Kings Accountancy :: For small and medium sized businesses with big ideas

24th June 2010

EMERGENCY BUDGET

Without doubt we have witnessed a most extraordinary sequence of events during the course of the last six weeks or so, in the political and financial world.

Firstly we saw the rather clever negotiations by Nick Clegg and his team to form the coalition, although, somewhat paradoxically, Nick Clegg, as Leader of the Lib Dems, has ended up with what is effectively a non job.

This week we have experienced what the Chancellor described as an "unavoidable" budget which is "tough but fair". The view of the previous Chancellor was that spending cuts would damage the recovery but George Osborne's view is exactly the opposite in that a failure to reduce the deficit will undermine confidence in British Sovereign Debt with far more serious consequences.

There have been some significant changes to the benefit structure that exits in the country, with a view to reducing the massive amount of expenditure that is presently in the system, and I anticipate that there will be more when we come to the Autumn Budget.

For example, I find it extraordinary that everyone over the age of 60 receives a Winter Fuel Allowance irrespective of their wealth or means. Surely it would make much more sense to just increase the pension credits slightly for those who are in need. Furthermore, although Child Benefit has been frozen for three years, I still consider that it is unnecessary to have it paid out across the board so that wealthy families continue to receive it.

The Personal Allowance will be increased by £1,000 to £7,475 from 6 April 2011. The Basic Rate Limit, or threshold at which higher rate tax is payable, will be reduced so that higher rate tax payers do not benefit from the increase in the Personal Allowance.

There is quite a lot of good news for small businesses in the next fiscal year. Corporation tax will come down, although against that there will be a small reduction in capital allowances, and the annual investment allowance has been cut quite dramatically from £100,000 to £25,000.

The rate of VAT will increase to 20% from 4 January 2011 which will effect us all. Thus if you are anticipating making any significant expenditure in the home, it would obviously be advantageous to do it this year rather than next. In addition it would make sense for us to bill our non vat registered personal tax clients prior to the end of this calendar year.

The much anticipated increase in Capital Gains Tax is at 28% for higher rate tax payers and is therefore not quite as penal as was feared. There is a significant and welcome extension to Entrepreneur's Relief which now taxes the first £5 million of qualifying gains at 10%.

Obviously we will have to wait for the Finance Bill to see what is in the small print and we will produce a more detailed report at that time.

11th February 2010

There have been a number of recent changes and indeed some that are pending, being brought in by HM Revenue & Customs (HMRC) and we are setting out the details below.

VAT

Probably the most important concerns VAT. Everyone is probably aware that the standard rate of VAT reverted to 17.5% with effect from 1 January 2010. Furthermore there have been changes to the percentages used in the Flat Rate Scheme and please contact us if you need any advice in connection therewith. Without doubt there are savings to be made for certain companies using the Flat Rate Scheme.

In addition it will be mandatory for all VAT registered traders with a turnover of £100,000, plus any newly registered traders, regardless of turnover, to submit their Returns online and to pay the VAT electronically with effect from 1 April 2010.

HMRC have promised that the relevant information, together with authorisation codes etc will be despatched in February 2010.

PAYE CODING NOTICES

The PAYE Coding Notices for use in the tax year commencing from 6 April 2010 are being sent out now but unfortunately there are many reports of incorrect codings.

We would suggest that you carefully check any Coding Notices that are sent to you.

COMPLIANCE CHECKS & A NEW PENALTY REGIME

HMRC obtained new powers with effect from 1 April 2009 but these have now been extended to all taxes and with effect from 1 April 2010 will apply to both PAYE and NICs.

On the subject of NICs you are probably aware that the Government has been increasing them little by little over the last year or so and there are more increases planned with effect from April 2010 and again from April 2011. Indeed from the latter date the Class 4 National Insurance Contributions, payable by the self employed will be increased by a further 1%.

It is apparent that politically the Government are keen to keep the standard rate of income tax at 20% but in actual fact they are increasing it, albeit in the form of National Insurance Contributions, quite significantly.

NEW SOURCES OF INCOME

The onus is on the taxpayer to notify HMRC that he should be in the self assessment system. If you don't already complete a Tax Return you will need to do so if you become a director or start a new self-employment. It also applies when you receive:-

Income from savings and investments of £10,000 or more
Income from untaxed savings and investments of £2,500 or more
Income from property (before deducting allowable expenses) of £10,000 or more

If you do not already complete a Self Assessment Return you should notify HMRC by 5 October 2010 if there is taxable income in the year to 5 April 2010, to avoid a £100 penalty.

VEHICLE BENEFITS FOR DIRECTORS & EMPLOYEES

The van fuel benefit charge rises from 6 April 2010 to the appropriate percentage x £18,000 (2009/10 £16,900).

However the Government is keen to encourage us to buy electric cars or vans and there are considerable tax savings for a director or an employee if they do.

HIGH EARNERS

Those with income of £100,000 plus per annum and those with income of £150,000 plus per annum will be paying higher rates of income tax with effect from 5 April 2010.

For those with adjusted net income over £100,000 the personal tax free allowance of £6,475 will be withdrawn by £1 for every £2 over the £100,000 limit. This effectively increases the tax rate from 40% to 60% on the band of income effected between £100,000 and £112,950.
For total taxable income over £150,000 in the tax year 2010-2011, the tax rate will be 50% (dividends 42.5%).
For individuals with income from £112,950 to £150,000 the marginal rate of tax will be 40%.

Sorry it is so complicated but we did not make the rules!

On the other hand there are ways of mitigating income tax and the following considerations may be appropriate:

Business incorporation. Capital distributions may be taxable at CGT rates of 18% or 10% with Entrepreneur's relief
For unincorporated businesses with income likely to be taxed at the 50% higher rate in the year assessed in the 2010-11 tax year, there may be scope for reducing tax/income by changing year ends and adjusting profits.
Timing of certain business transactions may be relevant e.g. timing of capital spending
Consider spreading your business income to lower taxpayers in the family by paying them fully for the work that they do to support your business
Transferring income producing investments between spouses may take a taxpayer below the critical £100,000 level
Charitable donations may be used effectively after 5 April 2010 to avoid the transitional band £100,000 - £112,950 and to reduce income below the £150,000 threshold. These can be made after the tax year-end when income levels for the 2010-11 tax year are known and an election made to treat Gift aid as made in that year.
Due to new Pension rules, from 2011-12 one off pension contributions are no longer as tax effective for those earning in excess of £150,000, but those with regular monthly or quarterly contributions should maintain them. And for those with total income between £100,000 and £112,950, pension contributions are effectively relieved at 60% if they take income down from £112,950 to £100,000.
Therefore, consider a salary sacrifice arrangement to increase employer pension contributions when your employees income is going to fall into the £100,000 to £113,000 band in 2011/12
From 9 December 2009, the rules changed so that anyone with income above £130,000 is within the scope of the anti-forestalling legislation. Broadly, such individuals who increase their pension savings may be subject to a special tax charge. The effect of the special tax charge is to withdraw any right to higher rate tax relief.
Note that a salary sacrifice will not be effective for keeping income below the pensions restriction floor of £130,000 if it is made for that purpose on or after 9 December 2009.
Tax free ISAs may become more attractive. ISA investment limits increase to £10,200 for everybody (maximum cash investment £5,100). Income and capital growth is tax-free and income will not be included in the consideration of higher tax rate thresholds.
Other investment reliefs include Venture Capital Trusts with income tax relief at 30% on investments up to £200,000 and Enterprise Investment Schemes with investments up to £500,000 giving income tax relief at 20%. There can be capital gains reliefs too. Restrictions apply.

If you need to discuss any of the above please contact Sarah Harrison or Graham King.

CAPITAL GAINS TAX GAINS AND LOSSES

If you want to sell shares or other assets you have an annual exemption of £10,100. You may wish to consider realising gains before 6 April 2010. We believe that the 18% rate of CGT is out of line with income tax rates and may well be increased.

WORKING TAX CREDITS AND CHILD TAX CREDITS

The eligibility requirements for tax credits can be found at http://www.hmrc.gov.uk/taxcredits.

COMPANY TAXATION

Small companies tax rate on profits up to £300,000 remains at 21%.

TRADING LOSS CARRY BACK CONTINUES

For companies with accounting periods ending between 24 November 2008 and 23 November 2010 and unincorporated business for tax years 2008/9 and 2009/10 losses may be carried back against profits over the 3 preceding years, most recent years first. Annual losses of up to £50,000 can be carried back to the earlier two years.

CAPITAL ALLOWANCES ON VEHICLES

From 2009-10 the annual allowances are dependent on the CO2 emissions of the car:

From 1 April 2008 cars with up to 110 g/km of CO2 emissions attract a 100% allowance. There is a 100% allowance on electric vans
for cars with CO2 emissions between 110 and 160 g/km the annual allowance is 20%
for cars with CO2 emissions over 160 g/km the annual allowance is 10%, calculated in a special pool

Again this is all very complicated but please do not hesitate to contact us if you wish to discuss the subject further.

COMPANIES ACT 2006

Finally there has been a significant change with the introduction of the Companies Act 2006. All companies with an accounting period that started on 6 April 2008 or later must file its accounts within 9 months after the end of the accounting period as opposed to 10 months previously. Thus accounts for the year ended 31 March 2010 will now have to be filed by 31 December 2010 instead of 31 January 2011.

We always try and prepare company accounts as soon as after the year end as possible so that the proprietor of the company has a fair indication of what has happened in the year and what any liabilities for tax are likely to be. However some fall through the net and we will be urging all directors of companies to file their accounts on time. Obviously if the filing deadline is 31 December there will have to be planning to make sure that they are not caught out by the Christmas holidays etc.

G G King
11 February 2010

6th May 2009: Budget 2009

The Chancellor in his Budget Statement issued on Wednesday 22 April 2009 made a number of announcements and in his attempt to balance the books for the year 2010 he has predicted that there will be growth next year which most commentators have suggested is over optimistic.

The figures issued by The Treasury for 2009/2010 estimate total receipts of £496bn against expenditure of £671bn. A deficit of £175bn. It is apparent that if we don't get the growth next year that he is forecasting we will have a horrendous problem which will be with us for many years. The extra debt in this year alone will push up Britain's national debt from below 40% - of the ceilings set by Gordon Brown in 1998 but since abandoned - to almost 80%. Indeed The Treasury has stated that it did not expect the Budget to come back into balance until 2018 or beyond.

Our view is that as there is little scope to increase government income there has to be a reduction in expenditure. The amount of projected expenditure on Social Welfare etc is enormous and whilst it is a difficult prospect to envisage it does seem that we will have to be far more austere in the manner in which we do deal with social protection and welfare.

High earners will be faced with an income tax charge of 50p in the £ for earnings in excess of £150,000 in the 2010/2011 tax year and also their relief for pension contributions will be restricted to 20%.

The Chancellor did announce a scheme for trading in old cars but the practicalities of this still have to be worked out. A maximum of 300,000 consumers will be given £2,000 to scrap their vehicle, which must be at least 10 years old, to buy a new car. As 86% of vehicles sold in the UK are made abroad it is difficult to see how this will either help our economy or many individuals. It does appear to be a copycat of the scheme announced in Germany which obviously does help their economy because of the vast number of cars that are made there.

Of the figure of £2,000, £1,000 will come from the government and £1,000 from the manufacture. This must be a bit daft as the manufacturers are discounting cars anyway to get them off their books.

If we look at the net affect of all the various allowances etc for individuals and of couples, the maximum benefit that will be received in this current year to April 2010 is approx. £58. Hardly a big deal!

As ever we shall have to wait to see what is in the small print. One measure that was sneaked in was to penalise accountants within companies, as they will be personally fined if they do not ensure that the systems they oversee are accurate. If the accountant is found by the Revenue to have made a careless or deliberate mistake over the accounts he or she could be fined and the company would also face a financial penalty. All rather scary!

To summarise, if the Chancellor has got his forecasts right, we are in for a tough time. As he probably hasn't, it will be a hard slog for many years to come.

10th February 2009: Slowing down of the British economy

The last few months have seen a further slowing down of the British economy and the Governor of the Bank of England has just announced that it is going to get worse during the course of this year.

Unemployment is increasing at a significant rate and the value of Sterling has dropped against the Euro and the Dollar. The Euro rate is approx. 1.10 and the Dollar rate is now approx. 1.45.

The FTSE 100 dropped down to a little under 4,000 but is now hovering around 4,300.

Bank Base Rate continues to be reduced and on Thursday 5 February 2009 it was lowered to 1%. We cannot see the necessity to reduce it to this level because it does mean that savers are not getting a return on their money and borrowers are still finding it hard to obtain credit, simply because the banks don't seem to be in a position to lend, or are being extremely cautious in setting their lending parameters.

Our conversations with estate agents would indicate that there are residential properties being sold and the market may have bottomed out, but this may of course be a false dawn so we are waiting to see what evolves during the course of the next few months. In general terms we would suggest waiting to say June this year and if it is evident that the market has bottomed then that will be the time to invest in the housing market.

Commercial property seems to be a no no and certainly there is every likelihood that it will continue to decline.

We still have to see evidence that the Government's policy of reducing VAT and trying to stimulate the market in such a way is the correct one but they are trying to help as much as they can. Their website (www. www.direct.gov.uk) does have a section on "Real Help For Businesses Now", which is worth a visit.

HM Revenue & Customs have set up a business payment support service, the telephone number of which is 0845 3021435. We have found that by phoning that number and explaining the circumstances of one or two clients they have agreed, on the telephone to a deferred payment of both corporation tax and income tax. Once the agreement is in place they will then forego imposing any surcharges but they will of course charge interest.

On a positive note we filed all our clients personal tax returns online by the deadline of 31 January 2009 and HM Revenue & Customs website seemed to work perfectly. Indeed those clients who were due a refund, received them by return. This does reiterate our continual appeal to get information to us as early as possible, so that any refunds due are made that much sooner.

HM Revenue & Customs are bringing in a new compliance checking framework and accompanying safeguards with effect from 1 April 2009. In basic terms there are new rules for record keeping, and in addition, the information gathering powers for the Revenue have become more consistent. We are aware of the new regulations and if any client does receive an enquiry then we will be able to process it in conjunction with HM Revenue & Customs.

The new year has brought a number of problems to both businesses and individuals. It really is a case of battening down the hatches and for businesses to be lean, mean and keen. Overheads have to be cut as much as possible and we just have to get through the next six months, or so and then review the situation at that time. If you need any help and advice then please contact us. In the meantime we wish everyone good luck and fortune.

29th November 2008: Decline in the financial markets

We have seen the most extraordinary series of events over the last few months! Before that the property market, both residential and commercial has been declining quite considerably over the last year or so but the last few months have seen an extraordinary downturn in both the value of Sterling and also the Stock Market. The latter has had a knock on effect in the drop in value of pension funds and other related investments.

The whole banking crisis that we have witnessed has put us on the brink of recession. On Monday 24 November 2008 the Chancellor presented his Pre-Budget Report which, as was expected turned out to be another Budget. But in the very unusual circumstances in which the nation's, and indeed the world's finances are positioned this was not unexpected.

We shall have to see whether the Chancellor's attempt to kick start the economy by reducing VAT and other tax breaks will have the required effect of increasing the general circulation of money.

We consider that the Chancellor is taking a huge risk by borrowing the extraordinary amounts of money which has been required to invest in the banking system generally and to put more money in the hands of the consumer.

What is evident is that despite these vast sums being put into the banking system and the drop in Bank Base Rate to 3%, the banks themselves do not appear to be responding by offering cheaper money to the business community.

Because of the vast losses that the banks have made through the sub-prime mortgage disaster, they are trying to repair their balance sheets by making increased profits in this current trading period. As a result of this they are not passing on the lower costs that they are experiencing which does mean that small businesses are not actually being helped as much as the government would like.

This is something that the government must sort out and somehow force the banks to lend more monies at attractive rates.

In his Pre-Budget Report the Chancellor did make available through the small firm's loan guarantee scheme an additional £1 billion but that can only work with the co-operation of the banks themselves. Somehow the Chancellor has to shake a few heads together so that the banking faternity come up with the goods to help as all.

27th November 2008: The Housing Market

The Housing Market has traditionally been one for long term investment and therefore the drop in values should be looked upon as a temporary adjustment similar to that experienced in the late eighties and early nineties. Generally we would advise that if you are able to hang on to your investments then it is better to do so. Any sales at the moment are often looked upon as fire sales but, having spoken to a number of estate agents recently it would appear that there may be some light at the end of the tunnel and deals are being done.

The buy-to-let market has seen a dramatic turnaround during the course of the last 6 months. In the Spring of this year there were a number of prospective tenants waiting to rent properties and as these came on to the market they were snapped up. However the situation seems to have changed dramatically and estate agents inform us that there are a number of properties now available for letting and no tenants to fill them. We shall have to see what happens once we have Christmas and the New Year out of the way. As stated above our advice is to hang on in there if you can afford to do so.

Summary

To summarise we have not seen anything like the carnage that is being experienced in the financial markets before. Without doubt the country, and the world, is in recession and the unemployment figures are getting higher and higher.

The Chancellor has tried to kick start the economy but we are not particularly optimistic about his chances of success. Without doubt things in the New Year will get worse before they get better so lets just hang on in there and take whatever action is needed to ensure that we come out of this mess in one piece.

05th June 2008: 10% Starting rate for savings

In the 2007 Budget, the Prime Minister Gordon Brown who was then Chancellor, announced a general reduction in the rate of income tax from 22% to 20% with effect from 6 April 2008. However, it became apparent when reading the 2007 Budget Notes that the 10% starting rate for tax for certain categories of income was to be abolished.

As a result these changes impact unfairly on lower paid workers with no savings income and consequently on 13 May 2008 the new Chancellor, Alisdair Darling, announced a package of measures designed to compensate the groups who will be hit hardest by the changes proposed in the 2007, and subsequently, the 2008 Budgets.

The changes he announced are as follows:-

1. The personal allowance for 2008/2009 will be increased (for one year only) from £5,435 to £6,035 an increase of £600.

2. The 20% Basic Rate Band is to be reduced by £1,200 to £34,800. This means that for higher rate tax payers the overall liability will remain unchanged following the increase in personal allowances.

The changes for those on PAYE will be effected in September 2008 when the code numbers will change but because of the PAYE system it does mean that they will be back dated to 1st April 2008.

Politically this is a great climb down by the Prime Minister but it does make sense. What doesn't make sense is that nobody at The Treasury or in Downing Street realised the political effect that the abolition of the 10% rate would have.

We are living in difficult economic times and whilst I do not think that we will enter into a recession as such, all the signs are that growth in this year will be reduced below the Treasury forecasts. This does of course mean that the government will miss its targets and in view of the poor state of the economy generally it will be fascinating to see which way they turn. Will they tax us or will they borrow? We shall have to wait and see but it will be interesting to see the scenario unfold.

23rd April 2008: Filing of self assessment tax returns

I am pleased to say that we filed all our clients Tax Returns in respect of the year ended 5 April 2007 by the deadline of 31 January 2008. However HM Revenue & Customs has recently announced that the following procedures must be put into place for the filing of Tax Returns for the year ended 5 April 2008.

In basic terms they are hoping that as many as possible Self Assessment Returns are filed online and we are in the process of gearing ourselves up to achieve this.

To enable us to file online the Inland Revenue will have issued you with an individual authorisation code and would you please let us have that as soon as possible.

However there will be a different set of rules for the submission. All paper Returns have to be filed by 31 October 2008 and then all online Returns must be filed by 31 January 2009.

We are hoping to file as many of our clients Tax Returns as possible online and also to make sure that this happens during the course of 2008 rather than have the mad panic in January. To this end I should be most grateful if you would try to get your records up to date so that the whole situation can be improved and that it does not result in the blind panic that we are faced with in January.

08th February 2008: Capital gains tax

The Chancellor has made important changes to the capital gains tax regime and these were first established when he made his Pre-Budget Report at the end of last year. At that time his proposals were that with effect from 5 April 2008 all gains made, whether or not they were business or non business assets would be taxed at 18% after the annual allowance of £9,000 had been deducted.

This however caused a storm of protest because at the present time business assets which have been held for more than 2 years are subject to a maximum rate of 10%. Thus our strategy at the time was to dispose of business assets prior to 5 April 2008 and non business assets after that date.

However there was considerable pressure exerted from the business community and as a result of that he has now partly relented by introducing an entrepreneur's relief in respect of business assets sold after 5 April 2008. There is a lifetime overall allowance of £1 million and up to that figure business assets covered by the new relief will be taxed at 10%. It has to be emphasised that to be entitled to this new relief the owner of the assets must have been involved with the running of the business in some way or form. Thus it would not have been effective had the owner merely held an investment property which happened to be looked upon as a business asset. For example a shop or other commercial property.

The Chancellor's strategy has been to stop the proprietors of Hedge Funds and other vehicles effectively having their income taxed at 18% rather than 10% as before and his recent amendments confirmed this strategy.

One of the problems that has come to light as a result of these changes is that Indexation Relief which was available on investments bought prior to 1998 has been abolished along with Taper Relief. It follows that if you have bought an investment such as a second home or buy to let properties and indeed shares prior to 1998 you will not get any relief for the effects of inflation and the total gain, if made after 5 April 2008, will be taxed at 18%. As an example if a tax payer had bought a second home in, say, 1986 and makes a profit of £140,000 on the sale, if they are basic rate tax payers then the gain under the present regime will be under £12,000. However under the new rules if the gain is made after 5 April 2008 the tax would be in excess of £23,500.