Thursday 24 March 2011

Budget 2011 - VAT

VAT Rates and Thresholds
There were few changes announced for VAT. The rates and thresholds are as follows from 1 April 2011:

Lower rate - 0%
Reduced rate - 5%
Standard rate - 20%
Registration turnover - £73,000 (up from £70,000)
Deregistration turnover - £71,000 (up from £68,000)

Low Value Consignments
Low value consignment relief allows goods to be imported into the UK by post from outside the EU, with no VAT or duties charged, if the value of the package is less than £18. This has encouraged suppliers of CDs, DVDs and other durable items, to supply goods via the Channel Islands and other non-EU territories to avoid VAT being applied on the sale price. The monetary limit for low value consignments will be reduced to £15 from 1 November 2011, and this limit will be reviewed in March 2012. The Government will also look at other ways of closing this loophole.

Online Filing
It will be compulsory for all VAT registered businesses to file their VAT returns online from 1 April 2012. At present only businesses who became VAT registered from April 2010 or those with turnover of £100,000 or more must file VAT returns online. Also from 1 August 2012 all requests to register or deregister for VAT will have to be made online.

Budget 2011 - Employers

NIC
When business owners and accountants are asked what single action could simplify the tax system, most suggest merging income tax and NI. This message has finally been heard by the Government, who will start consulting on how the operation of the NI and income tax could be combined.

This does not mean these two taxes will be merged. The Government has stated that NI will not be applied to savings, dividends or pensions. The likely changes will involve aligning the rules and mechanics of collecting the two taxes. However, don't expect big changes any time soon!

From 6 April 2011 the rates and thresholds for the main NI contributions were already known with most increasing by 1%. The main figures for 2011/12 are:

Lower Earnings Limit (LEL) for Class 1 NICs - £102/week
Employer's class 1 above £136/week not contracted out - 13.8%
Employee's class 1 not contracted out from £139 to £817/week - 12%
Employee's additional class 1 above £817/week - 2%
Self-employed class 4 from £7,225 to £42,475 per annum - 9%
Self-employed class 4 additional rate above £42,475 per annum - 2%
Self-employed class 2 - £2.50 per week
Voluntary contributions class 3 - £12.60 per week

Approved Mileage Rates
Where an employee uses his or her own car for business journeys their employer can pay them an approved mileage allowance payment (AMAP), free of tax and NIC.

This AMAP rate has been stuck at 40p per mile since about 2002, and at current petrol prices many employees who need to use their car for business cannot afford to do so. The AMAP will increase to 45p per mile from 6 April 2011 for the first 10,000 business miles per year, any additional miles can be reimbursed at 25p per mile. If the employer does not pay the full AMAP rate the employee can claim the additional amount in tax relief from HMRC.

The tax free AMAP can also be paid by charities to volunteers. The self-employed, who have profits below the VAT registration threshold (£73,000 from 1 April 2011), may also use the AMAP rate as a substitute for motor expenses claimed in their accounts.

Where an employee carries a fellow employee as a passenger on a business journey, an additional 5p per mile tax free can be paid. The rate will also now apply to volunteer drivers who take other volunteers on business/ charity related journeys.

Car Benefit
The tax charge for personal use of a company car is based on a percentage of the list price of that car when new.

From 6 April 2011 the percentages are all increased by 1% for those in the 15% to 35% range but with a 35% maximum kept. The taxable benefit of using a car with CO2 emissions of 121-129g/km is 15% of the list price. This percentage increases by 1% for each additional 5g/km of CO2 emissions to a maximum of 35% for cars with CO2 emissions of 225g/km or more.

Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to a set value, currently £18,000. This value will increase to £18,800 from 6 April 2011. The maximum taxable benefit of receiving fuel for personal use will increase from £6,300 (for 2010/11) to £6580 (for 2011/12).

Budget 2011 - Business Tax

IR35 Review
The Office of Tax Simplification was tasked with reviewing the operation of IR35, or the provision of services through intermediaries as the legislation is more correctly called. Unfortunately the Government does not agree that IR35 should be abolished. However, it has promised to improve the way HMRC provide guidance to businesses who are trying to operate IR35.

Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for the year from April 2012:

Main pool writing down allowance: reduced from 20% to 18%
Special rate pool writing down allowance: reduced from 10% to 8%
Annual Investment Allowance (AIA) cap: reduced from £100,000 to £25,000

Short Life Assets
At present a business can elect for named assets (not cars) to be treated individually for capital allowance purposes rather than being included in the main pool or special rate pool. The assets subject to this election are called short life assets as they are deemed to have a useful life of less than 4 years. If the business sells or scraps the short life asset before the end of its deemed life, the business will get tax relief for the full cost of that asset while it is being used by the business. This would not apply when the asset is included in one of the capital allowance pools.

For assets purchased on or after 1 April 2011 (6 April 2011 for unincorporated businesses), the life of the short life asset will be deemed to be 8 years. This will benefit larger businesses that incurred expenditure on assets in excess of their Annual Investment Allowance cap for the year.

Enterprise Zones
The Government will create 21 Enterprise Zones around the country. Further details of the exact location and duration of these zones will be released later. All we know so far is that businesses within these zones will be able to apply for up to 100% discount on business rates.

Tax Reliefs to Go
The Office for Tax Simplification has suggested a list of more than 40 tax reliefs that could be abolished because they are rarely used, or are in fact obsolete. Most of these reliefs will be abolished after consultation. Reliefs on this list which may be of interest to small businesses include:

- Tax free meals for employees who cycle to work
- Tax free late night taxis for employees
- Additional tax relief for companies that clean up contaminated land or buildings (land remediation relief)
- Relief from CGT for grants for giving up agricultural land

Corporation Tax Rates
The small profits rate of corporation tax will be cut from 21% to 20% from 1 April 2011, and is expected to remain at that rate for the next four years, but this has not been confirmed. The small profits rate applies to profits of up to £300,000 where the company has no associated companies which are trading.

The main rate of corporation tax was due to be cut from 28% to 27% from April 2011, but that rate will now be 26%, reducing by 1% per year thereafter until the rate reaches 23%.

Research and Development Tax Credits
Small and medium sized companies could previously claim tax relief of 175% for qualifying revenue expenditure incurred on research and development (R&D) projects. This tax relief will increase to 200% for R&D expenditure incurred after 31 March 2011. A further increase in this tax relief to 225% is planned for qualifying R&D expenditure incurred after 31 March 2012.

The rules that govern what type of expenditure qualifies for this relief will also be revised with effect from 2012 to make it easier for small companies to claim this relief.

Budget 2011 - Capital Taxes

Capital Gains Tax Rates and Thresholds
The rates and thresholds for capital gains tax are as follows for 2011/12:

Annual exemption - £10,600
Annual exemption for most trustees - £5,300
Rate for gains in basic rate band - 18%
Rate for gains above basic rate band - 28%
Rate for gains subject to entrepreneurs' relief - 10%
Lifetime limit for entrepreneurs' relief - £10,000,000

Entrepreneurs' Relief
This relief applies to gains made on the disposal of businesses, parts of a business, shares in trading companies and certain business assets disposed of after a business ceases or in association with a business disposal. The taxpayer and the business must both meet a number of qualifying conditions for the relief to apply.

Each taxpayer has a maximum amount of gains that they can include in a claim for entrepreneurs' relief, called the lifetime limit. This lifetime limit was initially set at £1 million from 6 April 2008. It was increased to £2 million from 6 April 2010, increased again to £5 million from 23 June 2010. The lifetime limit will be doubled to £10 million for gains made after 5 April 2011.

Inheritance Tax
The nil rate band for inheritance tax (IHT) will remain frozen until 2014/15 at £325,000. This is the amount of a person's estate that is free of inheritance tax.

The rate payable on death for 2011/12 remains at 40% with the rate payable on lifetime gifts to certain trusts remaining at 20%.

From April 2012 those that give at least 10% of their estate on death to charity will pay a reduced rate of IHT of 36%. Gifts made to charities are exempt from IHT.

Budget 2011 - Savings & Investments

Enterprise Investment Scheme
Income tax relief for investors is to be proposed to be enhanced as follows:

Rate of income tax relief: 2010/11 - 20%, 2011/12 - 30%, 2012/13 - 30%

Annual maximum investment qualifying for income tax relief: 2010/11 - £500,000, 2011/12 - £500,000, 2012/13 - £1,000,000

These changes will be subject to State aid approval from the EU.

Venture Capital Trusts
The range of companies that can accept investments through the EIS or Venture capital Trusts is to be increased from April 2012 to include those with gross assets less than £15 million, and with less than 250 employees. At present only companies with asset value of less than £7 million and with less than 50 employees can qualify for these tax favoured investments. The cap on the amount a company can raise through these schemes in any year will also be increased from £2 million to £10 million.

Pension Contributions
The level of contributions that can be made with full tax relief to a registered pension scheme is to be reduced from £255,000 to £50,000 per pension input period (PIP) falling in the tax year. However, this cap can be expanded by bringing forward unused relief from the previous three tax years, up to a maximum of £50,000 from each year. If the annual allowance is exceeded the taxpayer must pay an annual allowance charge on the excess at their marginal rate of income tax.

The Lifetime Allowance will reduce from £1,800,000 in 2011/12 to £1,500,000 in 2012/13.

Independent Savings Accounts (ISAs)
The ISA savings limits applicable in 2011/12 for those over 18 are:
Overall limit - £10,680
Cash up to - £5,340
Balance in stocks and shares up to - £10,680

For those aged 16 & 17:
Overall limit - £5,340
Cash up to - £5,340
Balance in stocks and shares up to - nil

From April 2012 the ISA savings limits will be increased in line with the consumer Prices Index (CPI) rather than in line with the Retail Prices Index (RPI), as has been the case so far.

Savings for Children
Children born between 1 September 2002 and 2 January 2011 inclusive were eligible for a child trust fund account (CTF). Each child received a voucher to allow the account to be opened which also provided an initial deposit. The existing CTF accounts will continue and funds of up to £1200 per year can be contributed for each child tax free. The CTF account can only be accessed by the child when he or she reaches age 18.

Junior ISA
The Junior ISA is a replacement for the CTF but no funds will be provided by the Government. The junior ISA will be available to all children resident in the UK who do not have a child trust fund account. It will also have the following features:

- No tax will be charged on income or gains earned within the ISA.
- Funds placed in the account will be owned by the child and locked in until the child reaches age 18.
- Accounts can be opened from autumn 2011 (exact date to be announced).
- Sharia compliant products will be offered as Junior ISAs.
- The annual savings limits will be announced later, but are likely to be similar to normal ISAs.

Budget 2011 - Individuals

Personal Allowances
The personal allowance for 2011/12 will increase by £1,000 to £7,475, but the 40% tax threshold will reduce to £35,000 (see below). This ensures that higher and additional rate taxpayers do not benefit from the increased personal allowance in this year. From 6 April 2012 the personal allowance will be increased again by £630 to £8,105, and in that year the 40% threshold will be reduced further to £34,370.

Personal allowances are withdrawn at certain income thresholds, indicated below, and cannot be claimed by non-domiciled individuals who elect to have their foreign income and gains taxed on the remittance basis for the tax year.

The 2011/12 personal allowances are...

Under 65 - £7,475
65-74 - £9,940
75 and over - £10,090
Minimum married couples allowance* - £2,800
Maximum married couples allowance* - £7,295
Blind person's allowance - £1,980
Income limit for allowances for those aged 65 or more - £24,000
Income limit for allowances for those aged under 65 - £100,000

* given where one partner was born before 6 /4/1935, and only as 10% reduction in tax.

Income Tax Rates
The tax rates for 2011/12 have been frozen at the 2010/11 levels but the threshold at which the 40% tax rate is applied is reduced to £35,000. This introduces a subtle tax increase as it pulls more taxpayers into the 40% tax bracket, and increases the amount of income subject to tax at 40%.

The 2011/12 rates and bands are...

Savings rate* (10%) - 0 to £2,560
Basic rate (20%) - 0 to £35,000
Higher rate (40%) - £35,001 to £150,000
Additional rate (50%) - over £150,000

* Only applies if non savings income is below this amount

Non-Domiciled and Non Resident
Individuals who are domiciled outside of the UK (non-doms), and who have been resident in the UK for at least 7 years out of the previous 9 tax years, must pay a remittance basis charge if they want to exclude their off-shore income and gains from UK taxation. This remittance basis charge is current set at £30,000 per year. It is proposed that from 6 April 2012 the remittance basis charge will increase to £50,000 for non-doms who have been UK resident for at least 12 years. Those who have been resident in the UK for at least 7 years but less than 12 years will continue to pay the £30,000 charge.

There is currently no clear measure by which an individual can determine whether they are treated as resident for tax purposes in the UK. The Government intends to introduce a legal test of residence with effect from April 2012.

Tax Credits
The main changes to Tax Credits as it applies to the self-employed, is the change in the income disregard from £25,000 in 2010/11 to £10,000 in £2011/12.

The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. The reduction in this threshold is likely to adversely affect families with fluctuating incomes, such as the self-employed. In the future, in order to avoid a claw-back of tax credits, the claimant will need to finalise their self-employed profit figures as close to the tax year end as possible.

Friday 4 March 2011

Leaving it to Charity

If you haven't made a Will, you should do so without delay. If you don't have any relatives you want to leave your estate to, consider making a Will that leaves most of your assets to specified charities. This avoids the potential problem of intestacy (dying without a Will), and saves tax as gifts to charities are free of inheritance tax. However, there are two traps to avoid:

Identifying the charity
Many charities have merged or changed their names in the recent past, so when it comes to distributing the estate according to the Will, it may be difficult to work out exactly which charity you intended the funds to go to. To avoid this problem make sure your Will states the charity's registered office and charity number. You can also include a clause in your Will specifying that the gift should be directed to any organisation that amalgamates with the original charity.

Residue of the estate
The second problem can occur where the charity has been left an undefined amount in your Will, such as the residue of your estate. This can lead the charity's officers hassling the executors, querying deductions such as legal fees and in extreme cases challenging the distribution of your estate in Court. To avoid this problem leave specified amounts of cash or assets to your chosen charities rather than the amount left over after other gifts have been made and any tax paid.

Traps with the Flat Rate VAT Scheme

The VAT flat rate scheme for small businesses is generally straight-forward to operate, but here are a few traps to watch out for.

Use the right rate
You will be aware that the standard rate of VAT increased to 20% on 4 January 2011. The flat rates used by traders in the flat rate scheme to calculate the VAT to pay to HMRC also changed from that date. Did you remember to apply the new rate for your business sector? Check whether you applied the correct flat rate from 1 January 2010 to 3 January 2011 when the standard rate of VAT was 17.5%, and from 1 December 2008 to 31 December 2009 when the standard rate was 15%.

Include all business income
You need to apply the flat rate for your business sector to all your business income, including income that is exempt from VAT such as rents. If you are self-employed and operate your VAT registered business in your own name, any income from property you let in your own name must also be subject to the flat rate scheme.

This applies whether or not you consider the lettings to be part of the VAT registered business. If you run your VAT registered business through a company and hold the let property in your own name, the flat rate scheme operated by the company will not include your rental income.

Bank interest
If you receive interest in your business as a core part of your business activities that interest should be included in the turnover to which you apply the flat rate. This could apply to businesses who handle large sums of money on behalf of clients and keep a share of the interest as part of the deal. However, where the interest is received as a passive activity, such as on a current or deposit account it is outside the scope of VAT and should not be included in the sum to which you apply the flat rate.

Taxman to Hassle Tax Cheats

In addition to the 50,000 letters being sent about keeping business records, the Taxman is writing to 12,000 self-employed people who claim Tax Credits, to check whether they have been understating their income.

As a self-employed person you can claim Child and Working Tax Credits just like an employee, but your self-employed income is likely to be more variable than a regular wage or salary. If the income from your self-employed business has fluctuated wildly during the past recession, you may well get one of those letters from the Taxman. You will be asked to supply evidence of your income, which will normally be your business accounts and possibly bank statements. We can help you compile the information requested.

The Taxman is also getting serious about tackling those who deliberately cheat the tax system, as opposed to those who make careless mistakes.

He is targeting individuals and businesses identified as deliberate tax cheats since April 2009, and will regularly monitor all aspects of that person's tax affairs. This will involve asking for further information to support figures on tax returns, and possibly making unannounced visits to business premises.

The monitoring will continue for two to five years, or as long as the Taxman thinks the person is a tax risk. Initially, about 900 people will soon be informed they are included in this monitoring scheme but this number may well increase in time.

Taxman Start Business Records Check

The Taxman is concerned that many small businesses are not keeping adequate records to support the entries on their tax returns. To encourage better record keeping he is taking a carrot and stick approach.

The carrot encouragement comes in the form of a number of new HMRC leaflets, and an online tool www.businesslink.gov.uk/recordkeepingcheck designed to help small businesses decide what records they must keep. These tools and leaflets contain quite a lot of jargon words and phrases, so we would recommend discussing your requirements with us.

The stick is a letter he is about to send to 50,000 small businesses, advising that they may be subject to a detailed records check.

Only a minority of these businesses will actually receive a visit from the Tax Office compliance check unit, and those visits will normally be arranged in advance. However, if your business is visited and your records are found to be inadequate you may receive a penalty of up to £3,000, which cannot be suspended even if you promise to keep better records in future.