Winter 08 - Davis & Co Accountancy Newsletter

Not All About Tax !

In his Statement to Parliament, the Chancellor of the Exchequer said that it was necessary for the government to ‘continue to address the difficulty that many small and medium firms face in getting loans’. He went on to ‘announce [that] the Government is to offer credit through a temporary Small Business Finance Scheme.

worth £1 billion to small businesses. It should allow small businesses to borrow sums from a thousand pounds to a million pounds at more flexible terms than before, making lending more affordable and easily accessible.’ He concluded that: ‘This will help SMEs experiencing short-term cash flow problems get the funding they need.’

Box 4.1 in the printed Pre-Budget Report says that: ‘To help SMEs with working capital and investment needs, early in 2009, the Government, with Regional Development Agencies’ support, will launch the Small Business Finance Scheme, a new temporary guarantee scheme to enable up to £1 billion of new Government supported lending by banks.’

That is all the information that was officially available at the time we went to press – essentially, that the scheme will be launched in January, that it will offer loans between £1,000 and £1 million, for working capital or investment needs, and that it will consist of a Government guarantee for bank lending. Unofficially, we understand that the Government will guarantee 75% of the amount advanced and that the scheme will run until March 2010.

It was also announced, as part of the Pre-Budget Report, that:

The European Investment Bank (EIB) has increased by half the funds available for lending to SMEs. In the United Kingdom, £4 billion will be available between 2008 and 2011, of which £1 billion will be available by the end of 2008. EIB loans are arranged through major United Kingdom banks – for details, see www.eib.org/about/news/eib-loan-for-smes.htm
£50 million of Government money will be made available to convert debt into equity or quasi-equity for ‘overleveraged’ SMEs
Regional Development Agencies (RDAs) will launch ‘transition loan funds’, aimed at helping ‘viable’ SMEs survive the next six months. £25 million will be available. The funds will be based on the Transition Loan Fund launched by Advantage West Midlands last month (November), a £4 million fund which grants loans of between £50,000 and £250,000 at commercial rates of interest. It is based on a similar fund established when the MG Rover plant at Longbridge closed in 2005. That fund made loans totalling £5.4 million to companies supplying MG Rover, safeguarding around 1,400 jobs in the area
The Export Credits Guarantee Department (ECGD), in conjunction with the banks, will introduce a temporary guarantee scheme to provide smaller exporters with better access to short-term working capital. Up to £1 billion will be made available. Additionally, the Fixed Rate Export Finance Scheme will remain in place for 2009.
Finally, early in 2009, Business Link will launch a portal website to direct ‘credit-worthy SMEs’ to the schemes which may be appropriate for them

Relief for business ratepayers

The Chancellor also proposed three easements for business ratepayers in England:

First, where it is discovered that premises, that should always have been subject to business rates, were by mistake not rated, it has hitherto been the practice to demand immediate payment of the rates due from 1 April 2005 to date. However, the Chancellor announced that backdated bills, issued before 31 March 2010, can now be paid in equal, interest-free instalments over eight years. The background to this is that it has recently been discovered that some port buildings have been erroneously excluded from rating, but the easement applies to buildings of all kinds.

Second, from 1 April 2009, for one year only, empty premises with a rateable value of less than £15,000 will be exempt from business rates (currently, there is an exemption for empty premises with a rateable value of less than £2,200 – these are generally very small premises, such as separately rated sheds).

Third, also from 1 April 2009, newly-rated premises will qualify for small business rate relief immediately. This corrects the anomaly, that at present a property cannot qualify for small business relief unless it was on the rating list on 1 April at the beginning of the financial year.

Further details on all three proposals are contained in a circular from the Department for Communities and Local Government to Local Authorities and posted at: www.local.communities.gov.uk/finance/busrats/bri62008.pdf.

Help in Hard Times

In a recession, Tax Credit planning may as important as tax planning

Now that the economy is clearly moving into a potentially serious recession, it is likely that many people will suffer a fall in earnings. Small business owners, for example, may find that their current year profits are sharply reduced and employees may lose overtime, commission or bonus payments, or even have to accept short-time working. As a result, many more people will become eligible to claim Working and Child Tax Credits and so it is worth considering what action should be taken now to maximise their future claims.

Protective Tax Credit claims

When Tax Credits were first introduced, there was some debate as to whether everyone should make a claim, even if their income was apparently too high for them to have any entitlement, on the basis that income was to be averaged over the (tax) year, so that a future fall in earnings might retrospectively reduce the weekly average. As claims can only be backdated for a maximum of three months, accessing the benefit for earlier weeks would depend on a protective claim having been made.

For example, suppose an individual’s weekly earnings unexpectedly halve in October. His average earnings for the tax year will fall by a quarter, but if he has not already claimed Tax Credits for the year, his claim can only be backdated to July. Hitherto, the general view has probably been that a protective claim is simply not worth the trouble. However, now that it is becoming more likely that earnings will fall sharply, perhaps the balance between the trouble of filling in the forms and the potential benefit needs to be reconsidered.

HMRC do not object to protective claims – to the contrary, they have posted a webpage positively encouraging the public to ‘Protect your right to Tax Credits by claiming early’ (www.hmrc.gov.uk/taxcredits/claiming-early.htm). Essentially, this recommends that anyone who thinks his income may fall, or who is waiting to hear whether he will qualify for disability benefits, should claim by 5 July in the tax year.

Of course, many higher-income families with children will already have claimed Tax Credits for 2008/09, in order to obtain the basic £545 ‘family element’ payment (which replaced the old tax allowance). But we think that anyone who has not yet claimed, should seriously consider doing so. A final point is that it is probably not wise to assume that everyone entitled to the ‘family element’ will have claimed it, as some may have considered it was not worth filling in all the forms, or simply ‘never got around’ to doing so.

Utilising overlap relief

Where an unincorporated business has an accounting date other than 5 April or 31 March, a period of low profitability can be an opportunity to utilise any overlap profits brought forward. For example, suppose a sole trader has an existing accounting date of 30 September and six months’ overlap profits available. If he extends his accounting date from 30 September 2008 to 31 March 2009, his assessment for 2008/09 will fall, if his profits in the six months to 31 March 2009 are less than the overlap profit. Even if the profit is exactly the same, it is probably worth utilising the overlap relief now, before its value is further eroded by inflation. (Also, depending on the trader’s circumstances at the time, it may not be possible to use the overlap relief tax-efficiently on final cessation of the business.)

Reducing the profit by utilising overlap relief now may not only reduce the tax (and National Insurance) liability, but also increase the trader’s Tax Credit entitlement.

Annual Investment Allowance

Claims to 100 per cent Annual Investment Allowances for equipment, machinery and vans purchased since April 2008 may reduce taxable profits substantially. As Tax Credit calculations are based on taxable profits, an AIA may well increase or create a Tax Credit entitlement for the tax year in which the accounting year ends – and for the following year, because of the £25,000 year-on-year disregard of increased profits for Tax Credit purposes. Again, it is important to ensure that there is a Tax Credit claim in force for the whole of each year affected.

Also, reducing profits by an AIA claim may create an opportunity to utilise overlap profits brought forward, so further reducing taxable profits and correspondingly increasing Tax Credits.

The downside of reducing profits by claiming a 100 per cent AIA is that some lenders pay more attention to taxable profit than accounts profit. This may be a consideration where the trader expects to be applying for a new mortgage, either on a house move or to remortgage when an existing fixed rate or tracker expires.

Directors and Tax Credits

Strictly speaking, since the Working Tax Credit Regulations were amended in April 2003, a company director has not been entitled to claim WTC (including the childcare element) unless he is ‘employed under a contract of service . . . where the earnings under the contract are chargeable to income tax as employment income’.

Opinions are divided as to quite what this means. We think that in the case of a small trading company, a working director will usually have at least an implied (unwritten) contract of service, so provided he receives some remuneration (say at the National Minimum Wage or more), he will count as an employee and so qualify for WTC, even if the majority of the profit is extracted from the company by way of dividends.

Others say that HMRC will deem the director not to be working under a contract of service unless there is a formal, written employment contract, because HMRC has given an assurance that a director will not be treated as an employee for NMW purposes unless there is a formal contract of employment. Obviously, if a WTC claim is in prospect, the boiler-plate solution is to ensure that there is a written contract of service in place (but note that the requirement to be in remunerated work does not apply where Child Tax Credit alone is claimed).

Does Not Happen’

According to Eric Bray, truth can be as strange as fiction

Mau, the lead character in Terry Pratchett’s book Nation, frequently uses the above expression as he encounters and copes with different situations on his island home following its devastation by a gigantic wave. (At this point perhaps it should be made clear that the action within this book takes place on a world in a parallel universe to our own.) Often, in real life, a sequence of events is related and followed by the question ‘Do you think this would make a good book?’ only for the inquiry to be squashed by the response ‘Oh no! Everyone would say it was all too far fetched.’

Baffling bureaucrats

Civil servants have a reputation for pedantry and obfuscation but there are times when they can also be baffled themselves. Some thirty years ago a set of first accounts was submitted to an Inspector of Taxes on behalf of a young chicken farmer. The Inspector accepted the accounts but queried how the capital to establish the business had been built up and immediately raised a set of estimated assessments, each for £500 and covering the six years from the time that the client had left school at age fifteen until the submission of the accounts. On behalf of the farmer, his advisers appealed against the assessments and as a result a detailed and lengthy investigation then ensued, which naturally involved the preparation and submission of a detailed history of all of the financial transactions that the young man had effected during the period in question.

In the course of the investigation the young man admitted that even at school he had been known for his care with his finances (he had been known as ‘the miser’) and he listed how he had acquired, repaired and sold on, one or two motor cycles and a car whilst in the employment of his father, a dairy farmer. During this time he met a young lady who was a nurse working on the local hospital wards at night and, without much in the way of outside entertainment during the day in the country, it was not very long before they found themselves in a situation where they had to marry (this was the 1970s!). At this point father stepped in and told the young man that if he passed over his savings, he, father, would apply for permission to build an agricultural worker’s property on the farm, thereby providing the young couple and their expected baby with a reasonable home. In his statements to the Revenue the young man stated that when he dug up part of the cash that he had buried under his father’s chicken run, some of the notes were so mouldy that they could not be used!

The couple moved into their new home once it was built and at this time the young man told his new wife that, as she was aware, it had always been his ambition to own his own poultry farming unit and that, as he had given all his savings to his father towards their new home, he had decided that they would live on what was then the basic agricultural worker’s wage and save what he received in excess of this figure. By this time the Inspector of Taxes had more or less accepted everything that the farmer had said and asked what was the figure that they had been living on. When told, he stated that it would not have been possible for anyone to live on such a low figure. At this point it appeared to almost everyone that settlement ‘Would not happen’ but the accounts clerk who had been dealing with the case had the inspiration to write to the Agricultural Wages Board and request copies of the agreed wage schedules for workers during the period in question. When these arrived they confirmed what the client had maintained and were submitted to the Inspector of Taxes with the query that ‘If a semi-governmental authority could agree a living wage at these levels, who was the Inspector to disagree?’ The case was closed in the client’s favour.

In a similar vein there is the tale of an Inspector telling a painter and decorator, who suffered from frequent bouts of illness, that the level of net income shown in his accounts was insufficient for him to survive on. The taxpayer responded by thanking the Inspector and asking him to pass that information on to his colleague at the (then) DHSS office downstairs, as the DHSS would only grant him an even lower sum each week that he was unable to work.

. . . and their protective measures

Unfortunately with the march of time and the overall increase in Health and Safety legislation, an increasing number of public buildings are closed to all dogs apart from guide dogs, with the result that this final anecdote may be somewhat more difficult to emulate. Once again this is a tale from the early 1970s and involves first accounts that were submitted to the same Tax Office as those of the chicken farmer related above.

The Deputy Chief Constable from one of the country’s major metropolitan authorities retired from the force and used a part of his commuted pension funds to buy a Post Office and General Stores. When his opening set of accounts was being prepared for submission, he insisted that a reasonable entry was included in respect of ‘Expenses of Guard Dog’. Not surprisingly, the Inspector queried this entry and requested more information, including the breed of dog. On being advised that the dog was a miniature poodle, he became quite adamant that no way could it be classed as a guard dog. The taxpayer responded that from his experience gained through a lifetime in the police force, he could vouch that a dog such as his was a better guard dog within his premises, as the poodle would be loud and extremely yappy whilst at the same time snapping at the heels of any intruder. On the other hand, something of the nature of a German Shepherd, whilst looking menacing to an intruder, would generally tend not to disturb the peace (at least until it got its teeth into any intruder).

The Inspector remained adamant until some days after this continued stance had been reported to the client, when the accountants received a letter that stated that on further consideration, following a visit from the taxpayer and his ‘guard’ dog, the Inspector had decided to allow half of the expenses being claimed. It subsequently transpired that the poodle, when released, had kept the Inspector holed up in one corner of the office until called off by its owner.

So it would seem that ‘Does not happen’ can happen, if a modicum of lateral thinking is employed when difficulties arise, with the result that the under-dog can come out on top.

Small Business Rate Relief Claims

The Department for Communities and Local Government has confirmed that businesses in England have until September 2010 to claim Small Business Rate Relief for 2007/08 to 2009/10 inclusive. However, in some circumstances relief may be lost or restricted if action is not taken well before then.

Originally, businesses in England wishing to claim Small Business Rate Relief had to submit a claim annually. Then in 2006 the Regulations were changed, so that from 2007/08 onwards only one claim is required for each five-year period a Rating List remains in force.

It was generally assumed this meant that a claim had to be submitted by the usual closing date for the first year for which it was to apply (30 September following the year end), but would then remain in force for future years until the end of the quinquennium. However, the Department recently issued a circular to Local Authorities, stating that the closing date for claims is 30 September following the end of the quinquennium (see www.local.odpm.gov.uk/finance/ busrats/bri52008.pdf for the full text).

The background to this requirement is that, generally speaking, Small Business Rate Relief may not be claimed where the trader occupies more than one property. However, relief may be claimed on the main property if any others have a combined rateable value not exceeding £2,199.

If a relevant change (as above) occurs on (say) 1 January 2009, the notification should be given by 29 January 2009. If it is not given until (say) 1 April 2009, relief for the period 1 January to 31 March 2009 will be lost, even if the trader otherwise still satisfies the conditions for relief and even if the formal claim to relief is not made until (say) June 2009.

Relief under the Small Business Rate Relief scheme for England is generally available where a businesses occupies a single property with a rateable value not exceeding £14,999 (increased to £21,499 in Greater London).

HMRC Cannot Move the Goalposts

A High Court Judge has held, that if HMRC complete an enquiry by amending the taxpayer’s self-assessment, they are limited, in any subsequent appeal proceedings, to defending their original closure notice, and cannot raise any entirely new points.

The facts of the case were very complex, but briefly, a company had developed some software and, in order to raise money to exploit it, had licensed that software to two investment partnerships, for a capital sum. In return, the partnerships were to receive a percentage of the revenue generated by the software. The substantive point at issue was whether the investment partnerships were able to claim a first-year allowance on the capital sum paid for their licences (under section 45, Capital Allowances Act 2001, now spent). There were complicated arrangements under which the investors paid only a quarter of the agreed price from their own resources and borrowed the remainder on limited recourse terms (to be repaid out of the revenue generated), so that they claimed first-year allowances on four times their real financial commitment. One can see why the Revenue challenged the claim.

In his closure notice, and more particularly in correspondence with the accountants acting for the investment partnerships, the investigating Inspector had stated that his disallowance of the first year allowance claim was based on section 45(4), Capital Allowances Act 2001, which denies relief ‘if the person incurring [the expenditure] does so with a view to granting to another person a right to use or otherwise deal with any of the software in question’.

However, at the Special Commissioner’s hearing, the Revenue expressly abandoned the section 45(4) point and sought to justify the disallowance on three other grounds. The Special Commissioner upheld the Revenue’s arguments on two of those three grounds, and the High Court Judge on one. But that was not decisive, because the Judge also held that, as the Inspector had expressly based his original closure notice solely on section 45(4) ‘it must follow that the scope of any appeal was confined to the question whether section 45(4) did indeed apply’. As the Revenue had expressly abandoned the section 45(4) point, the Judge held that he had no choice but to allow the taxpayer partnerships’ appeals and added: ‘If there is a moral to be drawn, it is that HMRC should ensure that they have considered all the points on which they may wish to rely before a closure notice is issued. Issue of the notice is an irrevocable step, and once it has been taken the battle ground on any future appeal will be defined by reference to it.’

Nevertheless, at an earlier stage in his judgment, he had noted that there is no statutory requirement for an Inspector to give reasons for his decision in the closure notice. Accordingly, the case may encourage the Revenue to issue more detailed closure notices. On the other hand, they may consider it pragmatic to state their decision in the simplest and broadest possible terms – ‘the claim is refused because it fails to meet the statutory conditions’, for example – which would be unhelpful, but would ensure that their hands are not tied if the case comes to the Tribunal.

Bare Trusts

Hitherto, generally accepted practice has been, where a chargeable event arose on a life assurance policy held in a bare trust for a minor, to assess the gain as income of the settlor. However, in Revenue & Customs Brief 51/08, HMRC state that, following legal advice, they now consider that the gain is properly assessable as income of the beneficiary.

This revised practice will apply for 2007/08 and later years of assessment. Where the settlor or the beneficiary has already submitted his 2007/08 Return, he should now file an amendment. The Brief emphasises that, where the settlor is a parent of the beneficiary, the usual rule deeming the child’s income (including chargeable event gains) to be the parent’s will still apply, so in those circumstances the chargeable gain should still be reported as the parent’s income. Finally, although the Brief states that it was ‘issued 8 October 2008’, it was not posted on HMRC’s website until 14 November (www.hmrc.gov.uk/briefs/

VAT on Houses

In September, HMRC published VATInformation Sheet 07/08, explaining their practice where a developer, who has built a house or flat intending to sell it on completion, has difficulty in finding a purchaser, and so decides to let the property until the market improves. Shortly put, the developer is likely to become a partly exempt trader (because rents paid under a short lease are VATexempt).

However, in Revenue & Customs Brief 54/08 they confirm that they will not normally object to a developer triggering a zero-rated supply by selling the freehold (or a long lease) to a connected person before temporarily letting the property. This is because it ‘does not produce a result contrary to the purpose of the legislation’, which is ‘that Parliament intended the construction of new dwellings should be relieved from VAT’.

Nevertheless, a sale to a connected person will be challenged when the object is to deduct VAT incurred on the repair, maintenance or refurbishment of an existing building.

Tax on small company profits

It seems churlish not to mention that the second increase in the small companies rate has been deferred for a year, and so the CLIENT BULLETIN notes that:

Secondly, the Chancellor announced that the small companies rate of corporation tax, due to rise to 22% in April 2009, will be held at 21% for a further year.

Reprieve for travel expenses claims

A consultation paper Tax Relief for Travel Expenses: Temporary workers and overarching employment contracts, issued last July, expressed concern that some individuals working on short-term contracts were able to turn a series of temporary jobs into a single employment by working under a single contract with an employment agency or ‘umbrella company’. The advantage in doing so was that, instead of having a series of temporary jobs, each with a single workplace, the employee had a single employment carried on at a series of temporary workplaces, and so was able to claim tax relief for his home to-work travel expenses – an anathema to every right-thinking taxman and Government Minister.

However, once again the Government has decided that, for the time being at least, it is more important to keep the wheof commerce turning than to worry about making sure the tax rules are thoroughly fair. Accordingly, paragraph 5.104 of the Pre-Budget Report states that: ‘Following the consultation . . . the Government has decided to leave the current rules unchanged. However, in the light of evidence from the consultation confirming poor levels of compliance in this area, HMRC will refocus its efforts to ensure that the current regime is properly applied. If compliance does not improve, the Government may return to this at a later date.’

The CLIENT BULLETIN explains the position by saying:

Thirdly, the Government had made it known that it was considering tightening up the rules governing tax relief for travel-to-work expenses incurred by employees and directors. Generally speaking, these rules are anyway very restrictive, but the Government still thought that they could be too generous for some employees and contractors working through agencies or ‘umbrella companies’. It was also feared that the attack could be widened to include individual contractors working through traditional one-man or one-woman companies.
However, the Pre-Budget Report states that the Government has now decided to allow the existing rules to continue for the time being, but to devote additional HMRC resources to ensuring that the existing rules are properly complied with. There have been suggestions that some agencies have allowed contractors to claim inflated travelling expenses as part of their remuneration package.

Some flexibility for tax payments

Details of HMRC’s new ‘Business Payment Support Line’ are posted at: www.hmrc.gov.uk/pbr2008/business-payment.htm. Apart from the unworthy thought that the fox is offering to help the chickens, our reservation about this new service is that it is predicated on the assumption that the trader has ‘temporary cashflow difficulties’ which he can trade out of. However, a serious recession may of course produce a long term cash famine.

The CLIENT BULLETIN accordingly emphasizes that arranging ‘time to pay’ will not always be a real solution to the trader’s difficulties:

Fourthly, in his Pre-Budget Statement to Parliament the Chancellor promised that: ‘From today, HMRC will enable firms facing difficulties to spread their tax on a timetable they can afford. This will cover all business taxes – VAT, corporation tax, income tax and National Insurance.’ Requests for time to pay will be considered by HMRC’s new ‘Business Payment Support Service’, which has said that it will ‘discuss payment options to help [traders] deal with temporary cashflow difficulties’. It suggests that it will usually be best for the trader to telephone the new ‘Business Payment Support Line’ (0845 302 1435) shortly before the payment is due. Once an arrangement has been made, late payment surcharges will not be levied, but interest will still continue to accrue in the usual way.

We would suggest that, before contacting HMRC, the trader should analyse the exact nature of the problem. Waiting for a delayed payment by a major customer, for example, might well create ‘temporary cashflow difficulties’, for which asking for time to pay would be an appropriate solution. However, if the underlying problem is that there has been a sharp reduction in sales, which because of the economic downturn may last for some time, other action may be more appropriate, and more effective. For example, the proprietor of an unincorporated business might wish to amend his payments on account of income tax on his profits (due 31 January and 31 July 2009). In some circumstances, extending his accounting year to a later date in the current tax year might reduce the assessment.

Relief for trading losses

Extending the period for which trading losses may be carried back strikes us as a good idea that was not properly thought through. For unincorporated businesses, the relevant loss will be that of the 2008/09 tax year, which in the usual case will be the loss incurred in the accounts year ending in the tax year. In many cases, the accounts year will have ended before the recession became apparent.

The CLIENT BULLETIN explains the problem as follows:

Fifthly, the Chancellor announced an extension of the general tax relief for trading losses. Broadly speaking (and the rules are in fact very complicated), under current law a trader who makes a loss may set it against profits assessed for the previous year (and so obtain a tax repayment). If the loss is larger than the profit assessed the previous year, the excess can be carried forward, for set-off against the profits of the next year in which a profit is made. For example, if a loss of £20,000 is made in the current year, 2008/09, and the assessment for 2007/08 was £15,000, the assessment for 2007/08 will be reduced to Nil and the balance of the loss, £5,000, can be carried forward for set-off against the profit of 2009/10.

The extension announced by the Chancellor is to allow a loss made in 2008/09 to be carried back for two further years – to 2006/07 and, if necessary, 2005/06.However, the total loss which may be relieved in the earlier two years combined is capped at £50,000.

An important point is that the new relief applies only to the loss made in 2008/09, which in the usual case means the loss for the year to the accounting date falling in the 2008/09 tax year. If the accounting date is (say) 30 June, that will mean the year to 30 June 2008, which was of course before the recession began to bite. At present, there is no indication that the new relief will be further extended to cover losses made in the accounting year ending in 2009/10. Subject to sight of the proposed legislation, it may be possible to obtain relief by extending the accounting date so that it falls later in 2008/09.

In any case, the loss relief rules are so complex that individual advice will be required on the steps to be taken to maximise the tax relief available. There will also be a parallel relief for companies, which will apply to losses incurred in accounting periods ending between 24 November 2008 and 23 November 2009.

We have in mind that, if the business slips into loss late in 2008/09, extending the accounting date may allow the losses to be utilised by aggregation, possibly also releasing overlap relief – but it will all depend on the figures.
The new relief is explained in PBRN 03 Extension of Trading Loss Carry Back for Business and HMRC’s Technical Note Extension of Loss Relief Rules – Carry-back of trading losses, published as part of the Pre-Budget package.

Capital allowances on motor cars

A consultation paper published as part of the Spring 2008 Budget proposed replacing the existing restriction on capital allowances for cars costing more than £12,000 with a new rule limiting cars with CO2 emissions over 160 g/km to an annual writing-down allowance of 10%. The Pre-Budget Report confirms that this change is to be made, with effect for cars purchased on or after 6 April 2009 (1 April 2009 for companies). An outline of the new scheme is provided by PBRN 17 Modernising Tax Relief for Business Expenditure on Cars, with draft legislation and a Technical Note promised ‘shortly’.
The CLIENT BULLETIN summarises the position as follows:

Hitherto there has been a special rule limiting the capital allowances that can be claimed on motor cars costing more than £12,000, to £3,000 a year (and also restricting tax relief for lease rental payments on such cars). For cars purchased on or after 6 April 2009 (1 April 2009 for companies) this rule will be replaced by a new rule restricting capital allowances on cars with CO2 emissions above 160g/km, to 10% a year (instead of the usual 20%). Lease rental payments on such cars will be subject to a flat-rate restriction of 15%. Importantly,these new restrictions will apply to taxis and hire cars, which were exempt from the old rules.

In some cases, there may now be an advantage in buying a new car before April, and in others in leaving the purchase until later. Because of the wide range of factors to be taken into account, we can only suggest that clients contact us for individual advice. Under the current regime, where a car is purchased (not leased) the restriction only has the effect of deferring relief, as a full balancing allowance is allowed when the vehicle is disposed of. Under the new regime, the car will enter the ‘10% pool’, so the full cost will still be written off, but over a very long time.

Personal tax proposals

The final page of the CLIENT BULLETIN attempts to explain the Chancellor’s enormously convoluted proposals for personal taxation and National Insurance contributions:

Anyone who has studied the detailed figures may have been surprised to notice that the basic rate band was extended from the first £34,800 of taxable income in 2008/09 to £37,400 in 2009/10 – an increase well above inflation. However, this was in fact the final instalment of a reform of personal taxation first announced in the Spring 2007 Budget. The counterweight is an even bigger increase in the National Insurance Upper Earnings Limit (the level of earnings at which directors’ and employees’ Class 1 contributions fall from 11% to 1%, and self-employed people’s Class 4 contributions from 8% to 1%). Broadly speaking, self-employed people will see no overall gain and directors and employees will be a little worse off. The only gainers will be people over State Pension age (65 for men, 60 for women), who are not required to pay National Insurance contributions, and some people with earnings below the Upper Earnings Limit, topped up with investment income.

Details of future changes have also been announced and are explained in the CLIENT BULLETIN as follows:

The Chancellor also presented what were in essence outline Budgets for 2010/11 and 2011/12. The first proposal is that, for 2010/11 and future years, people with an income over £100,000 a year will be entitled to only half the usual personal allowance, and those with an income over £140,000 will not be entitled to a personal allowance at all.

The second is that neither the basic rate band nor the personal allowance will be increased for 2010/11, because HM Treasury expects there will be zero inflation in the year to September 2009. The basic rate band will then be frozen for 2011/12 and the personal allowance will be reduced by £130. For 2011/12 and future years, there will be a new 45% rate of tax on income over £150,000 a year.

Finally, also from 2011/12, the National Insurance primary threshold – the income level at which employees’ contributions, and self-employed people’s Class 4 contributions, become payable – will be increased by about £12 a week, to align with the income tax personal allowance. At the same time, the employee’s contribution rate will rise from 11% to 11.5% (1% to 1.5% for earnings over the Upper Earnings Limit), the employer’s from 12.8% to 13.3% and the self-employed Class 4 rate from 8% to 8.5% (1% to 1.5% for earnings over the Upper Earnings Limit). Shortly put, employees earning less than about £20,000 a year will be paying lower contributions and those earning more will be paying higher contributions. For self-employed people the breakeven point is lower – around £16,500.

THE PRE-BUDGET REPORT

The Chancellor’s Pre-Budget Report last month did contain some genuinely good news for small businesses. Firstly, it confirmed that the Finance Bill 2009 will not include the controversial ‘income shifting’ legislation, which would have had a major impact on many family businesses.

The background is that in July 2007 the long-running Arctic Systems case was brought to a final conclusion by the House of Lords deciding that, where husband and wife are shareholders in a family company, each is taxable on the dividends he or she receives, even if one spouse does most or all of the work which earns the company’s profits. In Arctic Systems itself, husband and wife were equal shareholders in a company, through which the husband conducted his full-time business as a freelance computer programmer. The wife’s input was limited to part-time administration and support. The Revenue claimed that all the dividends, whether paid to the husband or the wife, should be taxed as the husband’s income, because he had earned the money, but the House of Lords rejected this argument. The real point at issue, of course, was that splitting the dividends between husband and wife reduced the average rate of tax paid on them.

The basic principle of the proposed legislation was that where, as in Arctic Systems, the spouse who actually earns the money sets up or agrees to arrangements which ‘shift’ part of the profits to the other, those arrangements should be effective for tax purposes only to the extent to which the ‘shifted profits’ represent a reasonable rate of reward for the recipient’s contribution to the business. This ‘anti-income shifting’ legislation was originally scheduled for implementation in April 2008, but was withdrawn for further consultation when it was argued that the central test – ‘What is a reasonable rate of reward?’ – was so subjective as to be unworkable.

It had been said that revised proposals would be brought forward for implementation in April 2009, but in the event the Government has decided, ‘given the current economic challenges’, to postpone legislation at least until April 2010. This means that, at least for 2009/10, the House of Lords decision remains in force and family companies can, with confidence, continue to split their dividends equally between husband and wife.
Tax on small company profits

Secondly, the Chancellor announced that the small companies rate of corporation tax, due to rise to 22% in April 2009, will be held at 21% for a further year.
Reprieve for travel expenses claims

However, the Pre-Budget Report states that the Government has now decided to allow the existing rules to continue for the time being, but to devote additional HMRC resources to ensuring that the existing rules are properly complied with. There have been suggestions that some agencies have allowed contractors to claim inflated travelling expenses as part of their remuneration package.
Some flexibility for tax payments
Fourthly, in his Pre-Budget Statement to Parliament the Chancellor promised that: ‘From today, HMRC will enable firms facing difficulties to spread their tax on a timetable they can afford. This will cover all business taxes – VAT, corporation tax, income tax and National Insurance.’

Requests for time to pay will be considered by HMRC’s new ‘Business Payment Support Service’, which has said that it will ‘discuss payment options to help [traders] deal with temporary cashflow difficulties’. It suggests that it will usually be best for the trader to telephone the new ‘Business Payment Support Line’ (0845 302 1435) shortly before the payment is due. Once an arrangement has been made, late payment surcharges will not be levied, but interest will still continue to accrue in the usual way.

In any case, the loss relief rules are so complex that individual advice will be required on the steps to be taken to maximise the tax relief available.

There will also be a parallel relief for companies, which will apply to losses incurred in accounting periods ending between 24 November 2008 and 23 November 2009.

CAPITAL ALLOWANCES ON MOTOR CARS

For cars purchased on or after 6 April 2009 (1 April 2009 for companies) this rule will be replaced by a new rule restricting capital allowances on cars with CO2 emissions above 160g/km, to 10% a year (instead of the usual 20%). Lease rental payments on such cars will be subject to a flat-rate restriction of 15%. Importantly, these new restrictions will apply to taxis and hire cars, which were exempt from the old rules.

All that said, of course, there must be a General Election before April 2011, and no-one can really know what the economic condition of the nation will be by then, so the proposals for 2011/12 are certainly not set in stone.
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.

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