Exchequer Weblog

If your business is under pressure to keep costs low, you may be tempted to pay the least possible wage you can get away with. But you must not risk paying below the national minimum wage (NMW). The current legal NMW hourly rates depend on the worker’s age as follows:

• - 22 and over: £5.73
• - 18 to 21: £4.77
• - 16 and 17: £3.53

If you don’t pay at least these rates, and the Tax Office find out, you are likely to get hit with an immediate and automatic fine. The fine will vary between £100 and £5,000, depending on the amount of underpaid wages that exist when the problem is discovered. If the underpayment is very serious the Tax Inspector can recommend that your case should be heard in the Crown Court, which can impose an unlimited fine.

You will also have to pay the underpaid wages to your workers for all relevant pay periods falling in the last six tax years. These underpayments of wages must be made good at the current NMW rates, not at the rates that applied when the work was done.
However, do note that minimum wage legislation doesn’t apply to people living in a family and working in the family business. This doesn’t include Limited Companies but as far as working directors are concerned who don’t have an explicit contract of employment, they are not subject to minimum wage legislation, so it can help to avoid giving them such a contract where you want to use dividends instead as a more tax efficient profit extraction strategy.

The Taxman is getting tougher on taxpayers, businesses and employers, who make mistakes on tax returns, VAT returns and other forms such as P11Ds, and PAYE end of year returns which must be submitted to HMRC. From April 2009 there is a new system of penalties, which will be calculated as a percentage of the potential lost revenue that arises from the mistake.

Say you forget to include a company car on a form P11D. The tax due from the employee for the year could be £2,300, with NIC class 1A payable by the employer of £736, which would make the potential lost revenue from that one mistake: £3,036 (£2,300 + £736).
A penalty for this mistake can be imposed by the Tax Inspector according to your behaviour when you made the error. You and the Inspector will need to agree whether you:

• - Made the mistake in spite of taking reasonable care: no penalty;
• - Failed to take reasonable care: up to 30% of the potential lost revenue;
• - Deliberately made the error: 20% to 70% of the potential lost revenue;
• - Deliberately made the error and attempted to conceal the error: 30% to 100% of the potential lost revenue.

As you can see there is still some scope for negotiation with the Inspector regarding the level of penalties for errors and mistakes. However, there will be less negotiation possible than under the present penalty system. The amount of penalty will depend on whether you were prompted or unprompted by the Taxman to disclose the error and on various quality factors relating to the disclosure. If the mistake occurred because you failed to take reasonable care, the Inspector may suspend the penalty if you agree to improve your systems so that the mistake is unlikely to happen again.

One point worth considering is that if you take reasonable care there can be no penalty. It may therefore be worthwhile reviewing your book-keeping systems to ensure you have a system that may lead the inspector more towards the opinion that any error did not come because you failed to take reasonable care over your book-keeping!

Normally March is the month in which the Chancellor presents his Budget proposals to Parliament, during which he announces the tax rates and thresholds for the coming tax year. However, this year, for various political reasons, the Budget speech has been delayed until 22 April 2009.

This delay should not affect the running of the tax system, as all the tax rates, thresholds and allowances for 2009/10 were announced in the Pre-Budget report on 26 November 2008. The PAYE codes for 2009/10 including the new personal allowance of £6,475 have already been issued, and the new PAYE and NIC tables are available from HMRC. Details of other Pre-Budget report announcements that affect employers are given in the Employer Bulletin no. 31, which was recently sent to all employers.

One announcement that was not made in November was the threshold for compulsory VAT registration. This increased from £64,000 to £67,000 on 1 April 2008, so the threshold could be frozen at that level in 2009. The UK has one of the highest thresholds for compulsory VAT registration in the EU, so freezing this threshold would not put the UK out of line with other countries. A freeze on the VAT threshold would also bring in more tax, as more businesses would have to become VAT registered.

Look out for our Budget News & Tips special posted here the day after the budget!

Sunday 5 April 2009 is the last day of the current tax year, and many small businesses choose either 5 April or 31 March as the end of their accounting year. Tax planning is key at this time of year, as action often needs to be taken before the end of the tax year or before the end of the accounting year. These are our top ten tips for action in March:

1. Total up your gross income for 2008/09. If this sum is over £40,835 you will pay tax at 40% on any excess, subject to extra tax relief for pension or charitable gifts. You may need to reduce the gross dividends you take from your company, if you don’t want to start paying higher rate tax. Where possible try to ensure you use up your full basic rate allowance.
2. Buy a new company car. Company cars with CO2 emissions of over 160g/km will attract less tax relief from 1 April 2009 (for unincorporated businesses it is 6th April 2009), so you may want to acquire any new cars in this category before that date. You will also accelerate capital allowances for all plant and machinery by purchasing before your accounts year end.
3. End your accounting period early. If your unincorporated business is currently making a loss, you will be able to set that loss against profits made up to three years ago if the accounting period ends before 6 April 2009. This is subject to a limit of £50,000 to the earlier 2 years but unlimited for the first year.
4. Make pension contributions to get tax relief of up to 40%. Even pension contributions for your children of £3600 (gross) can me made which will only cost you £2808.
5. Realise capital losses by selling the investment to cover any capital gains above your annual exemption limit. Some can even be set against income. It could be bought back by yourself if you wait 30 days or perhaps use an alternative vehicle to buy it back immediately.
6. Use up your ISA annual investment allowance of £7200 for tax free investing.
7. Use up your capital gains annual exemption by realising investments to use it up. Transfers between spouses are tax free and if planned properly can allow use of two annual exemptions.
8. Consider other investment based tax reliefs such as the Enterprise Investment Scheme and Venture Capital Trusts which can give substantial amounts of tax relief.
9. Work out your company’s marginal corporation tax rate. This could be as high as 29.75% where profits are over £300,000 or you and your spouse control several companies. Making a payment into your company pension scheme before the company’s year end could reduce that marginal tax rate.
10. Pay NICs due for past years. You can normally only pay past NI contributions for the previous 6 tax years, but some people are able to pay for earlier years if the payment is made before 6 April 2009. The rate of voluntary contributions increases to £12.05 from £8.10 per week on 6 April 2009, so it’s worth making these contributions before then if you need to.