EJBC Chartered Accountants

The June Budget introduced some complex changes to capital gains tax (CGT) that apply from 23 June 2010. For disposals made on or after that date there are now three alterative tax rates for individuals.

Taxable income and gains after deduction of allowances up to £37,400 are taxed at 18%. Those over the £37,400 limit are taxed at 28% and gains subject to entrepreneur’s relief are taxed at 10%.

The old CGT rate of 18% applies to all capital gains made by individuals and trustees from 6 April 2008 to 22 June 2010 inclusive, irrespective of the amount of the gain or the person’s level of income. Trustees pay CGT at 28% on all gains made on or after 23 June 2010 irrespective of the level of income of the trust.

The new higher rate of 28% only applies to individuals where their total taxable income and gains exceed the higher tax rate threshold of £37,400. That sum includes the total income for the full tax year less allowances and all allowable deductions, plus all capital gains made on or after 23 June less your annual CGT exemption of £10,100. Any gains made before 23 June 2010 are not included in this total. You can choose how to set-off any losses and your annual CGT exemption so you pay the minimum amount of tax. 

As an example:

Tony’s taxable income for 2010/11 is £27,400 after his personal allowance and all tax allowable expenses have been deducted. He sold a property in May 2010 that made a gain of £17,000, and sold another property in November 2010 for a gain of £25,100. Neither property qualifies for entrepreneurs’ relief or for the exemption as his main residence. Tony has no capital losses to use in 2010/11. The CGT on those gains is calculated as follows:
The first gain of £17,000 in May 2010 will be taxed at 18%.

The second gain in November 2010 of £25,100 plus his taxable income of £27,400 exceed the higher rate threshold of £37,400 by £15,100 and are liable to the higher 28% rate.

As such it makes sense to deduct the CGT annual exemption of £10,100 from the second gain so that only £5,000 of the gain is taxed at 28%. The remainder of the gain of £10,000 will be taxed at 18%. If Tony has any CGT losses he could also have chosen to offset those against the second gain to maximise relief at 28% rather than 18%.

There are a number of approved share schemes that a company can use to provide its employees with shares in the company they work for, or options to buy those shares at a favourable price. The scheme designed for small companies to use is the Enterprise Management Investment scheme (EMI).

• If the company chooses not to use one of the approved share or share option schemes and issues shares or options to its employees, there can be some very serious tax consequences, such as:
• The employee is taxed on the value of the shares he receives as if that value was part of his salary.
• The company must pay the employer’s class 1 NICs on the value of the shares issued.
• The company must also fund the employee’s class 1 NIC and the tax that should have been deducted under PAYE from the value of the shares provided to the employee.
• If the employee leaves shortly after acquiring the shares, the employer may not be able to recover the PAYE and NIC paid in respect of the value of those shares.
• If the Taxman views the giving of the shares as part of a tax avoidance scheme, the employee may be subject to tax and NICs on any dividends he receives from those shares, as if those dividends were salary payments.

If you want to provide your employees with shares please talk to us about how you want to achieve this, so we can advise on how to do it the most tax efficient manner.

Emma emma@ejbc.co.uk
 

In the recent budget, George Osborne announced a National Insurance Contribution (NIC) regional holiday, for any new business set up in areas such as: Scotland, Wales, Northern Ireland, North East, Yorkshire, Humberside, North West, Midlands and the South West. You will note that London and the South East, including the Thames Valley will NOT benefit from this incentive.
 

The scheme will be implemented over 3 years, and will exempt employers from up to £5,000 of Class 1 employers’ NIC per employee, in relation to the first ten employees.  The government claim it could be worth up to £50,000 in tax relief.  Although the scheme is due to be up and running by September 2010, it will be back dated to budget day of the 22^nd June.
 

Around the 23^rd of June, it was reported in the press that there was a flurry of new businesses incorporating in these areas. So does it have a really broad appeal?
 

There are a couple of key conditions surrounding this incentive:-
 

The business must be a new start up, so it is not simply a case of relocating an existing business to one of the targeted areas, or setting up a new company to carry on the old business, or even incorporating your business. 
 

Relief is only available for the first ten employees hired in the first year of business.  This is where I think it will have a limited effect, as smaller business tend to take longer to make decisions on employing staff. In most cases, they are unlikely to take on as many as 10 new employees in the first year. 
 

For those who it will benefit, it is really good news, especially when considering that employer’s national insurance will be increasing by 1% from April 2011 to 13.8%.
 

As a warning to new employers, the regional NIC holiday is only a temporary measure and with the plans to bring in NEST (National Employment Savings Trust) from 2012, you need to ensure that you get your budgeting right in respect of long term recruitment in your business.
 

Under NEST, if the employer does not already provide a pension scheme, they will be required to set up a NEST and contribute up to 3% of employee’s gross salary in to this scheme per annum.
 

If you have any questions about the subjects in this post , please contact us at info@ejbc.co.uk

With the budget less than a week away, our future tax regime, although not certain, is highly likely to impact individuals, particularly those fortunate enough to be higher earners.

This has made me think about getting back to basics when looking at tax planning advice.

When was the last time you reviewed your income streams to ensure that they are spread as evenly as possible between you and your spouse or civil partner?  Even if you are not a higher rate tax payer, there could be some benefits for you.
 

To give some examples:-

Investment income such as bank interest and dividends should ideally be held in the name of the lower tax earner.  If you currently pay tax at 50%, why pay higher rate tax on your investment income if your spouse or civil partner pays tax at a lower rate!
I appreciate that interest rates are low at the moment, however, even if your investment income is as little as £2000, paying tax at the 50% tax rate will mean your additional tax bill is £600, whereas a taxpayer who is not in the higher rate tax band, has nothing further to pay. 

Reallocating investment income can also be important for those taxpayers eligible for the aged related allowance.  For taxpayers 65 and over, your personal allowance is increased from £6,475 to £9,490 assuming that your income levels are below £22,000.
If you receive income above this level, the personal allowance is reduced on a sliding scale.  If you are on the borderline for receiving this allowance, you should consider carefully if any income streams can be paid to your spouse to keep your higher personal allowance intact.

If you are self-employed and your spouse / civil partner has no earnings, you should consider employing them in your business and paying them enough salary to cover their personal allowance at the very least.  If this income is recorded correctly, it won’t only save you tax, but will also give them a National Insurance record for the year, free of charge, which will count in the future when they come to apply for a state pension. 
You could take the above example one step further and bring your spouse or civil partner into your business as a partner. 

The partnership does not have to be 50:50 and may be set up as any percentage split to reflect their involvement in the business.  The idea of this type of tax planning would be to reallocate some of the business profits being taxed at 40% or 50%, to a partner who would pay tax at 20%.
 

A similar scenario would apply to those who trade through a Limited Company.  In this case, we would look to transfer ownership of shares to the lower rate tax payer. 
These are just a few examples of where reallocating income streams can prove useful from a tax perspective. 
 

A note of caution

Please remember that if you do reallocate investment income, you are giving away some control over that income stream, so if your spouse or civil partner decides to use their new found income to treat themselves, you may have little recourse!

Now that my top rate of income tax is a whopping 50%, will I get tax relief at that rate if I make charitable donations in this tax year? 

Yes. If you make donations to charities under the gift aid scheme you will get tax relief at the 50% rate. Your gift is treated as being made after 20% tax has been deducted. When you give £80 the gross amount of the gift is £100. Your personal thresholds for 40% tax and 50% tax are both extended by the gross amount of your donation. For your £80 gift you have an extra £100 of your income taxed at 20% rather than 40%, and an extra £100 of income taxed at 40% rather than 50%. In total you have gained tax relief of 50% (20% +20% +10%) on the £100 gross gift.        

My company has recently taken on an industrial unit that needs extensive fitting-out before it can be used by the business. How can I ensure that all the fittings I use will qualify for the maximum amount of capital allowances?
 

The cost of fittings that qualify as plant or integral features can be set against your company’s Annual Investment Allowance (AIA), which will give 100% capital allowance in the year of acquisition. The AIA cap has been increased to £100,000 per year for expenditure incurred on and after 1 April 2010. Plant is broadly stuff that is not fixed permanently to the building, such as shelves or display units. Integral features are fixed to the building and fall into these five categories:

• Cold water systems (not hot)
• Electrical systems (including lighting)
• Space or water heating systems, including a powered system of ventilation, air cooling or air purification
• Lifts, escalators or moving walkways
• External solar shading
   If the fitment does not qualify as plant or integral features it can qualify for 100% enhanced capital allowance (ECA) if it has energy or water saving qualities, and it has been included on the approved ECA list at:  http://www.eca.gov.uk/  

Normally a loss arising from letting of commercial or residential property, can only be carried forward to set against profits from that same property business. However, where part of the loss has been generated by the deduction of capital allowances, that part of the loss is available to set against the owner’s other income in the same tax year. 

A capital allowance generated loss is very unlikely to arise in connection with letting residential property as capital allowances cannot be claimed for equipment used in residential properties, but such allowances can be claimed for equipment or integral features used in or attached to commercial properties.

Improvements to commercial properties made since 6 April 2008, such as new lighting or air-conditioning systems are classified as integral features, and thus qualify for capital allowances.  All integral features and other plant and equipment that qualify for capital allowances can fall within the Annual Investment Allowance (AIA), which gives a 100% deduction in the year the cost is incurred. The AIA is capped at £50,000 per year for expenditure incurred before 6 April 2010, but that cap is doubled for expenditure incurred on or after that date.

The capital allowance generated loss from a let commercial property could be considerable where there has been high expenditure on items that qualify as plant, machinery or integral features.  Do be aware that losses made after 24 March 2010 may be barred from being set-off against other income if there was a plan in place to deliberately avoid tax by generating those losses. For further information or help, get in touch with Emma at emma@ejbc.co.uk  

With the impending changes to capital gains on the horizon, lots of clients are asking for advice on whether they should look to sell their buy to let properties.  Such a decision may be taken out of their hands if the proposed changes come in on budget day, but if they are delayed until the new tax year, what should you do?
 

Things to consider:
 

What would you do with the proceeds of a property sale?  Putting the proceeds in a building society will not yield a high return, so what other savings options are available? 

What return are you currently getting, could it be improved?  If you plan to reinvest in say another property, think about the buying costs such as legal fees and stamp duty.
 

Also consider that many other people are also considering selling at the moment. This could lead to the market being flooded with similar properties, if so, how much could this affect the selling price of your property?
 

Before making a decision, explore all the CGT reliefs that maybe available to you.  Although the tax rate maybe on the increase, there are still some CGT reliefs available such the principal private residents relief and letting relief.
 

Tax has a huge influence over decisions we make, as we all want to pay as little as possible.  If you are currently facing the dilemma of sell or not to sell, please come and talk to us so we can run through all of your options. 

Emma Thomas ACA FCCA CTA

emma@ejbc.co.uk

My business is an agency that provides rented holiday accommodation to UK holiday-makers. My commissions are less than the VAT registration threshold, so I am not VAT registered. What contracts and invoices do I need to put in place to avoid charging VAT to either my clients (the landlords) or to the holiday-makers who rent the properties? 

You want to stay under the VAT threshold, so you need to prove to the VAT man that you are an agent working on behalf of the landlords, and are not a re-seller of holiday accommodation. You should have a written agreement with each of the landlords that clearly states that the landlord is the principal who is making a contract with the holiday-maker, and you are their agent.

All invoices you issue should show your fees as separate items to the cost of the holiday accommodation. If the holiday-maker pays you for the use of the holiday-let, the bill they pay should clearly show the amount due to the landlord, and the amount due to you as the agent. Ideally the two amounts would be shown on separate invoices.

Since April 6th, HMRC can impose penalties if you are late in paying over the payroll and CIS deductions you make in the tax year. ‘Late’ in this context means the payment reaches the Tax Office after the 19th of each month, (or 22nd when paying electronically). 

Until now HMRC did not impose penalties or interest on small employers if all the payroll deductions for the year reached him by 19th April (or 22nd) after the end of the tax year. Large employers (those with more than 250 employees) have been subject to surcharges for late payment for some years, as they have been obliged to pay over all deductions electronically. 

Those surcharges for large employers have been scrapped and all employers are now subject to the same penalties. However, small employers do not have to pay over their deductions electronically. 

The penalty will be based on the total amount of deductions paid late for the tax year and will be calculated based on the number of times payments are late in a tax year as follows … 

- Late once – no penalty - Late 2 to 4 times – 1% penalty 

- Late 5 to 7 times – 2% penalty - Late 8 to 10 times – 3% penalty 

- Late 11 or more times – 4% penalty 

The penalty applies to the total amount that is late in the tax year (ignoring the first late payment in that tax year). 

If any payment is made more than six months late a further 5% charge is added to the above penalties. Where the payment is over 12 months late another 5% penalty charge is added. 

However, these penalties cannot be imposed automatically as at present HMRC does not know how much PAYE etc you should be paying over month on month. Although, when the Taxman inspects your PAYE records and it is apparent that you been late in paying over your payroll deductions, he has every right to impose these heavy penalties for late payment.