Furnished Holiday Let Property – abolished

The EU seems to have caused a problem for the Chancellor. As a direct result of EU rulings the UK has been compelled to extend the various tax advantages of ‘Furnished Holiday Lettings’ status to properties located within the European Economic Area (EEA) – as long as they meet the required qualifying criteria.

Clearly the UK Treasury were very unhappy with this, and in his April 2009 budget the Chancellor announced that the entire Furnished Holiday Lettings tax legislation is to be repealed and withdrawn with effect from 6 April 2010.

What difference will this make?

Obviously if you presently rent out accommodation as a qualifying holiday let in the UK it will make a big difference.

From the 6 April 2010 FHL property income will revert to being taxed as non-FHL property income. In a nut shell the downside tax effects after 5 April 2010 are:

  • you can no longer set of FHL losses against other income
  • you can no longer claim capital allowances for the purchases of furniture and equipment, and
  • you will lose significant capital gains tax reliefs including roll-over and entrepreneurs’ relief if you dispose of FHL properties after 5 April 2010.

  • you will lose the ‘Business Property Relief’ on FHL property, which means the property value will become chargeable to inheritance tax.

What are the opportunities?

As always change can have positive effects. We have listed a two below:

  • if you own a let property in the EEA, that would have qualified as a FHL property under the present rules, it may be possible to back date changes to your tax returns for 2007 and 2008. This would include set off of surplus FHL losses against other income.
  • if you have sold a property in the EEA that would have qualified for more favourable capital gains tax treatment, computations can be revised for the years ending 5 April 2007 and 5 April 2008.

What’s next?

If you feel that you may be affected by these changes we should meet and discuss as soon as possible. The most immediate deadline is to apply for a late change to your 2007 self assessment tax return if it needs to be changed; this has to be done by 31 July 2009. (If you have operated your FHL trade through a company, amendments to tax computations for accounting periods ending after 31 December 2006 have to be submitted by the same date, 31 July 2009.)

Disputes at work – the new rules

The regulations that govern how employers handle discipline, dismissal and grievance issues in the workplace change as from 6 April 2009.

The new system is designed to be more straightforward and flexible, the aim being to help employers resolve disputes before they reach the point of an employment tribunal.

The hope is the new rules will cut down on the time, money and stress that disputes can mean for employers. Which is why the emphasis is now being placed on dispute resolution mechanisms.

The Employment Act 2008 has implemented a number of changes.

The existing statutory procedures for dealing with discipline, dismissal and grievance issues, as established by the 2002 Act, are repealed.

A revised Acas Code of Practice is introduced, and Acas, the employment relations body, is to provide a free, early conciliation service.

Employment tribunals will have discretionary powers to adjust awards by up to 25 per cent if employers or employees fail unreasonably to comply with the Acas Code.

Tribunals will be allowed to award compensation for financial loss in certain types of claims.

The Acas Code of Practice

The new code replaces the previous Acas code, which was issued in 2004, and it establishes fair and transparent procedures that need to be observed in disputes. Adopting this sort of approach will be less time consuming and less likely to harm working relations.

Employees should be involved in the drawing up of these procedures, which should then be put in writing.

It is important that employees understand them, know where they can be found and know how they are to be used.

The code covers a number of principles that need to be followed to ensure that the process is fair, efficient and straightforward.

Issues should be raised and dealt with promptly. Meetings and decisions should not be delayed unreasonably.

Employers should always behave consistently. The facts of a particular case should be established through any necessary investigations.

Employees should be told of the problem and provided with an opportunity to set out their case before any decisions are made.

Employees should also be allowed to bring someone with them to formal disciplinary or grievance meetings, and they should be entitled to appeal against any formal decision made.

In instances of grievances only, the employee should explain the cause of the grievance to the employer at a formal meeting which both the employer and employee must make every effort to attend.

The employer should decide what is an appropriate course of action and inform the employee of this in writing. If the problem is not resolved, the employee should be permitted to take grievance further.

If an employee raises a grievance during a disciplinary process, the disciplinary may be suspended temporarily in order to deal with the grievance. If the two are related, it may be appropriate to deal with both at once.

Whereas the old code was mandatory in the procedures that had to be followed, the revised code is not. That means that failing to observe the code does not necessarily make a person or business liable.

However, employment tribunals will take the code into account when considering relevant cases. The tribunal will consider whether any failure to follow the code was unreasonable, while also recognising specific factors such as the size and resources of the business. Should the tribunal judge the failure to follow the code, by employer or employee, as unreasonable, it may adjust any awards up or down by 25 per cent.

Grievances

The code defines grievances as “concerns, problems or complaints that employees raise with their employers”. The word “grievance” does not need to be used in the complaint.

When the complaint is presented in writing, it is probable that it will qualify as a grievance, which means the employer should†treat it as such.

Employers should acknowledge the complaint and invite the employee to a formal meeting. By following the code and with guidance from Acas or a legal adviser, an employer should be able to handle problems before an employment tribunal is the only remaining option.

Disciplinaries

Acas defines disciplinary situations as those that include “misconduct and/or poor performance” on the part of the employee.

If businesses that have a procedure in place for dealing with the performances of an employees, this can be used; but the principles of ‘fairness’ set out in the code need to be observed.

Mediation

When the internal procedures of a business can’t solve a particular problem, employers should consider using an independent third party. A mediator may be someone who works within the same organisation, provided they are properly trained and not involved in the dispute, or may come from outside the business.

A list of registered workplace mediation providers can be found at www.civilmediation.org (England and Wales) and at www.scottishmediationregister.org (Scotland).

Employment disputes in 2009

With the change in regulation, employers may want to know how they should deal with disputes that straddle the 6 April dateline.

If the trigger event occurs on or after 6 April 2009, they should follow the new procedures based on the 2008 Act. If the trigger event occurs on or before 5 April 2009, they should follow the old procedures based on the 2002 Act.

In the case of a disciplinary or dismissal case, the date of the trigger event will be that on which the employer starts action against the employee. That is, the date the employee receives the letter that explains a disciplinary action is being contemplated.

Where no letter is sent, the date of the meeting at which the issue is raised will be the trigger point. In the absence of both, the trigger point is the date on which the disciplinary action is taken.

In the case of a grievance, the trigger date is the date of the action about which the employee complains.

More information on whether the new or old system applies can be found at www.berr.gov.uk/resolvingdisputes

Preparing for the new legislation

If your procedures for dealing with grievance, dismissal and disciplinary issues comply with current legislation (pre-6 April 2009), you may not have to change them to comply with the new code.

However, it does present the opportunity to review those procedures to make them easier to understand and apply. For example, you could draw up a more relaxed and informal approach to dealing with problems at work and consider including a mediation stage in your internal processes.

The Acas Helpline, on 08457 47 47 47, is open 8am-8pm Monday to Friday and 9am-1pm on Saturdays.

A copy of the new code can be downloaded at www.acas.org.uk/dgcode2009

This is only a brief outline of the new rules, and any employer who is unsure about the effects on their employment policies should seek professional advice.

Tax on cars

From 2009/10 (i.e. from 1st  or 6th April 2009) the notion of an ‘Expensive Car’ will disappear for tax purposes. Instead of there being single asset pools for these vehicles, based on purchase cost to the business, cars will be added to the 10% or 20% pools depending on their CO2 emissions:

Over  160 g/km – 10% pool

110-160 g/km – 20% pool

Below 110 g/km – 20% pool but with 100% FYA (the significance of adding the 0% unrelieved expenditure to the pool is that any proceeds on the sale of the vehicle will be deducted from the pool on disposal)

The effect of pooling cars is that balancing adjustments will not be received on disposal and this will have a big effect on businesses that regularly replace expensive cars.

There is a transitional 5 year period where existing single asset pool cars are treated under the old rules. Thereafter these cars will be pooled.

Capital Allowances – Companies

A couple of examples below highlight that cases need to be assessed on their individual circumstances:

1) A company buying a £15,000 car in either March or April 2009, with the intention of keeping it (say) 5 years. CO2 emissions 159 g/km, disposal proceeds £4,500:

Mar-09 Old Regime
Year 1 2008-9

£15,000 @ 25% capped at

£3000
Year 2 20% £12,000 £2,400
Year 3 20% £9,600 £1,920
Year 4 20% £7,680 £1,536
Year 5 Balancing allowance £6,144 less £4,500 £1,644
£10,500
Apr-09 New Regime
Year 1 2009-10 20% £15,000 £3,000
Year 2 20% £12,000 £2,400
Year 3 20% £9,600 £1,920
Year 4 20% £7,680 £1,536
Year 5 £4,500 reduction to pool, 20% £6,144 £329
£9,185

2) A company buying a £45,000 car with the intention to keep it 3 years. CO2 emissions 195 g/km, disposal proceeds £22,000:

Old Regime
Year 1 25% £45,000 capped £3,000
Year 2 20% £42,000 capped £3,000
Year 3 Balancing allowance, £39,000 – £22,000 £17,000
£23,000
New Regime
Year 1 20% £45,000 £9,000
Year 2 20% £36,000 £7,200
Year 3 £22,000 reduction to pool, 20% 6,800 £1,360
£17,560

In both examples, the residue of expenditure in the pool continues to attract annual writing down allowances in future years, meaning that the differences between the tax allowances claimed under the old and new schemes will be recouped eventually, but not for many years.

Capital Allowances – Unincorporated Entities

The rules for unincorporated entities mirror those for companies, but, due to the nature of unincorporated entities, there is one exception. It is possible for unincorporated businesses to own vehicles that have an element of private usage. Typically this applies to cars driven by the business proprietors. Cars with private use adjustments will continue to be dealt with via single asset pools, meaning balancing adjustments on disposal will still be available.

Consider a car costing £16,000, which will be kept for 5 years, with CO2 emissions of 165 g/km and expected proceeds of £5,000 on disposal:

New Regime
No private use
Year 1 10% £16,000 £1,600
Year 2 10% £14,400 £1,440
Year 3 10% £12,960 £1,296
Year 4 10% £11,664 £1,166
Year 5 £5,000 reduction to pool, 10% £5,498 £550
£6,052
New Regime
10% private use
Year 1 90% of 10% £16,000 £1,440
Year 2 90% of 10% £14,400 £1,296
Year 3 90% of 10% £12,960 £1,166
Year 4 90% of 10% £11,664 £1050
Year 5

Balancing allowance 90% of £10,498 – £5,000

£4,948
£9,900

As with the company example above, the difference in allowances claimed will be recouped over a number of years.

Motorbikes

Under the first year allowance (FYA) scheme motorbikes were treated as if they were cars. Under the new regime, they will be excluded from the definition of cars, meaning that they will be eligible for the annual investment allowance (AIA).

Company Cars and Benefits in Kind

We all know that providing company cars is generally considered to be less cost / tax efficient than providing employees with additional money to provide their own car. Whilst this rule of thumb continues to hold largely true, consider a car like the Toyota Aygo. A basic model costs c£6,950 and has CO2 emissions of 108 g/km. As such:

Employee: – Benefit in kind £695, equating to £278 (Higher rate) or £139 (Basic rate) tax per annum

Employer: – Ers NI £89 per annum – 100% first year tax relief on the vehicle – RFL £0 (CO2 < 100 g/km) or £35 (CO2 101-120 g/km) per annum

The only question is, how do you convince your sales reps that they want a 1.0 litre Toyota Aygo?!

Other manufacturers are also working on cheap, low emission cars and something like 106 of these are below the 110 g/km threshold for FYA’s) and more below the 120 g/km (for the minimum benefit in kind charge). See:(http://www.comcar.co.uk/newcar/companycar/poolresults/110tax.cfm)

Medical check ups – now tax free

HMRC have now agreed that all medical check-ups provided by employers to an individual employee will be treated as tax and NIC free, even if the check-ups are not available to all employees.

This clarifies a number of changes in their approach, and informal concessions, in the last few years. The change will be acknowledged in the forthcoming Finance Bill 2009.

Notifying HMRC about self employment

From 6 April 2009 there is a change in the penalty you will pay if you are late notifying HMRC that you have commenced self-employment.

Up to 6 April 2009 the penalty was £100 and you had 3 months after commencement of trade to let HMRC know.

From 6 April 2009 the rules are changed as follows:

1. Anyone who ceases or becomes liable for Class 2 or Class 3 contributions must notify HMRC immediately.
2. A penalty may be levied (between 30% and 100% of the “lost contributions”) if notice is not given by 31 January following the end of the tax year in which you become liable.
3. There will be no penalty if you have a reasonable excuse for the late notification.

PAYE code changes

If your local tax office sent you a demand to pay tax you would obviously take some interest in the issue – is this change correct? When do I have to pay it?

Would you feel the same if you received a notification of change to your PAYE code number?

Your tax code is set at the level at which you pay no tax. If your tax code is 600L, you can earn up to £6,000 a year (£500 per month) tax free. If towards the end of a tax year this reduces to say 400L, your annual tax free allowance will have dropped to £4,000. Depending on the degree of reduction and the timing of the adjustment, you may suffer an immediate and perhaps significant drop in your take home pay.

What to do?

Your tax code can be revised in a downwards direction for a number of reasons. Some of the more frequent causes are set out below:

*  State Pensions – your State Pension is paid to you with no deduction for tax. Unfortunately the pension is treated as income for tax purposes and if you are employed and in receipt of the pension, HMRC will seek to collect any tax due by reducing your tax code.
* Benefits in kind – if your employer provides any form of taxable benefit, company car, health insurance etc.
* Unpaid tax from previous tax years.

An interesting situation arises if the total reduction in a tax year exceeds your basic tax free allowance. For instance if at the beginning of a tax year your tax free allowance was set at £6,500, but your untaxed State Pension for the forthcoming year was £10,000, this would result in a negative code of -350. (£6,500 – £10,000). On your Notice of Coding this would be displayed as K350. A K code means that you have no allowances to set off against your salary before tax is calculated – in fact, in the example set out above, £3,500 will be added to your taxable earnings! An increase in a K code will increase your tax deductions and reduce your take home pay.

If you receive a notification that your tax code has changed do check it out, H M Revenue & Customs have been known to make mistakes!

National Minimum Wage changes April 2009

All employers should be aware that changes have been introduced to the penalties that will automatically be levied after 6 April 2009 if you fail to observe your obligations regarding payment of National Minimum Wage rates.

From 6 April 2009, a new automatic penalty will be levied where HMRC compliance officers find arrears of the National Minimum Wage (NMW).

Penalties will range from £100 to £5,000 and those employers who settle within 14 days of notification will receive a 50 per cent discount of the penalty for prompt payment. The penalty must be paid in addition to any arrears owed to the workers. The most serious cases of non compliance may be tried in a Crown Court and subject to an unlimited fine.

To reflect this change, the current system of separate NMW enforcement and penalty notices will be replaced by a combined notice of underpayment and penalty. This will be issued whenever HMRC discover that arrears were outstanding at the start of their enquiries.

The notice will detail the amounts due to workers and any penalty due on those arrears. For PAYE reference periods starting on or after 6 April 2009 the penalty will be half the total underpayments shown on the notice. HMRC can pursue arrears claims for workers going back up to six years.

You will be able to appeal both the amount of the arrears and the penalty to an Employment Tribunal (an Industrial Tribunal in Northern Ireland) under new appeal rights. You can call the National Minimum Wage Help line in confidence on Tel 0845 6000 678.

The rates are as follows:

The rates set are based on the recommendations of the independent Low Pay Commission. The rates change on 1st October each year.

National Minimum Wage rates applicable from 1 October 2008

  • Workers aged 22 and over – £5.73 per hour
  • Workers aged 18-21 –         £4.77 per hour
  • Workers aged 16-17 –         £3.53 per hour
  • Accommodation offset –      £4.46 per day (£31.22 per week)

Tips for new employers

The basic rules for employers with new employees are important for any business.

There is no ‘Casual Labour’ exemption, if you take an employee on with intention of keeping them for just a couple of weeks on a temporary basis – the rules still apply.

If the correct PAYE and NIC is not deducted off employees, then the Employer will be held liable for any shortfall discovered.

If a new employee does not have a P45 from their previous job, then they must sign a P46 (or if they are students working only in the holidays, a P38S).

If they tick Boxes A or B – they will be on the emergency PAYE code (of 647L in 2009/10)

Employees on the basic code of 647L will pay no tax on earnings up to £125 a week, above that tax is deducted at 20%.

National Insurance Contributions are paid by the employee (11%) and employer (12.8%) on earnings above £110 per week.

If the week’s earnings are between £95.01 and £110.00 per week there are no contributions deducted but the employee is still credited with a basic National Insurance contribution. For this reason a form P11 (deduction sheet) must be maintained throughout the year for the employee.

If the employer does not pay an employee more than the NIC LEL (Lower Earnings Level) (of £95 a week in 2009/10), they do not have to prepare a P11 deductions sheet for them or include them on the year end P35. However, the employer must still have a record of wages paid to each employee in each week or month.

Service companies and the year end return

It’s time for employers to complete and file the annual PAYE return (form P35), and for the second year the form asks about the status of the company, causing some confusion and concern.

The form has these two questions which require yes or no answers:

Are you a Service Company?

–  If “yes”, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

Guidance on how to answer these questions is found on page 18 of the leaflet E10 (2009): Finishing the Tax year up to 5 April 2009.

If the business has no employees it will not be completing a form P35.

The introduction the guidance to section 6 says:

The first question narrows those employers who need to consider whether the second question applies.

This is a helpful statement as it leads you to believe that if your business is not a Managed Service Company (MSC) and is not affected by IR35 you can answer “no” to both the first and second questions.

However, the detailed guidance to question 1 indicates that you should answer “yes” to question 1 if the owners of the business perform any services in person for the customers of the business, and the income from that work forms at least half the total business income. Services are generally anything that is not the provision of goods.

It is clear that you should only answer “yes” to question 2 if the IR35 or MSC rules do apply to your business, all other businesses should answer “no”.

However, a “yes” to question 1 and “no” to question 2 might give the Taxman cause for concern as it will not be what he is expecting. Indeed these companies could well be contacted at some point in the future by HMRC.

Businesses who are confident they are not subject to IR35 or the MSC legislation, might therefore wish to answer “no” to both questions 1 and 2 in section 6 of part 3 to the P35 form for 2008/09.

If you are concerned that IR35 could apply to your business please contact us.