tax update and planning points spring 2011 locations docs/uk...tax update and planning points spring...

Michael Steed, MA (Cantab),CTA (Fellow),MAAT

www.kaplanfinancial.co.uk

Tax Update and planning pointsSpring 2011

Contents

1 IT /NIC update and tax efficient business structures in 2011;

2 Property tax issues – still OK to invest?

3 Cars and other employee benefits;

Contents

4 Business tax issues;

5 VAT and overseas service – the latest position;

6 Administration issues.

1 IT /NIC Update and tax efficient business structures for SMEs in 2011

New PA rates• 2011/12 – £7,475 for under 65s (£6,475); it

will be £8,105 in 2012/13;

• In 2011/12 the basic/higher rate band is £35,000 (down from £37,400) of taxable income;

• It will drop again in 2012/13 To £34,370;

• So lots more people will pay higher rate tax.

Personal allowances – 2010 onwards

• PA is “gradually reduced to nil” for individuals with “adjusted net income” over £100,000 –from April 2010;

• Rather like means testing on age-related allowances - £1 abatement for each £2 excess!

• PA lost when income reaches £112,950.

Marginal tax rates 2010/11 onwards

60%

50%

40%

30%

20%

10%

0% PA HRB100k

100K+ 2 x PA 150k

What are the effects of this?

• 40% taxpayers will see an increase in their IT bill of £80 in 2011/12;

• If PA lost (above £113,000), then this widens to £480;

• Need to also consider the NIC changes.

Res non-doms

• Strictly: residents who are non-domiciled in the UK –there are many of these;

• “Loophole” for remittance basis;

• Only taxed in UK on income and gains remitted to the UK;

• If remittance, then lose PAs and long-term non-doms pay £30k RBC.

Non-doms - Budget changes

• No RBC where money remitted to UK to invest in UK businesses;

• £30,000 RBC increased to £50,000 if resident for more than 12 years

• New statutory test for residence to be introduced

Am I non-domiciled?

• Robert Gaines-Cooper case;

• Tried to say no longer UK domiciled;

• Had house and art collection in the UK;

• Failed!

Tip......

• Anyone dealing with clients or employees moving into the UK or out of the UK will need to read:

• HMRC6;

• Available on the HMRC website.

NIC rates

2010/11 2011/12Lower earnings limit

97 102

Primary threshold (e’ee)

110 139

Secondary threshold (e’er)

110 136

Upper earnings limit

844 817

Primary main rate 11% 12%Primary residual rate

1% 2%

Secondary rate 12.8% 13.8%

So, what’s the effect of all this?

• Consider an employee on £20,000 pa2010/11 2011/12 Difference

PA 6475 7475

Tax @20% 2705 2505 200

NIC PT 5720 7228

NI rate ((E’ee)

11% 12%

Primary NI payable

1571 1533 38

Total hit 4276 4038 238

So, what’s the effect of all this?

• Consider an employee on £50,000 pa2010/11 2011/12 Difference

PA 6475 7475

BR/HR boundary

37400 35000

Tax@20/40% 9930 10010 (80)

NIC PT 5720 7228

NIC rate 11/1% 12/2%

Primary NIC payable

4259 4381 (122)

Total hit 14,189 14,391 (202)

What about the self-employed?

• Main Class 4 rate increased from 8% to 9%;

• Lower Profits Limit (LPL) raised from £5,715 pa to £7,225 pa;

• Upper Profits Limit (UPL) drops from £43,875 pa to £42,475;

• Class 4 rate above the UPL rises from 1% to 2%.

Self-employed earning £20,000

2010/11 2011/12 Difference

PA 6475 7475

IT 2705 2505 200

Class 2 125 130 (5)

Class 4 LPL 5715 7225

Class 4 rate 8% 9%

Total Class 4 1143 1150 (7)

Total hit 3973 3785 188

Self-employed earning £50,000

2010/11 2011/12 Difference

PA 6,475 7,475

IT 20/40% 9,930 10,010 (80)

Class 2 NIC 125 130 (5)

Class 4 rates 8/1% 9/2%

Class 4 UPL £43,875 42,475

Total Class 4 3,114 3,323 (209)

Total hit 13,169 13,463 (294)

What does this mean?

• One implication is that personal allowance salaries and dividend strips will continue to be popular for small businesses;

• BUT…….

• With the new OTS… this may be attacked!

Incorporation

• So what do the numbers look like, sole trader v company?

• The following table compares tax/NIC (Class 2 and 4) for a sole trader;

• With a company: a PA salary of £7,072 and all of the remaining profits after CT taken as a dividend:

Tax/NIC burden SE and Ltd CoyProfit Sole trader Company Saving

10,000 885 586 299

15,000 2,335 1,586 749

20,000 3,785 2,586 1,199

30,000 6,685 4,586 2,099

40,000 9,585 6,586 2,999

50,000 13,463 9,206 4,257

75,000 23,963 19,206 4,757

And the conclusion is?

• Incorporation still presents good opportunities for the right clients;

• This table doesn’t take into account the extra costs associated with running a company, but the contrast is still impressive, especially at the higher profit levels.

Efficient extraction using family members

• Using spouses and civil partners;

• Salary and dividends – is there a “right” salary?

• Dividends – practical issues.

• What about benefits such as cars?

Tip........Alphabet shares

• Need great care here;

• If artificial, HMRC could attack;

• Settlements legislation;

• May be good reasons – family businesses with two generations.

The problem with goodwill

• IFA regime from 1 April 2002;

• Only for companies – not sole trades or partnerships;

• Can be used on incorporation in the right circumstances;

• Is it the “right” goodwill?

2 Property tax issues – still safe to invest?

The basic rules

• Buy to lets in the UK – all one trade;

• All overseas buy to lets are all one trade;

• No cross relief for losses between the two;

• No cross relief to other income – all property losses are ring-fenced.

Overseas owners

• Common for overseas nationals to own property in the UK;

• Anything we need to know?

• Will they be allowed to have a personal allowance?

• S56, ITA 2007.

Furnished holiday lets (FHLs)

• Changes from April 2011:• Changing loss relief

–Only c/f v FHL business profits

• Changing CA rules;

• Election process if you fail to qualify in any one year.

UK and foreign separately

Furnished holiday lets (FHLs)

• Originally to be abolished from April 2010;

• Now to continue including EEA properties;

• Changes from April 2012:• changing (upwards) letting days

– Availability 140 210– Actually let 70 105

Furnished holiday let

• CGT aspects look as though they will remain:

• Entrepreneurs’ relief, rollover relief etc.;

• Some merit in holding FHLs in companies to benefit from the Substantial Shareholding Exemption if say trading through a company;

• Otherwise ER?

3 Cars and other employee issues

– From 6 April 2011:• Alternative fuel reductions disappear• £80K list price cap goes• Scales start at 125g/km

– From 6 April 2012• Emissions < 100g/km – 10% x list price• Rises 1% for each 5g increase

Company cars – green issuesCompany cars – green issues

– From 6 April 2011:• Alternative fuel reductions disappear• £80K list price cap goes• Scales start at 125g/km

– From 6 April 2012• Emissions < 100g/km – 10% x list price• Rises 1% for each 5g increase

Company carsCompany cars

– Private fuel in company car• From 6 April 2011• Base figure for private fuel benefit rises from

£18,000 to £18,800– Private fuel in company van

• From 6 April 2010• Charge rises from £500 to £550

– Electric company vans• Exempt benefit from 6 April 2010• 100% CA for business

Other transport issuesOther transport issues

Authorised Mileage Allowance Payments (AMAPs)

• Using your own car for your employer’s business;

• The 40p rate rises to 45p from April 2011;

• The 25p rate is unchanged;

• The 10,000 miles limit is also unchanged.

AMAPs

• Note the VAT angle;

• Employers can recover the VAT in the petrol element of the AMAP;

• See the approved rates on the HMRC website;

• Need enough VAT receipts to cover the claim.

Other employee benefits

• Child care vouchers rules change in April 2011;

• Higher rate relief on costs eliminated from April 2011 – but only for new joiners;

• Late night taxis –under review – targeted by the OTS – probably gone by 2012.

4 Business tax issues

CTA 2009• Accounting periods ending on or after 1 April

2009;

• Rewrites calculation of taxable income and the language is different;

• The boxes on the CT600 will have different titles

• Minor changes of principle.

Pro-forma computation

Corporation Tax Computation for the year ended 31 March xxxx£

Profits of a trade (UK and overseas) (DI) XProfits of UK property business (Sch A) XProfits from overseas property business (Sch DV) XProfits and losses from non-trading loan relationships (DIII) XMiscellaneous Income (DVI) XCompany distributions (DV) XNet chargeable gains XTotal profits XLess: charges on incomeDonations to charity (X)Taxable Total Profit (Profits chargeable to corporation tax) XAdd: Franked Investment Income - FII- Exempt dividends received x 10/9 XAugmented Profits (Profits) X

Taxable

DeterminesCT rate

ESC C16

• Widely used for end-of-life companies;

• Converts income to capital;

• After the Wilkinson case, ESCs now under pressure – encode or drop;

• C16 still in place as at 1 April 2011;

• Changes likely this year.

CTA 2010

• CTA 2010 – calculating tax liability – small profits relief

etc;

– loss reliefs and group relief;

– Associated companies etc;

.

Corporation Tax Rates

Augmented Profits FY 2008 &2009

FY 2010 FY 2011

Up to £300,000 21% 21% 20%

£300,000 - £1.5m 28%Less: MR

28%Less: MR

26%*Less: MR

£1.5m or more 28% 28% 26%

MR Fraction x (£1.5m – Augmented Profits) x TTPProfits

* Reduces by 1% pa until 23%

Capital allowances

• Lots of changes:• 2008 – WDAs reduced from 25% and 12% to

20% (main pool) and 10% (special rate pool);

• Further changes:

• 2012 – 20% drops to 18% in the main pool; and

• 10% drops to 8% in the special rate pool.

WDA

• Year end not 31 March – need to apportion WDA over FYs

• Year ended 31 December 2012– 1.1.2012 – 31.3.2012 = 91 days– 1.4 2012 – 31.12.2012 = 275 days

– wda (91/366 x 20% ) + (275/366 x 18%) = 18.49%

Annual Investment Allowance

• 2010 – rises from £50k to £100k – may need to be pro-rated;

• 2012 will drop to £25,000;

• 2012 may need to be pro-rated (like 2008 and 2010);

• So businesses will need to review the timing of capital spending carefully.

Short life assets

• Better cash/tax result by making an election for SLAs for assets sold/disposed of within 4 years of purchase;

• Raised in Budget 2011 to 8 years;

• Allows more businesses to take advantage of this;

• How relevant is this in light of the AIA?.

Enhanced Capital Allowances

• ECAs at 100% for:

• Energy technology;

• Water technology;

• Low emission cars;

• www.eca.gov.uk

Lord Carter of Coles - key recommendations

The universal electronic delivery of business tax returns by 2012.

• SA – April 2008;

• PAYE – April 2009;

• VAT – April 2010;

• CT – April 2011.

Key date for iXBRL 1 April 2011– Accounts and computations must be

filed in a specified data format known as Inline XBRL (iXBRL);

– AND

– All Corporation Tax liabilities must be paid electronically

• Internet banking;• Telephone banking;• Direct Debit;• Bank Giro;• Debit and credit card at www.billpayment.co.uk/hmrc;• BACS;• CHAPS.

How to pay “electronically”

When exactly?

CT600s that are delivered on or after 1 April 2011 for accounting periods ending on or after 1 April 2010;

Example:

Accounts for the year ended 30 June 2010, will need to be filed using iXBRL by 30 June 2011.

The Rationale Behind iXBRL– International standard;

– Early identification and quick resolution of simple errors;

– Apply risk parameters to • deselect low risk cases• flag items outside ‘norms’;

– Better targeted questions during investigations;

– Continually develop HMRC’s picture of risks and norms.

XBRL v iXBRL

• XBRL is an international standard that allows tagged boxes to be compared;

• iXBRL adds a second layer of machine code to the WYSIWYG screen

• The user doesn’t see this code.

One Document – Two Purposes

Human Readable Computer Readable

Inline XBRL [iXBRL]

Better data and smarter use

Company Tax Return – submitted online with accounts and CT comps in iXBRL

Human readable format

Holding Database

Risk Mart

Analysis capability

computer readable format

Define /develop risk parameters

Risks identified

Policy making

Intervention

Resolution

Inspector

Other databases

CT CompsAccounts CT600

Companies House & HMRC in unison

– iXBRL will be mandatory for HMRC but voluntary for Companies House;

– HMRC and Companies House now offer a template-based ‘Joint Filing’ software tool, suitable for smaller companies

Software

– HMRC’s CT filing product is in place and operational;

– Bulk of the commercial tax computations products are available now (eg VT software, Iris);

– BUT……. Some important software like Sage struggled to have it ready for the 1 April 2011;

– CIOT submissions to Treasury February 2011 –counsels delay for iXBRL implementation -rejected.

HMRC’s “soft landing”

– HMRC says that it will exercise a sympathetic approach to penalties in first two years but flexibility beyond that• Reasonable Excuse;• Reasonable Care.

Associated companies

• Proposed changes following consultation document;

• Definition?

• Impact – consider a H &W company –different businesses, even different location;

• Associated under current rules?

• Will the changes make any difference?

Associated companies

• Definition in S25 and S449, CTA 2010 (from S416, ICTA 1988);

• Two companies are “associated” if one controls the other, or one person controls both;

• S448 defines “associates” – includes “relatives” (spouse, brother and sisters, parent or remoter forebear);

Associated companies

• Proposed changes remove the accidental association (in part covered by ESC C9);

• From 1.4.11, companies only associated if there is a “substantial commercial interdependence”;

• Means:

• Administration, directorships, staff, premises, purchasing/selling arrangements etc.

Food for thought......

• Would a husband and wife who ran a pub and who each had limited companies be associated?

• Husband Ltd runs the drinks;

• Wife Ltd runs the catering.

While we are there.....

• Don’t forget the parallel issue for spousal companies for the AIA;

• Same premises?

• Same trade?

NIC holiday for new businesses

• Emergency Budget 2010 - £5k for employers for up to 10 employees in first year;

• Poorly taken up – wrongly targeted?

• Sole traders, companies and partnerships;

• Three years from June 2010 to September 2013.

Corporate Tax Road Map

Lowering tax rates whilst maintaining tax base

Maintaining stability – and allowing companies certainty re tax regime

Tax regime must be competitive to attract/retain business in UK

Avoiding complexityTax should not distort business and commercial decisions

Areas of change

• Already implemented– Reduction in main CT rate from 28% to 26%

• intended to be 23% by April 2014– Exemption of most dividend income from CT

• Proposed further changes– Controlled Foreign Companies– Innovation and IP– R&D Tax credit– Taxation of overseas branches

Transfer pricing

• Consider value at which inter-group transactions are recorded– should be on ‘arms length basis’

• Companies under common control;• UK and overseas companies

– small and medium companies exempt unless manipulation;

• New OECD transfer pricing guidelines 2010;• Taken into UK legislation (TIOPA 2010).

NIC holiday for new businesses

• Regional only:• Northern Ireland;• Scotland;• Wales;• East and West Midlands;• North East;• North West;• Yorkshire and Humber.• (www.gos.gov.uk/regionfinder)

NIC holiday for new businesses

• Only for new businesses;

• Based on activities;

• So can’t be an old business in a new coat;

• Fred incorporates into Fred Ltd won’t qualify;

• Employing a spouse or family member.

Review of IR35

• After a review by the OTS, the Government has announced that it will keep IR35, but will publish guidelines as to its operation;

• A dedicated hotline will be available;

• Review only be specialist teams;

• Monitoring through an IR35 forum.

Review of IR 35

• Looks good in the short term; but...

• If IT and NIC are to be merged, then IR35 will have to be part of that process;

• Recent difficulties with contractors working through agencies - caught by IR35 through the agency/client contract – not by the agency/company contract;

• Will this approach help?

The problem with agencies.....

Client company

Agency

IR35 company

The IR35 company can be brought into IR35 by the contract between the agency and the client!

5 VAT and overseas services

The new VAT package 2010/11

• This affects businesses moving services across international boundaries;

• It does not affect movement of goods – that’s the same as before.

The reverse charge

UK

3C

EC

3C

EC

SERVICES OUT

SERVICES IN

In both cases –reverse charge in the UK Reverse charge in

EC Member State only

3Cs will have their own in-bound rules

Inside the scope of UK VAT

Outside the scope of UK VAT

New VAT package from 2010• The basic rule has changed from 1 January

2010;

• For services;

• There is a difference between B2B; and

• B2C supplies;

B2B supplies

• For B2B supplies, the place of supply (POS) is now where the customer is situated;

• In effect this means that VAT will be brought to account where the service is consumed.

B2C supplies

• The place of supply is where the supplier belongs;

• In effect, a default for services to consumers;

• Taxes consumption somewhere in the community.

Example 1• An accountant does due diligence for a Jersey

company. The bill is sent to Jersey.

• This is a B2B supply and the place of supply (ie where VAT is brought to account) is Jersey;

• There is no VAT in Jersey, but they now have their own GST;

• We don’t care – no VAT to worry about!

Example 2

• An accountant does the tax for an individual who has moved to Germany for a couple of years.

• This is a B2C supply and the accountant will have to charge UK VAT;

• The place of supply is the UK.

Example 3

• An accountant does the tax for an individual who is in Pakistan.

• This is a B2C supply and the accountant would normally have to charge UK VAT;

• BUT, the new rules allow intellectual services (old Schedule 5) to be outside the scope of UK VAT.

Overrides

• As before, there are some overrides;

• For example: land;

• For land the POS will be where the land is situated (ie same as before);

What are the 2011 changes?

• Performance services are now like all the other services;

• For 2010 only, they were subject to tax in the place where they were performed;

• Examples include: repair work, lecturing, valuation, music gigs.

New VAT package from 2010

• EC Sales Lists also include services for the first time;

• From 1 January 2010;

New VAT package from 2010

• Also 8th Directive reclaims are now electronic;

• Will now be submitted to HMRC rather than Member State;

• Should be much easier!

• See BN 77, Budget 2009.

6 Administration issues

Time to pay scheme

• The budget announcements confirmed that the time to pay scheme will be retained;

• But the scheme is only targeted at businesses in TEMPORARY financial difficulties;

• It is NOT designed for businesses to come back to time and again.

Payroll administration

• In year penalties and interest for late payments in year;

• From April 2010;

• Generally first late is penalty free;

• Then a sliding scale – up to4% of the total amount that is late in the year (ignoring the first late).

New late filing and payment penalties – self assessment

• Penalties for late filing from April 2011:

• One day late - £100 (even if you have no tax to pay or you’ve already paid;

• 3 months late: automatic day penalties of £10 per day up to £900;

• 6 months late - further penalty - greater of 5% of the tax or £300;

• 12 months late – further penalty - 5% of tax due or £300 (could go up to 100% of the tax)

New SA late payment penalties (cont)

• 30 days late – an initial penalty of 5% of the unpaid tax;

• 6 months late – a further penalty of 5% of the unpaid tax;

• 12 months late – a further penalty of the unpaid tax.