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December 2007 (2)
BUSINESS MATTERS
CAPITAL
ALLOWANCES FOR MACHINERY AND VEHICLES
One
of the highlights of the Spring 2007 Budget was Gordon Brown’s announcement that a new ‘Annual Investment Allowance’,
to be introduced in April 2008, will allow traders to claim 100 per cent first-year tax allowances for most purchases of machinery,
equipment and vehicles, to a ceiling of £50,000 a year. (The main exception will be motor cars.)
The
new ‘AIA’ will be available for purchases on or after 6 April 2008 for sole traders and partnerships, and on or
after 1 April 2008 for companies. However, this does not mean that every trader
will be able to go out on 6 April and spend £50,000 on equipment which will qualify for the 100% AIA. This is because the
allowance is an allowance for the trader’s accounting year, and so will be time-apportioned where the trader’s
accounting date is other than 5 April (31 March for companies). For example:
- Tom's accounting date is 30 June. He may claim an Annual Investment Allowance
on expenditure up to £11,748 (86/366ths of £50,000) for purchases in the period 6 April to 30 June 2008. In his next accounting
year (the year to 30 June 2009) he will be able to claim AIA on purchases up to £50,000.
- Toy factory Ltd’s accounting date is 30 September. It will be able to claim
AIA on expenditure up to £25,000 (183/366ths of £50,000) for purchases in the period 1 April to 30 September 2008.
- Susan's accounting date is 5 April. She will be able to claim AIA on expenditure
up to £50,000 for purchases in the year 6 April 2008 to 5 April 2009.
Suppose
Tom, above, intends to buy a new van which will cost £20,000. His choices are:
- To buy the new van before 6 April 2008, in which case he will be able to claim
the current 50% first-year allowance (for the 2008/09 tax year, as the purchase is made in his accounting year ending 30 June
2008). Thus £10,000 of the cost will be written off in 2008/09 and the balance (by way of writing-down allowances) in future
years.
- To buy the van between 6 April and 30 June 2008 (both dates inclusive). In this
case he will be able to claim the slightly higher AIA of £11,748 for 2008/09, and again the balance will be written off by
way of writing-down allowances in future years.
- To wait until 1 July 2008, when the whole cost of the van can be written off
by way of the new AIA. This looks like the best solution, but there are two points to watch. The first is that tax relief
for expenditure incurred in the new accounting year will not be enjoyed until 2009/10. The second is that Tom's profits for
the year to 30 June 2009 may not be high enough to absorb the full 100% allowance, so he may anyway be forced to reduce his
claim.
Even
in this very simple and straightforward example there are many issues to bear in mind. For example, the trader may be intending
to purchase more than one vehicle or item of equipment – and it may be possible to ‘have your cake and eat it’
– to claim the full cost as an AIA, but to enjoy tax relief in 2008/09 – by changing your accounting date, though
this would have other implications which would have to be carefully considered. Also, the purchase date, for tax purposes,
is the date expenditure is incurred (as defined by the tax legislation), which is not necessarily either the date the order
was placed, or the date the supplier issued an invoice, or the date payment is made.
Accordingly,
I would strongly recommend clients, who are considering significant machinery, equipment or vehicle purchases and wish to
maximise the benefit to be obtained from capital allowances, to discuss their plans with me as soon as possible.
Finally,
remember that where a purchase is made by an individual trader (rather than through a company), the Annual Investment Allowance
will reduce his income not only for income tax purposes, but also for Class 4 National Insurance and (where appropriate) Tax
Credits. That said, of course, there is no point in buying equipment that is not needed just for the sake of the tax allowance.
PAYE/PAYROLL CHECKUPS
This
is not a new subject but I am aware of the increasing interest from HMRC relating to Tax/NIC liabilities from employers; particularly
with regard to perceived benefits such as mobile telephones, entertainment/subsistence, home working, etc.
If
an Inspector finds something amiss with the current year's records, HMRC will usually cast doubt on the figures for the previous
six years. Quite apart from the extra work created, the employer will have to make good any underpayment of tax/NIC, even
if this arose out of a simple misunderstanding, together with interest and penalties.
Therefore,
it may be worthwhile asking me to carry out a review of your payroll procedures. Any problems can then be identified and resolved
before a PAYE inspection takes place.
EMPLOYMENT
STATUS TAX
Leading
on from PAYE/Payroll reviews, a recent case before the Special Commissioners (Demibourne Ltd) concerned the way in which a
person the subject of an employment status case was to be treated for the purpose of a PAYE settlement with the employer.
Of particular concern was the issues of whether or not it was possible to continue with current arrangements that have often
been applied whereby the taxman allowed an offset of tax paid by an individual whilst they were treated as self-employed in
arriving at the PAYE settlement due from the employer.
The
taxman is now exploring a practical solution which recognises that tax might have already been paid by the worker concerned.
An implementation date will be considered as part of the work to develop the proposed solution. If you have had a recent PAYE
inspection which has included a dispute of the status of a worker, then please let me know.
HUSBAND
AND WIFE BUSINESSES
The
Treasury has just released a consultation document containing proposals to deal with what is termed "income splitting" between
family members in a business. The proposals will affect how small businesses arrange their tax affairs.
The
proposals, which may take effect in 2008, would govern how income is shared within a family business. Broadly they impose
an arm's length test and require family businesses to work out how much income they have 'foregone' by making a comparison
with how the business would have operated had everything been done by independent third parties operating on a fully commercial
basis. This has particular implications for arrangements between husband-and-wife businesses.
As
most family businesses do not operate on an arm's length basis, these new rules will create major headaches for even the most
simple business structures between spouses.
One
spouse might be the main income generator but he or she may well be unable to run the business without the support of the
other. It is not possible to measure purely in hours the input into a business that a spouse makes. The support of the spouse
may well be the difference between the business succeeding and failing.
If
you would like further information about the proposals, please get in touch with me.
CAPITAL GAINS TAX REFORM
In
the October 2007 Pre-Budget Report the Chancellor of the Exchequer announced a fundamental reform of Capital Gains Tax. This
will apply to disposals by individuals (including sole traders), partnerships and trusts, but not to disposals by companies.
Broadly,
where an asset is sold (or otherwise disposed of) on or after 6 April 2008, taper relief will not be given (and nor will indexation
allowance, which is now due where the asset was acquired before April 1998), and all gains will be charged at a new single
capital gains tax rate of 18%, irrespective of the rate of income tax paid by the vendor. There will be some other more technical
changes, but it has been confirmed that the ‘principal private residence relief’ will not be affected and that
there will still be an annual exemption as well as other reliefs.
How does this affect people planning to sell their businesses?
After
taper relief, the effective rate of capital gains tax paid on the sale of business assets is currently, in most cases, 10%
of the chargeable gain. From 6 April 2008 this will rise to 18%. Very broadly speaking, business assets, subject to capital
gains tax, include buildings used for the purposes of the owner’s trade or profession, farmland, goodwill and shares
in family trading companies.
Where
assets were purchased before April 1998, their base cost for capital gains tax purposes is currently increased by indexation
allowance, which reduces the chargeable gain. From 6 April 2008, indexation allowance will not be available, so the chargeable
gain will be higher. Other, more technical, changes may deny reliefs which are currently available and so increase the chargeable
gain further.
Accordingly,
the prospect from 6 April 2008 is that a higher rate of tax will be charged on a larger taxable gain. One obvious solution
is to sell the business, or the business asset, before the end of the current tax year. However, it may well not be possible
to arrange a sale in the time available, and any prospective purchaser is likely to know of the 5 April 2008 deadline and
use it as a bargaining counter.
It
is theoretically possible to ‘freeze’ the accrued indexation allowance and taper relief by transferring business
property to a family trust before 6 April 2008. The transfer to the trust will benefit from the accrued indexation allowance
and taper relief, and the trust will benefit from a higher base cost for the asset. However, it is not possible both to freeze the taper relief and to claim the usual hold-over relief
for a gift into trust, and so the stratagem is likely to trigger an immediate capital gains tax charge – in other words,
the owner has to pay something now in order to save more later. Other possible tax implications must also be considered (for
example, stamp duty and inheritance tax), as well as practical matters. For example, if the property in question is mortgaged
or charged to the bank, will the lender accept the change of legal ownership?
A
final point to bear in mind is that the Chancellor has hinted that he may amend his proposals to include an exemption for
(say) the first £100,000 of gains made on a retirement sale.
If
you have a business, or a substantial business asset, or shares in a family trading company, which you are considering selling,
I recommend that you discuss your options with me as soon as possible. It is not possible in this newsletter to give any general
advice, as so much depends on the facts and figures of the case.
And how does it affect portfolio investors?
A
lower rate of taper relief currently applies to non-business assets, such as shares quoted on the Stock Exchange and units
in a Unit Trust. Depending on the length of time for which the shares or units have been held, this may reduce the chargeable
gain by up to 40% and the effective rate of capital gains tax paid by a higher rate taxpayer to a minimum of 24%, and by a
basic rate taxpayer to a minimum of 12%. However, the position is further complicated by the fact that indexation allowance,
which may be available in addition to taper relief, will be abolished for sales on or after 6 April 2008.
If
a useful amount of taper relief (or taper relief plus indexation allowance) is currently available on a particular holding,
an investor may wish to consider making a disposal within his 2007/08 annual exemption, to take advantage of the accrued taper
relief and indexation allowance before it is lost forever. ‘Double bed-and-breakfasting’ (sale by a husband and
repurchase by his wife, or vice versa) may be used to crystallise a gain within
the annual exemption. However, I would recommend you take advice before entering into any such transaction which creates or
utilises a capital gains tax loss, as the Finance Act 2007 included some complex anti-avoidance legislation which may deny
relief in these circumstances.
An
alternative is that a straightforward gift or sale between husband and wife (or between civil partners) on or before 5 April
2008 will have the effect of preserving any accrued indexation allowance (but not any taper relief). This might be worth considering
where the investment has been held for a long time, so that a substantial amount of indexation allowance is at stake.
Finally,
many Alternative Investment Market (AIM) shares count as business assets for taper relief purposes. If they have been held
for at least two years, and are sold by 5 April 2008, they will qualify for maximum taper relief, so that the effective rate
of capital gains tax will be 10% for a higher rate taxpayer and only 5% for a basic rate taxpayer. From 6 April 2008, both
will pay tax at 18% on their gains.
And what about buy-to-let landlords?
A
buy-to-let property which is let to a tenant who occupies it as his home is not a business asset. If it is sold on or before
5 April 2008, the profit on sale is likely to make the owner a higher-rate taxpayer, even if he is not one already, and so
the rate of capital gains tax will vary between 24% and 40%, depending on how long the landlord has owned the property. Other
things being equal, therefore, the vendor would do better to delay the sale until the 18% flat rate comes into effect on 6
April 2008. However, if you are considering selling a property, please do discuss the position with me, as in some circumstances
the facts may produce a different answer (tax is never straightforward!). Also, of course, a firm sale now may be worth more
than the hope of a sale later.
Depending
on the circumstances, commercial property (for example, a shop) which is owned and let out may qualify as a business asset
for taper relief purposes, as may cottages, etc, used for furnished holiday lettings.
The position is complex, so personal advice, tailored to your own circumstances, is essential.
This newsletter deals with a number of topics which, it is hoped, will be of general interest to
clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases,
so please contact me for personal advice on your own affairs.
Back to Articles
August 2006BUSINESS MATTERS
DON’T PANIC !HM Revenue and Customs are sending out
a new wave of letters to small business proprietors. They are designed to test new ways of ensuring that traders are keeping
proper business records and declaring all their profits. Because this is a pilot project, the letters vary considerably, but
they are likely to ask the trader:·
To allow Tax Inspectors to visit the trader’s
premises to examine his or her cash handling and accounting procedures and the books (or computer records) for the current
year.·
To complete a questionnaire – questionnaires
are being compiled for trade sectors where HMRC suspects under-reporting of profits is commonplace.·
To ‘self-audit’ by reconsidering
specific entries on his or her last Tax Return (a development of the notorious ‘enabling letters’, which suggested
that trade expenses had been overstated).·
To read a list of errors and false statements
found in Returns submitted by other people carrying on a similar trade and to confirm that his or her own Return does not
need correction.·
To respond to a ‘challenge’ –
where HMRC will state that they have specific information that a particular figure on the trader’s Return is incorrect.
An example might be a relatively small discrepancy between the contractor’s and the subcontractor’s record of
payments made.It should
be noted that the only relevant statutory powers HMRC have are to examine the trader’s payroll, Construction Industry
Scheme and VAT records – otherwise, they cannot insist on his or her co-operation. The unspoken threat is, however,
that if the trader does not co-operate, HMRC may open a formal Enquiry.Two points cause great concern. The first is that HMRC originally proposed to
write to traders without sending a copy to their agents/advisors. Although they have now relented, past experience warns us
that HMRC’s system for sending copies is unlikely to be 100% reliable, so please contact me immediately if you receive
such a letter. The second is that HMRC also intend to telephone traders with their requests and queries. I very strongly recommend
that you make a careful note of the requests made and questions asked, say that you cannot sensibly answer them ‘off
the top of your head’, and again contact me immediately. (Also, bear in mind that anyone seeking information may not
really be calling from HMRC.)If
you do receive a letter, or a telephone call, don’t worry. HMRC are not writing or calling because they have any real
reason to believe your last Tax Return was inaccurate. They are targeting you because you are a cash trader, or because their
computer considers your figures to be ‘outside the norm’, or because of ‘guilt by association’ –
they have found that other people carrying on similar trades have been cheating on their taxes, so they assume you have too.WORKING FROM HOMEWorking from home is increasingly popular
and I am often asked if this creates a liability for business rates. Quite often a particular room is used as an office or
workroom. It was decided some time ago at the Lands Tribunal (the court for hearing appeals against rating assessments) that
simply working from home does not turn the house into a business premises.What matters is whether the premises have been physically adapted for business
use; whether equipment that would not normally be found in a private home is used (excluding computers, printers etc); and
whether there are significant numbers of business visitors.A business rates liability may arise where a separate structure is erected or where an integral
garage is converted into business use. A sign or advertisement or brass plate may also trigger a charge. Simply furnishing
a spare room for use as an office is unlikely to create a problem.Where there are people other than the householder and immediate family working
on the premises, such as a secretary or book-keeper who are not family members, liability to business rates may arise. This
will also be the case where clients and other business contacts visit on a regular basis. PAYROLL CHECKUPSDo you wait until the brakes have failed before you take your car to the garage?
Of course not - and perhaps you should not wait until there is a PAYE inspection before checking that your payroll records
are in good order.It
is very easy for an officer from HMRC to find fault with the records of even the most organized and honest employer. For example,
the officer may claim that tax should have been deducted from certain subsistence and travel expense payments.If queries arise on the current year's
records, HMRC will usually call for and examine the figures for at least the last six years. Quite apart from the extra work
created, the employer will have to make good any underpayment of tax, even if this arose out of a simple misunderstanding,
together with interest and penalties.Therefore,
you may consider it worthwhile to ask me to carry out an informal review of your payroll procedures. Any problems can then
be identified and resolved before a PAYE inspection takes place. INHERITANCE TAXThe reform of the inheritance tax treatment of family trusts,
announced in the Budget, was severely criticised, not only by accountants and lawyers, but also by financial commentators
in the newspapers and elsewhere. In response, the Government has made a number of changes of detail to the original proposals,
but the main structure of the new scheme remains unchanged. All the argument has left most people thoroughly confused as to
what the current position actually is, so the main article in this newsletter seeks to answer some ‘frequently asked
questions’:Do
I need to make a new Will?Lawyers
estimate that around half of existing Wills may not achieve the best inheritance tax result under the new régime. The
most common problem is likely to affect trusts set up by Will for the benefit of the testator’s children. Under the
old rules, favourable treatment applied provided the beneficiary became entitled to the income generated by the trust
no later than age 25. Under the new rules (in their final form), to qualify for favourable treatment, the beneficiary must
become entitled to the capital outright by that age. (This vitally important point would be easy to overlook, as
it has largely been overshadowed by the argument as to whether the qualifying age should be 18 or 25.)A difficulty when reading a Will (or any
document setting up a trust) is that the trustees often have statutory powers, which are not set out in the document itself,
but which may affect the tax position. The Government itself overlooked this point when drafting the original legislation
for this year’s Finance Bill. Do not assume, therefore, that the Will actually means what it says.Because circumstances change, it is anyway
good practice to review your Will at least every five years: if a further prompt is needed, the new legislation certainly
provides it. Do
I need to review my existing life assurance policies?Life assurance policies are often written in trust, either to protect the beneficiary from
creditors or with a view to reducing inheritance tax liabilities. In its final form, the new legislation makes it clear that
a policy taken out before Budget Day will continue to be subject to the old inheritance tax rules, even if premiums continue
to be paid after Budget Day. However, this protection can be lost if substantial changes are made to the policy: the life
assurance company should be able to advise whether a proposed change will trigger what is technically called ‘loss of
transitional protection’.A
related point is that it may be possible, under the terms of the policy trust, to appoint new or additional beneficiaries.
Generally speaking, the legislation allows a ‘window of opportunity’, which closes on 5 April 2008, to do this
in a tax-efficient way. Accordingly, policyholders should, before that date, consider whether the policy trusts still fully
reflect their wishes.Are
new tax-efficient life assurance policies still available?A more limited range of life assurance based inheritance tax plans remains available.
However, whereas in the past ‘flexible’ plans have traditionally been the most popular, for the future the most
tax-efficient will require the investor to make an irrevocable choice of beneficiary(ies) at the outset.Is there still any scope for making lifetime
settlements?Surprisingly,
despite all the bad publicity, the answer is: ‘Yes’. And in many cases, a lifetime settlement will actually be
more attractive than before.To
start with the bad news, most settlements made by living people will now be subject to an immediate inheritance tax charge,
calculated as 20% of the value of the property settled. But the exceptions will be:·
Where the property settled falls within the
settlor’s nil rate band (currently £285,000). Strictly speaking, tax is chargeable at nil per cent, which (as
will be explained below) has important consequences.·
Some (not all) trusts set up as part of a divorce
settlement.·
Trusts for the benefit of a seriously disabled
person.Additionally,
all lifetime trusts, except those for the benefit of a seriously disabled person, are potentially liable to an inheritance
tax charge every ten years (a maximum of 6% of the value of the trust property) and when any property leaves the settlement.However, the good news is that the new
rules may reduce the capital gains tax payable on transferring assets to a settlement. Broadly put, the gift of investments
to a settlement counts as a disposal for capital gains tax purposes, but if the transfer is subject to inheritance tax, then
the gain may be ‘held over’ until the investments are eventually sold by the trustees. This applies even if no
inheritance tax is actually payable because the settlement falls within the settlor’s nil rate band.Paradoxically, therefore, the new legislation
may actually help someone wishing to set up a relatively small trust for his or her family, using existing investments.Does the ‘seven year rule’
still apply for lifetime gifts?The
rule remains that a lifetime gift is written off the donor’s inheritance tax ‘clock’ after seven years –
so that if an individual survives for seven years after making a gift, his full nil rate band will be available to set against
his estate on death. This point was not clear from the original Budget Day announcement, which led to further confusion.What can we do if someone died recently?Here the problem is likely to be that the
Will was written with the pre-Budget legislation in mind and so does not achieve the optimum tax result under the new law.Some modern Wills set up a ‘discretionary
Will Trust’ which effectively allows the executors to rewrite the Will within two years of the testator’s death.
Otherwise, it may be possible for the beneficiaries and potential beneficiaries to rewrite the Will by means of a Family Arrangement
– this is also possible where the
deceased died intestate, but in either case is more complicated where the original beneficiaries include children (who are
in law incapable of giving their consent). Again, the time limit is two years from the testator’s death...... or less recently?However long ago the testator died, the
trustees of an existing Will Trust have until 5 April 2008 to rearrange matters to achieve a more favourable inheritance tax
outcome. The same applies where the trust was originally set up by a living person.What can be done will depend on the circumstances of the case,
including the trustees’ powers under the Will or the general law, but most commonly it will involve either ensuring
that the beneficiary becomes entitled to the capital by age 25 or arranging for the current life tenant to surrender his or
her interest (which in some circumstances may provide an inheritance tax free transfer to the next generation). In either
case, expert legal advice will be required and it will be necessary to consider the capital gains tax, as well as the inheritance
tax, implications of any proposed arrangement. This newsletter deals with a number of topics which, it is
hoped, will be of general interest to clients. However, in the space available it is impossible to mention all the points
which may be relevant in individual cases, so please contact me for personal advice on your own affairs. Back to Articles
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