The taxable benefit on the use of company cars and fuel for those vehicles has increased from 6 April 2010. Take for example a petrol-powered car with CO2 emissions of 160g/km. In the tax year to 5 April 2010 you were taxed at 20% of the vehicle’s list price. From 6 April 2010 the taxable benefit for driving the same car will be 21% of its list price.

The tax position for those who have free fuel with their vehicles is even worse. Until 5 April 2010, the value of the fuel-benefit for all company cars was based on a fixed value of £16,900 multiplied by the percentage used to calculate the car benefit. So there is an increase in both the percentage and the multiplier. From 6 April 2010 the value increases to £18,000. This means the taxable benefit of having free fuel for a petrol car with emissions of 160g/km will increase from £3,380 to £3,780.

Company van drivers are also hit by the rise in the fuel benefit. Currently where free fuel is provided in a company van, and the van is used for some non-business journeys, the driver is taxed on £500 per year for the use of that fuel. From 6 April 2010 the van driver will be taxed on £550 per year for use of the fuel.

You can reduce these high tax charges by switching to a low emissions car. Where the CO2 emissions are 120g/km or less the car benefit for petrol cars is just 10% of the list price, and half that amount where CO2 emissions are 75g/km or less. We could only find one car with emissions in that bottom category: Toyota plug-in Prius, which has an official CO2 emissions rating of only 67g/km.

If your vehicle has zero emissions such as an electric car or van, there is no tax charge at all from 6 April 2010. What’s more, when your business buys a new electric vehicle it can write-off the full cost for tax purposes in the year of acquisition.

Now we have 0.01% growth, and the recession is officially ‘over’, HM Revenue & Customs (HMRC) seems to be toughening its stance on payment and appears to be rejecting an increasingly large number of applications for the scheme.

Chancellor Alistair Darling stated that ‘Time-To-Pay’ will be there “for as long as is needed” but this is questioned by figures obtained by

accountancy firm Wilkins Kennedy – the money owed under the scheme has reduced from £1.15billion in April 2009 to £1.01billion at the end of November 2009.

It seems that arranging a ‘Time-To-Pay’ deal in the current climate is now more difficult than ever before.

Some key ‘Time-To-Pay’ statistics:

• To date c. 240,000 businesses have been able to reschedule their crown debt;
• 60 per cent of these arrangements are for three months or less;
• 1 per cent of arrangements are for 12 months or more;
• 8 per cent of businesses which have an arrangement under the scheme have failed to make ANY monthly payments.

Presenting a workable, robust and deliverable case to HMRC will greatly improve your chances of obtaining their support.

’Time-To-Pay’ developments:

• Following the Pre-Budget Report the ‘Time-To-Pay’ scheme has been extended to include partnerships;

• From 31 January 2010 all unincorporated businesses from sole traders to large partnerships will be required to make payment on account for their self-assessment tax;

• The VAT rate has returned to 17.5 per cent leading to a rise in payments due to the revenue;

• The 0.5 per cent rise in National Insurance (NI) contributions will further increase the crown liabilities burdening businesses;

• Where tax arrears exceed £1million there will be a requirement for an Independent Business Review (IBR) to be conducted to establish a company’s needs.

We are happy to assist in arranging time to pay agreements.

The most likely connection is that you are married or in a Civil Partnership. Fortunately if you and your spouse or civil partner are living together at any time in a tax year in which you make the transfer or sale, any gains are deferred until your spouse or civil partner sells the asset.

One consequence of being connected is that any company you control, either on your own or with other connected persons may be treated as associated companies and affect the amount of company profits that qualify for the small company’s rate.

The full list of connected persons for the purposes of transferring assets is set out below:

1. Your spouse or civil partner.
2. Your brothers and sisters, and those of your spouse or civil partner.
3. Your parents, grandparents or other ancestors, and those of your spouse or civil partner.
4. Your children and other direct descendents, and those of your spouse or civil partner.
5. The spouses or civil partners of any of the above relatives.
6. Your business partners and their spouses or civil partners and relatives (except for genuine commercial acquisitions or disposals of partnership assets.)
7. As mentioned above any company you control, on your own or with any of the people listed above, will be connected for tax purposes.
8. The trustees of any settlement where you or any person connected with you is a settlor.

The definition for the purposes of determining associated companies is more limited.

Clogged Losses

If for any reason you dispose of an asset to a connected person and make a loss on the transaction, the loss can only be used in the same year or carried forward and used against future gains, to the same connected person.

It will also be necessary to demonstrate that on the second or subsequent disposal you were still connected.

HMRC refers to these as Clogged Losses!

If you run your own company and are considering an increase in your salary 2010-11 you might like to consider the following points:

1. From 6 April 2010 if your income is in excess of £100,000 you will start to lose your tax personal allowance, initially this can create a marginal tax rate up to 60%.
2. From the same date if your income is over £150,000 you will be subject to the 50% rate of income tax.

Consequently increasing your earnings in 2010-11 may not be a tax effective move if you are a high income earner. Instead you may like to consider paying yourself a bonus in March 2010? You must have a clear and commercially sound reason for a bonus payment. If you were to follow this strategy the bonus would be taxable at the current highest rate, 40% and would have no effect on your current year personal allowance.

There is a timing downside to this arrangement; any tax and NIC due on the bonus would become payable on 19 April 2010 (22 April if you pay electronically) instead of being spread over the year if you settled on a salary increase instead.

Of course, when practical to do so, extra dividends are a better option than bonuses (because of the NIC costs). Dividends voted in March 2010 will mean extra higher rate tax due 31 January 2011.

If you are a high income earner and would like to discuss this and other strategies for minimising the impact of the changes coming in the next tax year please get in touch. There are still options we could look at before 6 April 2010.

The cost of a staff party or other annual entertainment is allowed as a deduction for tax purposes. Also as long as the criteria below are followed, there will be no taxable benefit charged to employees:

1. The event must be open to all employees at a particular location.
2. The cost is only tax deductible for employees and their partners (which would include directors in the case of a company) but not sole traders and business partners in the case of unincorporated organisations.
3. An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the average cost per head of the function does not exceed £150. Partners and spouses of staff attending are included in the head count when computing the cost per head attending.
4. All costs must be taken into account, including the costs of transport to and from the event or accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring. No deduction will be allowed for the £150 exemption.
5. VAT input tax can be recovered on staff entertaining expenditure. If staff partners/spouses are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

A final note on gifts for employees.

Trivial seasonal gifts for employees!

Employers may find the following Revenue concession useful – we have copied the note directly from the HMRC handbook:

“An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.”

One final caution regarding VAT and staff gifts. VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys however are zero rated for VAT purposes!

Merry Christmas!

There has been speculation that this rate will increase to discourage schemes to have income treated as capital gains. Next year, 2010-11, the top rate of income tax will be 50%, with some marginal rates up to 61.5%. With capital gains tax rates at 18% and in some cases 10% (if a gain qualifies for Entrepreneurs’ relief) and an annual exemption for individuals currently up to £10,100 a year, the temptation to steer earnings towards capital gains and take advantage of legitimate planning devices, seems inevitable.

The Pre-Budget report will no doubt clarify these expected changes and as soon as we have up-to-date information you will be the first to know.

In the meantime a quick reminder of the types of gain that qualify for Entrepreneurs’ Relief.

The relief has been available since the 6 April 2008 when indexation relief and taper relief were withdrawn for individuals.

Basically the relief is available in respect of:

• gains made on the disposal of all or part of a business (this includes a sale of shares in a qualifying company)
• gains made on disposals of assets following the cessation of a business, and
• gains made by certain individuals who were involved in running the business

The first £1 million of gains that qualify for relief will be charged tax at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.

An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for Entrepreneurs’ Relief.

If you are interested in receiving more information regarding current tax planning in this area please call.

There are options. If you are concerned about the impact of this new tax band on your taxed income do call there may be planning opportunities we could discuss with you prior to the end of the current tax year.

How do these new tax changes apply?

• If your income exceeds £100,000 the basic personal allowance will be withdrawn at the rate of £1 for each £2 your income exceeds £100,000. If personal allowances stay at the present level £6,475, you will lose your allowance completely when your income exceeds £112,950. As you will be taxed at 40% on your income between £100,000 and £112,950, whilst progressively losing your personal allowance, the marginal tax rate in this banding can be up to 60% and there is also national insurance, making 61.5% in total.

Planning note:
If you have a legitimate strategy to keep your taxable income below £100,000 in 2010-11 and so potentially save 61.5% tax this would be an opportunity not to miss. Call us if you are affected.

• From 6 April 2011 higher rate pension relief is being withdrawn from individuals who earn in excess of £150,000 a year.

Stamp Duty
A stamp duty ‘holiday’ was announced for residential property in September 2008, which effectively raised the lower threshold property values where SDLT is imposed at 1%, from £125,000 to £175,000. The lower threshold (£125,000) will apply once again from 1 January 2010. Where the residential property is located in a disadvantaged area the threshold from which the 1% rate of SDLT is imposed is £150,000.

SDLT is normally imposed at the completion date for the property sale, not the date on which contracts are exchanged. If the buyer takes possession of the property before the completion date, SDLT is charged on that earlier date. To take advantage of the zero rate of SDLT on a property costing no more than £175,000 you need to complete or take possession of the property before 1 January 2010.

CGT on Homes
There is a relaxation of the rules on principle private residence relief where part of the home is occupied exclusively by an adult in care, and the owner of the property is paid to care for that adult. In such cases the whole of the property will qualify for exemption from capital gains tax.

Furnished Holiday Letting

Tax concessions for the commercial letting of furnished holiday lets will be removed with effect from 6 April 2010 for unincorporated businesses and from 1 April 2010 for companies. Hoteliers and bed and breakfast proprietors are not affected by these changes.

the impact is:-
- Losses - future profits and losses from furnished holiday lettings will be treated as income from a property business, and thus relief for losses will be available only against the property lettings business. Any current losses from the furnished holiday lettings, which have not been used before April 2010, will be carried forward to be set against the future property lettings business.
- Pensionable income – from 6 April 2010 income from a furnished holiday lettings business will not count as pensionable income, which may reduce the amount of pension contributions available for tax relief in any tax year.
- CGT – the capital gains relief associated with disposing of a property used in a commercial furnished holiday letting business will cease to apply for disposals made after 5 April 2010. Consider a disposal to a trust or family member before this date.

- IHT - the business property relief exemption on property will cease to apply from 5 April 2010

Owners of FHL property are currently treated as traders and the income, losses and gains on sale are potentially available for a number of tax advantages compared to non-FHL property owners. These advantages include:

• Profits are deemed to be trading income and are taken into account for pension purposes
• Certain capital expenditure will qualify for the Annual Investment Allowance. (100% tax deduction)
• Losses are deemed to be trading losses and available to set off against any other income of the owner(s).
• Gains on sale may qualify for rollover relief and entrepreneurs’ relief.

For 2009-10 and certain earlier years, property owned in the EEA (European Economic Area) was included as FHL property as long as the usual qualifying conditions were met. This was announced in the 2009 Budget.

It is also worth mentioning that FHL is not treated as trading for all tax purposes. For example, there is no special treatment for business property relief for inheritance tax purposes. Generally speaking FHL will not qualify for business property relief unless part of an enterprise incorporating other facilities.

What to do?

If you are contemplating the sale of FHL property it may make sense to complete the transaction before the present capital gains tax concessions expire on the 5 April 2010. Potentially the gain on the sale may qualify for Entrepreneurs’ Relief. This could reduce your tax on any gain to just 10%, as long as the sale meets the required criteria.

If you are a long term investor and have no intention of selling, you could consider bringing forward any capital expenditure that may qualify as part of your Annual Investment Allowance. For 2009-10 you are allowed to claim a 100% deduction for expenditure up to £50,000. If this claim either created or enhanced an overall loss, you could set off the loss against your other earnings and reduce your liability for 2009-10. (You may also be able to carry losses back if this is more advantageous.)

Planning pointer.

If you own FHL property, now would be a good time to take a hard look at the tax planning advantages that are still in date. As soon as we cross the 5 April 2010 threshold all the present options are lost! Please call if you would like more information on this topic.

Sole traders and partnerships are taxed under the self assessment rules. Profits are allocated as agreed by the business owners and tax is calculated on an individual basis based on this profit share. If sole traders or partners withdraw the retained profit after tax this is treated as drawings and not a business expense.

It is possible for sole traders and partners to draw out more than the balance on their current account, to become overdrawn, and suffer no tax consequence. Of course there is no long term future in doing this as funds needed for the business, will be dissipated and the business will drift towards insolvency. Businesses of this type pay tax on business profits, not the amount taken out of the business by the owners.

Limited companies and their owner directors are treated very differently. A limited company has a distinct legal identity of its own, quite separate from its shareholders/directors. Money that is withdrawn by the owners, in whatever way, always has a tax and possibly National Insurance consequence except as a repayment as a loan from a director.

Essentially money withdrawn by directors will be treated as:

• salaried earnings or benefits, and/or
• dividends

So if you pay your private bills through a limited company what happens?

If you already have money invested in your company that has been credited to a director’s loan account in your name, then the payment of a private bill can be debited to this account, reducing the amount the company owes you. In this case there is no tax consequence.

If you do not have money invested in your company in this way, any private payments you make will create an overdrawn balance on your director’s loan – you will owe the company money. Now there are tax consequences.

If your loan account does become overdrawn the following options and tax effects are available to you.

1. You repay the overdrawn balance. If this is done as soon as the payments are made there should be no tax to pay.
2. The company writes off the loan. The balance written off will be treated as your earnings subject to PAYE and National Insurance, or in certain circumstances, as a dividend.
3. The director’s loan remains unpaid. A benefit in kind charge will be created equal to a statutory rate of interest for the time the loan is overdrawn in a particular tax year. This benefit can be avoided if the company charges your loan account with an equivalent interest charge. Unpaid director’s loans can also create an additional corporation tax charge if the loan remains unpaid more than nine months after the company’s year end. This extra tax can be reclaimed by the company when the loan is subsequently repaid, but there will be a delay.

Action point
If you need to overdraw your loan with the company it is better to plan for the tax consequences and perhaps find a more suitable way to extract funds from the company. Please call if you would like more information on this topic.