Client Newsletter – December 2011

“Active Accounting and Tax”

Introduction

Whilst we no longer have a formal “Pre-Budget Report” each November or December, the Chancellor of the Exchequer delivered an “Autumn Statement” on 29 November and in the following days, the Treasury have issued a considerable number of documents concerning tax and NIC thresholds for 2012/13 and other tax changes that are proposed to be introduced in Finance Act 2012. In what I consider to be a very good move, a lot of proposed new tax legislation is now issued for comment the previous December, this helping to ensure that it is well drafted and meets the intended policy objectives – in the past this has not always happened, leading to some very badly written legislation that is now having to be “tidied up”.

I also review previously announced measures coming to force from April 2012 and comment on current “issues”, in particular the 31 January 2012 deadline and HMRC Penalties – these seem to be more and more of an issue! – see my tips and make sure you are not caught out.

HEADLINES

• Changes to HMRC penalty regimes mean getting returns and other information submitted on time and making payments on time is all the more important, as is the action you must take if you can’t pay on time.
• HMRC cutbacks mean they are still not able to send us copies of many documents including coding notices – PLEASE SEND ANYTHING YOU RECEIVE FROM HMRC to us as soon as possible after receipt – coding notices for 2012/13 will start to be issued in January 2012.
• If you expect to spend over £25,000 on fixed assets in the next year or so, capital allowances changes from April 2012 mean it may be best to bring purchases forward to before that date – there are also other changes to capital allowances you may need to consider.
• Confirmation of the Tax and NIC thresholds for 2012/13 mean we can confirm our recommendations for salaries within a tax/NICs efficient remuneration package from April 2012.
• VAT – ALL returns will have to be submitted online from April 2012 and payment will have to be made electronically, but NO RATE CHANGE!
• VAT reclaim on mileage unchanged since June 2011.
• Are you undertaking “Research and Development” – enhanced tax relief for such expenditure may be available from April 2012.
• If you are expecting a capital gain in 2012/13 – and are prepared to invest in a start-up company, 78% tax relief may be available, but the CGT threshold is frozen to “pay for this”.

To find the information you need in this newsletter – covering the above points and quite a few other matters, please refer to the headings overleaf. If you are interested in any other current matters that are not referred to, please do not hesitate to get in touch with Kim or me to discuss your concerns.

1. 31 January 2012 deadline
2. Paying HMRC on time, what happens if you don’t and what to do if you can’t
3. Please send us all HMRC documents
4. Capital allowances from April 2012
5. Income Tax and NICs for 2012/13
6. Salary recommendations for 2012/13
7. VAT – ALL returns to be sent online
8. VAT and mileage payments to staff
9. Research and Development -Significant increase in the tax relief available for small businesses
10. Start-up EIS tax relief
11. Capital Gains Tax
12. PAYE Annual Reconciliations
13. Stamp Duty for 1st time buyers
14. Charities sharing costs – VAT relief
15. Are you paying Class 2 NICs in error?
16. Employee gifts – the tax rules
17. VAT – low value consignment relief
18. Statutory residence test
19. CGT when you cease trading (ESC C16)
20. Practice matters: Staff changes and Christmas office hours

1. 31 January 2012 deadline
   1. The 31 January 2012 deadline has more significance this year, following a change in the penalty regime relating to self-assessment returns. Quite simply, if a 2011 return that was not submitted on paper before 31 October 2011, is not received by HMRC using some form of online filing, by midnight on 31 January 2012 – a late filing penalty of a minimum of £100 will be incurred.
   2. The previous rule whereby this penalty was limited to your tax liability if this was less than £100 and could be £Nil, has gone – you will be fined if the return is late and the penalties will increase much earlier than previously if submission is significantly delayed after 31 January 2012 – including £10 per day penalties in some situations.
   3. PAHCo Comment: Looking at our systems, we have not submitted as many returns for clients at this point, early December 2011, as we have done in previous years. If you have not yet let us have the necessary information to prepare and submit your return, including, if required, information from which we can prepare your accounts for a relevant period, please can you now let us have this as soon as possible.
   4. As is only fair in these circumstances, we will process information in the order that we receive it.

   TAX CREDITS

   5. PAHCo Planning point: If you included any form of estimate when you submitted your Tax Credits Annual Declaration by 31 July 2011, the estimate needs to be replaced by definitive figures before 31 January 2012. If you require any assistance with this, please do not hesitate to get in touch.

   CORRECTIONS TO 2010 RETURNS (FOR THE YEAR ENDED 5 APRIL 2010)

   6. If you have become aware of any errors in your 2010 return, although these originally needed to be submitted by 31 January 2011, it is possible to submit a “repaired” return to HMRC before 31 January 2012
   7. If this is the case and we have not already discussed the matter with you, please get in touch as soon as possible in order that the position might be reviewed.
2. Paying HMRC on time, what happens if you don’t and what to do if you can’t
   1. PAHCo comment: HMRC attach what many consider to be far too much importance to being paid exactly on time and in the past year or so substantial tax geared penalties have been introduced for even the smallest failure to meet their requirements. To put this into context, at the highest level HMRC are charged with collecting a lot more “tax”, whilst reducing their costs by up to 25% over the course of this Parliament. They are therefore looking for ways to collect more from the same “tax base”. Whilst they say penalties are only ever designed to “change behaviour”, this is considered by most accountants and tax agents to be disingenuous, as what most people would consider to be very minor transgressions are penalised more and more.
   2. I think most taxpayers would accept that if they pay late, a commercial interest charge is reasonable recompense for the Exchequer, but the penalties, on top of interest, that are now routinely being charged are affecting more and more clients. As a result, understanding your obligations to pay on time and how HMRC interpret the rules is becoming extremely important. I therefore make no apology for starting this newsletter with two sections dealing with HMRC enforcement activities. Before I go on to look at some aspects of payments relating to individual taxes, there are some general principles it is worth restating.
   3. The main two are that where HMRC specify a date for a payment to be made, payment MUST REACH HMRC’s bank account by that date and if that payment date is a Saturday, Sunday or Bank Holiday, payment must be received by the last working day BEFORE this.
   4. PAHCo Planning point: Particular problems with payment dates arise at Easter and May Day Bank Holiday – HMRC consider it is up to you to realise this and take appropriate action to bring payments forward.
   5. If you are paying electronically, using online or telephone banking, BACS, CHAPS, a debit or credit card via the HMRC website or going to the bank or Post Office with a payslip and cheque, we recommend you allow at least THREE clear working days – i.e. NOT Saturdays, Sundays or Bank Holidays, between the day on which you send the payment and the day it is due to be received by HMRC. For example, if payment is due on a Friday, we recommend it should be sent no later than the previous Monday. For payment due on a Wednesday, we recommend it be sent by the previous Thursday – unless of course there is a Bank Holiday in the meantime, when earlier payment will be required.
   6. PAHCo Comment. We are aware HMRC’s literature suggests a shorter timescale than this, but in our view this cannot be relied on and we very strongly recommend allowing three clear working days for an electronic payment as stated above. Whether your payment is late is a matter of fact for HMRC and if a payment has ended up being late, even if you can prove you sent it in accordance with their suggestion, you will find yourself involved in a time consuming process to prove your innocence.
   7. HMRC does not currently accept payment using the “faster payments” process that the banks set up a little while ago – I understand there is a commission charge involved in this, which HMRC are not prepared to pay. However, we have “heard on the grapevine” that the EU is forcing HMRC to join this system, possibly from as soon as 1 January 2012, but there is no official announcement yet and therefore you should not rely on being able to use “faster payments” at present.
   8. It is possible to give HMRC a direct debit to collect the various amounts due to them, but apart from VAT, where the process is relatively straightforward, there are some management issues with other taxes as prior to the due date you will have to tell HMRC – online using their “gateway”, how much the direct debit is to be; to me this is as complicated as making an electronic payment in another way. I also appreciate not everyone is prepared to give HMRC a direct debit mandate!
   9. If you are paying by cheque, but please bear in mind that for a number of payments, in particular VAT and Corporation Tax, payment by cheque is no longer permitted, you should allow sufficient time for the cheque not only to reach HMRC, but also for payment to be cleared into HMRC’s bank account. For payments by cheque, we recommend you send a payment such that is received by HMRC at least SEVEN clear working days before the due date.
   10. The one current exception to these rules is the payment of income tax based on a self-assessment return. At present, a cheque received by HMRC on or before 31 January or 31 July, as required, is considered sufficient, but we would expect these payments to be brought in line with the other rules within the next year or so.
   11. More details on how to pay HMRC are given on their website at www.hmrc.gov.uk/payinghmrc. However, I must warn you this is not the easiest website to follow.
   12. Based on our clients’ experiences I have some further comments on payments for two individual taxes – PAYE and VAT. These are the most troublesome, PAYE having to be dealt with up to 12 times a year and VAT usually quarterly. The basic rules set out above apply to all these payments, the problem being an employer also registered for VAT has up to sixteen chances to get it “wrong” each year.

   PAYE

   13. PAHCo Comment: From 5 April 2010, HMRC were given new powers to charge a penalty, in addition to interest, based on the number of late monthly/quarterly payments made during a tax year. Whilst HMRC might argue that the new penalties were widely publicised, it is fact that very few people realised the effect of the new rules and HMRC made little attempt to tell employers they were building up penalties during the 2010/11 tax year. What then happened was that in August or September 2011, penalty notices were sent out based on late payments made in 2010/11 – and the arguments started!
   14. PAYE is normally due on the 19th of each month if payments average more than £1,500 per month or quarterly, on 19 July, 19 October, 19 January and 19 April for “small” employers. If more than one payment of PAYE is not received by the due date an escalating penalty of between 2% and 4% of all late payments is charged.
   15. HMRC have come in for considerable criticism this year over PAYE penalties, both in respect of those charged for late submission of end of year returns P35 and P11d, and also in respect of late in year payments. The particular criticism has surrounded HMRC not telling employers in a timely fashion that they were in default, this giving them the earliest chance of correcting matters and possibly mitigating the penalty. This initially arose as HMRC did not issue late filing penalties in respect of PAYE returns until some months after the default arose and these penalties are charged on monthly basis. Not unreasonably, many of those charged a penalty complained that if they had been told of the problem earlier, they would have corrected it earlier and a penalty issued in late September saying a return due in May was now liable to penalty of £500 (£100 per month or part late) would have been much less.
   16. If you do not agree with a penalty that has been charged you can first ask HMRC to think again – called an internal review, and give them any evidence you might have that you had a “reasonable excuse” for the late submission or payment. Following this, if you still disagree, you can appeal to the First Tier Tax Tribunal; this applies to all taxes, not just PAYE. Several substantial late PAYE return penalty appeals have already been heard by the First Tier Tribunal and HMRC have been forced to reduce penalties in some cases. The position on late monthly payment penalties is less clear at present, as cases have still to come to the First Tier Tribunal. Hopefully, when determining these cases, the Tribunal will make HMRC take all relevant factors into account, particularly that the penalties were new, many employers did not understand the rules and were not advised in a timely fashion that they were incurring penalties.
   17. PAHCo comment: However, whatever the Tribunal decisions eventually are on cases relating to the 2010/11 tax year, I think these will most probably only be applicable to that year as the furore and publicity over the penalties charged this year will mean HMRC will now expect all employers to have a full understanding of the new rules.
   18. As the penalties now being charged are based on individual payments of PAYE being late, it is extremely important to make sure HMRC records a payment as being sent for the correct period – HMRC treats payments made as being for a month or quarter ending on the 5th of the month. Because of this, as well as there being a problem with payments made late, perversely there can also be a problem if payments are made early and payments should only be made between, say, the 6th and 18th of the month, depending on weekends and Bank Holidays of course! – or they may be misallocated. If payments are misallocated, they can sometimes be sorted out, but it will require a phone call to HMRC to do this; we can assist with this if required.
   19. However, it is not always possible to reallocate payments at your request. We have come across a situation where a client missed a monthly PAYE payment and then sent the payment for that month in the next month – subsequently delaying all monthly payments effectively by one month. Whilst payments had been made before the 22nd in most months, in calculating a penalty HMRC advised that, once they had been told a payment was for a particular month then neither they nor the employer could, in law, change that allocation – so all the payments after the missed one were treated as late and the maximum 4% penalty on most PAYE payments was charged.
   20. PAHCo Planning point: If you do have to miss a PAYE payment, don’t do what is set out in 2.19, but instead make a time to pay arrangement with the Business Payments Support Service for the missed payment, preferably before the payment is due, see 2.23 to 2.27 below, and make subsequent payments on time. This will ensure later payments are allocated as “on time” and reduce any penalty to the minimum.

   VAT

   21. VAT returns have to be submitted by the end of the month following the end of the return period. Where a return is submitted by post, if you want to pay by cheque, this must accompany the return, but for electronic payment – payment having to be made electronically if the return has to be submitted online – also see section 7 below, a further seven days are allowed for the payment to reach HMRC. This payment date is the one most often affected by Easter or the May Day Bank Holiday – be aware!
   22. If you are prepared to give HMRC a direct debit – and you can restrict a direct debit mandate to “just” VAT, or any other individual tax you want to pay that way, then following the “on time” submission of a return HMRC will tell you when they will take the direct debit, which will be no earlier than the 10th of the month, an extra three days. If you have a limit on the amount you can pay online from your bank account each day and your VAT payment is more than this, a DDR also solves this problem.

   WHAT IF I CAN’T PAY HMRC ON TIME

   23. The BUSINESS PAYMENT SUPPORT SERVICE (BPSS) was set up a couple of years ago now and is designed to help businesses with “occasional” problems in paying tax to HMRC on time. They can be contacted on 0845 302 1435 and their opening hours are Monday to Friday 8.00 am to 8.00 pm, Saturday and Sunday 8.00 am to 4.00 pm, excluding bank holidays.
   24. In general, a first request for a payment arrangement will normally be granted quite easily, but if you are having continued problems in paying HMRC, they may want a lot more information about your business before agreeing to the arrangement.
   25. Once an arrangement has been made with HMRC, although interest remains payable, penalties of all forms cannot then be charged in respect of the tax deferred through the arrangement – although of course, you do have to keep to the arrangement you agreed, or it will be cancelled.
   26. More details about the service can be found on the HMRC website at www.hmrc.gov.uk/payinghmrc/problems/bpps.htm.
   27. PAHCo Planning point: It is essential to contact the BPSS as soon as you think you may not be able to make a payment to HMRC. If you need any assistance to do this, we are pleased to help, but it will be best if you are present when the call is made to them as they sometimes ask questions we cannot easily answer.
3. Please send us all HMRC documents you receive
   1. Owing to continued cutbacks in their budgets, HMRC are reducing still further the number of documents that they automatically copy to your tax agent and, in law, quite a lot of HMRC correspondence has to be with you directly.
   2. PAHCo Planning point: In future, please do not assume we have had sight of any HMRC document of any sort that is sent to you, unless you have sent it to us yourself. We do not need the original of any document, if you have the facility an emailed scan or a copy in the post will be fine (but please make sure you scan/copy both sides of the document if it is two sided – this particularly applies to PAYE coding notices where very important information is often on the reverse).
   3. This is all the more important at present as we expect PAYE coding notices for 2012/13 will begin to be issued from January 2012. In order to ensure any corrections to these notices can be made in time for the start of the tax year in April 2012, please let us have sight of any and all notices you receive, as soon as possible.

   AUTHORISATION CODES

   4. In some situations we have to apply for an online authorisation code to enable us to deal with a particular matter on your behalf. Currently HMRC (always) and Companies House (sometimes – codes also being required for their purposes) will only issue such a code directly to you, even if we have authority to act on your behalf in all other respects. These codes are supposed to be issued by HMRC/Companies House within seven days, but can take longer than this to arrive owing to the way in which they organise their post to save money.
   5. PAH Planning point: We will always tell you when we have asked for a code to be issued and would ask for these to be sent on to us as soon as you receive them, as the codes can have an expiry date after which they have to be reissued. We are not able to file various documents on your behalf online until the appropriate code has been entered on the Government system.
4. Capital allowances from April 2012
   1. The annual investment allowance (AIA) will be reduced from £100,000 to £25,000 from 31 March 2012 (technically 5 April 2012 for partnerships and the self-employed), but see planning point 2 in 4.4 below regarding transitional arrangements for businesses whose year-end is not 31 March/5 April.
   2. This figure is the maximum on which 100% tax allowance for capital expenditure can be obtained in the year of purchase and therefore if you intend to spend more than £25,000 on fixed assets qualifying for AIA – primarily plant and machinery, but excluding cars (please contact us if you are unsure whether your proposed expenditure will qualify), then bringing expenditure forward to before 31 March/5 April 2012 could well be beneficial.
   3. PAHCo Planning point 1: There are some strict rules defining “when” expenditure is made for the underlying asset to qualify for capital allowances, if you think this will be an issue for you, please contact us for further advice.
   4. PAHCo Planning point 2: If your year-end is NOT 31 March/5 April then complex transitional arrangements apply to your expenditure – IT IS NOT JUST A MATTER OF BEING ABLE TO SPEND UP TO £100,000 BEFORE 31 MARCH/5 APRIL and get full tax relief. If this applies to you and you are planning expenditure of more than £25,000 in the period from now to 31 March/5 April 2012, please contact us so we can confirm the capital allowances that will be available to you – this also being dependent on what you have already spent in your current year.
   5. In addition to the reduction in the AIA, the two rates of writing down allowance for unclaimed capital expenditure brought forward and current year expenditure in excess of the AIA are being reduced to 18% (previously 20%) and 8% (10%).
   6. There are also a number of more specific changes to the capital allowances regime from April 2012, perhaps the most important one being in respect of equipment to generate electricity or heat (or to produce biogas or biofuel) that attracts a Feed-in tariff or tariffs under the Renewable Heat Incentive. Whilst expenditure will continue to be eligible for AIA – within the reduced level of £25,000, excess expenditure will need to be carried forward in the special pool to which the 8% writing down allowance will apply.
   7. Other detailed changes to capital allowances from April 2012, include a change in the CO2 emissions for cars in the various allowance bands, rules on agreeing capital allowances between a purchaser and seller where assets change hands and a defined timescale for determining the eligibility for capital allowances for plant and machinery contained within a building. If any of these are of interest to you, again please contact us for further advice.
5. Income Tax and NICs for 2012/13
   1. As previously announced the standard personal allowance will increase to £8,105, up £630 from the 2011/12 figure of £7,475. Further increases of the same amount – to £8,735 and £9,365 and then a final increase of £635, will make the allowance £10,000 from April 2015, just in time for the 2015 General Election?
   2. In 2012/13 there will be some relief for all taxpayers from this change, as there is to be no compensating reduction in the higher rate threshold where 40% starts to be charged (£42,475). However, this threshold is not being increased either, meaning the benefit of the higher allowance is the same – £630 at 20% = £126, for all taxpayers earning more than the new allowance.
   3. Whilst there are also increases in the two “Age” allowances, strangely these are going up by less than the under 65s’ personal allowance. The 65-74 allowance goes up £560 to £10,500 and the over 75 allowance is up by £570 to £10,660 – these both being inflation based increases of about 5.6% rounded to the nearest £10. The income limit for age allowances is also increased by inflation to £25,400 (£24,000).
   4. PAHCO Comment: There are frequently comments in the press that the real inflation rate for the elderly is considerably in excess of the main rate published by the Government and in this context, these increases are really very small.
   5. The thresholds at which the standard personal allowance begins to be withdrawn and the “additional” tax rate of 50% comes in to play remain at £100,000 and £150,000 respectively.
   6. Whilst the personal allowance appears to be increasing on this pre-determined pattern as part of the Coalition agreement between the Conservatives and the Liberal Democrats, the same is not true for National Insurance thresholds, where the increases are much less, although, bizarrely, the increase in the employer’s NICs threshold is 5.9% whereas the increase in the employee threshold is less at only 5%. My gut feeling is this is an attempt to get these two thresholds the same before too much longer – perhaps as part of an exercise that is going on considering the eventual merger of many aspects of income tax and National Insurance.
   7. On an annualised basis, this means employers will start to pay NICs at 13.8% on employee earnings above £7,488 (£624 per month; £144 per week), whereas employees will pay at 12% on earnings over £7,592 per annum (£633 per month; £146 per week).
   8. The Upper Earnings Limit over which employees’ contributions drop to 2% is unchanged at £42,875 per week (£3,540 per month, £817 per week). No increase in this might also be considered to be strange as one might have expected this also to increase by inflation – this will result in just over £200 less in employee’s NICs being paid by a 40% taxpayer than would otherwise be the case. The explanation is that any increase would take this figure over the 40% threshold for income tax, which as noted in 5.2 above is unchanged.
   9. The self-employed class 2 weekly contributions will be increased to £2.65 (£2.50) and the small earnings threshold, beneath which these contributions do not need to be paid will be £5,595 (£5,315) – if you expect your self-employment earnings in 2012/13 will be less than the new limit, please contact us so we can apply for an “exception” on your behalf.
   10. If you pay Class 2 NICs by direct debit, please also remember these contributions are now collected six monthly on 31 January and 31 July in each year and therefore the next collection being on 31 January 2012 when 26 weeks at £2.50 = £65 will be taken from your bank account.
   11. PAHCo planning point – looking ahead to April 2013: From April 2013, the 40% threshold, currently £42,475, will be an extremely important figure for all families with children and claiming child benefit. It is currently proposed that child benefit be withdrawn after this date from a family where anyone earns more than the 40% threshold. This is what is known as “cliff edge” tax change, where £1 of additional earnings can trigger in some cases what will be several thousands of pounds in lost benefit. It has already been pointed out that a family with two equal earners could earn up to £84,948 between them without losing any child benefit, but that a family with one earner on £42,500 per year would lose it all and the unfairness of this. However, to date, the Government has stuck to its guns on this proposal, which was initially announced in the “emergency” Budget in June 2010. I would expect to hear more about this in the Budget in March 2012 and will obviously keep you updated.
6. Salary recommendations for 2012/13
   1. PAHCo Planning point: Our normal standard salary recommendation within a tax and NICs efficient remuneration strategy for an owner managed company will be £8,105 – £675 per month, for 2012/13.
   2. If we do your payroll for you, we will automatically update your salary on this basis from April 2012, but if you do this yourselves or use another bureau, please do not forget to ask them to make this change at the appropriate time.
   3. As in 2010/11 and 2011/12, this will result in some NICs becoming payable in the last couple of months of the tax year, based on the “directors’ method” for calculating these. In our opinion it is “worth” maintaining a National Insurance record and paying a small amount of contributions each year and the 2012/13 annual total of employer and employee contributions for a salary of £8,105 will be £146, this compares with £85 in 2011/12, but is still less than the £181 in total NICs arising from a personal allowance based salary in 2010/11.
   4. PAHCo Planning point: If you have any queries on this or would like us to consider an alternative salary as part of your remuneration strategy, please get in touch.
7. VAT – ALL returns to be sent online
   1. If you currently submit your VAT return on paper, with effect from your first return for a VAT period commencing after 1 April 2012, you will have to submit it online and if a payment is required, it will have to be sent electronically. For information on what constitutes an electronic payment, please see 2.5 above.
   2. If you want to send your return off yourself, you will need to register for the Government gateway via the HMRC website and the “do it online” section. Please do this in good time before your first “online” return is due, as codes have to be sent out in the post and this can take a few weeks to get sorted out. If you need help to do this, please ask.
   3. PAHCo Planning point: If you would prefer not to be bothered by the HMRC procedures, we are happy to submit a VAT return for you, using your figures. However, this also takes a little time to set up and we would ask you to let us know as soon as possible if you want us to do this for you from April, so the appropriate arrangements can be made. We make a fixed charge of £25 plus VAT, for the online submission of a VAT return on your behalf.
8. VAT and mileage payments to staff
   1. The “company car” mileage rates are updated four times a year on 1 March, 1 June, 1 September and 1 December. Following reviews on 1 September and 1 December 2011, no changes were made to the petrol or diesel rates shown below.
   2. These rates represent the accepted figures for tax-free reimbursement of fuel costs to company car drivers for business mileage, assuming that there are no payments for petrol made other than in respect of business mileage claims and can also be used by all registered businesses as the gross of VAT rate on which VAT can be recovered as business input tax – for example in respect of employee mileage claims.
   3. The revised table shows previous rates as well to show the changes over a full year; the figures in brackets being the pence per mile in VAT that can be reclaimed.

   Engine size	Petrol Cost (per mile)				Engine size	Diesel Cost (per mile)
   	From 1 June 2011	1 Mar to 30 May 2011	1 Dec 2010 to 28 Feb 2011	1 June to 30 Nov 2010		From 1 June 2011	1 Mar to 30 May 2011	1 Dec 2010 to 28 Feb 2011	1 June to 30 Nov 2010
   1400cc or less	15p (2.5)	14p (2.333)	13p (1.936) until 4/1/11 then (2.167)	12p (1.787)	1600 cc or less	12p (2.0) (Decreased owing to fuel efficiency)	13p (2.167)	12p (1.787) until 4/1/11 then (2.000)	11p (1.638)
   1401-2000 cc	18p (3.0)	16p (2.667)	15p (2.234) until 4/1/11 then (2.500)	15p (2.234)	1601-2000 cc	15p (2.5p)	13p (2.167)	12p (1.787) until 4/1/11 then (2.000)	11p (1.638)
   over 2000 cc	26p (4.333)	23p (3.833)	21p (3.128) until 4/1/11 then (3.500)	21p (3.128)	over 2000 cc	18p (3.0)	16p (2.667)	15p (2.234) until 4/1/11 then (2.500)	16p (2.383)

   4. PAH planning point: As I have previously advised, the VAT reclaim on business mileage can amount to a significant figure and we strongly recommend that you consider reclaiming VAT on this basis if you have not previously done so. If you need any assistance with this, or have any queries on the matters referred to above, please do not hesitate to give either Kim or me a call.
   5. Please note that although the maximum tax-free rate payable to staff members using their own cars increased from 6 April 2011 to 45p per mile for the first 10,000 business miles and 25p thereafter, THE VAT RECLAIM IS NOT AFFECTED BY THIS CHANGE.
   6. The only documentation requirement to reclaim VAT on the above basis is that you need to collect VAT receipts from employees at least equal to the value on which VAT has been reclaimed.
9. Research and Development -Significant increase in the tax relief for small businesses
   1. The Government currently provides extra tax relief for research and development activities, but this has hitherto been limited to situations where over £10,000 per annum is spent on such activities and the relief is mired in complication and HMRC anti-avoidance activity – they have set up specialist offices to deal with this relief, one of which is in Cambridge.
   2. The relief takes the form of increasing the amount spent on R&D activity by up to 75% – spend £10,000, get £17,500 of tax relief, and if that results in a loss, actually repaying Corporation Tax on that loss to the company.
   3. From April 2012 it is proposed that the cap of £10,000 be removed, meaning that many more companies will be able to claim R&D relief.
   4. PAHCo Planning point: If you undertake R&D activity and would like to undertake a review as to whether you could benefit from the extension of the relief, please get in touch to discuss the matter. As already mentioned, the relief is complicated and subject to HMRC approval, so if it looks likely that relief can be claimed, the earlier the process of getting HMRC approval is started, the better.
10. Start-up EIS tax relief (Seed Enterprise Investment Scheme)
    1. Income tax relief under the Enterprise Investment Scheme has been around for many years and was enhanced in 2011/12 by an increase from 20% to 30% in the tax relief available for such an investment.
    2. In the Autumn Statement the Chancellor has taken this a step further by confirming a new “Seed” EIS (SEIS) providing tax relief at an unprecedented rate of 50%, no matter what the investor’s marginal rate of tax is, but subject to a limit of the total tax paid by the investor for the tax year in which the investment is made, to encourage investment in new early stage companies carrying on or preparing to carry on, a new business in qualifying trades.
    3. To complement SEIS, there will be a capital gains tax holiday for assets disposed of in 2012/13, where the gains, per the documents issued in December 2011, are reinvested in SEIS shares in the same year. It appears this was a late addition to the Autumn Statement as draft legislation has not yet been published and this will be important – some CGT reliefs require not just the gains to be reinvested, but the full proceeds and it is important to know which is required – they are quite different!
    4. PAHCo Planning point 1: Where the capital gains tax holiday and SEIS relief are combined, total tax relief of up to 78% could be obtained! If you are interested in making an SEIS investment to gain these reliefs, please contact us for further advice.
    5. PAHCo Planning point 2: From the other side of the coin, if you are thinking of starting a new business that might be able to take advantage of investment from persons using the SEIS, again please get in touch. We expect the rules for a business to be classified as “new” will be very tight – along similar lines to that used for the NIC “holiday” introduced last year and, to gain access to investments under the scheme, it may well be important to take action very soon indeed to make sure any company you set up meets the “new” definition for SEIS purposes.
11. Capital Gains Tax
    1. To “pay” for the SEIS as set out in section 10 above, the capital gains tax exemption will be frozen at £10,600 in 2012/13.
    2. There will also be some tidying up with regard to potential capital gains in respect of overseas bank accounts. Gains on withdrawals of funds from overseas bank accounts will no longer be liable to capital gains tax but, conversely, losses will not be allowable.
12. PAYE Annual Reconciliations
    1. In the past few months HMRC have been undertaking their annual PAYE reconciliation. As with many other HMRC documents, see section 3 above, we will not receive a copy of any reconciliation they have prepared for you.
    2. PAHCo Planning point 1: If you do not complete a self-assessment tax return, but have asked us to act for you in your personal tax affairs and you have received a form P800 or other information from HMRC showing their calculation of your tax position for 2011/12 or indeed any earlier year, I should be grateful if you could send it to us as soon as possible in order that we can check it.
    3. We have noted that the calculation received from HMRC in a number of such cases has assumed the taxpayer has continued to receive interest on bank accounts at the same level as was obtained some years ago, before interest rates on savings accounts collapsed to the current derisory levels. In many cases, particular for elderly taxpayers with total income from all sources in the £24,000 to £30,000 range, in which the age allowances are being reduced owing to the income level, this results in a substantial over-demand for tax and needs to be corrected. Even if it suggested the tax be taken off under PAYE in future year, as I say, please send the calculation to us as this tax may not be payable at all and the demand should be reviewed and if necessary corrected.
    4. PAHCo Planning point 2: As mentioned in 2010, these reconciliations should not be undertaken for taxpayers who submit a self-assessment return, but the HMRC PAYE system – the new version of which performs the calculations, does not seem to have a note of all the PAYE records that are also self-assessment taxpayers. Where we are aware this is the case this is simply remedied by a phone call – so if you have received an unsolicited calculation from HMRC we need to know, even if you have ignored it on the basis the matter will be settled when you self-assessment return is submitted. This is still important if the calculation showed a repayment and even more important if the amount apparently overpaid has been sent to you – as in that case the repayment needs to be recorded on your self-assessment return or it will be incorrect.
    5. If we are not currently acting in your personal tax affairs and you would now like us to review your position, or you know anyone who is confused by an HMRC calculation and would like our advice, please get in touch as soon as possible to discuss the matter.
13. Stamp Duty for 1st time buyers
    1. PAHCo Planning point: The relief from stamp duty for first time buyers on all houses up to £250,000, normally 1% is charged on properties between £125,001 and £250,000, will be withdrawn on 24 MARCH 2012 as previously announced.
14. Charities sharing costs – VAT relief
    1. Where one charity performs services for another charity, VAT can rear its ugly head as the first charity is deemed to be in business and could end up having to charge VAT on the value of the services it performs for the other body. This problem also applies to universities, further education colleges, housing associations and other bodies that have exempt and/or non-business activities for VAT purposes.
    2. This has been recognised as a problem at EU level and legislation will be introduced to have effect from Royal Assent to Finance Bill 2012 – expected in July 2012, to allow groups of bodies to exempt supplies made to their members from VAT, provided certain conditions are satisfied.
    3. PAHCo Comment: Whilst it is to be hoped HMRC will help eligible “bodies” or “groups” to comply with the conditions – these will need to be reviewed carefully before changes are made on the basis of this relief. It also needs to be noted that the relief will not be introduced until Royal Assent and changes to working practices will probably need to be deferred until that time.
15. Are you paying Class 2 NICs in error?
    1. The system for collecting the weekly Class 2 self-employment NICs appears to be completely separate from other HMRC collection processes and if you have ceased in self-employment, these contributions are not automatically cancelled following the submission of the self-assessment return confirming you have ceased in business.
    2. On a couple of occasions in the past year, when taking on new clients, we have come across situations where people have been paying Class 2 in error, either because they have ceased in self-employment altogether or following the transfer of the trade to a limited company.
    3. PAHCo Planning point: If Class 2 contributions have been paid in error, these can be refunded on application to the National Insurance Contributions Office, Benton Park View, Newcastle upon Tyne, NE98 1ZZ and completion of form CA8480. If you need any assistance with this, please contact Claire Jackson in St Ives.
16. Employee gifts – the tax rules
    1. At this time of year we are often asked questions about gifts to employees and given HMRC enforcement activity is on the increase, I will summarise the position.
    2. If a gift is of money or “money’s worth” – for example a gift voucher, then it MUST be treated as additional NET pay and income tax and both employer and employee National Insurance contributions grossed up under the PAYE system. However, an actual gift of “trivial” value is not considered the employee’s income and is tax allowable for the business. Although HMRC do not specify a figure for “trivial”, if the gift is worth more than, say, £50, then a benefit in kind would arise on the employee, but the cost is still tax allowable for the business.
17. VAT – low value consignment relief to be abolished
    1. This item is more “for interest” rather than of practical importance; have you wondered why, when you buy a CD or DVD online, it is often sent from Jersey or Guernsey?
    2. The answer lies in VAT, in that an item worth less than £15 sent to the UK from the Channel Island (where VAT does not apply) is not subject to VAT on importation; normally, goods arriving from overseas are subject to VAT on entry to the UK. To take advantage of this in the modern age, online retailers have set up operations in the Channel Islands and are not paying VAT on low value items. This is to the obvious disadvantage of UK retailers and having given over a year’s notice, this relief will be abolished from April 2012.
    3. It remains to be seen how online retailers react to this change, but I am afraid an increase in the cost of items previously eligible for the relief seems very likely
18. Statutory residence test
    1. For those of us who live and work in the UK “full time”, there is no problem in determining whether we are “resident” in the UK for tax purposes. However, for an increasing number of people who work both in the UK and overseas, determining how much of their income or gains should be taxed in a particular jurisdiction can get very complicated indeed.
    2. Further complications arise in a year when someone comes to or leaves the UK and in cases where someone is in the UK, but was not born here – a non-domiciled person.
    3. This is an area where tax law has not really kept up with what is happening in the real world and in the past year, a number of cases on residence have been decided in the Supreme Court. It had been expected, to bring all the law on this matter together, a statutory residence test would be introduced from April 2012, but it has proved impossible to design this in time and it will now be postponed until April 2013. We will contact any clients who may be affected as soon as the proposals are announced.
19. Capital Gains Tax when you cease trading (ESC C16)
    1. I commented in our Spring 2011 newsletter on the potential withdrawal of an extra-statutory concession known as ESC C16. Under this concession, when a company is informally wound up using the simplified process for striking off at Companies House, the final payment of monies remaining in the company to shareholders can be treated as a Capital Gain, this in turn normally being eligible for the entrepreneur’s rate of CGT of 10%, rather than as dividend income taxable at up to 50%.
    2. A couple of years ago, following a tax case in the House of Lords, the legality of Extra Statutory concessions was questioned and since then, rather than these being informal rules, most of the concessions have been formalised in law. HMRC have long been concerned that ESC C16 was open to abuse and there is anecdotal evidence of people forming a company, trading for a couple of years, then closing the company and taking all the money out as a gain at 10% tax, before forming a new company and starting the cycle again; you may have heard of someone who at least claims to have done this.
    3. To stop this “phoenixism” as it is called, there are anti-avoidance rules, but HMRC do not seem to have been very good at enforcing them. As a result, from April 2012, when ESC C16 is formalised in legislation, a limit of £25,000 is being introduced on the money withdrawn from a company on informal winding up that can be treated as a capital gain; any monies in excess of this will be treated as a dividend and taxed on the recipient accordingly.
    4. It will still be possible for capital treatment to be obtained for larger amounts, but only if the company is formally wound up in a solvent Members Voluntary Liquidation. In law, although the company is solvent, this work has to be carried out by a licensed Insolvency Practitioner and will cost in the region of £5,000 to £7,500. However, in many cases the costs of a formal liquidation will be insignificant compared to the money coming out of the company being taxed at 10% rather than 40% or 50%
    5. If you would like any further advice on this matter, please get in touch.
20. Practice matters: Staff changes and Christmas office hours

    CLAIRE JACKSON

    1. I am pleased to announce that Claire Jackson has been promoted and is now in charge of our tax services to clients on a day-to-day basis. If you have any queries on tax and Kim and I are not available, please get in touch with Claire. She is based in St Ives and can be contacted by email on claire@paulahill.co.uk.

    LISA JONES

    2. Katherine Ray left us in the Summer, she has gone to Northern Ireland to live with her partner and I am pleased to say we have appointed Lisa Jones to replace her.

    CHRISTMAS OFFICE HOURS

    3. This year, both our offices will be closed from 5 p.m. on Friday 23 December 2011, and re-open at 9 am on Tuesday 3 January 2012. If you have an urgent query during the Christmas period, please do not hesitate to telephone me on 01480 462713; I will endeavour to deal with the matter as soon as possible.

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