WW Tax Club

Controlled Foreign Companies

2012-02-08T13:56:00.002Z

CFC Reform – Further draft legislation and update on the proposals

Under current law, a Controlled Foreign Company (CFC) is an overseas company controlled by United Kingdom residents which pays less than three quarters of the tax which it would have paid on its income had it been resident in the UK. The controlled foreign companies’ provisions are directed at companies which artificially divert UK profits to low tax territories or other favourable overseas tax regimes to reduce their UK tax liabilities.

The Government has been going through a consultation process to reform that CFC tax rules and on 31 January 2012 published an update on the CFC reform as well as updated draft legislation for consultation. The Treasury has acknowledged the need for further amendments to the draft legislation published on 6 December 2011 and is working with businesses and advisers to achieve final legislation.

The key points arising from the recent consultation are as follows:

Finance company partial exemption

The most attractive feature of the new regime is the opportunity for certain finance profits to benefit from a low tax rate of 5.75%.

A limited full finance exemption is proposed where the CFC’s interest income exceeds the aggregate borrowing costs of the UK group or for interest income that arises from certain transactions (such as share issues) that place no reliance on the wider group.

Application of the new CFC rules to the financial sector

The current proposal is to have an insurance safe harbour of between 200% and 250% of minimum regulatory capital and a banking safe harbour limit of the greater of a 12.5% Tier 1 capital ratio and the level of Tier 1 capital that the bank would be required to hold if regulated in the UK plus a 2% buffer. These proposals will be subject to continuing discussions with the insurance and banking sectors and draft regulations will be published in due course.

The Gateway Test

The Gateway is intended as a simple test to allow groups to identify whether they are within the scope of the CFC rules. The Government has acknowledged that this is currently too complicated and does not enable businesses to determine with sufficient certainty whether or not a foreign subsidiary is potentially within the scope of the rules. Revised draft legislation will be shared with businesses when available.

Temporary Period of Exemption

It is proposed that where a UK group acquires foreign subsidiaries or a non-UK group moves to the UK, the group will be given a period of time to restructure the foreign subsidiaries so that they fall outside the CFC rules.

Foreign Branches

The new CFC regime will also apply to foreign branches of UK resident companies. For CFC purposes the branch will be treated as if it were a subsidiary of a UK company.

Commencement

The new rules will apply to accounting periods beginning on or after 1 January 2013. Comments have been requested on the latest consultation by 10 February 2012.

For further information/advice on this topic please visit http://www.wardwilliams.co.uk/

HMRC postpones new SME Business Record Checks

2012-02-07T13:04:00.000Z

HMRC is to postpone any new SME business record checks (BRC) until it has formulated a new approach to these interventions targeted more at high-risk businesses. Responding to pressure from the representative bodies, HMRC agreed in December to review the entire BRC project. New visits will not resume until HMRC announces the detail of a 'revamped' approach, expected at some time after April 2012.

For further information/advice on this topic please visit http://www.wardwilliams.co.uk/

HMRC update: Collecting small debts through PAYE

2012-01-30T10:30:00.002Z

From April 2012 HMRC will be able to collect debts of less than £3,000 by including them in the taxpayer’s PAYE code. This applies to both tax debts and tax credit overpayments.

Last year HMRC began writing to affected individuals so that they would have the opportunity to arrange to pay the outstanding amount by another method. HMRC will now start including outstanding debts in PAYE codes issued from January 2012. Such amounts will be included in the code issued at the start of the tax year but will not be added to the code in-year.

There are some points here which Ward Williams draw to the reader’s attention:

1. Is the HMRC calculation of tax underpaid (or tax credits overpaid) correct? HMRC have been through torrid times lately with staff reductions and management and software traumas, which means their information is not always up to date. Unfortunately it has been the experience of the writer that many of the tax calculations issued by HMRC are wrong; indeed one of my colleagues believes that they are “usually” wrong.

2. Do you wish to pay this tax debt through PAYE, thereby reducing your take home pay every pay day or is the collection of an extra amount of tax of up to £2999 causing you hardship? As agents, we have access to a dedicated telephone line to HMRC and we should be pleased to use this to attempt to arrange some other form of payment. For instance the PAYE regulations prohibit more that 50% of an employees cash earnings (E.g. his/her earnings excluding benefits such as BUPA or a company car) from being deducted in tax. In some cases HMRC may not have realised that this limit has been exceeded. It might also be possible to spread the payments over up to 3 years rather than one where hardship can be demonstrated.

3. Whose fault was the underpayment? Where it was caused by a HMRC error, in some cases HMRC will agree to totally or partially write off the debt.

For further information/advice on this topic please visit www.wardwilliams.co.uk

Car tax levy could hit SME owners

2012-01-26T09:27:00.000Z

SME owners and their employees may face a hefty increase in tax and NIC charges when a new emissions scale for company car tax comes into play on the 6^th April 2012.

An income tax charge (and Class 1A national insurance liability [currently 13.8%]) will be applied for the private use of a company car on 10% of the car’s list price where a car has CO2 emissions from 76g/km to 99g/km. For emissions of 100 g/km the rate will be 11% rising by 1% per 5g/km band, to a maximum of 35% (emissions of 220 grams per kilometre or above).

For example the taxable benefit for emissions of 120g/kms is 10%. From 6^th April 2012 this will increase to 15%. That is a 50 % increase in the tax payable. The new charge means that a car with emissions of 120g/kms and a list price of £12,000 used by a 40% taxpayer will face an increased tax liability of £240 calculated as:

List price £12,000 x 5% (being the increase from 10% to 15%) x tax rate of 40%

There will also be a further increase, albeit of just 1% of the list price, for vehicles with CO2 emissions of between 95 and 219 g/km in 2013/14.

It is therefore important to review the company car you either provide as an employer or drive as an employee.

For further information/advice on this topic please visit www.wardwilliams.co.uk

Maximising your business Annual Investment Allowance

2012-01-09T11:35:00.000Z

Businesses should consider making the most of the current £100,000 tax-free Annual Investment Allowance (A.I.A) before it reverts back to just £25,000!

The AIA is currently offering 100% tax relief on qualifying investments such as technology, machinery, furniture and business vehicles up to £100,000.

However, you need to invest soon as businesses have until 31 March 2012 to plan and complete any capital investments that are likely to exceed the £25,000 threshold you want maximum tax relief.

Although some tax relief will still be available on investments over £25,000 from April 2012, it will be less generous. Therefore businesses should consider bringing forward any capital investment plans to maximise the higher available tax relief in 2011-12. As always any investment must be based on commercial principles and not simply tax led.

For further information or advice on this topic please visit http://www.wardwilliams.co.uk/

Statutory residence test

2012-01-06T12:52:00.000Z

The Government has confirmed that it proposes to introduce a statutory residence test. However the introduction has been delayed by a year to April 2013.

The response to the consultation together with draft legislation will be published around Budget 2012. The Government announced that it would include any reforms to ordinary residence at the same time.

Distributions to shareholders – ESC C16

2012-01-06T12:51:00.002Z

As expected ESC C16 is to be put on a statutory basis with effect from 1 March 2012, but capital treatment will only apply to distributions of up to £25,000. Where a company distributes surplus assets to shareholders and is then struck off the register, Extra Statutory Concession ESC C16 treated the distributions as the equivalent of a distribution in a winding up, allowing the distributions to be treated as capital payments, provided the relevant conditions are met.

Feed-in Tariffs and the Renewable Heat Incentive

2012-01-05T15:52:00.000Z

Solar panels will attract plant and machinery allowances in the special rate pool. Businesses receiving payments or incentives under the Energy Act 2008 (Feed-in Tariffs and the Renewable Heat Incentive) will not be eligible to claim Enhanced Capital Allowances.

Relief on Investments: Seed Enterprise Investment Scheme

2011-12-30T14:14:00.000Z

The Government has announced a new scheme for relief on investments in start-up companies to be called Seed Enterprise Investment Scheme (SEIS), and it will be available from 6 April 2012. It will run alongside the existing Enterprise Investment scheme (EIS) but will be targeted at start-up companies.

The main features of the new scheme are as follows:

Income tax relief of 50% of the investment will be available to individuals who invest in qualifying companies, irrespective of their marginal rate of tax;
An annual investment limit of £100,000 per individual will apply;
A cumulative investment limit of £150,000 per company will apply;
Gains arising on the disposal of other assets in 2012/13 will attract a capital gains tax exemption if they are reinvested through the SEIS in the same year.

The enhanced rate of relief reflects the inherently risky nature of small start-up companies

In addition to announcing the new scheme, the Government has confirmed that simplifications will be made to the existing rules for Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

For further information or advice on this topic please contact Ward Williams.

www.wardwilliams.co.uk

Amendments to R&D Claims

2011-12-29T15:52:00.006Z

The Finance Bill includes the increase in the rate of R&D relief for SMEs to 225% with effect from 1 April 2012, now that State Aid approval has been granted. This increased rate of relief also applies to pre-trading expenditure. In order to pay for this increase, vaccine research relief is being withdrawn for SMEs, and the payable credit is also being reduced to 11%.

A benefit for start-ups is that the restriction in the amount of the R&D relief to a company’s PAYE/NIC liability will be removed for accounting periods ending on or after 1 April 2012. R&D relief is subject to the requirement that the claimant is a going concern.

The requirement for minimum expenditure of £10,000 a year will be removed for accounting periods ending on or after 1 April 2012.

There is also a change to the definition of ‘externally provided worker’, so that the requirements to be met in order to include the costs of temporary workers in a claim will be relaxed from 1 April 2012. The requirement will now be that the individual must provide their services to the claimant company under the terms of a contract between themselves and another person (not the claimant company). The relevance for SMEs is that they can often lack the specialised R&D staff they need, and bring them in on a temporary basis through a temporary agency.

Included in the Autumn Statement was the announcement that an ‘above the line’ tax credit would be released for consultation in the 2012 Budget and legislation will be included in Finance Bill 2013.

For further information or advice on this topic please contact Ward Williams.

www.wardwilliams.co.uk

Patent Box

2011-12-28T11:55:00.000Z

The Government is introducing a Patent Box from 1 April 2013, which will apply a reduced 10 per cent rate of corporation tax on profits attributed to patents.

The Government aim is that the Patent Box will create a competitive tax environment for companies to develop and exploit patents and other similar intellectual property (IP) in the UK. The Patent Box will provide an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products. This will encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK's position as a world leader in patented technologies.

The Key points are:

· UK businesses will be able to benefit regardless of how they use their patents - whether they are licensed, included in patented products, or used in internal processes or to provide services.

· Worldwide income from existing as well as new IP will be included. To enable this, the full benefits of the Patent Box will be phased in over five years from 1 April 2013 i.e. 60% of the Patent Box benefit will be available in 2013/14 increasing to 100% by 2017/18.

· In many cases the profit attributed to patents is calculated from total profits using a step-by-step method. This structured approach will increase certainty for businesses using the regime and reduce administrative burdens compared to requiring businesses to value each patent individually.

· Smaller claims can benefit from a simplified calculation.

· In response to business' comments on the June 2011 consultation, the Government has made a number of technical changes.

Overview of the Patent Box regime

The Patent Box is expected to benefit a large number of UK companies in a wide range of sectors. Businesses will be able to benefit regardless of how they use their IP - whether it is licensed to others, included in products they sell, or used in internal processes or to provide services. Worldwide profits from qualifying IP will be eligible for the reduced 10 per cent tax rate.

Qualifying IP includes patents granted by the UK Intellectual Property Office and the European Patent Office, as well as supplementary protection certificates, regulatory data protection and plant variety rights. It will also include patents granted by other EU Member States that have comparable patentability criteria and search and examination practices to the UK. The Patent Box will apply to existing as well as new IP, and to acquired IP provided that the group has further developed the IP or the product which incorporates it.

In many cases companies will be able to benefit where they themselves have rights to the IP owned by others. A UK Patent Box company could, for example, own European rights to exploit a patent while the rights to other territories are held by other companies. Alternatively a UK Patent Box company may have rights to IP developed in collaboration with another company or a university.

Qualifying income includes:

• sales income from patent protected products, including spare parts;

• licence fee or royalty income from licensing of patent rights;

• patent right sale proceeds; and

• patent right damages for infringement.

In calculating those profits to which the 10% rate will apply a three stage mechanical process has been identified involving:

• Stage 1: Identification of relevant intellectual property (IP) income and profits;

• Stage 2: Deduction of routine profit; and

• Stage 3: Deduction of any IP profits relating to marketing intangibles.

Claimants will now have the option of performing a bespoke marketing intangibles valuation in order to arrive at a notional royalty amount to be extracted from residual IP profits giving the final patent profit figure to be taxed at 10%.

Companies which use their IP to perform processes or provide services will benefit from the Patent Box up to the level of an arm's length royalty for the use of the qualifying IP.

The patent box regime will be phased in from 1 April 2013

This is a significant opportunity and there is time in 2012 to ensure that your company is best placed to use the scheme to its full benefit. A targeted anti-avoidance rule (TAAR) will apply and comprehensive guidance will be published in summer 2012.

For further information or advice on this topic please contact Ward Williams: http://www.wardwilliams.co.uk/

An update on what we already know: Personal and Corporate taxes

2011-12-23T12:54:00.001Z

Personal taxes

The rates of income tax applying for the year 2012/13 will be unchanged so that the basic rate of income tax is 20%, the higher rate is 40% and the additional rate is 50%.

From 6 April 2012 the Finance Bill includes:

· An increase to the personal allowance by £630 to £8,105 for those under 65; and

· A reduction to the basic rate limit by £630 to £34,370.

However the starting point for paying income tax at the 40% rate remains unchanged from 2011/12 to 2012/13.

The capital gains tax exempt amount is frozen at the 2011/12 level of £10,600. In future the CPI will be used as the default indexation assumption for the capital gains tax annual exempt amount.

The inheritance tax allowance nil rate band has been frozen at £325,000 until April 2015. From 6 April 2015 the CPI year on year increase will be used as the default indexation assumption for the nil rate band.

The rates of national insurance (NIC) are due to be released with the 2012 Budget.

Corporate taxes

As previously announced a further 1% reduction in the main rate to 24% for the Financial Year commencing 1 April 2013 has been included in the draft legislation for Finance Bill 2012. The main small profits rate remains at 20%.

For further information/advice on this topic please visit www.wardwilliams.co.uk

R&D Tax Relief for Production

2011-12-01T12:39:00.000Z

A question can arise as to whether production can be treated as part of continuing research and development (R&D) rather than just the making of a product to meet an order. The HMRC position has been that production could never be treated as R&D if the product was actually sold to a customer. HMRC has now issued draft guidance on production which can benefit from R&D tax credits.

The reality for many businesses is that the R&D activity will continue after a company commences the process of making goods or services that are supplied to a customer.

The start point is the underlying principle that any activity must seek to achieve an advance in science or technology and that “activities which directly contribute to the advance, by resolving science or technological uncertainty, are R&D”.

Where a product is created as part your R&D activity it is important to show the degree to which its creation contributed to an advance by resolving scientific or technological uncertainty, rather than simply whether it was created with a view to supply to customers.

The draft guidance is available at www.hmrc.gov.uk/consultations/production-guidance.pdf

For further information/advice on this topic please contact enquiries@wardwilliams.co.uk or visit www.wardwilliams.co.uk

Subsistence payments for employees travelling abroad

2011-11-28T10:50:00.002Z

HMRC has published an updated list of worldwide subsistence rates for expenses payments that can be made to employees travelling abroad, without deduction of tax. The list provides benchmark rates when paying accommodation and subsistence expenses; for example for lunch in Rome. These amounts can be paid without the requirement for the employee to produce receipts and do not have to be recorded on forms P11D.

Note that these tax free rates are in addition to the incidental overnight expenses of up to £10 that can be paid to employees who are abroad overnight.

The above is to simplify administration for employers but they will need to ensure that they have their own systems in place to manage and control this type of expenditure.

For further information/advice on this topic please visit www.wardwilliams.co.uk

HMRC Business records checks scheme expanded

2011-11-21T10:20:00.000Z

HMRC have extended their controversial programme of checking the business records of small and medium-sized enterprises (SMEs).

Initially, HMRC will levy a penalty only in the most extreme cases of poor record-keeping. The department intend to issue penalties of up to £3,000 for serious inadequacies in the longer-term.

Up to 12,000 checks will be completed by the end of the current financial year; 20,000 are provisionally planned for 2012/13.

Please do not hesitate to contact our Business Services Department if you have any concerns about this HMRC initiative or require a comprehensive review of your business records.

For further information/advice on this topic please visit http://www.wardwilliams.co.uk/

HMRC and Mortgage Lenders Work Together

2011-11-16T12:44:00.000Z

The new scheme to combat mortgage application fraud was launched on 1 September 2011. The mortgage verification scheme has been developed by HMRC, the Council of Mortgage Lenders and the Building Societies Association.

Mortgage lenders will only use the scheme where they suspect mortgage fraud, following their own checks. Where they have inadequate evidence of declared income and suspect fraud, mortgage lenders will send HMRC information from the mortgage application using a secure electronic platform. HMRC will cross check the income details declared to lenders against information provided in income tax and employment returns. It will then advise lenders whether or not the details match. Lenders will use this information in making their lending decisions.

Not surprisingly HMRC will use this information within their own risk assessment process to identify undeclared income. Any mortgage lender can use the scheme at a cost of £14+VAT per case.

Nobody should object to the principles of preventing both mortgage fraud and undeclared taxable income. However no doubt the system will be abused by both the mortgage lender and HMRC, the question will be how far this abuse goes. At minimal cost the mortgage lender has access to confidential information in respect of the taxpayer and HMRC has access to information in a format that was never intended to be submitted to HMRC. We all know how much of a hash both these organisations can make in interpreting legitimate information provided to them. Time will tell.

For further information/advice on this topic please visit www.wardwilliams.co.uk

UK Tax Residence

2011-10-27T09:31:00.001+01:00

Gaines-Cooper (and others) has failed in his latest bid to overturn court decisions in favour of HMRC. The Supreme Court dismissed appeals by Gaines-Cooper and two other taxpayers who contended that HMRC’s booklet IR20, which provided general guidance on residence until it was replaced by HMRC6 in 2009, set out a clear test that as long as a taxpayer limited days in the UK on average to no more than 90, then the right status was non-resident. But the Supreme Court held that ‘the correct interpretation of the guidance was that the 90 day test applied only to those taxpayers who had clearly left the UK and that this did not apply in the two cases considered’.

The absence of clear rules (in all areas of tax) does lead to uncertainty for the taxpayer. In the case of UK residency we will have the statutory test next year but there will be significant uncertainty for those who believe that they have already left the UK.

On a wider point what is clear is that any HMRC guidance is only that guidance. HMRC get it wrong and the taxpayer should not rely on it. Ultimately the underlying law must be consulted.

Please visit www.wardwilliams.co.uk for more information.

CIS late filing penalties

2011-10-21T16:57:00.000+01:00

The penalties for late CIS contractor monthly returns are changed from 6 October 2011. Penalties will now be charged as follows:

£100 for the initial failure to meet the due date of 19th of the month.
A further £200 if the return is still outstanding two months after the due date.

Then in addition the tax geared penalties kick in

The greater of 5% of any deduction shown on the tax return or £300 if more than six months late.
A further tax geared penalty as above if the return is more than 12 months late.

For new CIS contractors who have not sent any previous returns and are filing your first returns late there will be an upper limit of £3,000 of the total fixed penalties (£100 and £200) that may accrue. The upper limit does not apply to any tax geared penalty unless the minimum penalty of £300 applies.

Millions set for Tax Rebates

2011-10-20T09:47:00.000+01:00

About six million people are set to receive tax rebates averaging £400, while another million will learn they have underpaid their tax by about £600.

H.M. Revenue and Customs (HMRC) said letters would begin going out in the next few months, with those owing money able to pay in stages either by having their tax code adjusted or coming to an agreement with HMRC.

It is the second year tax and National Insurance discrepancies have been identified by a new computer system.

Those who will be told they have underpaid tax are expected to owe between £500 and £600 on average.

In some cases, it appears the system has not been able to sort through and separate information on people leaving jobs, meaning those who have stopped working and started drawing a pension are being treated as if they have two income streams. The problems are also affecting people with more than one job, or those who have changed jobs in the past few years.

HMRC hopes to have the process completed by December 2012.

If you receive any such correspondence and would appreciate a second opinion then please do get in touch. Please visit www.wardwilliams.co.uk for more information.

Furnished Holiday Lettings

2011-10-11T09:28:00.000+01:00

HMRC have for many years allowed the owners of furnished holiday accommodation situated in the UK to be treated for a number of tax purposes as though they were traders. In 2009 the rules were extended to cover all qualifying properties situated anywhere in the EEA.

In 2011the rules have been amended to

(1) Remove the entitlement, where there is a loss, to make claims for sideways loss relief against general income and terminal loss relief. This change takes effect for income tax purposes in relation to 2011/12 onwards and for corporation tax purposes in relation to accounting periods beginning on or after 1 April 2011.

(2) Extend the length of time for which the accommodation must be both available for letting and actually so let. This change takes effect for 2012/13 onwards for income tax or for accounting periods beginning on or after 1 April 2012 for corporation tax.

The revised day count tests are as follows:

(i) The 140-day limit is being replaced by a requirement that the accommodation must be available for commercial letting to the public for at least 210 days in the tax year.

(ii) The 70-day limit is being replaced by a requirement that the accommodation must actually be let on a commercial basis to the public for at least 105 days in the tax year

Remember that the accommodation must not be let for periods of long term occupation of more than 155 days during the year.

There are two elections you can make to reach the occupancy threshold. There is an averaging election which can be made for any year where one or more of the properties do not reach the requisite limit. Thus, if, in 2011/12, two holiday cottages were let for 75 days each and a third one was let for only 68 days, the taxpayer could make an election which would treat each of the properties as satisfying the day count test for that tax year. Where a person has holiday property both in the UK and elsewhere in the EEA, the averaging election must be made separately for each of the two categories of property.

In addition the new period of grace election can assist where a property which has previously qualified as holiday accommodation fails to do so in the following year despite genuine efforts to do so. For 2010/11 onwards, where the property owner makes an election on or before the first anniversary of the normal self-assessment filing date for the tax year, the accommodation can be treated as satisfying the ‘letting condition’ for that year. Where an election has been made for that first year the period of grace can be extended to take in the following year as well. This election can only be made if an averaging election is not made in respect of the same tax year.

If the holiday property is owned jointly by a husband and wife, the normal 50:50 rule for splitting income does not apply and the couple are entitled to divide up their income for tax purposes as they see fit.

Note that the capital gains reliefs will continue to apply to UK letting businesses and now extends to non UK lettings:

· entrepreneurs’ relief;

· rollover relief;

· holdover relief;

· relief for loans to traders; and

· the substantial shareholdings exemption.

HMRC have issued an advanced version of their new Helpsheet (HS253) which can be found at www.hmrc.gov.uk/manuals/pimmanual/attachments/PIM4100_helpsheet.doc

Tax strategies for contractors and directors

2011-09-23T15:10:00.000+01:00

Following on from our earlier post on current tax strategies we have set out an overview of an opportunity for contractors together with a variation on this which is available to directors. We would again stress that this is about understanding your options and the associated risks. In short we would rather you hear about these opportunities from us and have a sensible discussion about whether they fit your circumstances. The area around contractor solutions is complex which has not been helped by the huge amount of misinformation that exists in this market place and historically commercial solutions that simply don't work.

Contractor Solutions- for individuals providing personal services. Equivalent monthly contract value in excess of £4,000. Indicatively the net funds available to workers will be between 82 to 84%

Contractor Solutions for directors - for individuals in owner managed companies currently providing services to the company as a director, there is an opportunity to provide services in the form of consultancy. Equivalent monthly contract value in excess of £5,000. There is a substantive process which can deliver significant long-term benefits to the individual and the company. Indicatively the net funds available to workers will be between 80 to 82%.

Please contact us if you would like to know more.

Tax Strategies and Structures

2011-09-22T10:31:00.000+01:00

Now that the last Finance Bill has received Royal Ascent it is noticeable that a number of new tax strategies have been released. The new disguised remuneration legislation brought an end to many strategies that had been around for some while. The longer a tax strategy is around the more likely there is to be copycat solutions. This new legislation is both long and complex and more particularly has been spectacularly poorly drafted. This has meant that it has been difficult to unwind existing structures caught by the new legislation and gain any certainty in the interpretation of that legislation as it impacts on current transactions, both those which are simply undertaken in the normal course of business and those that could be seen as part of a more aggressive tax strategy.

Our objective is to ensure that clients are fully informed of their tax options so that they can make informed decisions. It is not our role to second guess what our clients want to do. What we can do when looking at any tax planning is to assess both the commercial and tax risks associated with it and to assist the client in understanding whether the tax planning meets their needs. The truth is that some tax planning, from that perceived as low risk through to the more aggressive high risk strategies, is poorly thought through and even more poorly implemented.

That is not to say that there are not some very effective tax solutions available which are not only robust in their structure but also rigorous in their implementation. Even in these circumstances it must be assumed that HMRC will enquire into any tax planning and therefore it is vital that those providing a solution also have the skills, resources and the will to defend their planning. The fact is that it can take many years for an enquiry to be closed. This extended open enquiry period is in part a result of the complexity of the tax legislation and the shortage of resources available to HMRC, and if one were cynical there is little incentive for HMRC to close a case where it is not certain of winning the argument as it creates uncertainly in the minds of the taxpayer and may dissuade them in carrying out any new planning. Danny Alexander's announcement this week suggests that HMRC will increase its focus in this area backed by greater resource.

There may be new opportunities out there that fit with your own needs but after reviewing your options the answer may simply be to do nothing. Over the next few days we will provide details of the tax strategies that we are familiar with and which meet our own internal quality and risk assessment.

VAT initiative campaign

2011-09-22T09:10:00.000+01:00

A business has until 30 September 2011 to tell HMRC that it should have been VAT registered at an earlier date and as a result be able to take advantage of a late registration penalty that is likely to be capped at 10% of the tax unpaid during the late period.

A business has then until 31 December 2011 to send the completed VAT registration form (VAT 1) to HMRC, while the online registration is not open to those taking part in the VAT initiative.

HMRC tolerance on tax calculations

2011-06-27T07:46:00.000+01:00

A tolerance has been used since the introduction of PAYE to accommodate the rounding up and down that automatically happens when the tax tables are used to calculate the deductions.

HMRC have applied a tolerance of £50 for at least the last two decades. This meant that when it checked the tax deducted for taxpayers at the end of each tax year, it would not take any action in respect of underpayments of tax less than £50.

In September 2010 the tolerance was temporarily increased to £300, covering the years 2007/08, 2008/09 and 2009/10. This was in the wake of the problems arising from the reconciliations carried out for those years using NPS.

The tolerance for 2010/11 will revert to £50.

PAYE Tax Coding

2011-06-21T08:26:00.000+01:00

HMRC’s new National Insurance and PAYE system enables HMRC to use self assessment (SA) tax return information to update PAYE codes automatically. Thus, as an SA return is filed for 2010/11 the taxpayer’s PAYE code for 2011/2012 will be updated automatically to include other income (such as rental income or interest) and tax relief for payments (such as Gift Aid) based on the amounts in that return.

However

if a taxpayer does not want their other income/reliefs included in the PAYE code then an X is needed in Box 3 on page TR5 of the SA return.

If a taxpayer does want other income/reliefs included in their codes but the amount and/or type have changed from 2011/12, then this further information should be included in the white space at Box 19 of the SA return.

Generally no more than £10,000 of income will be included in the code unless a specific request is made to HMRC. This is subject, however, to the current restrictions that limit the amount included in the code to 50% of the gross pay or where the inclusion of the income would more than double the taxpayer’s liability.

It should be noted that if other income /reliefs were included in the 2010/11 code then these estimates will be automatically carried forward to the 2011/12 code unless HMRC is advised otherwise or until the 2010/11 return is submitted.

Non residents

2011-06-20T08:21:00.000+01:00

HMRC has issued its draft guidance on “non-residence and full time work abroad” which is to be included in next update of HMRC6 Residence, Domicile and the Remittance Basis

HMRC has indicated that when assessing whether an individual is on a full-time contract of employment abroad, it will not generally challenge the claim to non-residence if the days worked in the UK are 10 days or fewer. Where those individuals work more than 10 days in the UK in a tax year then the position will depend on their particular circumstances.

A non-resident individual will pay tax on any employment duties which they carry out in the UK unless those duties are “merely incidental” to an employment abroad.

VAT on business samples

2011-04-20T08:07:00.000+01:00

Following a European Court Case HMRC have changed its view that only one free sample of a product can be treated as free of VAT. HMRC now accept the position that that all samples provided for marketing purposes are free of VAT and should not be treated as full value sales.

VAT previuosly paid in respect of the above samples can now be reclaimed, subject to the four-year time limit.

7 day grace period for filing returns comes to an end

2011-04-19T21:02:00.000+01:00

From 1 April 2011 company tax returns for accounting periods ending after 31 March 2011 must be filed online. All forms P35 and P14 must already be filed online and contractors are no longer required to file end of year CIS returns. As a result HMRC has withdrawn ESC B46 which provided for a seven day period of grace in which by concession no penalties were charged for later filing.

In short post delays can no longer be an excuse for late filing.

IR35

2011-03-31T15:56:00.000+01:00

Unfortunately IR35 is here to stay. The Government has realised that its abolition would hit tax revenues. It is a shame that the revenue implications outweigh the fact that this was poor legislation which has been poorly implemented. The Governement has committed to making clear improvements in the way IR35 is administered, which in itself will not be a challenging target given on where they are starting from. These improvements will supposedly include setting up a dedicated helpline staffed by specialists, publishing guidance on those types of cases HMRC view as outside the scope of IR35, targeting compliance activity by restricting reviews to high risk cases and setting up an IR35 Forum which will monitor HMRC’s new approach. We wait with interest to see what, if anything,happens.

Plan to merge Income Tax and NICs

2011-03-31T15:48:00.000+01:00

The Chancellor announced plans to start consultation on merging income tax and National Insurance Contributions (NICs). The government will maintain the contributory principle in any changes and will not extend NICs to individuals above state pension age or to other forms of income such as pensions, savings and dividends. This will take years and no doubt will be a painful process for everyone.

Research and development expenditure (R&D

2011-03-28T08:02:00.000+01:00

The current rate of R&D tax credit for SME businesses is 75% of the amount spent, so that a business can obtain tax relief for 175% of the amount of qualifying expenditure.

The rate of relief is to be increased from 1 April 2011 to 100%, so that a business will benefit from 200% tax relief on qualifying expenditure. This means that the tax system will contribute a maximum of £55 for each £100 of qualifying expenditure for businesses in the marginal corporation tax band of 27.5%. Relief at the small profits rate will be worth £40 per £100 spent.

There have been no changes to the R & D rate available to large companies which is currently 30%.

Further changes will come in 2012. Where R & D losses are surrendered for payable tax credit relief, the limit of the relief to the amount of PAYE and NIC paid in the year will be abolished, as will the minimum spend of £10,000. Further changes will be proposed following the Dyson report, to which a detailed response will be published in May.

Capital allowances - short-life assets

2011-03-28T07:52:00.000+01:00

The existing short-life asset (SLA) regime allows businesses, who invest in plant or machinery and subsequently sell or scrap that plant or machinery within four years, to elect to treat such assets separately from the main capital allowances pool and generate a balancing allowance on disposal. This Budget extends the period from four years to eight years from the end of the chargeable period when the original expenditure is incurred. This applies to expenditure from 1 April 2011 for corporation tax and 6 April 2011 for income tax payers.

Owing to the administrative burden of keeping detailed records for individual assets and the dates of their sale or destruction, as well as the recent introduction of the Annual Investment Allowance (AIA), many businesses choose not to make SLA elections. The extension of the regime is likely to make it more attractive to businesses that are incurring expenditure substantially above the AIA limit, however, the scale of the balancing allowance generated between years four and eight is less than half of that up to year four.

The Patent Box Regime

2011-03-24T12:45:00.000Z

The Government has confirmed in the Budget that a reduced 10% rate of corporation tax for profits arising from patents will be effective from 1 April 2013 but it will continue to consult on the detail of this measure.

As previously reported by wwtaxclub companies with income from patents commercialised after 29 November 2010 cam benefit. Industries in pharmaceutical, technology, manufacturing, energy and utilities, telecoms, aerospace, defence, consumer and media businesses should benefit.

A further consultation document will be published in May 2011, with legislation proposed for Finance Bill 2012. The reduced rate of corporation tax will apply to profits arising from patents from 1 April 2013.

We continue to be positive on this. Should be an opportunity for these businesses and it is not too soon to look at discussing what areas of your business might be able to take advantage of this regime.

Corporation tax rates - additional 1% reduction from April

2011-03-24T12:27:00.000Z

The main rate of corporation tax will now reduce to 26% in April 2011, and not 27% as previously announced. The small profits rate of tax paid by small companies will however still reduce only by 1% to 20%.

The reduction in the rate of corporation tax only applies to tax on profits in excess of £1.5 million in a year. The marginal rate on profits between £300,000 and £1.5 million will also reduce, with a marginal rate of 27.5% applying to profits in that range from April 2011, rather than the current rate of 29.75%.

The main rate of corporation tax will continue to reduce by 1% per annum until the rate reaches 23%.

Once the full rate of corporation tax reaches 23%, the marginal rate on profits between £300,000 and £1.5 million will be 23.75%, assuming that the small profits rate remains 20%.

One for the larger companies rather than many SME's and the relative benefit of the small companies rate continues to diminish over time. Note that changes in corporation tax rates do not help sole traders and those trading in partnership. Certainly worth another review of their trading structure for these businesses.

Entrepreneurs’ Relief lifetime limit doubled

2011-03-24T12:01:00.000Z

The lifetime limit on Entrepreneurs’ relief has been doubled with effect from 6 April 2011. The limit for disposals from 23 June 2010 to 5 April; 2011 is £5 million, and the limit from 6 April 2011 onwards is £10 million. Those taxpayers who have made previous disposals up to or in excess of the limit can make further disposals after 6 April attracting the ER rate of 10% CGT, but previous disposals in excess of the old limit will not be revisited.

The previous limit of £5m would have covered most SME circumstances and therefore the benefit is likely to be limited to a small number of individuals, including serial entrepreneurs. No more than 30,000 claim any part of their relief in any one year. Perhaps more of a PR story for the government but welcome never the less.

New rules for pension schemes

2011-02-14T08:05:00.000Z

For pension contributions for an input period ending after 5 April 2011 the limit on tax allowable inputs to a registered pension scheme will be cut to £50,000. Currently it can be up to £355,000, subject to the forestalling regulations.

When considering defined benefit schemes (the accumulation of pension benefits works differently to those of a contribution scheme) the factor to be used in valuing the inputs increases from 10 to 16.

The new annual £50,000 limit will be increased by any unused allowance for the three preceding years provided the individual was then a member of a registered pension scheme. Unused allowances for 2008/09, 2009/10 and 2010/11 can be carried forward to 2011/12, but, for this purpose only, the unused amount for any of those years is computed under post-2010/11 rules. Therefore, it is assumed that the annual allowance was only £50,000 for each of 2008/09, 2009/10 and 2010/11, and pension input amounts for those years are recalculated as if the new rules had already been in place.

In short even if you are not in a position now to make contributions to a scheme because of the current economic climate there is a benefit in setting up a scheme, if you do not already have one, to protect the unused relief allowance to be used in future years. OK £50,000 is still a lot of money for most of us but why not keep your options open.

The multiple to be used in valuing inputs to a defined benefits scheme is to be 10 for the three years ending 5 April 2011.

Where these limits are exceed there will be an annual allowance charge, the charge will be computed as if the excess pension savings were part of the individual's taxable income and as if they formed the top slice of that income.

While being a member of a defined benefit scheme is far from the norm there are still many individuals who are entitled to this benefit. For these people there can be some unforeseen consequences. For example:

John gets promotion and an increase in his pay from £70,000 to £80,000 a year. He has accrued 20 years of pensionable service (on a 60th scheme) so his pension fund at the beginning of the pension input period is 20/60 x £70,000 x 16 = £373,333. This is increased by the change in the consumer price index, say 3%, to £384,533. The closing value is 21/60 x £80,000 x 16 = £448,000. The increase of £63,467 exceeds £50,000 so John will have a tax liability (assuming he is a 40% taxpayer) of 40% of £13,467 = £5,386.

For information the pension input periods of a registered pension scheme end either on each anniversary of its commencement or, if a date prior to the first anniversary of its commencement has been nominated, on each anniversary of that date.

Patent Box

2011-01-19T08:48:00.000Z

The Government has now published (29 November 2010) its thinking on the taxation of innovation and intellectual property as part of its proposed Corporate Tax Reform.

The document acknowledges that there are currently no specific incentives for companies to retain IP in the UK during commercialisation. In contrast, several other jurisdictions provide incentives for companies to own and exploit IP, particularly patents, in addition to R&D incentives. As a result, the UK tax regime can be uncompetitive for companies to hold and exploit patents. This provides incentives for businesses to transfer patents offshore prior to the full realisation of their value, in order to benefit from more advantageous regimes elsewhere.

To encourage businesses to retain and exploit IP in the UK the proposal is the introduction of the Patent Box. The aim of the Patent Box is stated as rewarding successful technical innovation.

In summary the proposals are:

· A 10% rate for profits arising from patents, to apply from 1 April 2013.

· The regime to focus on patents rather than on other forms of IP. This is because it is believed that patents have a strong link to ongoing high-tech R&D and manufacturing activity which the Government sees as a priority to encourage in the UK. They are also clearly identifiable, and provide exclusive legally protected rights to exploit a novel product or process.

· The 10% rate to apply to net patent income after associated expenses, including pre-commercialisation expenses, rather than to gross income.

· All patents first commercialised after 29 November 2010 will qualify for inclusion in the Patent Box. More detailed qualification and transitional rules will be discussed during the consultation period.

· Available to both royalty income and “embedded‟ income, that is included in the price of patented products.

· To determine the proportion of income commercially related to patents (“embedded”), either the “arm’s length principle”, as set out in the Organisation of Economic Co-operation and Development (OECD)‟s Transfer Pricing Guidelines to be applied, but for the sake of simplicity the Government favour the adoption of a largely formulaic approach.

· Potentially link the amount of income which can be attributed to the Patent Box to the level of ongoing R&D or associated manufacturing activity.

While the Patent Box will not apply until 1 April 2013 it does impact upon patents commercialised after 29 November 2010 so it is relevant to current operations and the management of your IP.

The Government has requested responses to the proposals by 22 February 2011. The full document can be found at

http://www.hm-treasury.gov.uk/d/corporate_tax_reform_part2b_innovation_and_intellectual_property.pdf

R&D Tax Credits - Don't miss this valuable benefit

2011-01-14T15:22:00.000Z

The financial benefits of the R&D tax scheme can be substantial, particularly for companies involved in technology who are likely to undertake eligible work. While many companies are using this scheme successfully, many others either do not realise that they have eligible projects or consider that it is not worth the effort because of a misconception of the process involved.

R&D Tax Credits were introduced for Small and Medium Enterprises (SMEs) in April 2000 and for large companies from April 2002. Any type of company can claim the relief if incurring qualifying expenditure of at least £10,000 per annum on qualifying activities.

The credit represents an additional 75% tax deduction for qualifying expenditure by SMEs (30% for expenditure by large companies). In addition, should an SME be loss-making it can surrender its enhanced deduction for a repayment of a tax credit, up to the equivalent of 24.5% of the actual expenditure, capped at the PAYE/NIC contributions made by the company in the accounting period.

A company continues to be an SME until it has failed the criteria for two consecutive accounting periods and, similarly, once large, does not cease to be large until it has ceased to fulfill the criteria over two accounting periods. Special rules apply when a company joins or leaves a group.

Definition of qualifying activities:

Broadly an activity must be seeking to achieve a significant advance in science or technology through the resolution of a scientific or technological uncertainty. The DTI Guidelines give more detail in terms of what HMRC considers being qualifying activities – these can be found via the following link: http://www.berr.gov.uk/files/file13258.pdf

The definition is deliberately technology-neutral, so that claims are possible from any field of science or technology, other than work in the arts, humanities, social sciences and economics, including engineering and software, not just the more obvious areas such as life sciences.

Definition of qualifying expenditure:

The bulk of most claims will relate to staff or consumables costs, although there are special rules for subcontractor costs and agency worker costs.

Time limit for making a claim:

A claim by an SME or large company for the additional relief at 75% or 30% must be made within two years of the end of the accounting period in which the expenditure is incurred. For SMEs, if a claim is also made to surrender the enhanced loss for a tax credit repayment, the claim must be made within two years of the end of the accounting period in which the expenditure is incurred.

HMRC Business Records Checks

2011-01-06T11:50:00.000Z

HMRC published a Consultation Paper on 17th December announcing that they intend to start a programme of Business Records Checks (BRCs) that will review both the adequacy and accuracy of business records within the SME sector. The timing of the Consultation is not ideal with a closing date for comments of 28th February 2011.

Whilst the need to keep proper records in order to comply with tax obligations is widely acknowledged, HMRC’s random enquiry programme indicates that poor record keeping is a problem in around 40% of all of SME cases (circa 5 million). Research by the Organisation for Economic Cooperation and Development (OECD) indicates that poor business record keeping generally leads to an underassessment of tax even where there is an audit-type check into a return for the period covered by such records. On this basis, HMRC's view is that poor business record keeping is responsible for a loss of tax in up to 2 million SME cases annually

As ever with HMRC Consultations, the die appears to be already cast: the programme of checks will happen starting in the second half of this year with HMRC projecting 50,000 reviews annually for the next 4 years. The Consultation is merely concerned with how to implement the programme.

Additionally, the BRC programme will be accompanied by a tariff-based penalty regime for failure to keep proper records. The maximum penalty for failure to maintain business records currently stands (and will remain) at £3,000, but the imposition of any penalty – let alone the maximum - has historically been quite rare. HMRC have said that they do not intend to have a regime which simply levies £3,000 every time there is a failure to keep proper records. The implication is that some level of penalty will be charged, the question is merely how much.

Furthermore, HMRC state in their impact assessment that this initiative will bring in £600million over the four years. Abbey Tax have commented "Are we the only cynics who have worked out that 4 x 50,000 x £3,000 comes to ... wait for it… £600million?!?"

The reasons for keeping proper books and records is far more than just about tax but this does provide an element of the "stick".

VAT Increase

2011-01-04T08:58:00.000Z

The standard rate of VAT increased from 17.5 per cent to 20 per cent today, 4 January 2011.

For any sales of standard-rated goods or services that you make on or after 4 January 2011 you must charge VAT at the 20% rate. If you have a cash business and calculate your VAT using the VAT fraction you must use the VAT fraction of 1/6 on your standard-rated VAT inclusive sales from 4 January 2011.

If you provided goods or services before 4 January 2011 and raised a VAT invoice on or after that date you can choose to account for VAT at 17.5%. You don't need to inform HMRC if you do this. If you started work on a job before 4 January 2011 but finish afterwards you may account for the work done up to 3 January at 17.5% and the remainder at 20%. If you choose to do this you have to be able to demonstrate that the apportionment is fair.

If you provide a continuous supply of services you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier.

If you are a retailer you must use the 20% rate for all takings that you receive on or after 4 January 2011 unless your customer took away the goods (or you delivered) before 4 January 2011, in which case you should use the 17.5% rate. As a retailer you have 28 days to adjust your display prices and during this period you can put up a notice to let your customers know that an adjustment will be made at the till to account for the VAT change. This could lead to some "interesting" conversations.

WW Tax Club

2011-01-04T07:45:00.002Z

It has taken a little while to get this underway but using the excuse of the start of a New Year, Ward Williams Chartered Accountants are formally launching WW Tax Club today. The purpose of WW Tax Club is to keep businesses up to date on current UK tax legislation so that you can make informed decisions. We will be making regular posts on relevant and topical tax issues that impact upon SMEs. We have also set up a twitter account at http://twitter.com/wwtaxclub as a further method of keeping you informed. We hope you find it useful.

P46(Car)

2010-09-29T22:07:00.000+01:00

HMRC have confirmed that from 2011 it will once again process forms P46(Car) submitted online by employers showing car changes. However, they will no longer be compulsory. Currently, changes during a tax year to employee motor cars are not automatically processed by HMRC. This is an example of how a tax under/overpayment can arise in a year.

Vat on expenses incurred in other EU countries

2010-09-28T22:01:00.000+01:00

An area that has always been a huge frustration has been reclaiming VAT on expenses incurred in other EU countries. Many simply have not bothered. A new system for reclaiming VAT on these expenses started from 1 January 2010. UK registered businesses should submit their claims through the HMRC website. HMRC will pass on the claim to the relevant national authority. The deadline for claiming VAT refunds relating to expenses will be September of the following year (ie the end of this month for 2009). See www.hmrc.gov.uk/vat/refund-procedure.pdf.