March 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 - March 07.

With the tax year end approaching on 5th April we thought we'd remind you of some of the key planning opportunities available now. After 5th April, it's usually too late...

• Use up your ISA annual investment allowance of £7000 for tax free investing.
• For Buy to Let properties, if repairs are needed, do them now to bring forward the relief by a year.
• Use up your capital gains annual exemption by realising investments to use it up. Transfers between spouses are tax free and if planned properly can result in use of two annual exemptions.
• Make pension contributions to get tax relief of up to 40%. Even pension contributions for your children of £3600 (gross) can me made which will only cost you £2808.
• Realise capital losses by selling the investment to cover any capital gains above your annual exemption limit. Some can even be set against income. It could be bought back by yourself if you wait 30 days or perhaps use an alternative vehicle to buy it back immediately.
• Consider other investment based tax reliefs such as the Enterprise Investment Scheme and Venture Capital Trusts which can give substantial amounts of tax relief.
• Employees should consider repaying the cost of private fuel if it is less than the tax cost of the benefit in kind.
• Look at paying bonuses prior to 6th April to avoid potential NI increases in the budget.
• Make gifts to use up your IHT annual exemption of £3000.
• Ensure you use up your personal allowance and basic rate tax bands. One way is to vote company dividends as necessary.
• For traders with 31st March year ends, invest in vehicles and plant and machinery now rather than later to accelerate capital allowances.

For a tax review appropriate to your own circumstances and advice on these and other year end planning opportunities, please contact us.

Newsletter issue - March 07.

There are some significant tax advantages to investing in woodlands including...

• Income Tax - there is no income tax payable on woodlands. Relief for losses incurred and any interest paid in the initial planting period is not available but as and when profits arise, they are not taxable. Forestry grants are not taxable but annual grants under the Farm Woodland Premium Scheme are.
• Capital Gains Tax - there is no CGT on trees that are standing or felled but the land is a chargeable asset for CGT purposes. However, various reliefs from this are available, including rollover relief and business assets rates of taper relief if the woodlands operation is a trade.
• Inheritance Tax - if the woodlands are managed on a commercial basis, even with there being no income tax, they qualify for 100% Business Property Relief as long as they have been owned for 2 years, meaning that no Inheritance Tax is payable on the woodlands investment. This covers both the timber and the land.
• VAT - if sales reach the registration limit it is necessary to register for VAT, although registration can also be made on a voluntarily basis before then so that VAT on business expenditure is reclaimable.

To benefit from these incentives it is NOT actually necessary to plant the trees yourself and wait for them to grow! Woodlands of all ages can be bought and sold on the open market and various woodland management companies and investment schemes exist. Government Grants are also available.

Newsletter issue - March 07.

The long awaited new rules for the Construction Industry are now nearly here and all Contractors and Sub Contractors need to be familiar with them. There's more responsibility, more administration and more risk of being attacked by the Taxman.

Under the new scheme...

• Cards and certificates are being replaced by a 'verification' service to confirm whether subcontractors should be paid gross or net. Where paid net, the rate of deduction is increasing from 18% to 20%. For any workers who are unregistered, there is a new higher rate of deduction of 30%, so it's important for all Sub Contractors to get themselves registered. With the influx of foreign workers, there are now CIS factsheets available from HRMC in twelve other languages which may be useful to provide to the relevant Sub Contractors.
• Instead of issuing vouchers, contractors will make monthly returns and issue pay statements.
• The monthly return will include a declaration that the contractor has considered the status of the workers on the return and that none of them is an employee.

It is Contractors who will face the big changes, with even more emphasis on getting the employment status of their workers correct. Having to reclassify workers will be very expensive in terms of National Insurance and other employee rights such as holiday pay. Subcontractors who want to remain self-employed would do well to consider what they can do to help maintain this status and we can help advise on what is necessary.

The new CIS scheme brings with it a wide range of penalties for non-compliance, especially in relation to getting returns in on time and wrong.

New CIS software is also now on the market to assist with the increased administration and we can advise on this.

Guidance on the operation of the scheme is available at http://www.hmrc.gov.uk/new-cis/new_guidance.htm but please contact us for more practical advice and assistance in your own circumstances.

Newsletter issue - March 07.

Like many other Email scams there is now one doing the rounds where an Email purports to come from HMRC, asking the taxpayer for their bank details to allow a large tax repayment to be made. We've never known the Taxman being quite so forthcoming as this!

HMRC say the email shows a potential tax rebate from HMRC Premier Services - with the name 'Premier Services' in a green box. This is not a legitimate HMRC message and should be disregarded. It is a 'phishing exercise' and uses bogus e-mails and websites to trick people into supplying confidential or personal information.

Other ones may also be sent so ensure you never respond to these types of email. We will deal direct with the Taxman for you to get all rebates you are entitled to.

For more details of how to protect yourself online, see getsafeonline.

Newsletter issue - March 07.

Q. I run a building company and need to take on a self-employed worker. He doesn't have his own van and so I've offered to provide him with one as a van is needed for him to do the job. What's the tax position on that?

A. You need to be very careful in doing this. The Taxman is likely to take the view that if you are providing a van, as you may do for employees, that this is indicative of an employment and not a self-employment relationship. Getting the status of the worker wrong can be very expensive. The provision of the van is not necessarily conclusive if there are other factors that are indicative of self-employment but would certainly be taken into account. If you can substantiate the worker is still truly self-employed then the van would not be taxable on him and you could claim capital allowances on the cost of the van. The same rules would apply to the provision of van running expenses. However, if the worker was classified as an employee the rules are different and less generous.

Q. My company accounts year ended on 31st December 2006. I ordered a new machine on 22nd December and received an invoice on 24th December for the machine, due for payment 30 days later. The machine was not delivered until early in January because of the Christmas holidays. Can I still claim the capital allowances in my accounts to 31st December 2006?

A. Unfortunately, the date that matters is usually the date on which the obligation to pay becomes unconditional. This is normally the invoice date but in this case, on the 31st December, your obligation to pay was still conditional on the delivery on the machine and had not yet become unconditional. Depending on the amount involved you could consider extending the year end to bring the date within your accounting period to be able to claim the first year allowances in full.

Q. I'm looking at taking out a loan with my bank and then loaning this on to my daughter to help her start her business as a sole trader. She will pay me back with interest to cover my costs but what are the tax consequences?

A. Your daughter could claim tax relief on the interest she pays to you, just as if she had taken the loan from a bank for business purposes. However, any interest you receive from your daughter is taxable on you and you cannot offset the interest you pay against this, leaving you with a nasty tax bill. I assume your daughter is unable to obtain the loan herself. One alternative solution to avoid this would be for you to become a partner in the business. The loan interest you pay would then be deductible from your share of the profits, which could possibly be an amount equal to the interest. You could also look at if your daughter could get the loan herself but with you acting as guarantor in support of the application.

Newsletter issue - March 07.

This is a summary of Gordon Brown's 11th budget report as Chancellor delivered on 21st March 2007.

The information in this summary is based on our understanding of the Chancellor's proposals.

No action should be taken without obtaining appropriate professional advice and as ever the devil will be in the detail.

We now summarise the main tax effects of the budget.

BUDGET HIGHLIGHTS

This budget was probably more radical than any in recent times. There was the shock ending of the 2% cut in basic rate income tax, although when looking at more of the detail below you will see there were plenty of rises to counteract this.

Most of the tax rates and allowances for 2007/08 were already known but there were some significant changes for 2008/09 onwards.

Overall the budget was tax neutral. Whilst poorer families were probably the biggest winners and Mr Brown believes that 80% of us will be better or no worse off, the biggest losers were probably...

• Small businesses who saw the small companies corporation tax rate increased from 19% to 22% by 2009.
• Higher earners, partly as a result of the National Insurance changes where those on incomes of £43,000 or more could end up paying around £1,000 more in NI.

Other key highlights included...

• A rise in the higher rate income tax threshold to £43000 by 2009.
• Decrease of 2% in the main corporation tax rate for larger companies.
• The abolition of the 10% starting rate of income tax on non-savings income.
• Some simplification of the tax system, mainly through tax bands and capital allowances.
• Increased personal allowances for pensioners.
• The inheritance tax nil rate band will rise to £350,000 by 2010.
• Tax credits remain a key part of Mr Brown's tax system for giving back to workers on lower incomes.
• Road tax on the highest polluting vehicles is increased to £300 and to £400 from next year. Least polluting vehicles to have the duty cut to £35.
• Child benefit for a first child to rise from £17.45 to £20 a week by 2010.
• Tax relief on empty property is to be restricted to 6 months and to 3 months on empty retail property.

PERSONAL TAX

Income Tax Rates

• From April 2008 the basic rate of income tax was cut by 2%, from 22% down to 20%.
• At the same time, this has been partly counteracted by scrapping the lower rate 10% tax band for non-savings income.

So there will be just 2 tax rates - 20% and 40%, apart from keeping the 10% rate for savings income which has kept some of the complexity.

Income Tax Bands

The income level at which 40% tax starts to be paid increases to £43000 (presently just over £38000) but not until 2009.

Increased Personal Allowances for Pensioners

• For pensioners under 75, the tax free personal allowance is rising from £7,280 to £9,770 by 2011.
• For the over 75's the tax free allowance will rise annually from £7,420 to £10,000 by 2011.

However, pensioners earning more than £25,830 could find they are no better off due to the rules whereby your tax free allowance is affected by the amount you earn.

National Insurance

The upper earnings limit for National Insurance is being raised to bring it in line with the 40% income tax threshold to £43,000 in 2009 (presently £33,540).

Increased ISA Limits

With effect from 6th April 2008 you can save up to...

• £3,600 in a cash ISA (presently £3,000)
• £7,200 in a stocks and share ISA

This is with an overall annual savings limit of £7,200.

The simplified structure for ISA's that will come into force in 2008 was already announced by the Chancellor in the pre-budget report last year. The changes mean that although you can put more into a cash ISA, if you put the maximum of £3,600 in, you will only be able to invest £3,600 in stocks and shares, which is less than the current limit of £4000.

The simplified structure also removes the distinctions between cash mini ISA's, stocks and shares mini ISA's and maxi ISA's with effect from 6 April 2008.

Enquiry Window

For self assessment returns for individuals and companies, the enquiry window for HMRC to enquire into your Tax Return presently runs from 12 months from the filing deadline and so acts as a disincentive file your return early.

The enquiry window will now be linked to the date you actually file your return with effect from 2007/08 onwards.

Overseas Property Owners

People who own properties abroad often do so through a company, either for legal or tax reasons abroad. At present this could result in a tax charge really meant for employees who receive free holidays in a house provided by their employer as a result of being assessed to a benefit in kind.

Whilst this has rarely happened in practice, the Chancellor announced that such rules will not apply to people who invest in their own properties through a company. The removal of this charge is also retrospective. This charge will no longer apply to companies whose sole activity is holding the property for personal occupation and/or letting. The property also has to be the company's only or main asset.

Pension Term Assurance

The Chancellor put an end to tax relief on pension term assurance. Individuals will no longer be able to get tax relief on premiums paid to personal fixed term life insurance policies where the only benefit payable is a lump sum on death or critical illness.

The good news is that relief for policies taken out before the relevant cut-off date can continue to be claimed as long as the policy is not varied.

Self Assessment Filing Dates

For 2007/08 and future years there are new filing dates for paper returns which have to be filed by 31st October (presently 31st January). Online returns continue to have the 31st January deadline and so for the 2007/08 returns they still have until 31st January 2009 to file.

EMPLOYMENT TAX

Employee Benefit Trusts

There is already a limit on the amount an employer can have as a tax deduction for contributions, which is limited to the amount actually paid to the employee within 9 months of the end of the accounting period, such payment also to give rise to tax and national insurance.

However, some employers have tried to go around these rules by declaring a trust over assets which they already control and claimed a tax deduction for the value of that declaration. The new legislation will ensure that no tax deduction is possible in these circumstances.

Company Car and Fuel Benefits

• Company car drivers who have a car capable of being run on E85 fuel will get a discount of 2% on the percentage applied to the list price with effect from 6th April 2008 for company car tax.
• The same 2% reduction will also apply for cars capable of being run on E85 fuel for company fuel tax.
• The figure for the company car fuel benefit charge to which the relevant percentage is applied will remain unchanged at £14,400 for 2006/07.

BUSINESS TAXES

Corporation Tax

• Main corporation tax rate. This has been reduced by 2% from 30% down to 28% from April 2008. That applies for companies with profits in excess of £1.5 million.
• Small companies rate. That is companies with profits up to 300K who will be dismayed to see the small companies rate increased from 19% to 20% from April 2007, 21% from April 2008 and 22% from April 2009. This has been designed to reduce the tax differences between the self-employed and small companies, where Mr Brown claims individuals artificially incorporate themselves to pay less tax. Surely not!
  Greater consideration will now be required as to the tax benefits of incorporation for small businesses, especially with the reduction in the basic rate of income tax also coming into effect.
• The upper and lower profit limits remain unchanged.

Managed Service Companies and Contractors

The pre-budget announced draft legislation relating to managed service companies, so that those working under such arrangements, would pay the same tax and NI as employees from April 2007, with the MSC having to account for the tax and NI.

This budget aims to make it even more difficult to the avoid the new legislation. There will be a focus on looking at the nature and characteristics of the MSC to decide if it is an MSC. Where the MSC does not pay the tax and NI due, that debt will be able to be transferred to the directors of the MSC and the MSC provider. Also, for travel and subsistence purposes, the contractor will be treated as if employed by the end user, so not able to claim travel to where the duties are performed. The new regime will be very complex and expert assistance is critical. Using your own limited company, instead of a managed service company may be a viable alternative.

Capital Allowances

Overall there is to be a simplification of the capital allowances regime with increased allowances coming for new investment in plant and machinery.

• The temporary rate of 50% first years capital allowances on plant and machinery for small businesses is extended for one more year and for medium size businesses remains at 40%.
• From April 2008 there is a new system coming in. Small firms can claim a new 100% relief for new capital investment in plant and machinery up to £50,000 by means of a new "annual investment allowance" (AIA), which is effectively a 100% capital allowance. The new AIA is a cash flow benefit by speeding up the rate at which tax relief is given rather than being spread over a number of years.
• Allowances for pooled plant and machinery are to be reduced by aligning them with the economic rate of depreciation at 20% (previously 25%) from April 2008.
• Subject to consultation there will be a reduction in the capital allowances for fixtures that are integral to a building from 25% to 10% from April 2008.
• Annual relief for long life assets to be raised from 6% to 10% from April 2008.
• The expensive car rules will be removed, to be replaced with a system based on CO2 emissions.
• Industrial Buildings Allowances, Hotel Buildings Allowances and Agricultural Buildings Allowances to be phased out over the next four years.
• The tax credit for research and development will increase from 150% to 175% from April 2008 for small companies and from 125% to 130% for large companies.

Empty Properties Land Remediation

A 100% Business Premises Renovation Allowance is being introduced after 11th April 2007, for renovating business premises that have been empty for a year or more and are located in certain disadvantaged areas. This extends the relief presently available and also includes offices and shops.

Landfill Tax

The standard rate is being increased from 1st April 2007 from £21 to £24 per tonne.

From 1st April 2008 it will increase to £32 per tonne, with the lower rate increasing from £2 to £2.50 per tonne.

Landlord's Energy Saving Allowance

This allows for a deduction for expenditure on energy saving items against property rental income which was announced in the Pre-Budget.

The annual allowance is for £1,500 per property and not per building as was originally the case. It will be available until 2015.

CAPITAL TAXES

Inheritance Tax Nil Rate Band

The inheritance tax nil rate band will increase to £350,000 by 2010 (presently £285,000). This had already been set to rise to £325,000 by 2009. After allowing for potential house price inflation, these increases may not be as generous as they seem.

Pre-Owned Assets

Where an individual enjoys the benefit of free or low cost use of an asset they previously owned or provided the funds to purchase, an income tax charge was previously introduced on 6th April 2005.

An election can be made to include the asset as part of their estate for inheritance tax purposes instead and so avoid the pre-owned assets charge. The legislation will allow HMRC to accept late elections for the income tax charge not to apply and the inheritance tax gift with reservation regime to apply instead.

Capital Gains Tax Annual Exemption

The annual capital gains tax exemption for individuals will rise to £9,200 (presently £8,800) from 6 April 2007.

Stamp Duty Land Tax for new Carbon Homes

From 1 October 2007 until 30th September 2012, all new zero carbon homes costing up to £500K are to be exempt from stamp duty land tax. Homes above this will have the first 500K exempt.

Pension Funds

Despite calls for change, significant tax charges at death on pensions remain in place. Those passing on their pension fund on death and aged over 75 can have their fund hit by a tax charge of up to 82 per cent.

VALUE ADDED TAX

Turnover Limits

The VAT registration turnover limit rises to £64,000 from 1 April 2007 (previously £61,000).

The deregistration limit increases to £62,000 (presently £59,000).

VAT Fuel Scale Charges

These will in future be based on CO2 emissions with effect from accounting periods beginning on or after 1st May 2007.

Transfers of a Going Concern

At present, when a business is transferred as a going concern for VAT purposes, the seller has to transfer the VAT records to the purchaser. However, it will now be possible from 1st September 2007 for the seller to retain the records by applying to HMRC, unless the purchaser was to keep seller's VAT number.

Less VAT to help Smokers Quit!

Whilst the price of a packet of cigarettes has risen 11p, nicotine patches and similar products will have a reduced VAT rate of 5% from 1st July 2007.

Benedicts Accountants are based in London, offering local business owners and individuals a wide range of services.

All clients are entitled to fixed fees, work delivered on time and unlimited phone support. Visit our website jbenedict.co.uk for more information.