Tax E-News Monthly Update - April 2010

AVOID THE PERSONAL ALLOWANCE TRAP

From 6 April 2010 there is a gradual withdrawal of the personal allowance if your taxable income exceeds £100,000. This is via a reduction of £1 of allowance for every £2 of excess taxable income, and it means that if your 2010/11 taxable income is within the range of £100,000 to £112,950 you will amazingly suffer tax at the staggering rate of 60%! The marginal income tax rates are as follows:

You may well consider this to be outrageous, and together we should be able to find an alternative strategy if your taxable income is likely to be within that range.   

COMPANY CARS

The Budget proposes even more changes to the company car regime – but this is mostly good news as the income tax charge on the benefit for private use is being reduced if the car has low CO2 emissions. That mirrors the policy used for road fund tax.

The income tax charge on the benefit of having a company car for private use has in fact now been announced for all tax years up to and including 2012/13 (indeed to 2014/15 in some cases). As such, a robust tax strategy can now be established and we will be pleased to become involved in this for you.

The level of CO2 emissions qualifying for the basic minimum 15% charge is 130 g/km for 2010/11; 125 g/km for 2011/12; 120 g/km for 2012/13. That’s the bad news, but there is a lower charge of 10% of list price where CO2 emissions do not exceed 120 g/km, reducing to 99 g/km from 2012/13.

There is an even lower charge of 5% where CO2 emissions do not exceed 75 g/km from 6 April 2010 to 5 April 2015. However, the April 2010 edition of What Car? does not report any car within that range! One for the future, then.

From 6 April 2010 right through to 5 April 2015 the tax charge is on NIL where the company car or van cannot produce CO2 emissions under any circumstances when driven. This is basically an electric vehicle and does provide some real tax saving opportunities in the right circumstances.

ASSOCIATED COMPANIES

Normally a limited company making taxable profits of up to £300,000 in its accounting year pays only the small companies’ rate of corporation tax which is 21%, as opposed to the standard rate of 28%. Not surprisingly there are rules to stop you controlling more than one company and getting several tranches of profit of £300,000 enjoying that lower rate, and if for example you controlled three companies the associated companies’ rules mean that each company only has £100,000 of profits taxed at 21%.

But in fact the rules are much wider, and if your spouse or civil partner controls another company it will also be associated with yours for this purpose. After many years of protests, there is a promise in the Budget that the Finance Bill 2011 will relax these nasty rules. It proposes that whilst the rights of a person and his nominees will always be taken into account, the rights of others (e.g. spouse) will only be relevant in limited circumstances. It suggests three categories of linkage:

We doubt that this important relaxation is politically sensitive, and it should therefore see the light of day whatever happens at the forthcoming General Election. We will make sure that we take advantage as soon as we can, and get your company tax down wherever possible.

BUSINESS PAYMENT SUPPORT SERVICE

BPSS is available to help viable businesses to meet their tax obligations when they are experiencing temporary financial difficulties. It provides a streamlined service for businesses to arrange additional time to pay their HMRC tax bill. Most decisions are claimed to be made “within 10 minutes”. 

This support has been very successful and has already helped over 200,000 businesses employing more than 1.4 million people. To 14 March 2010 over 305,000 agreements have been reached with businesses to spread tax payments of more than £5.2 billion. HMRC now say that they will continue to offer time to pay as a permanent part of its support for all viable businesses having difficulty in meeting their tax obligations.

BPSS is primarily aimed at self-employed people and companies but HMRC will consider applications from anyone who is having temporary difficulties in meeting their tax obligations.

A word of caution is needed as it has been reported that a second claim for a time to pay arrangement is likely to meet detailed investigation by HMRC before it is agreed.

CAPITAL ALLOWANCES 

It is reckoned that fewer than 5% of businesses spend as much as £50,000 annually on buying new equipment. if you are one of the few, you will be delighted to learn that the annual investment allowance of 100% on the first £50,000 spent is doubling to £100,000 for expenditure from 1 April 2010 for limited companies – from 6 April 2010 for sole traders or partnerships.

If your accounting period does not run to 31 March there is a pro rata calculation needed, so that for example a calendar year end would mean a 100% allowance for the year to 31 December 2010 on £87,500.

MANAGED PAYMENT PLANS

HMRC will be introducing these in April 2011 as a new way of paying tax by instalments. What will happen is, that if you so wish, you can enter into a voluntary arrangement to spread tax payments by instalments which are balanced equally on either side of the normal due date.

This is clearly not for everyone, but it will provide a means of proper budgeting which could be useful. We will keep you fully informed of this new opportunity as details are released.

ENTREPRENEURS’ RELIEF

It was a real surprise to learn from the Budget that the flat rate of capital gains tax (CGT) of 18% is not changing – although there is a view that it will increase in due course. Just as big a surprise was the dramatic doubling of the valuable entrepreneurs’ relief on gains made on qualifying business disposals. The relief is 4/9ths of the gain and this serves to reduce the normal CGT rate of 18% to 10% on the first £2 million of gains in certain circumstances (£1 million if the disposal was before 6 April 2010). It is now therefore worth a maximum of £160,000.

There are plenty of tax planning opportunities using this relief and we will be pleased to advise you fully.

CORPORATE TAX MITIGATION

EBT's [Employee Benefit Trusts] have been used for many years by companies to both reward and retain the service of key members of staff/workforce. In simple terms an Employer makes a Contribution to an EBT, using an offshore trust, obtains a Corporation Tax deduction, and funds are available within that offshore trust for the benefit of key employees.

Over the past 20 years the increasing use of EBT's for the mitigation of Corporation Tax has brought about an increasingly active stance against their use by HMRC, resulting in the introduction of legislation seeking to deny a tax deduction unless benefits are paid out to employees and HMRC receive income tax. In recent years various EBT 'derivatives' have become available - none of which HMRC has taken to!

Current thinking - fully supported by Counsel’s Opinion is that a contribution to an EFRBS (an EBT derivative) occasions a corporation tax deduction, whilst the transfer of funds to a sub fund triggers the tax deduction without giving rise to an income tax or national insurance liability.

Many in the accountancy world thought that the dramatic increase in usage of EFRBS to transfer funds from a company to an offshore trust, with a corporation tax deduction, would be stopped in the last Budget. To their great surprise no changes were made. Why was this? We can't be certain but we suspect HMRC is of the view that the legislation as drafted gives the tax effects detailed in the HMRC manuals. As, in the opinion of HMRC, the legislation is in accordance with the guidance in the HMRC manuals there is no need to make any changes in the law ....because on their interpretation the corporation tax deduction can be denied. This seems to be contrary to the clear words of the legislation, which are there for all to see. We are therefore left in the position that the legislation (as interpreted by leading Tax Counsel) says one thing and the HMRC manuals say another. Both are confident that their interpretation is correct, and it will in all likelihood require the intervention of the Tax Tribunals or courts to determine the correct position.