Exchequer Weblog

Business Rates
From 1 April 2008 most empty business properties became liable to business rates, when previously empty properties were exempt from rates. After much protest, and a number of instances where properties were demolished, the exemption from business rates is to be applied to all properties with a rateable value of less than £15,000 for the tax year 2009/10 only.

Car tax (vehicle excise duty)
There was a lot of fuss after the Budget in March 2008 over the proposed increases in car tax (VED) for older cars registered after 1 March 2001. These increases in VED have now been scaled back to £5 per car per year for most cars for 2009/10, but larger increases will apply for new polluting cars.

Excise Duties
Just to prove this was a real Budget the duties on cigarettes increased from 6pm on 24 November 2008. Duties on wine and spirits go up from 1 December 2008. To compensate for the reduction in VAT, fuel duties are also to increase from 1 December 2008 and then again on 1 April 2009!

There is no immediate change in the main rates of class 1 employers and employees national insurance from 6 April 2009. However, a large rise in class 1 national insurance is proposed from 6 April 2011 to 11.5% for employees, to 13.3% for employers, and the additional rate payable above the upper limit is to increase from 1% to 1.5%. This would bring in a significant amount of additional revenue for the Government beyond 2011.

Class 3 national insurance is a voluntary class normally paid by people who want to top up their NI contributions in order to receive the full state pension. This voluntary rate is increasing from £8.10 per week to £12.05 per week from 6 April 2009. So if you need to top-up your NI contributions it would be best to do this while the rate remains at £8.10 per week.

Income tax
The rates and thresholds of income tax have been set for 2009/10 as follows:
Savings rate (on Savings income only) - 10%: £0 - £2,440
Basic Rate - 20%: £0 - £37,400
Higher Rate - 40%: Over £37,400
However, an additional higher tax rate of 45% is promised from 6 April 2011 for those with total income above £150,000. These individuals will also lose the benefit of the personal allowance (see below). The rates paid by Trusts will also increase to 37.5% for dividends and 45% for other income from 6 April 2011.

Personal Allowances
In May 2008 the Chancellor increased the basic personal allowance to compensate lower earners for the loss of the 10% tax threshold. This increase is carried forward into 2009/10.
There is a cap on the benefit of the personal allowances given to those aged over 64 where their income exceeds the income limit. A similar mechanism of reducing the benefit of the personal allowance is proposed for those with total income over the thresholds of £100,000 and £140,000 in 2010/11 and beyond.

Pension Contributions
The lifetime and annual allowance for pension contributions were set for the five years from 2006/07 to 2010/11. These allowances will now be frozen at the 2010/11 rates until at least 2015/16, which will restrict the tax relief available to very high earners:
- Life time allowance: £1.8 million
- Annual allowance: £255,000

Losses
To help smaller businesses survive the recession the normal one year carry back rule for trading losses is going to be extended to three years, but only for a limited period. When a loss is carried back from the current year (year 0) to year -1, and cancels out the profits in year -1, the tax paid for year -1 can be reclaimed. This provides an immediate cash-flow boost for the loss making business.
The rules will be different for companies and for unincorporated businesses such as sole-traders. In both cases the amount of loss carried back to year -1 will be unlimited as now, but the total loss which can be carried back to years -2 and -3 cannot exceed £50,000. Losses not used against profits in earlier years will be carried forward, assuming the business continues to trade.

- Companies. Where a loss is made in an accounting period that ends between 24 November 2008 and 23 November 2009, that loss may be carried back up to three years, subject to the £50,000 cap. Where the loss-making period is less than 12 months the £50,000 cap is reduced proportionately. The rules for surrendering a loss to another group company will not be changed.
- Unincorporated businesses. If you trade as a partnership or sole-trader you are taxed on the profits you make in the accounting period that ends in the relevant tax year. For example the profits or loss for the year to 31 March 2009 are taxed or relieved in the 2008/09 tax year that ends on 5 April 2009.
In order to claim the extended three year carry back of losses you must have a loss for the accounting period that is taxed in 2008/09. Young businesses in the first four years of trading already get a three year carry back of losses, so this extended loss relief is targeted at established businesses.
If you made a small profit in the year to 30 April 2008, taxed in 2008/09, but a large loss in year to 30 April 2009, taxed in 2009/10 you will not get the three year carry back. Because the loss has fallen into the ‘wrong’ taxed year: 2009/10 instead of 2008/09 it can only be carried back for one year instead of three years. In this situation you could change your year end to 31 March 2009 to capture the loss early and take advantage of the three year carry back.

Corporation Tax
Two years ago the rates of corporation tax for companies with ’small’ profits were set to rise on 1 April 2008 to 21% then on 1 April 2009 to 22%. The Chancellor has now decided to postpone the second of those increases to 1 April 2010.
‘Small’ profits are those that fall below the small company rate threshold of £300,000. This threshold is proportionately reduced by the number of companies associated with the main company. An associated company can be one run by your spouse or civil partner, or another company over which you have control.

Income Shifting
Last year the Government threatened to bring in legislation to deal with the problem of couples sharing business income to reduce tax. This was going to happen from April 2008, but was postponed until April 2009. It has now been put back on the ‘too difficult pile’ until at least the recession is over. So there are no immediate changes for family businesses.

In order to boost consumer spending across all sectors the standard rate of VAT will fall from 17.5% to 15% for a limited period from 1 December 2008 to 31 December 2009, when it will return to 17.5%, as the Chancellor predicts that the recession will be almost over by then.
This is going to be very awkward for VAT registered businesses as you need to consider whether to, and how to pass on the VAT reduction. You do not have to change your VAT inclusive prices, but you must change your accounting system to record the correct standard rate of VAT as follows:

1. You must record the VAT due on all your sales at the correct rate from 1 December 2008. The zero and reduced rates have not changed. Only VAT at the standard rate has reduced to 15%, which amounts to 13.043% or 3/23 of the gross figure, whereas VAT at the old standard rate of 17.5% is 14.894% or 7/47 of the gross.
Example
A sale worth £470 including VAT at 17.5% on 28 November means you have collected VAT of £70 from the customer. The same sale of £470 made on 1 December including VAT at 15% means you have only collected VAT of £61.30, so you have kept an additional £8.70 profit from that sale.

2. Any invoices issued from 1 December 2008 must show the new standard rate of 15% for standard rated items. However, if your invoice is for something that was completely delivered before 18 November 2008, or you were actually paid for the complete sale before 1 December 2008, you should use the old standard rate of 17.5%.

3. If you have the sort of business that receives stage payments for long contracts, such as in the construction industry, there are particular rules to consider. The relevant date for VAT is normally when you issue a VAT invoice or receive a stage payment. So any invoices issued for stage payments received on or after 1 December 2008 must have VAT accounted for at 15%, even if some of the work was performed before 1 December.

4. If you use the flat rate scheme for small businesses you need to look up the new flat rate for your business sector in appendix E of the detailed VAT guide on the HMRC web site at http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. Most, but not all of these flat rates have changed from 1 December 2008 and you must apply the new rate to your VAT inclusive sales if you want to stay in the flat rate scheme. We can help you calculate whether you should stay in the scheme with your new flat rate.

5. If you use the cash accounting scheme you need to be particularly careful about recording exactly when the sale was made and the invoice was issued. This is because you need to pay over VAT of 17.5% for sales made before 1 December 2008 even if you receive the payment on or after 1 December 2008.

Although single companies can normally only carry losses forward, where there are several companies in a group the losses made by one company can be set against profits made by other companies for the same year. Companies are regarded as a group when either 75% of the ordinary shares from one company are owned by the other company, or two or more companies are each owned at least 75% by a holding company.

Where a group exists all the trading losses, property losses, and excess charges (but not capital losses) arising in the loss-making company can be transferred to another company in the same group, to reduce the corporation tax that company pays for the same accounting period. You can opt to move as little or as much as the loss as you wish.

If you have more than one company it is therefore worth considering if they should be arranged in a group structure to take advantage of group loss relief.

Companies pay corporation tax at different rates according to the level of their taxable profits, so it makes sense to move the losses to the company that pays the highest marginal rate of corporation tax. The calculations can get quite complicated where there are a number of different types of income and various sizes of company in the same group, but your accountant or tax adviser can help you reach the most tax efficient solution.

In the present climate where house builders are stuck with properties they can’t sell, they may be tempted to rent them out.
However, when building firms rent out newly built homes instead of selling them, this can cause VAT problems. This is because new residential properties are zero rated for VAT and letting residential property is exempt from VAT. The amount of VAT charged to the buyer in both cases is the same: nil, but the seller’s ability to reclaim VAT on its costs is not.

Briefly you can reclaim VAT on costs associated with something you sell which carries zero-rate VAT, but you can’t reclaim the VAT when the thing you sell is exempt from VAT.

Where your business has only a small proportion of VAT exempt sales, you may be able to ignore the ban on reclaiming VAT, if the VAT relating to the exempt sales is less than:

• - £7,500 per year; or
• - 50% of the business’s VAT on purchases for the year

Working out how much of the VAT you paid relates to the new properties which are let is not straight-forward. The total amount of VAT on the purchases that relate to those buildings must be spread over 10 years. If the properties are let for say 2 years before they are sold then 2/10ths of the VAT on the costs is regarded as relating to exempt sales. If this total is within the limits shown above, you have no VAT problem.

However, in real life the calculations are rarely that simple. If you are forced to let newly-built residential property please ask your accountant to check your VAT position.

With increased interest rates, losses on property lets may be increasing, so it’s worth taking a look at how those losses are treated for tax purposes, to help get tax relief for any losses.

Where property is held in your own name
If you let a property you own personally, even it was previously your own home, you must report the rental income and expenses on your tax return. This applies whether you make a profit or loss from the letting.
Where you own several let properties all of the income and expenses relating to your UK properties are thrown together to establish the overall profit or loss for the year. Properties which are located outside of the UK are excluded from this property group, as are properties which are let as furnished holiday homes on short lets. The profits and losses from foreign properties must be shown on the foreign income pages of your tax return. Furnished holiday lettings have their own rules for dealing with losses and have some advantages.
It is important to declare the loss, if that is the position from the general property group. Although you can’t set that loss against your other income, it can be carried forward without time limit. If you do make a profit from letting your properties in a future year the loss you have made this year will reduce the tax you have to pay in that future period. If you don’t claim the loss you won’t be able to use it in the future.

Where property is held through a company
Where you hold let properties through a company the mechanism for calculating the profit or loss from the lettings is rather different. The interest paid on any borrowings taken by the company to fund the properties is not deducted directly from the rents, but it is treated as a separate expense.
The rental income from all the properties the company owns is set against the costs relating to those properties, excluding interest paid. Only at that stage is the interest payment set-off against all of the company’s profits for the year. If those profits do not cover the whole of the interest paid, the excess interest cost is carried forward to the next year. The carried forward interest can only be set against the company’s non-trading profits, such as from property or interest received. This means that it is not easy to get tax relief for excess interest where the borrowing relates to let property.

If your business is feeling the pinch in this general economic downturn, it’s more important than ever to look at what you can do to help your business. Here’s 10 ideas to get you started…
1. Get paid sooner! Encourage your customers to pay more quickly, by giving small discounts or just by chasing them promptly. Send out invoices for completed work as soon as possible, and for long term projects ask for stage payments on account.
2. Promote best value products. If you have a range of products or services, look at giving more prominence to the best value items in your marketing.
3. Talk to your bank. Keep your bank informed, particularly if you are going to have a need to secure extra funding or even renew existing arrangements. If fees are being increased it may pay to look elsewhere for facilities.
4. Take advantage of the crunch. If you are cash positive, turn the crunch to your advantage. Some businesses may be keener to make a sale so those with cash may be able to negotiate some great bargains, particularly for early payment!
5. Staffing needs and working hours. Consider asking staff to change their working hours to part-time or flexi-time, with an appropriate drop in total pay. Or to take their holidays now if business is slow. If a skilled member of staff is about to retire ask them to stay on part time, as this may be cheaper than recruiting a new employee.
6. Office rent. Ask your landlord if you can change the rent from quarterly in advance to monthly. Or with improvements in technology perhaps now is the time to consider if you could run your business from home to lose the office rent altogether! But don’t forget this last option could change your council tax liability from  domestic to  business rating.
7. Don’t forget the marketing. Whilst cutting back on costs can be necessary in a recession and it may be tempting to cut the marketing budget, it may prove a false economy if sales suffer. Whilst others cut back on their marketing, you may be able to use this to your advantage and keep on marketing to get a larger share of the present market.
8. Renegotiate with suppliers. Review the agreements you have with suppliers for continuing services, such as energy or cleaning. Can you renegotiate any of these contracts to get a better deal?
9. Reduce tax payments on account. Review the projected tax payments for your business. Payments on account for unincorporated businesses can be reduced and reclaimed if you are confident of the taxable profit figure. This is a good reason for getting the accounts completed quickly after the year end.
10. Carry back losses. If your business is likely to make a loss for the current year, quantify that loss as soon as possible and submit a claim to carry back the loss to get a refund from HMRC. Limited companies can only carry losses forward if they cease to trade completely.