Tax Update 2007

Tax update October 2007

The fuss surrounding the CGT changes in the Pre Budget Report is starting to subside, but there are lots of changes already in the pipeline.

Sparkle recently attended a full day tax update and has produced a briefing note (as usual). I therefore reproduce this note in full, but it’s fairly hard work. Some of it may change over time as the rules are written/invented (rather than just announced).

The average policy-making Civil Servant is “in charge” for no more than 10 years, so what appears to be a “new idea” is nothing of the sort. Stand by for a repeat of history: don’t mention investment income surcharge.

Headlines are as follows:

• Tax is going up

The Government has noticed that the best way to raise tax is to reduce the rate and then remove existing allowances. Hence the adjustments to Capital Allowances. I’m willing to bet that the new £50k annual allowance won’t last very long. Cars are in for a caning on green grounds. And then there’s the question of how to tax those nasty small company dividends.

• “Income splitting” is subject to attack

Beware the terminology. This is actually a much bigger issue than the Arctic case. The Revenue’s pre-Arctic statement included 39 examples, including partnerships, of what they consider to be evasion. All husband and wife partnerships are potentially suspect, although some more so than others. This will be chaos.

• The CGT changes

This promises to be an absolute bonanza for anybody wanting to convert income subject to 40% tax to capital subject to 18% tax. They really don’t realise what they’ve done.

Given the outrage from the small business community (over the abolish on of taper), they are talking about bringing back retirement relief, presumably making it harder to qualify than it used to be.

more....

Chris Duckett

20.10.07

For those interested in the detail, read on:

Incorporation

The tax saving benefits of incorporation have gradually and continue to erode. The ‘bunce’ year being in 2001 when the £10k nil rate was in. The professional view is that profits of no less than £40k should be the starting point with some clients in the (never in a million years category).

The Government has stated its concern over tax motivated incorporation and will continue to monitor the extent to which labour income is extracted as dividends.

The 2008 personal Tax Return includes a box to declare total income from service companies. So it looks like we may need to identify the dividends specifically from owner managed companies. Previously, this information would have been very difficult to quantify.

The Government has promised to bring in changes from 6th April 2008 to put a stop to the tax advantages obtained by the payment of dividends and allocation of partnership profits, but no one (especially the Government) knows how this will work.

CT rates

Large companies are to pay less (30% to 28%)

Small companies to increase from 19% to 22% incrementally over 3 years. Because of the way it’s calculated, the marginal rate (on profits of £300k -£1.5m) reduces slightly, but it’s still 30%+.

R & D tax relief

The amount of relief is to increase from 150% to 175%, but where this is claimed as a refund the amount repayable remains at 24% of the qualifying investment.

Film schemes

No longer work

EBTs (Employee Benefit Trusts)

Tax relief will be restricted to the amounts, which have been subject to PAYE. The clever boys have found a way round this and there is currently £500bn at stake.

Capital allowances

Big changes starting in April 2008, but the rules have not been finalised yet. The allowance on existing kit will go down from 25% to 20%. New kit will attract allowances of 20% or 10%. The 50% first year allowance is to go. This is to be replaced by the Annual Investment Allowance (AIA), which means that the first £50k spent on kit (not cars) will be 100% relievable.

The £50k allowance will be pro rated for the first year where the accounting date is not 31/3 or 5/4.

Each business can have the full AIA, even if linked to others, apart from company groups. Partnerships which include companies will not get the AIA.

The reduction in the allowance from 25% to 20% will also be pro rated where the accounting period straddles 6th April. For example, for a 30 September year end, the WDA is 22.5%.

Clients with existing large CA pools should consider de-pooling to safeguard balancing adjustments.

Purchases of kit from April will attract 20% allowance after AIA, unless the kit is integral fixtures to a building in which case the allowance will be 10%. This is in contrast to ‘productive equipment’.

ABAs and IBAs to be phased out starting in April. 2008/9 they get 75% of the original allowance, 2009/10 ­ 50% and 2010/11 ­ 25%. Thereafter nil.

The existing favourable allowances for ‘Green technology’ remain.

There are to be changes in the CA treatment for cars, but this has not been earmarked to start in April.

1. Cars with CO2 emissions of 120g/km or less get 100% allowance (small Citroens, Peugeots, Toyotas and one Mini Cooper model). The benefit in kind on these company cars is calculated at 10% of list price. The downside is the balancing charge on disposal
2. CO2 emissions from 121 to 165 g/km will go into the main pool and get 20%
3. Cars above this (lots) go in another pool and will probably only get a 10% allowance

BUT the big loss is on balancing adjustments. It remains to be seen how private use will be handled.

Leased cars will also be categorised with the over 165g/km attracting lower reliefs.

Managed service companies (+?)

This is fairly stringent anti avoidance of the IR35 type. The criteria for this to apply is as follows:

A company/ pship

1. Provides the service of individuals
2. The income for their services is paid intact
3. Less NI is paid than would be paid it were employment income
4. A person who carries on business of promoting or facilitating the use of companies is involved. (Scheme provider) Not an agent, accountant, solicitor.

“A scheme provider benefits financially on an ongoing basis from the provision of the services, influences the provision and promotes an undertaking to make good any tax loss.”

In these cases PAYE must be operated (like IR35). If the PAYE is not paid there is legislation in place to collect this from another connected person.

At the moment, we have no idea who these rules will apply to.

VAT

The scope of missing trader fraud has been broadened so that any person in a supply chain can be liable for fraudulently unpaid VAT. The moral of this is to check the people you’re dealing with.

Assets with private use. The Lennartz principle allows 100% initial reclaim with the VAT payback in respect of the private use to be no longer than 10 years for property and 5 years for other assets.

E filing changes

SA 2008 Returns; paper to be filed by 31 Oct. online by 31 Jan

Those who do file paper returns still have until 31.1.09 to amend (15 months not 12)

HMRC will have 12 months from the date of submission to start an enquiry

Payments will only count the day the cheque CLEARS (all taxes).

PAYE returns mandatory on line from April 2011.

VAT returns to be filed and paid electronically by April 2010. Applies to newly registered and existing with t/o more than £100k.

CT file and pay online from April 2011.

Income Tax

From April the 10% band goes and the BR band reduces from 22% to 20%. The losers in this are those with income of around £18k or less per annum.

Tax Credits have been increased.

NI

The percentages are the same (11% and 12.8%) for employees but the rate at which it goes down to 1% has been raised so the higher paid get to pay more NI.

Class 2 is £2.20 per week.

The Government wants to unify tax and NI, but they don’t know how to do it yet.

IHT

Nil rate bands

2007/08 £300K

2008/09 £312K

2009/10 £325K

2010/11 £350K

For the death on or after 9.10.07 the unused nil rate band of the previously deceased spouse (or civil partner) can be claimed. A claim can be made regardless of when the first one died as long as the unused proportion can be proved. The maximum extra nil rate band will be limited to 100% so serial widow(er)s are not encouraged to become so.

So Joe died in 2001/02. The nil rate band then was £242k. He used half of it. If Elsie (his wife) dies on

1st December 2007, her estate can have a nil rate band of £450k (300k x 150%).

CGT

From April 2008 it will become simpler. Taper relief goes. The difference between the sale price (or market value) and the cost (or March 82 value if later) will be taxed at 18% less the annual exemption.

Anyone who was looking at a 40% tax rate under the old rules is laughing.

The change is possibly beneficial for the sale of non-business assets where the best rate was effectively 24%.

This is detrimental for the sale of business assets where the rate was 10%.

Indexation allowance is to be abolished which effectively cuts the cost value in half where the asset was held at March 82. This is very bad news for farmers. There is expected to be a rush of disposals between now and April to capture the existing reliefs. This may be facilitated by the use of Trusts where the owner wants to retain ownership.

Unquoted trading companies need to consider whether to sell before 6th April 2008

Share options may need to be exercised before 6.4.08.

more.....

Overseas holiday homes

Sometimes it is necessary to own these via a company (France). There will be no benefit in kind for its use, providing that the company only exists to own the property.

Capital losses

There is anti avoidance legislation to prevent transactions where the main purpose is to gain a tax advantage (not avoidance). Consider the case where a husband owns an asset and transfers it into joint names just prior to sale to get the use of his wife’s exemption.

Tax efficient energy

Households who produce clean energy for their own use but sell any excess to the National Grid will not be taxed on this. No CG will apply to the disposal of (domestic?) ROCs.

Domicile/Residence

Non doms do not pay tax on income/gains which stay outside the UK. The rest of us mortals pay tax on our worldwide income and gains. From April the non doms will either have to include their worldwide income and pay tax on it or pay a straight £30k ‘penalty’. They also lose their tax free personal allowance.

For non residents to remain so they must not spend more than 91 days on average in a year. Days of departure and arrival will now count in the 91 days.

Foreign Dividends

Will generally be taxed the same as UK from 6.4.08. The gross overseas div will be the net UK div. Credit for the overseas tax will be given as well as the deemed UK tax.

Partnership losses

Non active partners will not be able to claim more than £25k losses. Non active means spends an average of 10 hours per week on the business.

Associated companies

Still up in the air. ESC C9 defines a relative as spouse or minor child, but does not provide a let out for business partners.

New penalty regime

To apply to Returns filed after 31.3.09

Innocent error 0%

Careless upto 30%

Deliberate but not concealed upto 70%

Deliberate and concealed upto 100%

If disclosure takes place, these penalties will halved if prompted and reduced by unprompted to nil for careless and to around 1/3 of the maximum for the others.

The End (finally)

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