Advisory fuel rates

To reflect the increases in fuel prices, HMRC have issued new advisory fuel rates for employees driving employer provided cars. These take effect for all journeys undertaken from 1 July 2008 so employers wishing to use the new rates should advise affected employees and update any expense forms as soon as possible.

Engine size	Petrol	Diesel	LPG
1400cc or less	12p (11p)	13p (11p)	7p (7p)
1401cc – 2000cc	15p (13p)	13p (11p)	9p (8p)
Over 2000cc	21p (19p)	17p (14p)	13p (11p)

HMRC are supposed to give employers a month’s notice of changes the Advisory Fuel Rates (AFR). However according to the HMRC guidance:
‘the recent fuel price increases which justify these AFR changes have happened very rapidly. In these unusual circumstances we are mindful that an implementation date of 1 July might mean that drivers will be incurring higher fuel prices before the new rates become effective. Consequently, where employers are able to do so, HMRC is content for the new rates to be implemented immediately ie from 1 June.’

Other points to be aware of about the advisory fuel rates:

• employers do not need a dispensation to use these rates
• employees driving employer provided cars are not entitled to use them to claim a deduction if employers reimburse them at lower rates. Such claims should be based on actual costs incurred.
• the advisory rates are not binding where an employer can demonstrate that the cost of business travel in employer provided cars is higher than the guideline mileage rates. The higher cost would need to be agreed with HMRC under a dispensation.

If you would like to discuss your car policy, please contact us.

Internet Link: Advisory fuel rates

Budget for the Righteous

If you smoke, drink and drive fast cars then the 2008 Budget will have upset you because the headlines are:

Fags up 11p
Beer up 2p
Car tax will rise to £950 in 2011 if you drive a Chelsea Tractor type vehicle.

For the rest it was a non-budget, everything that's going to happen from April 2008 was announced by Gordon Brown last year with just a few tweaks made.

If you run a small company then there is a bit of good news - the threatened taxing of spouses who take dividends, at 40% instead of 20% , was deferred until 5th April 2009.

The headlines are :

CIGARETTES AND ALCOHOL

• Cigarettes up 11p a packet of 20 from 1800 GMT; five cigars up 4p.

• Beer up by 4p a pint, wine 14p a bottle, spirits 55p a bottle and cider 3p a litre by Sunday.

• Duties on alcohol will go up by 2% above inflation for next four years.

CARS, FUEL AND ROAD PRICING

• From 2009, major reform of the vehicle excise duty. For new cars from 2010, the lowest-polluting cars will pay no road tax in the first year. Higher-polluting cars will pay more.

• Funding set aside for road-pricing proposals.

• 2p increase in fuel duty is postponed until October this year.

• For environmental reasons, fuel duty will rise by 0.5p per litre in real terms in 2010.

HOUSING

• From April, key workers, such as teachers and nurses, will be able to borrow money from shared equity schemes.

• Stamp duty on shared ownership homes will not be required until people own 80% of their home.

• More people should have the chance to have a long-term fixed mortgage, which a report shows can reduce the risks for first-time buyers and can keep them on the housing ladder.

• Sites for 70,000 more houses have been identified.

PENSIONERS

• Winter fuel allowance will go up from £200 to £250 for the over 60s and from £300 to £400 for the over 80s.

BENEFITS

• From October 2009, rules for housing and council tax benefit will mean families on benefit are better off in work.

• From April, 2009, child benefit will be increased to £20 a week.

• From April 2010, all long-term recipients of incapacity benefit will attend work capacity programmes.

BUSINESS

• Corporation tax will fall from 30% to 28% by April this year, but rise to 21% for small companies.

• Funds available through the small firms loans guarantee will increase by 60% in the next year.

• There will be a capital fund of £12.5m to encourage more women entrepreneurs.

AIRPORTS AND AIR TRAVEL

• New measures at Heathrow and other airports, using biometric technology, to speed up the time it takes to get through security checks.

ENVIRONMENT

• Laws will be introduced by 2009 to tax plastic bags if shops do not do more to charge for their use.

• £26m to help make homes greener.

• The government is asking the European Commission for tougher targets on car fuel emissions

EDUCATION

• There will be £200m extra for schools to raise GCSE results. By 2011, every school "will be an improving school".

• There will be a £30m fund to improve science teaching.

POVERTY

• Five million customers on pre-paid meters should get a "better deal". Energy companies should spend £150m on social tariffs.

• £17 more a week for poor families with one child.

• A family with two children earning up to £28,000 a year will be £130 a year better off. A further £125m to be spent over the next three years to help families.

SAVINGS

• The government will launch the "savings gateway" nationally with the first accounts available by 2010.

• Cash ISA limit confirmed as £3,600 a year from April.

If you would like further information on any aspect of the budget please call Haydn Pyatt on 01527-521717

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ENTREPRENEUR RELIEF

In the Pre-Budget Report in October 2007 the Chancellor, Alistair Darling, announced a series of changes to the capital gains tax (CGT) regime for individuals and trustees. These changes included the abolition of taper relief and indexation relief and the introduction of a single rate of CGT of 18%. The changes take effect from 6 April 2008.

On 24 January 2008, in response to pressure from the business community, the Chancellor announced a new ‘Entrepreneurs’ Relief’. The first £1m of gains qualifying for relief will be charged at an effective rate of 10%.

Gains in excess of £1m will be charged at 18%. An individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains.

Business leaders had been calling for the re-introduction of a form of Retirement Relief, which some of you may remember. The rules for retirement relief required you to have been in business for a number of years but the new rules are designed to be simpler:

• there will be no minimum age limit, and
• relief will be available where the relevant conditions are met for a period of one year.

The relief will apply to gains arising on the disposal of:

• the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership, and
• shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company.

Commenting on the announcement Richard Lambert, Director General of the CBI, said:

‘This is superficially quite clever and on the surface might seem like a relief after three months of uncertainty, but even the smallest business owner will lose taper relief and indexation and be worse off.

The reality is that these revised measures will do nothing to help the real business powerhouses of this country. Although £1 million might sound a lot, it could have been built up over twenty or thirty years. It is clear that the real wealth and job creators of the UK's economy, selling assets for a lot more, will be seriously clobbered.

Today's changes still discriminate against the long-term holding of assets, in favour of short-termism, and will do nothing to restore stability to the life insurance market, which faces a period of turmoil.’

Please do get in touch if you have any immediate concerns. We will let you have further detail once this is available.

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VAT invoicing changes from 1 October 2007

If you are in business and registered for VAT, from 1 October 2007 you are required to add certain information to your sales invoices. However in the first year of the new requirements HMRC will issue penalties for non compliance with the new requirements in exceptional cases only.

Who does this affect?

While the new regulations apply to the whole of the VAT population, most businesses will already comply. Those most likely to be affected are:

• businesses who do not presently operate a sequential sales invoice number system
• businesses using the margin scheme for second-hand goods, works of art, antiques and collectors items
• businesses involved in making travel related supplies that fall within the scope of the Tour Operators Margin Scheme
• businesses involved in intra EC supplies of goods and services, and
• businesses making supplies where the customer accounts for the VAT

What is required?

1. Invoice numbering - all VAT registered businesses should now sequentially number their sales invoices.
2. Second hand margin scheme - if you use this VAT scheme you should note this fact on your sales invoice. We suggest you add the following line to your invoice: "This invoice is for a supply covered by the VAT second-hand margin scheme."
3. Tour operators margin scheme - if you use this VAT scheme you should note this fact on your sales invoice. We suggest you add the following line to your invoice: "This invoice is for a supply covered by the VAT tour operators margin scheme."
4. Cross border EC supplies - if you make such a supply, which would be exempt if supplied in the UK or subject to the reverse charge provisions, you will need to make an appropriate note on your invoice. As this is a more complex area we suggest you call if you would like our help with the compliance aspects of the relevant invoicing changes.
5. Intra EC supplies of goods - these supplies tend to be zero rated for VAT in the UK. A simple statement to include on your invoices could read: "Intra-community supply, subject to VAT in the country of acquisition."
   

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Changes to Fuel Rates from 1 January 2008

A reminder that from 1 January 2008 the Revenue have published new mileage rates that company car users can use to calculate the fuel cost of running their vehicles for private purposes. If this private element is repaid to employers the employees will avoid the penal car fuel benefit charge.

The new rates are:

Engine size:

1400cc or less: petrol 11p, diesel 11p, LPG 7p.
1401cc to 2000cc: petrol 13p, diesel 11p, LPG 8p.
Over 2000cc: petrol 19p, diesel 14p, LPG 11p.

Employers can also use these rates to calculate the VAT input tax on fuel included in staff mileage claims - employers will need to retain fuel receipts from staff to prove the fuel was purchased. (Obviously it is unlikely that staff will have receipts that exactly match the fuel element on their claim forms. Receipts should cover the same time period and be sufficient to cover the VAT claimed.)

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Income Tax - downsides to basic rate reduction

On 6 April 2008 the basic rate of income tax will reduce from 22% to 20%. More importantly the starting rate of 10% is abolished from the same date. (In the tax year 2007-2008 the first £2,230 of taxable income is taxed at 10%.)

Three possible adverse affects of these changes are:

1. Low Incomes - if you have a low income you may actually be worse off! The drop in the basic rate to 20% may not fully compensate for the loss of the 10% starting rate band.

2. Pension Contributions (Basic Rate tax payers) - an unwelcome effect of the lower basic rate tax rate is a lowering of total contributions to your pension scheme. At present if you pay £78 into your scheme the Government will top up the contribution with the basic rate tax deducted, £22 - total contributions invested £100. After 5 April 2008 you will need to increase your contributions to £80 per month, tax top up £20, to achieve your £100 total investment. If you do nothing your monthly contributions will decrease at the rate of £2.50 per month, for each £100 presently invested. (2007-2008 net contribution £78 plus tax credit £22 = total contribution £100. 2008-2009 net contribution £78 plus tax credit £19.50 = total contribution £97.50.)

Note for Higher Rate tax payers: If you pay tax at 40% from 6 April 2008 you will be able to claim an additional 20% relief on your pension contributions - prior to 6 April 2008 this was limited to an additional 18%.

3. Gift Aid contributions - the reduction in the basic rate will reduce the total amount received by charities. If you presently pay £78 per year to a charity under the Gift Aid provisions the Government provide a tax rebate of £22 to the charity, total gift £100. After 5 April 2008 the same gift of £78 will create a tax rebate of £19.50. As in the pension example in 2 above, to maintain the combined cash benefit of your gift you will need to increase your contribution to £80.

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Income Shifting Consultation

You may well remember that the Arctic Systems case involved a husband and wife who owned a company 50/50 and, broadly, took the profits out by way of dividends, again 50/50. HMRC attempted to tax the dividends solely on the husband, as he was performing most of the work which generated the profits of the company.

Following HMRC’s defeat in this case, the government has published draft legislation to prevent a tax advantage being gained through what has become known as ‘income shifting’. This legislation will apply from 6 April 2008 to:

• company distributions, usually dividends; and
• profits from a partnership.

The proposed rules are very widely drafted and will catch many owner-managed businesses involving husbands, wives and other family members, as well as businesses run by non-family members, leaving many with a substantially higher tax bill.

We will, of course, keep you informed of developments. However, if you have any questions or concerns in the meantime, please do not hesitate to contact us.

Inheritance Tax Nil Rate Band

Chancellor Alistair Darling announced in his Pre-Budget speech a change to the way in which the inheritance tax (IHT) nil rate band of £300,000 can be used for married couples and civil partners.

Before the introduction of this change, where an individual died and left some or all of their property to their spouse or civil partner, then that transfer was exempt from IHT. However, on the death of the second spouse or civil partner, only one nil rate band was available, meaning that a nil rate band had been effectively wasted. This is because of the IHT exemption for transfers between spouses or civil partners.

The Pre-Budget change means that the proportion of any nil rate band unused on the first death may be used when the surviving spouse or civil partner dies.

This change is effectively backdated for situations where a spouse or civil partner died before the announcement of the change, as long as the ‘surviving’ spouse or civil partner dies on or after 9 October 2007.

This is a significant change that will affect many families and HMRC have now issued the relevant form IHT216 to claim a transfer of any unused IHT nil rate band.

Please do contact us if you would like more advice on this issue.

Link to HMRC Form : IHT216 form

Advisory Fuel Rates

To reflect the increases in fuel prices, HMRC have issued new advisory fuel rates for company car drivers. These take effect for all journeys undertaken from 1 January 2008 so employers wishing to use the new rates should advise affected employees and update any expense forms as soon as possible.

Engine size	Petrol	Diesel	LPG
1400cc or less	11p (10p)	11p (10p)	7p (6p)
1401cc – 2000cc	13p (13p)	11p (10p)	8p (8p)
Over 2000cc	19p (18p)	14p (13p)	11p (10p)

Other points to be aware of about the advisory fuel rates:

• employers do not need a dispensation to use these rates
• employees driving company cars are not entitled to use them to claim a deduction if employers reimburse them at lower rates. Such claims should continue to be based on actual costs incurred.
• the advisory rates are not binding where an employer can demonstrate that the cost of business travel in company cars is higher than the guideline mileage rates. The higher cost would need to be agreed with HMRC under a dispensation.

If you would like to discuss your company car policy, please contact us.

PRE BUDGET ANNOUNCEMENT 9 OCTOBER 2007

Personal Tax

Tax rates for 2008/09
As previously announced the government proposes to radically change the tax rates for 2008/09 onwards when the 10% starting rate will be abolished for earned and pensions income and the 22% basic rate of tax will be reduced to 20%. The higher rate of tax will continue at 40%.

The starting rate will continue to be available for savings and investment income. There are no changes to the tax rates applicable to dividends. However the rate of tax applicable to capital gains will change significantly to a flat rate of 18% for 2008/09 (see Capital Taxes section).

The income tax bands for 2008/09 were not announced in the Pre-Budget Report. Details of these are normally made available in the main spring Budget.

Comment
Gordon Brown had previously announced the reduction of the basic rate of tax by 2% in the Budget earlier this year. He also announced that the point at which people start paying the higher rate of tax will be increased significantly to £43,000 from 2009/10.

There is, however, a significant sting in the tail for some of those with earned income. The changes in the upper earning limit for NIC (see Employment Issues) will largely negate the income tax savings for many.

Allowances
The Chancellor did not announce the level of income tax allowances for 2008/09. The current personal allowance for those under the age of 65 is £5,225.

Tax Credits
There are two types of Tax Credits; Working Tax Credit (WTC) and Child Tax Credit (CTC). The CTC is potentially available to families who have responsibility for one or more children. There are several elements to the credit but broadly the maximum is an annual amount for 2007/08 of £1,845 per child together with a family element (generally one per family) of £545 per annum. The amount per child has been increased but the family element has been frozen since the introduction of the credit.

Some credit is likely to be payable for 2007/08 if a family’s income is less than £58,175 a year, or £66,350 if there is a child under one year old.

The government announced that from April 2008:

• the child element of Child Tax Credit will increase by £25 above earnings indexation, in addition to the £150 increase earnings indexation already announced in the Budget
  
  
• the income threshold for Working Tax Credit will increase to £6,420
  
  
• a higher rate of taper will apply for those in the fast taper band (up from 37% to 39%)

Pensioners
The Chancellor has announced that from April 2008 the Pensions Credit will be increased to a minimum of £124 for single pensioners and £189 for couples.

Payments on account (POA) threshold
Individuals who complete a self assessment tax return have to make direct payments to HMRC of their income tax and Class 4 national insurance contributions. The POA are made on 31 January and 31 July each year with a balancing payment for the tax year being made by 31 January following the end of the tax year. The POA are broadly made by reference to the previous year’s liability. POA are not due where more than 80% of the previous year’s liability was met by tax deductions at source from income such as employment or savings.

Currently where the previous year’s liability is less than £500 no payments on account are due and the taxpayer just makes one payment on 31 January following the end of the tax year of their full liability.

From 2009/10 the £500 threshold will be doubled to £1,000. The first POA affected by this change will be those due on 31 January and 31 July 2010.

Comment
This measure is expected to remove 367,000 taxpayers from POA most of which have business income.

Residence and domicile
The government has announced the completion of the residence and domicile review with a package of reforms which will take effect from April 2008.

The main proposal is that UK residents who are non-domiciled, who wish to continue to be taxed on a ‘remittance basis’ rather than on their worldwide income and gains, will have to pay an annual charge of £30,000. This measure is being introduced to ensure that they contribute in respect of the foreign income and gains which they keep abroad and on which they do not pay UK tax. The charge will apply if they have been resident in the UK for more than seven years.

Other proposals include:

• users of the remittance basis will lose their automatic entitlement to the personal allowance, currently £5,225, subject to a de minimis
  
  
• to ensure that when determining if an individual is resident in the UK, days of arrival and departure are counted
  
  
• to amend the current rules to remove flaws and anomalies that allow individuals who are assessed only on a remittance basis to sidestep UK tax where it is due on income and gains.

The government will consult on the detail of these proposals and on a wider range of options, including an option to make those individuals who are resident in the UK for more than ten years contribute more.

Pensions
The government proposes to extend the existing rules to prevent the abuse of pensions tax reliefs through members surrendering rights under registered pension schemes during their lifetime or through reallocation of assets after a member’s death.

The measures will have effect for surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member when the member dies on or after 6 April 2008.

Capital Taxes

Capital gains tax (CGT) reform
The Chancellor surprised everyone with major changes to the CGT regime. Legislation will be introduced next year to give effect to a new single rate of charge to CGT at 18%. A number of changes will be made for disposals made on or after 6 April 2008 to simplify the capital gains tax regime, including:

• the withdrawal of taper relief
• the withdrawal of indexation allowance
• simplification of the share identification rules.

CGT annual exemption
The annual exemption allows the first element of chargeable gains made in a given tax year to be exempt from CGT. An annual exemption will remain in place and for 2007/08 this is currently £9,200.

CGT rates of tax
Individuals making capital gains currently treat those gains as the top slice of income. This means that, currently, tapered gains are charged at 10% where gains plus taxable income do not exceed £2,230; 20% between £2,231 and £34,600; and 40% on any balance. For trustees the rate of CGT is 40%.

For 2008/09 there will be a single rate of capital gains tax set at 18%, which will apply to individuals, trustees and personal representatives.

CGT reliefs
Taper relief was introduced for disposals on or after 6 April 1998 and can reduce the amount of the gain chargeable to CGT. The amount of relief available depends on whether the asset is classed as a business or non-business asset and, also, on the length of time an asset has been held since 1998.

For disposals on or after 6 April 2008 and any held over gains coming into charge on or after that date, taper relief will no longer be available. The chargeable gain will be liable to tax at 18%, after deducting allowable losses, any other reliefs and the annual exemption.

Indexation allowance was, for individuals and trustees, the precursor to taper relief and gave relief for the effect of inflation on the costs incurred on assets. Indexation was frozen as at 5 April 1998. Currently, where an asset was held at 6 April 1998 and is disposed of after that date, any gain on the disposal may be eligible for indexation and taper relief.

For disposals on or after 6 April 2008 indexation allowance will no longer be available.

Simplification of the share identification rules
The current rules for the identification of shares and securities for CGT purposes require a complex order of identification, which is dependent upon the dates when the assets were acquired.

Due to the changes to taper relief and indexation allowance, all shares of the same class in the same company will be treated as forming a single asset from 6 April 2008, regardless of when they were originally acquired. However certain anti avoidance rules will remain.

Comment
The major changes announced will mean that CGT calculations will become a lot simpler. However although an 18% rate of CGT sounds low, there will be many losers.

Consider a higher rate taxpayer who makes a gain on £1m on a business asset. Business asset taper relief is available at 75%, so, in simple terms, only £250,000 is chargeable at 40%, a bill of £100,000.

Under the new rules, the whole of the £1m is chargeable at 18% a bill of, £180,000. Simplification may come at quite a price!

Inheritance tax (IHT) threshold
The IHT nil rate band was increased to £300,000 with effect from 6 April 2007.

Transfers of property between spouses or civil partners are generally exempt from IHT. This means that if an individual dies and leaves some or all of their property to their spouse or civil partner, they may not have fully used their nil-rate band.

The new rules will allow any nil-rate band unused on the first death to be used when the surviving spouse or civil partner dies. The transfer of the unused nil-rate band from a deceased spouse or civil partner, irrelevant of the date of death, may be made to the estate of their surviving spouse or civil partner who dies on or after 9 October 2007.

The amount of the nil-rate band available for transfer will be based on the proportion of the nil-rate band which was unused when the first spouse or civil partner died.

For example, on the first death none of the original nil-rate band was used because the whole of the estate was left to the surviving spouse. If the nil-rate band is £350,000 when the surviving spouse dies, it would be increased by 100% to £700,000.

Comment
This is an interesting way of addressing a problem that has arisen over recent years, namely that house price increases have meant that many people have been dragged into the IHT net. Certainly the change will help address this issue.

Stamp Duty and Stamp Duty Land Tax (SDLT) changes
To continue the theme of simplification, further changes are proposed from next year.

Firstly for transactions involving residential and non-residential property where the chargeable consideration is less than £40,000, there will no longer be a need to notify HMRC about the transaction.

Secondly transfers that currently attract stamp duty not exceeding £5 will be exempt and will not have to be presented for stamping.

Finally for transactions that occurred on and after 19 July 2007, where there is a transfer of an interest in a property within an investment partnership, there will be no charge to SDLT.

Planning Gain Supplement (PGS)
The PGS has been the subject of consultation since 2004 and, although no definite start date has yet been announced, it is expected to be introduced where planning permission is granted after 31 March 2009. The following principles have been established:

• the PGS will be levied at a flat rate on the difference in the value of land without planning permission and the freehold value with full planning permission
  
  
• both residential and commercial developments will be included
  
  
• there is unlikely to be any exemption for small scale developments such as building a single house in a back garden
  
  
• the developer will pay the PGS within 60 days of the date the development commences
  
  
• the developer will have to self assess the PGS and obtain the necessary valuations.
  

Comment
The PGS is designed to encourage landowners to release land for development, although how a tax on this action will achieve this aim remains to be seen. Landowners and developers need to consider the impact of the PGS on proposed developments that may not commence until after 31 March 2009.

Business Taxes

Income shifting
In July 2007 Mr and Mrs Jones won their case in the House of Lords. The profits of Arctic Systems (their company) which were paid equally to them by means of dividends would be taxed on each of them rather than solely on Mr Jones. The government believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage.

The government has announced that draft legislation to take effect from 2008/09 to address income shifting will shortly be issued for consultation. The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits.

HMRC will provide ‘practical guidance’ on the legislation as to the circumstances which may not be caught by the legislation. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business.

Income from employment, interest on savings and any other source will not be affected.

Comment
Legislation was widely expected following the Arctic Systems case. We await the publication of the draft legislation with interest!

Tax simplification reviews
The government has announced the start of a ‘significant programme of tax simplification’. Three reviews will be started in the autumn where HM Treasury and HMRC will work in partnership with business to evaluate how a range of tax policies could be simplified. These initial reviews will cover:

• how to simplify VAT rules and administration in the UK and the EU
  
  
• how anti avoidance legislation can best meet the aims of simplicity and revenue protection
  
  
• how to simplify the corporation tax rules for related companies.

VAT rules and administration
Areas where simplification will be of most significance to all VAT registered business include:

• Partial Exemption and the Capital Goods Scheme
  
  
• the frequency with which businesses submit returns
  
  
• VAT retail schemes.

Comment
There are 1.9 million VAT registered organisations in the UK. The VAT system already contains a wide range of schemes and methods, many targeted at smaller businesses, designed to simplify administrative requirements. However business has told the government that it would like to see further simplification.

Corporation tax rules for related companies
Areas where simplification will be of most significance to UK companies include:

• associated company rules for small companies corporation tax rate
  
  
• group aspects of corporation tax on chargeable gains
  
  
• corporation tax self assessment filing and payment for groups
  
  
• the burden of the transfer pricing rules.

Comment
There are over one million active companies in the UK, many of which have related companies, either as part of a wider company group, or because of association through common ownership. These relationships may complicate their tax affairs, and simplifying the corporation tax treatment of related companies could help reduce administrative and compliance burdens.

Spreading of tax relief for pension contributions
Employers generally get tax relief against their taxable profits for contributions paid to a registered pension scheme. Relief is given for the accounting period in which the contributions are paid. Tax relief for some large contributions above £500,000 maybe spread over a period of up to four years.

Legislation will be introduced in Finance Bill 2008 to ensure that the rules that spread tax relief for large employer pension contributions relative to their contribution in the previous year cannot be circumvented. This measure will have effect for payments made on or after 10 October 2007 under binding obligations entered into on or after 9 October 2007.

The measure will ensure that the spreading of contributions cannot be avoided by routing them through a new company.

Other anti-avoidance measures
Action is being taken to counter various avoidance schemes:

• financial products - disguised interest (and thus taxable) as dividends (which are exempt from tax for companies)
  
  
• abusing the availability of interest relief through the payment of interest in advance
  
• avoidance involving the sale and finance leaseback of plant or machinery and attempts to exploit long funding leases to create a tax loss where there is little or no commercial loss.

Company gains on life policies
Legislation will be introduced in Finance Bill 2008 to bring all life insurance policies and life annuity contracts to which a company is a party, other than protection-type policies, within the loan relationships legislation that is used to tax debts and debt-like instruments.

The special legislation that currently applies to such policies held by companies (‘the chargeable events’ rules) will therefore be repealed.

Comment
In practice very few companies own life policies and annuity contracts partly because of the archaic chargeable event rules. Where such policies and contracts are used for investment, economically they resemble debt-like instruments. Under this measure they will be taxed as such under the loan relationships legislation which is a far more sensible taxation system.

Tax relief for business cars
In March 2007 the government issued a second discussion document about business expenditure on cars.

The proposals are that:

• the existing 100% first year allowances for cars with CO2 emissions up to 120g/km be retained
  
  
• the general plant and machinery capital allowances pool will be used for cars with CO2 emissions between 121 and 165g/km
  
  
• a new car pool would be introduced with a lower writing down allowance than the general plant and machinery pool for other cars.

As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000.

The government has issued a summary of the responses to the proposals. The majority of the respondents supported reform of the current system but views were divided as to what would be a preferable system. In the light of this, the government has not indicated its next steps to modernise the tax relief system.

Fire safety capital allowances
Legislation extending capital allowances to expenditure on building alterations, made in response to a notice from a Fire Authority, is to be repealed for expenditure from April 2008.

Relief for expenditure on fire safety equipment such as fire alarms and sprinkler systems will continue to be available for all businesses.

Comment
The repeal sounds more severe than it actually is. The rules giving relief for fire safety alterations were introduced in 1974 to encourage businesses to ensure that existing buildings met fire safety standards. But since that date fire safety legislation has been reformed and now operates on a self-assessment basis. The tax relief provision applies only to those who have not complied with fire safety requirements and, as a result, are issued with a prohibition notice by a Fire Authority. To ensure that this does not encourage businesses to delay vital safety improvement work, the relief is being removed.

VAT and housing
Currently VAT is chargeable at 5% on renovations or alterations to residential properties that have been empty for at least three years.

Eligibility for this reduced VAT rate will, on and after 1 January 2008, apply to renovations or alterations carried out to residential properties that have been empty for at least two years.

Employment Issues

Company cars and the fuel scale charge
Where a car is provided for an employee’s private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions. The percentages range from 15% to 35% for most cars. There are currently discounts available for environmentally friendly cars and from 6 April 2008 there will be a 2% discount for cars that have been manufactured to run on E85 fuel.

If free fuel is provided for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit and a ‘multiplier’, which is currently £14,400. For 2008/09 the figure will increase to £16,900.

Comment
The fuel scale charge figure has not changed since it was introduced in 2003. This rise, combined with an increase in the car benefit percentages for 2008/09, means that many employees will see a substantial increase in their tax bills from next April.

Employers should seriously consider whether the fuel benefit is worth maintaining, as the associated Class 1A payable by employers on benefits in kind will also go up.

National Insurance Contributions (NICs)
In the last Pre Budget Report, all of the NIC rates were announced for the forthcoming year but, this year, no rates at all were announced!

In this year’s Budget, significant proposed changes to the limits between which NICs are payable were announced. For 2008/09 the upper earnings limits (UEL), above which employees continue to pay contributions of 1% on earnings, will be increased by £75 per week above indexation.

The upper profits limit for Class 4 national insurance for the self-employed will also be increased in 2008/09 by £75 per week above indexation.

In the following year the upper earnings limits will be aligned with the point at which the higher rate of income tax becomes payable.

Comment
The government claims the increases in national insurance are aimed at simplifying the tax system but it comes at quite a cost to employees and the self-employed.

Other NIC changes
Under an exemption that has existed since at least the 1960s, employers in the construction industry can pay into a third-party pooled holiday pay scheme, from which employees receive their holiday pay. There is no liability to deduct employer and employee NICs on that payment.

HMRC have become aware that this exemption is being used by large employers of workers outside the construction industry, putting significant amounts of revenue at risk. From 9 October 2007, the exemption is withdrawn for all businesses but the construction sector. For the construction sector, a five year transitional period will be introduced before the exemption is withdrawn completely on 30 October 2012.

Aviation tax
The government has announced that it intends from 1 November 2009 to replace Air Passenger Duty (APD) with a tax payable per plane rather than per passenger. The government will consult with the industry on the detail of this tax.

It was also announced that amendments will be made to the current definitions to determine the class of travel for APD. The change will remove an anomaly whereby passengers on ‘business class only’ flights are currently liable for reduced rates of APD. The government proposes using seat pitch, more commonly referred to as leg room, to help determine classification. This measure will take effect for journeys on or after 1 November 2008.

Vehicle Excise Duty (VED)
The government has announced inflation only increases on motorcycle VED rates in 2008/09.

VED rates for special types of vehicles, combined transport vehicles and all vehicle categories linked to the basic goods rate will be frozen.

It announced on 1 October 2007 that VED rates for heavy goods vehicles will be frozen in 2008/09.

All changes take effect for licences commencing from 1 April 2008.

DO YOU ISSUE VAT INVOICES ?

With effect from 1 October 2007, it will now be a mandatory requirement for all VAT invoices to have an identifying number, which must be from a series that is unique and sequential.

Also, users of the margin scheme for second hand goods, users of the Tour Operators' Margin Scheme, and businesses which provide either intra-EC VAT exempt services or services subject to the reverse charge procedure must now include on their invoices either a reference to the relevant article in the EC Directive, a reference to the relevant UK legislation, or any other reference evidencing the supply made. Previous references advised by HMRC are superseded.

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Small businesses need an exit strategy

Many business owners spend years getting their business off the ground, developing their customer base, and striving to increase the business value in the marketplace. Ironically, these same owners often don’t develop a plan for getting their investment out of the business. No matter how great your entrepreneurial and management abilities, the day will come when you want to sell the business, turn it over to someone else, or simply shut it down. It makes sense to plan for that day.

Here are three key considerations when developing an exit strategy:

Know your business. How do you want to exit the business? Do you want to sell the firm or turn it over to family members or employees? How long do you plan to stay involved in day-to-day operations? How much money will you take out of the business for retirement or other ventures? How will you deal with relinquishing control to others? Thinking through the answers to these questions is key to a successful exit strategy.

Set up an advisory team. Whether you plan to sell the business or turn it over to others, it makes sense to get at least two professionals involved from the start: your solicitor and your accountant. An experienced business lawyer can guide you through the maze of requirements and factors surrounding due diligence, business sales, and estate planning. Your accountant can prepare accurate financial statements, develop tax strategies, and may even provide a business valuation. Depending on the type and complexity of your firm, you also might hire other professionals, including commercial estate agents and management consultants.

Make the transition smooth. If you plan to sell the business or hand it over to someone else, the new owners will want assurance about the firm’s future viability. To provide this assurance, take steps to ensure that your customer base remains stable, suppliers stay committed, and the transition to new management flows as smoothly as possible. Often these goals can be accomplished by retaining key employees who have established relationships with clients and suppliers. In addition, smart buyers will want to verify your figures. You can facilitate this process by ensuring that your financial records are in order and your assets valuations are up to date.

If you need help planning an exit strategy for your business, give us a call.

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Illegal Working Action Plan

Illegal Working Action Plan

New legislation is set to introduce prison sentences and/or unlimited fines for employers who are found to have knowingly employed illegal workers.

Under the plans, civil penalties will also be levied on companies which have been negligent in carrying out checks on workers.

The proposed measures form part of the Home Office"s Illegal Working Action Plan, and are due to take effect early next year.

The Action Plan also includes the proposed introduction of compulsory biometric identity cards for foreign nationals, and a new employee checking service which aims to improve the support offered to employers.

Responding to the proposals, the Confederation of British Industry (CBI) acknowledged that employers have a duty to check their staff, but warned that ID and other documents must be reliable.

John Cridland, CBI Deputy Director-General, said, "At the moment fake documents can make life very difficult for employers, and the Government also has problems with identification".

"The burden on business will be reduced if the new checking service is good quality and if the new ID card system for migrants is effective."

TAX FREE VAN BENEFIT FOR EMPLOYEES

Revenue & Customs will allow a van to be used for transport to and from work without a benefit-in-kind assessment arising.

To ensure that it remains tax free the following steps must be taken

1. Make it a condition of the driver’s employment contract that whilst they can use the van for ordinary commuting, no other private use is permitted by them (or their family). If any of your drivers fit into the insignificant private use category there should be no charge for 2006/7.

2. Have a signed agreement with the employee, which states that:

“The Van is made available to the Employee for travel on Company business. The Employee is permitted to use the Van for ordinary commuting to and from home, the Employee’s place of work, but all other private use is strictly prohibited. According to HMRC guidance, prohibited private use includes using the Van to do the supermarket shopping each week, taking the Van away on a week’s holiday or using the Van outside of work for social activities.

The Employee is also required to keep a daily mileage log in the vehicle recording the reason for the journey and the number of business miles travelled.”

3. Record that the van driver has an alternative vehicle for private journeys.

4. Write into the Taxman to confirm which Van drivers have insignificant private use, listing their names and NI numbers. Ask that their tax codes for 2007/8 be revised accordingly. Now is also a good time to check that no-one has been paying tax on a benefit that doesn’t exist.

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Teenage helpers are tax savers

Your teenage children are always asking for extra cash - as paying them out of your taxed income is expensive, is there a way to get your company to pay them instead ?

How it mounts up

Teenage spenders. Children of all ages are expensive. But when they reach their teenage years, the demands on your cash get even harder to resist. You probably give your teenagers pocket money of some description too. If you pay it out of taxed income it has to be grossed up to show what it really costs. For example, if your daughter and son receive £10 and £12.50 per week respectively, it won't cost you £1,170. In fact, the amount you have to earn to pay them this sum is actually £1,983! (if a higher rate taxpayer).

Get them working. Of course you could send them out to after-school and Saturday jobs to help earn their own money. There are some legal rules to comply with, e.g. the child must be 14 or over and not work for more than five or eight hours (depending on age) on a Saturday, but by and large there are plenty of employers looking for younger workers. So why not join that list of employers? You could take your teenage children onto the payroll, get the company to pay their pocket money (and more) as wages and save yourself a tidy sum in tax at the same time. How is it done?

On the payroll

You could employ them in the office on a Saturday morning to carry out filing duties, tidying up, counting stock etc. You could do the same for a couple of hours after school during the week too (as long as they don't work past 7pm). You have plenty of flexibility here. Maybe the fleet of company cars needs a wash?

Paper formality. You should add them to your payroll like any other employee. The good news is that the company can claim a full tax deduction for their wages.

How much to pay? The national minimum wage of £3.30 per hour only applies to 16 and 17 year-olds so you can basically pay what you like. However, the more the company pays them, the more you'll save personally. And remember, it's deductible for the company. They'll need to complete a Form P46 if employed for more than a week.

Will they pay tax? Everyone has a personal allowance, which, for 2006/7 is £5,035 (£5,225 next year). As long as your teenage worker's total income for the year is less than this, he (or she) won't pay a penny in tax - and that would buy him (or her) around 50 pairs of the latest trainers! Plus, neither you nor they will pay any NI (as long as they're under 16).

Really so straightforward?

Whilst you don't have to issue them with contracts, it would be helpful to list their principal job tasks. And do make sure they actually work for the money, otherwise the Taxman might turn nasty.

Tip 1. Workers under 16 won't be issued an NI number. So simply enter their date of birth and gender on the end-of-year returns. Of course the good news is that they won't pay any NI either.

Tip 2. As employees of the company you can go one stage further by giving them benefits-in-kind such as a mobile phone. If the contract's in the name of the company, the benefit will be tax-free.

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How do I correct VAT errors ?

When to issue a credit note/re-invoice

• If the VAT error on sales invoices is less than £2,000 in total, issue the credit note/re-invoice. This will automatically result in an adjustment to the figures on your next VAT return

When to claim bad debt relief

• If an invoice has not been paid for six months after the due date for payment (i.e. not the invoice date). You then need to make an entry in the bad debt relief account and adjust Box 4 of your VAT return.

When to make a voluntary disclosure

• If the VAT error on sales invoices is more than £2,000 in total. Then tell the VATman in writing by completing form VAT 652 which can be downloaded from the government website HERE
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• Note: you can only adjust errors covering the last three years.

Sign up for rates relief

Small firms are being urged to ensure they benefit from a government tax relief initiative with just a month to go until the application deadline.

Many Small to Medium sized Enterprises (SMEs) are in danger of missing out from crucial savings a result of Small Business Rate Relief (SBRR).

Under the scheme introduced in April 2005, each business that has premises with low rateable value can claim relief from their business rates.

Businesses with rateable values of below £5,000 are entitled to 50% rate relief. The relief decreases on a sliding scale by 1% for every £100 of rateable value over £5,000, up to £10,000.

But despite the savings, the take up has been slow so far. There are many firms who are either unaware of SBRR, or who do not realise they qualify for it.

Earlier this year, a survey by the Local Government Association suggested that less than half of the 870,000 small businesses across England which qualify for the scheme, had applied for it.

SBRR applications must be received by local authorities within six months of the end of the financial year in question. The deadline for 2005/06 is 30 September. So get those claims in fast !

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Make your Bank work for you

Have you taken a look at your company’s banking relationship lately? Probably not. Chances are you opened an account at a local branch when you started the business and haven’t changed since. But your business and its banking needs have almost certainly changed. So has the banking industry. As big banks have consolidated nationally, smaller overseas based banks have opened and flourished. You’ll find a wealth of banks eager to compete for your business.

Periodically, it’s a good idea to examine how well your bank is serving your needs. You and your accountant or bookkeeper should arrange to meet with your local bank manager or relationship officer. Your goal is to summarise your company’s performance and banking needs, and then ask the bank how it can best serve you. Topics to discuss include:

	Fees. Is your current fee structure the best for your business? Explore alternatives that might reduce fees. Consider switching to an “analysis” method, where you earn credit for the deposits you maintain.
	Payment processing. Review how you pay your bills to suppliers and how you deal with payments from customers. Would more use of electronic payment processing improve your operations? Would your business benefit from cash management techniques to improve cash flow?
	Loans. Do you have or will you need a business loan or line of credit? If so, discuss possible rates, terms, and alternatives. Remember, most banks are eager to make sound loans. Put that to your advantage in discussions.
	Deposits. Banks are also hungry for deposits. Discuss how much you keep on deposit and how you are compensated for those amounts. If your business has large cash balances at certain times, discuss possible short-term investments.
	Other services. Discuss other banking needs such as company credit cards for executives who travel.

Your bank should be your business advocate. Keep the communication open and the pressure on to make sure it fills that role.

How to Survive a PAYE/NIC Inspection

However confident you are that your records are complete and well maintained, a PAYE/NIC inspection might still catch you unawares. If you use a computer payroll they will not spend time checking the calculations as they used to, they will put more effort into going through expense payments looking for any private element and for cash taken out that is not supported by receipts. Here are some pointers to help you:

Your records must provide details of all relevant benefits for the tax year to 5 April.

Even if you are registered for VAT, your P11D ( Annual statement of benefits paid to employees ) records have to be VAT inclusive.

You must include travel, subsistence, and entertaining in the information you enter on forms P11D, even if incurred for business purposes (unless you have an official Revenue dispensation).

HM Revenue & Customs and the Contributions Agency are likely to challenge all doubtful claims on the business mileage limit. Where you do not provide fuel for private motoring that is assessed on the employee, keep full mileage logs for every vehicle, whether owned privately or by the company - an inspection team would ask for evidence of business mileage. Keep separate figures for each car where there is a change during the year, or where more than one vehicle is available to a director/employee.

The fuel scale charge is an 'all or nothing' benefit, so if the business pays for any private fuel and is not fully reimbursed by the employee, the employee must accept the corresponding private fuel benefit and you must report it on a P11D.

For all categories of expense/benefit, pay careful attention to anything incurred in the name of an individual director/employee, but paid or reimbursed by the business. NIC problems will arise if you do not treat this properly.

You are required to retain all records and information relating to payroll, benefits, etc. for three years after the tax year end - but keep them for six years, the period for which the Revenue has powers to investigate your business accounts.

You are now more likely than ever to be subject to a full review of your compliance systems and procedures, so don't leave anything to chance.

Make sure you are not vulnerable to the risk of PAYE/NIC liabilities, penalties, and problems - sort them out now. If you need any help, contact us.

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Could your business survive a flu pandemic?

The nation is beginning to discuss the possibility of a flu pandemic; that is, a worldwide outbreak of a new and lethal strain of influenza. Nobody knows when a pandemic will occur – it could be within a year or within 20 years. But medical experts seem certain that a pandemic will happen sooner or later. Three pandemics occurred in the last century. The most serious, in 1918, killed tens of millions of people around the world. Today with airtravel being so common the spread would be much faster.

The government has started to plan for the consequences of a pandemic. However, in the chaos that would accompany a serious outbreak of flu, your business can’t rely only on the government. At this point, it’s probably too early to make concrete plans. But it’s not too early to start thinking about the possible effects on your business and how you would deal with them.

Consider the following issues:
	Loss of employees. How would you cope if perhaps 25% of your employees were sick and unable to report for work? How would your business be affected?
	Quarantined employees. What would happen if a significant number of your employees were quarantined and unable to report to work? Could they work from home? It’s quite possible that compulsory quarantine would be imposed if an area is affected by an outbreak.
	Loss of a supplier. How would you be affected if a major supplier lost employees and cut back production? How much inventory do you keep on hand?
	Disruption in shipping. A pandemic could well disrupt transportation and shipping. This could affect both your supplies of materials and your ability to ship a product.
	Loss of communications. In a worst case, telephone and/or Internet service could be interrupted. How would this affect your ability to do business?

The potential problems and the solutions to them are different for every business. There are certainly no easy answers. However, the businesses that come through a pandemic in the best shape will be those that have done their planning! Make a start by assessing your vulnerabilities and thinking of possible responses.

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Every employee works in customer service