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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The Government’s proposal to extend the Landlord’s Energy Saving Allowance to corporate landlords has recently been given formal State Aid approval by the European Commission.

The scheme provides incentives for landlords to improve the energy efficiency of their properties. From 8 July 2008 corporate landlords will be able to claim up to £1,500 a year per property against the cost of purchasing and installing energy-saving items such as floor insulation and draught proofing.

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For periods commencing on or after 1 July 2008 HMRC have increased the threshold under which a business can make good errors or mistakes it has previously made when preparing its VAT returns.

Prior to this period any “errors” totalling over £2,000 had to be reported to the VAT man under the “voluntary disclosure" rules. Going forward this has been raised to a minimum of £10,000 with even higher thresholds for businesses with turnover of £1,000,000 who can correct themselves “errors” of up to 1% of turnover up to a limit of £50,000.

I see this as a welcome relaxation of the rules which will help to cut red tape for many businesses.

But beware, as there is no longer “disclosure” when an adjustment is made, then the adjustment will not meet the definition of a “disclosure” for the new penalty regime and hence penalties could still become due.

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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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Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).

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

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

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

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

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

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

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

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

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

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

So how do you apportion home costs?

The Revenue gives several examples of the approach it recommends.

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

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

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

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

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

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

The proposed increases to the current rates are as follows: 

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

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In order for an employee or director of a company to benefit from the new Entrepreneurs’ Relief after 5 April 2008, he or she must have held more than 5% of the company’s ordinary shares for at least twelve months. But it will not be necessary to have held all of the shares being sold throughout the period, as one of the Revenue’s FAQs makes clear:

Q - I already hold over 10% of the shares in the company. If I acquire another 4% of the shares and sell the whole 14% 6 months later, can I get entrepreneur’s relief on the whole 14%, or only on the 10% I held for the whole of the one year qualifying period?
A - Relief will be available in respect of the whole 14% holding if the qualifying conditions are met. The requirement is that a 5% stake is held throughout the qualifying period. The particular shares or securities disposed of do not have to be held throughout that period.

www.hmrc.gov.uk/cgt/entre-faqs.htm

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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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…but don’t hold your breath; the proposals, when formulated, will only apply to companies with less than 10 employees and turnover under £750,000. This may not be quite what most SMEs were hoping for.

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There has been a great deal of concern, since Alistair Darling’s announcement that taper relief would be abolished from 6 April 2008, that people holding loan notes after selling their business would face an 18% tax rate, rather than the 10% they had expected at the time they sold the business.

The Revenue have just released draft legislation on the proposed Entrepreneurs’ Relief, together with answers to a number of frequently asked questions. Within the latter, they have confirmed that, if the original disposal would have met the conditions for Entrepreneurs’ Relief (e.g. 5% ordinary shareholding, carrying 5% of the votes, owned by a director or employee, or a business interest held for at least one year prior to the sale), the encashment of the loan notes will do, too.

This applies only if the loan notes are “Qualifying Corporate Bonds” (which most are) but will be a welcome relief to many former business owners.

If you would like to discuss whether you might be affected, please contact Cathy Corns or me.

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Anyone who has exchanged shares for non-qualifying corporate bonds (or non-QCBs, for short) needs to review their position carefully – before 5 April 2008.

Unless, in addition to the non-QCBs, they meet the criteria for the new Entrepreneurs’ Relief (e.g. they have been employed by the company that issued the loan notes and have owned at least 5% of the company’s ordinary shares throughout the twelve months prior to encashing the loan notes) they will face an 18% capital gains tax bill, rather than the 10% they might have expected when exchanging their shares.

It may be possible to benefit from the lower rate – but only by acting well in advance of the change.
If you think you might be affected by this and would like to discuss what you can do to keep your tax bill down, please contact Cathy Corns or me.

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Anyone thinking of exchanging shares in their trading company from loan notes in another company after 5 April 2008, will need to be very careful about which type of loan note they accept.

The rules are involved and every circumstance will differ.

If you would like to know more, please get in touch with Cathy Corns or me.

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Someone “selling” their company by taking shares in the acquiring company may be in for a nasty surprise after 5 April 2008.

The new Entrepreneurs’ Relief, which comes into effect on 6 April, will reduce the capital gains tax due on selling shares from 18% to 10% only if the vendor:

• worked for the company; and 
• owned at least 5% of the ordinary shares in that company, carrying at least 5% of the votes, throughout the twelve months leading up to the sale.

Our experience is that these two criteria are often not met, either because the vendor does not work for the new company or because he holds less than 5% of its ordinary shares.

If you are likely to be affected by the new rules (including situations where the exchange has already happened) and would like to discuss what might be done to improve your position, please contact Cathy Corns or me.

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The Revenue have confirmed that the £1 million “lifetime limit” for capital gains qualifying for the new Entrepreneurs’ Relief will apply only to gains made after 5 April 2008.

Official confirmation to anyone born in April 1968 that life really does begin at forty.

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The new Entrepreneurs’ Relief, which comes into play from 6 April 2008, will (subject to certain criteria) reduce the capital gains tax due when shares in trading companies – or business interests – are sold.

It will not, however, be available where business assets are sold in isolation, rather than as part of the disposal of a business. This would include, for example, the sale of land owned and used by a farmer, unless the sale could be argued to be of a distinct business.

This is likely to be an area of debate with the Revenue and, in many cases, might only be settled by the Courts.

If you would like to discuss how this might affect you – and whether there is anything you can do to avoid this hike in the tax likely to be due – please contact Cathy Corns or me.

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In his quieter and more introspective moments, Alistair Darling must wonder if he has the Midas touch in reverse; and if he doesn’t, many others are probably doing it for him.

Fresh from the Revenue’s “clarification” of his proposals for non-doms, which effectively reversed much of what he and they had said previously, the Chancellor now faces criticism from business leaders that his new plans favour non-doms over British-born entrepreneurs.

Under the new proposals, non-doms will be able to elect for a “deemed sale” of their British and overseas assets at 6 April 2008, meaning that they will pay UK capital gains tax only on the growth in value from that date.

In contrast, UK-born entrepreneurs have no such option and will not only lose the benefit of indexation allowance for assets held between 1982 and 1998, but also see the standard rate of capital gains tax on some assets rise by 80%.

We are aware of one example where the post-5 April 2008 tax bill will be nearly four times the liability before, and are sure this will be repeated many times over, sometimes with even more extreme results.

The Chancellor and Revenue are, we understand, adamant that their current proposals will not alter, and in many cases there is, frankly, little that can be done to improve matters.

That does not mean you should not try.

Please contact Cathy Corns or me if you would like to discuss this in more detail.

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As you are only too well aware by now, the Chancellor announced a major reform of the capital gains tax (CGT) regime by setting a single flat rate of 18% from April 2008. Following a major outcry, the new entrepreneurs’ relief has been announced; this relief will reduce gains liable to CGT by 4/9ths, resulting in an effective rate of 10% on gains of up to £1m on disposals of a business by an individual.

But while business owners may be relieved by the introduction of a 10% rate of CGT on the first £1m of gain, their employees are likely to be far less happy as holdings of less than 5% will not qualify for relief.

The Government have encouraged companies to reward and motivate employees with shares but now exclude such employees from the new entrepreneurs’ relief.

There must be some logic – my problem is I just can’t see it!

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The Government has recently published its response to consultations on changes to the way in which relief will be given for expenditure on plant and machinery.

This is just a brief reminder of the anomalies in 2008 of the new ‘annual investment allowance’ (AIA). This will be introduced in April to provide for a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars) and replace the existing first-year allowances for small and medium-sized enterprises.

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A members' voluntary liquidation ("MVL") can be a tax efficient exit option for the shareholders of a solvent company.

Under current legislation shareholders receiving a distribution through an MVL or, where appropriate, using Extra Statutory Concession C16, may benefit from the business asset taper relief provisions.

The government has recently announced (http://www.hmrc.gov.uk/cgt/disposal.htm) that as from 6 April 2008 all capital gains will be taxed at a flat rate of 18% irrespective of the marginal income tax rate of the taxpayer concerned; and also that the current systems of taper relief and of indexation allowance will be abolished. Alongside these reforms the government will introduce a tax relief for many entrepreneurs that will deliver a 10% tax rate for up to the first £1 million of lifetime capital gains.

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Last week, the Chancellor announced details of his so called “Entrepreneurs’ Relief”, the replacement for taper relief, for business owners facing an increase of more than 80% from 6 April 2008.

It would be easy, given all the hype surrounding this new relief, to forget the position for people holding assets that would never have qualified as “business assets” and the 10% capital gains tax rate. By this, I mean assets such as shares in investment companies, residential “buy to let” properties and others not used in trading businesses.

In some respects, their position is more complicated, as the reduction in capital gains tax rates will be offset by the abolition of indexation allowance (the effect of inflation before 1998) and the decision as to the best time to sell may not be so obvious. It is certainly not as simple as saying that the headline rate falls to 18% so matters are automatically better after the changes come into force.

You may think it is now too late to sell before 6 April 2008 – but this is not necessarily the question that needs to be answered.

If you would like to discuss how the new rules might affect you and what you might be able to do to ameliorate any negative effects, please contact Cathy Corns or me.

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HMRC has recently confirmed one very important point on assets that have been owned for a number of years. Such assets will have accrued a substantial amount of indexation relief (over 100% to date on assets held on 31 March 1982). Where an individual owns such assets on 5 April 2008 the indexation relief is irretrievably lost.

However HMRC have now confirmed (http://www.hmrc.gov.uk/cgt/faqs-cgt-reform.htm) that where an asset is transferred to a spouse or civil partner on a no-gain no-loss transfer the indexation relief is captured as part of the new owner’s base cost for tax purposes. This is an important planning possibility.

Regrettably though life in tax is never 100% straightforward – if the original owner would qualify for the new entrepreneurs relief and the new owner would not then the value of the historic indexation has to be compared with the value of the new relief before any transfer is made.

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The Chancellor’s announcement of the new “Entrepreneurs’ Relief” from 6 April 2008 appears to herald a marked change in the tax position of owners of commercial property.

Though the details have yet to be formalised, it seems that unless the property is let to the owner’s business – or to a company in which the owner has at least a 5% shareholding – the minimum tax rate on selling that property will increase to 18%.

Since 2000, anyone owning a commercial property used by an unquoted trading company would qualify for the higher rate of taper relief and could potentially pay only 10% capital gains tax on selling the property after two years.

It seems unlikely that this change will create a false market in such property before 6 April 2008 but there may be steps that can be taken to negate some of the impact of this effective tax increase in the time available.

If you would like to discuss what might be possible, please contact Cathy Corns or me.

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As we reported last week, Alistair Darling has released details of what he and HM Revenue & Customs are calling “Entrepreneurs’ Relief” (which probably sounds better than the U-turn that many consider it to be).

Under this new relief, which is set to become law from 6 April 2008, the self-employed, employees and directors will qualify for a 10% tax rate on selling their interest in the trading business or company for which they work.

 

Continue Reading...

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The Chancellor has just announced a new capital gains tax relief for entrepreneurs to ameliorate the effect of the new 18% flat rate that comes into force from 6 April.

The relief will be targeted to the owners of small businesses as well as employees and directors who, very broadly, hold at least 5% of the shares in a trading company. The relief is said to apply on the sale of the shares.

The relief reduces the tax rate on the first £1 million gains but as a lifetime limit. For gains over £1 million the standard rate of 18% will apply.

Further details are promised but at the time of writing this are still not available. The details so far available can be seen in full at http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2008/press_05_08.cfm  

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

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

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Given the Revenue’s dummy spitting response to the House of Lords’ judgement in the Jones v Garnett (Arctic Systems Limited) case, it was a safe bet that any attempt to stop husband-and-wife businesses shifting income between spouses would be hard hitting and wide ranging.

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I am sure you already know this – but just in case – HMRC allows companies to spend £150 per head per year on staff parties, tax-free for the employees. This total should not only cover food and drink, but also accommodation and transport if the employer pays for these, plus VAT, divided by the total number of guests. The number of guests should include non-employees.

A few important points to remember:

• The limit applies for a tax year, so if you give a Summer and a Christmas party that together cost less than £150 per head, both will be tax free for employees
• The £150 is per head not per employee – which helps if partners are invited
• But the £150 is the total cost including not only food and drink but also travel and accommodation.
  
  

Have fun!

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

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

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Charitable Incorporated Organisations

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

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As my colleague reported in August, businesses have been experiencing very lengthy delays in obtaining a VAT number. This was due to a backlog of applications with HMRC, due in part to increased checks to try and eliminate “carousel fraud”.

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According to The Times the Government are looking to mitigate the changes proposed in the Pre Budget Statement three weeks ago. Apparently the plan is to introduce a form of retirement relief of £100,000, aimed to assist small businessmen who are selling up and retiring. As of the time this was posted the HMRC website had no details on this and so we do not know if it is accurate and, if so what is meant by small or retiring or what tests have to be met to qualify.

Any mitigation of the tax is welcome and I will be in touch again when more details are available.

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Extended exemptions for certain medium-sized companies

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

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This blog follows on from my last post.

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

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

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

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Companies pay corporation tax at 20% on the first £300,000, right? Wrong! A company pays at 20% of the first £300,000 divided equally between it and its associates.

Companies are associated where:

·         one of the companies has control of the other, or

·         both of the companies are under the control of the same person(s).

A person controls a company if he is entitled to >50% of:

·         the share capital, or votes;

·         the distributions to shareholders;

·         the assets on winding up (this includes loan creditors).

The problem is that when looking at control you have to take account of a person’s associates. These are:

·         spouse (includes separated, but not divorced) and civil partner

·         parents, grand parents and remoter forebear

·         brother or sister, including half siblings (but not step, aunts, uncles or cousins)

·         partner (as in a business partnership)

·         settlements and will trust associates; - trustees are associated where the individual, or any living or dead relative is or was the settler; and where the individual is interested in a settlement, then beneficiaries, remainder men and trustees are associates.

Under self-assessment it is your responsibility to make sure your company pays the right amount of tax.

So – are you sure you know all your company’s associates?

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

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