December 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!

Newsletter issue - December 08.

This was a tax cutting mini-budget covering everything from Air Passenger Duty to UK REITS. However, there is plenty of warning of specific tax rises to come in future years - should this Government still be in power! We have pulled out the matters that are most pertinent for small businesses, but as with any Budget further details are likely to emerge in the next few days so please contract us if you have specific queries. Our December Newsletter will also expand on any emerging issues.

VAT

In order to boost consumer spending across all sectors the standard rate of VAT will fall from 17.5% to 15% for a limited period from 1 December 2008 to 31 December 2009, when it will return to 17.5%, as the Chancellor predicts that the recession will be almost over by then.

This is going to be a right royal pain for VAT registered businesses as you need to consider whether to, and how to pass on the VAT reduction. You do not have to change your VAT inclusive prices, but you must change your accounting system to record the correct standard rate of VAT as follows:

1. You must record the VAT due on all your sales at the correct rate from 1 December 2008. The zero and reduced rates have not changed. Only VAT at the standard rate has reduced to 15%, which amounts to 13.043% or 3/23 of the gross figure, whereas VAT at the old standard rate of 17.5% is 14.894% or 7/47 of the gross.

   Example
   A sale worth £470 including VAT at 17.5% on 28 November means you have collected VAT of £70 from the customer. The same sale of £470 made on 1 December including VAT at 15% means you have only collected VAT of £61.30, so you have kept an additional £8.70 profit from that sale.

2. Any invoices issued from 1 December 2008 must show the new standard rate of 15% for standard rated items. However, if your invoice is for something that was completely delivered before 18 November 2008, or you were actually paid for the complete sale before 1 December 2008, you should use the old standard rate of 17.5%.
3. If you have the sort of business that receives stage payments for long contracts, such as in the construction industry, there are special rules to consider. The relevant date for VAT is normally when you issue a VAT invoice or receive a stage payment. So any invoices issued for stage payments received on or after 1 December 2008 must have VAT accounted for at 15%, even if some of the work was performed before 1 December.
4. If you use the flat rate scheme for small businesses you need to look up the new flat rate for your business sector in appendix E of the detailed VAT guide on the HMRC website at http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. Most, but not all of these flat rates have changed from 1 December 2008 and you must apply the new rate to your VAT inclusive sales if you want to stay in the flat rate scheme. We can help you calculate whether you should stay in the scheme with your new flat rate.
5. If you use the cash accounting scheme you need to be particularly careful about recording exactly when the sale was made and the invoice was issued. This is because you need to pay over VAT of 17.5% for sales made before 1 December 2008 even if you receive the payment on or after 1 December 2008.

Please ask us to run through the VAT rules in relation to your particular business. Remember this VAT change is only temporary, so all your systems will have to be changed again on New Years Eve in 2009 before the standard rate of VAT increases from 15% to 17.5% on 1 January 2010.

Small Business

Losses

To help smaller businesses survive the recession the normal one year carry back rule for trading losses is going to be extended to three years, but only for a limited period. When a loss is carried back from the current year (year 0) to year -1, and cancels out the profits in year -1, the tax paid for year -1 can be reclaimed. This provides an immediate cash-flow boost for the loss making business.

The rules will be different for companies and for unincorporated businesses such as sole-traders. In both cases the amount of loss carried back to year -1 will be unlimited as now, but the total loss which can be carried back to years -2 and -3 cannot exceed £50,000. Losses not used against profits in earlier years will be carried forward, assuming the business continues to trade.

• Companies. Where a loss is made in an accounting period that ends between 24 November 2008 and 23 November 2009, that loss may be carried back up to three years, subject to the £50,000 cap. Where the loss-making period is less than 12 months the £50,000 cap is reduced proportionately. The rules for surrendering a loss to another group company will not be changed.

• Unincorporated businesses. If you trade as a partnership or sole-trader you are taxed on the profits you make in the accounting period that ends in the relevant tax year. For example the profits or loss for the year to 31 March 2009 are taxed or relieved in the 2008/09 tax year that ends on 5 April 2009.

  In order to claim the extended three year carry back of losses you must have a loss for the accounting period that is taxed in 2008/09. Young businesses in the first four years of trading already get a three year carry back of losses, so this extended loss relief is targeted at established businesses.

  If you made a small profit in the year to 30 April 2008, taxed in 2008/09, but a large loss in year to 30 April 2009, taxed in 2009/10 you will not get the three year carry back. Because the loss has fallen into the 'wrong' taxed year: 2009/10 instead of 2008/09 it can only be carried back for one year instead of three years. In this situation you could change your year end to 31 March 2009 to capture the loss early and take advantage of the three year carry back.

Corporation Tax

Two years ago the rates of corporation tax for companies with 'small' profits were set to rise on 1 April 2008 to 21% then on 1 April 2009 to 22%. The Chancellor has now decided to postpone the second of those increases to 1 April 2010.

Small' profits are those that fall below the small company rate threshold of £300,000. This threshold is proportionately reduced by the number of companies associated with the main company. An associated company can be one run by your spouse or civil partner, or another company over which you have control.

Income Shifting

Last year the Government threatened to bring in legislation to tackle the problem of couples sharing business income to save a bit of tax. This was going to happen from April 2008, but was postponed until April 2009. It has now been put back on the 'too difficult pile' until at least the recession is over. So there are no immediate changes for family businesses.

Personal Tax

Income tax

The rates and thresholds of income tax have been set for 2009/10 as follows:

However, an additional higher tax rate of 45% is promised from 6 April 2011 for those with total income above £150,000. These individuals will also lose the benefit of the personal allowance (see below). The rates paid by Trusts will also increase to 37.5% for dividends and 45% for other income from 6 April 2011.

Personal Allowances

In May 2008 the Chancellor increased the basic personal allowance to compensate lower earners for the loss of the 10% tax band. This increase is carried forward into 2009/10 as follows:

There is a cap on the benefit of the personal allowances given to those aged over 64 where their income exceeds the income limit given in the table above. A similar mechanism of reducing the benefit of the personal allowance is proposed for those with total income over the thresholds of £100,000 and £140,000 in 2010/11 and beyond.

Pension Contributions

The lifetime and annual allowance for pension contributions were set for the five years from 2006/07 to 2010/11. These allowances will now be frozen at the 2010/11 rates until at least 2015/16, which will restrict the tax relief available to very high earners:

• Life time allowance: £1.8 million
• Annual allowance: £255,000

National Insurance

There is no immediate change in the main rates of class 1 employers and employees national insurance from 6 April 2009. However, a large rise in class 1 national insurance is proposed from 6 April 2011 to 11.5% for employees, to 13.3% for employers, and the additional rate payable above the upper limit is to increase from 1% to 1.5%. This would bring in a significant amount of additional revenue for the Government beyond 2011.

Class 3 national insurance is a voluntary class normally paid by people who want to top up their NI contributions in order to receive the full state pension. This voluntary rate is increasing from £8.10 per week to £12.05 per week from 6 April 2009. So if you need to top-up your NI contributions it would be best to do this while the rate remains at £8.10 per week.

Other Taxes

Business Rates

From 1 April 2008 most empty business properties became liable to business rates, when previously empty properties were exempt from rates. After much protest, and a number of instances where properties were demolished, the exemption from business rates is to be applied to all properties with a rateable value of less than £15,000 for the tax year 2009/10 only.

Car tax (vehicle excise duty)

There was a lot of fuss after the Budget in March 2008 over the proposed increases in car tax (VED) for older cars registered after 1 March 2001. These increases in VED have now been scaled back to £5 per car per year for most cars for 2009/10, but larger increases will apply for new polluting cars.

Excise Duties

Just to prove this was a real Budget the duties on tobacco and cigarettes increased from 6pm on 24 November 2008. Duties on wine and sprites go up from 1 December 2008. To compensate for the reduction in VAT, fuel duties are also to increase from 1 December 2008 and then again on 1 April 2009!

Newsletter issue - December 08.

The Pre-Budget Report has clarified the future tax relief available on the purchase of cars and motorcycles.

Cars purchased by companies from 1 April 2009 (and by unincorporated business from 6 April 2009) will attract tax relief depending on the vehicle's CO2 emissions:

• Up to 110g/km - 100% allowance in year of purchase
• Up to 160g/km - 20% deduction per year
• Over 160g/km - 10% deduction per year

Under this system it will take longer to achieve full tax relief for the cost of a car, particularly for the higher polluting vehicles. When a post March 09 car is sold the balance of the unclaimed cost remains in the pool of business equipment to be deducted at the normal rate of 10% or 20%. So full tax relief is not given even though the car is no longer owned.

Currently, on the disposal of a car that cost over £12,000 the unrelieved purchase cost is claimed as a balancing allowance. Cars that are acquired before 1 April 09 will continue to attract a balancing allowance on sale for a transitional period of five years. After 31 March 2014 all pre-April 09 cars will be added into the relevant pool for business assets. Therefore, if looking at purchasing this type of car, it could be advantageous to purchase before April.

Cars used by partnerships and sole-traders will attract tax relief at the same rates as for company owned cars. However, a balancing allowance will still be available on sale where the car has been used privately by the business owner. So ensuring some private usage may be beneficial.

From April 2009 all motorcycles purchased by businesses will qualify for the Annual Investment Allowance, which will normally give 100% deduction in the year of purchase.

Newsletter issue - December 08.

Are you missing out on a reduction in your business rates? The small business rate relief scheme (SBRR) can reduce your business rates by over 50% if your building has a rateable value of less than £5,000. The SBRR provides smaller discounts in business rates for properties with rateable values of up to £15,000, or £21,500 in Greater London.

Business rates are collected by local authorities, but the amount due is set nationally using a standard multiplier for all commercial properties. This multiplier is 46.2p in England for the tax year 2008/09. Scotland and Wales set separate multipliers and have slightly different versions of the SBRR that give different reductions. The Northern Irish Assembly still operates the pre-1990 old rates system for all domestic and business properties.

SBRR applies a lower multiplier (45.8p for 2008/09) to businesses that qualify and gives additional reductions as shown below:

Example
A business using a property with rateable value of £6,000 would pay £2,772 in business rates at the full rate of 46.2p for 2008/09. If it successfully applied to use the SBRR it would pay £6,000 x 45.8p = £2,748 x 60% = £1,648.80. That's a reduction of 41% from the original bill of £2,772.

The catch is you have to apply to use the SBRR from the billing authority that collects your business rates. You can now make one application to cover all the years from 2007/08 to 2009/10, and reclaim any excessive business rates paid for those earlier years. Contact your billing authority for their claim form. Each authority has a different form, but some authorities have not updated their information to show the extended deadline for claims, which is now 30 September 2010 for the current valuation period.

Newsletter issue - December 08.

The recent downturn in world stock markets has reduced the value of many pension funds. If you are nearing your expected retirement date you may well want to boost the value of your pension fund for it to have sufficient future income to pay out the required level of pension.

One way to boost your pension fund is to liquidate some of your personal investments and pay the proceeds into your pension scheme. If your investments are worth less than their cost price you will make a loss on the sale, but this loss will be available for you to use in the future to reduce the taxable amount of your future capital gains. If you make a gain on selling your investments that gain will be taxable, but you can set your annual exemption of £9,600 against your total of your gains before the balance is subject to capital gains tax at 18%. The contribution you make into your pension fund will also attract tax relief at your highest rate of tax. If you pay tax at 40%, half of the tax relief is reclaimed by the pension fund and the remaining 20% by you. This tax relief could help you recoup the losses on your investments.

If you have a self invested pension scheme (SIPP) you can transfer your investments directly into the pension fund, with the agreement of the fund administrators. This sort of contribution is called an in-specie contribution. The transfer to the SIPP is still treated as a disposal by you at market value, so a gain could arise although you will have no actual proceeds. If the gain is less than your annual exemption no capital gains tax will be payable. The advantage of transferring investments to your SIPP is that you can claim tax relief at 20% on the market value of the assets transferred, and the investment remains under your control in your SIPP.

The following types of investments may be transferred as in-specie contributions into a pension fund:

• Commercial property in the UK or located overseas;
• Hotels, guest houses and nursing homes;
• Riding stables and golf courses;
• Forestry, woodland and agricultural land;
• Non-income producing land;
• Shares in unrelated companies, including;
  • VCT shares
  • EIS shares
  • Shares acquired from employee share schemes
  • Shares in Real Estate Investment Trusts (REITS)

The shares do not have to be quoted on a stock market, but unquoted shares must be valued on a fair market basis before the transfer. Some of the above investments may be held by your own company, in which case the company could make an in-specie pension contribution as your employer.

The value of the total contribution should not exceed the tax free annual allowance for the year, which is currently £235,000. Please seek advice before making a transfer of any investment, as there are detailed regulations to abide by in each case.

Newsletter issue - December 08.

Some of the rules and forms for statutory sick pay have changed recently, so make sure you have the right forms to hand when the winter flu hits your office.

Most employees qualify for SSP from day one of their employment, if they are paid above the lower earnings limit for national insurance (currently £90 per week). If they qualify the employer should pay them SSP, or an equivalent amount from the company's own sick pay scheme, from the fourth day of sickness. Note that all agency workers now qualify for SSP on the same basis as other employees, even if their contract is for less than three months. This change was brought in on 27 October 2008.

The employee is entitled to receive SSP for 28 weeks, where they are still sick throughout that period. If at the end of that period the employee is still unable to work he moves onto State benefits. A revised SSP1 form has been introduced because of the change in structure of the State provided sickness benefit, which is now called Employment and Support Allowance (ESA). To tell the employee he is no longer entitled to SSP the employer must complete the new form SSP1 and send it to the employee. The new version of this form can be downloaded form the Department of work and pension website at http://www.dwp.gov.uk/lifeevent/benefits/ssp1_08_print.pdf and it must be used where the SSP entitlement runs out from 27 October 2008.

Newsletter issue - December 08.

Q. I see that the Chancellor has postponed bringing in a new law to tax family companies who share business profits between spouses, the so-called income shifting rules. I'm an IT contractor starting a new company through which I will provide my services. In light of this would you advise me to issue shares to my wife on the formation of the company to help avoid higher rate tax in the future?

A. The proposed income shifting rules were to supplement the existing settlement rules that tax the artificial transfer of income between spouses. If your spouse holds shares and receives dividends from your new company you may avoid higher rate tax, but you must also avoid being caught by the settlement rules. To do this give your spouse ordinary shares which have full voting rights, which you have subscribed for yourself. It is good practice for your spouse to also be a director of the company and take part in all major decisions, such as who to bank with, and when dividends should be issued. Whilst the Chancellor has said income shifting rules will not be introduced in the Finance Act 2009, there is no guarantee that the law will not be changed the following year as the Chancellor has said it will be kept under review in the most tax efficient manner. However, for now it does work. Please note this advice is on the assumption you are not caught by the IR35 service company rules.

Q. My son built and maintained a few websites on behalf of local businesses. Before he started his university course in October he transferred the code and customer details to an established website creation company for £18,000. How should this money be taxed?

A. It seems your son has a bright future as an entrepreneur. The sum he received is a capital payment for selling his first business and it is taxed as a capital gain. The full gain of £18,000 (assuming no costs) should qualify for entrepreneurs' relief, which will reduce it by 4/9ths, leaving £10,000. From this sum he can deduct his annual capital gains exemption of £9,600 leaving just £400 taxable at 18%, producing a tax liability of just £72. He should declare the gain on the capital gains tax pages of his 2008/09 tax return.

Q. We raised some sales invoices in November 2008 with VAT charged at 17.5%, for services to be delivered in December 2008. The invoices have already been paid. Do we have to take any action now because of the decrease in the standard VAT rate to 15% from 1 December 2008?

A. You don't have to make any adjustment to your invoices if you don't want to, as the VAT was correctly accounted for in November. However, you may issue a credit note if you wish to amend the original invoices to show services supplied in December at 15% VAT. This will only be worthwhile where your customers are unable to reclaim the full amount of the VAT charged.

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