Davis & Co LLP. Accountancy News - New Goverment Tax Plans

The new Government has published its programme of reform, including substantial tax change.

Well, we were all caught out, weren’t we? On polling day, who cared that the Liberal Democrats wanted to charge capital gains tax at income tax rates – the best outcome they could hope for would be a hung Parliament, in which they might be able to block measures they did not support, but certainly could not effectively promote ideas which neither of the main parties advocated. Ho hum. What we now seem to have is a close partnership between two parties – or at least their leaders – an alliance which took the wise precaution of not publishing its manifesto until after the election. That manifesto is contained in three documents:

Read together with the parties’ original election manifestos, these documents give a fairly detailed overview of the new Government’s five year plan for the nation, to be implemented over the course of the new Parliament. In this article we have sought to bring together all the information currently available on the proposals of most interest to small business – those concerning taxation, employment rights and financial support for enterprise.

The new Government’s overall fiscal and financial stance
The Coalition Agreement said that:

‘The parties agree that deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain. We have therefore agreed that there will need to be a significantly accelerated reduction in the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes.’

Before the General Election, the Conservative manifesto had promised ‘an emergency Budget within 50 days of taking office’. Despite the delay in reaching the Coalition Agreement and forming a new Government, Budget Day has been fixed for Tuesday, 22 June 2010. It seems inevitable that a second shotgun Finance Bill will be propelled through Parliament at record speed, before noble Lords and elected representatives push off for a no doubt well-earned summer break.
The Coalition Agreement states twice that the new Government has ‘ruled out joining the European Single Currency’ for so long as the Agreement lasts and that ‘Britain will not join or prepare to join the Euro in this Parliament’ (now scheduled to run to May 2015).

Increased personal allowance
The cover of the Liberal Democrats’ election manifesto promised ‘Fair taxes that put money back in your pocket’ and the text inside proposed raising the personal allowance to £10,000 from 2011/12. The Conservative manifesto included no parallel proposal, but the Coalition Agreement states that:

‘The parties agree that the personal allowance for income tax should be increased in order to help lower and middle income earners. We agree to announce in the first Budget a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes.’

This presumably means that the benefit of the increased personal allowance will be clawed back from higher income groups by way of reducing the higher rate threshold and / or restricting the allowance to the basic rate. The Coalition Agreement continues:

‘We also agree to a longer term policy objective of further increasing the personal allowance to £10,000, making further real terms steps each year towards this objective. We agree that this should take priority over other tax cuts, including cuts to inheritance tax.’

Increasing the inheritance tax threshold to £1 million had of course been a central plank of the Conservatives’ pitch to voters.
The Conservative manifesto had also promised to ‘recognise marriage and civil partnerships in the tax system’. Although not spelled out in the manifesto, the detailed proposal was to allow up to £750 of one spouse’s (or civil partners) personal allowance to be transferred to the other, if it would otherwise be wasted (so producing a maximum tax saving of £150). However, the Coalition Agreement states that: ‘Provision will be made for Liberal Democrat MPs to abstain on Budget Resolutions to introduce transferable tax allowances for married couples.’

National Insurance contributions
Before the General Election, both the Conservatives and the Liberal Democrats had criticized the Labour Government’s plan to increase Class 1 National Insurance contributions from 2011/12 (the employee’s contribution from 11% to 12%, and from 1% to 2% for earnings above the UEL, and the employer’s contribution from 12.8% to 13.8% ). The Conservative manifesto proposed a compensatory increase in the thresholds at which employees’ and employers’ contributions become payable and the Liberal Democrats said: ‘While it will be impossible to remove the Government’s tax rises while the deficit is so huge, the increase in National Insurance contributions is a damaging tax on jobs and an unfair tax on employees, so when resources allow we would seek to reverse it.’

The compromise reached, given the overriding priority given by the Liberal Democrats to increasing the income tax personal allowance, was that:

the earnings threshold for 2011/12 will be £6,915 and the contribution rate 12%, or 2% for earnings above the UEL.

Presumably (though this has not been specifically confirmed) the one percentage point rise in Class 4 contribution rates, proposed by the outgoing Chancellor, will also be implemented.
The Conservative manifesto promised that ‘for the first two years of a Conservative Government any new business will pay no employer’s National Insurance on the first ten employees it hires’. This promise is not repeated in the Coalition Agreement or the Programme for Government.

Capital gains tax
The Coalition Agreement says that the parties ‘agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities’. This follows the Liberal Democrat manifesto proposal of ‘taxing capital gains at the same rates as income, so that all the money you make is taxed in the same way’, but ameliorating it with an (as yet unspecified) relief for ‘entrepreneurial businesses’. One might ask, when is a business not entrepreneurial, and the answer seems to be when it essentially consists of investment in property, including holiday lets. Under the heading ‘A fair deal for the countryside’ the Liberal Democrats promised that they would ‘through our policy on capital gains tax, ensure that those who use second homes as speculative investments pay tax on enhanced capital value at the same rate as on earned income, not at 18 per cent as at present’.
Welcome back, capital gains tax charged at 40% or maybe even 50%. Though no implementation date is given, it seems unlikely that the new regime could apply to disposals before 6 April 2011. Applying different rates of direct tax to transactions at different times of the year would be unprecedented and require some substantial changes to online filing software and HMRC’s own computer systems. In theory, there may accordingly be a window of opportunity to make sales under the current, relatively benign, regime, The problem is, of course, that the deadline gives a prospective purchaser a bargaining counter to use in negotiations with the vendor. After April 2011, it is likely that many owners will be reluctant to sell and choose instead to wait until the tax rules change again, so the hoped-for revenue may yet prove to be faerie gold. (The Liberal Democrat manifesto estimated that the higher rates of capital gains tax would raise £1,920 million in 2011/12, but this was before conceding exemptions for business assets.)
There is an unpleasant rumour that the new Government also intends to reduce the annual exemption, but this is not mentioned in any of the published material.

Small business taxation
The new Government’s policy statement The Coalition: Our Programme for Government says that:

‘We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens on the self-employed, or restrict labour market flexibility.’

That, frankly, could mean almost anything. There is no express mention in any of the published material of ‘income shifting’, Arctic Systems or ‘false self-employment’.

Corporation tax and capital allowances
In his speech to the CBI, the new Chancellor said that he will use the forthcoming Budget ‘to set out a five year road map for a big reform of corporation tax’. The Programme for Government promises to ‘reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates’. When the Labour Government introduced the 100 per cent Annual Investment Allowance, the Conservative shadow Treasury team argued against it, saying that the money would be better spent reducing the headline rates of corporation tax. Whether ‘simplifying reliefs and allowances’, will include abolishing the AIA is not yet clear.
The new Chancellor also said that he ‘wants to reform the complex Controlled Foreign Companies rules that have driven business overseas’ and the Programme for Government promises to ‘refocus the research and development tax credit on hi-tech companies, small firms and start-ups’.

Tackling tax avoidance
The Coalition Agreement says that: ‘The parties agree that tackling tax avoidance is essential for the new Government, and that all efforts will be made to do so, including detailed development of Liberal Democrat proposals.’ The LD manifesto had suggested: ‘Tackling tax avoidance and evasion, with new powers for HM Revenue & Customs and a law to ensure properties can’t avoid stamp duty if they are put into an offshore trust.’
Finally, the Programme for Government promises to ‘review the taxation of non-domiciled individuals’. The Liberal Democrats had suggested ‘reforming the system of ‘non-domiciled’ status, allowing people to hold such status for up to seven years; after that time they will become subject to tax on all offshore income in the same way as domiciled British citizens’. And (whisper it quietly) ‘requiring all MPs, Lords and Parliamentary candidates to be resident, ordinarily resident and domiciled in Britain for tax’.

Child and Working Tax Credits
The Coalition Agreement says that: ‘The parties agree that reductions can be made to the Child Trust Fund and Tax Credits for higher earners.’ The Conservative manifesto had proposed that a new Government should ‘stop paying Tax Credits to better-off families with incomes over £50,000’.
As proposed in the Conservative manifesto, the Programme for Government promises ‘to reduce the couple penalty in the Tax Credit system as we make savings from our welfare reform plans’. It also promises to ‘reform the administration of Tax Credits to reduce fraud and overpayments’.

On 24 May, HMRC announced that, for children born on or after 1 August 2010, the Government’s contribution to his or her Child Trust Fund will fall from £250 to £50 (from £500 to £100 for children from lower income families). Children whose seventh birthday falls on or after 1 August 2010 will not receive their promised second payment. From 1 January 2011, no new Child Trust Fund vouchers will be issued at all.

Pension and assistance for the elderly
The Coalition Agreement promises to ‘restore the earnings link for the basic State Pension from April 2011 with a ‘triple guarantee’ that pensions are raised by the highest of earnings, prices or 2.5 %’.
The Conservative manifesto promised to ‘protect the Winter Fuel Payment, free ‘bus passes. free TV licences, Disability Living Allowance and Attendance Allowance and Pension Credit’. The Liberal Democrats also indicated that they would retain Pension Credit but proposed ‘reforming Winter Fuel Payments to extend them to all severely disabled people, paid for by delaying age-related Winter Fuel Payments until people reach 65 (though continuing) Winter Fuel Payments to all current recipients of Pension Credit’. The Liberal Democrat manifesto estimated that these changes to the Winter Fuel Payment rules would save £300 million in 2010/11. The Programme for Government restricts itself to promising to ‘protect key benefits for older people such as the Winter Fuel Allowance, free TV licences, free ‘bus travel, and free eye tests and prescriptions’.

Tax relief for pension contribution
The Liberal Democrat manifesto proposed ‘giving tax relief on pensions only at the basic rate, so that everyone gets the same tax relief on their pension contributions’. However, this was not mentioned in the Coalition Agreement or the Programme for Government.

Taxation of pension funds
The Conservative manifesto promised ‘when resources allow, starting to reverse the effects of the abolition of the dividend tax credit for pension funds’. Again, this was not mentioned in the Coalition Agreement or the Programme for Government.

Equitable Life
The Coalition Agreement states that the parties ‘agree to implement the Parliamentary and Health Service Ombudsman’s recommendation to make fair and transparent payments to Equitable Life policyholders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure’. Further details are given in a Treasury Press Release of 25 May 2010.

Compulsory annuity purchase
Both manifestos promised to ‘scrap the rule that compels you to buy an annuity when you reach age 75’ and this is reconfirmed in the Coalition Agreement. But what will it mean in practice?

‘Alternatively Secured Pensions’ are already available, so it is not in fact compulsory to buy an annuity. The problem is that lifetime withdrawals are taxed as income and that funds remaining at death are likely to be subject to an 82% tax charge (a 70% unauthorized payment charge plus 40% inheritance tax on the 30% remaining). This is widely perceived as confiscatory. However, given the tax relief for pension contributions and the exemptions for pension fund investments, it is hard to imagine any Government increasing the proportion of the final pension pot that may be enjoyed as a tax-free lump sum.
The Liberal Democrat manifesto also proposed ‘giving people greater flexibility in accessing part of their personal pension fund early, for example to help in times of financial hardship’. The Programme for Government undertakes to ‘explore the potential’ of this proposal.

VAT – the elephant in the sitting room
Neither manifesto said very much about VAT – in fact the Conservatives said nothing at all. The Liberal Democrats recommended ‘refunding VAT to mountain rescue services’ and ‘equalising VAT on new build and repair on an overall revenue-neutral basis’, as a way to ‘protect greenfield land and our built heritage by reducing the cost of repairs’. Neither of these proposals is mentioned in the Coalition Agreement.
The wild card, of course, is the headline rate of VAT and the uneasy suspicion is that an increase, or possibly a series of increases, is almost inevitable. An increase to 19.5 % (generally accepted as the European average) or 20% is widely predicted, though of course back in 1979 Sir Geoffrey Howe virtually doubled the VAT rate from 8% to 15% in his first Budget. The maximum increase that could be made immediately by Treasure Order is to 21.875% - a greater increase would require primary legislation in the forthcoming Finance Bill. Alternatively, or additionally, the Finance Bill could introduce a higher rate for ‘luxury goods’ – back in 1975 there was a 25% rate on petrol, television sets, electrical appliances for use in the home, fur coats and jewellery.

The Conservative manifesto also said that ‘a floor under the standard rate of Landfill Tax [should be imposed] until 2020 to encourage alternative forms of waste disposal’.

The end of the Uniform Business Rate?
The Coalition Agreement includes the statement that: ‘The parties will promote the radical devolution of power and greater financial autonomy to local government and community groups. This will include a full review of local government finance.’ The Liberal Democrat manifesto had proposed ‘returning business rates to councils and basing them on site values, as a first step towards the radical decentralisation of taxation and spending powers to local people’.
The Coalition Agreement also refers to ‘the cancelling of some backdated demands for business rates’ – we understand that this refers to the Valuation Office Agency’s decision, in 2008, to impose a liability for rates on the occupiers of buildings at ports, backdated to April 2005, superseding the previous practice of charging rates on the port authority.
As promised in both parties’ manifestos, the Programme for Government undertakes to ‘find a practical way to make Small Business Rate Relief automatic’.
Finally, the Programme for Government promises to ‘stop plans to impose supplementary business rates on firms if a majority of the firms affected do not give their consent’. (The power for ‘top tier’ Local Authorities in England to charge a supplementary rate on premises valued at more than £50,000 came into force on 1 April 2010.)

Council Tax
The Programme for Government promises to ‘freeze Council Tax in England for a least one year, and seek to freeze it for a further year, in partnership with local authorities’.

As proposed by the Conservative manifesto, the Programme for Government also promises ‘to give local residents the power to veto excessive Council Tax increases’.
There is no mention in the Coalition Agreement or the Programme for Government of a change to local income tax, long advocated by the Liberal Democrats.

Finance for business
The Coalition Agreement says that: ‘We agree that ensuring the flow of credit to viable SMEs is essential for supporting growth and should be a core priority for a new Government, and we will work together to develop effective proposals to do so. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalized banks.’
The Programme for Government also promises to ‘support would-be entrepreneurs through a new programme – Work for Yourself – which will give the unemployed access to business mentors and start-up loans’.

Employment law
The Programme for Government confirms that the Coalition ‘supports the National Minimum Wage because of the protection it gives low-income workers and the incentives to work it provides’.
The Coalition Agreement states that: ‘The parties agree to phase out the default retirement age and hold a review to set the date at which the State Pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women.’ Abolishing the default retirement age featured in both parties’ manifestos, increasing State Pension age only in the Conservatives’.
There is also agreement that: ‘There should be no further transfer of sovereignty or powers (to the European Union) over the course of the next Parliament. We will examine the balance of the EU’s existing competences and will, in particular, work to limit the application of the Working Time Directive in the United Kingdom.’

On a more liberal note, the Conservative manifesto had proposed in the short term extending the right to request flexible working to every parent with a child under the age of eighteen and, in the longer term (and after a trial in the public sector) further extending the right to request flexible working to all employees. It also proposed introducing ‘a new system of flexible parental leave which lets parents share maternity leave between them’. The Programme for Government promises to ‘extend the right to request flexible working to all employees, consulting with business on how best to do so’,

Unfinished business
As reported in our last edition, four measures were deleted from the original Finance Bill 2010. The Conservative party objected to the higher excise duty on still cider and most sparking ciders, and so the Bill was amended to reduce the increase from inflation plus 10% to inflation plus 2 % , with effect from 30 June 2010. This reduction, originally indented to be temporary, will now presumable become permanent.
The proposal to introduce a ‘landline duty’ was also removed from the Bill. The Conservative manifesto promised to ‘scrap Labour’s ‘phone tax and instead require BT and other infrastructure providers to allow the use of their assets to deliver superfast broadband across the country’. The landline duty was not mentioned in either the Liberal Democrat manifesto or the Coalition Agreement, and now looks unlikely to go ahead.
The third provision to be removed from the Bill was the proposed powder for HMRC to require security deposits from employers for payment of PAVE tax (similar to the current system of security deposits from traders for payment of VAT). However, the Conservatives’ objection to this proposal was not absolute – rather, it was based on the lack of prior consultation and of any ‘safeguards… to protect businesses from the heavy hand of HMRC’, together with ‘the problem that criminal offence [of trading without paying a security] was being created in connection with a requirement that had not been properly explained or scrutinised’. Accordingly, it is far from impossible that HMRC will convince their new masters of the desirability of enacting a similar provision in due course.

The final measure removed from the Bill was the abolition of the special tax régime for furnished holiday lettings. Tax on furnished holiday lettings was not mentioned in either the Conservative or the Liberal Democrat manifesto (apart from the LD proposal to increase capital gains tax on disposals of such properties to income tax rates), but the Programme for Government says that the Coalition will ’take measures to fulfill our EU treaty obligations in regard to the taxation of holiday letting that do not penalise UK-based businesses’.
Before the General Election the (then Shadow) Chancellor had said that a Conservative Government would seek to avoid the damage that would be caused by abolishing the special regime for furnished holiday lets by ‘fiscally neutral’ changes ‘ including proposals to change the eligibility thresholds and amending the interest deductibility criteria’. The reference to ‘ eligibility thresholds’ may be linked to a general understanding that the holiday letting season is longer in the United Kingdom than elsewhere in Europe, so that an increase in the number of weeks for which a qualifying property has to be let would have the effect of focusing relief on United Kingdom properties.

Measures postponed from the Finance Bill
Three VAT measures were deferred by the previous Government to their proposed post-Election Finance Bill – changes to ‘Lennartz accounting’, the imposition of VAT on some postal services provided by the Royal Mail, and changes to the definition of aircraft qualifying for zero-rating. As all these changes are required to comply with European law, they will presumably be including in the first Finance Bill brought forward by the new Government.
Other changes are due to be made by Statutory Instrument, notably:

Given that these proposals have not been criticised by any political party, there is no reason to suppose that they will not be implemented as originally planned.

Looking forward – to 2015
The Coalition Agreement says that in future there is to be a General Election every five years, held on the first Thursday in May. Thus the next General Election will be held on Thursday, 7 May 2015- in fact, the timetable will be very much like this year, as Easter Sunday will fall on 5 April. Let us hope that this does not lead to the Finance Act 2015 being enacted with the unseemly haste we have seen this year.

Less time Allowed to Pay Tax Debts
The “Jungle Drums” in the last few months HMRC have become very reluctant to allow tax debts to be paid by instalments over more than 12 months – hitherto, the maximum timescale for repaying arrears and becoming fully up-to-date and compliant has traditionally been 36 months.

Paragraph 800040 of HMRC’s Debt Management and Banking Manual was updated in March 2010 to include the statements that:

‘Arrangements are tailored to the ability of the customer to pay and are typically for a few months although they can be longer. Time to Pay arrangements (TTPs) lasting over a year are only agreed in exceptional cases. Most arrangements involve regular monthly payments being made but in exceptional cases may involve a short period of deferral … For business taxes the TTP duration should be less than 12 months. Exceptionally periods in excess of 12 months can be considered.’

The manual also emphasizes that ‘the TTP period must be as short as possible’. Accordingly, repayment over 12 months should not be seen as the standard agreement – it is the maximum time that is likely to be allowed. (What will count as ‘exceptional’ circumstances is not clear.)
The move to shorter agreements seems to be a result of the centralisation of TTP work at HMRC’s Business Payment Support Service. Paragraph 801110 of the Debt Management and Banking Manual, which instructed Revenue staff to ‘take a practical approach’ to longer time to pay requests, has been deleted, apparently also in March 2010.

VAT on Caravans
The minimum width for a caravan to qualify for zero-rating was, on 20 April 2010, increased from 2.3 metres to 2.55 metres. The alternative minimum length test remains 7 metres.
This was announced in Revenue & Customs Brief 20/10 Changes to zero-rate on caravans, which may have escaped attention because it was never listed on HMRC’s ‘What’s New?’ page.

Tax Credit overpayments
A different approach is taken where a Tax Credit overpayment is being recovered by a direct bill. Paragraph 800030 of the Debt Management and Banking Manual confirms that: ‘Customers who have a Tax Credit overpayment are offered the option of spreading their repayment over 12 months without question.
Customers are advised of this option on the TC610 notice to pay letter.’
Furthermore, paragraph 801300 indicates that all requests to spread payment over up to three years will be agreed without further enquiry, though payment by direct debit is ‘encouraged’. Longer repayment terms and remission are possible in cases of hardship.

Hotel Bookings
Hotel accommodation for business travellers may be arranged through a hotel booking or business travel agency, on the basis that the agency pays the hotel and recovers the cost from the traveller (or more likely, his employer).
Hitherto, the general practice was to deal with such supplies outside TOMS (the Tour Operators’ Margin Scheme for VAT), so that the ultimate customer (the traveller or his employer) could claim credit for the input tax. But following changes introduced on 1 January 2010 to make TOMS fully compliant with EU law, it is no longer possible to exclude business-to-business supplies from TOMS in this way. There is however a workaround, which is for the booking agent to act as a disclosed agent for his customers. The necessary arrangements and paper trail are explained in HMRC Business Brief 21/10 Tour Operators’ Margin Scheme and the treatment of ‘hotel billback’ transactions (issued 21 May 2010).

Equitable Life
Last months’ Queen’s Speech included a promise to legislate, in the first year of the new Parliament, to set up a scheme ‘to make fair and transparent payments to Equitable Life policyholders’.
The rationale for compensation from public funds is that the losses suffered by policyholders were partly due to failures by the regulatory bodies that were sufficiently serious to amount to maladministration.
A statement issued the same day by the new Financial Secretary to the Treasury, Mark Hoban, said that Sir John Chadwick’s final report will be submitted to the Government in mid-July.
Sir John was originally commissioned by the Labour Government in January 2009. Shortly put, his function is to establish the extent to which policyholders’ losses were caused by official maladministration (as found by the Ombudsman and accepted by the previous Government) and the extent to which those losses were suffered by different classes of policyholder. It is not part of his brief to recommend the compensation payable.
The new Government will publish Sir John’s report and then set up an independent commission to design an appropriate compensation scheme. However, two points have already been decided: payments will not be subject to means-testing (though early payments may be made in cases of hardship) and the dependants of deceased policyholders will be eligible for compensation.
Further information about the work of Sir John’s enquiry is posted at www.chadwic-office.org. The Financial Secretary’s statement was published as a Treasury Press Release on 25 May 2010 and there is also a mini-website devoted to Equitable Life within the Treasure website (www.hm-treasury. gov.uk/fin_equitable_life.htm).

Erinaceous Group
HMRC have accepted that 0.5p ordinary shares in the Erinaceous Group plc became of negligible value, for capital gain tax purposes, on 23 March 2010.
A full list of all securities agreed by HMRC to be of negligible value is posted at www.hmrc.gov.uk/cgt/negvalist.htm.

Business Journeys in Company Cars

Where an employer provides a company car, but the employee pays for the fuel, the employer may pay a mileage allowance for business journeys. HMRC accepts that payments not exceeding the ‘advisory fuel rates’ are reimbursements of expenses, not subject to income tax or Class 1 National Insurance contributions.

The ‘advisory fuel rates’ (AFRs) are reviewed every six months and on Tuesday, 25 May HMRC announced new rates which took effect virtually immediately – from Tuesday, 1 June 2010 . The new rates are (old rates in italics):

Engine size Rate per mile
Petrol * Diesel LPG

Up to 1400cc                        12p         11p                         11p         11p                         8p          7p
1401 to 2000cc                    15p         14p                         11p         11p                         10p         8p
Over 2000cc                         21p         20p                         16p         14p                         14p         12p

*Including petrol hybrid cars

These rates may also be used to reclaim input VAT in respect of fuel used for business journeys (receipts to cover the amount reclaimed are required).
Though the rates for most cars have been increased, employers are not obliged to pay the full ‘advisory rate’, so there will be no problem in continuing to pay the old rate. However, the ‘advisory rates’ are also used where the employer pays for all the fuel used for both business and private travel and the employee is required to reimburse the cost of fuel used for private journeys: the usual scale charge for private motoring is not avoided unless reimbursement is made at at least the relevant ‘advisory rate’, so continue reimbursement at the old, lower rate will create a fuel scale charge for the whole year. However, a month of grace is allowed, so the higher rate need not be charged until 1 July 2010.

July 6 (Tuesday): Forms P11D, P9D and (for Class 1A National Insurance contributions) P11D (b) for 2009/10 to be filed by today. Copies or summaries of the information on Forms P11D and P9D must also be given to employees no later than today.
Where an employee received benefits from a person other than his employer during 2009/10, that person must by today provide the employee with a statement of the cash equivalent and other details (a typical example is benefits provided, to a retailer’s staff, under a manufacturer’s incentive scheme).
Employers to make the following Returns for 2009/120 in respect of tax- approved share schemes:

Form 34           SAYE Share Option Schemes
Form 35           Company Share Option Plans (CSOPs))
Form 39           Approved Share Incentive Plans (SIPs)
Form EMI40    Enterprise Management Incentives

Employers (and others) to make ‘Form 42’ Returns of ‘reportable events’ which occurred in 2009/10 in connection with shares acquired by employees outside tax-favoured arrangements.
Last day for making a report to HMRC where an employer provided a redundancy, etc, package in 2009/10, which was worth more than £30,000 and included benefits-in-kind.
Deadline for a close company to elect that all beneficial loans to a director be treated, for the purposes of calculating the benefit-in-kind charge for 2009/10, as a single loan (section 187, Income Tax (Earnings and Pensions) Act 2003).

July 7 (Wednesday): Under the post-April 2006 pension tax regime, non-cash benefits provided (otherwise than from a registered pension scheme) to a retired employee are taxable (with some exceptions, including a £100 per annum de minimis exemption). Returns of benefits provided in 2009/10 are to be made by 7 July 2010 – for further details, see HMRC’s Pension Tax Simplification Newsletter 28 (2 July 2007).
End of the week of grace allowed, by Extra-Statutory Concession B46, for the receipt of CTSA Returns for accounting periods ended 30 June 2009.

July 14 (Wednesday): Due date for Returns of payments by a company from which income tax is deductible, for the quarter to 30 June 2010.

July 19 (Monday): Class 1A National Insurance contributions for 2009/10 due today.
PAYE and Construction Industry Scheme: quarterly payment date for small employers and contractors.

July 30 (Friday): Due date for Returns of stock dividends issued in the quarter to 30 June 2010.

July 31 (Saturday): Income Tax Self-Assessment: Second payment on account for 2009/10 due today. Penalty for late filing doubles to £200 if outstanding Tax Returns for 2008/09 do not reach HMRC by today. Also, second 5 per cent surcharge if 2008/09 income tax, Class 4 National Insurance contributions and capital gains tax not paid by today.
Those Child and Working Tax Credit claimants required to submit details of their actual income for 2009/10 should submit their final figures by today – or an estimate, with final figures by 31 January 2011- failing which payments of Tax Credits will be suspended.

HMRC have confirmed that they intend to implement the new penalty regime for late filed CIS Returns next year, ideally in April, but could be later depending on the complexity and availability of development resources’.

The new penalty regime is set out in Schedule 55, Finance Act 2009 and provides for:

A fixed penalty of £100 as soon as a Return is late.

A further fixed penalty of £200 if the Return is not made within two months of the filing date.

A tax-geared penalty of 5% of the total payment due for the Return period (subject to a minimum penalty of £300) if the Return is not made within six months of the filing date.

A further tax-geared penalty if the Return is not made within a year of the filing date. This will generally be 5% of the total payment due for the Return period (subject to a minimum penalty of £300). However, if the withholding of information is deliberate and concealed, the maximum penalty will be 100% of the total payment due (or £3000 if more), and if deliberate but not concealed 70% (or £1,500 if more). These maximum penalties will be subject to reduction under the usual rules for disclosure and co-operation.

To avoid a new contractor running up a huge liability to penalties because he was unaware of the obligation to make Returns, Paragraph 13 of Schedule 55 provides that, when a contractor makes his first Return:

The total fixed penalties for that and previous periods will be capped at £3000.

The £300 minimum penalty for Returns filed more than six months late will not apply.

The £300 minimum penalty for Returns filed more than a year late (where the withholding of information was not deliberate) will not apply.

Those easements may still leave the contractor with a substantial penalty liability. Paragraph 16 of Schedule 55 gives HMRC a general power to reduce any penalty chargeable under the new regime if the ‘think it right because of special circumstances’. HMRC have said that they ‘expect that this provision will be used infrequently’ and have indicated that it is unlikely to be used to grant further relief to new contractors benefiting from the £3000 cap.

The Government announced in the March Budget, that in line with recommendations from the Low Pay Commission, with effect from 1 October 2010 all apprentices must be paid a minimum of £2.50 per hour.
Currently, apprentices in England should be paid at least £95 per week in accordance with the Government’s contractual minimum funding guarantee. However, apprentices who are under 19 or in the first year of their apprenticeship are exempt from the National Minimum Wage (NMW). The new proposals will mean that any apprentice who is currently exempt from the NMW must be paid a minimum of £2.50 per hour. This may inevitably cause concern for small employers who may struggle to meet increased costs of employing apprentices. So what should employers do?
What they should not do is react by dismissing apprentices. An apprentice - whether modern or traditional - is an employee; however, it is a very special type of employment contract. To start, it is difficult to dismiss an apprentice during the course of his or her apprenticeship for something other than gross misconduct. Although an apprentice who continually does not carry out his or her duties to the point that they are unable to complete their training may be dismissed a lesser risk, occasional neglect of duties will not normally suffice for a dismissal to be fair, regardless of length of service.
Dismissing an apprentice could leave an employer exposed to a claim for compensation for loss of earnings for the full period of the apprenticeship agreement, together with a claim for further loss of earnings as a result of the apprentice being prevented from qualifying in their chosen trade. Compensation could therefore be significant. If an employer feels that there are genuine circumstances which may result in the apprenticeship being terminated, he should take legal advice before effecting a dismissal.

National Minimum Wage Rates
Description                              Current rate                             Rate from
                                                                                                1.10.2010
Apprentices (age 18 or                         None for NMW but                 £2.50
under or 19 plus but in                        £95 a week under
the first year of their                the Government’s
apprenticeship)                                                minimum funding
                                                guarantee

Other apprentices NMW applicable rate, as below

16 and 17 year-olds £3.557 £3.64

18 to 20 year-olds £4.83 £4.92

21 year-olds £4.83 £ 5.93

Adult rate £5.80 £5.93

Flat Rate, Bumpy Ride?
Once in the flat rate scheme it’s not so easy to get out of it!

In a recent Tribunal case (Brian Reynolds [2010] UKFTT 40 (TC), 21 January 2010) a taxpayer lost his appeal after he tried to leave the Flat Rate Scheme for Small Businesses with retrospective effect when he found that he was paying more tax than he would have done if he had used the normal method of VAT accounting.
The Commissioners’ decision on the application to withdraw from the scheme was contained in a letter of 12 June 2008. It allowed withdrawal from the date of the application (28 May 2008), but not retrospectively. HMRC stated that the fact that a business would pay less VAT if it withdrew from the scheme was not considered a sufficient reason to allow an early withdrawal. The taxpayer appealed this decision.
The jurisdiction of the Tribunal in this case was governed by section 84 (4ZA), VAT Act 1994. This provides that the Tribunal cannot allow the appeal unless it considers that HMRC could not reasonably have been satisfied that there were grounds for its decision. In other words, the Tribunal did not have jurisdiction to‘re-make’ HMRC’s decision. The Tribunal’s role was solely to determine whether HMRC reached its decision in a manner in which no reasonable HMRC officer would act. Did they act capriciously? In reaching their decision, did HMRC ignore relevant factors, or take into account irrelevant factors?
HMRC’s policy is that retrospective applications should only be allowed in exceptional circumstance. The mere fact that a taxpayer will pay more tax under the flat rate scheme is not considered exceptional for these purposes. In the Tribunal’s opinion the flat rate scheme is intended to provide a measure of simplification for small businesses, and is intended to be revenue neutral. The Objective of the scheme is not to provide a mechanism for small businesses to pay less VAT – and this is clear from the provision of the VAT Directive which allows Member States to implement simplified VAT account arrangements for small businesses.
The flat rate scheme is based on average rates of input VAT recovery for business sectors – and as it is based on averages, it is inevitable that some taxpayers will pay more (or less) than the average. In the Tribunal’s opinion, if taxpayers were allowed to join or withdraw from the scheme retrospectively, then this would defeat the simplification objectives of the scheme.
Taxpayers could ‘game’ the system and join the scheme on a ‘punt’, and after three years review their input VAT and apply to withdraw from the scheme with retrospective effect if they found they would pay less VAT as a result. The Tribunal found that HMRC had acted reasonably in refusing to allow a retrospective withdrawal from the scheme in this case.

So what are ‘exceptional circumstances’?
The decision in Reynolds was in contrast to HMRC’s policy where they think that there are exceptional circumstances.
For example, a sole proprietor management consultant owns a buy-to-let property that he rents out. The income and expenditure on the flat is kept totally separate (different bank account, etc) from the consultancy income. Even though he keeps separate records and bank accounts for this by-to-let activity, it is still classed an exempt business income and therefore within the scope of the flat rate scheme. The flat rate scheme percentage is applied to be gross income at the rate of 12.5 %. He then decides to sell the property for £400,000.
The sale is exempt from VAT (sale of existing residential property), so potentially within the scope of the flat rate scheme. However, it would be very unfair if he had to pay £50,000 of VAT on the sale (£400,000 x 12.5%). Assuming he was unaware that he needed to account for VAT on the sale of the flat and the error was discovered on a VAT inspection, he could face an assessment plus penalties and interest.
HMRC have confirmed that in these circumstances they would allow him to retrospectively withdraw from the flat rate scheme, to reflect the principle of proportionality as these are exceptional circumstances. On the downside the trader would have to recalculate his VAT from the period he retrospectively withdrew from the scheme to a current date.
What about retrospective applications to join?
Although HMRC do not publicise the fact, it is worth noting that they do have discretion to allow applications for retrospective use of the scheme (often desirable in cases of belated registration).
In an earlier Tribunal case, C J Anderson (VAT Tribunal Decision), 20,255 the appellant, a self-employed lorry driver, applied to join the flat rate scheme, requesting that the authorisation be backdated to the inception of the scheme some four years earlier,. HMRC authorised the appellant to use the scheme, but refused backdating.
On the basis of the individual circumstances of the case, the Tribunal allowed the appeal finding that:

…and the moral of the story is
The moral of this story is that a business should be very careful before entering the flat rate scheme to ensure that they do not end up paying more VAT on their day-to day activities than they would using normal VAT accounting, as they will only be able to leave the scheme respectively if there are other exception circumstances.

This newsletter deals with a number of topics which, it is hoped, will be of general interest to clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases, so please contact us for personal advice on your own affairs.

Davis & Co LLP - Accountant Newsletter - UK Budget Bulleting April 2010