eSmartTax The Electronic Tax magazine January / February / March 2008
Pantheon Capital Strategies Unit 4 Beech Court Wokingham Road, Hurst, Berkshire RG10 0RU Tel: 0845 2410207 Web Site: www.total-planning.co.uk E-mail: info@pantheon-capital.co.uk
Capital gains tax
proposed changes delayed until April 2008
Valuing shares of land as related property… reducing the level of discount
Business taxmajor system package of
reforms announced
Also in this issue
Preparing for a VAT inspection… how to handle the process Residential property investors… the capital gains tax winners! Smaller firms… less confident about business prospects
PLUS: REVISED INTEREST RATES SETTING OUT THE FIGURES INDIVIDUAL SAVINGS ACCOUNTS TRUST IN YOUR FUTURE
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Contents
08
14
28
12
In this Issue 05
06 Revised interest rates…
reductions the result of movements in market rateS
06 Pension scheme administrator 07
eSmartTax - January/February/March 2008
returns and event reports… online filing date on the horizon Disqualification from Parliament (Taxation Status) Bill… a matter of tax
08 Setting out the figures…
new rates from 1 January 2008
09 Valuing shares of land as 10 11 12 13
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Business tax system… major package of reforms announced
14 14 15 16 16
related property… reducing the level of discount Research and development… 31 March 2008 deadline approaches Individual savings accounts… allowances increased following rule changes Preparing for a VAT inspection… how to handle the process Residential property investors… the capital gains tax winners! Size of annual company reports on the increase… up 5 per cent on 2007 Save As You Earn schemes… proposed changes could lead to higher tax bills Clamp down on super-rich non-UK domiciled taxpayers… lack of reliable data affects progress UK plc not such an attractive place to do business in Europe… tax system placed in the bottom half of league table Family businesses could face higher tax bills… proposed new rules to overturn famous defeat 3
Contents 17 18 19 20 21 22 24 25 26 26 27 27 28 29 29 30 31 32 33
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Trust in your future… tax efficient vehicles People don’t plan to fail, but they do fail to plan… Home is where the ‘tax bill’ is! Your domicile determines the tax regime Careful planning well in advance, the cornerstone of IHT planning… keep it in the family Keep your tax in shape… tax wealth check
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TAX EFFICIENT WAYS TO GIVE… are you taking full advantage of them Capital gains tax… changes delayed until April 2008 Economic fundamentals remain sound… survey targets SMEs across all sectors Smaller firms… less confident about prospects Over-complicated tax system… private enterprise expansion plans stifled
19 27 12 08
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Late debtor payments… over half of companies do not charge interest Employee payroll errors… 1 in 10 fail to check payslips Getting ready for business… preparation, preparation, preparation Dates for your diary… Money laundering…
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The winners and losers… new single rate proposed from 6 April 2008 Capital allowances… changes effective from 1 April 2008 Companies Act 2006… the benefits to business Franchising… building a successful business operation
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06 eSmartTax - January/February/March 2008
TAX REFORM
Business tax system Major package of reforms announced The government announced a major package of reforms to the business tax system in the 2007 Budget, with the aim of enhancing the international competitiveness of the UK, by encouraging investment, promoting innovation and ensuring fairness across the tax system. The package included reforms to deliver a simpler; two-rate system of capital allowances, to ensure the tax system better reflects the economic depreciation of capital assets. The package also included the introduction of a new annual investment allowance of £50,000 for all businesses, to promote investment particularly by smaller firms. According to research, this will allow 95 per cent of businesses to write off all of their investment (excluding expenditure on cars) in the year in which it is made.
In July last year, the government published business tax reform: capital allowances changes, a consultation on the government’s proposals for the key design features of the new annual investment allowance, new rules on integral building features and the transitional rules for the move to the new rates of capital allowances. A technical note has now been published, including draft legislation, on these changes. The government estimates that the administrative burden of the capital allowances system on business under the new capital allowances regime will be reduced by £15 million. The technical note announces the government’s intention to extend the provision that allows capital allowances to be claimed on thermal insulation added to existing industrial buildings to all commercial buildings, at a rate of 10 per cent, in line with the government’s approach to environmentally beneficial features integral to buildings.
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The government also intends to withdraw the special industrial buildings allowances available in Enterprise Zones (EZAs) from April 2011, to coincide with the withdrawal of industrial buildings allowance. The government considers that these allowances have now served their purpose, and that there is no case for retaining them. No business that has already claimed EZAs will be affected by this.
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NEWS IN BRIEF
Revised interest rates
PENSIONS
Online filing date on the horizon
Pension scheme administrator returns and event reports
Pension scheme administrators are being reminded by HM Revenue & Customs (HMRC) that Pension Scheme Returns and Event Reports for 2006/07 must be filed online by 31 January 2008.
Reductions the result of movements in market rates HM Revenue & Customs have announced revised interest rates for quarterly instalment payments, and early payments of corporation tax not due by instalments. The revised rates, which took effect from 17 December 2007, cover quarterly instalment payments and early payments of corporation tax not due by instalments, in respect of accounting periods ending on or after 1 July 1999. The rates have been cut as a result of the recent movement in market rates. The rate of interest charged on underpaid instalment payments of corporation tax changes from 6.75 per cent to 6.5 per cent.
Since 16 October 2007, it has been mandatory to file the following reports electronically: Applications to register a pension scheme; Registered Pension Scheme Returns; Accounting for Tax Returns; Scheme Administrator’s Declarations; Event Reports; Notifications of the winding-up of a registered pension scheme; and Notifications of a scheme administrator terminating their appointment. Paper versions submitted after 15 October 2007 will be returned and deemed as not received. This could result in a penalty if an online return is not subsequently filed or filed late. The 2006/07 Event Report has a filing deadline of 31 January 2008, as does the Pension Scheme Return for 2006/07 (if a notice to file one was issued on or before 31 October 2007). The accounting for tax return for quarter 3 (1 October to 31 December 2007) has a filing deadline of 14 February 2008.
The self assessment return for pension schemes (SA970), which also has a 31 January filing deadline is not covered by the new rules, and can only be filed on paper. Pension scheme administrators, or those acting on behalf of pension schemes, which need to register for HMRC’s ‘pension schemes online’ service, should do so as soon as possible. It can take up to seven working days to activate a new account as some information has to be sent by post. In addition, January is a particularly busy month for HMRC online services, so early registration and filing is recommended.
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The rate of interest on overpaid instalment payments of corporation tax, and on corporation tax paid early (but not due by instalments) changes from 5.5 per cent to 5.25 per cent.
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eSmartTax - January/February/March 2008
GETTING LEGAL
Disqualification from Parliament (Taxation Status) Bill
A matter of tax
The Disqualification from Parliament (Taxation Status) Bill, published at the end 2007, is a single-clause Bill that proposes that those electing for the non-domiciled remittance basis of taxation will be disqualified from acting as an MP or Member of the House of Lords. John Whiting, Chairman of the CIOT’s Management of Taxes Committee, says: “One can understand the driving force at work here but there is also an important matter of tax principle. A taxpayer will, under the proposed non-domiciled rules, be given an option over two bases of taxation. Yet someone choosing one route is, seemingly, to be handed an extra penalty. It does seem a bad precedent if making what might be regarded as the wrong tax choice attracts adverse treatment in another area.”
The changes to the tax rules for non-domiciliaries were first announced in the PreBudget Report in October 2007. Broadly, UK residents who are non-domiciled will have to pay an annual charge of £30,000 to ensure that they contribute in respect of the foreign income and gains which they keep abroad and on which they do not pay UK tax. The charge will apply if they’ve been resident here for more than 7 years. Users of the remittance basis also lose their tax free personal
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allowances. The measure is targeted to protect competitiveness by ensuring that secondees to the City are not affected (the majority have left the UK by 7 years). At the time of the Pre-Budget Report, the government announced that it would consult on the detail and on a wider range of options, including specifically whether those who have been resident here for more than 10 years should contribute more.
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REVISED FUEL RATES
Setting out the figures New rates from 1 January 2008
Revised Advisory Fuel Rates have been published by HM Revenue & Customs (HMRC), which took effect from 1 January 2008. Fuel Advisory Rates are mileage rates set by HMRC to reflect actual annual running costs of cars. If the rate paid per mile of business travel by employers is no higher than the advisory rate for the particular engine size and fuel type of the car, HMRC will accept that there is no taxable profit and no Class 1 NICs liability. The aim is to save time for both employers and HMRC by setting out some figures that can be used in the majority of cases. They give employers more certainty about what the mileage rates that they choose to apply mean for tax and National Insurance contributions (NICs). The rates only apply where employers: reimburse employees for business travel in their company cars, or require employees to repay the cost of fuel used for private travel. The rates do not apply in any other circumstances. In particular, employees driving company cars are not entitled to use them to calculate a deduction if employers
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reimburse them at lower rates. Such calculations should continue to be based on actual costs incurred. If an employer pays mileage rates that are higher than the advisory rates but is unable to demonstrate that the fuel cost per mile is indeed higher, there is no fuel benefit charge if the mileage payments are made solely for miles of business travel. Instead, any excess will be treated as a taxable profit and as earnings for Class 1 NICs purposes. The employee can obtain relief for
any actual expenses which have not been reimbursed.
Even if it seems that the actual cost of the fuel could be more
Providing that all of the miles of private travel have been properly identified, HMRC will accept that there is no fuel benefit charge, and therefore no Class 1A NICs liability, where the employer uses the appropriate rate from the current table (or any higher rate) to work out the cost of fuel used for private travel that the employee must repay to the employer. Again, this reflects the fact that they are intended to reflect actual average fuel costs.
than the current advisory fuel rate, it is only in exceptional cases that HMRC will consider arguing that a higher repayment rate should apply. The rates applying from 1 January 2008 are as shown in the table below.
Engine size Petrol Diesel LPG 1400cc or less
11p
11p
7p
1401cc to 2000cc
13p 11p
8p
Over 2000cc
19p
11p
14p
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GETTING LEGAL
Valuing shares of land as related property Reducing the level of discount HM Revenue & Customs (HMRC) have issued some guidance and received legal advice regarding the application of IHTA 1984, s. 161(4) when valuing shares of land as related property. IHTA 1984, s. 161 provides that, when valuing a share of property for inheritance tax where the spouse or civil partner also has an interest in the same property, the spouse’s or civil partner’s interest is taken into account. The effect is to reduce the level of discount that smaller, unaggregated shares of property can attract when valued. The precise basis on which this is done was the subject of litigation during 2004 and resulted in the High Court decision Arkwright and another v Inland Revenue Commissioners [2004] EWHC 1720 (Ch). The appeal had previously been considered by the Special Commissioners who found that the HMRC could not rely on section 161(4) in the case of incorporeal shares of land. Section 161(4) requires the aggregate value to be apportioned in accordance with the proportion the smaller number of shares are
held to the total held by both spouses/civil partners. The Special Commissioner found that whilst the measure could apply to property which had a distinct or individual existence as a unit, such as unit trusts or a set of furniture (for example twelve dining chairs), it did not apply to fractions of units. HMRC did not pursue this point when its appeal was heard by the High Court.
received legal advice that section 161(4) may, in fact, apply to fractional shares of units. Accordingly, HMRC will apply section 161(4) when valuing shares of land as related property in any inheritance tax case where the account was received by HMRC after 28 November 2007. HMRC will consider litigation in appropriate cases.
The High Court decided that the question of the open market valuation was, in the absence of agreement between HMRC and the personal representatives, a matter for the Lands Tribunal. In the course of seeking to reach agreement HMRC has
It is now not possible to have further judicial consideration of the section 161(4) point in the context of the Arkwright decision. Any existing cases in which section 161(4) is considered in point will therefore be dealt with on the basis of the Special
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Commissioners’ decision in the Arkwright case as it relates to the interpretation of section 161(4). HMRC will, when so requested, also reconsider any cases involving land valuations which were concluded after the Arkwright decision was handed down on 16 July 2004 and determined on the basis that section 161(4) applied.
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TAX RELIEF
Research and development 31 March 2008 deadline approaches
A reminder has been published by HM Revenue & Customs (HMRC) to companies claiming (R&D) tax relief for accounting periods ending before 31 March 2006; these must be made by 31 March 2008. R&D tax relief allows companies to claim an enhanced deduction in respect of qualifying R&D expenditure. The amount of the enhancement depends upon the size of the company but generally small and medium companies can claim a 150 per cent deduction and large companies can claim 125 per cent, in respect of qualifying expenditure. The deduction reduces the taxable profits and therefore the corporation tax payable. In some instances the enhanced deduction gives rise to tax losses and in certain circumstances small and medium companies can surrender these in return for a payable tax credit. Claims to the payable tax credit must be made, amended or withdrawn by inclusion in the company’s tax return or amended return. This means that the time limit for making payable tax credit claims is the same as that for making or amending a company tax return, and this is generally two years from the end of the accounting period. This time limit is unaffected by an open enquiry.
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In a move to simplify the claims process it was decided to align the time limits rules for claiming R&D relief across the various R&D schemes. This was done in The Finance Act 2006, which introduced amendments to the existing claims rules. As a result, for accounting periods ending on or after 31 March 2006, all claims to R&D tax relief, including vaccine research relief, must now be made in a tax return and are subject to the normal corporation tax self assessment time limits for making, amending and withdrawing claims. When the time limits were changed it was decided to introduce a transitional period to give companies time to make their enhanced deduction claims for past years. The transitional period covers accounting periods ending after 31 March 2002 but before 31 March 2006 and runs until 31 March 2008. This means that all claims to R&D tax relief for the accounting periods covered by the transitional period must be made by 31 March 2008.
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WEALTH CREATION
Individual savings accounts Allowances increased following rule changes
Commencing from 6 April 2008 the annual Individual Savings Account (ISA) investment allowance will be raised to £7,200. Up to £3,600 of that allowance can be saved in cash with one provider. The remainder of the £7,200 can be invested in stocks and shares with either the same or a different provider. In addition ISA savers will be able to invest in two separate ISAs each tax year, a cash ISA and a stocks and shares ISA. Mini and maxi ISAs will no longer exist. Mini cash ISAs, TOISAs and the cash component of a maxi ISA will automatically become cash ISAs. Mini stocks and shares ISAs and the stocks and shares component of a maxi ISA will automatically become stocks and shares ISAs. In addition, from 6 April 2008, all Personal Equity Plans (PEPs) will automatically become stocks and shares ISAs. ISA savers will be able to transfer money saved in their cash ISA to their stocks and shares ISA. Investors will be able to invest in this re-labelled PEP, as long as they haven’t subscribed to another stocks and shares ISA during the current tax year.
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Investors who wish to continue investing in existing ISAs do not have to take any action as long as they: saved in that ISA in the previous tax year; signed a continuous application form for that ISA, and have not already saved in another ISA of the same type (cash or stocks and shares) during the current tax year. In the event that an ISA is transferred to a new provider and a continuous application form was not signed, or the investor did not save in their ISA in the previous tax year, then a new ISA application form will need to be completed.
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VAT
Preparing for a VAT inspection How to handle the process
VAT inspections by HM Revenue & Customs (HMRC) are a routine part of running a limited company. So how should you prepare and what can you expect when HMRC conduct a VAT inspection? Here’s an easy guide to the things you should do to prepare your business now, and how to handle a VAT inspection when it happens. Your first notice that a VAT inspection will be required will usually be a telephone call from your local office of HMRC. They will usually advise that the company has been selected for a routine inspection, and request to agree a date for a meeting at the company’s offices, usually within 30 days. When a date has been agreed, the local office will confirm the date and time of the meeting by letter and also the name of the visiting Inspector.
nA ll supporting documentation, e.g. contracts, correspondence, etc. n Bank statements nY our VAT certificate and certificate of registration
The most obvious step is to ensure your VAT affairs are totally in order. The confirmation letter will ask you to ensure that the following records, accounts and documents are available, dating back three years from your last due return, or to the start of trading, if registered for less than three years:
Staff should be made aware that the business is being investigated and that it is a routine event you are prepared for. There’s nothing more worrying than seeing the boss stressed while a stranger roots through the paperwork. It’s also worth telling your staff that if the Inspector asks them any questions, they should direct them to you rather than attempt to answer them.
n Annual accounts n The VAT account or any related working papers n All books and accounts, cashbook, petty cashbook, sales and purchases day books n Sales and purchase invoices
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HMRC generally prefer to make their visit at the company’s trading address, which in the case of most contractors would be the director’s home. The director would need to be present at the meeting.
The meeting will typically start off by a short conversation with yourself to go through the basic facts, for example when the company started trading, it’s main trading activity, level of turnover, type of records kept.
This will usually be followed by the Inspector reviewing the detailed records, checking the calculations and the completeness of the accounting records and supporting vouchers. Even innocent mistakes could be viewed badly by Inspectors, so you must take professional advice immediately to work out the best course of action. The first meeting will be followed by a second and concluding meeting to go through their findings. You will be advised of any errors in your calculations or accounting procedures that will need correcting. This may even result in a refund of VAT to you if you have made an error in HMRC favour. Within a few days of the meeting, you will receive a letter from the Inspector, confirming any adjustments to be made, which would usually be made on the next quarter’s VAT return.
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PROPERTY
Residential property investors The capital gains tax winners!
Residential property investors were one of the biggest groups of winners following the proposed announcements made to capital gains tax (CGT) during last years Pre-Budget report in October. The unexpected announcement that the CGT rate from 6 April 2008 would be reduced to a flat rate of 18 per cent effectively means that people investing in property that had been concerned at CGT payable at 40 per cent, would be relieved of this pain if they sold on or after 6 April 2008. The 18 per cent flat rate is due to become payable if contracts are exchanged on or after 6 April 2008. The losers were those who would benefit from indexation relief and non-business taper relief. The Chancellor announced his proposal to remove these from 6 April 2008. Indexation relief is available for properties that were purchased before 6 April 1998. This is an allowance that adjusts gains for the effects of inflation up to 1998. Non-business taper relief became effective on 6 April 1998. This tapering relief is a replacement for indexation relief and is available for non-businessrelated assets, such as properties.
The amount of relief available is dependant upon the period of property ownership. Taper relief starts once you have owned the property for a minimum of three years and increases to a maximum of 40 per cent of the gain after 10 years. Even though the buy-to-let market has been very much in vogue over the past few years, there are a good number of investors who originally invested in the early 1990’s or even earlier. For many of these investors
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the question is, ‘will I pay less in taxes if I sell now, or if I sell in the following tax year?’ As the current proposals stand if investors wait until next year, they will definitely miss out on indexation relief and probably the maximum amount of nonbusiness taper relief. Holding out until the next tax year, when the current proposed 18 per cent flat rate of CGT is introduced, will bring about a tax saving for both the more recent
investor and the long term investor. However, the saving for the newer investor is likely to be considerably greater than for those more established investors.
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NEWS IN BRIEF
ENTERPRISE
Size of annual company reports on the increase Up 5 per cent on 2007 In its annual survey of reports, Deloitte the professional services firm concluded that the size of annual reports continues to increase every year and they advise that this trend should be reversed. They say the most striking finding is the consistent narrative feel to the reports ‘with individuality losing out to uniformity.’ During 2007 the average length increased to 89 pages, which may indicate that companies are writing to order. This increase could also be the result of companies making an increasing use of model narrative reports due to the need to comply with complex rules and time pressures. There will be more rules this year, with section 417 of the 2006 Companies Act coming into force and the Financial Reporting Review Panel reviewing certain narrative reports.
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Save As You Earn schemes Proposed changes could lead to higher tax bills
Employees, who have taken advantage of a popular employee benefit, saving for shares in their company, could be hit by a higher tax bill as a result of the proposed changes to capital gains tax (CGT) announced in the Pre-Budget Report announced last October. Almost 2m employees invest through a Save As You Earn scheme, which, for a fixed period of either three or five years, allows them to put between £5 and £250 a month straight from their pay packet into the scheme operated by a bank or building society on behalf of the employer. At the end of the period, employees are given the option of buying the shares at the agreed fixed price or, if the company’s shares have fallen, to take their savings and a tax-free bonus in cash. Employees who take the shares pay CGT when they come to sell them, if the amount they have earned is over the current CGT-exempt threshold of £9,200. Higher rate taxpayers who hold their shares for at least two years are subject to 10 per
cent CGT currently, while basic rate taxpayers pay 5 per cent. Following the proposed changes to CGT the effects will mean that all of these employees would now pay 18 per cent on the sale of the shares from 6 April 2008. IFS ProShare, a not-for-profit organisation that seeks to promote the benefits of employee share ownership have said that this change will affect a ‘significant minority’ of those using the Save As You Earn scheme and concluded that the Treasury has not fully assessed the consequences for employees saving through employee share plans.’
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DOMICILE RULES
Lack of reliable data affects progress
Clamp down on super-rich non-UK domiciled taxpayers
Recently the Treasury admitted that its plans to clamp down on super-rich nonUK domiciled taxpayers were being affected by a lack of reliable data. The figure which relates to just over 15,000 people is thought to have a combined wealth of £140bn, and that includes £65bn attributed to a small number of super-rich. With the combined taxable annual income of this latter group estimated at about £1.9bn and “non-dom” rules allow these people to avoid a £600m tax bill. The Treasury has also estimated that it is losing £1bn a year to the “non doms”. It does not believe that what it calls a ballpark figure, particularly in respect of the super-rich, is sufficiently reliable to be a basis for constructing tax policy. “This is not a robust estimate of the sort required for policy making,” the Treasury said. “Data on the wealthy are inherently subject to very wide margins
of uncertainty, so this £1bn figure would be a very weak basis for policy making.” In October’s Pre-Budget Report, the government said it was going to impose a £30,000 charge on “non-doms” who wanted to preserve the benefits of a status which allows wealthy foreigners to avoid UK tax. But in a consultation document ahead of legislation planned for this April, will hit overseas taxpayers who have lived in the UK for seven of
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the last ten years, the Treasury said the absence of reliable information was affecting policy decisions. “This is an area where data is limited,” the Treasury said. “While this does not preclude analysis or policy development, it does argue for a prudent and cautious approach.” The Treasury is also using the consultation document as an opportunity to close a number of “non-dom” loopholes. The Treasury estimates that there are about 114,000 “non-doms” in Britain with about 40 per cent working in the financial services sector. The consultation paper suggests about 3,000 people may leave the country in response to the new “non-dom” charge.
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ENTERPRISE
GETTING LEGAL
Tax system placed in the bottom half of league table
Proposed new rules to overturn famous defeat
A study published by the accountancy firm KPMG at the end of last year reported that complex rules and an over-legislated tax system placed the UK in the bottom half of a league table of the most attractive places to do business in Europe. The study revealed that Cyprus, Ireland and Switzerland gained the top ranks for their combination of easy to understand rules, low tax rates and stable fiscal laws. More than 400 businesses across Europe were interviewed for the survey, which put the UK 12th out of 22 countries for the attractiveness of their domestic tax regimes. Companies said the volume of tax legislation was too high in Britain and they found tax rules too difficult to interpret. However, the UK scored well when it came to stability. The Czech Republic, Romania and Greece were placed at the bottom of the table. They were criticised for frequent changes to their tax laws. Nearly 70 per cent of those that responded reported they felt an unattractive tax regime in their country put their businesses at a disadvantage when competing with foreign companies. However, the survey found that lower tax rates and simpler systems were not enough to provide competitive business practices. Firms said a highquality workforce and easy access to raw materials and markets were equally important.
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Family businesses could face higher tax bills
Thousands of family businesses could face higher tax bills under proposed new rules to overturn a famous defeat for the government in the courts. Husband and wife businesses, along with all other arrangements between family members in companies and partnerships, may now be caught by the change. The rules, drafted by HM Revenue & Customs (HMRC), aim to overturn a defeat in the House of Lords that allowed a husband- and-wife team to take an income from their business in a form that minimised their tax payments. The new rules also go beyond a husband-andwife business and include all small businesses where the relationship was “not arm’s-length.” Under the proposed legislation businesses would have to provide detailed evidence of how they pay themselves or face fines. It is estimated HMRC could collect an additional £1bn in tax. This would mean two people living together, a brother and sister or a father and son in business together, could be caught by the new rules. It is also understood that business partners caught by the rules would need to justify to HMRC how they are paid. If they are both directors of the family firm, which is common, they would need to document how much time they each spend managing the business and detail how much capital they contributed and in what form.
A spokesman for HMRC said the agency wanted to consult on the rules to make sure the legislation was workable. He added: “The government believes that income shifting; the process whereby an individual gains a tax advantage by artificially shifting part of their income to another person who is subject to a lower rate of tax, is unfair. The majority of employees and most business-owners cannot shift their income.” The new rules follow the case of Geoff and Diana Jones and their IT business Arctic Systems. In the summer of 2007 they won a four-year court battle against HMRC that also benefited an estimated 30,000 husband-and-wife-owned companies, using dividends as income to minimise their tax bills. Tax payable on dividends is lower than on salaries.
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WEALTH PROTECTION
Trust in your future Tax efficient vehicles
Even though the government has simplified the situation on inheritance tax (IHT) for married couples and registered civil partnerships who own more valuable houses, are there still merits in setting up trusts? The choice of trusts isn’t simple any more. Wealthy parents may also wish to consider giving executors as much flexibility as possible in their Wills as to which trusts should be created, as the situation is changing so fast that it is impossible to predict what trust, if any, will be most suitable in the future. The need to make provision for an IHT strategy centres round those with assets below or hovering near the IHT threshold. If you are cohabiting, then marriage or a registered civil partnership still has the potential to save a considerable sum of money in tax. It is still a very effective way to ensure that you do not have to pay IHT when the first of you dies. If you are married or in a registered civil partnership and have already made provision for tax planning in the form of setting up nilrate band trusts in your Wills, you may be left wondering how the changes announced to the IHT system could affect you. The main thing to remember is the importance of obtaining professional advice to assess your particular situation before any action is taken. For couples with assets likely to appreciate at a faster rate than the nil-rate band or with assets which qualify for relief from IHT, such as business assets or agricultural property a discretionary trust is likely to be the preferred option. Since the nil-rate band is now expected to be increased in relation to average house-price rises, couples who have assets increasing at a faster rate may be better off setting up trusts. If a Will establishes a discretionary nil-rate band trust, then
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the executors can choose not to set up that trust if they think it is better for the survivor to inherit outright. They have two years in which to decide and if they eventually decide against a trust the survivor’s estate would attract two nil-rate bands. Depending on your situation people who use trusts should probably have more than just their home in the way of assets. Putting part of the family home into a nil-rate band trust is not a guaranteed way to reduce the IHT bill and HM Revenue & Customs could decide to challenge such arrangements. Instead, these nil-rate band trusts, if used, should be for assets such as shares and other property investments. Wealthy married couples and registered civil partnerships could also create lifetime versions of nil-rate band trusts by putting in assets equal in value to the prevailing IHT allowance (currently £300,000) every seven years. Lifetime nil-rate band trusts are much less often made by single people, as the main reason to do this would be to stop a child getting the assets straight away. But if this is not an issue, it may be more beneficial for single people to make outright gifts rather than using a trust as they are not, like couples, trying also to provide for a surviving partner.
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WEALTH PROTECTION
People don’t plan to fail, but they do fail to plan Don’t fall foul of the rules
Regardless of your age inheritance tax (IHT) is a great example of a tax where bills could be significantly reduced if you plan ahead. See if you are taking full advantage of the options available to you! 30 to 40 something’s If you are married or in a civil registered partnership, assets pass to each other on death IHT free and since the last Pre-Budget Report you can also now inherit each other’s nilrate tax allowance (£300,000 each for the tax year 2007/08). Writing a Will is also one of the key parts of starting to plan for IHT. This gives your executors considerable flexibility to try and reduce even further any tax that may become due when you die. In particular if you are married, by setting up trusts for your children. Life insurance can be used to assist your heirs to pay an IHT bill with the proceeds paid IHT-free if written in an appropriate trust. Many insurers do not offer this facility unless you ask. By using lifetime nil-rate band trusts, a couple could potentially put over £1.8m outside the IHT
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net over a period of 21 years. You could put a sum equal to your IHT allowance into a trust every seven years and, provided you live seven more years, there should be no IHT payable on it. Professional advice should always be taken first to discover whether this option is appropriate for your particular situation. Ensure pension plans are written in trust as death benefits on policies not written in trust could potentially be taxable. Take tax advice early as decisions about how you build up investments could have major repercussions later on and may trigger avoidable capital gains tax bills if you later decide to give away assets. 50 to 60 something’s In this age bracket it is crucial to review your Will and tax plans every year if your circumstances alter, regulations change or you become
substantially wealthier. You could consider helping your children purchase a property. A family where, for instance, both parents and all the children each have a property in their own name should, in most circumstances, pay considerably less tax than one in which the parents own all of them. Business property relief is available for family businesses, potentially reducing the IHT bill to nil on these assets. But the law is complex, and changing, so once again professional advice should be taken. If your investment risk for reward attitude is high, then making investments in Alternative Investment Market (AIM) stocks and other similar vehicles may offer IHT relief. Always take professional advice first to assess your situation.
70 to 80 something’s Review your Will and tax plans as you did in your fifties and sixties and consider making regular gifts from income and using your gift allowances. Such gifts are free of IHT. It is important that you keep records to help your executors, as HM Revenue & Customs have become more suspicious about whether such gifts meet the criteria. Make other gifts that fall outside of the IHT net if you live seven years after making them. As transfers between spouses and civil registered partners are tax-free, it is often better to transfer an asset to the younger, healthier partner who is more likely to live longer and who can then give it away. Leave your affairs in order with lists of assets and account numbers as well as notes proving entitlement to relief’s such as business property or gift relief. IHT is payable six months after you die so it makes sense to leave your affairs in a tidy state to make the process less stressful for your heirs.
eSmartTax - January/February/March 2008
TAX MATTERS
Home is where the ‘tax bill’ is! Your domicile determines the tax regime allowances An individual’s domicile can be equated with their home for tax purposes, as opposed to the concept of where an individual resides at any given moment. As such, it is fundamental to how tax is paid. Everybody has to have a domicile. You can change your domicile, but it can be difficult to persuade HM Revenue & Customs (HMRC) that you have. If you want to move abroad for tax purposes you need to show you have shifted all aspects of your life offshore. If you are non-UK domiciled, you can live in the UK and not pay tax on your overseas income and capital gains. This is called the “remittance basis of taxation” and enables you to fund your lifestyle without a UK tax liability. If you’re domiciled and resident in the UK, everything you own worldwide is subject to UK tax. HMRC’S form, DOM1, has the relevant questions to help establish if you are unsure of your particular position. It’s worth remembering that any individual with an overseas father may find themselves non-UK
domiciled, even though they have never lived outside the UK. Similarly, you could live in the UK for a considerable time as an overseas national (perhaps more than 50 years) and still be non-UK domiciled. If you are non-UK domiciled the government has proposed changes to these rules. These include an annual charge of £30,000 to benefit from non-UK domiciled status once you have lived in the UK for seven years. If you are non-UK domiciled, you should take professional advice and consider taking steps now to secure your profits before 6 April 2008. From this date, the rules are likely to be tightened and many of the existing advantages may disappear. If you are British and want to retire abroad, inheritance tax (IHT) may be a major concern for you. To avoid an IHT liability you must change your domicile status. You will have to persuade HMRC that you have left the UK permanently. For the first three years of your departure, you will still be subject to IHT even if you have shed your domicile status. You could consider using a life assurance policy written in an
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appropriate trust to cover any potential tax bill levied in this three-year period A tax bill that becomes due will depend on where you reside. But residence is an annual test, while domicile looks at your longer-term intentions. You will be resident in the UK if you spend six months a year in the UK or 90 days a year on average. If you are non domiciled in the UK, you can still be resident here and avoid tax on offshore profits. If you are UK domiciled, shedding residence is a key way to escape tax, although this could require you to go abroad for at least five years.
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WEALTH PROTECTION
Careful planning well in advance, the cornerstone of IHT planning Keep it in the family
Taxing facts There are 2.86m widows and 800,000 widowers in England, Scotland and Wales who could all benefit from increased IHT allowances due to the changes in the rules made by Chancellor Alistair Darling in his October 2007 Pre-Budget statement. In this current tax year everyone has a £300,000 IHT allowance. Anything you leave over and above that value attracts a 40 per cent IHT bill. In the past husbands and wives or more recently civil registered partnerships have been able to inherit all their partner’s assets without being liable to IHT. However, when the second partner died, the tax was liable on everything above the allowance or nil rate band, as it is known. The changes mean that in addition to the free transfer, any unused allowances on the first death now also pass to the other partner. So if the first partner dies and leaves everything to the other one, there will currently be a double allowance (£600,000) at the time of the second death. The rule change retrospectively permits all widows and widowers to claim no matter when their partner died. The calculation is based on the percentage of the allowance used at the time of the first death and is applied to the allowance at the time of the second death.
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NAVIGATING ESTATE PLANNING Have you ever been widowed or has your civil partner died?
YES
NO
Was any of your late spouse’s/civil partner’s Nil Rate Band (NRB) unused on death? Have you made any lifetime gifts in the last 7 years? (including both chargeable transfers and potentially exempt transfers)?
No
In the event of your death in tax year 2007/08, your estate will have a NRB of £300,000.
YES
In the event of your death in tax year 2007/08, your estate will have an available Nil Rate Band (NRB) of £300,000 less the value of the lifetime gifts made within 7 years of your death.
(NB: lifetime gifts made by the deceased within 7 years of death will reduce the available NRB. It is not safe to assume that 100% of the NRB was unused simply because you inherited the entire estate).
No
In the event of your death in tax year 2007/08, your estate will have a NRB of £300,000.
YES
Calculate the % of the NRB which was unused. In the event of your death in tax year 2007/08, the NRB for your estate will be increased by £300,000 multiplied by that percentage. If you have not made any gifts in the 7 years prior to death, the overall NRB will therefore be £600,000. Any lifetime gifts in the 7 years prior to your death would reduce this figure if they were a chargeable transfer/failed PET.
Lifetime gifts which are exempt from IHT can be ignored for the purpose of this flowchart. For example, gifts to spouse, civil partner, charity, small gift of £250, gift from surplus income. This list is not exhaustive.
eSmartTax - January/February/March 2008
WEALTH PROTECTION
Tax wealth check Keep your tax in shape Paying the correct amount of tax Make sure you have been paying the correct amount of tax over the past year. Mistakes do happen and can go unspotted. If you are over 65, you should check you are getting the correct personal allowance. The allowance for the 2007/08 tax year is £5,225, but if you were aged 65 to 74 on April 5 2007 it is increased to £7,550. If you were aged 75 or over on April 5 2006 the tax free allowance stands at £7,690.
If you are married and one of you was born before 1935, you could claim an additional allowance called the married couple’s allowance. This allowance is restricted to give relief at a fixed rate of 10 per cent. This means that, unlike the personal allowance, the married couple’s allowance is not income you can receive without having to pay tax. It reduces your tax bill by 10 per cent of the amount of the allowance you are entitled to.
This extra allowance can be reduced if a pensioner’s earnings are relatively high. The personal allowance falls by £1 for every £2 earned above £20,900, although the personal allowance cannot be cut below the normal level of £5,225. The charity TaxHelp for Older People says HM Revenue & Customs often fails to switch people to this higher allowance automatically because it does not have the birth dates for all taxpayers resulting in people paying more tax they should.
Protecting your wealth from tax If your spouse is a nontaxpayer, you could consider transferring any spare savings into their name. This makes use of their personal allowance to avoid being taxed on the interest earned. It is crucial to make sure that you are protecting as much of your savings and investments as possible from income tax and capital gains tax.
eSmartTax - January/February/March 2008
In this current tax year you could shelter £3,000 of your bank or building society savings in a Mini-cash ISA, or invest £7,000 of equities in a Maxi-IAS. Alternatively, invest £3,000 in a Mini-cash ISA and £4,000 in a stocks and shares Mini-ISA. You cannot open a Maxi and a Mini in the same tax year. Pensioners with an ordinary savings account should fill in form R85 to receive bank and building society interest without tax being deducted. It is also worth considering tax-free savings certificates from National Savings & Investments if you are a higherrate taxpayer. Mitigating inheritance tax Rising property prices over the past decade have lead to inheritance tax (IHT) becoming a significant problem, and as a result more people should now be making the maximum use of all IHT mitigation tools.
One solution is to give away assets where possible, but only those that you are quite sure you will not need later on. Gifts made at least seven years before you die are not subject to IHT. You could also give away money that may be described as “excess income’’ without incurring an IHT liability. In addition, £3,000 may be given away tax-free each tax year. Relatives can also give a bride and groom £2,500 (parents can give £5,000) and friends £1,000 without triggering a tax bill on death. Charitable giving Donations made to charities can attract tax relief. Giving to charity through Gift Aid allows the charity to reclaim tax at your highest rate.
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CHARITABLE GIVING
Tax-efficient ways to give Are you taking full advantage of them? Gift Aid Gift Aid is a scheme that was introduced by the government in 1990 to enable charities to reclaim the income tax on donations received from UK taxpayers. When the basic rate of income tax is trimmed from 22 per cent to 20 per cent this April, charities estimate that they will end up £71m worse off, unless people alter their direct debits to take account of the cut. Last year alone, Gift Aid was worth £828m to UK charities. To make Gift Aid possible you need to sign a Gift Aid Declaration. You can usually download this from any charity’s website, or simply ask the charity you want to give to, to send you one. To be eligible for the Gift Aid scheme, you must be a UK taxpayer. Currently it is possible to claim back 22 per cent in Gift Aid, which is equivalent to 28p for every pound, so, if you were to give £100, then the total gift to the charity would be £128. From 6 April this year the current 22 per cent will drop 2 per cent to 20 per cent, reducing the tax relief on a £100 gift to a lower amount of £125. Those giving to charities should therefore make use of
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the remaining months of this tax year to maximise their gifts.
only cost you 78p, or, if you’re a higher rate taxpayer, it will only cost you 60p.
For higher rate taxpayers the current additional amount, the difference between 22 per cent and 40 per cent, needs to be claimed back by the individual tax payers through their self-assessment form.
You can choose to support any charity of your choice through payroll giving, and can contribute to more than one if you want to. Under payroll giving the payment is deducted from the employee net of tax and then HM Revenue & Customs pays the gross amount to the designated charity. For higher rate taxpayers, the charity receives the whole gift and the employee does not have to claim back the additional tax separately.
You only need to make one Gift Aid declaration per charity, and as long as you remain a taxpayer, that charity can go on reclaiming the tax you have paid for as long as you make donations to it. The charity can only reclaim the basic rate of tax if you have paid enough tax in the tax year to cover the amount reclaimed on your gifts. Payroll giving When you donate to charity through payroll giving, otherwise known as Give as You Earn, your donation is taken directly from your pay before it is taxed. Payroll giving differs from Gift Aid because employees that choose to give through the scheme benefit from full income tax relief on their donations, but with Gift Aid it is the charity that gets tax relief at the basic rate. This means that each £1 you give will
There are no minimum or maximum amounts and it is entirely flexible as to when you stop or start giving and you can gift money to more than one charity. As long as the charity is one that is UK registered, then it can receive payments. Charity accounts If you plan to give to more than one charity, you can open an account with the Charities Aid Foundation (CAF) with a minimum of £10 a month, or a single payment of at least £100. You’ll receive a “charity chequebook” and Charity Card to make tax-free donations to whichever charity you choose whenever you wish. Currently more than
eSmartTax - January/February/March 2008
CHARITABLE GIVING
4,000 charities are registered to accept Charity Card donations, so you can give to them directly using your card. The CAF reclaims the tax at the basic rate on your behalf and adds it to your balance. If you pay tax at the higher rate, you can again claim back the difference between the basic and higher rate on your tax return. You get a statement every month telling you exactly how much you have given, and this acts as your record when you complete your tax return. You can also fund your account through payroll giving, so that the money you pay is taken from your salary before it is taxed. Donating shares ShareGift is a charity that accepts shareholdings, no matter how small, sells them on your behalf and donates the profits to charity. Millions of pounds are tied up in tiny holdings of shares that would cost more to sell than they are worth, creating a problem for shareholders and for companies. Prior to the launch of ShareGift, there was no simple solution for shareholders who wanted to dispose of such shares. You
should include your share certificate when you send the coupon back. If you have lost your share certificate, you will need to get a replacement from the company’s registrars before the shares can be sold. If you are a British taxpayer, you can claim income tax relief on the value of quoted stocks and securities when you donate them to charity. In addition, donating shares to charity will give rise to neither a gain nor a loss for capital gains tax (CGT) purposes. You will need evidence of your donation of shares for HM revenue & Customs. You can claim the relief in various ways, for example via your self-assessment form or by contacting your nearest tax office. You also need to make sure that you keep a signed and dated copy of the transfer form that ShareGift will send you to sign when they have received your share certificates. In addition keep a note of the value of the shares on the date that you gave them to charity. The charity bank The Charity Bank, which launched in 2002, is unlike any other savings bank. It is the only regulated bank in the UK that is also a registered charity, and the only bank
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that uses 100 per cent of its depositors’ savings (both business and individual) solely to support charity and other community enterprises. In the past five years, it has supported over 400 charities, providing business guidance and where appropriate loan finance, over 60 per cent of which has been targeted in underserved communities, reaching 3m people across the country. You receive a certificate to acknowledge their support for the region, and are kept regularly informed about how their money is being used. At the end of the one-year period you get your investment back in full, together with the interest.
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ENTERPRISE
Capital gains tax Proposed changes delayed until April 2008
Alistair Darling, the chancellor delivered another blow to businesses and shareholder groups by announcing that concessions to ameliorate the impact of changes to the capital gains tax (CGT) regime would be delayed until April this year. His proposals could mean considerable tax rises for companies currently paying at the rate of 10 per cent, and this has caused particular worry among business owners close to retirement who could face a sudden rise in their tax liability. The chancellor had promised an announcement before the end of last year on the results of consultation over the abolition of taper relief on CGT, but was forced to admit the postponement, citing the “wide range” of representations, some “quite complex.” The Treasury said the chancellor intended to press ahead with the reform in April this year, leaving only weeks for any late changes to be digested. The chancellor announced a flat rate 18 per cent CGT in the Pre-Budget Report on October 9 last year, removing taper relief that could be as low as 10 per cent, but quickly accepted modifications would need to be made.
confirmed, of a £100,000 tax relief for people who sell businesses and retire. Business owners have warned the continued threat of an 80 per cent tax increase from the 10 per cent rate after two years to 18 per cent was distorting the market.
The Chartered Institute of Taxation (CIOT) recommended that any changes to the current capital gains tax regime do not come into force until April 2009 to allow time for a full consultation. They are concerned that this puts many small businesses and individuals in an extremely difficult position who are unable to plan their tax affairs with any degree of certainty. Also the current state of limbo means that any entrepreneur considering disposing of their business now has scant idea of the tax implications if the sale is after 5 April 2008.
The move was criticised by the Federation of Small Businesses (FSB), after they had expected the issue to be resolved by December last year, although the body welcomed the news that the chancellor would again meet the FSB and other business organisations.
Mr Darling last year assured the CBI employers’ at the organisation’s conference that he was listening to the vociferous business protests against his Pre-Budget Report decision to implement a single 18 per cent rate of CGT. The shareholder lobby group IFS ProShare said the changes planned for April would force an extra 13 per cent tax on shares worth more than £9,200, when they are currently only subject to a 5 per cent tax. The proposed changes would replace the current system where the tax rate on the sale of business assets is reduced the longer it is held, falling to 10 per cent after two years. Employers warned of a further backlash if the final concessions were not significantly broader than the option, already announced but not officially
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eSmartTax - January/February/March 2008
ENTERPRISE
Economic fundamentals remain sound Survey targets SMEs across all sectors
The Confederation of British Industry (CBI), speaking for some 240,000 businesses that together employ around a third of the private sector workforce, has reduced its forecast for the UK economy during 2008. Amid the growing concerns of the impact the credit crunch and a cooling in the housing market could have, the CBI has downgraded its forecast to 2 per cent following a third consecutive reduction. It also believes inflation will continue to rise next year due to higher food and oil prices, reaching 2.6 per cent by the end of 2008 and making further interest rate cuts unlikely. The CBI have rejected talk of a full-on recession stating that while the 2008 slowdown may appear dramatic set against last year’s strong growth, the fundamentals of our economy remain sound and talk of a fullblown recession is overstated. Signs are emerging that the credit crunch is starting to affect entrepreneurs and smaller business bosses, but the impact on economic activity still looks limited, according to the CBI. The CBI revealed in the GfK NOP survey that targets the owners, chairmen and directors of 500 small and medium sized enterprises (SMEs) across all sectors, that only 12 per cent of firms had already experienced a deterioration in the availability of capital, but that 22 per cent expected some constraint over the next few months, and 31 per cent over the next 6 to 12 months. Overall, some 35 per cent are either
experiencing, or expect to experience, some deterioration.
while 26 per cent are cutting jobs or recruitment plans.
The survey sought to confirm anecdotal evidence on the impact of the credit crunch and the proposed changes to capital gains tax (CGT). More stringent lending conditions and the increased cost of credit are the main signs of the deterioration. Lack of availability of new finance and the withdrawal of previous credit lines, which would both be of more serious concern to companies, were less frequently cited.
Asked about recent government proposals to change the CGT regime, 40 per cent of SMEs said the changes have a negative impact on their business. This sentiment sharpened to 57 per cent among those who have held equity in the business for more than ten years. Of all the business leaders surveyed, 61 per cent held equity in the firm.
Only one in five (19 per cent) of the firms questioned said credit tightening was currently affecting or was expected to affect business decisions and plans. Of this fifth, 34 per cent said they are cutting output or stock levels, 29 per cent are trimming capital investment (and a further 25 per cent postponing investment plans),
eSmartTax - January/February/March 2008
All three key elements of the CGT shake-up, the abolition of taper relief, the change in the marginal rate, and the abolition of indexation relief, were seen as important factors, especially among those with an equity stake. But there was a spike of strong concern around taper relief, with 85 per cent of those who said CGT changes were “very negative” citing taper relief as “highly important”.
The CGT changes were not regarded as a move that cut tax red tape, with 63 per cent of respondents saying the proposals were not a “desirable simplification”. Instead the proposals are already hitting future business plans: 43 per cent have altered their plans for investment in new business, while 36 per cent have changed their minds on investing in existing business. Over four in ten (42 per cent) equity holders said they will become less entrepreneurial because of the CGT changes. The youngest and smallest businesses were particularly prone to investment cutbacks. 70 per cent of all respondents said the CGT changes had undermined the government’s approach to enterprise, and 72 per cent believed that the government’s commitment to enterprise was in doubt. Two thirds of firms (66 per cent) doubted that the government is fully committed to encouraging enterprise, with 31 per cent of those firms strongly disagreeing, while an overwhelming 93 per cent thinks the government needs to do more to restore its commitment to an enterprise culture.
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NEWS IN BRIEF
ENTERPRISE
Smaller firms Less confident about business prospects Small firms are less confident about their business prospects now than three months ago, according to the Bank of Scotland’s confidence index. The survey revealed that 33 per cent of small business owners said it was a good time to own a small company in the UK, compared to 38 per cent who thought the opposite was the case. The majority (60 per cent) of small business owners questioned thought economic conditions would get worse in 2008, a 24 per cent increase, while just 7 per cent thought the business climate would improve. The survey reported that recruitment was expected to be measured and growth to be steady but slowing. Increasing tax demands and red tape would also add to the pressure small business owners already face.
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Private enterprise expansion plans stifled Over-complicated tax system A survey of private enterprises has concluded that the UK’s over-complicated tax system is stifling companies from expanding, according to research from Pricewaterhouse Coopers (PwC). The survey revealed that only a quarter (27 per cent) of smaller firms felt the current tax system was supportive of their needs, contrasting with 45 per cent of larger organisations, while 9 out of 10 small firms felt they needed an effective voice representing their interests within HM Revenue & Customs. On average, 35 per cent of business owners saw the UK tax regime as encouraging for enterprise, although this had increased from 21 per cent 12 months ago. The study also revealed that almost half (49 per cent) of companies want the tax system to
be simplified to lighten the compliance and administrative burden on private enterprises, while overall use of tax incentives remains low, at 14 per cent compared to 11 per cent a year ago. Although there is a more positive view coming from UK privately-owned companies these messages must be balanced against findings that suggest there is still a negative perception of the UK tax system, and its support for enterprise, and that significant improvements are needed. The survey also revealed that almost threequarters (69 per cent) of firms saw themselves as ‘mature’, suggesting there is only a limited amount of companies that are actively looking to expand.
eSmartTax - January/February/March 2008
CREDIT CONTROL
Late debtor payments Over half of companies do not charge interest
Over half of companies do not charge interest on late payments but the reasons for this are more to do with company culture than fear of upsetting customers, research suggests by credit agency Graydon. Small firms are missing out financially by failing to enforce interest payments on late payers and to effectively chase up outstanding invoices. Research by the organisation claims that just 4 per cent of companies regularly charge interest on late payments, which they are entitled to do under the Late Payment of Commercial Debts Act 1998. A further 44 per cent only do so occasionally, meaning the majority of small firms never charge interest.
The research also suggested that the main reason for failing to charge interest was not due to fears of upsetting customers but because the company itself had not developed a culture where this was normal. Four out of 10 firms said it was not their company’s policy to charge interests on monies owed, and 25 per cent said it created more administrative work. Almost one in five (19 per cent) said they did not enforce the legislation because
it was not customary in their industry while just 9 per cent were worried about upsetting the customer and 7 per cent worried about losing their business in the future. The research highlights the fact that many companies have still not embraced the idea of demanding their statutory rights to interest, despite it being almost five years since the last amendment to the 1998 Act became law. Companies should ensure that their payment terms and conditions include the right to charge interest on late payments, and that these terms are agreed upfront by clients.
NEWS IN BRIEF
Employee payroll errors 1 in 10 fail to check payslips
Three-quarters of employees don’t understand the information on their payslip and over half have been affected by a payroll error, according to a YouGov survey. The poll also revealed that 1 in 10 fails to check their payslip while 1 in 5 wouldn’t notice a pay error at all. Employers are more likely to underpay than overpay, the survey added, with 41 per cent of those affected by an error not receiving what they were entitled to compared to 17 per cent who were paid too much. “Employers should encourage employees to consistently check this information and educate them on what to look out for,” said Ian Sparrow, director at ADP Employer Services, which commissioned the research.
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eSmartTax - January/February/March 2008
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ENTERPRISE
Getting ready for business Preparation, preparation, preparation
Many business start ups fail because of inadequate market research, over crowded sectors, insufficient customer awareness, the wrong location; in fact the list of potential pitfalls is almost endless. Setting up and running a business is a time consuming task, you need to be dedicated and focused and able to structure your time in order to be successful. The rewards of starting up your own business can be great, but think carefully if you have the attributes and right sort of personality to cope with going it alone. So you have decided that this is the course for you, but are not quite sure where to begin? Alternatively, maybe you have a fledgling business but need help to move it forward. You should think carefully about which structure suits your particular circumstances before making a definitive decision. Choosing the wrong structure could expose you to unnecessary costs and risks, while failure to address certain practical
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issues may result in you falling out with your business partners or associates. Having said that, the status of a sole trader suits many professions where starting up and does not require major investment. It will not stop you from employing people when you start to get busy, but it will allow you to keep a tight grip on your business and to run it as you wish. There are different ways to start a new business. These vary from self employment and partnership to private and public limited companies. There are a lot of important points you need to consider when thinking about starting your new business. Many important questions need answering while considering your future enterprise. These will typically include:
n What kind of business should I be? n What do I call my business? Do I break a trademark rights or copyright with my proposed name? n Do I need a license? n How the trading laws affect me and my business? n Statutory insurance requirements n Keeping business records n Annual requirements n Tax liabilities n Appointing professional services organisations; Accountants, Lawyers. It is crucial to take professional advice to ensure that you make the correct decisions on the structuring of your new business operations and to obtain assistance with the annual statutory requirements: from annual filings with Companies House and the Tax Office to preparation of resolutions and minutes for day-to-day operations.
eSmartTax - January/February/March 2008
TAX FACTS
Dates for your diary Missing these deadlines could be costly! January 2008 Monday 14th Payment of any tax due in respect of CT61 for the quarter to 31 December 2007. Company CT61 return for the quarter to 31 December due. Saturday 19th PAYE/NIC due for the month to 5/01/2008. Thursday 31st Deadline for submitting your 2006/2007 Self Assessment return (up to £100 penalty if your return is late). Thursday 31st Balance of your 2006/2007 Income Tax & Capital Gains Tax due, plus first payment on account for 2007/2008 tax year (interest will run on any payment due and not paid).
February 2008
outstanding tax due on 31 January 2007 still remaining unpaid.
March 2008 Wednesday 19th PAYE/NIC due for the month to 5/3/2008. Monday 31st Last minute planning for tax year-end 2007/2008. Make sure you use any Capital Gains Tax and Inheritance Tax annual exemptions, and any unused pension relief (Income Tax).
April 2008
Saturday 5th End of 2007/2008 tax year. Sunday 6th Beginning of 2008/2009 tax year.
Saturday 2nd Deadline for submitting P46 (car) for employees whose car/fuel benefits changed during the quarter to 5 January 2008.
Monday 14th Payment of any tax due in respect of CT61 for quarter to 31 March 2008. Company CT61 return for the quarter to 31 March due.
Tuesday 19th PAYE/NIC due for month to 5/02/2008.
Saturday 19th PAYE/NIC due for month to 5/04/2008 (interest will run on any unpaid PAYE/NIC for the tax year 2007/2008).
Thursday 28th 5% penalty surcharge on any 2006/2007
GETTING LEGAL
Money Laundering Changes to regulations now affective
Changes to the money laundering regulations became affective from 15 December 2007. The new rules affect trust or company service providers, which include recruitment agencies; company formation agents; suppliers of accommodation or correspondence addresses; telephone answering service providers; and people acting as professional trustees. Those businesses affected now have an obligation to carry out checks on customers’ identity, identify the risk of moneylaundering posed by a customer and report suspicious activity to the Serious Organised Crime Agency (SOCA). “The money laundering regulations aim to safeguard firms from abuse by criminals, while also making it easy to comply, with the minimum impact on business,” said HM Revenue & Customs business director, money laundering regulations, Melissa Tatton.
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eSmartTax - January/February/March 2008
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CAPITAL GAINS TAX
New single rate proposed from 6 April 2008 The winners and losers
The Pre-Budget report in October has created a number of winners and losers under the proposed changes to the capital gains tax (CGT) regime for individuals, trustees, and personal representatives. These changes will not have any effect for companies. The main proposal is to impose a new single rate of capital gains tax of 18 per cent on the disposal of all assets after 6 April 2008. In addition, a number of other proposals have been suggested to simplify the capital gains tax regime including: n T he withdrawal of taper relief; n The withdrawal of indexation allowance; n Simplification of share identification rules. Currently, there is a distinction between business and nonbusiness assets which qualify for different rates of taper relief. For business assets, the minimum effective rate of tax on a disposal that can be achieved is 10 per cent, and for non-business assets, this minimum rate is 24 per cent (higher rate taxpayers). There are qualifying holding periods which broadly are two years for business assets and ten years for non-business assets to achieve the maximum deduction. For those who are making
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disposals without the benefit of any taper relief, the reduction in (higher rate) capital gains tax from 40 per cent to 18 per cent will be welcomed. However, many disposals do qualify to some extent for either business or non-business asset taper relief and the timing of disposals in respect of these assets could increase or decrease the eventual liability. Business owners There are a number of issues that business owners should be considering: If contemplating a sale, look at the figures of tax pre and post 6 April 2008; If contemplating an exit through winding up, can this be achieved prior to 6 April 2008 i.e. does the business have assets that need to be disposed of and will there be sufficient time to do so? Has a sale already taken place where the vendor is now holding loan notes? Many
clients take loan notes on the disposal of their company in order to defer a CGT liability. They should now take urgent action to consider whether or not the loan notes should be redeemed early in light of the proposed changes. Alistair Darling, the chancellor delivered a blow to businesses and shareholder groups by announcing that concessions to ameliorate the impact of changes to the CGT regime would be delayed until April this year. It is unlikely that the final form of that legislation will be known until the Finance Act receives Royal assent in the summer of 2008. Professional bodies have placed a great deal of pressure on the government to at least defer the introduction of these rules by a year, allowing time for consultation to be carried out as to the effects and to deal with some of the many anomalies that arise.
Investors A review of your investments and the potential rate of CGT on any gain should be undertaken within the next few months so that you can consider whether or not to make a sale this side of 6 April 2008 or after that date. If you are currently anticipating a 10 per cent tax rate on a disposal of business assets, you may wish to take action to “bank� that lower tax rate on an unrealised gain before 6 April 2008. If you hold an investment asset which at the moment qualifies for an effective tax rate of 24 per cent (ten-year holding period), you may wish to consider delaying disposing of this asset until after 6 April 2008 to achieve the proposed 18 per cent rate. Tax is only one element to consider in respect of any disposal, be it of a business or private asset, but the changes will mean that there are some winners and some losers, and the timing of a disposal can have a fairly dramatic effect on the tax liability depending upon availability of taper relief and indexation allowance.
eSmartTax - January/February/March 2008
ENTERPRISE
Capital allowances Significant changes effective from 1 April 2008 There will be a number of significant changes to capital allowances with effect from 1 April 2008: First year allowances (FYAs) for small and medium sized businesses will be scrapped All businesses, irrespective of size, will have an Annual Investment Allowance (AIA) of £50,000 The writing down allowance (WDA) for expenditure in excess of the AIA will be 20 per cent, in place of the existing 25 per cent There will be new rules for cars based on CO2 emissions There will be a new 10 per cent WDA for integrated fixtures and for long life assets
relief. Expenditure on cars will not form part of the AIA. The allowance will be reduced pro rata for accounting periods of less than one year. Only one allowance will be available for a group, and will be shared between the companies in the group. Any unused allowance is lost.
10 per cent WDA even though the asset is no longer owned
Writing down allowance Expenditure in excess of the £50,000 AIA will receive a writing down allowance (WDA) of 20 per cent (or 10 per cent if relevant) in the year of acquisition and such expenditure will be added to either the general pool or the separate pool for integrated fixtures and long life assets. Brought forward written down balances will be relieved by applying the new rates of WDA.
Integrated fixtures and long life assets Integrated fixtures are items such as air conditioning or lifts, which form part of the standard integral fittings in a normal modern building, rather than productive equipment acquired for use in the trade. It is possible that the legislation will include a list of specific assets which meet the definition. Previously such assets benefited from the 25 per cent WDA available to general plant and machinery.
Specific energy saving or environmentally beneficial equipment will continue to benefit from a 100 per cent allowance in the year of acquisition
Cars Cars purchased after 1 April 2008 will have their own rules based on CO2 emissions: Low emission (< 120 gm/km): 100 per cent allowance in year of acquisition
Industrial buildings allowances are to be phased out from April 2008 over a period of four years
Medium emission (between 120 and 165 gm/km): expenditure goes into the general pool with a WDA of 20 per cent
Annual investment allowance The annual investment allowance (AIA) will be available for all businesses. The first £50,000 of qualifying capital expenditure in a year will benefit from 100 per cent
High emission (> 165 gm/km): each car goes into a separate pool, has a WDA restricted to 10 per cent, and will have no balancing allowance on disposal. Instead, the pool balance will continue to receive a
eSmartTax - January/February/March 2008
The rules for leased cars will also be switched to an emissions-based regime, with tax relief for lease payments being restricted for high emission cars.
The WDA for long life assets (life expectancy > 25 years) is being increased from 6 per cent to 10 per cent. “Transitional” year If your accounting period straddles 1 April 2008, expenditure will be treated differently depending whether it falls before or after the date of change. Hybrid rates of WDA will also apply based on the rates before and after 1 April. Where commercial considerations allow, advice should be sought on when to incur capital expenditure most tax-efficiently.
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ENTERPRISE LAW
Companies Act 2006 The benefits to business
The statutory statement of directors’ general duties makes the well established law in this area more accessible and brings it into conformity with modern business practice. Companies will be able to make greater use of electronic communications for communications with shareholders. Liability for reports to the market has been clarified. Directors will automatically have the option of filing a service address on the public record (rather than their private home address). There will be improved rules for company names. Companies will no longer be required to specify their objects. The company memorandum will become a formal document recording the position at the point of registration, with just the articles being the continuing constitutional document. Shareholders will be able to agree limitations on the liability of auditors. Key benefits for private companies There will be separate and simpler model Articles of Association for private companies, reflecting the way small companies operate.
Enhanced proxy rights will make it easier for shareholders to appoint others to attend and vote at general meetings.
It will be easier for companies to take decisions by written resolutions. Private companies will no longer be prohibited from providing financial assistance for the purchase of their own shares. There will be simpler rules on share capital, removing provisions that are largely irrelevant to the vast majority of private companies and their creditors. Key benefits for shareholders The business review requirements will promote higher quality narrative reporting by quoted companies. The Bill sets out the criteria whereby a shareholder can bring a “derivative” action on behalf of the company against a director for breach of duty, while making sure that unmeritorious suits are quickly dismissed and costs fall to the person bringing the claim. There will be greater rights for indirect (i.e. those who hold through a nominee) shareholders. These will include the right to receive information electronically or in hard copy if they so wish.
Shareholders will receive more timely information, reflecting improvements in technology and the increased rate at which information becomes out of date. There will be more timely accountability to shareholders by requiring public companies to hold their AGM within 6 months of the financial year-end There is a new right for shareholders of quoted companies to have a resolution proposed for an AGM to be circulated at the company’s expense if received by the company before the financial year-end. The government has made clear that it would like institutional investors to disclose how they use their votes. The Bill provides a power, which could be used to require institutional investors to disclose how they have voted.
As part of our “think small first” agenda, a separate, comprehensive “code” of accounting and reporting requirements for small companies will be set out. Private companies will not be required to have a company secretary. Private companies will not need to hold an annual general meeting unless they positively opt to do so.
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eSmartTax - January/February/March 2008
ENTERPRISE
Franchising
Building a successful business operation Over the past 10 years franchising has grown dramatically in the UK as more businesses look to develop their operations and network through franchising. If it is done well, franchising is a very powerful tool for generating business development, company growth and competitiveness. There are several steps which potential franchisors should take: Research the market to ensure that products and services are competitive and distinctive enough to be franchised and that customer demand is sufficiently widespread. Produce a business plan outlining proposals in full and including a detailed strengths, weaknesses, opportunities, and threats (SWOT) analysis. Protect all property rights by registering trademarks, trade names and patents with the relevant trademark and patent offices. Test the franchise in the form of a pilot operation lasting at least 12 months and ideally longer if the business is in any way seasonal. The pilot scheme should be
undertaken at more than one location to test the concept in different geographical areas. A comprehensive pilot operation will ensure the right strategy, highlight problem areas and enable the franchisor to finalise the package before committing to developing a network. With the pilot operation running successfully, the franchisor can prepare and launch his or her network. At this stage, the franchisor should instruct an experienced solicitor to draw up a comprehensive franchise contract setting out the obligations of each party, including how the fees, mark-ups on supplies and any other payments from the franchisee are to be calculated. These obligations should be made clear at the outset of any agreement with a franchisee. Produce a prospectus to attract suitable franchisees and determine the criteria for the franchisee selection.
Produce a comprehensive operations manual and training programme for franchisees, to set sustainable standards of customer service. Establish a central management function and possibly field support staff to support the franchise network. Set up a system to monitor the performance of franchisees. Develop a marketing, sales and advertising strategy to promote the franchise network, especially when competing with rival companies who may already be known to your potential customers.
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The articles featured in this electronic publication are for your general information and use only and are not intended to address your particular requirements. They should not be relied upon in their entirety. 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. Articles that make reference to announcements made in the Pre-Budget Report are based on draft legislation which is expected to be enacted in the Finance Act 2008. Produced by Goldmine Publishing Limited • PO Box 5756 • Milton Keynes • Buckinghamshire • MK10 1AG