CLIENT NEWSLETTER - AUTUMN 2007

“ACTIVE ACCOUNTING AND TAX”

INTRODUCTION

The first pre-Budget report speech by the new Chancellor of the Exchequer, Alistair Darling, was very suddenly brought forward from an expected date of possibly the third, but more probably the fourth week of October, to Tuesday 9 October amidst the speculation that Gordon Brown would call an election. The major effect of this was a number of announcements I would have expected were not ready and had to be pulled, whilst it is arguable other announcements that were made had been put together in a considerable hurry and the full detail not properly thought through.

However, there is still a lot of information and it is clear, contrary to press reports, the Government had in fact been looking at both Inheritance Tax reform and the taxation of “non-domiciles” for some time, as there are fully considered announcements with supporting detail, on these issues.

One particular casualty of the early pre-Budget report was that, owing to the retail price index (RPI) for September not being available, although the Chancellor was able to announce personal allowances, etc, would be up-rated by inflation, he was unable to give exact figures; these were subsequently announced on 19 October. Although we now have this information, which I set out below, there are still some significant areas where the Chancellor intends to introduce legislation in Finance Act 2008, to have effect from next April, but we have absolutely no idea of his detailed thinking.

HEADLINES

• Major reform of Capital Gains Tax – for those selling a business and retiring this is bad news, but for the serial entrepreneur, not as bad as the press says! Discussions on the details are continuing with business representatives.
• Legislation to combat income splitting, as in Arctic Systems, to be in FA 2008.
• Reform of small business taxation still on the long-term agenda, but no proposals brought forward.
• New Construction Industry Scheme penalty “holiday” is now over.
• 2008/09 personal allowances increased by about the RPI inflation rate of 4%.
• Lower National Insurance thresholds increased by the same amount, but the new tables confirm significant changes to upper NI thresholds will come into force from 2008/09 – with a reduction in the basic rate of Income Tax, removal of the starting rate of 10% and these changes, how will this affect you?
• Once again, very selective uplifts in Working and Child Tax Credit payments and thresholds; fiscal drag in reverse!
• Widows and widowers allowed to claim the unused portion of their spouses Inheritance Tax "nil rate" band, with retrospective effect, but there are catches.
• Planning gain supplement dropped, but a “roofs” tax on new homes instead?

As always, it is only possible for me to comment on some of the matters contained in the pre-Budget report and the other documents that have been issued since my last newsletter. If you are interested in any other matters that are not mentioned in this newsletter – see the full index overleaf, please do not hesitate to get in touch with me to discuss your concerns. To find the information you need in this newsletter, please refer to the following headings:

1. Capital gains tax reform	10. Planning gain supplement not to be introduced
2. Income splitting – changes after Arctic Systems	11. Tax simplification
3. Longer term reform of small business taxation	12. Increase in payments on account threshold
4. Capital allowances – 2008 changes	13. £5 stamp duty charges to be abolished
5. New construction industry scheme – penalties!	14. Possible change to P11d reporting
6. Personal Income tax allowances for 2008/09	15. Non-domiciled individuals – what is this about?
7. NICs and Income tax rate changes in 2008/09	16. How HMRC check your tax return
8. Tax credits changes for 2008/09	17. Directors duties-Companies Act 2006 changes
9. Inheritance tax – transferable £nil rate band for	18. Money laundering requirements married couples and civil partners
	19. Minimum wages and holidays

1. CAPITAL GAINS TAX REFORM

For business owners, the most attention-grabbing headline from this year’s pre-Budget report is the substantial Capital Gains Tax (CGT) reform for disposals after 5 April 2008. The Chancellor proposes to sweep away thousands of clauses in the Taxes Acts relating to CGT and introduce a simplified system, not unlike the original regime, but which was at a rate of 30%, when CGT came into being in 1965.

It is proposed taper relief for business and indeed other assets, together with all still existing indexation, be swept away for disposals by individuals, partnerships and trusts; this being combined with the introduction of a flat rate of 18%. The CGT rules for companies are not affected by the changes.

PAH comment: Whilst the general tenor of the proposals has been accurately reported in the press, there are a number of points of detail that are being inaccurately portrayed. What is clear is that those retiring will have to pay 18% Capital Gains Tax on selling their businesses after 5 April 2008, rather than the effective rate of 10%, after taper relief, they would suffer if they had owned the business for 2 years and sold before that date.

However, many reports, including one on the BBC News on Monday 22 October, in a news report following a meeting between business leaders and the Chancellor concerning his proposals, have suggested that business asset rollover and gift holdover reliefs are being abolished; THIS IS NOT CORRECT!

These two reliefs ensure that where someone disposes of a business asset, but reinvests the proceeds in another business asset, then the payment of CGT is deferred until such time as the subsequent asset is sold; the gain can be rolled over through several businesses if applicable. There are quite a lot of rules concerning these reliefs, in particular concerning how much of the proceeds have to be reinvested, but the basic principle remains untouched as does the CGT principle private residence relief for homes.

In addition, the Capital Gains Tax reliefs attracting to EIS, VCT and EMI investments, if you have one of these you will know what they are, remain intact, except that taper relief will no longer be available.

PAH comment: There has also been quite a lot of talk in the press that although this is a substantial change from the position that has existed during the taper relief regime, historically, a rate of 18% is still “quite low”. Whilst, in headline terms, this is true, - the original CGT rate was 30% and then it was linked to your marginal rate of income tax, meaning for a higher rate taxpayer the rate could be 40%, subject to taper and other reliefs and of course your annual personal allowance for CGT, there is one substantial exception with regard to a Capital Gain arising when a business is sold on retirement through age or ill health.

Before 1998, when the taper relief rules were introduced, if a business asset had been held for at least 10 years (the relief being proportionally reduced for a shorter period) and a Capital Gain was realised on retirement on the grounds of age or ill health, then the first £250,000 (at 1997 “prices”, don’t forget) was free of CGT, with there being a 50% relief on the next £750,000 (again at 1997 “prices”) the resulting “retirement relief” being deducted from the Capital Gain before the tax payable was calculated. Retirement relief was phased out in the period up to 2003, because the new taper relief introduced by Gordon Brown from 1998 was so powerful. Following the abolition of the relief, those retiring and making a Capital Gain of more than £250,000 had to get used to paying some tax, but at the relatively low rate of 10%.

To show you the effect of the proposed changes, if a business owned for ten years was sold for a gain of £250,000 in 1997 (after all allowances etc) and subject to retirement relief, there was no CGT charge. During the taper relief period, the charge would have been £25,000, but this will now go up to £45,000. Looking at some bigger figures, if a similar business had been sold for a gain of £1 million in 1997 (after all allowances etc), and again was subject to retirement relief, there would have been no CGT due on the first £625,000 and a 40% charge on the remaining £375,000 = £150,000. During the taper relief period, the charge would have been reduced to £100,000, but this will now go up to £180,000; I for one consider this to be a substantial increase!

It is clear that the proposals on Capital Gains Tax announced in the PBR have not gone through the normal Treasury processes. Whilst one can never be sure, it is likely that they are a reaction to the adverse publicity on the tax paid by “private equity” that hit the headlines over the Summer. However, if that is the case, why not simply increase the business asset holding period for taper relief to say five or even back to the ten years required for pre-1998 retirement relief? As this was not done, it is easy to see why, given that it is admitted the change is expected to raise the best part of £1 billion in additional tax, the business community cannot understand the Government's intentions towards it.

PAH comment: I have never seen such anger from the business community on a national basis to a proposal, this resulting in petitions being organised by some newspapers and the CBI, IOD, British Chambers of Commerce and the Federation of Small Business getting an hour long meeting with the Chancellor. The business leaders left this meeting commenting that they thought that there was some scope for manoeuvre although predictably, this was denied by “a Treasury spokesman”.

The problem with opposing these changes is that in recent years business people and professionals have been frequently, quite rightly in my view, complaining about how complex the tax system is, but when a substantial simplification is proposed, and there is no doubt this is an incredible simplification, we don't want it because it will mean we have to pay more tax. If it were me making these representations, I would be looking for a way to reduce the blow, but without the Treasury losing face or the simplifications being lost – perhaps the reintroduction of some form of retirement relief is, practically, the best that can be hoped for.

It is my understanding that the business organisations will be going back to the Treasury with some more detailed proposals shortly and I am sure the tax and accounting professional bodies will have some input to that process. Should there be any significant developments on this and indeed on the proposals for Arctic Systems avoidance – see Section 2 below, then I will issue a further Client Newsletter at the time those proposals become clear.

Planning points re business assets: In the meantime, what can you do? If you were thinking of selling your business in the next 6 months to a year or so and stand a realistic chance of bringing that sale forward to before 5 April 2008, without diluting the price that you would receive too much, then this would be worth considering. If it were possible to leave that flexible until such time as the results of the business leaders’ representations are known, then that would be even better, but I appreciate how impractical this may be.

Alternatively, dependent on your view of past and future capital growth of particular assets, you might want to take the opportunity to transfer a business asset to a different legal entity, perhaps a company, before 5 April 2008. Whilst this would crystallise the gain to date, paying some tax at a lower rate now might be the prudent thing to do and you will have enshrined a much higher "cost" in the new entity.

Planning point re non-business assets: Whilst the rate of CGT on business assets is going up, the new flat rate of 18% means the tax on non-business assets, which will frequently include buy to let properties, is coming down – it’s a funny world! The reverse of the planning point on business assets applies here, if you can defer the sale of non-business assets until after 5 April 2008, this may well lead to a lower tax charge.

2. INCOME SPLITTING – CHANGES AFTER ARCTIC SYSTEMS

As mentioned in the headlines above, the Treasury intends to bring forward specific anti-avoidance legislation to nullify the decision reached by the House of Lords in the Arctic Systems case, for details on this see my Summer 2007 newsletter – available on our website at www.paulahill.co.uk or from Andrew Coates here in the office. It is intended this legislation will be effective from 5 April 2008, but no detailed proposals have been announced. Many professional commentators feel it will be extremely difficult for the Government to create an unambiguous definition of the Arctic Systems circumstances that can be applied to a wide range of cases.

PAH comment: Until we see the proposed definitions, there is very little more I can do to advise clients on this point. I will be keeping a close eye on any developments and will produce some further guidance for clients as soon as we know what the new rules will be. However, if you are concerned and would like to discuss your position in the interim, of course please do not hesitate to give me a call.

3. LONGER TERM REFORM OF SMALL BUSINESS TAXATION

Whilst there is the now "usual" comment on this in the pre-Budget report, this still appears to be in the "too difficult" pile and the experts in this area will most probably be the same people who are currently working on the Arctic Systems anti-avoidance legislation – see 2 above.

Aside from the anti-avoidance legislation on income splitting, although I have to admit it is possible this will have wider implications, it looks likely significant changes to the rule that a company is the more tax efficient structure for businesses with expected profits of more than about £25,000 per person per annum cannot now be made before 5 April 2009.

As always, you must bear the IR35 legislation in mind and we are getting to the point when HMRC may start asking a lot more questions about contracts, following up on the new information they will obtain from the different questions that will be asked on the end of year PAYE returns in 2008. I wrote about this in more detail in Section 1 of my Winter 2006 newsletter following last year's pre-Budget report - this is also available on our website if you need to refer to a copy.

As I also said last year, we are always pleased and indeed prefer, to look at any potential new contract that our clients undertake, from an IR35 perspective and are able to give advice on the sometimes relatively subtle changes that might be made to improve matters.

Of course, there are often other very good commercial reasons why a company may be the preferred structure, one important one being the separation of business liabilities from your personal assets.

4. CAPITAL ALLOWANCES – DO YOU NEED TO CHANGE YOUR FIXED ASSETS PURCHASING PROGRAMME IN 2008?

Planning point: Just a quick reminder of the substantial changes to the capital allowances regime that are being brought into force from April 2008. Full details on this were set out in my Summer 2007 newsletter (as noted above, this is available at www.paulahill.co.uk) and if you have any queries concerning whether it would be better for you to bring forward a substantial fixed assets purchase or indeed to put it back, please do not hesitate to give either Kim, Linda or me a call.

5. NEW CONSTRUCTION INDUSTRY SCHEME PENALTIES

Planning point: It has been announced that the period of grace under the new construction industry scheme has ended and that with effect from 19 October 2007, full penalties will be charged for late or incorrectly completed monthly returns.

Please remember the term "construction industry" is much more widely defined than many people think and can include the installation of machinery etc, where that machinery is "fixed" in a building. If you are in any doubt about your position under the scheme, please get in touch with us – or it could cost you dear.

6. PERSONAL INCOME TAX ALLOWANCES FOR 2008/09

As noted in the headlines, the main personal allowance will rise by a fraction over 4% up to £5,435 for 2008/09 from £5,225 this year. As always, the standard PAYE code is 1/10th of this figure and will therefore be 543L.

If your current code is 522L you will probably not receive any formal notification that the code number is going up, and your employer or pension provider should implement the new code automatically from any payments due to you in April 2008.

Planning point: However, HMRC are seeking to collect other bits and bobs of tax through the PAYE system wherever they can. If they are aware that you have income from other sources, even if you do complete a self-assessment return, then you may find that around about Christmas you receive a new, almost certainly lower, PAYE Coding Notice for 2008/09.

If you are in any doubt about the reasons why your PAYE code has been lowered or think that the adjustment is inappropriate, or just have a query about it, please do not hesitate to send the Coding Notice to us for further review. If you are a self-assessment taxpayer and we complete your return on your behalf, it is absolutely essential we see your PAYE Coding Notice when this is received, to make sure that no inappropriate adjustments are being made.

We believe that the alteration of PAYE codes to include “other income” is a concerted attempt by the Government to increase the speed with which tax is collected. In general terms, if you are able to pay your tax in another way, having the amount due collected through your PAYE code could result in some of the tax due being collected up to 22 months earlier than would otherwise be the case!

Although the general increase in allowances for 2008/09 is around about 4%, there is an exception with regard to the personal allowances for those aged over 65, which are going up by around about 19.5%; this is as announced by Gordon Brown in the Spring 2007 Budget. The allowance for those aged between 65 and 74 will increase from £7,550 in 2007/08 up to £9,030 and for those aged over 75 the allowance will be £9,180 in 2008/09.

As always, there is an income limit for the age related allowances and if the income for someone aged over 65 exceeds £21,800, the additional allowances are reduced by half of the excess of income over that amount until they reach the standard personal allowance of £5,435. This means that those aged over 65 having income of more than around about £29,000 in 2008/09 will find their personal allowances reduced back to the standard level for younger people.

7. NATIONAL INSURANCE CONTRIBUTIONS AND INCOME TAX RATE CHANGES IN 2008/09

The lower thresholds for National Insurance contributions are being increased by the same rate of 4% referred to in the section 6 on personal allowances above. The lower earnings limit of £87 per week, above which an employee is credited with having made National Insurance contributions is increased to £90 and the primary threshold above which National Insurance contributions are actually payable goes up to £105 – in fact a 5% increase on the 2007/08 figure of £100.

BUT: the big change in National Insurance contributions is a substantial increase in the top level at which the 11% employee rate or 8% Class 4 self-employed rate is payable. This does not affect the 12.8% employer's contribution, which was never subject to an upper limit.

Historically, the Upper Earnings threshold, above which only the supplementary contribution of 1% is payable, has been set at a somewhat lower figure than the point at which the 40% tax band comes into play. However, from 2008/09 these are being aligned as part of a more general “alignment” of Income Tax and National Insurance rules – this gives rise to a very nearly 15% increase in the upper limit for NICs.

This increase is being bought in alongside two Income Tax reforms and the actual result is that a person earning around about £40,000 a year will pay almost exactly the same amount of Income Tax and National Insurance Contributions combined, as they did in 2007/08. The two changes to Income Tax are the removal of the 10% band, charged on the first £2,230 of income above your personal allowance in 2007/08, but then a reduction in the 22% basic rate band charged from that point up to when the 40% band comes into force, down to 20%.

When the proposals for the abolition of the 10% starting rate of tax were announced back in March, there was a furore at the time, as this means that lower paid taxpayers will end up paying quite a substantial amount of additional tax; I set out a table below showing the effect of this on employed earnings between £10,000 and £20,000 per annum. This shows the effect of the reduction of 2% in the basic rate “overtakes” the removal of the 10% starting rate at a salary of just over £15,000 per annum. All taxpayers earning more than the personal allowance, but less than £15,000, will pay more, with the maximum additional tax and NICs payable of just over £194 occurring at a 2008/09 salary of £7,665; figures in brackets in the table below are additional tax and NICs, positive figures being a net saving.

Whilst the figures for a self-employed person are slightly different, they follow the same pattern and again there is an increase in the combined total of income tax and NICs on annual profits of between the personal allowance and just over £15,000.

The table below shows the effect of the combination of the removal of the 10% rate, the 2% fall in the basic rate and the increase in the National Insurance Contributions upper limit for those with salaries of between £20,000 and £42,500. As you can see, there are some unusual effects, the increase in the upper NICs threshold sharply reducing the benefit of the 2% cut in the basic rate of income tax over a £35,000 salary, any benefit being virtually eliminated at a £40,000 salary.

However, here, the figures for self-employed taxpayers are different, owing to the 3% difference between the employee NIC rate of 11% and the Self-employed Class 4 NIC rate of 8% - see overleaf. The equivalent table for a self-employed taxpayer is as follows:

Whilst a self-employed taxpayer is less affected by the changes, it must be remembered the NICs paid by the self-employed give rise to rather fewer social security benefits.

As always, we will continue to review your personal remuneration strategy each year, both as part of our tax year-end work and also when we complete your accounts and personal tax return. Of course, an increase in NICs like this will further tip the scale towards forms of remuneration, e.g. dividends, on which NICs are not charged. In previous newsletters, I have commented that charging NICs on some company dividends seems an almost too simple change for the Government to make, but this is a complex issue and as I say in section 3 above, the longer-term reform of small business taxation still appears to be in the "too difficult" pile.

PAH comment: The above tables have been compiled from the latest available information and I must admit I had expected that the publication of the upper earnings limit for employee and self-employed contributions, which is now £40,040 per annum would let us into the secret of what the 2008/09 40% Income Tax threshold would be. However, looking at the tables that have been published in detail, I believe the Government may be being a little coy with the information it has made available. If you take the £40,040 figure and deduct the personal allowance for 2008/09, this should equal the 40% Income Tax threshold, but the figure that you reach, rounding to the nearest £10, is £34,600, which is the 40% threshold for taxable income in 2007/08.

Accordingly, regrettably, I believe it likely that when the tax bands are announced in the 2008 Budget we will either have a further increase in the upper limit for National Insurance Contributions or no increase in the 40% tax band limit which will of course mean many more people end up paying tax at the 40% rate – more fiscal drag (this being the term used when the Government simply does nothing and allows inflation to increase the tax take) .

For some time, the fact that there are an entirely different set of rules covering National Insurance Contributions and Income Tax have been seen as an unnecessary complication within the tax system, but nevertheless the Government insists that National Insurance is not a tax; to be fair, Governments of all persuasions have taken this view over the years. There have been proposals put forward, by quite powerful Parliamentary committees, that National Insurance as a separate entity should be completely done away with and an individual’s eligibility for all forms of Social Security Benefits, including the state pension, judged on their Income Tax record rather than a separate set of National Insurance records.

The changes proposed this time take the “alignment” forward quite a lot, but with one extremely important exception. In the detail of the pre-Budget report, it states that the Government is not able to proceed with a proposal to align the assessment period for Income Tax and National Insurance. Your liability to Income Tax for a particular tax year is just that, an annual liability. Accordingly, if you start and stop work during a tax year it is your total income across the whole year less your personal allowance for the whole year that is your taxable income in the final instance.

However, for National Insurance contribution purposes, matters are looked at on either a weekly or monthly basis. Accordingly, notwithstanding what your income is for the full year, if you earn over the individual weekly or monthly limits, these being based on a normal pay period for the industry that you are employed in, always a week for the self-employed, a contribution is due for the individual pay period notwithstanding your annual total income.

Perversely, an anti-avoidance rule means that company directors have to have their National Insurance assessed on an annual basis – if they didn’t they could pay themselves their entire year's salary in one pay period – but of course current remuneration strategies reduce National Insurance to almost £nil through the payment of dividends, so perhaps this rule is not particularly effective in current circumstances – and of course the self-employed also have their Class 2 and Class 4 National Insurance Contributions assessed on an annual basis.

Whilst on the subject of self-employed NICs, the weekly class 2 rate is being increased to £2.30, this is usually collected by direct debit or on quarterly invoice and the changes here will happen automatically. However, the small earnings limit beneath which a self-employed person does not have to pay the Class 2 weekly “registration” contribution has not been increased by as much as might have been expected and will be £4,825 for 2008/09 – why this cannot be increased to the personal allowance of £5,435, nobody seems to know.

8. TAX CREDITS CHANGES FOR 2008/09

Whilst there have been increases of about RPI inflation of 4% in some of the rates and limits, once again, there is no increase either in the family element of £545 or the income limit of £50,000 after which this begins to be abated – this could be called fiscal drag in reverse – see my comment on fiscal drag in section 7 above.

As always, if you are concerned about your tax credits position, please do not hesitate to give Linda Harrison a call here in the office.

9. INHERITANCE TAX – TRANSFERABLE £NIL RATE BAND FOR MARRIED COUPLES AND CIVIL PARTNERS

As has been extremely widely covered in the press, the Government has announced that the unused portion of the Nil Rate Band for Inheritance Tax (IHT), arising on the estate of the first of a married couple or civil partners to die, can be transferred to and used on the second death.

PAH comment: However, the way this has been widely reported in the press, as being a doubling of the IHT threshold on the second death, is incorrect and thereby lies the catch.

Many people, particularly those who are clients of an accountancy practice or who have lawyers within the family, have taken advice over the years and set up what is commonly known as an IHT Nil Rate Band Discretionary Trust. On the first death, rather than all of the assets being transferred to the surviving spouse/civil partner, part of the estate was transferred into a trust – there are a number of different ways of doing this, but the principle remains the same. Accordingly, in these cases, the IHT Nil Rate Band existing at the time of the first death has been used and this amount will not be available on the second death.

What will happen on the second death in such circumstances, is that the amount used in the transfer to the trust or similar arrangement on the first death will be deducted from twice the IHT threshold at the time of the second death. As the IHT threshold has been going up quite substantially, although not by house price inflation of course, over the last few years, this should result in some increase in the amount available on the second death, but it is not a general doubling of the threshold!

Planning point: The new rules mean that where the first of a married couple or civil partners dies from now on, it may no longer be necessary and possibly not tax efficient to transfer part of the estate into an IHT Nil Rate Band Discretionary Trust. In most circumstances, where a will has been written including such trust arrangements, it should be possible to vary those arrangements and not use the trust, but that may depend on all beneficiaries being in agreement. Unfortunately, whilst it would be churlish not to welcome this change, it will mean those who have already taken action to mitigate IHT under the old rules should revisit their arrangements to ensure they are flexible enough to be varied if, on reflection after the first death, the use of a trust is no longer appropriate.

PAH Comment: The new rules also beg the question as to whether information regarding the amount of the IHT Nil Rate Band used up on the first death will be available. In fairness, some of the supporting information on this proposal – and the fact that there is such supporting information leads me to believe that, unlike as stated in the press and by the Opposition, the Government had in fact been thinking about this for some time, recognises this difficulty and suggests that the best available information should be used.

If there is no information available at all, then there is no guidance as to whether it will be assumed that the IHT Nil Rate Band was not used or whether there will need to be detailed research into the will, etc. In cases where there is a trust in existence, then this will be more straightforward, but for many small estates, particularly those for which no Inheritance Tax or other form of return was required at the time, perhaps even thirty or forty years ago going back to the Estate Duty days, this will be a very difficult practical point and it remains to be seen how HMRC will react to the suggestion that none of the IHT Nil Rate Band was in fact used up on the first death.

10. PLANNING GAIN SUPPLEMENT NOT TO BE INTRODUCED

Over the last three or four years since Kate Barker’s report on housing supply, the Government has been consulting on the introduction of a new tax on the gain that arises when a piece of land or redundant property obtains planning permission for new building. However, in the pre-Budget report it has been announced that this is “too complicated” and the proposed tax, due to come into force from 5 April 2009, will not now be introduced.

What is coming in in its place would appear to be something like what is known as the “roof” tax, which is levied in development areas such as Milton Keynes. My understanding is that in the Milton Keynes area, a flat rate “tax” of £18,500 per individual dwelling is levied on developers to fund infrastructure.

PAH comment: Whilst £18,500 infrastructure tax may not be that much on a property costing several hundred thousand pounds, the effect of this on “social” housing is relatively substantial, a point I have discussed with two of our clients who are councillors in the Milton Keynes area. I understand that these proposals will not be taken forward in a Finance Act, but in a new Planning Reform Bill, which will “empower Local Planning Authorities in England to apply new planning charges to new development, alongside negotiated contributions for site-specific matters.” If you are interested in these proposals, you will need to keep a check on the website of the Department for Communities and Local Government, we will obviously pass on any comments that we receive, but now that this matter is outside of normal taxation channels, I may not receive as much information about these changes as previously.

11. TAX SIMPLIFICATION

Each year, the Government puts a number of small items into the pre-Budget report and indeed the main Budget statement, which are designed to simplify tax administration processes. This time, there are about 20 of these, of which two are of genuine interest, one is definitely not a simplification and the others are in tax areas we, and you, typically are not involved with.

12. INCREASE IN PAYMENTS ON ACCOUNT THRESHOLD

From 2009/10, i.e. for payments due on 31 January 2010, whilst this seems a long way away I agree that, practically, this is the earliest possible date, the minimum amount that will trigger an automatic payment on account is being increased from £500 to £1,000.

PAH comment: Whilst this will mean that fewer people have to make a payment on account, it will not, in any way, alter the amount of tax due in the final instance and may mean that some people who currently do make a payment on account will be required to find up to £1,000 extra the following 31 January.

I appreciate the payment on account system is very complicated and not well understood by many people. When we prepare your tax return each year, we always explain the current liability and payment on account position for you. We will obviously continue to do this and make sure that you are aware, as far in advance as possible, of future tax liabilities that may not, under the new rule, be covered by an earlier payment on account.

Planning point: If you prepare your own return, whilst payments on account will automatically be calculated for you by the software, they can be difficult to understand and you may not be aware of your options in this area. We are always pleased to check these for you and to advise if an automatically calculated payment on account can be reduced or even eliminated.

13. £5 STAMP DUTY CHARGES TO BE ABOLISHED

A number of, in particular company secretarial documents, including Share Transfer Forms, attract Stamp Duty at a minimum rate of £5. The Stamp Duty in question is either a fixed charge or a minimum charge of £5 where the duty is ½% of the value of a transaction, for example a share sale.

From Budget Day 2008, documents currently requiring the fixed rate charge will be exempt from Stamp Duty and those with a value based charge of ½% will be exempt if the charge is £5 or less, this effectively exempting all transactions with a value of £1,000 or less. Given that, most frequently, the documents requiring stamping are for small share transfers worth less than £1,000 then this is a real simplification.

14. POSSIBLE CHANGE TO END OF TAX YEAR P11D REPORTING

The one area in the simplification list, that I am particularly concerned about being dressed up as a simplification, when it is not, at least not for many smaller businesses, concerns the preparation of forms P11d.

A number of large employers have well-established expenses and benefit in kind policies and review these on an annual basis coterminous with the tax year. As a result, these businesses can work out, in advance for a tax year, a figure for the value of benefits in kind attributable to each employee. They are arguing that rather than completing a separate form P11d process each year, it would be simpler for them to be allowed to add the amount of the benefits in kind to the gross pay each month and to pay tax and employer's National Insurance contributions as they go along.

PAH comment: Whilst I can see the attractiveness of this to a large employer with such a system, practically, this could be a complete nightmare for small employers with variable benefits in kind that are maybe not available for a full tax year or change significantly, for all sorts of reasons, during the tax year.

I am pleased to say that the Technical Committee of the Association of Taxation Technicians, on which I sit, has recognised that there could be a substantial difference between the big employer and small employer approach to this point. I hope very much that if this simplification is adopted, it will be on a voluntary basis, such that small employers are not overburdened with additional monthly requirements, because they do not have the same sort of expenses and benefits policies that would enable them to look at this on an annual basis.

15. NON-DOMICILED INDIVIDUALS – WHAT IS THIS ABOUT?

At their party conference, the Conservative party proposed various tax cuts which would be at least partly funded by a levy on “non-domiciled individuals”. Stepping aside from the argument over how many such people there are and how much tax they would have to pay to make up for proposed tax cuts elsewhere, a number of clients have asked me for a simple explanation as to who are non-domiciled individuals and why are they getting away with not paying sufficient tax; this is my attempt!

In very simple terms, a non-domiciled individual is a person who was not born in the UK and who has allegiance to another country to which, at some time in the future, they expect to return. The definition is a lot more complicated than that, but for the purposes of this article, it will suffice.

When such a person comes to the UK and stays, they have to pay tax on the income that they earn or otherwise “arises” in the UK, again a simplification, but suitable for the purposes of this article.

However, as long as they remain non-domiciled, they are not required to return their worldwide income to the UK authorities. Again in simplified terms, they are only required to return to the UK authorities income earned from outside of the UK, if it is physically brought into the UK, this is called the “remittance” basis.

In many countries, a person resident in the country in a tax year, which again in simple terms means they were there for more than half the year or who habitually is in that country for more than 90 days a year over a longer period, is required to submit full details of their worldwide income, including details of the tax deducted in other jurisdictions. Their whole worldwide income is then subject to tax, but under “double-taxation” treaties between most major countries, the tax deducted in another jurisdiction is then taken away from the amount payable. In this way, an individual ends up paying the higher of the tax charge in the country in which they are resident or in which the income actually arises, but no more than that.

Again simplifying the actual position, what is proposed by the various parties is broadly similar – they are simply arguing about how much revenue it would raise. The suggestion is that non-domiciled individuals should be required to return their worldwide income in the UK and pay the full amount of tax less overseas withholding tax, or perhaps instead of making that full return, which in some cases – perhaps Roman Abramovich or Mohammed Al Fayed might be examples, could be immensely complex, they would be required to pay a fixed rate charge – either £25,000 or £30,000 per annum has been mentioned, as a penalty for not making that full return.

Practically speaking most of the individuals who might be subject to the fixed rate charge have the power to vary their tax residence and also to vary the countries in which their income is deemed to arise through complicated offshore arrangements. The argument goes that a number of them would simply pay the UK’s charge, which in any event could be treated as taxation in the UK and deducted from the tax return in another company under a double-taxation treaty, so they probably wouldn’t pay any more “worldwide”, than they are doing at present and this would represent a simple source of additional revenue for the UK Exchequer, with a very small collection cost.

PAH comment: The political argument is of course more complex.

16. HOW HMRC CHECK YOUR TAX RETURN

We are now some three years into the merger of the old Inland Revenue and H M Customs and Excise into H M Revenue and Customs (HMRC). It is clear to those of us involved in discussions with the authorities that ex Customs and Excise staff and procedures have gained the upper hand and I estimate that only about 20% of the Senior Officials in HMRC come from the old Inland Revenue – there has been a lot of early retirement.

One major problem in the integration of the two departments has been that the legislation applying to the two of them had grown up entirely separately. The legislation surrounding Customs and Excise extends from the times when Customs Officers sat on the cliff tops with muskets looking to deter smugglers, whereas the Inland Revenue, the junior body in fact, grew up following the need to raise taxes from the landowning populace to fight wars in the 18th Century. One of the major exercises has been to bring together the operating and control powers of the two departments and we are reaching the stage where this work is very nearly complete. In the last few months, on behalf of the Association of Taxation Technicians, I have been attending a number of workshops and as matters being discussed in those workshops are for open consideration, it is stressed no firm decisions have been made, the sort of changes that are being considered can be freely discussed.

One thing that is becoming clear is that HMRC is changing significantly. In the past year, we have seen a major exercise with regard to income in overseas bank accounts that belongs to UK residents – and therefore is required to be taxed here. HMRC sought and obtained powers to get information directly from the banks concerned and then invited those people named in the bank’s declarations to bring their affairs up-to-date. A significant number of people have chosen to do so, and they will receive more lenient treatment than those who have not, whom HMRC are just beginning to follow up.

In addition, HMRC are looking at obtaining nationwide information on all sorts of matters, from bank interest received, whether or not tax was deducted at source, to the granting of buy to let and other mortgages. Obtaining this information on a nationwide level and relating it to the taxpayer population through complex computer cross matching, will enable them to mount independent checks as to whether interest has been properly declared on tax returns, whether letting income is being declared and to institute compliance interventions, as they call them, if required.

I find some of these approaches to be a little bit confusing as HMRC, to be fair under direct instructions from Ministers, has sought to remove people from the self-assessment system over the last few years. Instead of every 40% taxpayer be required to fill in a return, which used to be the case, this has now been limited to those with income of more than £100,000, or having another reason, perhaps because they are a company director or have to complete one or other of the supplementary pages to a return.

This means that an awful lot of people are not having their tax affairs properly reviewed on an annual basis, although the authorities are trying to do this on a rolling about three year basis, from our experience with limited success.

PAH comment: I would remind all readers, particularly with the increasing level of external compliance checks now being made, to make sure that they either complete a self-assessment return themselves, if they are required to do so, or take advice if they are uncertain of their circumstances – HMRC will provide free if perhaps not impartial advice to anyone who requests it – whilst we cannot provide free advice, it will be impartial!

One other important change that will, almost certainly, be coming on-stream in the next couple of years is the removal of the current “enquiry window” following the submission of a return. Currently, HMRC have a period of up to one year from the latest date for submission of a return to start an enquiry into any of the figures on that return. It had been expected that this “enquiry window” would be reduced to one year from the actual date of submission of a return from next year, and this may still be the case, but beyond that, the position looks less certain.

A couple of years ago, the then Inland Revenue took a case against a Mr. Veltema. It was “discovered”, discovery being an important concept in tax law, that Mr. Veltema had been less than truthful in a number of different declarations. In simple terms, Mr. Veltema and his advisers had taken a view on a number of transactions between himself and a limited company. Whilst it was arguable that this information was made available to HMRC, to enable them similarly to take a view – they disagreed!

Looking at the detail of this case, it appears the information was supplied in dribs and drabs and some on personal documents and some on company documents. Because of this, it took a long time for HMRC to put all of it together and at the end of that period, they raised a substantial tax assessment. Legal argument in the case was whether Mr. Veltema had supplied sufficient information in time, which HMRC had then not used during the relevant enquiry period(s).

To cut a long story short the case was decided in favour of HMRC and the tax assessment stood. The importance of this case from a general point of view is it now sets the standard for the way in which information has to be disclosed to HMRC before a taxpayer, company or individual, can rely on the protection of the “enquiry window”.

At one recent workshop I attended, a member of the HMRC “Powers and Deterrents” team, put forward the view that with the benefit of the precedent set by the Veltema decision, in fact, “enquiry windows” were, practically, obsolete.

Indeed, they were putting forward some suggestions that would limit HMRC’s powers in the future, but with a minimum of three instead of a one year “enquiry window”, with the proviso that if you did give them information and they didn’t use it within one year then they couldn’t go back on information that had been correctly and fully supplied – the definition of correctly and fully will prove to be interesting in the future.

PAH comment: The purpose of this article is to give you some information that the HMRC compliance checking system is changing and arguably not for the better as far as the ordinary taxpayer is concerned. Their checks are going to become more invasive and there will be more “proving your innocence” than perhaps there used to be in the past – a simple example of this being the VAT invoice sequencing rules I referred to in my Summer 2007 newsletter.

17. DIRECTORS DUTIES - COMPANIES ACT 2006 CHANGES

1st October 2007 was another important date in the introduction of various matters contained in the Companies Act 2006. Possibly the most significant item introduced on that date was a statutory definition of the duties of a director of a company. Space precludes a full discussion of these matters here and, practically, this will only be of any great significance if the directors and shareholders/members are different people, but this will include those businesses with EIS shareholders and of course clubs and societies operating through a limited company. There is a very good article on this subject in the August 2007 edition of the Companies House magazine – The Register. This can be obtained free of charge (it is a pdf. file) from the Companies House website at www.companieshouse.gov.uk. The article is written by Brenda Hannigan, the Professor of Corporate Law at the University of Southampton and, whilst covering the legal position, is written in as simple terms as is possible.

Other provisions of the Companies Act 2006 coming into force from 1 October 2007 are provisions for minority shareholders to bring a claim in the name of Company, and new rules on the appointment of auditors for private companies and further deregulation of the rules for meetings in private companies.

Provisions already in force include information requirements for company websites and emails signatures – these now need to contain the same sort of information as on the company letterhead, the facilitation of electronic communication with shareholders, protection of Directors from action by non-shareholders and the abolition of the statutory disclosure requirement for Director’s shares in accounts, we are updating your accounts for this last point when we prepare the next set from now.

Planning point: If you have any queries on any of the above points, please do not hesitate to give Kim or me a call.

18. MONEY LAUNDERING REQUIREMENTS

With effect from 15 December 2007, there is to be major extension of money laundering requirements as applied to firms of Chartered Accountants, and indeed to anybody who deals with financial matters on behalf of another person. If persons acting in such a manner are not regulated by a professional body, they will have to register directly with and their compliance will be monitored by HMRC; we are monitored by the Institute of Chartered Accountants in England and Wales.

Whilst in the way of these things there are some final issues still being decided, it is likely we will have to ask all clients to provide us with formal identification papers – passport, proof of address etc. This has been a requirement for all new clients for the past couple of years or so, but I understand is now to be extended to all clients.

There are also some completely new concepts and obligations being introduced, we will have duties to

• Undertake customer due diligence measures
• Identify the beneficial owners of assets
• Apply enhanced customer due diligence measures on a risk-sensitive basis
• Identify politically exposed persons and take extra precautions
• Conduct ongoing monitoring of client relationships including clients' risk profiles

PAH comment: Whilst we will apply these new procedures as lightly as we possibly can, you will appreciate I have no choice but to comply fully with the new rules. When we ask for different information and or documents than in the past, the new rules are often going to be the reason for this. If you have any queries over anything we ask you for, please do not hesitate to ring me personally to discuss the matter.

19. MINIMUM WAGE RATES AND MINIMUM HOLIDAY ENTITLEMENT

From 1st October 2007, the hourly rates rise as follows: adult rate from £5.35 to £5.52; development rate (18 to 21 year-olds) from £4.45 to £4.60, and (16 to 17 year-olds) from £3.30 to £3.40. This is the first time for some years the rates have seen only "inflationary" increases – in fact, the increases are rather less than RPI annual inflation to September 2007, which as noted in section 6 above has occasioned a 4% average rise in Income tax allowances etc.

As well as changes to the minimum wage rates, 1st October 2007 also saw the first phase of the increase in the number of days paid holiday to which employees are entitled, from 20 to 24 days. Bank holidays are included in the allowance; for instance, if an employee already gets four weeks’ paid holiday plus bank holidays, their entitlement will not be affected. Please remember that the statutory paid holiday entitlement applies to all employees including part-time employees. Working out holiday pay for part-timers can be very difficult, particularly if their hours are variable. If you need any assistance with this, please do not hesitate to give Kim or me a call.

20. CHRISTMAS CLOSURE

This year, the office will be closed from 5.30 pm on Friday 21st December, reopening at 9.00 am on Wednesday 2nd January 2008. For emergency matters during this period, please contact me on 01480 462713, where there will be an answering machine.

PAUL HILL

This newsletter is prepared for the general information of clients and contacts of Paul A. Hill & Co only. No liability can be taken in respect of any action taken or not taken because of relying on the information contained in this newsletter alone. Only the general position can be stated here and there are often qualifying conditions or other criteria that affect the way in which tax relief is given or other proposals will affect you or your business. You should always take individual advice based on the exact circumstances that you have before taking any form of action, or indeed refraining from any action.

© Paul Hill and Paul A. Hill & Co. – October 2007