CLIENT NEWSLETTER – SPRING 2011

“ACTIVE AND IMAGINATIVE ACCOUNTING AND TAX”

INTRODUCTION

George Osborne gave his second Budget – his first “ordinary” one on 23 March 2011. In the emergency Budget in June 2010, he set out a range of public spending cuts and tax increases that would affect all of us. Nine months later, the 2011 Budget was an important test of the Coalition Government.

Faced with a range of conflicting economic data, sluggish growth forecast, rising inflation and fuel prices, not to mention the need to tackle the largest Budget deficit in the UK’s history, the Chancellor’s options were limited. In view of this it was no surprise that he set out a fiscally neutral Budget.

However, he was at pains to emphasise that no new tax rises would be introduced and took some steps to relieve the pressures on households facing higher tax and NIC, as well as higher fuel and food prices, whilst at the same time setting out a strong pro-growth agenda.

The Spring Budget used to be the time when Chancellors announced the tax rates and bands for the forthcoming year with somewhat of a flourish – in an effort to surprise their political opponents. These days quite a lot of the proposals are announced up to a year in advance and it is no different this time. Accordingly, in this newsletter I go over the tax rates and allowances for 2011/12, before looking at some of the Budget measures that are of immediate impact, finishing with a look ahead to 2012/13, when we already have some idea what tax rates and allowances will look like, in what will then be the third year of the Coalition Government.

THIS NEWSLETTER COVERS THE FOLLOWING TOPICS:

1. Income tax 2011-to-12
2. Personal National Insurance contributions in 2011 2012
3. Changes to take home pay in 2011 2012
4. Employers National Insurance Contribution for 2011 2012
5. Our recommended remuneration strategy
6. Payroll processing – year end and 2011 2012
7. PAYE codes for new State pensionser
8. Mileage Rates- an unexpected increase
9. VAT matters
10. Corporation Tax
11. Capital Allowances – General Rules
12. Capital Allowances – Energy Saving Equipment
13. IR35 – no change but greater certainty
14. ESC C16 – withdrawal of a concession
15. Is your business undercapitalised – try EIS?
16. Research and Development tax credits
17. Furnished Holiday lettings
18. Individual savings accounts
19. Capital gains tax
20. Inheritance tax
21. Stamp duty land tax
22. Enterprise zones
23. Small business rate relief
24. Anti-avoidance – disguised remuneration
25. Tax in the EU and mutual assistance
26. Income tax in 2012 2013
27. Corporation tax in future years
28. Merger of income tax and National Insurance
29. Real time PAYE information
30. Further reform of small business taxation?

As I always say, it is only possible for me to comment on some of the matters contained in the Budget and on other current issues. If you are interested or concerned about any other matters that I have not covered in the Newsletter, of course please do not hesitate to get in touch with me to discuss the point.

1 Income tax in 2011/12

2011/12 is the first tax year of the Coalition policy, arguably influenced substantially by the Liberal Democrats, of moving towards taking those earning less than £10,000 per annum out of Income Tax altogether.

From 6 April 2011 the personal allowance for those aged under 65 is substantially increased to £7,475 (2010/11 £6,475) with increases to £9,940 (£9,490) and £10,090 (£9,640) for those taxpayers aged between 65 and 74 and over 75.

As has always been the case the additional personal allowance given to those aged over 65 is reduced by £1 for every £2 where total income is over a limit now of £24,000 (2010/11 £22,900). This means that for older taxpayers whose income exceeds £28,930 (aged 65 to 74) or £29,230 (over 75) the personal allowance is reduced to the standard figure of £7,475 – the 2011/12 limit of £24,000 has been set in such a way such that the total income at which the personal allowance is reduced to the standard figure is unchanged from 2010/11.

One major change from April 2011 is the level at which higher rates of Income Tax are due. Whilst the personal allowance has been increased, the Government announced this will not result in any tax decrease for 40% taxpayers. In order to achieve this, it is necessary for the threshold at which the 40% tax band starts to be reduced to £42,475 of total income, compared to £43,875 in 2010/11; this means more people are sucked into the 40% band.

For taxpayers whose income exceeds £100,000 the personal allowance is reduced on the same basis as that for older taxpayers referred to above (£1 for every £2 of additional income), meaning that where income exceeds £114,950, no personal allowance is available at all.

PAHCo Planning point: As this rule gives an effective marginal tax rate of 60% for income falling in the range £100,000 to £114,950, having total income between these two figures is undesirable. If you feel it likely your income in 2011/12 will be in this range, please contact us to discuss possible options.

There is no change to the level at which the additional rate of 50% is due – this remains at £150,000.

2 Personal National Insurance Contributions in 2011/12

From April 2011 there are major changes to the rates at which National Insurance is charged, both for employees and self-employed taxpayers.

PAHCo Comment: Whilst the Chancellor might argue he has softened the impact of the quite substantial increases in National Insurance announced by the previous Government before the 2010 Election, the effect of his changes is only to remove any increase from those earning under about £20,000 per annum. If you earn more than that amount, you and indeed also employers paying people more than that amount – see section 4 below, will have to pay quite substantial increases in National Insurance Contributions in 2011/12.

For employees, what is known as the primary Class 1 rate of National Insurance Contributions is increased by 1% to 12% on income between £7,288 and £42,484 per annum. For 2010/11, this was 11% on incomes between £5,720 and £43,888. The changes to both these thresholds, in particular the substantial increase in the lower threshold, are necessary to limit an actual increase to those earning over £20,000.

Employees whose earnings exceed £42,484 will be required to pay 2%, rather than 1% on earnings above this level, with no upper limit.

If you are self-employed, the Class 2 weekly contribution is increased to £2.50 – up by 10p from 2010/11. However, if your self-employment income is less than £5,315 (2010/11 £5,075) you are able to apply for a small earnings exception certificate.

PAHCo Planning point: If this applies to you and you do not have an exception certificate, please contact us to arrange for this to be set up.

There is also to be a significant change to the way in which Class 2 contributions are collected. Previously these have been paid either monthly by direct debit or quarterly by invoice, but now they are to be payable only twice a year – on 31 July and 31 January. I understand that the payment due on 31 July 2011 will cover April, May, June and July 2011, with the payment to be taken on 31 January 2012 the next six months and then six months on 31 July 2012, and so on. If you pay by direct debit there is no need to do anything yourself, the existing mandate is satisfactory – when you receive the notice of contributions payable for 2011/12, the new payment dates will be explained.

PAHCo Comment: The alignment of the payment dates for Class 2 National Insurance contributions with other self-employment Income Tax and Class 4 National Insurance contributions – for details on the changes to this see below, means that it is likely in future this will not be assessed as a separate matter, but part of your annual self-assessment. This may mean the need to apply separately for an exception certificate, which can be a considerable nuisance to keep on top of, will become unnecessary. In my opinion this is also a necessary precursor to any merger of Income Tax and National Insurance – see section 28 below.

Class 4 profits based contributions for the self-employed will be payable on profits between £7,225 and £42,475 (2010/11 £5,720 and £43,875) at a rate of 9% (8%). As with employee National Insurance contributions, the additional charge on profits above £42,475 is raised to 2% from the previous 1%.

A final thought on NICs!: Although Coalition policy is to move towards those earning under £10,000 being taken out income tax, whether they can also be taken out of National Insurance is another matter! – whether or not it is merged with Income Tax.

3 Changes to take home pay in 2011/12

With wholesale changes to thresholds and rates in all different directions, it is quite difficult to see the effect of the changes.

I set out below tables showing the net take home pay and the difference between the two for both an employee and a self-employed person at various different levels of earnings, assuming the same amount is earned in both the 2010/11 and 2011/12 tax years.

The table for an employee is as follows:

Salary	£15,000	£30,000	£40,000	£42,475	£50,000
Tax 2010/11	(1,705)	(4,705)	(6,705)	(7,200)	(9,930)
NI 2011/12	(1,021)	(2,671)	(3,771)	(4,043)	(4,260)
Take Home	£12,274	£22,624	(29,524)	£31,232	£35,810
-	-	-	-	-	-
Tax 2012/12	(1,505)	(4,505)	(6,505)	(7,000)	(10,010)
NI 2011/12	(933)	(2,733)	(3,933)	(4,230)	(4,381)
Take Home	£12,562	£22,762	£29,562	£31,245	£35,609

Owing to the increase in the personal allowance, income tax beneath the 40% threshold of £42,475 in 2011/12 is reduced by £200 (the £1,000 increase in the allowance at the basic rate of 20%), but increased National Insurance wipes this out as soon as 40% tax has to be paid.

The table for a self-employed person, including a partner in a partnership (in that case based on their share of the partnership profits) is as follows:

Profits	£15,000	£30,000	£40,000	£42,475	£50,000
Tax 2010/11	(1,705)	(4,705)	(6,705)	(7,200)	(9,930)
NI 2011/12	(743)	(1,943)	(2,743)	(2,941)	(3,114)
Take Home	£12,552	£23,352	(30,552)	£32,334	£36,156
-	-	-	-	-	-
Tax 2012/12	(1,505)	(4,505)	(6,505)	(7,000)	(10,010)
NI 2011/12	(699)	(2,050)	(2,15%0)	(3,173)	(3,323)
Take Home	£12,796	£23,445	£30,545	£32,303	£36,667
-	-	-	-	-	-
Difference	£243	£93	(£7)	(£32)	(£289)

In this case the difference percentage increase in the rate of Class 4 National Insurance contributions over the Class 1 increase for employees, means the cut-off point where additional total income tax and NICs are payable is just under £40,000.

PAHCo comment: For those who want to do the maths, there has been an increase of 1% in the rates for both Primary Class 1 employee NICs and Class 4 self-employed profits based NICs. However, 1% as a percentage of the previous 8% figure for Class 4 contributions is a 12.5% increase in the rate, whereas a 1% increase in the previous 11% figure for Primary Class 1 contributions is only a 9.09% increase in that rate. This is the reason for the different points at which the overall amount payable increases in 2011/12 and given the fiddling about with the threshold for employer Secondary Class 1 NICs – see section 4 below, it is perhaps a little surprising the Class 4 threshold was not further adjusted to take this into account.

4 Employers National Insurance Contribution for 2011/12

I am sure all employers had very much hoped that following the coming to power of the Coalition Government, the previously announced swingeing increase in employer’s National Insurance contributions (technically secondary Class 1 NICs) would have been reversed. However, this is not the case and as announced in the emergency Budget last Summer, the rate of employer’s National Insurance will increase to 13.8%, up from 12.8%, with effect from April 2011.

However, as for employee contributions for those earning under £20,000, employers will be exempted from any increase in their contributions in respect of employees they pay a salary of less than £20,000. To achieve this, there is also a substantial rise in the threshold for employer National Insurance contributions, which will now only be charged on salaries paid above £7,072 per annum (£5,720 in 2010/11).

PAHCo Comment 1: It should be noted the threshold for employer NICs is now different from that for employee NICs. In the same way as there has been a different rate of increase in the Class 4 self-employed NIC charge over the employee Class 1 charge, the rate of increase in the employer Class 1 charge of 1% on 12.8%, an uplift of 7.81%, is less than the 9.09% uplift in the employee rate. To make sure increased NICs are paid by both employees and employers at the same salary level, the thresholds for the contributions have had to become different.

PAHCo Comment 2; it is worth noting that from a situation only four or five years ago where we had one threshold at which Income Tax and both employee’s and employer’s National Insurance began to bite, meaning it was relatively simple to understand the effect of changes on business profits, we now have a situation where there are different thresholds for all three of these items:-

• £7,475 for Income Tax
• £7,288 for employee National Insurance
• £7,072 for employer National Insurance

and Mr Osborne claimed he was simplifying things!

There was no mention in the Budget of the Employer NIC “holiday” for new business outside of London, the South East and Eastern regions. My understanding is that the take up of this scheme has been very low indeed, although it does remain available in Northamptonshire and Lincolnshire and generally to the north and west of there. If you are interested in this scheme, I set out details in section 5 of my Summer 2010 newsletter, this is available on our website if you do not have a copy – or of course, please get in touch for further information.

5 Our recommended remuneration strategy

Our recommended remuneration strategy for 2010/11 for withdrawals from an owner managed company was a salary equal to your personal allowance of £6,475, topped up by dividend payments, subject to overall levels of profits available for distribution and the 40%, £100,000 and 50% income tax thresholds being taken into account as required in your particular case; this level of salary involved payment of total NICs (employee and employer’s) of £180.86, this ensuring you maintained an NIC payment record for the tax year.

PAHCo Planning point: For 2011/12 we recommend the salary element of your remuneration be increased to the new personal allowance of £7,475. At this level of salary, the benefit of the increased NICs thresholds outweighs the increase in the rates and the overall NIC payable will reduce to £85.61; I hope you will find this acceptable!

As previously, if you have taxable income from different sources, for example benefits in kind or substantial savings or land and property income, this may affect our salary recommendation.

Where a different remuneration strategy has previously been in place, for various reasons, we will review and agree the new strategy for 2011/12 with you on an individual basis.

6 Payroll processing – year end and 2011/12

PAHCo Reminder: Please remember the time limit for payment of PAYE/NICs for 2010/11 is 19 April 2011 and that interest WILL be charged on any amounts due for the year not received by HMRC before that date. Please also remember HMRC do not accept “faster payment” using electronic means and although you get three extra days grace when paying electronically, the extended deadline is one day earlier on 21 April 2011 this year as the 22^nd is Good Friday! In view of this, I recommend payments be made by no later than Friday 15 April 2011, to make absolutely sure they are received by HMRC in time.

The due date for submission of form P35 and related documents is 19 May 2011 and HMRC WILL apply fines for late submission – this is now a major “earner” for them! There are no longer any “days of grace” with regard to this deadline.

If you have a requirement to submit form(s) P11d, these need to be sent to HMRC by 6 July 2011, again, HMRC WILL apply fines for late submission. During the past year, we have obtained dispensations from the reporting of expenses on form P11d for many clients, following a considerable relaxation in the rules concerning such dispensations. However, if you do not have a formal dispensation then please remember that as well as actual benefits in kind, such as private medical insurance and company cars and vans, all expenses paid to directors and employees, aside from mileage at or below the tax allowable rate – see section 8 below, have to be reported to HMRC on form P11d. Given the relaxation of the dispensation rules, we expect HMRC to crack down on non-compliance with the regulations in the very near future.

If you have any questions about PAYE compliance – either end of year processes or in respect of ongoing requirements – or have just got so fed up with it you would like us to do your payroll compliance for you, please do not hesitate to get in touch, we should be pleased to assist. In this connection, also see my notes on real time PAYE in section 29 below – coming to a payroll near you probably in 2012.

If you do your own payroll, please make sure that you have installed all the latest updates from your software supplier before running your April 2011 payroll – from my notes above you will appreciate there are many changes!

If you have previously relied on the Employer CD Rom from HMRC to process payroll, this is no longer being issued and has been replaced by a set of “Basic PAYE Tools” on the HMRC website.

7 PAYE codes for new State pensionser

Whilst nothing as such to do with the Budget, HMRC have advised that, regrettably, there may be some issues with PAYE code numbers in respect of people who began to receive a State pension during 2010/11, which could result in them having underpaid tax for the year ending 5 April 2011. This would appear to be a hangover from the problems with the new PAYE coding system last Autumn, in that whilst they were dealing with the fallout, HMRC seem to have taken their eye off the ball with regard to new State pensioners.

In case you are not aware, a State pension is paid gross, with no tax deducted, but the value of the pension is then deducted from a PAYE code applied to any other income, including occupational pensions, that you may receive. Where this is not done, insufficient tax will be deducted under PAYE from your occupational pension or other employment.

HMRC have advised that some new State pensioners have not had the fact of their receiving a State pension included in code numbers for 2010/11, or indeed in the codes that have already been issued for 2011/12. As the situation for 2011/12 has now been identified, it is expected revised code numbers will be issued for that year shortly, which will mitigate the underpayment of tax that would otherwise arise going forward, but of course the 2010/11 tax year has ended.

HMRC advise that they are unable to “remit” i.e. forget about, the tax underpaid for 2010/11, although that has arisen from what can only be described as their error. However, they will allow the additional tax to be collected under PAYE over a period of up to three years, dependent upon how much is underpaid.

If you are or you know anybody who is affected by this and they suddenly receive correspondence from HMRC about additional tax being payable as a result of a new State pension, we should be pleased to look at the information and comment on it, to make sure everything is being dealt with correctly.

8Mileage Rates- an unexpected increase

A considerable surprise in the Budget was that for the first time since at least 2002, the mileage rate payable to staff which does not attract a tax charge has been increased to 45p per mile (up from 40p). This is the rate you can pay your staff for mileage travelled – although you do not have to do so, without a benefit in kind arising – the new rate is applicable for business mileage travelled from 6 April 2011.

The 45p rate is applicable to the first 10,000 business miles per annum; the rate for business miles in excess of this of 25p per mile is unchanged.

If you choose to pay less than the maximum, your staff can claim the difference between 45p/25p and the amount paid as an additional tax relief. If they are self-assessment taxpayers the claim is made on their return, but otherwise they will need to contact HMRC.

PAHCo comment: I think the Chancellor said this rate has not been increased since 2002 as that was when the current system for dealing with this came into force, however before that there was a slightly different system and I am reasonably certain that the rate was 40p in that as well, so I think 40p – at least for normal family cars, has been in place for rather longer than that. In preparing this newsletter, I looked up what petrol cost nine years ago – approximately half of what it is now at around about 70p per litre. However, any increase in the mileage rate is not to be sneezed at.

This rate can also be used by the self-employed and by members of partnerships to calculate business mileage for tax purposes Additional payments of up to 5p per mile in respect of each passenger that is carried can also be made without tax consequences.

PAHCo Planning point: Whilst this change in the rate does not make any difference to the amount of VAT that can be reclaimed per mile, as set out in my client alert of 3 March 2011, the rates of VAT that can be reclaimed on staff mileage have increased with effect from 1 March 2011. These are now becoming quite substantial and if you are not reclaiming VAT on business mileage I recommend you review the amount you may be able to claim.

If you don’t have a copy of my client alert of 3 March and would like one, please get in touch with Andrew Coates in St Ives – telephone number at the end of this newsletter or email him at Andrew@paulahill.co.uk and he will send you one, either in hard copy or by e-mail.

9 VAT matters

The VAT turnover registration threshold has been increased to £73,000 from April 2011, up from £70,000 in 2010/11. The deregistration threshold is £2,000 less and is now £71,000.

Businesses with a turnover of £100,000 and all new registrations have been required to submit VAT returns online and pay electronically for some time and it has now been announced that all VAT returns will have to be submitted online and payment made electronically with effect from April 2012; this is part of a movement towards all forms of tax submission being made online in due course and is unstoppable!

PAHCo Planning point: There are some further registration requirements before a trader can submit VAT returns online and these can take a little while to arrange as they involve an initial registration, followed by the sending out of passwords/codes by post, these then having to be input online to confirm your identity. In view of the time this can take, if you are affected by the new requirements, I recommend you register well in advance of April 2012. We are able to set up the arrangements for you for a fixed fee of £100 (plus VAT) and if you require also to submit returns online to HMRC after the new requirement is introduced, based on return information supplied by you, for a fee of £25 (again plus VAT) per return; you will however have to make the electronic payment yourself!

10 Corporation Tax

A second surprise in the Budget was the announcement that the previously advised reduction of 1% in the “full” Corporation Tax charge – down to 27%, was to be supplemented with a further 1% decrease and the rate for the fiscal year starting 1 April 2011 will now be 26%.

However, whilst a previously announced 1% reduction in the “small companies” rate of Corporation Tax will go ahead, this will be 20% for the year commencing 1 April 2011, no further reductions in this rate are expected. The small companies rate is the rate payable by companies with up to £300,000 in taxable profits, although this figure is reduced where there are “associated” companies.

Following the reduction in the “full” rate, where profits fall into the “marginal rate” for Corporation Tax – normally profits between £300,000 and £1.5 million per annum, although this is again subject to the associated company rules, these will be charged at 27.5%.

PAHCo comment: The reduction in the full rate of Corporation Tax could well be seen as a play to stop larger companies, a number of whom have been grumbling about corporate tax rates in the UK, from moving their tax base overseas and to attract back some who have already moved abroad. Since the Budget the Professional Press has been quoting some 22 major companies known to have moved tax domicile as it is known, based on the rates of Corporation Tax and a number of them have indeed been talking about “coming back” to the UK as a result of these changes.

There are to be further reductions in the full rate of Corporation Tax in future years and I look at these in the section 27 of this newsletter below.

PAH Planning point: In line with changes being made for other taxes, HMRC has announced it will no longer accept payment of Corporation Tax by cheque after 1 April 2011; all payments made after this date will have to be made electronically. Details of how to make electronic payments are set out on all Corporation Tax payslips, but if you have any queries on how to make a payment, please do not hesitate to get in touch with Claire Jackson in St Ives on 01480 468931 or at Claire@paulahill.co.uk

11 Capital Allowances – General Rules

PAHCo Planning point: The annual investment allowance (AIA) for the year ending 5 April 2012 (31 March 2012 for companies) will be £100,000, but this allowance is dropping to £25,000 per annum after that date. Accordingly, it remains extremely important that businesses plan asset purchases to maximise the value of the annual investment allowance which if not used is simply lost!

There have been quite a lot of complaints that the way capital allowances work, in particular for smaller businesses, mean that the reduction in the AIA from 2012/13 would be catastrophic for businesses with large plant requirements – for example those in haulage or farming where individual pieces of equipment can cost well in excess of £25,000.

PAHCo Planning point: Whilst there have always been some special rules to do with what are called “short-life” assets, to reflect the fact that normal capital allowances do not give sufficient tax relief over the useful life of the item concerned, this treatment was previously restricted to assets with a life of only up to four years, but this has now been extended to eight years. Where a business purchases assets with a life of up eight years in excess of the Annual Investment Allowance available for their accounting period, identifying such assets separately will ensure that although allowances will be restricted at the beginning, items such as lorries or farm machinery will attract a full “balancing allowance” when the asset is disposed of. Accordingly, when looking at fixed asset purchases, it will now be necessary to consider the useful life of items that exceed the annual investment allowance carefully, to make sure that appropriate computations are prepared and allowances obtained in the most timely fashion available.

However, before anybody gets too many ideas, the short-life asset treatment is not available for cars and items that may be considered to be integral features within a building.

12 Capital Allowances – Energy Saving Equipment

Certain energy saving equipment that meets a changing definition is eligible for 100% first year allowance whether or not the purchase price exceeds the annual investment allowance.

PAHCo Planning point: The list of equipment that qualifies for these additional allowances is changed from time to time and has recently been updated. If you are thinking of installing equipment that you feel may meet the energy saving criteria, please contact us for further details.

13 IR35 – no change but greater certainty

The Office of Tax Simplification which was set up last year to consider whether there were any sections of the Tax Code which could be changed substantially, has advised that IR35 is not working in the way that it was intended, but the Government has in turn decided that it cannot “afford” to abolish IR35 completely as this would take us back to the position where there will be nobody earning more than about £20,000 employed by any business– because it would be better for their current employer to sack them and then re-engage them through the medium of their personal service company.

PAHCo Comment: I think the market for consultancy services has matured a lot over the past ten years – IR35 has been with us since 2000 and from the words in the Budget speech, the Government seems keen for there to be more certainty over whether arrangements are inside or outside of the IR35 rules and not to stifle enterprise. I think the “proof” of this will be in the “pudding”, and we wait for further detailed information, but in my opinion this is “progress”!

14 ESC C16 – withdrawal of a concession

This rather strange description is of an “Extra Statutory Concession” with regard to the treatment of the distribution of assets in a company when it is dissolved.

In simple terms, this concession allows companies dissolved using the simplified Companies Act dissolution process, rather than a formal liquidation, to distribute assets to shareholders as a “capital” distribution, this being subject to Capital Gains Tax and therefore often eligible for Entrepreneur’s Relief, rather than an income distribution, which would be treated as a dividend.

PAHCo Comment: HMRC allege there has been widespread abuse of this concession in that some people have been continually opening and then closing companies a couple of years later, before then starting a new company in the same way, effectively treating a high proportion of their income from the first company as capital, before moving on to doing the same thing in the second company. Those of you that are consultants may have heard some “bar” gossip that this is what a “friend of a friend” is doing – and has done several times over the past few years! However, there is a specific anti-avoidance rule that outlaws “phoenixism” where ESC C16 is used and if caught, the legislation provides for quite draconian penalties in these circumstances, but it is also fair of me to say that HMRC are not as diligent as they might be in catching offenders.

In a typical HMRC sledgehammer to crack a nut process, it is now proposed that, effectively, ESC C16 should be withdrawn and the only circumstances in which a capital distribution of more than £4,000 can be made from a company, would be if it were formally put into liquidation. Under an entirely different set of rules, a liquidation, even if a company is completely solvent as would be the case when ESC C16 is in point, has to be undertaken by a licensed insolvency practitioner and having spoken to a local practitioner last week, the minimum cost of this is likely to be in the region of £4,000 to £5,000 plus VAT – although in certain circumstances the VAT can be reclaimed.

The professional institutes have protested to HMRC that they already have sufficient legislation to prevent abuse of ESC C16 and that it should be retained, but it looks likely that it will be removed; the exact date of its removal is currently uncertain.

PAHCo Planning point: We do have a few clients who are looking to use this concession in the course of the next few years and will be in touch with them separately once we have confirmation of the date on which ESC C16 will be withdrawn. However, if anybody else has any queries on this particular point, which I appreciate is quite complex, but nevertheless can provide substantial tax relief if a business is to be closed down on a permanent basis, please get in touch.

15 Is your business undercapitalised – try EIS?

The Income Tax relief available to taxpayers who subscribe for shares in small companies eligible for the Enterprise Investment Scheme (EIS) is to be increased to 30% of the amount invested from 6 April 2011, subject to a cap of the tax payable by the investor for the year. However, please note the 30% relief will not be available where investments after 6 April 2011 are carried back to 2010/11 under the special rules that can apply in certain circumstances.

When it was first introduced, EIS was dubbed the “Aunt Agatha” tax relief as it is designed to promote small-scale risk investments in trading companies, including by Aunts etc.; although investment by closer relatives is not permitted. There were always a number of restrictions on the relief, but over the years, these restrictions have been increased and the tax relief also reduced. In a “budget for growth”, the Chancellor has reversed quite a number of restrictions introduced in recent years, making the relief considerably more attractive.

PAHCo Comment: Undercapitalisation of small businesses in the UK is endemic and instead of looking for loan finance for your business, why not consider if equity finance, perhaps under EIS, is available from any relatives or friends. If you have a requirement for substantial finance, say over £100,000, the increase in tax relief will mean there are more EIS “funds” being set up to allow investors to get tax relief, but spread the risk. If you are interested in any of these possibilities, please contact us for further information.

The Chancellor also proposed significant changes to the size of companies eligible for the Enterprise Investment Scheme, although, as is the way these days, as some of these changes are classified as state aid to business, they have to be approved by the European Commission.

Assuming this all goes through, companies with up to 250 employees and gross assets of £15 million will be eligible for the scheme – this being a doubling of the current figures. In addition, a company will be able to take in £10 million annually under EIS investments and an individual make investments of £1 million annually, again substantial increases.

16 Research and Development tax credits

For a number of years the Government has offered Research and Development Tax Credits to small and medium sized businesses. However, there have been a lot of bureaucratic requirements and unless a business was undertaking substantial amounts of Research and Development expenditure, practically, it was not worth trying to claim the Tax Credit as you would spend more on fees trying to get HMRC to approve it than the credit was itself worth.

The Government have announced a considerable number of improvements to the current scheme whereby certain lower limits on amounts of expenditure in a tax year are removed and the amount of Tax Credit increased – effectively what you are allowed to do if you meet the criteria is to multiply the amount actually spent on research and development by up to two and a quarter times, and take the increased figure into account as a tax deduction.

PAHCo Planning point: Whilst the definition of research and development remains quite “tight”, if you are undertaking expenditure that you classify as research and development, please contact us to see if you may qualify for additional tax relief under the new rules.

17 Furnished Holiday lettings

The farce of the uncertainty over the tax treatment of furnished holiday lettings in the last few years has now come to an end and the proposals outlined last year for significant reductions in the beneficial tax regime will come into force from 6 April 2011.

From that date, a property will only qualify as a furnished holiday letting if it is available for let for 210 days in a tax year and actually let for 105 days; these thresholds being increased by 50% over those previously in use. There will however, be some smoothing provisions such that if a letting meets the criteria for one year, it will be deemed also to meet the criteria in both of the following years, before becoming ineligible – unless of course the criteria are met again in a subsequent year!

In addition, if a loss results from furnished holiday lettings, whilst it will still be available to be carried forward against future profits from letting, it will not be able to be offset “sideways” against other income – this being one of the most beneficial aspects of the previous regime.

PAHCo Planning point: The “old” position, does however apply for 2010/11, including in respect of properties located in the European Economic Area and if you meet the conditions for availability and actual letting in 2010/11 and have substantial costs, it will be important to advise us of these, so the best tax position can be obtained.

18 Individual savings accounts

The overall limit for new savings in an ISA will be £10,680 for 2011/12, of which £5,340 can be saved in cash. This equates to £445 per month of cash savings, up from £425 in 2010/11.

In addition, “Junior” ISAs will be available from Autumn 2011, but it appears that this was a relatively late addition to the Budget speech and not a lot of information is available at present. In particular, there are two issues that will need to be addressed, what is the limit for savings and whether there will be any particular rules relating to parental contributions into a Junior ISA. We will keep you informed as further information becomes available.

19 Capital gains tax

The Capital Gains Tax annual exemption will rise by £500 to £10,600 in 2011/12.

In addition, Entrepreneurs Relief, whereby the rate of Capital Gains Tax is reduced from the new maximum of 28% down to 10% in respect of the disposal of a trading business or business assets, will be extended to lifetime disposals of £10 million – doubling the £5 million threshold only introduced last year.

PAHCo Comment: Also, although perhaps I am reading between the lines of the Budget speech a little, I believe the Government is considering whether some of the particular requirements for Entrepreneur’s Relief, in particular the requirement to be an employee, might be relaxed, but there is nothing definite in this regard at present.

20 Inheritance tax

As previously announced, the nil rate band for Inheritance Tax will remain at £325,000 for 2011/12.

21 Stamp Duty Land Tax

Whilst we do not get involved with Stamp Duty Land Tax very often, there are three points of interest:-

• A new rate of SDLT of 5% on values over £1 million will be introduced from 6 April 2011 as previously announced.
• Anti-avoidance legislation will be introduced such that the use of companies or Islamic Finance Schemes to avoid Stamp Duty Land Tax will be outlawed.
• SDLT payable on “bulk” purchase of properties will be based on the average price of the properties purchased rather than the total price.

If you have any queries on any of these points, please do not hesitate to contact us for further advice.

22 Enterprise zones

The Government is reverting to an old idea of having some areas, usually deprived areas of major conurbations, described as Enterprise Zones where special tax and other business development incentives will apply. There are to be twenty one of these, eleven of them have already been identified – as expected in deprived areas of major cities, but the other ten are “up for grabs”.

PAHCo comment: These further ten Enterprise Zones will have to be bid for by what are known as Local Enterprise Partnerships and in the area close to our offices, I am pleased to say that there already exists a Greater Peterborough/Greater Cambridge Local Enterprise Partnership that would be in a position to bid for such a zone. Through my involvement with the Chamber of Commerce, I am well aware of the Local Enterprise Partnership and whilst the Board of Directors will have to go through a bidding process, it is certainly to be hoped that an Enterprise Zone will be able to be located somewhere within the local area – perhaps the greatest chance of success lies in Fenland.

I will refrain from further comment on the advantages of Enterprise Zones until I am aware whether one is going to be available in the local area, but if you have any queries on these in respect of any other part of the country, of course please do not hesitate to give me a call.

23 Small business rate relief

The current various schemes for small business rates relief have been extended until October 2012.

If you are unsure whether either you are getting or indeed if you qualify for business rates relief, some of the schemes are limited to smaller premises only, please contact your local council offices.

24 Anti-avoidance – disguised remuneration

As has been previously announced, full legislation concerning new anti-avoidance rules with regard to disguised remuneration will be included in the Finance Bill. Draft legislation in this regard was issued on 9 December 2010 and in the Budget the Chancellor announced that this would be slightly amended to make sure that certain schemes that are not considered “tax avoidance”, but might fall within the net using definitions in the draft legislation, are taken out of consideration.

These new rules cover a wide range of marketed tax avoidance schemes including many of those branded as Employee Benefit Trusts (EBTs) and Employer Funded Unapproved Retirement Benefits Schemes (EFURBs)

PAHCo Comment: We are in touch with all clients who have schemes that might be affected by the new rules and I will not go through them in detail here, but if you have any queries, please do not hesitate to get in touch.

25 Tax in the EU and mutual assistance

There are a considerable number of significant differences between UK tax law and that in other European Countries and, particularly if you own property overseas, it is important you understand how legislation where you own your property affects you.

PAHCo Planning point: One tax “area” that varies substantially between individual EU countries is their equivalent of Inheritance Tax. Please check you understand how the death of even one of two joint owners of an overseas property might be taxed. Whilst we are not experts in EU tax law, we may be able to assist you to understand the position if you require. One way of avoiding potential problems on the death of a person owning overseas property is to have that property owned by a UK limited company, rather than by individuals and UK tax law has been relaxed in recent years to make this easier – call me if you would like any more information on this point.

The main reason for mentioning this at this point is the Budget confirmed that under EU legislation, the Government is required to bring into law specific provisions under which HMRC has to provide assistance to any other EU Government who believe that the tax obligations of a UK citizen in their country have not been properly complied with. It is expected this legislation will come into force from 1 January 2012.

26 Income tax in 2012/13

The Chancellor announced that the personal allowance will increase from £7,475 to £8,105 in 2012/13 and that, unlike this year, there will be no compensating decrease in the 40% threshold, so all taxpayers receiving a personal allowance – which we must assume means those earning under about £116,000 per annum will benefit to some extent, with those earning under £100,000 per annum benefitting at their marginal rate of tax.

However, he also announced that in future inflation based “automatic” increases in allowances and thresholds would be based on the CPI (Consumer Prices) version of inflation rather than the previous RPI (Retail Prices) measure. CPI inflation, whilst currently running at well over 4%, does not include various items such as housing costs and is generally rather less than RPI inflation.

27 Corporation tax in future years

Having taken an extra percentage point off the full Corporation Tax rate for 2011/12, the Chancellor still intends to make a further three 1% cuts in succeeding years, such that the rate will be 23% for year commencing 1 April 2014.

PAHCo Comment: With the reduction in the full rate, but no expected reduction in the “small companies” rate, the marginal rate also reduces significantly and will be 23.75% in 2014/15. As a result, whilst for many years it has been “standard” tax planning to avoid the marginal rate, as the years go by, this may no longer be the best course of action.

28 Merger of income tax and National Insurance

The Office of Tax Simplification has suggested that the Chancellor might consider the merger of Income Tax and National Insurance contributions in view of the administrative burdens placed on business and the country generally from there being two entirely separate schemes.

It is fair to say that this is not the first time that such a merger has been suggested, but on all previous occasions, including when I was working personally in the Deregulation Unit of the Department of Trade and Industry in the early 1990s, have ended up in the “too difficult” pile.

PAHCo Comment: In the Budget, the Chancellor referred to the fact after any merger he did not intend National Insurance to apply to pensioners or dividends and he intended to maintain what is known as the contributory principle, i.e. you have to pay in to the system in order to get various benefits out. All of this makes any merger the more difficult, although the Universal Benefits and Pension system due to be introduced shortly, may change some of the contributory requirements.

A consultation paper on the proposed merger will come out shortly and I think it would be futile to try to prejudge what that is going to say. However, this remains an interesting area and we will keep you up to date as much as we can.

From an employer’s perspective, whatever happens, I think it likely that some form of “jobs tax” – currently secondary Class 1 National Insurance contributions, will be retained.

29 Real time PAYE information

PAHCo Comment: I do not believe that there is to be any further discussion about the principle involved here as this information is necessary on a “real time” basis to enable the Government to introduce the new “universal benefit”. There would, of course, still be time delays in the Government receiving information for claimants receiving income other than from employment, but you will appreciate real time PAYE information will ensure that benefits are correct for the majority of Government “customers”.

PAHCo Planning point: From a tax planning perspective this will be “challenging” to say the least and it will be necessary to plan remuneration very carefully in advance, as it will not be as easy to make adjustments later on. Our “Active” approach of discussing remuneration strategy with clients in advance will be of considerable assistance in this, but it will be necessary for us to be in touch with you on a more regular basis to make sure that the remuneration strategy we suggest meets your needs on a continuing basis.

30 Further reform of small business taxation?

Although there was only an oblique reference to further reform of small business taxation in the Budget, in my opinion this does remain firmly on the agenda. However, the proposed merger of Income Tax and National Insurance will take up all of the “best brains” in the Treasury over the next couple of years and therefore detailed reform of small business tax will have to be left until that has either been completed or deemed too difficult.

PAHCo Planning point: Accordingly, the strategies we are encouraging clients to adopt – incorporating if profits are more than around about £25,000 per year and using low salary and dividends where possible, remain the best approach.

If you have any queries about the future of small business taxation or would just like to discuss how we think things may go over the next five to ten years, please do not hesitate to get in touch.

Our business grows mainly by referrals and we are always looking for new clients. I should appreciate it if you could let me know of any colleagues, customers or associates who may be interested in the way we do business. Thank you.

PAUL HILL

This newsletter is prepared for the general information of clients and contacts of Paul A. Hill & Co. Limited 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. Limited – April 2011