The lack of available finance in the economy has meant that businesses are increasingly looking to their suppliers for credit. 

The result of this for many SME’s is a build of trade debtors (and a wide range of excuses given to their credit controller). With this backdrop, it is fundamental for SME businesses to recognise the early warning signs of debtor problems – for example:

• industry rumours that the debtor is experiencing financial difficulties
• debtor’s sector adversely affected by macro-economic trends (such as those experienced by retailers over the last year)
• payment terms change/payments are missed
• management at the debtor become elusive and do not return calls/other correspondence.

Late invoices should be flagged to senior management as soon as they become overdue. Unless it is an immaterial figure, the account should then be reviewed weekly – the likelihood of collecting an account reduces as each day passes.

In my next blog I will provide some ‘best practice’ guidance on how to manage slow paying accounts.

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

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The SME businesses which feel that they will weather the ill effects of the recession, are beginning to consider long term strategies for growing their businesses. With struggling competitors, suppliers and even customers, growth by acquisition currently offers a serious prospect of rapid expansion at attractive valuations. 

A cost effective due diligence service can add value to almost any transaction. There is little point in an SME undertaking a ‘full-blown’ due diligence exercise - which for bigger deals will cover not only financials, but specific work on operations, staff, pensions, properties, legals and many other issues. However a limited scope due diligence should provide the buyer with comfort in making their decision, and also a sound basis upon which to negotiate the price or other key terms.  

In the current financial environment, there are many examples of poor due diligence (when the economy is booming, due diligence failures will be less apparent). Failing to spot problems prior to signing the deal can have a devastating effect on the ability of a business to service its debt and ultimately survive. Don’t find out too late… 

If you are considering acquiring a company, please do get in contact with Julian Dobbin to discuss the potential due diligence services that may be of value.

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It is no secret that the number of corporate deals completing in 2009 is significantly less than previous years. There are many reasons for this (too many to list in this blog) – one important factor is the perception of vendors on the valuation attributable to their company. 

If an entrepreneur has spent 20 years creating a profitable business, it is natural that he or she will wait for the right time to sell. It instinctively feels like the wrong time to sell - valuations across all asset classes are low in comparison to those seen in recent years (though the markets are showing a small recovery as I write, they are still substantially lower than 2007 levels). The sale of shares in private companies are also generating lower valuations – though not as low as many people expect.

Valuations are always subjective and each valuer will probably treat the impact of the recession differently. From my perspective, the additional considerations for a valuation include:

• earnings valuations – in my experience multiples have reduced by 1-2, and earnings forecasts must be revised to reflect the maintainable profits in the medium term (on average this will be a lower figure than would have been projected in previous years). Please note that three recently completed deals have seen multiples in the 4-5 range (pre-tax).
• net asset valuations – an adjustment should be made to reflect diminishing stock values, and the valuation and recoverability of trade debtors should be considered in detail. Freehold values may have reduced since surveys undertaken even three months ago.
• discounted cashflow – earnings levels should be considered in light of the economic down turn. For the discount factor – the cost of capital must reflect the long term outlook, assuming that today’s low interest rates will continue could create substantial overvaluations.

There are some genuine recession proof sectors – but even in these areas, valuations should be reviewed, as the reduced availability of finance can place additional risk on a business.

Julian Dobbin is a partner at Mercer & Hole. Please contact him directly to talk about multiples and valuations relevant to your business.

The views given in this blog are personal to the author.

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The credit crunch has reduced the availability of traditional funding sources for all businesses.

The Government has attempted to counteract this by introducing the EFG scheme for SMEs, and also the working capital scheme (a 50% guarantee to lenders on their working capital loan portfolios) and the capital for enterprise fund – a quasi venture capital fund providing equity of £250,000 to £2m for SMEs.

There are also various regional bodies that provide support and funding for SMEs. I recently attended a seminar, hosted by the ICAEW and Finance South East (FSE). FSE, which is financed by the South East England Development Agency provide a suite of funding options aimed at SMEs, such as:

• Grants – available for R&D, up to a maximum of £500,000, but typically much lower than this
• Commercialisation loans – up to £60,000 for pre-revenue businesses with a clear USP, repayable on basis of future income 
• Seed fund – venture capital fund which requires matching private investment, up to £250,000 of capital for ambitious, growing businesses
• Accelerator loans – up to £100,000 to fund expansion for high growth potential businesses (not for working capital)

These funding sources can offer critical support for SMEs, and it is worth considering if your business could qualify.

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In my last posting I gave the first 5 tips, which covered the stage before an offer for a business had been made. My next tips pick up after the offer is accepted.

During Due Diligence :

This is the stage where you test the assumptions you made when you put together your offer.

6. Appoint a good accountant and lawyer. The potential long term costs of not taking appropriate advice should be considered very carefully!

7. Go back to your offer and the assumptions you made. Ensure the information provided by the vendor can be verified and corroborated by other data.

8. Consider the earnings figure you were presented with when you made your offer. Is it really sustainable? Will it be affected by exchange rate movements? Are contract terms due to change, will cost rises be matched by increases in revenue?

9. If you are acquiring shares, consider the potential for hidden liabilities. The most common are taxes – including corporation tax, VAT, PAYE, National Insurance etc. Also look at ongoing litigation, bonus arrangements, customer overpayments and any other matters appropriate to the business.

10. Spend a lot of time on your financial projections. Assess the impact of potential problems (reduced sales, lower margins etc) in a sensitivity analysis, paying particular attention to cashflow. Consider whether the budget complies with covenants set by the bank, and the amount of head room you have.

As I said in the last post, the priorities in an acquisition differ, dependent upon its nature – there are many other risks which should be considered in making an acquisition decision.

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It is an old adage but a good one: valuing a private company is an ‘art and not a science’. Given the same set of figures, it is very possible that all 20 Mercer & Hole partners would provide a slightly different valuation. 

My tips for preparing a valuation, which should be accepted by both parties in a jointly appointed expert witness case, are: 

• Use your experience of the SME market – It is no use trying to directly apply stock exchange multiples to private companies. Recent business sales in the local market should be used as a benchmark, to compare against discounted FTSE multiples.
• Use sector knowledge – it is useful to talk to my partners that have particular sector expertise (for example in construction, logistics, retail etc). This way you can identify the trends, valuation bases, recent transactions and other pertinent matters that will affect your opinion.
• Utilise the different disciplines within the practice – I often talk to my colleagues in our tax, transaction services and insolvency departments. Drawing on their experience adds a different dimension to the report.
• Apply several different valuation bases – consider earnings, net asset, dividend, discounted cash flow and any other relevant methodologies. This way a balanced opinion is given.
• Make the valuation understandable to others. It is good to avoid lengthy reports, but it is very helpful if both parties in the dispute can understand how the figures are arrived at. If one party feels the valuation is difficult to understand, it is more likely to lead to a prolonged and unnecessary dispute.

The production of an objective valuation which is accepted by both parties ‘first time round’ is our goal. This saves the time and money spent on protracted disputes over the valuation.

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

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There is much confusion over the requirement for guarantees under the Enterprise Finance Guarantee (EFG) scheme.

The Bank must be satisfied that all available personal assets have been pledged, before lending under the EFG scheme. However it is at the banks discretion to determine whether:

• Personal assets may be considered ‘available’ as security (see below)
• The applicant is personally committed to the venture
• The applicant is using the EFG solely to avoid pledging personal assets.

The EFG is new ground for all of us. Good luck, and please leave comments if you have any interesting observations on the application process.
 

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The credit crunch is having an affect on all asset prices, and this is bringing some first time buyers/investors into the private SME market. With this in mind, I thought I would ‘blog’ some tips for SME acquisitions.

Prior to an offer being made :

1. Buy the trade / assets, and not the shares. With a company you inherit its problems and therefore potential liabilities. There are also tax advantages to buying the trade and assets. This is particularly important for ‘distressed’ acquisitions.
2. When reviewing profits for valuation purposes watch out for shareholders / directors remuneration. If the costs of their input to the business are not in the P&L, the valuation will be inflated.
3. Consider other missing costs. This is particularly relevant where a seller has more than one business - is rent correctly allocated? Which company does the accountant charge? etc
4. Customers. Reliance on a smaller number of large customers is a risk. The health of the customer base in the current economic climate is crucial. Ask the seller for outline details of clients – their size, sector etc and review the level of their own personal contact with customers. Consider what protection should be added into the offer – such as an ‘earn out’ for the seller.
5. In your offer be careful to clarify the assumptions you have made, and the conditions attached. This will make it easier to renegotiate the price should issues be identified during Due Diligence.

I will cover the 2^nd set of five tips in my next post.

Please note that the tips differ, dependent on the nature of the acquisition. I have been very general here and there are many other risks which should be considered in making an acquisition decision.

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This scheme will support bank lending, of 3 months to 10 year maturity, to UK businesses with a turnover of up to £25 million who are not able to access the finance they need. It will provide loans of between £1,000 and £1 million and is currently available until March 2010.

The guarantee can support new loans, refinance existing debt, or conversions of existing overdrafts into loans to release capacity to meet working capital requirements.

It is a very flexible tool in comparison to the previous scheme – the parameters in size have been widened significantly, and an interesting new feature is the flexibility to use the EFG in 'share' transactions.

Only time will tell whether the EFG will be a success. The decisions to lend are delegated to the banks, who will apply their own criteria. However it appears to be a step in the right direction, and I for one hope that the EFG scheme will provide a lifeline for the many viable, but cashflow pressurised, SME’s in the UK.

See guidance from Business Link by clicking here.

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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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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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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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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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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.

Continue Reading...

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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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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.
Continue Reading...

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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.
Continue Reading...

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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. Continue Reading...

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

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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. Continue Reading...

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If you are concerned about the proposed change to a new flat Capital Gains Tax rate of 18% you may be interested to know that a petition has been opened on the Downing Street website.
Continue Reading...

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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.

Continue Reading...

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The Chancellor of the Exchequer, Alistair Darling, will be presenting his 2007 Pre-Budget Report and the outcome of the Comprehensive Spending Review on the afternoon of Tuesday 9th October.

I will post details of important announcements here shortly after the end of his speech.

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The Institute of Directors recently unveiled a policy paper ‘The SME Glass Ceiling – Growth Obstacles in 2007’, which identified a series of priority issues for government action.

Apparently regulation, taxation and education are (and were) of concern to businesses of all sizes. The report identifies five issues that are highlighted specifically by small and medium-sized enterprises (SMEs).

Continue Reading...

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Now that all the hassle is over I took some time to reflect on the pressures applied to business by the Revenue. I know the returns of benefits (forms P11d) have been around for years but so has the old “higher-paid” limit of £8,500. So employers have to fill a form in for anyone paid the minimum wage who receives any benefit at all.

Sure dispensations can help but actually getting one out of the Revenue is not always as easy as one would hope.

Continue Reading...

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I was asked recently for advice by a client, a 40% taxpayer. He wanted to make a substantial donation to charity, funded by the sale of an investment property. The property had a market value of £100,000 and the cost was £20,000.

Basically he had two choices : gift cash, or gift the property.

If he sold the property and gifted the funds to charity the position would be: Continue Reading...

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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.


Continue Reading...

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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.

Continue Reading...

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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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Whilst outlining the Government’s draft legislative programme for the next Parliamentary session to the House of Commons recently, Gordon Brown indicated that the Planning Gain Supplement Bill may be dropped! 

In his statement the Prime Minister said:

 

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An Englishman’s home is his castle – well maybe, but HMRC are looking to storm the drawbridge. In a recent consultative document HMRC put forward some plans - unannounced visits to private homes.

In HMRC’s view private residences come in three guises:

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