eSmart Tax Issue 9 by Steve Wright

THE DIGITAL BUSINESS AND WEALTH MANAGEMENT MAGAZINE

eSmartTax Issue 9

New Disclosure Opportunity Tackling offshore evasion of taxes

Revenue is vanity, profit is sanity but cash is king How are you managing your cashflow?

Darling delivers third Pre-Budget Report Recession worse than had been predicted

ALSO INSIDE THIS ISSUE

Relief for entrepreneurs’ Pre-Budget Report

Business planning

Tax doesn’t have to be taxing

What should you be doing during 2010?

The main points at a glance

PROTECTING YOUR WEALTH PRE-BUDGET REOPRT NEWS IN BRIEF MAKING A WILL

inside this

issue Welcome to the latest issue of our business and wealth management magazine. Inside this issue we look at the much anticipated and politically charged 2009 Pre-Budget Report. On 9 December, the Chancellor, Alistair Darling delivered what he described as “fiscally neutral” measures, with the clear focus being the state of the economy, inter-weaving themes around the green agenda, support for business and certain revenue generating measures aimed at those with “broad-shoulders.” Turn to page 5 to read the full article. Good cash management can help small businesses survive the recession and come out stronger than before. On page 10 we look at how most businesses can survive periods of making a loss but they can only run out of cash once. In the turbulent economic conditions we are currently experiencing, the old saying, “revenue is vanity, profit is sanity but cash is king” has never been a more appropriate reminder of where business priorities should lie. In the current economic climate is has never been more important to ensure that you are not paying too much tax. With the most difficult conditions in recent years, protecting your wealth has rarely been more challenging. This is why it is vital to ensure that you are not paying more tax than you need to. Turn to page 22 to find out what options you could consider. At the time of publication, the global financial crisis and events are changing very quickly, and some further changes are likely to have occurred by the time you read this issue. A full content listing appears on page 3.

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08 26

Inside this issue 05

Boosting your pension

Higher rate tax payers beware

The main points at a glance

What should you be doing during 2010?

Making a will

Individual Saving Accounts

Darling delivers third Pre-Budget Report

Recession worse than had been predicted

06 Business planning 08 08 News in brief Inheritance Tax artificial 08 schemes closed Pre-Budget Report

Tax allowances frozen

Wider solutions to the problem of trusts being examined

A Pre-Budget Report for business?

Revenue is vanity, profit is sanity but cash is king

National minimum wage

13 14

Corporation Tax increase deferred for SMEs

How are you managing your cashflow?

Significantly lower than those seen in recent years

28 28 28 29 30

Act fast before the end of the tax year Don’t be lured by the glister of fool’s gold

Don’t leave your loved ones with additional cost and complications Are you taking advantage of the increased savings allowance?

New Disclosure Opportunity

Tackling offshore evasion of taxes

New tax plan targets construction businesses

Self-employed reclassified to PAYE

Car scrappage scheme

Government’s extension welcomed

Relief for entrepreneurs’

Tax doesn’t have to be taxing

Tax facts

Taxing ideas that could save you money

Deregistering for VAT

Controlling your finances

Self Assessment

Planning matters

Further pension changes on the horizon for higher earners

More effective ways of holding boards to account should be explored

Taxation of workers

National insurance contributions

Important aspects to bear in mind Fallout from the global financial turmoil continues

16 Shareholder activism 20 ‘unrealistic’ Starting a business

22 Protecting your wealth Money laundering 23

Are you paying too much tax? Treasury launches review

Fulfilling your tax obligations Burden on SMEs impacts on profitability

How complicated are your tax affairs?

Contributions restricted on a tapered basis from 2011 False self-employment in construction

0.5 per cent increase from April 2011

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

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Pre-Budget Report

Darling delivers third Pre-Budget Report Recession worse than had been predicted In a much anticipated and politically charged 2009 Pre-Budget Report, the Chancellor, Alistair Darling delivered what he described as “fiscally neutral” measures, with the clear focus being the state of the economy, inter-weaving themes around the green agenda, support for business and certain revenue generating measures aimed at those with “broad-shoulders.” Mr Darling postponed tough decisions on spending cuts but raised future taxes for anyone earning more than £20,000 to fund schools and hospitals.

National Insurance will increase by 0.5 per cent, on top of the half-point rise commencing 6 April 2010 - for all employer, employee and selfemployed rates from 2011. The Treasury admitted that the two-year cap on public sector pay rises at 1 per cent was effectively a cut because inflation was set to rise above 1 per cent and 95 per cent of the NHS budget would remain “constant in real terms,” meaning a £3.7 billion rise in 2012/13.

The budget deficit Mr Darling promised would be halved in four years. Spending for 2010/11 will increase as planned, but after the election only frontline hospital, school and police services will escape the cuts.

Mr Darling admitted that the recession had been worse than he predicted during 2008. The economy will shrink by 4.75 per cent in 2009 compared with his Budget estimate in April of 3.5 per cent. The public finances were also deeper in the red with a deficit of £178 billion this year, £3 billion more than he had predicted.

There will be £5 billion of cuts by reducing IT projects, reforming legal aid, privatising prison management and cutting the cost of residential care. Cuts of some 14 per cent over three years across the unprotected areas will be found.

As expected, there was a one-off tax aimed at deterring big bonuses. Aimed at all British banks, building societies and subsidiaries of overseas banks, it will subject discretionary bonuses above £25,000 to 50 per cent tax. n

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Pre-Budget Report The main points at a glance The main points from Alistair Darling’s third Pre-Budget Report.

Economy UK economy expected to contract by 4.75 per cent this year, with a return to growth in the fourth quarter. Forecasts UK will grow 1per cent-1.5per cent next year and by 3.5 per cent in 2011/12. Inflation to rise from 1.5 per cent to around 3 per cent early next year before falling back.

Public finances Provisions for potential impact from bank bail-outs on taxpayer revised down from £50bn to around £10bn. Borrowing to hit £178bn this year and £176bn next year - higher than Budget forecasts. As a share of GDP, borrowing to be 12.6per cent this year, 12 per cent next year, then 9.1 per cent, 7.1per cent, 5.5 per cent in 2013/14 and 4.4 per cent in 2014/15. Net debt forecast to reach 56 per cent of GDP this year, 65 per cent next year, and 78 per cent by 2014/15. UK deficit to be halved over four years.

Tax No change to Income Tax. VAT will return to 17.5 per cent on January 1 as

planned, with no other changes in VAT. In April 2012 the point at which people start paying 40 per cent income tax to be frozen for one year. No windfall tax on bank profits. One-off levy of 50 per cent on bank bonuses above £25,000, to be paid by the bank, not the employee. Employer pension contributions to be included in definition of tax income relating to pensions tax relief for those earning over £130,000.

National Insurance Contributions All employer, employee and self-employed rates of National Insurance to rise by a further 0.5 per cent from April 2011. Starting point from which National Insurance is payable to be raised so that no-one earning less than £20,000 will pay any more in contributions.

Pensions Basic state pension will rise by 2.5 per cent in April 2010, a real-terms increase of nearly 4per cent. Employer pension contributions to be included in definition of tax income relating to pensions tax relief for those earning over £130,000.

State contributions to public service pensions for teachers, councils, NHS and the civil service to be capped by 2012, saving £1bn a year.

Public sector Senior civil service pay bill to be cut by up to £100m over three years. Any new government appointment over £150,000 and all bonuses over £50,000 to require Treasury approval. All public sector pay settlements capped at 1 per cent for two years from 2011, while recognising the special circumstances of the armed forces. State contributions to public service pensions for teachers, councils, NHS and the civil service to be capped by 2012, saving £1bn a year.

Inheritance Tax Individual Inheritance Tax allowance to be frozen at £325,000 for the next year.

Jobs/unemployment Support for mortgage interest payments for the unemployed to be extended by six months. Financial support for 10,000 under-graduates from poor backgrounds to take up internships in industry and the professions. Guarantees of a place for every 16 and 17 year-old in education or training to be

available to school-leavers again in September 2010. Minimum number of hours those over 65 will need to work to receive Working Tax Credit to be reduced.

Benefits Benefits linked to inflation, such as Child Benefit, will rise by 1.5 per cent in April 2010. Support for Mortgage Interest Scheme will be extended for further 6 months.

Property Stamp duty holiday to end on 1 January 2010. Empty property relief threshold to be extended, 70 per cent of all empty properties will be exempt.

Green Government to finance four carbon capture and storage demonstration projects. An extra £200m to be released from April 2010 to help with energy efficiency, with an extra 75,000 households helped by the Warm Front scheme. New scrappage scheme to help up to 125,000 homes replace inefficient boilers, and changes to be made to the Climate Change Levy, company car tax and fuel benefit charge. From April 2010, people with a home wind turbine or solar panels that send power back to the National Grid

to receive an average tax-free payment of £900 a year.

Defence An extra £2.5bn to be set aside next year for military operations in Afghanistan. £5m allocated to help ex-service personnel set up their own businesses.

Education Minimum real-terms increases in spending on schools guaranteed for two years from 2011. Free school meals extended to 500,000 primary school children of low income working parents.

Health Minimum real-terms increase in spending on front line NHS.

Police Minimum real-terms increase in spending on front line policing.

Transport Electric cars to be exempted from company car tax for five years, with a 100 per cent first year capital allowance for electric vans.

Telecoms/Digital Super-fast broadband to be extended to 90 per cent of population by the end of 2017, funded by 50p-a-month duty on landlines.

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Business planning What should you be doing during 2010? Tax and financial planning should not be left until the end of the tax or financial year, but in advance of the end of your business year – consider the following: n T he impact on your tax position and financial results of accelerating expenditure into the current financial year, or deferring it into the next. n Paying additional pension contributions or reviewing your pension arrangements. n H ow you might take profits from your business at the lowest tax cost, and how timing of the payment of dividends and bonuses could reduce or defer tax. n Avoiding overvaluing stock and work in progress. n Improved cash collection strategies. n Improvements to your billing systems and record keeping, or a general systems review to improve profitability and cash flow. n Tax saving employee remuneration packages with potential cost savings for you and your employees.

News in brief Tax allowances frozen For the tax year 2010/11 all tax allowances and thresholds will be the same as for 2009/2010. The much anticipated 50 per cent tax rate will apply to income over £150,000 from 6 April 2010, as announced by Budget 2009. For the tax year 2012/13, the higher rate threshold (the point at which someone starts to pay higher rate tax) will be frozen at the 2011/12 amount. The personal allowance will be increased and the basic rate limit will be reduced by the same amount.

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Inheritance Tax artificial schemes closed Wider solutions to the problem of trusts being examined The government announced on 9 December that, with immediate effect, it was closing two artificial schemes designed to avoid Inheritance Tax charges on relevant property trusts. First, where a person transfers property into a trust in which they retain a future interest they will be charged Inheritance Tax if they become entitled to an actual interest under the trust. Second, where a person purchases an interest in a trust, that interest will be treated as part of their estate for Inheritance Tax purposes.

The government is also to examine wider solutions to the problem of trusts being used to avoid Inheritance Tax charges. During the Pre-Budget Report the Chancellor Alistair Darling announced that the Inheritance Tax (IHT) nil rate band would be held at £325,000 in 2010.

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A Pre-Budget Report for business? Corporation Tax increase deferred for SMEs Chancellor Alistair Darling’s announced in his third Pre-Budget Report that he would defer the 1p rise in Corporation Tax for small and medium sized businesses next year. Mr Darling said that the Corporation Tax rate for companies with profits of less than £1.5m would be frozen at 21per cent until April 2011, postponing the planned 1p increase. The Chancellor told MPs that he decided to defer an increase in Corporation Tax for small and medium sized companies to support their growth and investment early in the recovery. Gordon Brown, in his last Budget as Chancellor, announced staged increases in the tax, which is charged on profits up to £300,000 a year. It is estimated that the measure will cost the Treasury around £500m and save firms a maximum of £3,000 a year.

The planned rise in the small companies’ tax rate to 22 per cent will be deferred until 2010/11. Mr Darling also announced that the Enterprise Finance Guarantee, aimed at helping small businesses with turnover of less than £25m a year access money, will be extended for 12 months. Under the scheme, the government guarantees 75 per cent of a loan and the other 25 per cent is guaranteed by one of 35 participating banks. Since its launch in January it is estimated that over 6,000 businesses have received nearly £700m in loans. Mr Darling also said that VAT will rise to 17.5 per cent from 15 per cent from 1 January 2010, but there would be no further changes. It was also announced that all National Insurance rates will rise by a further 0.5 per cent from April 2011.

Pre-Budget Report business highlights n E nterprise Finance Guarantee scheme for bank loans to small businesses to be extended for a further 12 months. n 10 per cent Corporation Tax rate to be introduced on income which arises from patents in the UK. n Strategic Investment Fund to support hi-tech projects given £200m boost. n The Time To Pay scheme allowing firms to spread tax payments will be extended for as long as needed. n Empty property relief threshold to be extended so that 70 per cent of all empty properties will be exempt. n Increase in Corporation Tax for smaller companies to be deferred, leaving the 2010 tax rate unchanged.

Revenue is vanity, profit is sanity but cash is king How are you managing your cashflow?

Good cash management can help small businesses survive the recession and come out stronger than before. Most businesses can survive periods of making a loss but they can only run out of cash once. In the turbulent economic conditions we are currently experiencing, the old saying, “revenue is vanity, profit is sanity but cash is king” has never been a more appropriate reminder of where business priorities should lie. Cashflow is the lifeblood of all businesses and the primary indictor of a company’s health. It is also generally acknowledged as the single most pressing concern of the majority of small and medium-sized enterprises. In a credit crunch environment, where access to liquidity is restricted, cash management becomes critical to survival so company owners need to take a more aggressive approach to budgeting and business planning. Uncertainty is everywhere so it’s essential that companies are able to maintain a high degree of flexibility in order to adapt to the changing times. No organisation can ensure it has the requisite flexibility unless it has a clear picture of its cash position at all times. For the greatest chance of survival, organisations must exploit the knowledge and skills of their finance professionals, particularly in relation to cashflow and liquidity.

Financial support The most basic support that the finance team can provide now is to monitor the organisation’s cash position and projected income over the coming months. This requires finance professionals to work with the company as “business partners”, liaising to develop a clear understanding of the firm’s current situation and its cash cycle. This support from the finance function will help extrapolate the present financial position. By pinpointing key factors such as customers due to settle over the coming period; contracts in progress or further stock likely to be sold; suppliers to be paid and other expenses; and making allowance for any customers likely to default in order to determine any upcoming requirements, future cashflow bottlenecks and other crises can be avoided. The next stage of support is short-run crisis management. Once the essential

data has been assembled, you will be able to highlight ways of dealing with any potential flashpoints. Funds may be needed in an emergency, so any surplus balances or available lines of credit must be identified. If credit gets very tight, other methods can be used. Capital expenditure can often be deferred and spending plans should be reviewed as the assumptions on which they were based will have changed. In the same way, it is usually prudent to apply stricter controls, by lowering managers’ spending discretions. If there is a need to reduce costs quickly, procurement, discretionary bonuses, overheads and external contractors can be trimmed most readily. One message that companies must take on board is that there is a danger of false economies. It’s simple enough to place an embargo on capital expenditure or a block on recruitment. But these are blunt instruments. Take redundancies, for example. Laying off staff can be a false economy and costly if the positions need to be refilled in the medium term. A longer term approach could help the business to refocus and plan for the future.

Improving cashflow Having assessed the current situation, the finance team can help to improve the operation’s ongoing cash management. This requires a more detailed analysis of the company’s debtor stock, creditors, purchases and other spending. A firm hand also needs to be applied to cost controls, recruitment policies and investment criteria in order to limit cash outflows. Resolving problems in business processes that can lead to disputed invoices can accelerate payment. The impact of a major supplier failing can be as great as a bad debt, so this may be a good time to review the supply chain and terms of trade as well as credit management, underwriting policies and terms of sale. It’s also worth considering credit insurance. Looking at the longer term, the company needs to improve its understanding of future cashflow and use this knowledge to review its strategy and improve performance. Once cashflow is being clearly tracked, it’s time to identify some longer-term performance markers. Cashflow is an outcome rather than a

leading indicator of performance. Understanding leading indicators and their financial impact is crucial for better performance management. Doing more of what generates cash satisfactorily and plugging any unnecessary drains on cash is more important than winning prestigious accounts. Utilising activitybased costing as an accounting method can help the business move in the right direction by refocusing on its more valuable customers, activities or stock lines.

Expect the unexpected Looking at uncertainties in the longerterm, the introduction of scenario planning will allow a business to be better prepared for eventualities in the future. Rather than reacting to developments as they unfold and making hurried decisions, the business can turn to contingency plans or strategic initiatives which have been prepared well in advance. This type of activity requires the skill to combine financial and accounting disciplines with business expertise. Unfortunately, many organisations have not yet transformed their finance function to have the structures, systems and people in place to provide this level of decision support. For companies which have not yet developed their finance functions in this way, the current downturn may provide the “burning platform” needed to introduce the necessary change programme. The development of the finance team into true business partners who can add value across the whole business could also be more costeffective than spending money on new systems. Enterprise resource planning, business intelligence and new structures certainly help to increase the efficiency of organisations. But for ad hoc analysis or projects, you need good people who are close to the business. It’s only if the same exercise is to be repeated with some frequency that it becomes sensible to look into processes which would streamline or automate such activities. Cash management is as much an integral part of the business cycle as any other part of the process. The effect of cash is real, immediate and, if mismanaged or not managed at all, can be very unforgiving. It can be a company’s ruin.

Financial services, taxes and wealth management for individuals. Do you need a professional assessment of your situation? If you want to organise your financial affairs, particularly where it involves taxation – don’t leave it to chance. Contact us to discuss your requirements, and we’ll help you navigate this complicated area.

Deregistering for VAT Important aspects to bear in mind Deregistration from VAT is usually a fairly straightforward process. However, there are some important aspects to bear in mind which, if misunderstood, could prove costly. A business must deregister if:

National minimum wage Significantly lower than those seen in recent years The 2009/10 national minimum wage increases are significantly lower than those seen in recent years. Yet when measured against the latest trends in pay awards, it could almost be argued to represent a competitive increase.

National minimum wage current rates There are three levels of minimum wage, and the rates from 1 October 2009 are: n £ 5.80 per hour for workers aged 22 years and older n a development rate of £4.83 per hour for workers aged 18-21 inclusive n £ 3.57 per hour for all workers under the age of 18, who are no longer of compulsory school age

Development rate The development rate for workers age 22 and over was abolished for pay reference periods starting on or after 1 October 2006. From that date, all workers aged 22 and over who qualify for the national minimum wage are entitled to the main rate of national minimum wage. This applies even where the worker was previously in receipt of the development rate for those aged

22 and over and had been receiving that rate for less than six months.

Compulsory school age In England and Wales: a person is no longer of compulsory school age after the last Friday of June of the school year in which their 16th birthday occurs. In Scotland: pupils whose 16th birthday falls between 1 March and 30 September may not leave before the 31 May of that year. Pupils aged 16 on or between 1 October and the last day of February may not leave until the start of the Christmas holidays in that school year. In Northern Ireland: a person is no longer of compulsory school age after the 30th June of the school year in which their 16th birthday occurs.

Accommodation offset The daily rate of the accommodation offset is £4.51 (£31.57 per week) for each day that accommodation is provided.

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n I t stops making taxable supplies. n The legal entity changes, e.g. from a sole trader to a company (although the new entity could retain the existing VAT number). n It is sold (although the owner could retain the VAT number). n It registered because it intended to make taxable supplies but the intention no longer exists. n It is a corporate body and wants to join a group registration. n It is the representative member of a group registration and the group is to be disbanded. A business may deregister if it can satisfy HM Revenue & Customs (HMRC) that taxable turnover in the next 12 months will not exceed the deregistration threshold, currently £66,000. Although supplies of capital assets can be ignored in applying this threshold, positive rated supplies of land and buildings must be included. Sometimes, satisfying HMRC of reduced turnover levels can be difficult. Perhaps the area most misunderstood is the treatment of assets on hand at deregistration. VAT must be accounted for on tangible assets on hand (intangible assets such as goodwill are excluded) and positive rated interests in land on hand at deregistration where the VAT due would exceed £1,000. Therefore, the VAT-inclusive value would have to be £6,714 or more if all the assets were standard rated and the rate was 17.5 per cent (£7,667 with the rate at 15 per cent). It is important to include any relevant assets previously acquired in a transfer of a going concern, even though no VAT would have been charged at the time. However, assets may be excluded if VAT was not deductible on their original purchase e.g. cars, goods for business entertainment and any goods wholly used for exempt activities (although if the input tax was partially recoverable, such assets must still be included). If compulsory deregistration applies, HMRC will often allow the registration to stay open for up to 6 months in order to ‘tie up loose ends’.

Controlling your finances Fallout from the global financial turmoil continues

Keeping in control of your finances during the economic downturn is essential. As the fallout from the global financial turmoil continues to spill over into the real economy, many small business owners are struggling to stay solvent. This is no small issue as UK small and medium-sized businesses employ 13.5m people and account for 52 per cent of the UK turnover, according to the Department of Business, Enterprise and Regulatory Reform.

Understand tax Whether you’re starting a small business or already running one, you will need at least a basic knowledge of tax. It is important that you get your tax payments in on time, and that you keep the required percentage aside to cover your debt. If you have difficulties with tax payments contact HM Revenue & Customs (HMRC) as since last November 2008 it has been operating a new tax deferral scheme, providing about £1bn of credit to small businesses. The VAT registration threshold for businesses is 68,000, effective from 1 May 2009. As VAT can impact on every business transaction it is important to understand at least the basics, especially as a failure to meet deadlines or declaring an incorrect amount could lead to interest charges and penalties.

Know what’s coming As long as small businesses use properly prepared budgets and forecasts,

they should be able to anticipate most potential cashflow problems in time to take action. If you have already set financial targets, it will be simple to contrast expectations with results. An inevitable fear for small businesses is that liquidity will dry up and access to loans will be blocked by cautious banks. Consequently, the relationship between the small business owner and the bank is crucial. If you are having trouble making payments, let your creditors know. Explain why you are having difficulty and tell them when they can expect payment. Don’t try and ignore your debts as they will build up and damage relationships with suppliers. If, on the other hand, you can make payment on time, bear in mind that a reputation as a prompt payer is invaluable in these turbulent times. Some suppliers might even be willing to offer a discount in return for speedy payment.

Tackle credit control Maintaining control of credit is critical to smaller businesses, especially those that have limited cash resources. Unable to pay suppliers because of the money they are owed by customers, many profitable small businesses have been forced to cease trading. If a customer is likely to go out of business or tries to delay payment, serious consideration must be given as to whether they should be

extended credit. If you are not sure check references and credit ratings, as this will let customers know that you are serious about credit control. A recent survey from the Bankers’ Automated Clearing Services (BACS) found that four out of five small firms don’t credit check all of their customers, but there is no excuse for not taking action. Credit ratings can now be accessed quickly online, and while this is an added expense so is chasing up unpaid debts.

Records and reminders No matter how boring it is, as a small business owner you will need to put some time aside every week to organise your records and chase outstanding invoices. Start with the largest and oldest debts. Larger debts are significant as payment will always have a positive impact on cashflow. But you should always chase a late payment, no matter how small a debt is. If the payment date has passed without payment being made, there will be a reason. Whether it is something as simple as a missing invoice or as complex as an insolvent business avoiding payment, you need to chase it up. If your customers think they can get away with paying late they often will, so you need to make it clear that they won’t. There is always a chance that your client is having difficulties making payments and is only paying those who chase, in which case those who do follow

up are more likely to receive their money. In the situation of a customer making payment on account, immediately put a hold on their credit until the debt has been paid in full. Once this action has been taken, acknowledge receipt and ask for the remainder of the balance. Depending on the circumstances, you may need to negotiate a payment scheme. It is possible that you, as the supplier, are the cause of the late payment. Make sure you have been added to their payment records and try to understand the customer’s payment system. Larger businesses, in particular, can have complex systems of payment, so do not risk losing out when a simple phone call can ensure you receive what you are owed.

Starting a business Planning matters If the New Year is the motivation to start a business, you will need to consider, among other factors: the impact of the current economic downturn, the suitable availability of funding, your break-even, the nature of the business, the profit potential, the rate at which you expect the business to grow, the impact of being the business owner on all areas of your life and the degree of risk involved.

Planning and preparation You should prepare a business plan that will address such planning matters as: the source of your business capital, including your start-up requirements as well as your working capital funding,

(tax-efficiency is an important factor here), whether the business needs a PAYE scheme or to be VAT registered and, not least, the business structure that will best meet your needs; sole trader/sole practitioner, partnership, limited liability partnership or limited company.

For example, if you decide that incorporating your business is the preferred solution there may be important issues to consider before you go ahead. You may also need to consider where the ownership of any freehold property should be vested.

The preferred solution

It is also important to choose the right accounting date for your business. Is there a time of year when it will be more convenient to close off your accounting records? What would be the best time of year for stock-taking?

There are both advantages and disadvantages for each trading structure with respect to control, perception, support, and costs. There are also some things to avoid.

Choosing your accounting date

To what extent is your business seasonal? From a tax viewpoint, the choice of a year end early in the tax year for an unincorporated business usually means that an increase in profits is more slowly reflected in an increased tax bill. This can, however, backfire when profits reduce, as the reduction in tax is similarly delayed, and can leave you with a large tax liability when you retire or scale down your business.

It’s good to talk Advising HM Revenue & Customs (HMRC) when you become selfemployed, and probably liable to Class 2 National Insurance contributions, may not be very high on your list of priorities in the first weeks and months of a new business - but failure to notify that you are in business can attract a penalty. You may not even be sure about the date that your business started!

Claiming expenses You will pay tax on your profits, so it is essential to claim all business related expenses as well as the costs included in your accounting records. You can claim a proportion of your household running costs and a proportion of your home telephone bills if you maintain an office at home. You can also claim for the cost of travel and accommodation when you are working away from your main place of business. You must keep adequate business records, including a log of business journeys, because in addition to ensuring your accounts are accurate, these records may be requested by HMRC. Have you considered using a good computer package for record keeping? You will need to retain your business records for six years - make sure that they are kept safely and not exposed to damp.

Deduction, deduction, deduction ‘Capital allowances’ is the term used to describe the deduction you are able

to claim for expenditure on business equipment, in lieu of depreciation. A 100 per cent allowance is available for investment in designated energy saving plant and machinery, plant and machinery to reduce water use and improve water quality, and cars with official emissions of up to 110g/km. There are also generous allowances of 100 per cent of the cost to property owners of the renovation or conversion of vacant residential space over shops and other commercial premises if these are to be made available for rent, and for the capital cost of bringing empty business premises in disadvantaged areas, whether owned or let, back into business use. Otherwise, most equipment qualifies for an allowance of 20 per cent on a reducing balance basis, with special rules and rates for expenditure on long-life assets, fixtures integral to buildings, cars and industrial and agricultural buildings. As capital allowances are based on qualifying expenditure in the accounting year, you might consider buying plant and machinery before the end of the year, rather than just after, to obtain an earlier deduction.

Research and development Tax relief is available on qualifying research and development (R&D) expenditure at varying rates. However, the relief is only available to businesses which operate as limited companies. This may be a critical issue to consider at the commencement of your business. Maximum rates of relief for 2009/10: n For small and medium-sized companies paying tax at 21 per cent, the maximum rate of tax relief is 36.75 per cent (that is a tax credit of 175 per cent of the expenditure) n For small to medium-sized companies not yet in profit, the maximum rate of relief is 24 per cent n For larger companies paying tax at 28 per cent, the maximum rate of relief is 36.4 per cent (a credit of 130 per cent of the expenditure)

There is also a limit of around £5.5 million on the amount of additional tax relief a company can claim under the SME scheme. This is subject to a minimum spend of £10,000 in an accounting period. SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project will be able to claim the large company R&D tax credit. This means they will qualify for relief on 130 per cent of their expenditure.

Keep it in the family You can employ family members in your business, provided the salary and other benefits you pay them is commercially justifiable. You can remunerate family members with a salary, and perhaps also with benefits, such as a company car or van. The cost in tax of having a company van that is available for private purposes ranges to a maximum of £1,400 which includes the use of fuel for private purposes. Other options include medical insurance or making payments into a registered pension scheme. You can also take family members into partnership, thereby gaining more flexibility in profit allocation. In fact, taking your children into partnership and gradually reducing your own involvement can be a very tax-efficient way of passing on the family business. Be aware, though, that taking family members into your business may put the family wealth at risk if, for example, the business were to fail. HMRC may challenge excessive remuneration packages or profit shares for family members. If you operate your business through a limited company, under current tax law you can pass shares on to other family members and thus gradually transfer the business with no immediate tax liability in most cases. However, a tax saving for the donor usually impacts on the recipient and you need to steer clear of the anti avoidance rules known as the settlements legislation.

Tax-efficient incentives Under the Enterprise Management Incentive scheme (EMI) employees can be granted options over shares in your company. Employee commitment can be rewarded through the growth in value of the shares for which options are held, with the resulting capital gain, potentially, taxable at 10 per cent, although most will still pay 18 per cent. EMI and the Share Incentive Plan (SIP) are tax-efficient incentives that can be packaged to attract and retain the right people for the future of your company, at a cost the company can afford. Even the potential National Insurance contributions liability on the growth in value of SIP shares during the option period can be attached, by consent, to the employee. For investors there are several schemes under which tax relief’s or tax deferrals are available on investment in new and growing businesses: n T he Enterprise Investment Scheme allows income tax relief and Capital Gains Tax deferral, plus a tax exemption for any increase in the value of the investment after an initial three-year retention period n V enture Capital Trusts offer income tax relief’s and the opportunity to pool investment with others looking to invest in qualifying companies n C orporate Venturing offers companies tax breaks when they invest in smaller companies The rules and tax breaks for each scheme are different, and do tend to change frequently. The tax exemption for trading companies and groups on the sale of shareholdings of 10 per cent or more in trading companies may also encourage corporate investors. If you are aiming to bring new investment into your company, you will need to have a very clear idea of why the investors should choose your company, and

what they can expect to get out of it. You will need to have a comprehensive business plan, with supporting financial forecasts, to put before potential investors or lenders.

Talking tax Business profits are charged to income tax and Class 4 National Insurance Contributions on the current year basis. This means that the profits ‘taxed’ for each tax year (ending 5 April) are those earned in the accounting period ending in the tax year. There are special rules which determine the amount of profits taxed for the beginning and final years of a business, and for those joining and leaving partnerships.

Decisions, decisions When you take someone on in your business, you will need to decide whether they are an employee, or self employed. This is a complex area, because there is no statutory definition of ‘employment’ or ‘selfemployment’. The consequences of making an incorrect decision can be very serious indeed. You may be liable for not only the employer National Insurance Contributions, but also the amounts of tax and NICs that would normally be borne by the employee if you incorrectly treat someone as self-employed. Because large amounts of tax and National Insurance Contributions can be at stake, HMRC can take quite an aggressive line, so obtaining advice specific to your business is essential.

Catching up It is now a feature of the tax system that businesses must include in their turnover for the year a value for incomplete work, work you have completed and billed, but not yet been paid for, and work completed but not

yet billed, as at the end of the year. This was not always the case, and thus HMRC have been ‘catching up’. Service businesses have also recently had to make changes to their accounting systems to bring into account the sales value of incomplete contracts at the end of the year. There is a special tax rule which permits the effect of this to be spread over a number of years.

Limitation of liability If the limitation of liability is an important consideration, then a limited company may be the right solution, but do bear in mind that banks and other creditors often require personal guarantees from directors for company borrowings, so the owners or directors of the business may in fact bear the liabilities of the business out of their personal assets. Trading through a limited company can be an effective way of sheltering profits as the rates of Corporation Tax on profits are generally lower than those applying to unincorporated businesses. Although profits paid out in the form of salaries, bonuses, or dividends will normally be taxable at top rates (with quite punitive amount of National Insurance Contributions in addition), profits retained in the company will be taxed in 2009/10 at only 21 per cent. The tax rate increases significantly when taxable profits exceed £300,000. Retained profits can be used to buy equipment or to provide for pensions, both of which are eligible for tax relief.

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Insolvency issues designed to guide you through the maze of options. Is your business facing serious financial difficulties? Professional advice for directors considering the options for restructuring and turning around their business. Contact us to discuss the best way to deal with your responsibilities, donâ&#x20AC;&#x2122;t leave it until itâ&#x20AC;&#x2122;s too late.

Shareholder activism ‘unrealistic’ More effective ways of holding boards to account should be explored The Chartered Institute of Management Accountants (CIMA) has criticised the Walker Review for outlining unrealistic expectations on engaging shareholders more fully with corporate governance issues. CIMA is the world’s leading and largest professional body of Management Accountants and works at the heart of business. CIMA believes that while there is a need for active shareholder engagement, Walker has not grasped what can be achieved at a reasonable cost. CIMA advises that there may be more effective ways of holding boards to account and these should be explored. CIMA’s formal response also expresses disappointment at the fact that much of the review covers old ground that has already been outlined in the FRC’s (Financial Reporting Council) Combined Code. It is further concerned that the review sets out for organisations which provisions in the Combined Code they should ‘explain’ rather than ‘comply’ with. This is something CIMA believes organisations should be prepared to decide on for themselves. CIMA is certain that what is actually needed is a number of real life examples, actively promoting good governance and showing organisations how to abide by the spirit rather than the letter of the code. This is the best way of creating the right conditions in which companies can flourish in the long-term.

While the Institute, which advocates a principles-based approach to governance, has welcomed the fact that the Combined Code has remained fit for purpose, it has issued concern on some of Walker’s 39 recommendations. Notably, CIMA believes that the recommendations listed below (3, 7,8,10, 23 and 24) are not appropriate for the general corporate sector and should be limited to the banking sector. n N EDs (Non Executive Directors) on BOFI (Banks and other Financial Institutions) boards to be expected to give greater time commitments n The BOFI chairmanship role to have priority over any other business time commitment n The chairman of a BOFI board should bring a combination of relevant financial industry experience and track record of successful leadership capability n The chairman of a BOFI board should be proposed for election on an annual basis n The board of a BOFI should establish a separate board risk committee n A BOFI board should be served by a CRO (Chief Risk Officer) The Institute also believes that succession planning has been entirely overlooked, and that it is unhelpful to see the executive directors as the ‘villains of the piece’ as the appropriate tone should come from the top and employees need to be empowered, not rebuked.

CIMA says: “While Sir David Walker’s Review lists a number of appropriate recommendations, including those on remuneration, CIMA was disappointed to see the level to which the review has simply re-stated current thinking on corporate governance. In particular, CIMA would like companies to review more critically and independently where their specific circumstances justify deviation from the code without having to be steered by this sort of external review. While we broadly support the proposed Principles of Stewardship, we would ask Sir David to reconsider the emphasis placed in the review on improving shareholder engagement. We are sceptical as to the impact the principles can realistically have and we urge careful consideration of the costs and benefits involved. I look forward to reading the final version of the review in due course and hope Sir David takes our comments on board.”

Protecting your wealth Are you paying too much tax? In the current economic climate is has never been more important to ensure that you are not paying too much tax. With the most difficult conditions in recent years, protecting your wealth has rarely been more challenging. This is why it is vital to ensure that you are not paying more tax than you need to.

‘Gift Aid,’ the tax-efficient way to give Use Gift Aid to give and your gift will be topped up with a tax rebate. You may be able to reclaim some tax yourself so make sure you include details on your tax return. There are several organisations now which can consolidate your giving in one place, even providing an annual statement for your convenience.

Carry back your losses, claiming a corporate tax refund For 2008/09 and 2009/10 - companies can carry back trading losses for up to 3 years, rather than the 1 year previously. If it’s been a difficult year, make sure you don’t miss out on a potential tax refund from previous years. With the worst financial conditions for some years you may not be worrying about tax due on investment gains, but make sure you keep a note of your losses. You may also be able to offset these against future gains.

Splitting, offers benefits to couples

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Consider splitting your taxable income as equally as possible between you and your spouse or partner. Everyone under the age of 65 is eligible to receive £6,475 (2009/10) a year before any income tax is due. If appropriate, where this income is in just one person’s name, think about putting income-producing assets such as savings accounts in the name of the party with little or no income.

ISA returns, tax-efficient saving Individual Savings Accounts (ISAs) allow you to shelter your savings from the taxman each year,

so there’s no excuse for not making the most of this allowance: Savers born on or before 5 April 1960 (that is, aged 50 or over during the current tax year) can save up to £10,200. The full £10,200 can be invested in a stocks and shares ISA with one provider or up to £5,100 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same provider, or another. Savers who were born after 5 April 1960 can save up to £7,200. The full £7,200 can be invested in a stocks and shares ISA with one provider or up to £3,600 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same, or another provider. From 6 April this year, the ISA limit will increase to £10,200, up to £5,100 of which can be saved in cash for all ISA investors.

Pension relief, topping up your pension As we all live longer retirement is becoming an increasingly expensive affair. Think about topping up your pension, basic rate taxpayers currently receive 20 per cent relief on any contributions made whilst higher rate taxpayers receive 40 per cent relief. If you earn £150,000 or more, you will need to carefully consider your pension planning arrangements following the 2009 Budget. From 6 April 2011 tax relief on pension contributions will be restricted for those with an annual income (‘relevant income’) of £150,000 or more. For these people, tax relief will be tapered down until it becomes only 20 per cent for those with income over £180,000; the same level as for a basic rate taxpayer. To prevent effective planning ahead of the 2011 start date, new rules have been introduced which may restrict tax relief to the basic rate on some contributions made on or after 22 April 2009. They could also impose a tax charge where changes to existing defined benefit schemes are made on or after this date.

Money laundering Treasury launches review The Treasury has published a call for evidence on the Money Laundering Regulations 2007 and of the UKâ&#x20AC;&#x2122;s anti-money laundering policies and procedures under them. The call is part of a review of the regulations, with a look at how effective and proportionate the UKâ&#x20AC;&#x2122;s anti-money laundering rules are. The call for evidence is in two parts; Part A is aimed at money laundering experts and practitioners, such as businesses supervised under the regulations and money laundering supervisors. Part B is focused on private individuals and business customers. All aspects of the regulations will be covered by the review. This means the full scope of the regulations, not simply the changes made in 2007, as well as aspects, such as the structure of supervision and role of approved guidance, that are necessary for the implementation of the regulations. The Treasury is working with the Better Regulation Executive on the review and expects to report back on the evidence received and provide a response to it in 2010.

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Boosting your pension Act fast before the end of the tax year

Here are some useful hints to improve your pension prospects. Some employers may allow selected staff aged 50 and over to claim an income from their pension while they work full time. This option has been made possible by changes to pension rules in 2006, known at the time as A-Day. The size of the annual pension payment is cut by a certain percentage for each year the worker claims their pension early. However, members continue to accrue further pension rights under the plan, which is typically based on career-average pay, even when claiming a pension and salary in tandem. It is important to ensure that you can afford to utilise this option as drawing your pension early may provide you with enough income while you’re still working, but by taking your pension early you could have permanently reduced the income you will receive from it. Receiving both earnings and pension income will also mean you pay more tax on that pension income. Some schemes might also bar any accrual of pension benefits if it is drawn at 50 (rising to 55 this April). Taking benefits before the scheme’s normal retirement age of, say, 65, could mean losing 15 years’ employer contributions. There is also the possibility of missing out on making personal contributions and receiving tax relief and investment returns on these. You can take up to 25 per cent of your pension at any age as an “unauthorised payment,” provided the scheme allows it, but it will be subject to a tax charge of 55 per cent. This can be done every year. The 55 per cent tax charge does not look that unattractive when put in the context of the 82 per cent tax payment that your beneficiaries would be charged if you had money left in your pension and died after the age of 75. Equally, some younger pension savers are viewing the 55 per cent tax charge in the context of the forthcoming 50 per cent income tax rate for high earners. It is also possible to take up to 25 per cent as a tax-free lump sum and then vary the income taken from the pension by leaving the fund invested and going into “income drawdown.” This can be done with a personal pension, such as a Self Invested Personal Pension (SIPP), or

an occupational scheme, although few of these allow it. It is possible to take between nil and 120 per cent of rates set by the Government Actuary’s Department (GAD). This is reviewed every five years. Income levels can be changed within these boundaries or an annuity bought at any stage. Funds can be passed on to beneficiaries when you die, subject to a 35 per cent tax charge before the age of 75. After 75 you move into an alternatively secured pension (ASP). Income limits are narrower, between 55 per cent and 90 per cent of GAD rates for a 75-year-old. Financial dependants will be subject to an 82 per cent tax charge on the residual fund. If you have none, the money goes to charity. Remember, though, that your fund could also fall in value. GAD rates are tied to gilt yields, which are near all-time lows due to the Bank of England’s programme of buying up gilts (yields fall as prices rise). However, with a “scheme pension,” available via a SIPP, it is possible to take more money out of a pension fund. Rates are calculated by an actuary rather than GAD, taking into account assumptions of how long you are likely to live, the poorer your health, the higher the rate. If you have a Small Self Administered Scheme (SSAS), your business (sole trader, partnership, limited company or limited liability partnership) can borrow money from your pension fund at very competitive rates. In this way, directors and business owners can access vital funding they might not be able to get from their bank. Although the government performed a U-turn on allowing savers to put single residential properties, such as their second homes, into their pension funds in 2006, you can access the residential property market if you have a SIPP or SSAS through a “genuinely diversified commercial vehicle.” You can also use existing investments to make a pension contribution by selling them and buying them back in your SIPP, in what is known as “bed and SIPP.” From the start of the new tax year on April 6, 2010, the withdrawal of the personal allowance by £1 for each £2 earned over £100,000 means that

those earning between this amount and £112,950 will effectively get 60 per cent tax relief on pension contributions. That is because they will not only get 40 per cent tax relief on contributions, but also some or all of their personal allowance back depending on how much they contribute. If you die before taking any benefits from your personal or occupational pension scheme, the entire fund will pass tax-free to your chosen beneficiaries. These will, however, be added to your beneficiaries’ estates for Inheritance Tax purposes. This is levied at 40 per cent, so a £200,000 pension fund will potentially incur tax charges of £80,000, if this is over and above other assets worth over the current nilrate band of £325,000.

Retirement may seem a long way off, but are you saving enough now to live well in years to come? And if you’re approaching retirement, do you have enough saved for a comfortable retirement? It’s may not be too late to boost your retirement savings if you take action now. Or if you are now retired, you’ll need a strategy to enjoy your new lifestyle and make your savings last. If you would like to discuss the retirement options available to you, please contact us for further information.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

Higher rate tax payers beware Don’t be lured by the glister of fool’s gold High earners considering getting round the new 50p tax rate by converting income into more lightly taxed capital gains are being lured by the ‘glister of fool’s gold’, according to a top HM Revenue & Customs (HMRC) official. Dave Hartnett, HMRC permanent secretary for tax, pledged action against avoidance schemes, which is one reason the Treasury expects to collect only 30 per cent of the potential yield from the 50p rates. ‘For HMRC, a 70 per cent attrition rate or tax gap in respect of the 50 per cent rate would not be acceptable. We are keeping such schemes under very close scrutiny and where such schemes are seen to work technically, we will not hesitate to go to our ministers to ask for a change to the legislation,’ said Mr Hartnett. Some planning approaches maybe acceptable, as long as they are genuinely commercial arrangements that involved a transfer of risk to the employee. One acceptable approach might be to issue nil-cost share options. An employee could choose when to exercise the option and trigger the income tax bill over a period of between three and 10 years, which might coincide with a reduction in the tax rate.

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Making a will Don’t leave your loved ones with additional costs and complications People, who die without a will, or intestate, leave costs and complications to their loved ones and often gift hundreds of thousands of pounds to the State in avoidable Inheritance Tax. The Law Society says that anyone with assets and family or friends should make a will, regardless of their age. It is especially important if you are not married to your partner because the law does not accord partners the same automatic rights of inheritance as spouses. It is also vital if you have children, as you can nominate guardians to care for them. It is important to create a list of assets and debts and their approximate values. Include your property, investments, savings, insurance policies and pension. In addition consider details of individual bequests. Simply telling a relative that an item will be his or hers one day could cause trouble later. You should receive professional advice on Inheritance Tax (IHT) planning as part of writing your will. Simple measures could save the beneficiaries of wealthier homeowners tens of thousands of pounds in tax.

A key element of making a will is the naming of executors to ensure that your will instructions are carried out. These are often unpaid friends or family members, typically a spouse or partner, but can be paid professionals, such as solicitors or a bank or building society. Unpaid executors can choose a solicitor to do the work and reclaim fees and expenses from your estate. You should update your will every five years or so and whenever your circumstances are changed by a significant life event, such as marriage, divorce or a birth or death in the immediate family. Another example would be after a house purchase or move. Make sure one copy of your will is kept secure or deposit one with a probate registry.

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Individual Saving Accounts Are you taking advantage of the increased savings allowance? The end of the 2009/10 tax year is rapidly approaching and now is the perfect time to consider your Individual Savings Account (ISA) options. These tax-efficient wrappers are a popular and simple way to save and you don’t pay any personal Income Tax or Capital Gains Tax on any profit you may make. ISAs were introduced by this government in April 1999 to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) as a tax-efficient way to encourage people to save over the medium- to long-term.

What can you save or invest in an ISA? ISAs can be used to: n s ave cash in an ISA and the interest will be tax-free n invest in shares or funds in an ISA – any capital growth will be tax-free and there is no further tax to pay on any dividends you receive

with either the same provider, or another. Savers who were born after 5 April 1960 can save up to £7,200. The full £7,200 can be invested in a stocks and shares ISA with one provider or up to £3,600 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same, or another provider. From 6 April 2010, the ISA limit will increase to £10,200, up to £5,100 of which can be saved in cash for all ISA investors.

Transferring money from cash ISAs to stocks and shares ISAs If you have money saved from a previous tax year, you can transfer some or all of the money from a cash ISA to a stocks and shares ISA without this affecting your annual ISA investment allowance. However please remember once you have transferred your cash ISA to a stocks and shares ISA it is not possible to transfer it back into cash.

How much tax will you save? Interest and Dividends from savings:

Savers born on or before 5 April 1960 (that is, aged 50 or over during the current tax year) can save up to £10,200. The full £10,200 can be invested in a stocks and shares ISA with one provider or up to £5,100 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA

n i f you pay tax at the basic rate, outside an ISA you would usually pay 20 per cent tax (2009/10) on your savings interest n if you pay tax at the higher rate, outside an ISA you would usually pay tax at 40 per cent on your savings interest

n i f you pay the ‘saving rate’ of tax for savings, outside an ISA you would pay tax at 10 per cent on your savings interest n if you’re a basic rate taxpayer inside or outside an ISA you pay tax at 10 per cent on dividend income. This is taken as a ‘tax credit’ before you receive the dividend and cannot be refunded for ISA investments n if you’re a higher rate taxpayer you would normally pay tax on dividend income at 32.5 per cent. In an ISA you won’t get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax

Capital Gains Tax (CGT) savings If you make gains of more than £10,100 from the sale of shares and certain other assets in the tax year 2009/10, you would normally have to pay CGT. However, you do not have to pay any CGT on gains from an ISA. The value of your investment can go down as well as up and you may not get back the full amount invested.

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New Disclosure Opportunity Tackling offshore evasion of taxes The Chancellor, Alistair Darling reiterated the government’s commitment to in the PreBudget Report by announcing a new tougher penalty for anyone not taking advantage of the recent amnesties. Referring to the New Disclosure Opportunity (NDO) and the Liechtenstein disclosure facility, Mr Darling announced that legislation would be brought forward to ensure that those failing to declare offshore tax liabilities will face the tough penalties attracted by deliberate tax evasion. There will also be a new requirement to notify HM Revenue & Customs when opening offshore bank accounts in certain jurisdictions, supported by a separate penalty regime. Evading tax offshore could therefore result in combined penalties of up to 200 per cent of the unpaid tax. The total package of measures to protect tax revenues raises £165m by 2011/12 and protects around £5bn of tax receipts a year from erosion by tax evasion and avoidance. Anyone concerned about their offshore tax affairs should obtain advice on their position.

New tax plan targets construction businesses Self-employed reclassified to PAYE New proposals from HM Revenue & Customs will target construction businesses with a considerable increase in tax and increased red tape, warns City law firm Reynolds Porter Chamberlain. Under the proposals, the government will reclassify the income of self-employed workers in the construction sector so they will be subject to PAYE and higher rates of National Insurance. This means that construction businesses will have to pay National Insurance on the payments they make to affected workers at 12.8 per cent, that is

Car scrappage scheme Government’s extension welcomed The government’s decision to extend the car scrappage scheme could prove helpful to businesses with vans. Over £300 million has already been invested in the scheme, which encourages car drivers to trade in vehicles older than 10 years in return for a £2,000 discount on new models. Lord Mandelson, the Business Secretary, announced that a further £100 million would go into the scheme. The government has estimated that the extension will fund a further 100,000 vehicles, bringing the total up to 400,000. As well as additional public funding, the government has also

changed the qualifications for the scheme. The age eligibility for cars has been dated to 29 February 2000 (the previous registration cut-off point was 31 August 1999). Now owners with vans aged over 8 years can also qualify for the scheme (the original requirement was that vans needed to be 10 years old). The scrappage scheme is still due to come to an end on 28 February 2010 or when the current funding ends, whichever is the sooner.

payments of over £105 per week. Self-employed contractors caught by the proposed changes will also have to pay National Insurance at a far higher rate. Currently self-employed workers pay £2.40 each week in NICs, but if these changes are implemented, the figure could increase to 12.5 per cent of gross income.

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Relief for entrepreneurs’ Tax doesn’t have to be taxing Entrepreneurs’ relief potentially allows every individual to pay just 10 per cent on capital gains for up to £1 million. The relief took effect from 6 April 2008 alongside the Capital Gains Tax (CGT) reform programme announced in the Pre-Budget Report. Entrepreneurs who sell businesses must pay CGT on money generated by the sale. Entrepreneurs’ relief is available for gains made following the sale of all or part of a business, and gains made from the sale of any assets when a business ceases to trade. The government previously levied CGT at 18 per cent across the board. Under entrepreneurs’ relief, the first £1 million of gains has an effective rate of 10 per cent. After this, 18 per cent applies. There’s no limit to the claims an entrepreneur can make for the tax relief. The total entrepreneurs’ relief over the course of a lifetime, however, must not exceed £1 million of gains. The current tax-free annual exemption is £10,100

(2009/10) remains in place. The former taper relief and indexation allowance have gone. CGT is a single rate of 18 per cent. The entrepreneurs’ relief, however, reduces an individual’s first £1 million of gains by 4/9ths. The effective rate for this £1 million is therefore 5/9ths of 18 per cent = 10 per cent.

What you should do Review your position to ensure you are eligible for Entrepreneurs’ relief in the event of a sale of your business. Put planning in place, due to the ownership period condition, it is no longer possible to wait until the advent of a sale before capital gains tax planning is considered. Extend the scope of the relief to family members and other individuals which could result in multiple usage of the relief. Implement planning which will help you realise your investment with minimal tax impact.

Tax facts Taxing ideas that could save you money

Check your PAYE code You should check you are on the correct code, don’t just assume that if tax is being deducted at source it must be right. If you have been paying too much tax you can claim back the excess for up to six previous years. If you have been paying too little the Revenue can claim it back.

Make full use of your personal allowances We all have a personal allowance, currently £6,475 (under 65) a year, which is the amount you are allowed to earn before you start paying tax. Couples should consider maximising their personal allowances by channelling savings and investments towards the person who pays the least amount of tax.

Consider carrying out a salary sacrifice Salary sacrifice means giving up the right to part of your salary in exchange for a benefit, such as an employer pension contribution. Both you and your employer will save money on National Insurance and the employer also saves on Corporation Tax.

Make the most of tax relief at your highest marginal rate on pension contributions You should make the most of tax relief at your highest marginal rate on pension contributions. This tax break is particularly valuable if you are a higher-rate taxpayer and so receive relief at 40 per cent on your pension contributions.

Bring forward dividend payouts to this tax year If you are a high earner and work for a family company or have your own company, you should consider bringing forward income distribution from future years to this tax year. If you pay yourself a dividend this year, and assuming you are a higher-rate taxpayer, you would currently be paying an effective rate of 25 per cent on dividends. But from the next tax year you would, as a top-rate taxpayer, be paying an effective rate of 36.1 per cent on your dividends.

Take advantage of your ISA allowance It makes sense to fully utilise your Individual Savings Account (ISA) tax-efficient savings account allowance. The maximum annual contribution has been raised by £3,000

to £10,200. Those aged 50 or over on or before 5 April 1960 (that is, aged 50 or over during the current tax year) can invest the extra money immediately, while those under 50 can do so from 6 April 2010.

Make sure you receive your age allowance if you are over 65 Make sure you receive your age allowance if you are over 65. This allowance is currently worth £3,015 on top of the normal personal allowance for those aged 65 to 74 and £3,165 for those over 75, taking their total personal allowance to £9,490 and £9,640 respectively. Those entitled to it should make sure they claim it as it is sometimes not included automatically in an individual’s tax coding.

Savings and bonds If your deposit accounts pay interest only once a year and that falls after April 5, think about closing the account so that interest accrued to date will be taxed in the current tax year. You could also consider cashing in investment bonds and gilts (government bonds). Higher-rate taxpayers can take 5 per cent a year from investment bonds with no tax to pay but it becomes due at your highest rate when the bond is cashed in, so it’s wise to do so while in a lower band. The growth in value of gilts is subject to income tax, too.

Bring forward income Shareholders in their own businesses who take money as dividends will be taxed at 32.5 per cent until April 5, rising to 42.5 per cent the following day. On £10,000-worth of dividends, you would save £1,000 in tax by bringing the payment forward. Bear in mind, though, that you would also have to pay the tax via your self-assessment form a year earlier.

Share incentive schemes High earners could ask their employer to set up a share incentive scheme ahead of the changes so, instead of taking cash bonuses, they could receive shares in the firm. This converts income taxed at up to 40 per cent (or 50 per cent from 6 April 2010) into gains taxed at the flat rate of capital gains tax (CGT) of 18 per cent.

Defer tax relief Consider deferring claims for tax relief until the 2009/10 tax year has ended on

April 5, boosting potential tax relief to 50 per cent from 40 per cent.

Review family trusts It could be worth drawing income arising in a family trust. This is taxed at 20 per cent on up to £1,000 and 40 per cent thereafter, rising to 50 per cent from April. Even trusts with a small amount of income will be subject to tax at 50 per cent. Alternatively, beneficiaries could draw the income if their other earnings are below £150,000.

Crystallise pension benefits People in their early fifties who want to retire early, or release tax-free cash from their pensions, should consider doing so before April 5, when the minimum retirement age goes up from 50 to 55. However, there are some instances where it is not advisable to take the cash. For example, if your pension has a guaranteed annuity rate, you maybe better off using your entire fund to buy an annuity. If you are in a final-salary scheme you could choose to take extra tax-free cash and a reduced pension, although take care as the income you would give up is guaranteed, is inflation-proofed and has a widow’s or widower’s benefit. However, in other cases it may be worth crystallising benefits. Equally, it may be worthwhile if you want to free up cash to make gifts for Inheritance Tax planning or make other tax-efficient investments.

Review holiday lets If you let property short-term, this is the final tax year in which you can offset expenses against income, so get any work done on the property before 6 April 2010. It must be let for at least 70 days a year, excluding lets exceeding 31 days, and be available for rental for at least 140 days. If you are the owner of such a property you have until 5 April 2010 to take advantage of the current furnished holiday lettings tax relief’s. These include flexibility with using income losses, additional capital allowances, certain capital gains relief’s and relevant UK earnings treatment for pension purposes.

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Fulfilling your tax obligations Burden on SMEs impacts on profitability HM Revenue & Customs (HMRC) has issued a warning on the practice of “phishing.” Phishing is the term used where fraudsters attempt to steal your identity by sending you an email which leads you (via a “click here” link) to a counterfeit website in the hope that you will disclose private information such as your address, date of birth, national insurance number or bank details. HMRC will never send you an email asking you to disclose information of this nature. HMRC has warned of a scam concerning tax rebates. Fraudsters are emailing members of the public advising a tax rebate is due and they usually include a link which will take you to an online form where you can enter your personal details. They will then use these details to steal your identity and commit further fraud. Identity theft is big business and costs the UK around £1.7bn pounds every year. Fraudsters use the details they have obtained in phishing scams to take out loans, credit or store cards and run up debts in your name. Usually the first you know about it is when you genuinely apply for credit and are refused. Your credit rating can be damaged and it can take years to recover from the effects of having your identity stolen. It’s important for you to keep an eye on your credit history to make sure no one has applied for credit or are running up debts in your name.

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Self Assessment How complicated are your tax affairs? Self Assessment involves completing an online or paper tax return in order to tell HM Revenue & Customs (HMRC) about your income and capital gains (profits on the sale of certain assets), or to claim tax allowances or relief’s against your tax bill. HMRC uses the figures on the tax return to work out your tax bill, or you can work it out yourself. There are different types of tax return and different supplementary pages you may need to complete depending on your circumstances. There are also deadlines for sending your tax return in and penalties and interest charges if it arrives late. If you pay tax on your earnings or pensions through PAYE (Pay As You Earn) your employer or pension provider deducts tax on HMRCs behalf and you won’t usually need to complete a tax return. In these cases HMRC will normally also ask them to use the PAYE system to

deduct any tax you may owe on a State Pension or other taxable income (e.g. investment or rental income) up to a certain level. But if you have more complicated tax affairs, you may need to complete a tax return. There are also certain circumstances in which you will always need to complete a tax return, e.g. if you’re self-employed, a company director or a trustee, or if you have foreign income. Self Assessment tax returns are normally sent out in April each year, or a notice to fill in a tax return if you file online. If you have not received a return but think you should complete one, contact your tax office. Your employer or pension provider will have details of this. You can ask to complete a tax return at any time, e.g. if you want to claim a particular tax relief or exemption. HMRC will send you a return if necessary. You can’t send HMRC a Self Assessment return without contacting them first.

National insurance contributions 0.5 per cent increase from April 2011

Further pension changes on the horizon for higher earners Contributions restricted on a tapered basis from 2011 From 6 April 2011, tax relief on all pension contributions, including employers’ contributions, will be restricted on a tapered basis for those with annual total incomes of £150,000 and over with full loss of higher rate relief for those with income of £180,000 or more. Alistair Darling, the Chancellor, announced during his Pre-Budget Report that a further restriction on pension contributions for high earners will apply. It is now proposed that ‘income’ will include the value of employer contributions - i.e. pension benefits funded by, or eventually funded by, the individual’s employer. Individuals with pre-tax incomes of less than £130,000 (including

their own pension contributions and charitable donations but excluding employer contributions), will be excluded from the restriction and will not need to value their employer-funded benefits (reducing uncertainty and administration costs). The government has already introduced complex “antiforestalling” measures to prevent earners above £150,000 from making top-ups of more than £30,000 a year to their pensions before 2011. These rules now also apply to those earning more than £150,000 under the new “gross earnings” calculation.

Taxation of workers False self-employment in construction The government has issued a Consultative Document entitled ‘false self-employment in construction: taxation of workers.’ Whilst the issue of status is not new, and certainly not unique to the construction industry, there is a higher than average number of workers in this industry claiming ‘self employed’ status. Taking a more aggressive approach the government has outlined its proposals for introducing new legislation to deal with the issue once and for

all. The proposals effectively turn the whole issue on its head and suggest that the individual will be classed as an employee unless they satisfy one or more of three criteria. The criteria being: n T he individual provides plant & equipment over and above tools of the trade normal and traditional in the industry; n The individual provides materials required to complete the job; n The individual provides other workers to complete the job.

The starting point for employers’, employees’ and self-employed national insurance contributions (NIC) will be maintained at £110 a week despite the negative rate of inflation. But there will be an additional 0.5 per cent increase in the employee, employer and self-employed rates of NIC from April 2011, alongside an increase in the point at which individuals start to pay NIC to protect the 15m people on incomes below £20,000. The change effectively doubles the changes proposed in the 2008 Pre-Budget Report. The upper earnings and profits limits for Class 1 and Class 4 NIC respectively will be maintained at their current level of £844 a week, and for the self-employed, the rate of Class 2 contributions will continue to be £2.40 a week. Class 3 contributions will also remain at their current rate of £12.05. In line with the increase in the amount of the state pension (also announced in the PreBudget Report), the lower earnings limit and the special Class 2 rate for volunteer development workers that are linked to this level, will rise to £97 a week and £4.85 respectively. When added to those rises previously announced, this means that employer NICs will rise from 12.8 per cent to 13.8 per cent and employee’s rate will rise by 1 per cent from 6 April 2011. These changes will apply to all employers and employees who pay NIC (essentially those earning more than £97 per week. This will mean that, for example, those employees on incomes over £150,000 will see their marginal rates (for income tax and NIC) rising from 41 per cent now to 52 per cent from 6 April 2011.

Strategies to save NICs n I ncrease the amount the employer contributes to company pension schemes n S hare incentive plans (shares bought out of pre-tax and pre-NIC income) n F or companies, disincorporation and instead operating as a sole trader or partnership n I nstead of more salary, paying a significant one off bonus to reduce employee contributions (this will not work for directors) n P aying dividends instead of bonuses to owner-directors n P rovision of free childcare or childcare vouchers

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