HM Revenue & Customs (HMRC) have announced that 25% of their £4billion budget will be devoted to attacking tax avoidance and evasion, this year.

This represents a significant shift in emphasis and follows a lengthy 'litigation and settlement review', which has led to HMRC promising to prosecute far more often than it has done in the past. If the HMRC stay true to their word, the days of taxpayers cutting a deal over the amount of tax due in contentious cases could well be over - instead, the matter will be decided in court, with the decision setting a precedent for similar cases.

The expected return for this investment is £2.4billion, far less than HMRC might normally expect to receive for such an outlay.

It is unclear exactly what will be challenged at the moment; what does seem certain is that we can expect HMRC to undertake more frequent investigations and enquiries, especially where they feel reliance has been placed on the letter (as opposed to the spirit) of the law.

As their new Chief Executive, Lesley Strathie put it, “In the current difficult economic climate, it is more important than ever that HMRC helps and supports customers fulfil these obligations while relentlessly pursuing those who bend or break the rules.”

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

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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It was a fairly uneventful VAT budget.

The Chancellor confirmed that the standard rate of VAT will revert back to 17.5% on 1 January 2010 as previously announced. Draft “anti forestalling” legislation has already been published and will be introduced in the Finance Act 2009 to prevent certain exempt businesses from planning to benefit from the rate increase.

There was speculation beforehand that the standard rate of VAT would increase to at least 18.5% and/or that the Chancellor would make use of new powers to extend the reduced rates of VAT but neither of these has happened.

Other VAT changes announced are:

• The annual VAT registration threshold has been increased from £67,000 to £68,000. The annual threshold for deregistration has been increased from £65,000 to £66,000.
• Revised fuel scale charges will apply to VAT returns on or after 1 May 2009.
• VAT exemption will apply to gaming participation fees (bingo and other games of chance) with effect from 27 April 2009.
• The rate of bingo duty will increase to 22% for any accounting period beginning on or after 27 April 2009.
• Other miscellaneous changes to the rules for bingo and games of chance.
• A package of changes to harmonise cross border supplies of goods and services and to reduce fraud, will be introduced on 1 January 2010 as part of an EU wide exercise. The UK has announced new rules in relation to EC Sales Lists for goods and services, overseas VAT refunds and the time and place of supply of certain cross border services.  
• A reduced VAT rate of 5% will apply to bases for child car seats.
• A minor simplification of the option to tax 'permission' rules where previous exempt supplies have been made.

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

Jane Stacey is a VAT Manager at Mercer & Hole.

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On the individual capital gains tax exemption - this has been set at £10,100 for 2009/10.

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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The last few days have seen a number of issues of draft legislation that will be confirmed in the Budget and included in the Finance Bill but taking effect well before the Act is passed.  These include:

• Business cars - changes to the first draft legislation - http://www.hmrc.gov.uk/briefs/company-tax/brief2009.htm.
• Anti-avoidance on life policies - http://www.hmrc.gov.uk/offshorefunds/statement-finance-sec.htm.
• Anti-avoidance on employment income - http://www.hmrc.gov.uk/news/pta-announcement.htm.

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As mentioned in earlier blogs, this year’s Budget will be given by the Chancellor on 22 April 2009 – it has been delayed until after the G20 summit, which is then immediately followed by the Easter recess.

At this time of year many tax professionals try to second-guess what the Chancellor may announce in his Budget. Turmoil in the world’s markets makes these predictions harder than ever – he needs to increase the tax take, but will higher taxes cripple an already weakened economy?

We do know that the rate of VAT is set to revert to 17.5% on 1 January 2010. There are already cries for the 15% to be retained, but if it does go up next year would he be tempted to fix the rate at 20%?

Scrapping higher rate tax relief on pension contributions has often been put forward as something the Chancellor might consider – will this be the year that it happens?

As usual, we will just have to wait and see! 

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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The Chancellor will make his Budget statement on Wednesday 22 April 2009.  We will be providing analysis of Budget announcements on the day.
 

 

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The Chancellor delivered his Pre-Budget Report on 24th November 2008. Our Partners and Managers posted a number of blogs in relation to the 2008 Budget announcement – on both SME Plus blog and Tax Plus blog.

For concise, up-to-date and easy to digest Pre-Budget information please find below a list of the respective blogs posted: 

SME Plus 

Pre-Budget Report 2008 - VAT

Pre-Budget Report 2008 - Plant and machinery leasing

Pre-Budget Report 2008 - Income tax...relief for trading losses

Pre-Budget Report 2008 - Tax relief for business expenditure on cars

Pre-Budget Report 2008 - Corporation tax...small companies rate

Pre-Budget Report 2008 - Corporation tax...tax relief for trading losses

Pre-Budget Report 2008 - Empty property relief

Pre-Budget Report 2008 - Taxation of foreign profits

Pre-Budget Report 2008 - HMRC Business Payment Support

Tax Plus 

Pre-Budget Report 2008 - Non doms update

Pre-Budget Report 2008 - Income Shifting Rules...the dog that didn't bark!

Pre-Budget Report 2008 - Top rate of income tax to be increased to 45%

Pre-Budget Report 2008 - National Insurance to be increased

Pre-Budget Report 2008 - Consultation documents

Pre-Budget Report 2008 - VAT

Pre-Budget Report 2008 - Compensation for the loss of 10% band made permanent

Pre-Budget Report 2008 - Tax rate for trusts to be increased

Pre-Budget Report 2008 - Pension tax telief...freeze on limits

Pre-Budget Report 2008 - Changes to trusts...trust Darling!

Pre-Budget Report 2008 - Penalties for late tax returns

To receive our blogs direct to your inbox visit http://www.mercerhole.co.uk/news, click on the blog of your interest and follow a few simple subscription directions.

 

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On the same day as the Chancellor announced short term 'enhanced support' for businesses experiencing cash flow problems, HM Revenue & Customs issued a Consultation Document looking at a longer term approach to late paid tax.

In the short term at least, the Revenue is expected to adopt a softer approach towards businesses unable to pay their taxes on time, though how this will actually be played out in some offices remains to be seen!

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A number of changes to the taxation of foreign profits have been proposed:-

• an exemption for foreign dividends received by large and medium sized groups will be introduced in next year's Finance Bill;
• the Government will consult on options to reform the UK's Controlled Foreign Companies (CFC) rules so that profits genuinely earned by overseas subsidiaries are not taxed in the UK; and
• there will be a worldwide debt cap on interest, so that tax deductions for interest claimed by UK members of multinational groups will be restricted by reference to a group's consolidated net external finance costs.

Thanks to Sarah Withers for submitting this blog.

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The Chancellor has given a one year relief with the aim of helping smaller businesses manage short term pressures in the property market.

For Finance Year 2009/10, empty business properties with a rateable value of less than £15,000 will be exempt from business rates .

This is expected to apply to 70% of empty business properties.

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At present, companies making losses from trading activities are allowed to carry those losses back up to twelve months and set them against profits made in the previous year or to carry them forward indefinitely to set against profits from the same trade.

The Chancellor has announced that, for accounting periods that end between today and 23 November 2009, up to £50,000 of trading losses may be carried back up to three years.

There is no restriction on the amount of the loss that can be carried back twelve months, or carried forward against profits from the same trade.

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The previously announced increase in the small companies' rate of corporation tax, from 21% to 22%, has been deferred for twelve months and will now come into effect on 1 April 2010.
 

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As expected, the rules for capital allowances on cars are to change from April 2009 (1st April for companies and 6th April for unincorporated businesses). The rate of capital allowances will be determined by the CO2 emissions figure for the car rather than its cost. Cars with emissions up to 160g/km will be added to the main capital allowances pool and attract writing down allowances of 20% per annum on a reducing balance basis. Cars with emissions over 160g/km will go into the special rate pool with only 10% writing down allowances.

The relief for the cost of hiring or leasing cars is also set to change. At present the leasing costs are restricted if the original price of the car exceeds £12,000, with the amount of restriction increasing as the price of the car increases. From April 2009 the disallowance will be a flat 15% of the leasing costs for cars with emissions over 160g/km. For less polluting cars there will no restriction regardless of the price of the car.

The new rules give rise to a potential planning point for unincorporated businesses, which should ensure that all 'company' cars have some element of private use. By doing so, the cars will not fall within the pools mentioned above and balancing allowances will be available when the cars are sold - this is likely to accelerate the tax relief available.

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At the moment, trading losses suffered by businesses may be set against profits in two ways:

• carried back up to one year, to set against profits in the previous year; or
• carried forward against future trading profits from the same trade.

The Chancellor has announced that, for trading losses suffered during periods ending in the current tax year (ie to 5 April 2009) up to £50,000 of the loss may be carried back up to three years.

There is no restriction on the amount of the loss that can be carried back twelve months, or carried forward against profits from the same trade.
 

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As widely reported, the PBR today has confirmed that the standard rate of VAT will be cut to 15% with effect from 1 December 2008. (The new VAT fraction to be applied to VAT inclusive prices will be 3/23).

This means that standard rated supplies of goods and services made after this date will attract the new rate of VAT. Supplies at the zero or reduced rates and exempt supplies are not affected. The new rate will remain in place for 13 months till 1 January 2010, when it will rise again to 17.5%. (Anti- forestalling legislation will be brought in to prevent planning around the subsequent rate increase).

For sales spanning 1 December, special tax point rules mean that businesses can choose to charge VAT at the new rate on goods removed and services performed after the rate change, even if payment has already been received or VAT invoices issued. In those cases, credit notes will have to be issued to correct the VAT overcharged.

Special rules will apply to retailers, those providing continuous supplies of services (e.g construction industry) and other special schemes (second hand dealers etc). Detailed guidance on how to deal with the change is available on HMRC’s website.

The reduction in the standard rate will also amend the rates applied under the Flat Rate Scheme for small businesses. The revised percentages are published on HMRC’s website.

Other VAT and duty changes announced are;

Increase in threshold for Bespoke Retail Schemes with effect from 1 April 2009.
Simplification of the entry and exit rules for VAT Flat Rate Scheme with effect
from 1 April 2009.
Payment arrangements for those having difficulties paying VAT bills via the “Business Payment Support Service”.
Increases in fuel/alcohol and tobacco duty.
The Chancellor has urged retailers to pass on the rate cut “as quickly as possible”. In reality, businesses may choose not to pass on the cut. They are unlikely to welcome it as it will cost them to implement changes to prices /accounting and point of sale systems. In the retail sector, where prices are already being heavily discounted, it is hard to see that a further 2.5% cut will have much of an impact on sales turnover.
 

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The Pre Budget report will be on 24 November at 3:30pm according to the Treasury website.

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A report by a working group for the conservatives is recommending that the next conservative government should make radical changes to the way new tax legislation is drawn up and scrutinised - with a view to simplifying the UK’s tax code.

It proposes setting up an Office of Tax Simplification (OTS) to examine the existing law and practise and make proposals for simplification. As well as being staffed by HMRC and academics, it should also include individuals from the tax professions to provide both expertise and a fresh perspective.
The group also proposed setting up a new Select Committee on Taxation with membership drawn from both Houses. This committee should improve the scrutiny of government initiatives and proposals, and review proposals presented to it by the OTS.

Finally, the conservatives would look to re-establish the Pre-Budget Report as the time to propose technical changes in advance of the full Budget and Finance Bill. The thought is that this would have avoided many of the recent problems of badly thought through proposals, produced with little consultation and last minute legislation rushed through Parliament without sufficient scrutiny.

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

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

SME Plus

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

Tax Plus

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

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

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

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

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

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

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

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

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

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Companies thinking of offering EMI share options to employees will have three new factors to consider: 

•  the market value (at the date of grant) of the shares covered by the option is to increase to £120,000; 
• the company offering the option must have fewer than 250 employees; and
• new restrictions are being placed on the company’s activities.
  

The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.

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The main VAT changes announced in the Budget today are;

1. With effect from 1 April 2008, the annual VAT Registration/deregistration limits have
   increased to £67,000/£65,000 respectively. 
2. Revised fuel scale charges will apply for VAT return periods beginning after 1 May 2008.
3. A transitional period has been announced for VAT refund claims to 31 March 2009. This follows recent litigation relating to the three year capping rules introduced in 1996/7.
4. Withdrawal of the staff hire concession with effect from 1 April 2009.
5. A package of simplification measures for the option to tax.
6. Extension of the VAT exemption for fund management services.
7. The limits for correcting errors on VAT returns have increased from £2,000 to the greater of £10,000 and 1% of turnover.
   
   Full details of these changes will be contained in our Budget Tax Bulletin to be issued shortly.
   
   

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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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There appear to be no dramatic new announcements relating to pension planning in this budget. As previously announced the annual allowance increases to £235,000 for 2008/09. The lifetime allowance becomes £1,650,000.

Individuals who have not reviewed their pension arrangements since the 2006 'Pension Simplification' should do so now. In particular transitional protection against the effects of the lifetime allowance can be applied for. The deadline for applying for this protection is 5th April 2009.

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When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.

With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.

Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.

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The budget confirmed previously announced increases to ISA allowances for 2008/09.  From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.

Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.

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Legislation and consequently its introduction is being delayed for 12 months – party time!

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The 2008 budget included possible incentives for individual savers and investors at two opposite extremes of the market.

Firstly the announcement of more consultation on the Savings Gateway to encourage lower income individuals to save regularly in deposit accounts. This was originally consulted on in 2001 and has been trialed since. We shall wait and see whether a scheme whereby the government matches an individuals savings will actually be implemented.

Secondly the governments want to simplify the Enterprise Investment Scheme (EIS) to encourage investment in smaller, high-risk trading companies. These schemes allow an investor to benefit from 20% income tax relief as well as CGT deferral for reinvestments and gains free of CGT where income tax relief has applied. The government wants to increase the limit for income tax relief from £400,000 to £500,000 for 2008/09. This will be subject to State aid approval. In addition a consultation to try to encourage more investment is to be undertaken. This consultation will focus on various matters but will include how to increase awareness of these schemes amongst investors as well as the possibility of carrying back tax relief being extended to carry forward.

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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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The Chancellor has today announced an increase in the individual investor limit from £400,000 to £500,000 – subject to EU State Aid approval. The detailed tests for companies and investors otherwise appear to remain unchanged.

Whilst this is good news for companies seeking to raise funds – one word of warning. State Aid approval can take a long time to come through.

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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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Chancellor Alistair Darling will deliver his first full Budget on Wednesday 12 March 2008. The 2008 Budget comes amid the gloomiest economic situation for more than a decade, with volatile financial markets, a credit crunch and falling house prices.

Mr Darling will present the Budget to the House of Commons at 12.30pm and we will of course be blogging on SME Plus Blog and Tax Plus Blog during the course of the afternoon, providing analysis on the key highlights.

If you do not already subscribe to our blogs click here for SME Plus Blog or here for Tax Plus Blog to ensure you get our comment and analysis as and when it happens.

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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.

Even allowing for this, though, the consultation document released earlier this month looks likely to affect more people than nearly all commentators and tax advisers expected.

The aim of the new rules is to make sure that all family businesses split earnings and dividends “fairly” and to prevent what happened in the case of Arctic Systems Limited (where Mr Jones diverted some of the income he earned to his wife, to make use of her personal allowance and lower rate tax bands and reduce their combined tax bill significantly).

This may seem a laudable aim – especially to those of us not in a position to do the same – but, if the draft legislation does find its way onto the statute books, it will place onerous record keeping requirements on businesses in trying to justify payments to family members (and others) working in the business and create huge uncertainty for the individuals concerned but will still be very hard for the Revenue to enforce.

In any business where one or more people can control the amount and timing of any payments to partners, employees or shareholders, it is possible that those able to control these payments will have to pay tax on income they are deemed to have forgone (as if the payments had been made to them instead). To resist a Revenue challenge, the business will need to keep detailed records, to show that the amounts paid are fair, given the contribution made by each individual.

But what is “fair” – and how is anyone’s contribution measured? The Revenue’s guidance is eerily silent on these points and it seems to leave a huge gap that only the Courts may be able to fill.
Under Self-Assessment, the onus is on taxpayers to show that their calculation of their tax bill is correct. If they cannot, the Revenue will routinely charge penalties, based on the amount of extra tax found to be due. Without any indication on how to assess contributions or fair levels of earnings and dividends, it is highly likely that people who have made genuine attempts to calculate their tax bill correctly will face these penalties.

The consultation period runs out on 28 February 2008; the precise details are likely to be announced in a Budget, the following month. The new legislation will be effective from 6 April 2008.
There is little time for businesses and their advisers to consider the impact, let alone to act. If you think you might be affected by the new rules and would like to discuss what you can do before next April – and need to do after - please get in touch with Cathy Corns or me.

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I wanted to draw your attention to a blog posted by my colleague Barry Hallam on our sister blog Tax Plus blog...

It is being reported that Chancellor Alastair Darling will not be able to announce his revised proposals in the three weeks that had been promised. He told MPs today:

"It is not now going to be possible to conclude that process until the New Year,"

This is because he needed more time to study various, differing representations.

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