Exchequer Weblog

From this current tax year the Taxman can impose penalties if you are late in paying over the payroll and CIS deductions you make in the tax year. ‘Late’ in this context means the payment reaches the Tax Office after the 19th of each month, (or 22nd when paying electronically).
Until now the Taxman did not impose penalties or interest on small employers if all the payroll deductions for the year reached him by 19th April (or 22nd) after the end of the tax year. Large employers, (those with more than 250 employees) have been subject to surcharges for late payment for some years, as they have been obliged to pay over all deductions electronically.

For the last 12 months we have been warning that the favourable tax concessions for furnished holiday lettings (FHL), would end on 6 April 2010.

The legislation to change these tax rules was included in the 2010 Finance Bill. However, as part of the horse-trading at the end of Parliament before the General Election, the repeal of the FHL rules was dropped from the Finance Bill before it became the 2010 Finance Act on 8 April 2010.

The FHL rules remain in place for the time being. If Labour regain power on 6 May 2010, the FHL rules could be abolished, possibly from 6 April 2010. However, if a new government that draws support from rural areas gains control on 6 May, it is less likely that the FHL rules will be abolished in the foreseeable future.

There are a host of new employment related regulations coming into force on 6 April 2010. This is a brief summary of those regulations that are likely to affect you or your business:

• Fit notes – these replace sick notes issued by G.Ps and will state what the worker can do, rather than what he or she is prevented from doing.
• Pension date - the date from which the individual can draw the state retirement pension will not necessarily fall exactly on a woman’s 60th birthday. For example, a women who reaches age 60 between 6 April 2010 and 5 May 2010 will have a state pension date of 6 May 2010. This date also affects the payment of the employee’s NI contributions.
• NI contribution years - individuals who reach state retirement age only have to have to accumulate 30 full years of NI contributions or credits to gain a full state pension.

This was a pre-election Budget but without many give-away prizes. Many of the standard allowances and thresholds have been frozen for two to five years, which introduces hidden tax rises by way of fiscal drag.

This summary concentrates on the main tax issues businesses. The good news points for small businesses are the extensions of entrepreneurs’ relief and the Annual Investment Allowance. The bad news includes the new anti-avoidance rule for loans provided to participators in private companies. There are also a large number of complex measures which may not pass into law before this Government runs out of Parliamentary time.

Business Tax

Capital Allowances
The maximum Annual Investment Allowance (AIA) available to each business or group of companies will double to £100,000 for expenditure incurred from 1 April 2010 (6 April 2010 for unincorporated businesses). The cost of all qualifying equipment (not cars or buildings), that falls within the AIA limit can be deducted in full from the business profits in the year the equipment is bought.
The AIA was introduced in April 2008 with a cap of £50,000, which was sufficient to cover the annual capital expenditure for about 90% of businesses. This increase in the AIA limit means the capital expenditure of about 99% of businesses will be covered by the AIA, and thus will be allowable in full when incurred. Any capital expenditure in excess of the AIA limit is taken into the relevant capital allowance pool where it receives tax relief at either 10% or 20% per year.
Partnerships where one or more of the partners is a company do not qualify for the AIA. Also a group of companies only qualifies for one AIA limit for the whole group.

Loans to Participators
This is bad news for private companies. It undermines an arrangement that is becoming popular in owner-managed companies; where the director takes a loan from his company to spread the taxation of that income into a future tax year. When the loan is written-off or released by the company, the director is taxed on the value of the loan as if it was a dividend. However, the Taxman may also insist that the company pays class 1NICs on the loan write-off where the loan may have been substituted for part of the director’s remuneration.
Before today’s Budget the company could claim a deduction in its accounts for the value of the loan written-off as well as any NICs paid on that amount. For loans written-off on or after 24 March 2010 the company will not be able to claim a deduction in its accounts for the value of the loan, which will make the whole exercise very expensive. This new rule applies where the loan is provided by a privately owned company to a participator of that company, which includes all shareholders, directors and loan creditors of the company and their associates.

Corporation Tax
The corporate tax rate for small profits remains frozen at 21% for the financial year that runs from 1 April 2010 to 31 March 2011 (2010/11). The small profits rate applies where a single company has profits of no more than £300,000. Companies with profits of £1.5 million or more pay corporation tax at 28%. Profits that fall in the band £300,000 to £1.5 million are taxed at a marginal rate of 29.75%.
Where a company is part of a group or has associated companies the profit thresholds that determine where each tax rate applies are divided by the number of associated or group companies.

Business Rates
Businesses that occupy premises in England with rateable values of up to £6,000 per year will be able to claim full exemption from business rates for 12 months from 1 October 2010. In addition those businesses in properties with rateable values of up to £12,000 will be able to claim reductions in their business rates from that date. Different business rates relief schemes apply for properties in Wales and Scotland, but details of those schemes were not given in this Budget statement.

Individuals

Income tax Allowances
All personal tax allowances have been frozen for 2010/11 at the 2009/10 levels as follows:
Under 65 - £6,475
65-74 - £9,490
75 and over - £9,640
Minimum marriage allowance* - £2,670
Marriage one partner born before 6 /4/1935* - £6,965
Blind person’s allowance - £1,890
Income limit for allowances for those aged 65 or more - £22,900
* given at 10% rate only
This freezing of allowances for everyone amounts to a hidden tax increase as the value of the allowance is reduced in real terms by inflation, which from the latest measure of the consumer prices index (CPI) is now 3%. Unfortunately the annual adjustment in allowances is based on a different measure of inflation: the Retail Price Index (RPI) as reported for the year to September which was a negative number: (-1.4), which has resulted in frozen personal allowances for 2010/11.
Another hidden tax rise lies in store for those with total income of £100,000 or more. From 6 April 2010 those individuals will lose £1 of their personal allowance, for every £2 of their total income that exceeds £100,000. This equates to a marginal tax rate of 60% on that slice of income.

Income Tax Rates
The tax thresholds for 2010/11 at which each tax rate is imposed have also been frozen at the 2009/10 levels. This also introduces a subtle tax increase for those people whose income has increased, if that increase takes their taxable income over one of the tax thresholds.
Savings rate* - 10% - £0 - £2,440
Basic rate - 20% - £0 - £37,400
Higher rate - 40% - £37,401 to £150,000
Additional rate - 50% - Over £150,000
* Only applies to savings income such as interest where earned income is covered by allowances or is also within this band.
The 50% tax rate only applies on income over £150,000, it does not replace the 40% tax rate.

Capital Gains Tax
The much anticipated increase in the rate of capital gains tax (CGT) did not emerge, the CGT rate remains at 18% for 2010/11. The CGT annual exemption is also frozen for 2010/11 at £10,100, with the exemption for trusts set at £5,050.
The good news for all ambitious business people is that entrepreneurs’ relief is to be extended. Entrepreneurs’ relief reduces the effective rate of CGT to 10% on gains arising on the disposal of businesses and certain business assets. Taxpayers are limited to claiming this relief on up to £1 million of gains made from 5 April 2008 to the end of their life. This lifetime limit is to be increased to £2 million for disposals made after 5 April 2010. No additional relief is given for gains realised before 6 April 2010 that exceed £1 million.

Inheritance Tax
The nil rate band for inheritance tax has been frozen at £325,000 for 4 years. Although widows and widowers can benefit from the transfer of any unused nil rate band from their deceased spouse or civil partner, this freezing of the IHT zero rate represents an hidden tax rise in real terms.

Savings Income
The tax-free ISA limits have already been increased for 2010/11 to £10,200, of which £5,100 can be saved in a cash form such as a bank savings account. These limits will now be increased by the rate of inflation (RPI measure) every year from 6 April 2011. If the RPI is negative the ISA limit will not be reduced. The amount that can be saved in a cash form will continue to be half the value of the full ISA limit for stocks and shares.

Pension Contributions

Special Annual Allowance Charge
Taxpayers with total income of over £150,000 will have to pay a special annual allowance charge (SAAC) of 20% to 30% of the irregular pension contributions they make that exceed £20,000, or in some cases £30,000, in 2009/10 or 2010/11. Irregular contributions are defined as those made less frequently than quarterly. The measure of income is the taxpayer’s total income before deductions for the current tax year, or in either of the two preceding tax years.
Employees with total annual income before deductions of £130,000 or more can also be caught by the SAAC if the sum of their income plus value of the pension contributions made by their employer on their behalf totals £150,000 or more.
From 6 April 2011 tax relief on pension contributions will be tapered down to the basic rate of tax for those earning between £150,000 and £180,000 or more.

Annual Allowance Charge
Tax relief on pension contributions is capped at the lower of 100% of the taxpayers’ relevant earnings, or the annual allowance. This annual allowance is to be frozen at £255,000 for the tax years 2010/11 to 2015/16. Where the pension contributions made exceed the annual allowance the taxpayer must pay an annual allowance charge (AAC) of 40% of the excess pension contribution. The SAAC and the AAC can apply on the same pension contributions, but the amount subject to the SAAC is reduced by the amount of contributions already subject to the AAC.
The detailed rules that govern exactly how these charges apply are very complex, so if your pension contributions or earnings are likely to break any of the thresholds mentioned please ask us for tailored advice.

New Obligations on Employers
In spite of these excessive tax charges on high pension contributions the Government wants all workers to be a member of a pension scheme. From a date to be announced in 2012, all employers will be required to ensure that their employees are members of a pension scheme. If the employee is are not already a member of a registered pension scheme he will be automatically enrolled in the Government scheme known as the National Employment Savings Trust (NEST). The employer will be required to make contributions to NEST or the employee’s registered pension scheme.

Stamp Duty Land Tax

One of the give-aways of this Budget is relief from Stamp Duty Land Tax (SDLT) due on buying residential properties that cost up to £250,000, where the property transaction is completed between 25 March 2010 and 25 March 2012. The issue is that this zero rate only applies to first-time buyers, and the relief will have to be claimed by those individuals, it will not be given automatically.
To help fund this tax relief an additional rate of SDLT is to be introduced at 5% on properties costing £1 million or more from 6 April 2011. So if you are planning to buy that million pound home, get on with it!

V.A.T.

Rates
The rates of VAT have not been changed. The standard rate remains at 17.5%, the reduced rate is 5%.

Registration Threshold
The level of turnover that triggers a requirement to become a VAT registered trader within 30 days is to rise by £2,000 to £70,000 with effect from 1 April 2010. The turnover threshold below which traders can apply to become deregistered for VAT increases by £2000 to £68,000 from the same date.

Postal Services
Certain commercial postal services provided by the Royal Mail and ParcelForce, will become subject to standard rate VAT from 31 January 2011. Services provided to private individuals, such as stamped mail, will continue to be exempt from VAT.

 Tax Avoidance

Off-shore Income
The Taxman has been gathering information about off-shore accounts held by British residents from banks based in the UK and in tax havens such as Liechtenstein. Now three further tax havens; Belize, Grenada and Dominica are about to sign information exchange deals with the UK.
Tax evaders with off-shore accounts were given until 12 March 2010 to come clean and declare all their off-shore income and gains to HMRC. If they persist in their tax evasion tactics after 1 April 2011 and hide money in a country that does not have an information exchange agreement with the UK, they will find themselves subject to penalties of up to 150% of the tax due. If the tax evaded is £25,000 or more, HMRC may publish the taxpayer’s name and address as part of their name and shaming powers.

Security for PAYE
Currently the owners or directors of new business may be asked to provide a lump sum to HMRC as security before the business is permitted to become VAT registered. The Tax Office tends to demand such payments where the business owners have previously been involved in a business that failed owing VAT. From 6 April 2011 HMRC will also be able to ask for security payments from the business owners before the business is permitted to operate a PAYE scheme.

Disclaimer: The above summary has been compiled from publicly disseminated information and should not be relied upon as a definitive interpretation. Individuals and businesses should seek their own analysis before making any fiscal decisions.

If you regularly sell goods to VAT-registered businesses in other countries you will be familiar with the form VAT 101, also known as the EC Sales List. This form has been used to record the cross-border movement of goods for Government statistical purposes. It does not require a payment to be submitted with the form. However, you can be charged a penalty if you don’t submit your EC Sales List on time.

For sales made on and after 1 January 2010 the EC Sales List must also record the value of certain services supplied to VAT registered business in other EU countries, as well as goods. The services affected are those where the reverse charge applies, which means the customer charges themselves VAT at their own local rate, the supplier of the service does not add VAT to the invoice. This reverse charge procedure applies to most services supplied to businesses customers across international borders from 1 January 2010.

In our 5th January newslog we told you about the Taxman’s crackdown on undeclared commissions. On 11 January 2010 [he] launched a scheme to encourage medical professionals to disclose all their undeclared income, including commissions and any other income that hasn’t been shown on their tax returns. This scheme is called the Tax Health Plan, but at present it is only open to medical doctors who are registered with the General Medical Council (GMC), and to qualified dentists.

If you are a doctor or dentist, and you want to “come clean” to the Taxman you need to register your intention to make a disclosure under the Tax Health Plan by 31 March 2010. You will then have to present the full disclosure report and pay all the tax, interest and penalties due by 30 June 2010. Your accountant or tax adviser can help you calculate what is due and to complete the disclosure forms necessary.

The Taxman has started to issue the 2010/11 PAYE codes, for the tax year that starts on 6 April 2010. This code arrives in the form of a P2 notice, and a copy should go to your employer (on a form P9). If you have received your 2010/11 PAYE code already please study it carefully, as any corrections need to be made in the next few weeks.

Since the Taxman fired up a new PAYE computer last summer there have been a number of faults appearing in PAYE codes. In some cases the age allowance or married couples allowance disappeared, in other cases the state pension amount was understated. Now many of the 2010/11 codes have excluded some of the basic personal allowance, which should be £6,475 for those aged under 65.

This fault occurs if you have changed jobs in the last few years, or started to receive a pension.

At last a solution has been found to the problems businesses face when trying to reclaim overseas VAT. From 1 January 2010, to claim a refund of VAT you have paid in another EU country you must complete an online claim in the UK. You don’t have to battle with lots of incomprehensible forms in other languages, as the claim will be done entirely in English. The UK tax office will forward your claim to the relevant country, which will process the refund within four months of receipt. You should then receive the payment due within a further 10 days.

To make VAT refund claims in respect of VAT paid in other EU countries you need to first register to use the Tax Office VAT EU refunds system, which is part of the VAT online service.

The Government needs to raise more revenue to pay off the massive national debt, but it seems reluctant to announce higher tax rates. One tax that looks ripe for an increase is Capital Gains Tax (CGT). The current rate of CGT is just 18%, compared to a top rate of 40% for income tax.

An additional income tax rate of 50% will be imposed on income over £150,000 from 6 April 2010, and there are strong rumours that the rate of Capital Gains Tax (CGT) will also be increased from that date.

Nothing has been announced on this issue yet. Some say this silence is deliberate to avoid people rushing to make gains that will be taxed in the current tax year at 18% (or 10% with tax reliefs), rather than pay CGT at a much higher rate in 2010/11.

If you live in the UK you should declare on your UK tax return all of the interest you receive from investments and deposit accounts situated anywhere in the world. This applies even if you don’t transfer that income into the UK. Individuals who have non-domicile status (normally not born in the UK), can apply to use what is called the ‘remittance basis’, and in those few cases the off-shore interest does not have to be included on their UK tax returns if it remains outside of the UK.

The Taxman has a campaign to track down everyone who has held an offshore bank account or investment, and who has not reported the income as they were required to do so. A larger number of foreign banks, including the most secretive banks in Liechtenstein, have been forced to provide lists of account holders to the UK Tax Office. The accounts on this list include trustee accounts, bond accounts and all types of current and investment accounts.
The bank is required to provide the dates for which the account was open, the name and date of birth of the account holder, the balance at 31 March each year, and detailed transactional information for certain periods.

If you had an offshore bank account at some point in the past, which you forgot to include on your tax return, you can now come clean. From 1 September 2009 you can tell the Taxman you want to declare your offshore interest.
You can do this through the HMRC website, or by phone. Once you have made this initial approach you will be given a reference number, which you need to include on a detailed declaration. HMRC will also be looking for tax on the underlying capital where that came from an undeclared taxable source.

The full declaration must be submitted by 12 March 2010.

If you use this time to come clean to the Taxman, you still have to pay all of the tax and interest due, but the penalty for failure to disclose in earlier years will be limited to 10%. Although where the bank was a branch of one of the main UK banks the penalty may be 20%, as you could have disclosed this interest two years ago, under a similar scheme that ran in 2007. In normal circumstances the penalty can be up to 100%!