Client Newsletter – Summer 2010

“Active Accounting And Tax”

INTRODUCTION

In my Spring 2010 newsletter, covering the March Budget from Alistair Darling, I commented on his proposals and also made some remarks on what the Conservatives had said they might do if they won the election. As we now know, whilst Labour lost the election, the Conservatives didn’t win it and we find ourselves in what may reasonably be referred to as “interesting” – or at least uncharted, times as far as tax policy is concerned.

In preparing this newsletter, I looked up the expression “may you live in interesting times” in Wikipedia and find, whilst the origin of this as a curse remains in some doubt, it is reported that this is the first of three curses of increasing severity. The second one of these is “may you come to the attention of those in authority”, sometimes rendered as “may the Government be aware of you” – an interesting thought from the point of view of some of the matters referred to below.

In the Coalition’s “emergency” Budget of 22 June 2010, George Osborne was at pains to support business and set out a clear roadmap for business tax over the life of this Parliament comprising decreases in Corporation Tax rates, tempered by some reductions in capital allowances. In addition, there were some proposals to limit the impact on business of the NIC rises from April 2011, but these were not reversed. There were also cuts in benefits, including Tax Credits and increases in Capital Gains Tax and VAT, but, aside from these two specific taxes, there are no other changes for 2010/11.

Aside from the June Budget, there has been a change in the VAT “mileage” rates from 1 June 2010, the minimum wages rates from October 2010 have been confirmed and increased ISA limits are now available for all investors – but are you making the best use of yours?

THIS NEWSLETTER COVERS THE FOLLOWING TOPICS:

1. A review of 2010/11 Income Tax rates and allowances
2. Capital Gains Tax changes from 23 June 2010
3. Business tax roadmap for this Parliament – CT reductions, but capital allowances reduced as well
4. Employer NIC holiday for new business – but limited to certain regions and NOT in London, the South East or the East regions
5. VAT matters incl. mileage rates from 1 June 2010 changes, a reminder about recent changes and standard and flat rate increases from 2011
6. Other business matters incl. time to pay, minimum wage, rates relief, online filing, penalties and “reasonable” care/excuse and withdrawal of a concession
7. Our Tax Compliance Service for 2010/11
8. What is happening with Furnished Holiday Lettings?
9. Are you using your increased ISA limit?
10. What we currently know about Income Tax and National Insurance for 2011/12
11. Tax credits – big changes (mainly reductions) in 2011/12
12. Other matters, looking forward and the third curse!

As this was an “emergency” Budget, aside from the headline changes to CGT and VAT, there were significantly less other new proposals than in a normal Budget, although the “Budget Notes” prepared by HMRC did contain “updates” on a considerable number of items announced in March, but not passed into law owing to the election. The major changes in the June 2010 Budget are to be included in a Finance (No. 2) Act 2010 to be passed before the Summer Parliamentary recess and the new Government has confirmed that a lot of the “routine”, non-political changes announced in March, will bebrought back in a Finance (No. 3) Act 2010 in the Autumn. The relevant bill will be issued in draft form in July, to allow more time for detailed consideration of what can be quite complex changes required to counter tax avoidance.

PAH Comment: In my opinion, this is to be welcomed as the timetable for Finance Acts over the past few years has meant a rather less than desirable amount of time available for detailed scrutiny of new tax law.

To find the information you need, please look under the following headings:

1. A review of 2010/11 Income Tax rates and allowances
2. Capital Gains Tax changes from 23 June 2010
3. Business tax roadmap – Corporation Tax
4. Business tax roadmap – Capital Allowances
5. Employer NIC holiday for some
6. VAT mileage rates … and why you should claim VAT back on staff expenses.
7. VAT rate increases, insurance premium tax and Landline Duty
8. Other business matters – including the minumum wage and HMRC penalties
9. PAHco Tax Compliance Service 2010/11
10. Furnished holday lettings in chaos – 2010/11 and expected 2011/12 rules
11. ISA limits increased for all from 5 April 2010- are you using yours effectively?
12. Income Tax and NICs for 2011/12 and their effect on remuneration strategies.
13. Tax credits for 2011/12
14. Other matters, looking forward, and the third curse.

1 A review of 2010/11 Income Tax rates and allowances

The emergency Budget confirmed the previously announced Income Tax rates, bands and allowances for 2010/11 would remained unaltered, in particular, the withdrawals of allowances and reliefs for those earning over £100,000 and the 50% rate for those earning over £150,000.

As a result, the 60% marginal tax rate charged on incomes between £100,000 and £112,950 is confirmed and we have a complex set of marginal Income Tax rates for 2010/11, as follows.

Income range	Marginal rate of tax	Income range	Marginal rate of tax
£0 – £6,475	0%	£100,000 – £20%,950	60%
£6,475 – £43,875	20%	£20%,950 – £150,000	40%
£43,875 – £100,000	40%	Over £150,000	50%

 

Your marginal Income Tax rate is the additional Income Tax payable on the next £1 of income in the above ranges.

PAH Planning point: In view of the deficit, I think it unlikely the 50% rate or withdrawal of personal allowances will be removed before 2014/15 or possibly 2015/16 – just in time for the next election? Accordingly, it remains good advice to consider if it is possible to structure withdrawals from your business in a manner that minimises the effect of the above marginal rates – the key to which is planning!

In my Spring 2010 newsletter, Section 3 was devoted to a number of suggestions to avoid, as far as possible, paying tax at a marginal rate over 40%. These included

• Operating through a company if you aren’t already
• Looking ahead to identify income requirements over the next few years, in particular if you need a “very big” withdrawal in any one year
• Income “splitting” with a spouse or others
• Possibly paying 40% tax now to avoid 60% or 50% in another year
• Borrowing from the company instead of taking income, but a tax deposit may be required if this route is taken
• More “aggressive” strategies

If you no longer have a copy of this newsletter to hand, it may be found on our website at www.paulahill.co.uk.

PAH Planning point: If you would like any further advice on any of these strategies, please do not hesitate to get in touch.

PAYE code numbers

I also commented in my last newsletter on the considerable problems HMRC were having with their new PAYE coding computer system. Whilst I think things have improved slightly, clients are still advising us it is taking a long time to get a code number issued.

The official word from HMRC is that many of the teething problems have now been sorted out, but that because of the time spent on that, they are behind with routine matters – so it is still taking a long time to get a code issued!

PAH comment: With HMRC now processing forms P11d for 2009/10, due for submission by 6 July, which in turn these days automatically affect the coding system, I am afraid I don’t think this is going to improve in the short term and all we can hope is that it will be up to date by the time the 2011/12 coding run comes to take place in January 2011.

PAH Planning point: Please continue to let us have copies of all coding notices immediately on receipt, so we can make sure everything is being kept up to date. Whilst we are hopeful the processing of P11ds will lead to less problems than in previous years, this is a key time in the PAYE year and it is important to make sure HMRC only update benefit in kind amounts and the system does not relapse into recoding either expenses or other income, resulting in overdeductions of tax under PAYE.

Pension contributions for those with income of over £130,000

Please also remember that there may be significant withdrawal of tax relief for pension contributions for taxpayers with incomes over £130,000; this being implemented in many cases by the taxpayer being required to pay a possibly quite substantial “special annual allowance charge” on top of their normal tax liability.

PAH Planning point: If you are potentially affected by the special annual allowance charge on pension contributions for 2010/11, you may wish to consider reducing the amount paid to the pension company in the first instance, to make sure sufficient funds are available to pay the charge. I would stress this is a very complex area and would strongly recommend that if you are affected you ask us and your pension advisor to assist you.

The Government is aware of the complexity of the rules relating to the special annual allowance charge and is looking to change the way in which pension tax relief is given, such that it is not given in the first instance, rather than having to be clawed back later; it is intended any new rules will be introduced from 2011/12.

2 Capital Gains Tax changes from 23 June 2010

Whilst it was not a shock that the rate of Capital Gains Tax was increased in the emergency Budget, the fact that the highest rate was “only” 28% and the new rate came into force immediately were both somewhat of a surprise. On the rate, it is the new Chancellor’s view that a higher rate would lead to less tax being paid, partially through deals being postponed.

Having said that, the Government has defused quite a lot of complexity that could have arisen from changing a rate in the middle of a tax year by being really quite flexible over how the annual tax free amount, which was not reduced from the previously announced £10,100, despite there being a lot of rumours that it might be brought down to as low as £2,500, and losses can be allocated against gains made in the 2010/11 tax year.

Technically, the “standard” rate of capital gains remains at 18% with the “higher” rate of 28% only applying if an individual’s taxable income and gains combined exceed the threshold for 40% tax, currently £43,875. The higher rate also applies to gains made by trusts and estates.

It has also been necessary for there to be some technical changes in connection with gains eligible for entrepreneur’s relief, to make sure all such gains can be taxed at the rate of 10%; the lifetime limit for gains qualifying for this relief having been increased to £5 million. Owing to this, an entrepreneur realising a gain of up to £7.4 million will be better off because of thechanges; it is only above this level that the higher rate of CGT outweighs the benefit of the increase in the entrepreneur’s relief limit.

PAH Planning point: Whilst these technical changes don’t sound very much, they can have an impact on more complex deals, particularly where a business is being sold for deferred consideration by way of loan notes. In such circumstances, to obtain entrepreneur’s relief on the whole deal, CGT will become payable based on the date of the original transaction and not on when the loan notes are encashed.

It is also necessary to remember that the range of assets that qualify for entrepreneur’s relief is a lot smaller than those that qualified as “business assets” under the old pre April 2008 regime; in particular, a shareholding of less than 5% in a company is not eligible. Because of the effect of this on small employee share stakes, which the Conservatives have traditionally championed, we expect there may be some further announcements in the Autumn on this point.

PAH Planning point: If you are contemplating a disposal, we are pleased to give advice on the CGT rate applicable to the transaction and the amount payable.

There is also a “tidying up” provision, to make sure that private residence relief is not lost where an “adult placement carer” uses one or more rooms in their own home exclusively for the “caring activity”. PAH Comment: The need for this change brings into sharp focus how the tax system often fails to keep up with changes in the way things work in the “real world”!

3 Business tax roadmap – Corporation Tax

The main rate of Corporation Tax, currently 28% will be reduced by 1% per annum each year from 2011, such that from 1 April 2014, the rate will be 24%.

PAH Comment: Whilst a tax reduction of this sort may seem an anomaly at the present time, there has been quite a loss of Corporation Tax over the past few years from very large businesses seeking to move their headquarters overseas, for example to Dublin, where the rate of Corporation Tax is a lot lower than in the UK. The Chancellor clearly hopes that this planned series of reductions will reduce the number of major companies seeking to relocate.

The small companies’ rate for companies with profits of up to £300,000 per annum in a single entity had previously been expected to increase to 22% from 2011/12, but instead the rate will be reduced to 20%, but there were no comments on possible further reductions.

Please remember, the rate of Corporation Tax is set for each year beginning 1 April and where the rate changes and a company’s accounting period straddles 31 March, profits are time apportioned to the period before and after 31 March and the appropriate rate applied.

As a result of the reduction in the main rate, the marginal rate that applies to profits in excess of £300,000 up to £1.5 million, these figures being divided by the number of companies under common control if required, currently 29.75 % will reduce to 28.75% in 2011/12, then to 27.5% and 26.25% reaching 25% in 2014/15.

PAH Comment: This reduction in the marginal rate will alter the tax effectiveness and indeed the desirability of different approaches to reduce profits to the small companies rate and we will keep a close eye on this for you when we prepare your accounts and tax returns. PAH planning point: When tax rates are changing like this, for us to give you full and complete advice it is necessary for us to understand all aspects of your affairs, and in particular to be advised of any changes, especially to income other than from a company for which we prepare accounts, as early as possible.

The quid pro quo for the reductions in the Corporation Tax rates are some changes to the Capital Allowances regime, including the Annual Investment Allowance – see section 4 below.

4 Business tax roadmap – Capital Allowances

As trailed before the election, the reductions in the rates of Corporation Tax will be offset by changes to the Capital Allowances regime, including the Annual Investment Allowance (AIA).

The overall Capital Allowances system was changed a couple of years ago, with First Year Allowances targeted at certain types of expenditure in certain types of company being replaced with an AIA of £50,000. Whilst there are some exceptions, e.g. cars, generally speaking capital expenditure of up to this amount is tax deductible in the year of purchase.

However, at the same time, the rate of Writing Down Allowance was reduced from 25% to 20% and a new pool was introduced for certain expenditure where the rate of allowances was only 10%; although if pool expenditure brought forward is less than £1,000 in any tax year, that may be written off in full.

The March 2010 Budget increased AIA to £100,000 from April 2010, but the June Budget announced this would be decreased to £25,000. The only good news is that the reduction will not be until April 2012, so there is a two-year window at the higher level.

In addition, again from April 2012, the rates of Writing Down Allowance will be reduced from 20% to 18% for the “main” pool and from 10% to 8% for the special pool.

PAH Comment: When AIA was introduced, the then Government commented that the vast majority of businesses would be better off as average capital expenditure tended to be less than £50,000 per annum. However, you will appreciate that there are many industries, for example manufacturing and haulage, where it does not take very much for AIA to be used up.

PAH Planning point 1: If you can plan your capital expenditure over the next three to four years now, and expenditure in 2012/13 and 2013/14 exceeds £25,000 per annum, changing the timing of that expenditure to before April 2012 may well bring benefits. I should point out there is anti-avoidance legislation defining the date on which expenditure is incurred, so it will also be necessary to take liability for the expenditure before April 2012.

PAH Planning point 2: Indeed, more generally, if your expenditure is in excess of the AIA for a particular year, because unused AIA cannot be carried forward or back, retiming of expenditure should be considered to make maximum use of each year’s allowance

PAH Planning point 3: However, if that is not suitable for your business, it is possible for you to choose which capital purchases are covered by AIA. This could be an advantage if any purchases in excess of the AIA could be determined to be “short-life” assets – essentially any item with a lifespan of less than about 5 to 7 years. These assets, although there are some restrictions to what can be included – before you think about it, cars are excluded!, can benefit from a slightly better treatment, in particular, when the item is disposed of, a full balancing allowance is obtained rather than the sale proceeds merely being deducted from an ongoing pool, meaning you do get full tax write off for the item over its useful life.

5 Employer NIC holiday for some

Many “new” businesses set up on or after 22 June 2010 will be able to benefit from a three-year scheme for exemption from up to £5,000 of Employer’s NICs for each of their first ten employees hired in the first year of business. The holiday for a particular employee will be for the first 52 weeks of their employment provided that falls within the three-year scheme period.

So far, we have very little detail on the scheme, which probably means it was a last minute addition to the June Budget – just a set of short “questions and answers” (Q&As). These state that HMRC will publish a technical note on the scheme “shortly”, including details of how the holiday can be claimed and that it will start as soon as possible, probably from 6 September 2010, but this is subject to meeting the necessary legal requirements and is YET TO BE CONFIRMED (the Government’s emphasis). The necessary legal requirements probablymean getting EU “state aid to business” approval.

The Q&As go on to state prospective new businesses should not assume this will be the start date. However, if a business meets the criteria that will be published shortly, it will be eligible to benefit if it was set up between 22 June 2010 and when the holiday scheme starts. A business set up in this pre-scheme period will be required to pay ERNICs before the start of the scheme, but will receive a benefit of equal duration once the scheme starts.

I think before covering any other points, it is necessary to look at what is a “new” business for the purpose of the scheme. There is a note in the Q&As that states that “the Government will take steps to ensure only businesses which undertake a sufficient degree of new (my emphasis) economic activity will benefit”. Whilst we have no details, this could mean an anti-avoidance provision to prevent a current business closing down and then setting up in a phoenix-like fashion to take advantage of what could be a very generous tax break.

PAH Comment: Until we see what the proposals are in this area, further thoughts about how current businesses might reinvent themselves to take advantage of the scheme will have to be left as just thoughts. I will of course take a detailed look at this when the HMRC technical note is issued and comment further at that time.

Whilst it is tempting to look at this as being a 10 X £5,000 = £50,000 boost for qualifying new businesses that can get up to speed with 10 employees in a two year period, the employees needing to be taken on within two years so that the first anniversary of their employment falls within the three-year scheme period, looking at the wording in more detail, it is “up to” £5,000, meaning that the full amount will only be saved for employees taken on at a salary of around about £45,000 per annum.

As noted above the scheme will not apply in London, the South East and East regions of England as it is intended to promote the formation of new businesses employing staff in those regions most reliant on public sector employment and the proportion of jobs in the public sector is higher in other regions than it is in the Greater South East – as defined above.

From a practical point of view of where our clients are located, this means the closest places to St Ives/Chatteris that are eligible are Lincolnshire to the North, Northamptonshire to the North West, Warwickshire, Gloucestershire, Wiltshire (including Swindon) and Dorset to the West or South West.

If you can meet the location requirement – one wonders if small serviced offices or correspondence addresses in towns on the edge of the boundary will suddenly command a premium, then there seem to be two further qualifying conditions. Firstly, it is stated “most” employees will be within the scope of the new scheme, but those caught under IR35 and employees engaged through managed service companies are excluded.

PAH Comment: More importantly, there is no comment in the current Q&As regarding owner-managers/directors, one way or the other.

Secondly, certain business activities are to be excluded – I think this is probably because businesses in these areas already receive “state aid” to a level that means if they were included, the whole scheme would fail the EU state aid rules. The Q&As state the coal sector will be excluded and that there will have to be restrictions for the agriculture and fisheries sectors, but there may be more.

6 VAT mileage rates … and why you should claim VAT back on staff expenses.

In accordance with the six-monthly review schedule, new VAT mileage rates have been issued to be effective from 1 June 2010. Whilst these are called the company car advisory fuel rates, as I have mentioned in previous newsletters, these figures can be used to reclaim VAT based on employee mileage paid at the HMRC authorised mileage rates of up to 40p per mile for the first 10,000 business miles per annum and 25p per mile for any excess.

Until the 1 December 2009 review, these rates were announced, but then did not come into force until the following month. However, they can be now used for all mileage claims from 1 June 2010 and the next review will take place to be effective from 1 December 2010. If you have already completed a 30 June 2010 VAT Return using the old figures, if you want to claim the excess – there are increases in quite a lot of the rates this time, then that will be fine, just include the additional claim on your next return; there is no need to notify HMRC of this change.

The table is as follows, including the previous two rates as well, the VAT in pence per mile that can be reclaimed being in brackets:

Engine Size	Petrol Cost (per mile)			Diesel Cost (per mile)			LPG Cost (per mile)
	From 1 June 2010	1 Dec 2009 to 31 May 2010	From 1 July to 30 Nov 2009	From 1 June 2010	1 Dec 2009 to 31 May 2010	From 1 July to 30 Nov 2009	From 1 June 2010	1 Dec 2009 to 31 May 2010	From 1 July to 30 Nov 2009
1400 cc or less	12p (1.787)	11p (1.435) until 1/1/10 then (1.638)	10p (1.304)	11p (1.638)	11p (1.435) until 1/1/10 then (1.638)	10p (1.304)	8p (1.191)	7p (0.913) until 1/1/10 then (1.043)	7p (0.913)
1401 – 2000 cc	15p (2.234)	14p (1.826) until 1/1/10 then (2.085)	12p (1.565)	11p (1.638)	11p (1.435) until 1/1/10 then (1.638)	10p (1.304)	10p (1.489)	8p (1.174)until 1/1/10 then (1.191)	8p (1.174)
Over 2000 cc	21p (3.128)	20p (2.609) until 1/1/10 then (2.979)	18p (2.348)	16p(2.283)	14p (1.826) until 1/1/10 then (2.085)	13p (1.696)	14p (2.085) )	12p (1.565) until 1/1/10 then (1.787)	12p (1.565)

Please remember that to support a VAT reclaim based on staff mileage you need to collect from staff VAT receipts covering at least the miles travelled times the above rates and retain these as part of your records.

PAH Planning point: If you are not reclaiming VAT on staff mileage, please remember that from 4 January 2011, when the VAT rate increases to 20% – see section 7 below, the above figures will also increase, with the recovery for a 1401-2000 cc petrol car increasing to 2.5p per mile – can you afford not to make this claim?

7 VAT rate increases, insurance premium tax and Landline Duty

With effect from Monday 4 January 2011, as widely expected, the standard rate of VAT will increase to 20%; the VAT included in a VAT inclusive price will then be one-sixth of that price.

The issues arising from the increase will be identical to those that arose from the change to the rate back to 17.5% on 1 January 2010 and there will again be anti-forestalling legislation to prevent businesses manipulating the rules to avoid the rate increase. Such legislation is targeted at artificial arrangements and is unlikely to affect suppliers conducting their business “as normal” when no VAT increase is anticipated.

There is no change to the range of goods and services subject to the zero or 5% rates of VAT and therefore these are not affected by the change in any way.

Having said that, there will be one change, for some reason from 31 January 2011, in respect of certain postal services, technically those that Royal Mail is not required to make under a licence duty, this including Parcelforce, but not normal stamped mail, which will become subject to VAT. Registered traders using such services will of course be able to reclaim the VAT suffered in the normal way.

PAH Comment: Whilst the increase in the VAT rate was probably inevitable, the UK is not the only country in the EU that is increasing its standard rate of VAT at present. With effect from 1 July 2010 Romania (24%), Greece (23%), Finland (23%) and Portugal (21%) all increased their standard rates to more than the new UK rate. In addition, other member states such as Denmark, Hungary and Sweden (25%), Poland (22%) and Eire (21%) have rates higher than 20% and we have only caught up with the Italian rate, also of 20%. The rates in France (19.6%), Germany (19%) and Spain (18%) remain lower than the new UK rate, but who knows whether they will be by January!

Insurance Premium Tax (IPT) will also increase from 4 January 2011, the standard rate charged on most general insurance including property, motor and medical insurance increasing from 5% to 6%. There is a higher rate of IPT that applies to travel insurance and extended warranties for cars and some consumer goods and this will increase from 17.5% to 20% on the same date. Life assurance and other long-term insurance product are exempt from IPT.

Although the Government remains committed to extending the reach of higher speed broadband internet connections, the proposed landline duty on telephone lines of 50p per line per month, proposed to be introduced from 1 October 2010, will not be implemented.

8 Other business matters – including the minumum wage and HMRC penalties

Time to pay arrangements with HMRC

The Business Payments Support service remains in place and can be contacted on 0845 302 1435. If you cannot meet any form of tax or duty payable to HMRC, I very strongly recommend you contact the service in advance of the due date for payment to agree an instalment arrangement. As previously noted, whilst interest will be charged, surcharges and late payment penalties will normally be waived where a time to pay arrangement is in place.

Again as noted in previous newsletters, the big change for 2010/11 is that “in-year” penalties may be charged for late payment of PAYE, make sure you don’t fall foul of these by either paying on time, or agreeing arrangements in advance for instalment payments.

PAH Comment: I set out some further thoughts on these arrangements in section 7.1 of my Spring 2010 newsletter, particularly about the service expecting itself to be used as a “lender of last resort” This newsletter is available at www.paulahill.co.uk if you do not have a printed copy to hand.

Minimum wage rates

The minimum wages rates from 1 October 2010, incorporating a change to the age ranges, will be as follows:

Age Range	Minimum wage per hour
	£
Over 21	5.93
18 to 20	4.92
16 to 17	3.64
Apprentice rate	2.50

Please note that the highest rate is now applicable from age 21 rather than 22.

Business rates relief

The June Budget confirmed that the level of small business rates relief will be temporarily increased for one year, from 1 October 2010, giving full relief for eligible businesses occupying premises with a rateable value of up to £6,000 and tapering relief up to £12,000.

PAH Planning point: If you are eligible, you should expect to hear from your local council about this before 1 October 2010. If you feel you should be eligible, but do not hear about this by 1 October 2010, I suggest you contact them directly to establish the position

Online filing/EU Sales lists

Just a quick note to remind you that we are now at the point – for 30 June 2010 quarter VAT returns, where if you have been notified by HMRC to submit returns online, this is compulsory.

Whilst on filing matters – a further reminder about VAT EU sales lists. These require to be submitted for each calendar quarter, no matter what your normal VAT “stagger” is, possibly by as soon as 14 days after the end of the quarter. Whilst a longer time is allowed for online submission, it is not currently possible for us to do this online on your behalf as your agent.

In addition, in year PAYE forms now almost all have to be submitted online

PAH planning point: Please make sure you are aware of all forms you are required to submit to HMRC and the required filing method and deadlines for these. As set out immediately below, penalties are now frequently charged automatically for late or incorrect submission of returns. If you have any queries on or need any assistance with any forms you have to submit to HMRC, or indeed to any other Government body – e.g. Statistics’ Office forms, please do not hesitate to ask for advice.

HMRC Penalties and reasonable care or excuse

Whilst a penalty may be chargeable by HMRC for late or incorrect submission of a return or form or late payment of tax, the penalty may be withdrawn if you have a reasonable excuse for late submission or payment or can show you have taken reasonable care over the preparation of a return.

These days, penalties are issued automatically by HMRC computer systems for late submission or payment “offences” and it is important to note that if the filing or payment date is on a weekend or worse, a bank holiday Monday, the due date is brought forward to the previous Friday.

It is also the case that much tax legislation provides that as far as late payment is concerned, not having the money to pay the amount due is not a reasonable excuse! – in such circumstances please see paragraphs 8.1 above.

There is also one other new point on payments to HMRC, payments by cheque may no longer considered to have been received by HMRC on receipt of the cheque. From 1 April 2010, all cheque payments for VAT sent by post will be treated as being received by HMRC on the date when cleared funds reach its bank account – not the date when the cheque arrives. This means that businesses must allow enough time for their payment to reach HMRC and to clear. A cheque takes three bank working days to clear – excluding Saturdays, Sundays, and bank holidays.

For Corporation Tax, it is currently the case that a new rule is expected to apply from 1 April 2011. It is different from VAT and does not depend on when the cheque clears. The regulation for paying Corporation Tax by cheque from 1 April 2011 states the payment is to be treated as made on the second business day after the day on which the Board received that cheque. No regulations have been laid for Income Tax, so as things stand currently, the rules are unchanged. In other words, as long as a cheque for Income Tax is with HMRC by the deadline, it has arrived on time.

HMRC is currently trying to bring all of the taxes into the same position as regards matters such as payment rules and it is likely the rules for Corporation Tax and Income Tax will be amended, perhaps as soon as in the Autumn 2010 Finance Act to bring them into line with the VAT rule in paragraph 8.5.4 above. We will obviously advise you any changes when writing to you to confirm upcoming tax payments.

With regard to late submission of a form, in the early days of VAT, the VAT Tribunal determined that it was reasonable to assume the Post Office would deliver a return to HM Customs & Excise in Southend, in those days the envelope was prepaid with first class post, the following day. Accordingly, if you could prove that you posted the return on the day before the last working day of the month, then that was a reasonable excuse if the return was in fact delivered late to HMRC. Where we complete a paper VAT return for a client to be sent by post, we still suggest you get a certificate of posting from a Post Office to prove the date on which the return was sent, in case HMRC receives it late.

However, time has moved on since then and particularly now that online submission of virtually all documents is possible, Companies House, for one, no longer accept postal delays as a reasonable excuse for late submission. As mentioned in paragraph 8.4.4 above, it is important you make sure you are aware of the filing method and deadline of all the forms you are expected to submit to HMRC yourself, as it is much more difficult to show reasonable excuse for a late submission than it used to be and indeed, it may be impossible.

PAH Planning point: In view of this please let us have the information to submit returns on your behalf in good time. Whilst we will always endeavour to submit a return on time, however late before a filing deadline we receive information, there are times when this is very difficult and you may incur additional costs as more senior staff have to work on the return to meet the deadline. In addition, please return tax returns or other documents that are sent for your signature as soon as possible. Where a deadline is coming up we always show this, but must ask you to help us to give you the best and most cost effective service – chasing you up also costs extra.

Having looked at the position for late submission or payment, which particularly with the “in-year” late payment regime for PAYE coming on stream this tax year – by the way don’t think you have “got away” with this if you make a late PAYE payment and “nothing happens”, penalties for this will only be assessed and charged after the PAYE end of year return P35 for the year ending 5 April 2011 has been processed – probably about this time next year, we now also need to consider incorrect submission.

Whilst a penalty for lateness will be cancelled if you have a reasonable excuse, the penalty for an incorrect return will be cancelled or at least reduced, if you have taken “reasonable care” in the submission of the return – a term I have referred to quite often in recent newsletters. However, we are now beginning to get a much better feeling about what HMRC consider to be reasonable care and how taxpayers and their agents might demonstrate to HMRC that such reasonable care has been taken.

Very recently HMRC have issued a series of “Toolkits” setting out the “common errors” they find in submitted returns of all sorts and suggesting the questions and information a prudent taxpayer or their agent might ask of themselves and obtain before completing a return. We have reviewed these Toolkits and are pleased to report that our procedures already incorporated virtually all the suggested checks and we have since incorporated the remaining few, generally covering very unusual circumstances. In this way, we expect to be able to demonstrate “reasonable care” in the preparation of all returns for which we are responsible.

Withdrawal of an important concession

For a considerable number of years HMRC have operated an informal “Extra-statutory concession” concerning the filing dates of a limited range of forms, mainly relating to PAYE compliance. This concession provided that if the forms were received within a week of the filing date, no late filing penalty would be charged.

It has now been announced that this concession will be formally withdrawn from 6 April 2011 and that penalties will be charged if any return is even one day late – unless of course you have a reasonable excuse!

9 PAHco Tax Compliance Service 2010/11

We are currently sending out letters inviting clients to take up our Tax Compliance Service for the year commencing 1 August 2011. The “service” will reimburse our costs incurred with dealing with HMRC investigations into your affairs.

Depending on the exact subscription paid, the service covers our costs in respect of full or aspect enquiries into a business or personal tax return and disputes involving VAT, PAYE or NICs. In addition, for the new service year, the cover will also include dealing with the following matters that are becoming ever more frequent:

• VAT or Employer compliance reviews – “fishing” expeditions by HMRC
• Cross Taxes enquiries – HMRC looking into VAT, Income or Corporation Tax and PAYE at the same time!
• HMRC “Interventions” relating to Self-assessment, Employer Compliance or VAT – interventions is the term for simpler, shorter enquiries, but these still have to be dealt with carefully

This year, we have also negotiated that there will be no excess for aspect enquiries and believe the level of cover and fee structure is significantly better that many group schemes operated by business organisations.

If you have any queries about the service, please do not hesitate to give Linda Harrison a call in St Ives.

10 Furnished holday lettings in chaos – 2010/11 and expected 2011/12 rules

The situation with furnished holiday lettings (FHL) at present can only be described as complete chaos and in order to form any understanding of what is going on, it is necessary to recap “how we got here”.
For many years, certainly as long as I can remember, where “holiday accommodation” in the UK was available for letting for 140 days in a year and was actually let on a short term basis of less than 32 days for each let for 70 or more days in a year, then the activity was treated as a trade for Income Tax purposes. In particular, this meant that losses could be offset against other income from any source and that any profits were treated as earned income for pension contributions and for any other tax relevant reason.
About a couple of years ago, a complaint was made via EU channels that because only UK properties were eligible for this treatment, this was against EU law. The complaint was upheld at EU level and the UK was obliged to change the law. Accordingly, from 2008/09 all qualifying lettings within the European Economic Area had to be afforded the same treatment. This was first done by extending the concessionary treatment to non-UK but within EEA properties.
However, in order to prevent what HMRC was concerned might be very expensive claims from owners of properties in the EEA that “just” met the definition, it was also announced that from 2010/11, the treatment of such lettings as a trade would be completely discontinued, both for UK and EEA properties. Following withdrawal, income from holiday lettings would be treated under the different rules for land and property income – this removing the loss offset against other income and also meaning some expenses would no longer be tax deductible.
The necessary legislation was included in the Finance Act 2010 following the March Budget, but withdrawn in the horse-trading that took place once the election was announced. This consultation between the parties enabled a short Finance Act containing non-controversial matters to reach the statute books before parliament was prorogued in April in advance of the election.

PAH comment: At that time, I had thought that instead of the matter being totally removed from the Finance Act, the terms had been changed, but that now turns out not to be the case and it is now clear the rules for FHL, both in the UK and EEA, will remain as previously for 2010/11.

PAH Planning point: Accordingly, if you have FHL income then you have one more year at least when the rules set out in 10.1 above will apply. On this basis, if you have significant repairs to make to a property, this would almost certainly be a good tax year to do them!

The Government intends to consult over the Summer of 2010 on changes to the rules from 2011/12. We understand, as proposed by the Conservatives in the horse-trading discussions on the Labour Finance Act in April, the proposed changes being consulted on would:

• Increase, possibly double, the number of days properties have to be available for and actually let to qualify for the special treatment
• Change the way in which FHL loss relief is given
• Ensure the FHL rules apply equally to properties in the EEA.

We will obviously keep clients aware of the progress of the consultation, as the position becomes clearer.

11 ISA limits increased for all from 5 April 2010- are you using yours effectively?

Whilst I appreciate interest rates remain dreadfully low from the perspective of savers, using an ISA is still a particularly tax efficient way of going about it if you are going to save. The limits were increased to £10,200 for those over 50 from October 2009, but this higher limit is now available to all.

As previously, only 50% of this limit may be saved in cash, the remainder having to be in “stocks and shares”. If you save on a regular basis, you can now put up to £425 a month (£5,100 per annum) into a cash ISA.

If you are uncertain of how a stocks and shares ISA works and would like any advice, please contact your financial advisor or, if you prefer, Nigel Tyrell, the independent financial advisor with whom we work on a regular basis would be pleased to offer advice. If you would like Nigel to contact you about this, please give Kim or me a call and we will set this up.

In the June Budget, it was announced that with effect from April 2011, the annual ISA limits would be indexed – presumably in accordance with “CPI” – see 14.2.2 below, which is the Government’s preferred measure of inflation for tax and benefit uprating.

12 Income Tax and NICs for 2011/12 and their effect on remuneration strategies.

The Government has announced that in accordance with the Coalition agreement, one major plank of Liberal Democrat policy – the removal of a large number of the lower paid from Income Tax altogether, will begin to be introduced from 2011/12.

PAH Comment: I have always thought it odd that having set a minimum wage, the Government then took Income Tax back from it and this will begin to address this issue – the 2010/11 adult minimum wage for a 35 hour working week is just under £10,800.

From April 2011, the personal allowance will be raised by £1,000 to take many low earners out of Income Tax altogether. However, because this is intended to be of benefit only for basic rate taxpayers, to compensate for the higher personal allowance, the basic rate limit will be reduced by an amount estimated at £2,500, although the exact figure will not be confirmed until the Autumn. This would mean 40% Income Tax (and 28% Capital Gains Tax if relevant) beginning to have to be paid on total income of just under £41,500, as opposed to just under £44,000 at present.

PAH Comment: The position on National Insurance is slightly different as this is still, at least theoretically, a contributory system – you pay and then get something back when you need it.

The June Budget confirmed the previously announced changes to NICs from 2011 will still come into force, but for Employers only there will be an increase of £21 per week, over the figure that indexation in September 2010 would reach, in the threshold at which they have to start paying their portion of National Insurance contributions. This will result in a reduction of about £150 per annum per employee earning more than about £7,000 per annum over the amount previously proposed to be payable.

As it is some time since the changes to come into force from April 2011 were announced, here is a brief summary:

• Class 1 Employee main rate will increase by 1% to 12%
• Class 4 Self-employed profits’ based rate will increase by 1% to 9%
• BUT – see 12.7 and 12.8 below re the lower and upper thresholds for these rates
• All forms of Employer NICs (Secondary Class 1, Class 1A and Class 1B where relevant) (subject to the increase above in the Secondary Class 1 threshold referred to above) will increase by 1% to 13.8%
• The additional rates of Classes 1 and 4 payable above the upper threshold without limit, will double to 2%

The primary threshold at which employees and the self-employed begin to pay Class 1 and Class 4 NICs will be increased by £570 (as announced at the 2009 Pre-budget Report).

The Upper Earnings/Profits Limits for Class 1 Employee and Class 4 Self-employed NICs will be maintained at the new reduced 40% tax threshold. If this is lowered by £2,500 as indicated in paragraph 12.3 above, then contributions at the full rates on this amount will be reduced to the additional rate. The combined effect of the increase in the lower threshold and the decrease in the upper threshold will be a decrease of just under £320 for an employee earning at the old 40% threshold of £43,875 ( just over £225 for a self-employed person with the same level of profits)

As with the basic rate threshold for Income Tax, the final Upper Earnings/Profits Limits will not be confirmed until the Autumn.

PAH Comment: These changes are probably the ones that have most been influenced by the Coalition agreement and considerably complicate the overall position. In fact, in just three years, we have gone from a system where NICs of all forms and Income Tax began at the same figure to one where Income Tax, Employer NICs and Employee/Self-employed NICs begin at three different levels – woe betide anyone who still works out PAYE by hand!

Planning point: These changes mean that from April 2011, the position on remuneration strategy salary/dividend splits will be more finely balanced than previously and we will almost certainly need individual clients to confirm their instructions to us as there will be more choice than previously and no one “best” set of figures to use. A salary set at the increased personal allowance will most probably lead to considerably more NICs being payable than in recent years, so a compromise position will need to be agreed. We intend to conduct a review of remuneration strategies for 2011/12 in the “down” season for tax returns between 31 January and 31 March 2011 and will be in touch with all clients using this approach at that time.

13 Tax credits for 2011/12

Whilst there are to be cuts in a number of different Social Security benefits and also changes to entitlements, from our perspective, the biggest change is of course in Tax Credits and in particular to the “family element” of the Child Tax Credit, this being the element claimed by most of our clients with an entitlement to any form of Tax Credits.

The main thrust of the proposals is to reduce entitlement to Tax Credits for households with family income, as defined for Tax Credits, of £40,000 or more and to increase the standard withdrawal rate where initial thresholds are breached to 41p (up from 39p) in the £1.

The effect of this on the family element is marked. From the current situation where the income threshold for withdrawal is £50,000 and the rate of withdrawal 6.67%, the limit is coming down to £40,000 with a withdrawal rate of 41%! On this basis, the family element of £545 will be fully withdrawn at income of £41,330.

The additional family element for a child under one year will be removed altogether.

There are also to be changes in various thresholds and time limits relevant when family income changes, as follows:

• From 6 April 2011, the income disregard, the amount by which income can rise in one tax year compared to the previous one before a Tax Credit award must be revised, will reduce from £25,000 to £10,000 and then be further reduced to £5,000 from 6 April 2013.
• From 6 April 2012, there will also be a new feature in that a Tax Credit award will not be increased until there is a fall in income of more than £2,500 over the previous year.
• From 6 April 2012, the backdating of a new claim or increased award following a change of circumstances will be limited to one month instead of three.

There are a considerable number of more detailed changes in the individual elements that make up the Tax Credits system. If you are interested in any specific changes not referred to here, please give Linda Harrison a call in St Ives. PAH Comment: The withdrawal of the family element of the Child Tax Credit for claimants with over £40,000 in family income will hit a considerable number of clients, but from the Government’s point of view, has the benefit of apparent simplicity. I say “apparent” simplicity as this will mean a lot more claimants have to complete a detailed tax credits renewal form each year, rather than merely confirming family income remains within certain limits; I hope the system will be geared up to process these claims! It also remains to be seen how the Government will identify those entitled in 2010/11, but not entitled in 2011/12, BEFORE the Tax Credits annual renewals are submitted in July 2011. If this position is not identified, as payments automatically continue until the renewal date of 31 July, there will be overpayments to be repaid – this has the makings of an administrative nightmare.

PAH Planning point: This point has always been around, but is perhaps one I have not “pushed” in the last couple of years or so – the need to make a “protective” claim for Tax Credits if you think there may be any opportunity for you to claim these in the future, for example because your income drops substantially. The proposed decrease in the backdating of claims from three months to one month from April 2012, brings this back into focus – it is quite possible to make a claim for Tax Credits, but to receive no award, because your family income is above the thresholds. However, in these circumstances, if your annual income drops later on in a tax year, such that claim might have been made earlier if you had known your total income at that earlier point, the claim will not be partially time-barred under the backdating rules – although, from 6 April 2012, such a claim would be covered by the new rule concerning an income drop of £2,500 before a claim is recalculated.

14 Other matters, looking forward, and the third curse.

As always, it is only possible for me to comment on some matters contained in the June Budget or otherwise of current interest. If you require information on any other matters that are not mentioned in this newsletter, please do not hesitate to get in touch to discuss your concerns.

State pension and other benefits

From April 2011, the state pension will be uprated by a “triple guarantee”, i.e. by reference to earnings, prices (CPI – see below) or 2.5%, whichever gives the highest result.

However, in looking at price inflation, the Government has decide formally to adopt the CPI (Consumer Prices Index) rather than RPI (Retail Prices Index) as the measure of increases – for all benefits, Tax Credits and publicly paid pensions. CPI is different from RPI in that, inter-alia, it does not include housing costs.

Another benefit about which there was considerable comment before the June Budget was Child Benefit – as distinct from any Child “elements” of the Tax Credits system. The Chancellor confirmed this universal benefit will continue as previously – being neither means tested nor taxable, but the rate of benefit will be frozen for three years from April 2011.

Carers

I have already mentioned one change relating to Private Residence Relief under section 2 above.

There are two further changes to the Income Tax position of “shared lives carers” and in respect of payments to carers for looking after children under special guardianship orders. If you need any further advice on these, please contact us.

Child trust funds

From August 2010, contributions to these are to reduce at birth from £250 to £50 and from £500 to £100 and cease at age 7.

Whilst no new CTF vouchers will be issued from January 2011, CTF Accounts already in existence will continue to operate as currently.

Looking forward – Government consultations on proposed changes

The June Budget announced a considerable number of consultations on various tax topics, including:

• A new approach to tax policy making
• Tax avoidance including the possibility of introducing a general anti-avoidance rule
• IR35 and small business taxation more generally
• Taxation of non-domiciled individuals
• Review of the PAYE system
• The taxation of intellectual property
• The role Research & Development Tax Credits play in supporting innovation

PAH Comment: Some of these consultations can be welcomed wholeheartedly, but others must be viewed with some caution.

The document on a new approach to tax policy making sets out five key problem areas:

• A lack of a clear strategy for the tax system
• Consulting too late in the policy development cycle – when there is practically no time to make any changes before the intended implementation date.
• The length and complexity of the tax system in the UK
• Uncertainty arising from the volume and timing of tax changes
• Inadequate Parliamentary scrutiny of tax legislation

The tax and accounting professional bodies have been making these points for a long time and will take an active part in this major consultation. It is to be hoped this will lead to more sensible legislation.

A general anti-avoidance rule (GAAR) is another matter altogether. In very, and I stress very, simple terms this says anything HMRC doesn’t like is illegal. The idea of a GAAR is not new and was last proposed in the early years of the last Government, but was rejected. Various professional commentators think the mood has now changed and a GAAR may be on the cards. The reasons for this include the fact that there is much more anti-avoidance legislation, including a number of “mini” GAARs in various areas, for example in the taxation of employment income and also that the volume of tax legislation has almost doubled since 1998.

At the moment this has only been flagged up as something that needs to be considered as part of the review of tax policymaking – we shall all have to wait and see what develops.

The third item in the list above may seem the most attractive, but in my opinion is the most worrying. Essentially, assuming IR35 can be “got around” in the case of “contractors”, since about 1999, the tax regime for owner-managed businesses is as benign as it has been for many many years. There are examples in other jurisdictions, notably Australia and New Zealand, where the tax codes are otherwise broadly similar to the UK of an owner managed business being treated very much as a sole-trader or partnership is in the UK – I assure you this would lead to substantially increased tax and NIC bills for the vast majority of small owner-managed companies. If the removal of IR35, allowing many more people to operate other than employees is coupled with a major change to owner-managed business taxation – this is not good news in my opinion.

PAH Comment: I am convinced the Government realises the impact major changes will bring and in line with the consultation on tax policy, we will not see any knee-jerk reactions. However, it would appear owned-managed business taxation, in its widest sense, is on the agenda.

The third curse

Wikipedia advises the third curse is “May you find what you are looking for”.

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.