News

Whereas there was relatively little of importance in the Spring Budget, at least for individual taxpayers and the small business sector, many significant announcements were made by the new Chancellor in his first Budget Statement and in the accompanying documentation issued by HM Treasury and HM Revenue & Customs.

The income tax personal allowance (for those aged under 65) will remain £6,475 for this year, but will be increased to £7,475 for 2011/12. For most people, this will create a tax saving of £200. However, it will be clawed back from higher-rate taxpayers, by reducing the income point at which higher rate tax becomes payable. The higher rate threshold for 2011/12 has not yet been set because it depends, in part, on inflation for the year to September 2010.

As announced by the previous Labour Government, the contribution rates payable by employees, employers and self-employed people will all increase by one percentage point for 2011/12 – thus the main rates will be 12% for employees, 13.8% for employers and 9% for self-employed people.

To compensate employers, the salary point at which they begin to pay employer’s National Insurance contributions will rise by £21 a week (in addition to the inflation-linked annual uprating, which is yet to be announced). Very broadly speaking, this means that employer’s National Insurance contributions will fall where the employee earns less than £400 a week and increase where he or she earns more.

Employees will continue to pay contributions from the existing Earnings Threshold (currently £110 a week), plus an indexation allowance, so for 2011/12 there will be a lower starting point for employees’ than for employer’s contributions.

ISAs will continue to be available and the new Government has confirmed that it intends to index-link the subscription limit annually.

The requirement to use most of a pension fund to buy an annuity will be abolished for those whose 75th birthday falls on or after 22 June 2010. However, the details of what requirements, as to income drawdown, etc, will replace it have not yet been finalised. As an interim measure, those reaching 75 will be allowed to take an immediate tax free lump sum, make income withdrawals, and defer a final decision for up to two years.

Drastic changes were predicted, including taxing capital gains at income tax rates and decimating the annual exemption. In the event, the annual exemption remains £10,100 for 2010/11 and the Government has promised to index-link it annually in future.

Otherwise, gains made on or after 23 June 2010 (the day after Budget Day) will be taxed as if they were the top slice of income, but at a basic rate of 18% and a higher rate of 28%. For example, suppose for 2010/11 an individual’s total income is £15,000 below the higher rate threshold. In September 2010 he sells a buy-to-let property and makes a gain of £40,000. If there are no other disposals in the year, £10,100 will be covered by his annual exemption, £15,000 will be taxed at the 18% ‘basic rate’ and the remaining £14,900 at 28%. Accordingly, his total tax bill will be £6,872 and the Budget will have cost him £1,490 (10% of £14,900).

Entrepreneurs’ Relief will continue to be available and, for disposals on or after 23 June 2010 the lifetime allowance has been increased from £2 million to £5 million. As before, Entrepreneur’s Relief will reduce the rate of tax charged to 10%.

There will be no change to the existing tax rules for Furnished Holiday Lettings this year. However, two changes are being considered for implementation from April 2011.

First, one of the current rules is that, to qualify as holiday accommodation, the property must be available for letting to the general public for at least 140 days a year and actually let for at least 70 days. The potential change is that the specified number of days may be increased. The rationale is that European Community law requires the same tax rules to apply whether the property is situated in the UK or elsewhere in the EC. However, the Government would rather not apply the generally beneficial Furnished Holiday Lettings rules to properties abroad. The holiday letting season is generally longer in the UK than elsewhere in Europe, so increasing the specified number of days – it is said – would have the effect of excluding many overseas properties while not affecting most UK properties. However, increasing the number of days the property must be let to the general public could affect those with hard-to-let properties, or properties which are used by ‘family and friends’ for more than a few weeks a year.

Second, Furnished Holiday Letting losses (including losses created by interest payments) may currently be set against other income (such as income from employment, or an unrelated business). It is likely that, from 2011/12, losses will have to be carried forward, to be used against future Furnished Holiday Letting profits, although set-off against other income from property may still be allowed.

A final point to remember is that Furnished Holiday Lettings currently qualify for the capital gains tax Entrepreneurs’ Relief and there has been no indication that the Government intends to change this rule.

Perhaps surprisingly, the new Government has confirmed that the Inheritance Tax nil rate band will remain frozen at £325,000, at least until April 2015. This is apparently because the Coalition Agreement states that the nil rate band must be frozen until the income tax personal allowance is increased to £10,000.

The Annual Investment Allowance – the 100% write-off for most purchases of machinery and commercial vehicles – has become something of a political football. In April, the annual ceiling on qualifying purchases was doubled, from £50,000 to £100,000. But in the June Budget the new Chancellor announced that from April 2012 it will be reduced to £25,000. However, the Government estimates that the reduced allowance will still cover the annual purchases of 95% of businesses.

One complicating factor is that, where the trader’s accounting year is other than the year to 5 April (or 31 March for companies) the allowance was apportioned when it was increased, and it is thought that it will similarly be apportioned when it is reduced. For example, suppose a company makes up its accounts to 30 September annually. On present information, its Annual Investment Allowance ceiling will be:

There is accordingly a window of opportunity to make major purchases before the Annual Investment Allowance is reduced.

The calculations for an unincorporated business are similar, but complicated by the need to adjust for the odd five days (1 to 5 April each year). Please let us know if you would like us to confirm the maximum allowances for your own accounting periods!

Also from April 2012, the rate of annual writing-down allowances (for expenditure not written off at once by the Annual Investment Allowance) will reduce from 20% to 18%, and from 10% to 8% for ‘special rate’ items. This will be especially significant for purchasers of motor cars which, generally speaking, do not qualify for the Annual Investment Allowance and which, if their carbon dioxide emissions rating exceeds 160g/km, count as ‘special rate’ items.

The headline Budget news, though far from unexpected, is that the standard rate of VAT will rise to 20%, with effect from Tuesday, 4 January 2011 (Monday, 1 January being the New Year Bank Holiday). Given that most of their customers will be budgeting with static or falling incomes for at least the next two years, it remains to be seen how much of this increase retail businesses will be able to pass on in higher prices.

For traders using the Flat Rate Scheme for Small Businesses, there will be consequential increases in the flat rate percentages which apply under the scheme. If your current flat rate (disregarding the 1% reduction allowed in the first year of VAT registration, if applicable) is 6% or less, it will increase by half a percentage point; if it is between 6.5% and 10% it will increase by a full percentage point; and if it is 10.5% or more, it will increase by one and a half percentage points.

Looking at the expenditure side, traders should consider making purchases before the VAT rise if any of the following apply:

· They are not registered for VAT and so will not be able to reclaim the VAT paid as input tax.

· They make substantial exempt supplies and so are not able to reclaim all the VAT they pay.

A point to watch is that, depending on circumstances, VAT is often payable on the purchase of commercial premises, or on the rent payable under a lease or licence to occupy such premises. Here the additional VAT (if not reclaimable as input tax) may represent a significant additional cost. Generally speaking, a commercial lease will allow the landlord to increase the rent by any additional VAT payable, but it is worth checking the position with your solicitor if you are in any doubt. And, of course, if property in the immediate vicinity is currently difficult to let, the landlord may be willing to negotiate a lower headline rent.

For babies born on or after 1 August 2010, the Government’s contribution to his or her Child Trust Fund will fall from £250 to £50. However, it will still be worthwhile to make sure that the CTF account is opened. This is because it acts as a ‘Children’s ISA’ – interest credited to the account is tax free until the child’s eighteenth birthday. And parents, grandparents and anyone else may add money to the account, to a total of £1,200 a year. If the parents saved for the child in an ordinary bank or building society account, the interest would be taxable as their income.

Last month’s Budget contained few announcements that will be important to individual taxpayers or the small business sector. Tax and National Insurance contribution rates for 2010/11 had already been set by earlier Budget and Pre-Budget Reports and were merely confirmed. Furthermore, for anyone earning less than £100,000 a year, they are largely unchanged from 2009/10. It was also confirmed that the main rate of capital gains tax will remain 18 per cent for 2010/11 and the entrepreneurs’ rate 10 cent, the only surprise being that the lifetime ceiling on gains qualifying for entrepreneurs’ relief was doubled, to £2 million, with effect from 6 April 2010.

The Budget did however double, to £100,000, the annual ceiling on purchases of machinery and commercial vehicles which qualify for the 100% Annual Investment Allowance. The increased ceiling came into effect from 6 April 2010, or 1 April 2010 for companies. However, it is important to understand how this applies where the trader’s or company’s accounting year straddles those dates. This is best explained by way of an example:

A company makes up its accounts to 30 September annually. For the six months 1 October 2009 to 31 March 2010, the ceiling on expenditure qualifying for the Annual Investment Allowance remains £50,000. For the whole year 1 October 2009 to 30 September 2010, the maximum qualifying expenditure is calculated as follows:

Finally, suppose that in the six months to March 2010 the company had already spent £30,000 on purchases of machinery and commercial vehicles. In the six months to September 2010, further purchases of up to £45,000 would qualify.

With effect from 6 April 2011, HMRC will be able to require employers to provide security against payment of monthly or quarterly PAYE remittances. This will only apply where the employer has a history of late or non-payment and will work in a similar way to the current requirement to provide security for VAT payments. It is likely to require an employer to lodge security, in the form of a cash deposit or a bank guarantee, for the next four months’ or two quarters’ remittances.

There are small increases in the registration and deregistration thresholds – with effect from 1 April 2010, registration is compulsory once annual turnover exceeds £70,000 (previously £68,000) and deregistration is permitted if the trader can show it is reasonable to expect that his turnover for the next twelve months will fall below £68,000 (previously £66,000).

Where a company car driver (including the director of a small private company) has his or her petrol or diesel for private motoring paid for by the company, three tax charges arise. First, there is an income tax benefit-in-kind charge payable by the employee or director – in most cases, the year-on-year increase, from 2009/10 to 2010/11, is more than 10 per cent. Second, there is an additional Class 1A National Insurance contribution payable by the company – this is calculated in the same way as the income tax benefit-in-kind charge, so again the year-on-year increase from 2009/10 to 2010/11 is typically more than 10 per cent. Thirdly, there is also a VAT scale charge payable by the company, which from 1 May 2010 will increase by between 12 and 20 per cent.

The recent increases mean that it is unlikely to be tax-efficient for a company to pay for fuel for private motoring unless the employee or director covers a high private mileage (overall mileage is irrelevant). The alternatives are:

· For the employee or director to pay for all the fuel used in the company car, but then claim a mileage allowance from the company for business journeys.

· For the employee or director to pay for all the fuel used, but then claim a proportion from the company (for example, if total mileage was 5,000 of which 3,000 was for business journeys, he or she would claim 3/5ths of the total expenditure on fuel).

· For the company to continue to pay for the fuel, but for the employee or director to pay a mileage charge to the company for private journeys.

· For the company to continue to pay for the fuel, but for the employee or director to reimburse the proportion of total fuel purchases attributable to private motoring.

For self-employed people, only the VAT scale charge applies, but the tax at stake can still be significant. Overall, the choice will not be easy to make, as the calculations are in fact more complex than the above brief summary might suggest, and one has to take into account not only the best tax outcome, but also the administrative practicalities. Nevertheless, we would recommend all clients running company cars to review their policies with our assistance, if they have not recently done so.

Two major changes in the PAYE Regulations are about to come into force. Firstly, virtually all employers will be required to file their PAYE end-of-year Returns for 2009/10 and future years online – hitherto, online filing has been a requirement only for firms employing 50 or more people. The very few exceptions cover people with a genuine religious objection to using electronic communications and some (not all) employers of nannies, domestic staff or personal carers.

However, for this year only, there will be no penalty where an employer with five or fewer employees files a traditional paper Return. This means no more than five names on the Form P35, not the maximum number of people employed at any one time.

An employer with between 6 and 49 employees (again, counting every name on the Form P35) will be subject to a fine of £100 if he or she files a paper Return, rather than filing online. Where the employer has 50 or more employees, the fine for failing to file online will be at least £600, rising in stages to £3,000 where he has a thousand or more.

Any such fine will be levied in addition to any penalty due for late filing – the filing date for 2009/10 Returns is Wednesday, 19 May 2010, but in practice a week’s grace is allowed. Thereafter the late filing penalty is £100 a month if the employer has no more than 50 employees, £200 a month if he has no more than 100 employees, and so on.

If you are filing online for the first time, it is more important than ever not to leave the job until the last minute, as the registration process includes waiting for HMRC to send you a User ID and Activation PIN by post, which typically takes up to a fortnight.

Please contact us if you need any help organising online filing, or would like us to file on your behalf.

Secondly, there will be a system of penalties where monthly or quarterly PAYE remittances are not made on time. This will apply from the payment due for the month to 5 May 2010, or for the quarter to 5 July 2010. The level of the penalty will depend on the number of times a payment is late in a tax year:

The percentage is of the total paid late in the year, excluding the first late payment. So if the remittances for five months were paid late, the penalty would be 2% of the total remittances for the second to the fifth of those months.

Where remittances are made quarterly, there will be only four remittances for the year, and so the penalty will be capped at a maximum of 1%.

An important point to note is that penalty notices will not be issued until the end of the tax year (April or May 2011). HMRC say that they may issue a warning letter the first time a payment is made late, but they will not be issuing late payment notifications on a month-by-month basis. A liability may therefore accumulate over the year without being brought to the employer’s attention.

However, an employer in temporary financial difficulties who has reached (and keeps to) a ‘time to pay’ agreement with HMRC’s Business Payment Support Service will not be charged penalties on the late payment of any tax, etc, included in that agreement. Accordingly, it is important that an employer who foresees difficulties contacts the BPSS before the due date for the next PAYE remittance.

Where any payment is made six months late or more, there will be an additional penalty of 5% of that payment, rising to 10% if payment is a year or more late.

There will be a separate penalty system for Class 1A and Class 1B National Insurance contributions (on benefits-in-kind and PAYE Settlement Agreements respectively) – but note that as the new régime applies only to remuneration for 2010/11 and future years, Class 1A and Class 1B contributions for 2009/10 (due in July and October 2010 respectively) will not be affected. From 2010/11, the penalty will be 5% if payment is more than 30 days late, 10% if it is six months late, and 15% if it is a year late.

Tax due under the Construction Industry Scheme is included in the late payment penalty régime outlined above (whether or not the contractor is also an employer). Otherwise, the PAYE changes outlined above do not apply to the CIS.

With effect from 1 April 2010, all traders (except those registered before 1 April 2010, with a turnover below £100,000) are required to file their VAT Returns online and pay their tax by electronic transfer. At the same time, new rules came into force to determine the time at which VAT payments made by cheque are received by HMRC – these apply even to small traders not required, under the new Regulations, to make their payments electronically. Shortly put, until now, a payment made by cheque has been treated as made on the day the cheque was received by HMRC. But in future, it will not be treated as made until cleared funds have been credited to HMRC’s account – usually three working days after it is banked, but it may be longer. Thus if a cheque is posted first class on a Thursday and received and banked the following day (Friday), the payment will be treated as made the next Wednesday. If the due date was, say, Monday, the payment would count as late for VAT Default Surcharge purposes.

This newsletter deals with a number of topics which, it is hoped, will be of general interest to clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases, so please contact us for personal advice on your own affairs.

Remember the standard rate of Value Added Tax dropped from 17.5% to 15.0% on 1st December 2008, to calculate the VAT amount on an inclusive amount the fraction equates to 3/23 (remember at 17.5% this was 7/47)