CLIENT NEWSLETTER - SPRING 2007
“ACTIVE ACCOUNTING AND TAX”
INTRODUCTION
Gordon Brown gave his eleventh and what many commentators expected to be his last Budget on 21 March 2007. Right at the beginning of the speech, he made a joke about Gladstone also having given eleven Budgets as Chancellor of the Exchequer, but then also giving a twelfth when he was combining the roles of Prime Minister and Chancellor of the Exchequer, something Mr Brown thought nobody would ever want to do again!
However, in the rest of the speech and, as usual, in the plethora of supporting reports, press notices and technical briefs (a record 81 this time), what we got was not only his eleventh Budget, but also his twelfth covering the tax year 2008/09, starting 5 April 2008 and quite a bit of his thirteenth and even fourteenth Budgets as some announcements will not take effect until 2010/11! Indeed, in looking through all the documents, it is clear the vast majority of the changes that were announced in the speech have no immediate impact, starting in April 2008 at the earliest.
In an effort to make all of this understandable for clients I have split this newsletter into two sections as follows:-
- Tax matters relevant to the 2007/08 tax year and other matters of current interest (1 to 17)
- Tax matters relevant to 2008/09 and future tax years (18 to 20 below)
BUDGET HEADLINES FOR 2007/08 AND OTHER CURRENT MATTERS
- The Government appears to have abandoned substantial reform of small company/self-employment taxation, instead increasing the “small companies” rate of corporation tax and starting a major reform of capital allowances.
- Anti-avoidance legislation targeting Managed Service Companies to come into force on 5 April 2007.
- New Construction Industry Scheme to come into force from April 2007 – more information now available on practical operational matters.
- Income tax bands for 2007/08 increased by RPI inflation.
- VAT cash accounting threshold “doubled”, registration threshold up by £3,000.
- VAT re private use of cars brought onto an emissions basis.
- Land and property - new tenant's deposits to be subject to Government control.
- Significant parts of the Companies Act 2006 to come into force in Autumn 2007.
As always, there is a lot of detail in the Budget report – 319 pages, and associated documents – more than 1,000 further pages, and it is only possible for me to comment on some of these, plus of course other matters of current interest. I have tried to pick out issues I feel are of interest, however if you are concerned about any other matter, which I have not covered, please get in touch with me or one of the practice staff to discuss the point involved. To find the detailed information you need, please refer to the following headings:-
- Taxation of owner managed businesses
- Capital allowance changes for 2007/08
- Managed service companies
- Construction Industry scheme-practical matters
- Income tax bands
- Payroll matters
- VAT thresholds
- VAT place of supply rules/overseas thresholds
- VAT on motoring expenses-reminder/changes
- VAT rate-home adaptations/nicotine withdrawal
- Employee tax relief for training courses
- Stamp duty land tax – no change in thresholds
- Capital gains and inheritance tax
- HMRC action re overseas bank accounts, but..
- Relief from a tax charge on overseas property
- Do you take a deposit from your tenants?
- Companies Act 2006
- Main business tax changes for 2008/09
- Main personal tax changes for 2008/09
- Changes proposed for 2009/10 and onwards
1. TAXATION OF OWNER MANAGED BUSINESSES
It would appear, from the lack of any announcement to the contrary and following the non-appearance of a further consultation document at the time of the pre-Budget report, the Government has now abandoned any attempt at substantial reform of owner-managed business taxation. The Chancellor repeated his mantra of being concerned about tax-motivated incorporation, but now appears to be thinking the best way to deal with this is through increasing the corporation tax due from smaller companies, this will increase to 20% (from 19%) from 1 April 2007, rather than in any more complex manner; an exception being the new rules on Managed Service Companies – see 3 below.
It is perhaps a little bit surprising the Chancellor is taking this route as, in other parts of the world, notably Australia, there are models where an owner-managed company, called a proprietary company in Australia, is taxed in broadly the same manner as a self-employed business.
Planning point: Where the option is available, a company remains the best structure to minimise tax and National Insurance payments where profits, before considering any remuneration for the proprietor, are more than about £25,000 per annum. With the rate of corporation tax for smaller companies being announced for the next three years – also see 18 and 20 below, further reform in that period appears unlikely.
We calculate that, for 2007/08, the difference in the maximum take home pay available to a proprietor from a company, over that obtained from a self-employment with the same level of profit, is approximately £1,700 at £25,000 profit before proprietor's remuneration/drawings, very nearly £3,000 at £37,500 profit and very nearly £5,000 if the profit is £50,000 per annum.
With the cost of operating a company, over and above that of a self-employed business being, say, around about £1,000 to £1,500 per annum, there is a clear advantage at £25,000 in annual profit, which increases rapidly across the profit range up to £50,000. Above £50,000, the equation is slightly different in that the amount of additional benefit does not go up quite so quickly, owing to the higher rate of tax on dividend payments, but the benefit already obtained at the £50,000 profit level is maintained. Of course, if you are making profits of more than £50,000 per annum then there could well be different, commercial as opposed to taxation, reasons for wanting to operate as a company in any event.
The equation is also slightly different where there are two or more owner-managers in the business.
Planning Point: However, it is now clear that with increasing corporation tax on smaller businesses, the benefit of operating as a company where annual profits are expected to be less than £25,000 per annum is doubtful. Given that further rises in smaller company corporation tax are proposed – as noted above, see 18 and 20 below for more details, I am changing my previous advice and now recommend that those clients who are "traders" as opposed to "contractors", where the separate legal status of the company is important for other tax reasons, and expect their profits to be less than £25,000 per annum, consider disincorporating. This is a matter that is usually best discussed immediately after a set of accounts has been prepared and it is best, in turn, if those accounts can be prepared as soon as possible after the company’s next year-end; please be aware there will be some costs to transfer back to a self-employed business.
In certain circumstances, but it is fair of me to say, not all, there can be some advantages in planning a disincorporation such that, particularly if you have monies left in the company that you have not withdrawn, these are treated as a capital gain rather than as income, on dissolution of the company; this approach can also be used when a company is wound up on retirement. However, these rules are not effective in all circumstances and it is extremely important that a disincorporation is planned just as much as the original incorporation, when that took place.
In addition to profitability and costs issues, before a decision to disincorporate is made, the comments I made in my Winter 2006 newsletter on pension contributions should be borne in mind:
Planning point re possible disincorporation: In a self-employed business, there can be some issues if you want to pay pension contributions of more than £2,808 per annum (£234 per month) in 2007/08, as these will be dependent on your self-employment profits. Should you want to make pension contributions of more than this, but your profits could vary from year to year and on some occasions perhaps be less than the pension contributions you want to make, for whatever reason, then remaining, or indeed becoming, if relevant, a company is the only way to ensure you get all the tax relief you expect on your contributions. Within a company, contributions made by the company are compared with the salary of the employee and even if the contributions and the salary take the company into loss in a particular year, there is no claw back of pension contributions.
If you would like to discuss possible disincorporation of your business, please do not hesitate to contact me.
As we are reaching the end of the tax year, another planning point from my Winter 2006 newsletter on pension contributions also bears repeating:
Planning point: As I have mentioned previously, if you wish to make pension contributions of more than £2,808 (this is referred to as £3,600 gross per annum in tax legislation, but the amount you pay is net of basic rate tax relief of, for 2007/08, still 22%) = £234 net per month, then it is extremely important that you let us know as soon as possible. If we know your intentions, we can make sure, as far as we can of course, your salary from a company or profits from a self-employed business are sufficient (we could for example disclaim certain allowances in order to increase profits if that were to help the position) to meet the pension rules. Please also be aware the net limit may increase from 2008/09 because of the reduction in the basic rate of income tax – see 19 below.
As previously announced, HMRC's appeal to the House of Lords in the Arctic Systems (husband and wife company) tax case will be heard in June, but the judgment is not now expected until the Autumn. If you have any queries on this, of course please do not hesitate to give me a call.
2. CAPITAL ALLOWANCE CHANGES FOR 2007/08
Whilst wide sweeping reforms of capital allowances are proposed for 2008/09 – for details see 18 and 20 below, there are some changes in 2007/08 that could affect you and one planning point you may wish to consider.
In the first instance, the 50% first year allowance for expenditure on plant and machinery by small businesses is continued for one further year; this was due to expire on 31 March/5 April 2007.
The bigger immediate change is for those clients claiming Industrial or Agricultural Buildings Allowance. Whilst there is no change in the rate of allowance for 2007/08, balancing adjustments or allowances are discontinued as a precursor to phased abolition. Typically, such adjustments only arose on industrial buildings as it is rare for an agricultural building to change hands. If you are thinking of disposing of a building on which Industrial Buildings Allowance has been claimed, please contact us for further advice as to the tax effect of such a transaction, this may well be substantially different from that you were expecting.
Planning point: If you plan your expenditure on equipment over a period, owing to the changes being brought in from 2008/09, it may be better to consider, if it is commercially sensible of course, deferring expenditure originally planned for the second half of the 2007/08 tax year to 2008/09, to speed up the obtaining of capital allowances.
3. MANAGED SERVICE COMPANIES
Although as set out in section 1 above, the Government appears to have abandoned substantial reform of owner-managed business taxation, new rules concerning Managed Service Companies (MSCs) will be brought into force from 6 April 2007. This proposal was first announced in the pre-Budget report of December 2006 and for more detailed comments see my Winter 2006 newsletter.
During the consultation period on the details of the new rules, there was a lot of comment concerning the proposed definition of an MSC and how this would be enforced. Because of this, the definition has been considerably tightened with particular reference to the “MSC provider”. Where a person is determined to be an MSC provider, the new legislation will apply to all service companies made available by that person. Broadly, an MSC provider is a business which is involved in promoting or facilitating the use of companies to provide the services of individuals.
However, having said that, there will be exclusions for employment agencies and employment businesses which do not influence or control the finances of a Managed Service Company or the way in which payments to individuals are made. I am also pleased to say that there will be an exclusion for providers of professional accountancy and legal services!
The purpose of this extension to the original definition is to prevent MSC providers, instead of having a considerable number of “employees” channelled through one company, having an individual company for each employee; this being structured such that there was at least some pretence of the "worker" having "control" of the company. There is some evidence that in the last couple of months MSC providers have been seeking to incorporate a very large number of new companies to get around this particular aspect of the previously proposed definition.
PAH comment: The extension of the definition of an MSC to include any service company promoted or facilitated by an MSC provider, might bring more companies than was originally intended within the net. It is not clear, for example, whether a genuine "personal service company", which by itself is not a managed service company, but which obtains services relating to the management of the company from someone who, through also dealing with other types of arrangement is caught within the definition of an MSC provider, is now an MSC.
Planning point: If you know someone who is either using an MSC or perhaps is a "contractor" with what they believe to be a "personal service company, but who uses an agent other than an accountant to assist with the underlying legal and tax requirements, they would almost certainly benefit from a second opinion, i.e. other than from the person they are currently using, as to whether they are affected by the new rules; we should be pleased to provide such advice. Please ask then to get in touch with me in the first instance to arrange an initial free meeting.
4. CONSTRUCTION INDUSTRY SCHEME – PRACTICAL MATTERS
Whilst there is not anything particularly new to say about the Construction Industry Scheme, other than that, this time, it really will come into force on 6 April 2007, some more information is now available about the practical aspects of operating the scheme, including draft forms, etc. The key to the new scheme is the monthly return that requires to be made. Failure to make a monthly return on time, even a £nil return, will be punishable by a penalty of at least £100, although a “light touch” is promised for the first six months or so.
Planning suggestion if you only make occasional CIS payments: It is possible under the new regime to “sign off” for a period of up to six months, if you "believe" you will not make any payments to sub-contractors during that period. If a payment is then made within the six months, you will still have to make a return for that month, but I understand will not risk a penalty for missing a £nil return for any interim months in which you did not make a payment; you could then sign off for a further six months from that date. You will also have to make a £nil return if six months do elapse without a payment, but can then sign off for another six months. We are not sure how HMRC will react to smaller contractors who do not make payments every month "automatically" signing off between payments, but it does seem an option to avoid the possibility of a penalty for missing a £nil return!
At various presentations I have now been to concerning the new CIS, there was considerable scepticism whether the Construction Industry, particularly smaller businesses will be able to cope with the new scheme and its monthly requirements – what is a sole-trader supposed to do if they are on holiday or particularly tied up on a complicated job away from home at the time the monthly return needs to be submitted! However, the Government has proved deaf to all of the complaints about how difficult this might be to operate in practice and the proof of the pudding once again, will only be seen in the eating over the next six months or so – perhaps my suggestion above will help?
As many of you know, I am a member of the Technical Committee of the Association of Taxation Technicians and represent them on the Direct Taxes Consultative Committee of HMRC. In this capacity, I should be very interested to hear how the new CIS is working in practice and should be grateful if you could send any comments you hear to me, even if they are hearsay from friends or colleagues, in order that we can build up a “dossier”, hopefully not a dodgy one!, of the real problems that are being encountered with the scheme over the first few months of its operation.
5. INCOME TAX BANDS
Although the income tax personal allowances and National Insurance thresholds are announced at the time of the pre-Budget report, the Chancellor always defers the announcement of the bands for income tax until the actual Budget. For 2007/08, these have been increased by RPI inflation, the 10% rate of tax applying to the first £2,230 worth of income (no, it is not being abolished in 2007/08, only from 2008/09! – see 19 below). The basic rate of 22% (20% on savings income) will apply to the next £32,370 worth of taxable income over your personal allowance meaning that the higher rate of 40% is on income of £34,600 over your personal allowance, for 2007/08 total income of £39,825.
Planning Point: As in previous years, we are recommending a “standard” salary for those clients where we operate PAYE on your behalf as a company director. For 2007/08, this will be £7,455, as previously being the personal allowance plus the starting 10% rate of tax.
Fairly obviously, we will need to change this approach from 2008/09 and I comment on this in 19 below.
6. PAYROLL MATTERS
Planning Point: Can I make the usual plea to you that if you are operating your own payroll software, please make sure you have the appropriate updates from your supplier to take account of the new thresholds for 2007/08. You may well have already received an update which contains the changes to the income tax allowances and National Insurance matters that were announced at the time of the pre-Budget report and this should be used from the first payday on or after 6 April 2007. Most payroll providers send a second update in around about the middle of April, to include the changes to income tax rates and bands – this year there are no rate changes, but the bands have changed as indicated above; this should be used from the first payday after it is received. For all employees who have a normal i.e. not a “month or week 1” code, if the second update cannot be used for the first pay day in 2007/08, all matters will be cumulatively adjusted as soon as the update is applied to the second or any subsequent pay date.
Staff due to be paid on Good Friday 6 April 2007
Unusually, the first day of the new tax year for 2007/08 is a Bank Holiday – Good Friday. Where this occurs, technically speaking, if weekly or four weekly paid employees due to be paid on Good Friday are paid the previous day, 5 April 2007, this is a further payment in the 2006/07 tax year, rather than, as should be the case, the first payment in the 2007/08 tax year. Concessionally, in this rare circumstance, payments treated as paid on 5 April 2007, but which would, apart from the fact that Good Friday is a Bank Holiday, have been paid on 6 April 2007, are treated as the first payment for the 2007/08 tax year.
If you have any queries on this, of course please do not hesitate to give me a call.
National minimum wage
Although it seems only yesterday we were talking about the increase in October 2006, the increase from 1 October 2007 has already been announced. Many employers will be pleased to note that following substantial rises over the past few years, this year the rise has been limited to an increase of 3.2%. The main rate will increase to £5.52 (from £5.35) with the development rate for 18 to 21 year olds increasing to £4.60 (£4.45) and the rate for 16 and 17 year olds will be £3.40 (£3.30).
7. VAT THRESHOLDS
Registration threshold
With effect from a 12-month rolling period ending after 1 April 2007, the registration threshold has gone up to £64,000 (£61,000) and the deregistration threshold to £62,000 (£59,000), the increase in the main threshold being 4.9%.
Cash accounting scheme threshold doubled
However, the big news is that the VAT cash accounting scheme threshold has been more than doubled from £660,000 to £1.35 million, also with effect from 1 April 2007. This measure was originally announced in the 2006 Budget, but has been delayed as the cash accounting scheme is considered "state aid" in the EU and Commission approval is required. I think it fair to say that with such a substantial increase, this threshold is probably going to stick at this level for some years now.
Using the cash accounting method, registered traders are required to account for VAT output tax only on monies actually received by the business, not on invoices issued. The quid pro quo for this is that input tax can only be reclaimed when an invoice from a supplier is paid, not when it is received.
One of the major complaints about VAT is that sometimes it requires to be paid over to HMRC before the money has been received from customers; this is obviously not the case under the cash accounting scheme. In addition, problems that can arise with, for example, bad debt relief, are irrelevant under the cash accounting scheme.
There is a 25% “tolerance”, i.e. in a 12-month period, turnover is allowed to go 25% over the limit, before cash accounting has to be stopped, this meaning your turnover would have to be more that £1,687,500 in a rolling 12-month period, before eligibility for the scheme is lost.
Planning point: The one “problem” with moving over to the VAT cash accounting scheme is to avoid double counting, at the changeover point. Accordingly, it is extremely important that a proper review is undertaken of the first VAT period on the new method, to make sure that any invoices, either inputs or outputs, that were included on the previous return, are excluded from the first return on the cash accounting method.
You are not required to notify HMRC that you are using the cash accounting as opposed to any other method, but it is certainly possible, if there is a significant change to your normal quarterly VAT figures, that you may receive a query from HMRC the first time the cash accounting method is applied. In such circumstances advising HMRC that the cash accounting method has been applied for the first time, should be sufficient to satisfy them that all is well.
If we have assisted you to set up your VAT arrangements and your annual turnover is below the previous threshold of £660,000 for the cash accounting scheme, we will most probably have set you up using this method. However, if you have any questions or would like some assistance in changing to cash accounting, of course please do not hesitate to give me a call.
Other VAT special schemes
There are two other VAT special schemes it can be worth considering – the flat rate scheme and annual accounting; the latter scheme allowing for fixed payments of VAT on a monthly basis during the year and a balancing payment on submission of a VAT return after the year-end. Whilst the flat rate scheme continues only to be available for smaller businesses, generally those with a VAT-exclusive taxable turnover of no more than £150,000, the annual accounting scheme has the same thresholds as for cash accounting. There are pros and cons of both schemes and if you would like any information on them, please do not hesitate to give me a call.
PAH comment: Fairly recently, we have again come across an instance of a misunderstanding of how the flat rate scheme works. Under this scheme, by negotiation with HMRC, you are allocated a flat rate percentage VAT rate, this varies dependant on the nature of your business. However, this is not the same as charging VAT at, say, 17½% on the net value of the goods or services you supply, instead the flat rate percentage is applied to the gross of VAT amount charged to your customer.
For example: If you have a flat rate of 12½% and want to charge a customer £1,000 net of VAT, you still send them an invoice for £1,000 plus VAT of 17½% = £1,175 and they pay this full amount to you (hopefully at least!). The VAT you have to account for to HMRC under the flat rate scheme is 12½% of £1,175 = £146.88. If this amount is applied to the original £1,000, this gives a VAT rate 14.6875% on the net amount.
This point appears not to be well understood and, particularly if you are using a computerised accounting package, it is the 14.6875% rate that has to be entered as your flat rate, or the system will not calculate the VAT properly. If you would like any further advice on this or any other VAT matter, please do not hesitate to give me a call.
8. VAT PLACE OF SUPPLY RULES AND OVERSEAS THRESHOLDS
In the last few months, we have answered queries from a considerable number of clients concerning the supply of services overseas. The supply of goods overseas tends to be a relatively straightforward matter, but the supply of services can be more complex. With any supply of services that is not in the UK, it is important to establish the “place of supply” as this is where VAT is charged – and in that place only!
There are three places where a service can be deemed to be supplied:
- where the supplier belongs, in the case of most clients this will be in the UK, or
- where the service is actually performed, or
- where the customer "belongs", which has a long and complex definition!
Exactly what is being done and how it is being done is significant in determining which of these rules applies. In addition, services supplied to certain bodies, for example to the European Commission itself, which one of our clients does, are treated in yet another manner.
Planning point: If you are supplying services overseas, but have not thought about these matters, please contact us as a matter of some urgency to ensure you are adopting the correct approach. If VAT does need to be charged at UK rates, it may be much more difficult to claim this back from an overseas customer than it would be from a UK customer if there had been a VAT error over here.
VAT registration thresholds in other EU countries
One consequence of the supply of services overseas, where the place of supply is determined to be in another European Union country, is the need for you to consider whether you are doing business in that country and therefore need to register for VAT there. The registration threshold in the UK (£64,000 from 1 April 2007 as noted above), is by by far the highest in the European Union. In Eire and France, any business transactions could require registration and in many other EU countries, the registration threshold is €5,000 (approximately £3,400).
Planning point: If you have any doubt about the VAT treatment you have adopted for the supply of services overseas, please do not hesitate to contact us. Under intra-EU cooperation agreements it is clear that much more information than previously is now being passed around EU Governments with regard to this sort of matter and it is extremely important that you review the position, or considerable penalties could result.
9. VAT AND MOTORING EXPENSES
The vast majority of clients these days have their car outside of their business, but then keep a business mileage log and reclaim, as a business expense, their business mileage on the basis of 40p per mile for the first 10,000 business miles per year and 25p per business mile thereafter. All of the costs of running the car - fuel, insurance, road fund licence (VED), repairs, depreciation, loan interest, etc. are met by you personally and reimbursed by the mileage rate; this being a simple and, in most cases, fair way of obtaining recompense for business mileage travelled.
Planning point: In such circumstances, it is possible for your business to make a VAT reclaim based on the mileage rate. However, this has to be based on only a proportion of the 40p/25p mileage rate and the approved proportion has changed with effect from 1 February 2007; I sent out a "CLIENT ALERT" last month in this regard. If you did not receive a copy of this and would like to have one, please contact Andrew Coates in the office who will be pleased to send you a copy either by post or e-mail. Please remember that if you do make this claim, you must obtain petrol receipts from employees (including yourself) sufficient to cover the amount on which VAT has been reclaimed.
In these circumstances, it is NOT NECESSARY to make an adjustment to your VAT output tax for VAT on private motoring. This is because if you only claim for business mileage, then your business is not paying for any private motoring, so no VAT adjustment for it is required.
However, in circumstances where your business pays for all of your motoring expenses, including fuel for private use, then a VAT output tax charge adjustment is required, unless you elect not to reclaim the VAT on any of your petrol costs. Whilst this has been the position for a long time, I am setting it out again here for two reasons. The first of these is that we have recently come across a client who had misunderstood this point and I am worried this may be more widespread than I had thought. Secondly, the basis on which the VAT output charge is made is changing significantly from the start of your first VAT period beginning after 30 April 2007.
Planning point: First, please note the date of the change and which of your VAT returns will be the first one to be affected. Please then obtain the CO2 emissions figure for all vehicles for which an adjustment is made. Previously, the output tax charge had three bands based on engine size, but the new scale based on vehicle emissions has 21 different bands! For vehicles registered after about 2001, the emissions figure is on the registration document; if your vehicle was registered before 2001, the engine size will still be used as the basis for the charge. I expect the new scale charges will be included in the VAT notes leaflet sent out with the first return to which they are required to apply. Also, as far as I am aware, these changes only affect a small number of clients, to whom I will be writing directly, but if anybody else is either confused over the VAT output tax charge, or needs to know the new tables, please do not hesitate to get in touch.
10. VAT RATE CHANGES – HOME ADAPTATIONS FOR THE ELDERLY AND SMOKING CESSATION PRODUCTS
Whilst it was announced that VAT on both of these would be reduced to 5%, there is no technical brief on home adaptations, which leads me to believe this will be subject to further consultation on exactly what is included and will not be introduced until a later date, perhaps next year. Quite of lot of "aids" for disabled people are already zero-rated for VAT, but this may be intended to cover the costs of alterations, for example to accommodate a stair lift, in addition to the cost of the zero-rated stair lift itself.
The reduction in the VAT on smoking cessation products is from 1 July 2007, BUT for one year only.
11. EMPLOYEE TAX RELIEF FOR TRAINING COURSES
I regret to have to advise, there has recently been a crackdown on employees claiming tax relief against training expenses they have paid for themselves. I will not go into the detail of "why" this is, the tax law on this point is tortuous in the extreme, but there is a serious problem here in that with the publicity given to a recent "case" concerning a consultant psychiatrist, it seems likely virtually every claim for training expenses is going to be queried and many, if not most, rejected.
To avoid any doubt, for those of you might read between the lines of what I say below, the provision by an employer of "work-related" training does not confer any benefit in kind on the employee.
Planning point: If you are an employee, but your employer will not pay for training courses, you will most probably not be able to claim tax relief on any amount you pay, unless there is a formal requirement in your contract of employment for you to undertake particular courses. If there is then you may be able to claim that payment for the course was "necessary", a key point in tax law, for the purposes of your employment and in those circumstances tax relief could be given.
However, in many cases it is not possible to specify the training you are required to undertake and pay for in an employment contract and in these circumstances, if your employer cannot or will not pay for the training, you may wish to ask them to consider a salary sacrifice arrangement. Under such an arrangement, you agree your gross salary, before tax, can be reduced by the amount of the training expenditure and your employer will pay this directly on your behalf. Your employer is not out of pocket, as the total of the expenditure and your reduced gross salary is the same and you are better off as this effectively gives you the tax relief you cannot claim yourself – nuts, isn’t it!
For example, if your gross pay was £1,000 for a period and you had training expenses of £200 that would not be allowed on your return, if you pay the expenses out of after tax income and assuming you have a marginal tax rate of 40%, you would have £400 left - £1,000 less 40% tax less £200. However, if the expenses come off your gross pay you receive £800 less 40% tax = £480.
PAH comment: It is basically 100-year-old tax law that is being used to deny tax relief for these expenses – in technical terms it is a capital/revenue issue. However, in one recent case this has denied tax relief to a doctor client of ours for examination fees, an advanced paediatric life support course and literature, on which the tax relief would have been less than £500. If I had a sick child, I would prefer my doctor to have been on such a course and I am sure you would as well!
12. STAMP DUTY LAND TAX
PAH comment: It is most disappointing to note that there has been no increase in the Stamp Duty thresholds of £125,000, £250,000 and £500,000. With house price inflation continuing apace, the "fiscal drag" (additional tax revenue arising without the Government doing anything) that results from this is substantial. This does not even rate a mention in the Budget “red book” as it is the result of a Budget "non-decision" rather than the result of a Budget decision, the effects of which have to be set out in detail.
It is fair to say that fiscal drag of this nature is present throughout the tax system these days and though there are some proposals to address particular issues in 2008/09, the failure to increase other figures, such as the 40p per mile allowance, which was set when petrol was less than 70p per litre, is substantial.
13. CAPITAL GAINS AND INHERITANCE TAX
For 2007/08, the Capital Gains Tax allowance will be £9,200 per person and the Inheritance Tax threshold £300,000.
14. TAX CHARGES ON INTEREST FROM OVERSEAS BANK ACCOUNTS
In the past few months, the Treasury has been mounting a campaign, which has now been successful; to obtain substantial quantities of information from banks and other financial institutions regarding UK clients of those institutions who may have overseas bank accounts. The exact information they have asked for is phrased in a fairly obscure manner, but what they are getting at is whether there are any overseas bank accounts that UK residents had a duty to declare the interest on, on a UK tax return; it is expected within the next month or so there will be further announcements on this.
Planning point: If you have any overseas bank accounts, for any purpose, that you have not previously notified us about, now is the time to “come clean”! If you do not do this and HMRC have to chase you for outstanding information and tax, then it is likely they will seek penalties.
From what I have heard in HMRC circles, I believe that if affected taxpayers do not make full disclosure of overseas bank account interest within the next few months, covering from the date the overseas account was first opened, then the maximum penalties permitted in law will be charged, in addition to the tax due and interest thereon, mitigated by any overseas tax already paid of course, which will be payable in any event – please remember that HMRC is empowered to levy penalties of up to 100% of the tax due.
As I say, for there to be any possible remission of penalties owing to "co-operation", my understanding is that this matter will need to be dealt with very promptly, well before the deadline for submission of 2007 self-assessment tax returns.
15. BUT, RELIEF FROM POSSIBLE TAX CHARGES ON OVERSEAS PROPERTIES
It has been brought to the Treasury’s attention that a considerable number of UK taxpayers have purchased properties overseas through the medium of a UK or overseas company of some form. The use of a company in such circumstances is usually required to get around “forced heirship” rules, such as those that exist in both France and Spain. Under such rules, when somebody dies their estate has to be distributed quite narrowly, usually within the family, or substantial tax charges can result.
There is a technical problem in that it is possible, under UK legislation that such property owners could be charged to a benefit in kind in the UK based on their use of the overseas property. However, assuming that the company has been set up solely for the purpose of owning the overseas property and that there are no “connected companies” in the UK then in most circumstances, HMRC will accept that no such benefit in kind arises and will not pursue any benefit in kind for previous years.
Planning point: Notwithstanding this, many other UK tax issues can arise with foreign properties, particularly if these are let out for any form of consideration. Again, if you own a foreign property, but have not in the past let us have details of any income and expenditure on the property, please could you consider the matter and let us have full details when you supply the information for your 2007 self-assessment tax return.
16. DO YOU TAKE A DEPOSIT FROM TENANTS IN YOUR BUY TO LET PROPERTY?
If you do, each new deposit you take after 5 April 2007, this including retaining a deposit on any new short-term lease granted to an existing tenant after that date, will have to be notified to the Government and dealt with in one of two ways – custody or insurance. Under the custody scheme, you have to give the deposit to a Government nominated body who will retain it on your behalf. At the end of the lease, if there is any dispute over the return of the deposit, the custody body will act in that dispute and agree a settlement between the various parties. The alternative is that you retain the deposit, but register it with a different body, there is a choice of two for some reason, and pay an insurance premium that guarantees the deposit at the end of the lease.
Further information is available online at www.direct.gov.uk/tenancydeposit
Planning point: Even having read the Government’s advice, the one thing it does not tell you is which of the two schemes to adopt – custody or insurance. I have asked one of our clients, John Bint, who owns a considerable number of buy to let properties for his advice and he has come out very strongly in favour of the custody scheme. Although the custody scheme means you do not have access to the deposit during the period of the tenancy, the costs of an insurance-based scheme appear to be considerable and for this reason, John has chosen the custody route for his properties.
As well as owing a considerable number of buy to let properties, John also provides consultancy services to other buy to let owners. If you would like any advice on your property from an independent source, although I should point out John is not an "Independent Financial Adviser", I should be pleased to put you in touch with him on request.
17. COMPANIES ACT 2006
The other major piece of legislation that has recently been enacted, which will have effect on clients, is the Companies Act 2006.
As is usual these days, although legislation is passed in an Act, it is then brought into force over a number of years. In particular, the various provisions contained in the Companies Act 2006 will be brought into force from January 2007, April 2007, October 2007, April 2008 and then October 2008. Some of the provisions are of limited interest, but we will ensure clients are kept up date on any matters that may affect your operation of your company.
We will issue further newsletters or client alerts when the exact timing of future provisions in the Companies Act that may affect the way in which clients do business, are brought in.
I have mentioned that some provisions have already been brought in. These are mainly designed to facilitate electronic communications and if you have a website you will have probably already received “cold calling” e-mails from various people seeking to update the information contained on your website such that it is compliant with the Companies Act 2006.
Planning point: With immediate effect, companies and limited liability partnerships are required to detail their name, registered number, registered office and country of registration on all e-mail footers or disclaimers and on any relevant website. If you sell goods or services electronically, for example via your website, you must also state your VAT number.
In addition, certain provisions as of what is known as the “transparency obligations directive” are also now in force. These include provisions on company communication with shareholders, including electronic communication and “safe harbour” provisions for directors in respect of statements made in the Directors’ Report and related documents. Essentially, it is now possible for a company to communicate with its shareholders electronically without changing its Articles of Association. However, there are certain “ifs and buts” surrounding this and if you are thinking of doing this, please contact us for further advice before relying on the fact that a shareholder is deemed to have received a notice sent to them by electronic means.
By “safe harbour” provisions, this means that a director is only liable for statements in the Directors’ Report and related documents to existing shareholders of the company. This does not mean that such statements can be reckless, but that somebody else cannot rely on the statements made in the Directors’ Report and related documents and then sue the director if, for any reason, the statements in the report prove to be false.
This is unlikely to be a problem with any small company, as the information in the Directors’ Report is pretty straightforward and factual, but with medium and large companies now having to put more subjective information in their Directors’ Report, including a “business review”, this legislation seeks to protect the directors of a company in that situation.
PAH Comment: Some of the provisions of the Act coming into force in October 2007 concern Directors' duties, which will be defined in law much more extensively than previously. Whilst this is of limited impact in wholly owner-managed companies, where there are external shareholders of any sort, directors will have to take care to make sure they comply with the new rules. As this is applicable only to a relatively small number of clients, I intend to deal with this in a separate "Client Alert" nearer the time.
IN THE FOLLOWING SECTIONS, I CONCENTRATE ON THE MAIN CHANGES PROPOSED FOR FUTURE YEARS. MANY OF THESE ARE SUBJECT TO FURTHER CONSULTATION AND ALL MUST BE CONFIRMED IN THE 2008 BUDGET AND FINANCE BILL IN DUE COURSE
18. MAIN BUSINESS TAX CHANGES FOR 2008/09
Corporation tax rates
It is proposed the "mainstream" corporation tax rate be reduced to 28% from the current 30%, but the small companies' rate increase by a further 1% to 21% for 2008/09. No changes have been announced to the bands for corporation tax, so it is expected the small companies' rate will continue to apply to profits up to £300,000, with there then being a higher marginal rate before the mainstream rate applies to all profits if these are more than £1.5 million.
PAH comment: Whilst the additional corporation tax payable by smaller companies will reduce the tax saving achieved by operating through a company and therefore slightly increases the profit level over which this is effective, the "other" reasons for wanting to operate as a company – to allow independent contracting outside of IR35 or variable profits giving rise to pension contribution problems, remain and in my opinion, whilst the change in rate is unfortunate, it has no substantial effect on business structure decisions.
I suspect the Chancellor knows that without a major reform of smaller business taxation – a process he does not wish to start himself?, he is not going to solve the "problem" of tax motivated incorporation and has therefore decided he might as well take a bit more tax in the short term.
Capital allowances
Big changes are proposed for capital allowances including an "Annual Investment Allowance" (AIA) of £50,000. This is "subject to consultation", but would appear to offer, in more familiar language, 100% First Year Allowance (FYA) on the first £50,000 of expenditure on plant and machinery, BUT, at the same time, the rate of Writing Down Allowance (WDA) for any pool expenditure not previously claimed, will be reduced to 20% (25%).
Planning point: As noted in 1 above, it may be better to consider, if it is commercially sensible of course, deferring expenditure originally planned for the second half of the 2007/08 tax year to 2008/09, but before your year-end in that year, to speed up the obtaining of capital allowances; BUT NOT if your year-end is 31 March 2008, as that would mean deferring the allowances for a full tax year. If you are considering doing this, please contact us to confirm there are no other issues that might affect this decision in your particular case.
The Chancellor was keen to point out a small business with taxable profits of £150,000, spending £50,000 on plant and machinery would only have an overall corporation tax rate of 14% in 2008/09 - (£150,000 - £50,000 = £100,000 X 21% = £21,000 ÷ £150,000 = 14%), following the introduction of the AIA.
Planning point: If capital expenditure exceeds £50,000 in a year, there could be some advantage in looking at "short-life" elections for some classes of asset – it will be interesting to see if anti-avoidance rules are also brought in!
There is to be separate consultation on the rules for cars, but it is expected the £12,000 "expensive car" rule will be removed in favour of one pool for all cars not subject to private use restrictions. It is unlikely there will be any FYA on this pool and there will be a reduced WDA – probably between 10% and 15%. It is also expected the car leasing disallowance in the taxable profit computation – Schedule D Case 1 computation in "old speak", will be removed, or at least reformed and simplified.
The WDA on long life assets is being increased to 10% (6%), but the rates of Industrial and Agricultural Buildings Allowances will be decreased to 3% (4%). In addition, again subject to consultation on exact definitions, it will be necessary to separate expenditure on items that are classed as plant and machinery, but are "integral to a building" - the long life rate of 10% applying to such expenditure.
PAH comment: This sort of expenditure has long been a point of contention between business and HMRC as if the Tax Inspector could determine expenditure to be part of the building, rather than "plant and machinery", then very often no tax allowance was available at all – this leading to a plethora of case law.
19. MAIN PERSONAL TAX CHANGES FOR 2008/09
Basic rate of income tax
It is proposed the basic rate of income tax be reduced to 20%, but that the 10% starting rate be abolished. It has already been commented in the press that unless someone earning less than c.£18,600 is able to take advantage of another of the Chancellor's proposals, they will pay more tax as a result. Above inflation increases in personal allowances for pensioners are proposed, this and the changes to tax credits referred to below appearing to be part of the rationale for removing the 10% rate.
Our "standard" recommended salary from an owner-managed company has, for the past few years now, been set at the personal allowance plus the 10% rate of tax. From 2008/09, we will need to change this and it will be more difficult to set a "standard" rate. What we expect to do is to give you a range of salaries to choose from, having explained the effect a salary of a different level will have on your NICs record.
There are two important effects of a reduction in the basic rate of tax – on pension contributions and the benefit of gift aid payments to the recipient.
Planning point 1: Currently, with the basic rate at 22%, a payment of £2,808 into a pension scheme from your after tax income will result in the scheme being credited with a contribution of £3,600 (£2,808 X 100%/(100%-22%)). From 6 April 2008, the same contribution will only put £3,510 into your pension scheme (£2,808 X 100%/(100%-20%)). To get the same amount of £3,600 into your pension scheme you will have to increase your payment to £2,880, an increase of £72 or 2.56%.
Planning point 2: The same principle applies, in reverse, to gift aid donations to charities. If you pay £100 to a charity, they can currently reclaim £28.20 from the taxman (£128.20 less 22% = £100). From 2008/09, the charity will only be able to reclaim £25 – a decrease of 11.3%! For the charity to get the same amount from your donation you would have to increase your £100 to £102.56.
In both cases, the tax effect only applies to a basic rate taxpayer, as a higher rate taxpayer will claim more relief through their tax return to pay the extra contribution/donation!
PAH Comment: You may have noticed that the 10% rate will "continue to apply to savings income", however, this, to be blunt, is disingenuous and will only happen if your total income is less than about £7,500. This is complex to explain in more detail, without taking several pages, but if you have any queries, please give Linda or me a call.
There is one small technical change that will benefit those with small shareholdings in overseas companies – for example like those who have retained shares in the Spanish company Grupo Santander, following their takeover of Abbey National a few years ago. Dividends from small holdings in such companies will now be treated in the same way as UK dividends - this is welcome, but why can't it be done in 2007/08?
National insurance contributions (NICs)
Ever since their introduction, just after World War II, NICs have always been looked at by politicians, of all hues, as "something different" from other taxes. In particular, the politicians have always talked about what they called the "contributory principle" – you pay into the NI fund when you are working, but on other occasions draw from it – when you claim NIC based benefits or the state pension. Since the middle 1980s however, any pretence that "you get out what you put in" has all but been abandoned and now the Chancellor proposes to bury the contributory principle altogether, by aligning NIC bands with income tax bands over a couple of tax years - a betting man would lay odds on NICs as a concept disappearing as a separate charge within five years.
PAH comment: The current proposals envisage NICs increasing for those earning over about £35,000 per annum, but of course they will benefit from the reduction in the basic rate of income tax, subject to having to make more pension contributions and increase their gift aid donations. There are so many figures floating around in the technical brief on this, I believe it will only be after we have the personal allowances and NIC bands for 2008/09 – these will be announced at the time of the pre-Budget report in November/December – perhaps the first major announcement by a new Chancellor of the Exchequer? – that it will be sensible to do some comparisons and work out the winners and losers; I will therefore return to this in my Winter 2007 newsletter.
Tax credits
It is proposed that the income level at which working tax credit is withdrawn be increased substantially, by £1,200 to £6,420, but also that the rate of withdrawal be increased from 37% to 39%.
PAH comment: This would appear to offset the reduction in the basic rate of tax and keep the marginal rate of tax of someone on still a very low income at 70%! – as income goes up you pay more income tax (20%) and NICs (11%) and lose tax credits (39%) => 20 + 11 + 39 = 70!!!!!
Inheritance tax
The IHT allowance is proposed to rise to £312,000 in 2008/09.
ISAs
The maximum annual amount that may be invested in an "Individual Savings Account" will be £7,200 (£7,000) – yippee!, of which £3,600 (£3,000) may be in cash – again, why not from 2007/08?
Tax return filing dates
The filing date for a paper return for the year ended 5 April 2008 will be brought forward to 31 October 2008, the deadline for electronically submitted returns remaining at 31 January 2009.
20. PROPOSED CHANGES FOR 2009/10 AND ONWARDS
Corporation tax
The small companies' rate of tax is proposed to rise a further 1% to 22%
PAH comment: Some commentators in the accountancy press have pointed out that the UK is the only jurisdiction in the EU with two rates of corporation tax and wonder if the end of the line here is one rate at about the 25% level.
Capital allowances
It is proposed the rates of IBA and ABA be further reduced by 1% per annum until they are abolished. At that point, there will be no tax allowances for buildings, whatever they are used for.
Income Tax and NICs
There are proposals for above inflation increases in personal allowances for pensioners, with the allowance for those over 75 rising to £10,000 from 2010/11.
PAH comment: Although such rises are always welcome, it must always be remembered that over income of currently around about £20,000 per annum, "age" allowances are reduced by £1 for every £2 of income until they are the same as the allowances for those under 65.
The alignment of income tax and NIC bands is proposed to be completed in 2009/10 and as part of this the 40% threshold raised by £800 above indexation.
Inheritance tax
Proposed thresholds are £325,000 in 2009/10 and £350,000 in 2010/11
If you have any queries or would like to follow up on any matter, please do not hesitate to contact Kim, Linda or me.
