems

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

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

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

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

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

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

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

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

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

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

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

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After the media reports that around a million people are paying the wrong amount of tax this may not be the perfect time for HMRC to propose they are given an automatic right to collect unpaid (in their opinion!) tax by various measures including offset from other tax credits or repayments; direct from bank accounts; or by set off from salary - all without the need for any court order. Apparently, they say, this will reduce collection costs and bring forward payment dates. I have to say I believe that statement is accurate. I do also have to say that without a hearing you – the taxpayer – will have no right to defend your position.

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

Just imagine

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

The new rates which apply to all journeys on or after 1 August 2007 are as follows:-

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The Government talk about ensuring that people pay “the right amount of tax”. However, the tax system is so complex that the “right amount” is not always easy to determine. One of the responsibilities of the Revenue is to help people calculate their tax liabilities accurately and they have recently been testing new ways in which they might do this.

First came “enabling letters”. These were sent to sole traders, with certain types of businesses being specifically targeted. Revenue research indicated that a significant number of expense claims are incorrect. These letters therefore covered “common errors that lead to understatements of business profits”. The Revenue say that the issue of a letter does not necessarily mean that they think something is wrong – but receiving one can be worrying.

If you receive such a letter you should contact your tax agent as soon as possible. If nothing else, it is a good opportunity to check that:-

• business records are adequate
• any estimated figures are accurate
• business expenses claims are technically correct
• all income is included
• The second approach tried by the

Revenue involved “interventions”. Again these were aimed at selected unincorporated businesses and ranged from brief telephone calls to visits to the business premises for a review of accounting records. You have the right not to co-operate as these interventions are outside the normal Revenue powers of enquiry – but did you know this is the case?.

One feature of these interventions which was particularly controversial was the inclusion of questions relating to income which may or may not have been received in earlier tax years where the deadline for a formal Revenue enquiry had passed. You are recommended not to provide this information. If the Revenue have sufficient information to make a “discovery” about past years, then they should follow the procedures set down in law – thus ensuring that the you have rights of appeal and all other protections provided by that law.

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 With less than 10 days to go to the first deadline of the Offshore Disclosure Facility of 22 June HM Revenue & Customs clearly think that not enough people are taking advantage of the so-called “amnesty”.  HMRC are taking the unprecedented step of writing to and estimated 200,000 people suggesting that they might want to make a disclosure.  The letter  will be posted tomorrow and should dispel any reservations people may have had about whether HMRC already know about their accounts.  Further details can be found on the BBC News website.

If you receive one of these letters – speak to your accountant without delay.

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The new rules on partnership losses may have been designed to stop avoidance schemes but many "innocent" businesses may also be caught.

The changes are wide-ranging and could affect transactions where no actual tax avoidance is involved.  Of particular concern is the limit of £25,000.00 per year on the availability of relief on losses from trading partnerships for "non-active partners".

The changes apply to conventional partnerships, Limited Liability Partnerships and Limited Partnerships.

The key issue is what is a "non-active partner"?  Basically  a partner who spends an average of less than ten hours a week personally engaged in carrying out the partnership's trading activities is regarded as non-active.

The loss retention is actually capped at £25,000.00 per year regardless of how many partnerships you are in .

Any excess losses over £25,000.00 are carried forward to be allowed against future trading income from the trade in which the loss arose.

The rules are likely to affect husband/wife and civil partner partnerships where one member is actively involved and the other works elsewhere.  Similarly it will affect entrepreneur investors and, potentially, retiring partners who have scaled back their hours.

It is important to remember that the issue is hopefully one of timing -losses will not disappear, they will be available as and when (or if ) the business makes a profit.

If you are involved in partnerships on a part-time basis, you may need to review your position if there is a bad year to make sure relief is claimed correctly.

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Every one makes the odd bad investment - despite all of the promises, all of the hype and all of the expectation, sometimes things just do not work out. Instead of kicking the nearest cat, try and look on the bright side and see what use can be made of the losses generated. It will not get your money back, but if it can save you 40% then it has got to be better than nothing.

It is important that you make the best use of your capital losses – even if you have not been able to sell shares. If you own shares in companies that have substantially dropped in value, gone bust, etc you can claim that those shares now have a negligible value. The amount you originally paid for the shares will be treated as a loss, which can be set against your other gains to reduce your total capital gains tax liability. If the shares were in an unquoted trading company you may even be able to claim the loss against income.

You can also claim tax relief on the loss if you have guaranteed a loan made to the UK trading business, and you have had to pay up under that guarantee because the borrower defaulted. The amount you paid counts as a capital loss in your hands that you can use to reduce the tax on your other capital gains. Similar rules apply where you have loaned the money personally. None of this will get your money back – but it might help ease the pain.

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