April Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

This was a pre-election Budget but without many give-away prizes. Many of the standard allowances and thresholds have been frozen for two to five years, which introduces hidden tax rises by way of fiscal drag.

This summary concentrates on the main tax issues affecting our clients.

The good news points for small businesses are the extensions of entrepreneurs' relief and the Annual Investment Allowance. The bad news includes the new anti-avoidance rule for loans provided to participators in private companies. There are also a large number of complex measures which may not pass into law before this Government runs out of Parliamentary time.

Business Tax

Capital Allowances

The maximum Annual Investment Allowance (AIA) available to each business or group of companies will double to £100,000 for expenditure incurred from 1 April 2010 (6 April 2010 for unincorporated businesses). The cost of all qualifying equipment (not cars or buildings), that falls within the AIA limit can be deducted in full from the business profits in the year the equipment is bought.

The AIA was introduced in April 2008 with a cap of £50,000, which was sufficient to cover the annual capital expenditure for about 90% of businesses. This increase in the AIA limit means the capital expenditure of about 99% of businesses will be covered by the AIA, and thus will be allowable in full when incurred. Any capital expenditure in excess of the AIA limit is taken into the relevant capital allowance pool where it receives tax relief at either 10% or 20% per year.

Partnerships where one or more of the partners is a company do not qualify for the AIA. Also a group of companies only qualifies for one AIA limit for the whole group.

Loans to Participators

This is bad news for private companies. It undermines an arrangement that is becoming popular in owner-managed companies; where the director takes a loan from his company to spread the taxation of that income into a future tax year. When the loan is written-off or released by the company, the director is taxed on the value of the loan as if it was a dividend. However, the Taxman may also insist that the company pays class 1NICs on the loan write-off where the loan may have been substituted for part of the director's remuneration.

Before today's Budget the company could claim a deduction in its accounts for the value of the loan written-off as well as any NICs paid on that amount. For loans written-off on or after 24 March 2010 the company will not be able to claim a deduction in its accounts for the value of the loan, which will make the whole exercise very expensive. This new rule applies where the loan is provided by a privately owned company to a participator of that company, which includes all shareholders, directors and loan creditors of the company and their associates.

Corporation Tax

The corporate tax rate for small profits remains frozen at 21% for the financial year that runs from 1 April 2010 to 31 March 2011 (2010/11). The small profits rate applies where a single company has profits of no more than £300,000. Companies with profits of £1.5 million or more pay corporation tax at 28%. Profits that fall in the band £300,000 to £1.5 million are taxed at a marginal rate of 29.75%. Companies with ring-fenced trades (basically those in the oil industry), pay corporation tax at 19% or 30% for the financial year 2010/11.

Where a company is part of a group or has associated companies the profit thresholds that determine where each tax rate applies are divided by the number of associated or group companies.

Business Rates

Businesses that occupy premises in England with rateable values of up to £6,000 per year will be able to claim full exemption from business rates for 12 months from 1 October 2010. In addition those businesses in properties with rateable values of up to £12,000 will be able to claim reductions in their business rates from that date. Different business rates relief schemes apply for properties in Wales and Scotland, but details of those schemes were not given in this Budget statement.

Individuals

Income Tax Allowances

All personal tax allowances have been frozen for 2010/11 at the 2009/10 levels as follows:

Under 65 - £6,475
65-74 - £9,490
75 and over - £9,640
Minimum marriage allowance* - £2,670
Marriage one partner born before 6 /4/1935* - £6,965
Blind person's allowance - £1,890
Income limit for allowances for those aged 65 or more £22,900
* given at 10% rate only

This freezing of allowances for everyone amounts to a hidden tax increase as the value of the allowance is reduced in real terms by inflation, which from the latest measure of the consumer prices index (CPI) is now 3%. Unfortunately the annual adjustment in allowances is based on a different measure of inflation: the Retail Price Index (RPI) as reported for the year to September which was a negative number: (-1.4), which has resulted in frozen personal allowances for 2010/11.

Another hidden tax rise lies in store for those with total income of £100,000 or more. From 6 April 2010 those individuals will lose £1 of their personal allowance, for every £2 of their total income that exceeds £100,000. This equates to a marginal tax rate of 60% on that slice of income.

Income Tax Rates

The tax thresholds for 2010/11 at which each tax rate is imposed have also been frozen at the 2009/10 levels. This also introduces a subtle tax increase for those people whose income has increased, if that increase takes their taxable income over one of the tax thresholds.

Savings rate* - 10% - £0 - £2,440
Basic rate - 20% - £0 - £37,400
Higher rate - 40% - £37,401 to £150,000
Additional rate - 50% - Over £150,000

* Only applies to savings income such as interest where earned income is covered by allowances or is also within this band.

The 50% tax rate only applies on income over £150,000, it does not replace the 40% tax rate.

Capital Gains Tax

The much anticipated increase in the rate of capital gains tax (CGT) did not emerge, the CGT rate remains at 18% for 2010/11. The CGT annual exemption is also frozen for 2010/11 at £10,100, with the exemption for trusts set at £5,050.

The good news for all ambitious business people is that entrepreneurs' relief is to be extended. Entrepreneurs' relief reduces the effective rate of CGT to 10% on gains arising on the disposal of businesses and certain business assets. Taxpayers are limited to claiming this relief on up to £1 million of gains made from 5 April 2008 to the end of their life. This lifetime limit is to be increased to £2 million for disposals made after 5 April 2010. No additional relief is given for gains realised before 6 April 2010 that exceed £1 million.

Inheritance Tax

The nil rate band for inheritance tax has been frozen at £325,000 for 4 years. Although widows and widowers can benefit from the transfer of any unused nil rate band from their deceased spouse or civil partner, this freezing of the IHT zero rate represents a hidden tax rise in real terms.

Savings Income

The tax-free ISA limits have already been increased for 2010/11 to £10,200, of which £5,100 can be saved in a cash form such as a bank savings account. These limits will now be increased by the rate of inflation (RPI measure) every year from 6 April 2011. If the RPI is negative the ISA limit will not be reduced. The amount that can be saved in a cash form will continue to be half the value of the full ISA limit for stocks and shares.

Pension Contributions

Special Annual Allowance Charge

Taxpayers with total income of over £150,000 will have to pay a special annual allowance charge (SAAC) of 20% to 30% of the irregular pension contributions they make that exceed £20,000, or in some cases £30,000, in 2009/10 or 2010/11. Irregular contributions are defined as those made less frequently than quarterly. The measure of income is the taxpayer's total income before deductions for the current tax year, or in either of the two preceding tax years.

Employees with total annual income before deductions of £130,000 or more can also be caught by the SAAC if the sum of their income plus value of the pension contributions made by their employer on their behalf totals £150,000 or more.

From 6 April 2011 tax relief on pension contributions will be tapered down to the basic rate of tax for those earning between £150,000 and £180,000 or more.

Annual Allowance Charge

Tax relief on pension contributions is capped at the lower of 100% of the taxpayers' relevant earnings, or the annual allowance. This annual allowance is to be frozen at £255,000 for the tax years 2010/11 to 2015/16. Where the pension contributions made exceed the annual allowance the taxpayer must pay an annual allowance charge (AAC) of 40% of the excess pension contribution. The SAAC and the AAC can apply on the same pension contributions, but the amount subject to the SAAC is reduced by the amount of contributions already subject to the AAC.

The detailed rules that govern exactly how these charges apply are very complex, so if your pension contributions or earnings are likely to break any of the thresholds mentioned please ask us for tailored advice.

New Obligations on Employers

In spite of these excessive tax charges on high pension contributions the Government wants all workers to be a member of a pension scheme. From a date to be announced in 2012, all employers will be required to ensure that their employees are members of a pension scheme. If the employee is not already a member of a registered pension scheme he will be automatically enrolled in the Government scheme known as the National Employment Savings Trust (NEST). The employer will be required to make contributions to NEST or the employee's registered pension scheme.

Stamp Duty Land Tax

One of the give-aways of this Budget is relief from Stamp Duty Land Tax (SDLT) due on buying residential properties that cost up to £250,000, where the property transaction is completed between 25 March 2010 and 25 March 2012. The issue is that this zero rate only applies to first-time buyers, and the relief will have to be claimed by those individuals, it will not be given automatically.

To help fund this tax relief an additional rate of SDLT is to be introduced at 5% on properties costing £1 million or more from 6 April 2011. So if you are planning to buy that million pound home, get on with it!

VAT

Rates

The rates of VAT have not been changed. The standard rate remains at 17.5%, the reduced rate is 5%.

Registration Threshold

The level of turnover that triggers a requirement to become a VAT registered trader within 30 days is to rise by £2,000 to £70,000 with effect from 1 April 2010. The turnover threshold below which traders can apply to become deregistered for VAT increases by £2,000 to £68,000 from the same date.

Postal Services

Certain commercial postal services provided by the Royal Mail and ParcelForce will become subject to standard rate VAT from 31 January 2011. Services provided to private individuals, such as stamped mail, will continue to be exempt from VAT.

Tax Avoidance

Off-shore Income

The Taxman has been gathering information about off-shore accounts held by British residents from banks based in the UK and in tax havens such as Liechtenstein. Now three further tax havens; Belize, Grenada and Dominica are about to sign information exchange deals with the UK.

Tax evaders with off-shore accounts were given until 12 March 2010 to come clean and declare all their off-shore income and gains to HMRC. If they persist in their tax evasion tactics after 1 April 2011 and hide money in a country that does not have an information exchange agreement with the UK, they will find themselves subject to penalties of up to 200% of the tax due. It will be up to 150% if it is a jurisdication that which has agreed to exchange information with the UK, but does not automatically share that. If the tax evaded is £25,000 or more, HMRC may publish the taxpayer's name and address as part of their name and shaming powers.

Security for PAYE

Currently the owners or directors of new businesses may be asked to provide a lump sum to HMRC as security before the business is permitted to become VAT registered. The Tax Office tends to demand such payments where the business owners have previously been involved in a business that failed owing VAT. From 6 April 2011 HMRC will also be able to ask for security payments from the business owners before the business is permitted to operate a PAYE scheme.

Newsletter issue - April 2010.

The taxable benefit charged for the use of company cars and fuel for those vehicles is increasing from 6 April 2010. Say you drive a petrol-powered car with CO2 emissions of 160g/km. In the tax year to 5 April 2010 you are taxed at 20% of the vehicle's list price. From 6 April 2010 the taxable benefit for driving the same car will be 21% of its list price.

The tax position for those who have free fuel with their vehicles is even worse. Until 5 April 2010, the value of the fuel-benefit for all company cars is based on a fixed value of £16,900 multiplied by the percentage used to calculate the car benefit. So there is the combined effect of the increased percentage and the increased multiplier. From 6 April 2010 this value increases to £18,000. This means the taxable benefit of having free fuel for a petrol car with emissions of 160g/km will increase from £3,380 to £3,780.

Company van drivers are also hit by the rise in the fuel benefit. Previously where free fuel was provided in a company van, and the van is used for some non-business journeys, the driver is taxed on £500 per year for the use of that fuel. From 6 April 2010 the van driver is taxed on £550 per year for use of the fuel.

You can reduce these high tax charges by switching to a low emissions car. Where the CO2 emissions are 120g/km or less the car benefit for petrol cars is just 10% of the list price, and half that amount where CO2 emissions are 75g/km or less. We could only find one car with emissions in that bottom category: Toyota plug-in Prius, which has an official CO2 emissions rating of only 67g/km.

If your vehicle has zero emissions such as an electric car or van, there is no tax charge at all from 6 April 2010. What's more, when your business buys a new electric vehicle it can write-off the full cost for tax purposes in the year of acquisition.

Newsletter issue - April 2010.

From 1 April 2010 most businesses will be required to file VAT returns online and also pay the VAT due online. However, existing businesses with a turnover of less than £100k can continue to file paper returns and pay by cheque.

From 1 April 2010 all VAT payments made by cheque will be treated as being paid on the day the cleared funds reach the Taxman's account. Previously the VAT was treated as being paid on the working day the cheque reached the VAT Office. A cheque will normally take at least three working days to clear. Where VAT payment is received late more than once in 12 months you may have to pay a default surcharge (a penalty).

The Taxman will exercise his discretion not to charge a default surcharge for VAT periods that commenced before 1 April 2010, where the paper VAT form and the cheque payment are both received on time. VAT cheque payments for periods that begin on and after 1 April 2010 will have to clear the Taxman's bank account by the due date, or surcharges may apply.

Where the VAT return is submitted online the payment for any VAT due must also be made online. However this can cause problems where the VAT due for the quarter exceeds £10,000.

Many banks impose a daily limit of £10,000 for electronic payments for both business and personal accounts. Larger electronic payments can be made by CHAPs but this may involve bank charges of up to £35 per transaction. You need to check with your bank in advance about the best way to pay a large VAT bill electronically.

If your business is not already VAT registered but your sales are edging up towards the VAT compulsory registration threshold, (£70,000 from 1 April 2010), you need to be particularly careful about when you register. From 1 April 2010 there is a new set of penalties for failing to register for VAT on time. The penalty is based on the underpaid VAT. The minimum penalty will be 10% of the VAT due, and the maximum penalty 100%. The highest penalty will be charged where there has been deliberate concealment of the need to register for VAT.

Newsletter issue - April 2010.

Business rates are a big fixed cost for many small businesses and it is not easy to move to smaller premises if your sales decline. What's more, the rateable value of commercial properties is revised every five years, normally upwards. The latest revaluation takes effect from 1 April 2010, but it is based on the market value of the property at 1 April 2008, when the value of all commercial property was at an all time high!

If you think you property has been valued too highly for business rates, you can appeal against the rateable value of the property. This can be done online through the website of the Valuation Office Agency (VOA): http://www.2010.voa.gov.uk/rli. However, before you decide to launch into an appeal you should check what your neighbouring businesses are paying, and whether they have already submitted an appeal against their premises value. You can also do that online on the VOA website.

You need to have good grounds for your appeal. For example, perhaps something in the property's immediate surroundings has altered and had a detrimental effect on trade. Perhaps there are a high number of empty neighbouring buildings, or there has been a change in the size or use of the premises. The VOA also encourages you to talk to your local valuation office before submitting a formal appeal against your business rates.

You can also apply for small business rates relief where the rateable value of the property is less than £18,000 (for properties in England). This normally needs to be done through your local rating authority. There are different small business rates relief schemes for properties in Wales and Scotland, which will have various caps for the relief available.

The Budget also announced a temporary increase in business rates relief for properties in England with rateable values of up to £6,000. Businesses occupying such properties can claim full exemption from business rates for 12 months from 1 October 2010. In addition businesses occupying English properties with rateable values of up to £12,000 will be able to claim a tapered reduction in their business rates from that date.

Newsletter issue - April 2010.

There are a host of new employment related regulations coming into force on 6 April 2010. This is a brief summary of those regulations that are likely to affect you or your business.

• Fit notes – these replace sick notes issued by GPs and will state what the worker can do, rather than what he or she is prevented from doing.
• Pension date - the date from which the individual can draw the state retirement pension will not necessarily fall exactly on a woman's 60th birthday. For example, a women who reaches age 60 between 6 April 2010 and 5 May 2010 will have a state pension date of 6 May 2010. This date also affects the payment of the employee's NI contributions.
• NI contribution years - individuals who reach state retirement age only have to accumulate 30 full years of NI contributions or credits to gain a full state pension.
• A single year of NI contributions will count towards the state pension. Until now a person had to accrue at least one quarter of their working life (about 11 years for a man, 10 for a woman) to be entitled to any state retirement pension. Each year of NI contributions will be worth roughly £3.20 of weekly pension at current rates. It will be essential to accurately record the NI number for every employee, so that each individual can collect their pension entitlement when they retire.
• Home responsibility protection credits (HRP) will be given on a weekly basis. This will allow the HRP credit to be combined with actual NI contributions to make up a full year of NI credits. HRP credits are given where a person stays at home to look after a child and claims child benefit.

Newsletter issue - April 2010.

Q. I was trying to sell my business before the new tax year, to avoid a potentially large tax bill from an increase in the rate of capital gains tax. I haven't been able to, so what's the position for the 2010/11 tax year.

A. The rate of capital gains tax (CGT) has been kept at 18% for 2010/11, so you have not lost out by delaying the sale into the 2010/11 tax year. In fact you may benefit from entrepreneurs' relief that applies to gains on the disposal of businesses, and reduces the effective rate of CGT down to 10%. The cap on this relief has been doubled to £2 million for gains made on and after 6 April 2010.

Q. I work as a consultant through my own company based in Surrey. I have just secured a contract in Manchester, which is expected to last eight months. Due to the distances involved I will need to stay in Manchester for at least four nights a week. If I rent a small flat, rather than stay in a Bed & Breakfast place, can my company reimburse all the expenses associated with the flat, such as cleaning costs and cooking utensils?

A. Your workplace in Manchester will qualify as a temporary workplace as the contract is expected to last for less than 24 months. Thus all reasonable travelling and accommodation expenses connected with that assignment can be reimbursed to you by your company. You should provide receipts for all the expenses, unless the amount is covered by a dispensation agreement your company has with the Tax Office, such as for mileage claims.

Q. My company has recently taken on an industrial unit that needs extensive fitting-out before it can be used by the business. How can I ensure that all the fittings I use will qualify for the maximum amount of capital allowances?

A. The cost of fittings that qualify as plant or integral features can be set against your company's Annual Investment Allowance (AIA), which will give 100% capital allowance in the year of acquisition. The AIA cap has been increased to £100,000 per year for expenditure incurred on and after 1 April 2010. Plant is broadly something that is not fixed permanently to the building, such as shelves or display units. Integral features are fixed to the building and fall into these five categories:

• Cold water systems (not hot)
• Electrical systems (including lighting)
• Space or water heating systems, including a powered system of ventilation, air cooling or air purification
• Lifts, escalators or moving walkways
• External solar shading

If the fitment does not qualify as plant or integral features it can qualify for 100% enhanced capital allowance (ECA) if it has energy or water saving qualities, and it has been included on the approved ECA list at www.eca.gov.uk.

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