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!

SUMMARY

There was good news and bad news for small businesses in this Pre Budget Report.

The good news is the freezing of the corporation and income tax rates other than the promised 50% rate of income tax which will be introduced for income over £150,000 and personal allowances are also frozen at the 2009/10 levels.

The bad news will come from April 2011 when NI rates are set to surge upwards. Corporation tax may also increase in this month. Businesses with empty commercial properties may qualify for an exemption from business rates but only until 31 March 2011. There are further anti-avoidance rules to prevent high earners from gaining top level tax relief on pension contributions. Tax incentives are introduced to encourage you to buy electric cars and vans, but just how many milk-floats do you need?

CORPORATION TAX

Corporation tax for companies with 'small' profits was set to rise on 1 April 2010 to 22%, a rise originally planned to apply from 1 April 2009. However, the Chancellor has decided to postpone this increase for a second time. The corporate tax rate for companies with 'small' profits will now remain at 21% until at least 1 April 2011.

'Small' profits are those that fall below the single company threshold of £300,000. Companies with profits of £1.5 million or more pay corporation tax at 28%. Profits that fall in the range £300,000 to £1.5 million are taxed at a marginal rate of 29.75%

These profit thresholds are proportionately reduced by the total number of companies associated with the main company. An associated company is any company that is under the common control of an individual, group of related individuals or another company. Thus if you control two companies those companies are associated and only the first £150,000 (£300,000/2) of the annual profits of each company will be taxed at 21%.

Currently any companies controlled by your spouse or civil partner are also associated with your own company, even if your spouse's company has no commercial links to your own company. This associated rule is under review by the Taxman so it may be relaxed from April 2010 where the companies have no commercial links.

VAT

As previously announced the standard rate of VAT will increase from 15% to 17.5% on 1 January 2010. The Chancellor emphasised that he has no plans to make further changes to VAT, so we can be fairly certain that the VAT rates will remain as they are, at least until after the election.

The Taxman is aware that some businesses, particularly entertainment venues and pubs, will be trading at midnight on 31 December 2009 when the standard rate of VAT changes. By concession those businesses can treat their standard rated sales made before they close before 6am on 1 January as chargeable to VAT at the 15% rate. This concession does not apply to online retailers or to catalogue companies.

If your business is registered to use the flat rate scheme for small businesses, the flat rate used to determine how much VAT to pay to the Taxman will also change with effect from 1 January 2010. The new flat rates for each business sector are found in the Pre Budget Report Press Notice no. 33 on the HMRC website at http://www.hmrc.gov.uk/pbr2009/pbrn33.htm

Most, but not all, of these flat rates have reverted to the rates that applied before 1 December 2008. However, some rates have been increased by a greater amount to reduce the gain some businesses make by using the flat rate scheme. You may find that the new flat rate for your business sector does not produce the savings for your business as it did previously. If so you can leave the flat rate scheme at any time. We can help you calculate whether it is beneficial for you to stay in the flat rate scheme or not.

NATIONAL INSURANCE

There is no immediate change in the main rates of class 1 employers and employees NI from 6 April 2010. From 6 April 2011 a 0.5 per cent rise was planned but this has been increased to 1% for most rates of NI as shown below.

• Employer's class 1 above primary threshold 2009/10 - 12.8% : 2011/12 - 13.8%
• Employer's class 1A and 1B 2009/10 - 12.8% : 2011/12 - 13.8%
• Employee's class 1 below up earnings threshold 2009/10 - 11% : 2011/12 - 12%
• Employee's class 1 above upper earnings threshold 2009/10 - 1% : 2011/12 - 2%
• Self-employed class 4 between lower and upper profits thresholds 2009/10 - 8%: 2011/12 - 9%

There is also likely to be increases in the reduced rates of NI for contracted out contributions for both employers and employees, but those rates have not been confirmed as yet.

This increase in NI rates is double the increase announced in the 2008 Pre Budget Report. It amounts to a 7.8% rise in NI costs for employers in respect of the wages of every person employed. Employees will also suffer a 9% to 10% increase in NI charges, and the self-employed will be paying at least 12.5% more in NICs in 2011/12.

There will be an increase in the point at which individuals start to pay NI, meaning that people with an income below £20,000 will be protected from this change.

These NIC increases will bring in a significant amount of additional revenue for the Government from April 2011.

PROPERTY

Business Rates

From 1 April 2008 most vacant business properties became liable to business rates, when previously such properties were exempt from rates. In last year's Pre Budget report the Chancellor announced an exemption from business rates for empty properties which had a rateable value of less than £15,000, but only for the 2009/10 financial year.

This exemption is now to be extended for the year to 31 March 2011, and expanded to cover empty properties with a rateable value of less than £18,000. The higher threshold reflects the increase in rateable values following the business rates revaluation that comes into effect from 1 April 2010.

Furnished Holiday Lettings

The favourable tax concessions for the commercial letting of furnished holiday lets will be removed with effect from 6 April 2010 for unincorporated businesses and from 1 April 2010 for companies. Hoteliers and bed and breakfast proprietors are not affected by these changes.

• Losses - future profits and losses from furnished holiday lettings will be treated as income from a property business, and thus relief for losses will be available only against the property lettings business. Any current losses from the furnished holiday lettings, which have not been used before April 2010, will be carried forward to be set against the future property lettings business.
• Pensionable income - from 6 April 2010 income from a furnished holiday lettings business will not count as pensionable income, which may reduce the amount of pension contributions available for tax relief in any tax year.
• CGT - the capital gains reliefs associated with disposing of a property used in a commercial furnished holiday letting business will cease to apply for disposals made after 5 April 2010. However entrepreneurs' relief will apply to disposals after 5 April 2010 of FHL property, but only if the disposal is made within three years of the deemed disposal date on 5/4/2010.

Stamp Duty

A stamp duty 'holiday' was announced for residential property in September 2008, which effectively raised the lower threshold property values where SDLT is imposed at 1%, from £125,000 to £175,000. This lower threshold will revert to £125,000 on 1 January 2010. Where the residential property is located in a disadvantaged area the threshold from which the 1% rate of SDLT is imposed is £150,000.

SDLT is normally imposed at the completion date for the property sale, not the date on which contracts are exchanged. If the buyer takes possession of the property before the completion date, SDLT is charged on that earlier date. To take advantage of the zero rate of SDLT on a property costing no more than £175,000 you need to complete or take possession of the property before 1 January 2010.

CGT on Homes

Some commentators expected the rules that exempt one's 'main home' from capital gains tax on sale would be tightened up. This has not happened. Instead there is a relaxation of the rules where part of the home is occupied exclusively by an adult in care, and the owner of the property is paid to care for that adult. In such cases the whole of the property will qualify for exemption from capital gains tax.

INDIVIDUALS

Income Tax

All the income tax rates and thresholds will be frozen from 6 April 2010, with the exception of the 50% rate of income tax that will apply on income above £150,000.

2010/11 Income Tax Rates

• Savings rate (on savings income only) 10% for £0 - £2,440
• Basic rate 20% for £0 - £37,400
• Higher rate 40% for £37,401 to £150,000
• Additional rate 50% for over £150,000

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

Personal allowances: 2010/11

• Under 65 - £6,475
• 65-74- £9,490
• 75 and over - £9,640
• Minimum marriage allowance* - £2,670
• Marriage allowance born before 6 /4/1935* - £6,965
• Blind persons allowance - £1,890
• Income limit for age allowances - £22,900

* given at 10% rate only

Tax Relief for Pensions

Some incredibly complex rules were brought in from 22 April 2009 to discourage those with incomes above £150,000 from piling money into their pension schemes. This was because tax relief on pension contributions will be reduced for these high earners from 6 April 2011.

Many people with earnings around the £150,000 mark thought up cunning plans to reduce their taxable income to just below £150,000, so they wouldn't be caught by the restrictions on tax relief for pensions. In response to this planning the Government has changed the rules, by stating that anyone with income above £130,000 will be caught by the pension relief restrictions with immediate effect.

Inheritance Tax

Although the value of an estate that is exempt from inheritance tax was set at £350,000 with effect from 6 April 2010, this exempt threshold is to be frozen at the current level of £325,000. The justification for this freeze is that property prices have not increased over the last year.

COMPANY CARS AND VANS

Electric cars are cool! Or so the Government would like us to believe. From 6 April 2010 if you provide your employee with an electric car or van for their own use, it will be a tax free benefit. What's more when your company buys a new electric van from 1 April 2010 it will be able to write-off the full cost for tax purposes in the year of acquisition. This tax treatment already applies to all new low emission and electric cars. These new tax incentives only apply to fully electric vehicles, hybrids don't count.

The taxable benefit charged for the use of ordinary company cars and vans, and fuel for those vehicles, is set to increase from 6 April 2010. For example the driver of a car with CO2 emissions of 160g/km is currently taxed at 20% of the vehicle's list price. From 6 April 2010 the driver of the same car will be taxed at 21% of its list price. Currently the fuel benefit for that vehicle is based on a fixed value of £16,900, From 6 April 2010 this value will increase to £18,000. Hence the taxable benefit of having free fuel for the car will increase from £3,380 to £3,780.

The taxable benefit charged when fuel is provided for private use in a company van will increase from 6 April 2010 from £500 per year to £550 per year.

Newsletter issue - December 2009.

Many firms are foregoing expensive Christmas parties this year and as an alternative are giving small seasonal gifts to staff and customers. But before you break open the hampers consider what may be allowable for income or corporation tax purposes, and what VAT you can reclaim.

• Gifts to customers of the products or services you normally sell are tax allowable, as long as you are not in the food business.
• Small promotional gifts of any item are also treated as tax allowable for your business if they cost less than £50 each and carry a clear advertisement for the business. However, you cannot get income tax or corporation tax relief for the cost of gifts of food, drink, tobacco and gift tokens of any value.
• A number of gifts worth more than £50 in total should not be made to the same person in any 12-month period.
• If you are VAT registered you can reclaim the VAT on small gifts that cost up to £50 each, including gifts comprising of tobacco and alcohol.
• If the gift cost more than £50 (net of VAT) you must account for the VAT on the item as if you had sold it at cost.

Gifts to your staff are tax allowable, but your employees could be taxed on the value of the gift as a benefit in kind. In that case you would also have to pay Class 1A NI on the value of those gifts. The Taxman does consider some small items to be trivial benefits, which can be given as tax-free gifts to staff members. Trivial items can include seasonal gifts such as a turkey, an ordinary bottle of plonk (not fine vintage or champagne), or a box of chocolates.

Where you are considering making larger gifts to each employee such as a Christmas hamper, you can include the cost of those gifts in a PAYE Settlement Agreement (PSA) with the tax office. The PSA allows you pay the tax and NI due on behalf of your employees.

Newsletter issue - December 2009.

The standard rate of VAT is due to rise from 15% to 17.5% on 1 January 2010. This small rise in VAT may encourage people to make large value purchases in December 2009 rather than in January 2010, but there are other ways to take advantage of the lower VAT rate.

Where services or goods are invoiced for in advance, the VAT rate applies according to the date of the invoice. Say an organisation normally raises invoices for its annual membership fees on 2 January each year. If the 2010 membership invoices are raised on 1 December 2009 the members don't have the VAT increase and the organisation would receive at least some of its membership income earlier.

The VAT rate to be applied to a sale normally depends on the tax point for that transaction. This tax point is usually when the customer receives the goods or services. However, that tax point is superseded by an earlier date if the money is received before the supply of goods or services, or by the invoice date if that invoice is raised within 14 days of the goods or services being supplied.

When the VAT rate changes in the middle of these dates, you can choose whether to apply VAT at the date when the goods were supplied, or the date the invoice is raised. If you supply goods on say 24 December 2009, but raise the invoice on 4 January 2010, you have the option of charging 17.5% VAT rate based on the invoice date of 4 January 2010, or 15% VAT based on the date the goods were physically supplied.

Where you are supplying a service over a period that straddles the VAT increase, the VAT man will, by concession, allow you to charge VAT at 15% for the portion of the work done before 1 January 2010 and 17.5% VAT for work done on or after that date. Alternatively you can apply the usual rules and charge VAT according to the date the invoice is raised, or the payment is received, whichever happens first.

There are tax-avoidance rules which will add an extra 2.5% supplementary VAT charge where the value of the sale (and connected sales) total more than £100,000, or the customer and supplier are connected, or the payment is due more than six months after the date of the invoice. Talk to us if your sales are likely to fall into any of these categories.

Newsletter issue - December 2009.

Certain MPs got into hot water recently for including the cost of preparing their personal tax returns in their expense claims. Employees and company directors, including MPs, are not permitted to claim the cost of personal tax advice, or the cost of preparing their personal tax return as a deduction from their taxable income. If those costs are born by their employer, the cost should be treated as a benefit in kind, reported on the form P11D and taxed accordingly.

Where an individual runs his own business as a sole-trader, his personal tax return must include details of the turnover, expenses and profits of his business. The cost of preparing and completing that part of the tax return is tax allowable as that cost relates to the business and not to the individual's personal affairs. Where the remainder of the personal tax return requires little effort to complete the Taxman will, by concession, allow the whole of the cost of preparing the sole-trader's tax return to be treated as a tax allowable business cost.

Newsletter issue - December 2009.

One of the easiest ways to step into the world of business is to acquire the right to operate a franchise. To do this the franchisor, (the person providing the franchise), and the franchisee (the person who is to run the franchised business), will sign a franchise agreement.

A typical franchise agreement will cover various matters each with different tax effects such as:

• the right to operate the franchise for a period, often at specified premises or within a defined geographical area;
• initial services, such as advice on site selection and staff recruitment, training and assistance with the management of the unit;
• ongoing services including marketing, advertising, updating of the franchise and provision of stock and plant.

The grant of the right to operate the franchise and the provision of initial services will normally be covered by a lump sum payment from the franchisee. Ongoing services will be charged for by means of a periodic fee, paid monthly or weekly. Stock and plant items will usually be charged for as required by the franchisee.

The Taxman views the right to operate the franchise as an intangible capital asset. Where the franchisee is a company it can claim the cost of this intangible asset in its accounts, spread over an appropriate period. However, a franchise business operated as a sole trader or partnership will NOT generally get a tax deduction for the cost of an intangible asset. However, where the intangible asset includes know-how relating to industrial processes, mining, agricultural or forestry, the payment can qualify for capital allowances. Both incorporated and unincorporated businesses can claim capital allowances covering the cost of industrial know-how.

Amounts paid for on-going services will be treated as operating costs of the franchise business, and will be tax allowable in all cases. Items of plant will normally qualify for capital allowances, which will give a 100% allowance for the first £50,000 of plant purchased each year.

The tax treatment of the sums payable by the franchisee and received by the franchisor will not necessarily mirror each other. Similar items may also attract different tax treatment under different franchise agreements, it largely depends on the individual circumstances of the deal. In all cases the amounts paid need to be allocated against the different goods, services, and rights provided for under the franchise agreement to determine the correct tax treatment.

If you are looking at a franchise we can advise you on the tax consequences of the deal you are looking at and perhaps how to restructure matters to your maximum advantage.

Newsletter issue - December 2009.

Q. I have acquired a personalised number plate that spells out the name of my business. Can I put it on my business vehicle and claim tax relief for the cost?

A. The Taxman views the cost of a personalised number-plate, over and above what you have to pay to register the car, as an intangible capital asset. Companies can claim a deduction in their accounts for intangible assets acquired since 1 April 2002, but unincorporated businesses cannot. If your business is a company it can write-off the cost of the number plate over a reasonable period, which the Taxman will normally accept to be up to 20 years. If you trade in your own name or as a partnership, your business cannot claim a deduction for the cost, as the number plate does not qualify for capital allowances.

Q. My employer has just paid me a substantial sum described as 'damages' to compensate me for an injury I received at work. Will this payment be taxable?

A. Any payment to compensate for personal injury is not taxable. This applies whether the compensation is paid in one lump sum or as a series of periodic payments. Interest paid as part of the damages award is also tax free but interest paid because of the late payment of the award will be taxable.

Q. Can I set-off the losses from my sole-trader business against my employed income for the year?

A. Yes you can set the losses from your sole-trader business against your earnings from your employment in the same tax year, or in the previous tax year. If you started your sole trader business in the last four years, you can set-off the loss against your other income from the previous three tax years. However, the Taxman will need to be convinced that your sole-trader business is a real commercial business and not just a personal interest that you don't expect to generate a profit from. You will need to submit a personal tax return showing the business turnover, expenses and resulting loss. If your business turnover for tax year 2008/09 is £30,000 or more you will need to provide details on your tax return of the various categories of tax allowable expenses.

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