Tax tips 2010

We are approaching the end of the tax year (5th April) and now is a good time to review your financial affairs to ensure that they are as tax efficient as possible.

This is more important than ever, given the increase in tax rates due from April and the possibility of a new Government.

Tax increases

The top rate of income tax will rise to 50% from this April. It applies to individuals with a taxable income of £150k and the 50% is charged on income in excess of that level. Therefore, for many, the highest rate will remain at 40%.

Personal allowances have been frozen at £6,475 and for individuals with income over £100k, this will be withdrawn on a sliding scale. Therefore anyone with income over £112,950 will receive no tax free income tax allowance. This equates to a tax rate of 60% on that slice of income between £100k and £113k.

Married couples / civil partners

There are more planning opportunities here and you should ensure that your finances are arranged to utilise each personal allowance and lower tax bands. It might be sensible to transfer income producing assets to your spouse to take advantage of their lower tax rate.

You each have an exemption for Capital Gains (£10,100 for 2009/10). It makes sense to use this if you can. If you intend selling assets, it may be worth transferring them into joint names first, or spreading the disposals over 2 years.

The current rate of CGT is 18% and in some circumstances 10%. This is significantly lower than 40% (or 50% next year). There is no guarantee that the rate will remain this low.

Gift Aid donations should be made by the spouse with the highest tax rate..

VAT online

New registrations and anyone with turnover in excess of £100k will have to file and pay online sometime within the next 6 months. It applies to Returns starting from 1st April 2010.

EC Sales lists

Selling services to overseas companies now has to be reported separately. The rules are complex. It’s chaos. Anyone who thinks they may be affected should get in touch.

PAYE online

You have to submit your Employers end of Year Return online this time. They will not accept paper versions. If you have not done this before, you need to get organised now because there are hoops to be jumped through before you can submit the information. For the avoidance of doubt this has to be in by 19th May.

They are also intending to charge penalties for late payment of PAYE from April. So if you habitually wait ’til the end of the month rather than paying by the 19th, be warned. The penalties will apply even if you are only 1 day late. You are allowed to pay 1 month late and thereafter they will be looking for a penalty of between 1% and 4% of the late amount subject to how many times you have been late. A payment that is over 6 months late will attract a 5% penalty.

These penalties will be calculated and issued after the end of the tax year.

In 12 months time, you will need to be ready to do the rest of it online. That means P45s etc.

Inheritance Tax

I often get clients asking me if they have to pay tax on a lump sum cash payment received via someone’s will. The answer to that is no. You do have to pay tax on any income that is generated from that legacy.

If you receive a lump sum or asset during that person’s lifetime, there is a possibility that you could pay IHT if they die within 7 years of giving it to you.

A person is allowed to give away IHT free

• any amounts of income
• £3k per annum
• lump sum gifts on marriage
• small gifts of £250

This is complicated area and if anyone has any IHT queries, they should get in touch.

Estate planning

You should have a will and it should be reviewed regularly. You may need to consider the implications of Local Authority Care and how to protect your assets. IHT will relieve you of 40% of your capital in excess of £325k. The Local Authority could take 100% of your capital in excess of £25k.

False self employment

HMRC do not like labour only subcontractors and I don’t just mean in the building trade. They went after some flying instructors recently. HMRC lost (they weren’t flapping hard enough). Seriously though, if you’re in business and you pay someone to work for you and do not operate PAYE on the payment, it needs some consideration.

In most cases there will not be a problem, but if you do not have all of your ducks in a row, HMRC will expect you to pay the tax and NI that should have been deducted from the worker.

Holiday Lets

No longer a business from April. This means fewer tax reliefs on the income and gains from that source. Anyone directly affected should give me a call.

HMRC may ‘phone you at home’

This could be in the evening or at the weekend. Not only will you have to handle the shock element, you will also need to ensure that it’s not bogus. If you receive a call, you are entitled to refuse to talk to them. You should not give any personal financial information away and it would be worth asking the caller to confirm the last 4 digits of your tax reference.

HMRC ‘professionals campaign’

They are currently targeting doctors and propose to go after dentists next. Subsequently it will be solicitors and accountants. The idea being, that they have collected huge amounts of intelligence from third parties and they want the ‘professionals’ to come clean about any missing income. In return they will only charge penalties of 10%.

Record keeping

The Enquiry process has changed and is likely to be more aggressive than ever. You are required to maintain business records, which are sufficient to support a correct Return. Officers of HMRC have been quoted that Returns cannot be relied upon where records are incomplete and that includes the use of estimates.

Using the same figure every year for the private use of, say, motor is asking for trouble. We would prefer you to keep a mileage log for at least a couple of months every year. If you cannot be bothered, you may be sticking a target on your heads.

What they know about you

• Transactions involving sales of boats and planes
• Licenses to sell alcohol
• Licenses to keep cattle
• Grants for farming and conservation
• Auctioneers returns
• Gains on insurance policies
• Rent paid to landlords
• Land sales
• Vehicle history
• Taxi and radio cab licences
• Interest and dividends paid
• Overseas property
• Bupa and other medical insurers payments

They also have fingertip comparisons of your and other similar businesses. They can see how your turnover and profits have fluctuated over the years. They can see how much you draw to live on and take a view over whether it’s sufficient based on the other things they know about you.

MPs expenses

This isn’t relevant at all but it is interesting. The rules for employees to claim for expenses are very stringent. The expenses must be incurred, wholly exclusively and necessarily for the purpose of the job. If there is any duality of purpose, no claim can be made.

This rule applies to MPs too. They are employees.

The whole issue came to light in the 1980s when the Revenue first challenged MP expense claims. They rattled a few cages by assessing some MPs in respect of excessive claims and issued a memo stating that ‘some of the claims are of a kind which could well catch headlines if it was known that they were being made, let alone accepted’

The MPs were up in arms and it was quietly decided that a tax free allowance would be used instead. Effectively the Revenue were sidelined and the issue was to be handled internally. Of course it was going to be stringently monitored…..

Pension contributions

We cannot express opinions on whether this is a sound investment. You are however, allowed to contribute up to 3,600 per annum without any evidence of earnings, which could be useful for a non working spouse or individual in receipt of unearned income.

The rules for contributions change dramatically for higher earners from April 2011 with some measures taking effect now.

If you earn in excess of £130,000 and intend to invest over £20k per annum into your pension, HMRC will restrict the higher rate tax relief. This is complicated, so I will go into more details with anyone who feels they may be affected.

Capital Allowances (tax breaks for new kit)

Last year HMRC introduced a £50k allowance for new kit (excluding cars). So anyone who spends less than this in a year gets it all tax relieved at 100%.

Up to April 2010 expenditure over £50k was relievable at 40%. This does not apply to integral features.

Integral features, unless covered by the £50k AIA, are written down at 10% per annum so it takes a long time to get relief for this type of expenditure. This is water and air heating or cooling systems and kit that is generally part of the fabric of the building. You might get 100% allowances on this if it is energy efficient.

Other kit is relieved at 20%. As are cars unless their CO2 emissions exceed 160g/km in which case they are relieved at 10%. Cars owned by companies are a bad idea because there are no balancing allowances on sale. It could take 23 years to extract the cost of a gas guzzler in your accounts.

Confused? I can explain in more detail if required.

Finally

As usual it’s all fairly miserable. We advise all of our clients to take out investigation insurance. Having to pay insurance is a pain and you hope that you never need it, but if HMRC do come calling, you do not want a £5k accountancy fee on top of the aggravation factor, possible extra tax and the resulting interest and penalties.

Sara Morris

DUCKETT | 01432 370 572 | contact us

DUCKETT

t: 01432 370 572

contact us