Ten bite sized online video guides from HMRC for new and small businesses

Topics include setting up in business, record keeping, income tax, corporation tax and VAT.

The new Business Support service continues to offer tax payers deferred terms for settlement of their tax liabilities. Nationally the feedback from businesses and individuals who have made applications has been promising – HMRC have been sympathetic and supportive in most cases.

However there is a circumstance where the Support Service staff have been unable to assist and that is when businesses are making losses in the current tax year.

Under recent concessions from HMRC it is now possible to carry back some tax losses for 3 years. Of course it is not possible to quantify the tax effects of these losses until accounts are finally submitted with the relevant claims.

The Budget announcement last week now includes powers that will allow the Business Payment Support Service to take these losses into account when negotiating deferred payment arrangements.

We recommend that you call us if you need to quantify the effects of possible loss relief in the current year, and carry backs to previous years.

Some tax saving tips for parents

• From 6 April 2009 expectant mothers can claim a lump sum of £190 in the 25th week of pregnancy. Claim forms are only available from the midwife or doctor. The midwife or doctor will need to complete their parts of the form and sign and date it before giving it out.
• Up to £55 per week can be paid to employees in the form of Childcare Vouchers. Save tax and NI, and no cost to the employer (depending on provider chosen).
• From 6th April the standard rate of maternity/paternity pay increased to £123.06 per week.
• Make sure you claim for tax credits if appropriate. There is a calculator on the HMRC website . Make sure you keep HMRC up to date with any changes in circumstances eg new child.

New tax rates – you have choices!

We all know the story. Banks not properly regulated by the Government, and bailed out to the tune of billions and billions of pounds. The figure given in the budget was £175 billion deficit up from an expected £38 billion expected deficit just one year ago. I think most people agree the increased figure is also going to be an under-estimate. Now we have to pay for it.

From 6th April 2010 personal allowances are gradually withdrawn for those earning over £100,000. For every £2 of income earned above £100,000 personal allowances will be reduced by £1. This makes the effective rate of tax for those with earnings over £100,000 of 60%. There is national insurance of 1% also, so the true rate is 61%.

The rate will go back to 40% (really41%) for earningas over £112,500.

Then from £150,000 the new rate of 50% plus 1%NI ie 51%will apply.

If you dont like the idea of paying 40%, 51% or even 61% tax rates, you do have choices.

Perhaps one of the most straightforward options is to organise your affairs so that some or all of your income goes into a limited company. A company will pay 21% tax on profits up to £300,000. Clearly a big saving on 61%.

There is much more detail to discuss than we would wish to include here and indeed other tax planning options. Please contact us to discuss the details.

HM Revenue & Customs have announced they will spend £1 billion on enforcement and compliance this year, in the hope that they will cut tax avoidance and evasion by £2.4 billion.see Times article

That is a huge quarter of its £4 billion budget to be spent on catching tax-dodgers. The clampdown comes after a  “litigation and settlement review” the Revenue promised to take more people to court to recover tax instead of cutting deals in out-of-court settlements. Beware the cost of   defending yourself or your company in court if the need arises can be frighteningly expensive. That is why we recommend all clients take up our professional fees insurance. This enables your fees to be paid in the event of HMRC enquiry.

Lesley Strathie, who took over as the HMRC’s chief executive and permanent secretary five months ago, said that the organisation would relentlessly pursue those who bent or broke the rules.

Last month on the ITV Tonight programme an HMRC employee claimed that HMRC staff routinely bin letters and ignore tax errors in order to meet performance targets.

He said “Staff have actually been told that when someone rings in with a tax enquiry and you spot a mistake on a person’s record, you have to ignore itunless they have actually asked you to look at the mistake. Its all about the Government target of answering so many calls a day. And if you write in, the post often goes missing. It just disappears, just gets binned, some letters simply aren’t seen by anyone.”

HMRC’s official comment was that anyone found to be binning correpondence would be subject to disciplinary action.

A client recently asked me why MP’s are able to claim for Widescreen TV’s, expensive rugs, leather setees etc etc and not have a tax liability. All these things wouldnt normally be allowed as expenses.

The reason is a piece of law that MPs have passed which applies only to their own expenses. It is S292 ITEPA 2003. This law gives exemption from tax to any expense paid in accordance with a resolution of the House of Commons.

So they are exempt from the usual test as applies to everyone else in terms of an expense being necessary for their duties as an employee. S292 states that allowance is given for expenses “expressed to be” in respect of additional expenses necessarily incurred by a Member…..in performing parliamentary duties.

The Green book explains for MP’s the code of conduct on expenses adopted in 1995. This states in respect of expenses for staying overnight away from their main home MP may claim for the following costs:

• Rent or mortgage interest
• Hotel expenses
• Utilities and telecommunications chages
• Furnishings
• Maintenance, service agreements, cleaning and insurance
• Subsistence

So providing an MP expresses an expense to be in performance of his or her duties and that expense is approved by the Fees Office then it is not subject to tax.

Isn’t it typical

• Dream up a law that applies only to them….600 odd people out of a working population of millions
• Make things complicated, so people can’t really see what is going on

Part of the problem of course is that the Fees Office have been approving expenses which the Inland Revenue would not dream of allowing. Duck islands, moat clearing, patio heaters, wisteria removal, tennis court repairs, dog food – the list is endless!

Why do we need such a complicated system?

Surely the solution is to adopt a simple transparent system?

If your constituency is outside London, then you need somewhere to stay in London. Some state owned accomodation could be made available, perhaps together with an alternative option to receive a fixed sum perhaps a maximum of say £100 per night. Transparent, simple but perhaps less lucrative for those involved!

Update 27th May 2009

The Daily Telegraph has reported that HMRC issued a statement yesterday (Tue 26th) to say that MPs were not exempt from tax laws and that tax must be paid on some expenses.

“It’s a general principle of tax law that accountancy fees incurred in connection with the completion of a personal tax return are not deductible.

“This is because the costs of complying with the law are not an allowable expense against tax. This rule applies across the board.”

So HMRC are clearly saying the Fees Office has been wrong in approving these expenses.

It seems to me MP’s are in the embarrassing position that these expenses are not taxable because of the law they have created just for themselves, even though HMRC is clearly saying they should be taxable.

In the current harsh economic climate, many companies are making losses.

It is very common to find small companies paying modest salaries to the director / owners and also paying dividends, this is the most tax efficient way to extract profits from the company.

If the company is making losses then be aware that paying dividends could be dangerous! Dividends need to be paid from available profits – this could be profit earned this year or profits earned in earlier years but retained in the company rather than paid out as dividends.

Pay a dividend when there are no available profits and this is ‘ultra vires’ or invalid, this can have the following nasty consequences:

Firstly, the shareholders can be required to repay the invalid dividend to the company. This can happen after the company has gone into liquidation, and can be a very unexpected and financially painful experience.

Secondly, the Inland Revenue will treat the invalid dividend as a loan to a participator. Where such a loan is outstanding more than 9 months after the end of an accounting period, there is a tax charge of 25% on the value of the loan. This is commonly known as S419 tax (S419 ICTA 1988 is the legislation). There is also a tax charge on the benefit of an interest free loan (unless the amount of the loan is below £5,000)

UK tax legislation relating to capital gains tax (CGT) and inheritance tax (IHT) is designed to  favour of marriage or Civil Partnership. The recent Budget has done nothing to change this.

Be aware that the phrase ‘common law wife or husband’ is misleading, if one partner dies without a will, the other will have no rights to the estate.

If you are committed to a long term life partnership with another individual, and you are not married or in Civil Partnership, the opportunities to mitigate CGT and or IHT are limited. This article discusses these limited options.

• Assets owned when relationship started. Generally speaking it has been difficult to transfer assets between partners that were owned prior to the commencement of their relationship. For IHT purposes the transfer would be treated as a Potentially Exempt Transfer (PET) – any potential liability would only disappear after a seven year period. The IHT risk could be insured against by taking out a seven year life policy, but of course you would have to pay the premiums!

If assets are transferred between partners, and the asset in question is subject to CGT on disposal, any such transfer will create a CGT liability. The only exception is if the market value of the assets at the date of the gift or transfer is the same as, or lower than the original cost. With most share portfolios now in a loss position this may open up opportunities to equalise estates by gifting across securities. This may also crystallise CGT losses for the donor which he or she could put to good use.

Depending on the type of asset, transfers may trigger Stamp Duty Land Tax charges.

And finally, gains on gifts of certain business assets can be rolled over.

• Assets purchased after the relationship started.  Assets purchased together after the relationship has commenced opens up the possibility of equalising estates by owning such assets jointly.

If there are concerns about unequal financial contributions made by partners to purchase the asset, these can be reflected in the percentage share.

In certain circumstances it may also be effective to use a trust to accommodate certain aspects of the transaction.

• Insurance. If IHT planning is ignored a partner surviving a first death may be obliged to sell assets, if the couple’s assets were significantly above their nil rate bands. (Currently £325,000)

This may involve the survivor selling the family home, or taking out a mortgage, to pay IHT.

This risk can be covered by a first death life policy written in trust for the benefit of the survivor.

Conclusion

Most unmarried couples are disadvantaged in the UK tax system. Ultimately the only way to redress this is for our Government to legislate and remove this bias, or for affected couples to actually get married or enter into a Civil Partnership. Obviously there are many important non-tax reasons why this may be an inappropriate course of action to take.