One of the unwritten rules by which the annual Budget game is played
is that there is always an important announcement hidden away in a
single paragraph of the Budget Report, which is not mentioned
in the Budget Notes or Budget Day Press Releases. This year it was
paragraph 5.116, which said that: ‘Budget 2009 announces the repeal of
the Furnished Holiday Lettings (FHL) rules from April 2010. Until the
repeal takes effect, the FHL rules will be extended to those with
qualifying furnished holiday lettings elsewhere in the European
Economic Area.’

At present, qualifying furnished holiday
lettings are treated as a trading activity, which means that profits
are earnings for pension contribution purposes and losses are available
for relief against general income; that the usual capital allowance bar
on plant and machinery used in a dwelling does not apply; and that the
50:50 rule for assets jointly owned by spouses or civil partners is
disapplied. For capital gains tax purposes, furnished holiday lettings
qualify for roll-over relief on acquisition or disposal, for hold-over
relief as gifts of business assets, and for entrepreneur’s relief.
Whether they qualify for IHT business property relief does not directly
depend on their status for income tax purposes.

The FHL rules
have been extended to EEA countries with retrospective effect. Detailed
information about claims for 2008/09 and earlier years has been
published in an HMRC Technical Note In particular, HMRC will accept
late amendments to 2006/07 SATRs (and to Corporation Tax Returns for
accounting periods ending on or after 31 December 2006) until 31 July
2009.

Extended carry-back relief for trading losses

In
his Pre-Budget Statement last November, the Chancellor announced that
carry-back relief for trading losses would be extended, to allow a loss
made in 2008/09 to be carried back not only to 2007/08, but also to
2006/07 and 2005/06. At the time we said that, in the case of an
unincorporated business, the relevant loss would be the loss for the
accounting year ending in 2008/09, and that many businesses would have
accounting years which ended before the recession began to bite. For
companies, the extended carry-back was to have been allowed for losses
suffered in accounting periods ending between 24 November 2008 and 23
November 2009, which would have favoured a business with (say) a 31
October accounting date over one with a 30 November year end.

However,
in the Budget, the Chancellor announced an extension to his original
proposal, so that losses made by unincorporated businesses in either
2008/09 or 2009/10, or by companies in accounting periods ending
between 24 November 2008 and 23 November 2010 (both dates inclusive)
will now qualify for the three-year carryback.

As before,
relief will have to be taken against the most recent available profits.
Under the general law, a loss of any amount may be carried back for one
year, but the temporary relief limits the loss which may be carried
back for two or three years to £50,000. However, under the Budget
extension to the temporary relief, the £50,000 cap is applied
separately to the loss of 2008/09 and to that of 2009/10. For
companies, the cap will be applied separately to accounting periods
ending in the year to 23 November 2009 and to those ending in the year
to 23 November 2010.

In a related move, where a business expects to make a trading loss in the current tax year, HMRC’s Business Payment Support Service will
take the potential loss claim into account when deciding whether to
agree a rescheduling of payments for past years’ income or corporation
tax liabilities.  However, it will still be necessary for trader or
company to show both that the business remains viable, and that it is
‘genuinely unable’ to pay the tax immediately, or to enter into a
‘reasonable installment time to pay agreement’. The Press Release also
announces that businesses which have already entered into a
rescheduling agreement, but have found that their situation has become
worse, may now apply for a revised agreement.

Tax defaulters and a new disclosure facility

Traders
who incur a penalty for deliberate evasion will, if the tax at stake
was £5,000 or more, be required to submit to ‘close monitoring’ for the
next five years. In particular, they will be required to submit more
detailed business accounts information, including details of the nature
and value of any balancing adjustments in the accounts. It is not clear
whether legislation will be required to implement this proposal.

The
Chancellor reconfirmed that there will be a ‘New Disclosure
Opportunity’ (NDO) for holders of offshore accounts, which will run
between Autumn 2009 and March 2010. The penalty to be charged has not
yet been announced.

Naming and shaming

The
Finance Bill 2009 will empower HMRC to publish the name and address of
any individual or company on whom, or on which, a penalty for
deliberately understating their tax liability, or for deliberately
failing to notify their liability to tax, has been imposed. However,
there will be no publication where:

• The tax at stake did not exceed £25,000; or
• The penalty is for failure to take reasonable care, rather than a deliberate default; or
• 
  The individual or company made a full and unprompted disclosure of the
  default, or a prompted   disclosure within a timescale specified by
  HMRC; or
• The relevant default was committed before the new legislation comes into force.

Details
will be published quarterly on HMRC’s website, and will include the
trade or profession of the defaulter (or the trade sector of a
company); the amount of tax, interest and penalties; and the period
covered. Details will be removed from the website after 12 months.

Tax rates and personal allowances

The capital gains tax annual exemption for
2009/10 will be £10,100 (£5,050 for most trusts). Otherwise, income
tax, capital gains tax, corporation tax and inheritance tax rates,
allowances and exemptions for 2009/10 remain as announced at the time
of the November 2008 Pre-Budget Statement, as do 2009/10 National
Insurance contributions and the figures used for calculating Working
Tax Credit and Child Tax Credit.

 

One change will be made to the calculations for Pension Credit:
from November 2009 the capital disregard will be increased from £6,000
to £10,000. This will also apply to pensioner claims to Housing Benefit
and Council Tax Benefit. Pension Credit claimants are expected to
benefit by an average of £4 a week.

Corporation tax The
main rate of corporation tax is traditionally announced one year in
advance and the Chancellor confirmed that it will remain 28% for the
Financial Year 2010 (begins 1 April 2010).

Income tax  In
his November 2008 Pre-Budget Statement the Chancellor proposed that,
for 2010/11 and future years, people with an income over £100,000 a
year should be entitled to only half the usual personal allowance, and
those with an income over £140,000 should not be entitled to a personal
allowance at all. He also proposed that, for 2011/12 and future years,
there should be a new 45% rate of tax on income over £150,000 a year.

By the time of the Budget, he had decided that harsher measures were required and so announced that:

· For 2010/11 and future years, the income tax personal allowance will
be reduced by £1 for every £2 that an individual’s income exceeds
£100,000 (and so will be reduced to nil at an income of £112,950). This
replaces the originally-proposed two-stage reduction.

·
The new top rate, charged on incomes over £150,000, will also be
introduced in 2010/11, and will be 50% instead of 45%. There will be a
corresponding 42.5% rate for dividend income.

· Also from 2010/11, the trust rate will be increased from 40% to 50% (and the dividend trust rate from 32.5% to 42.5%).

Pensions and pension contributions

The Chancellor announced that, from April 2011, the tax relief on pension contributions paid by those with incomes of more than £150,000 will
be tapered down until, at an income of £180,000 or more, it is reduced
to relief at the basic rate only. There will be a corresponding
‘benefit-in-kind’ charge on employer contributions to occupational
pension schemes (including defined benefit schemes). There is to be
consultation on how this charge will be calculated, which is the main
reason the proposal will not be implemented until April 2011.

Meanwhile,
however, there will be anti-forestalling measures to prevent
individuals with incomes of £150,000 or more obtaining a tax advantage
by paying exceptionally high pension contributions between 22 April
2009 and 5 April 2011.

The Finance Bill 2009 will include
provisions ensuring that where a pension is paid with assistance from
the Financial Assistance Service (FAS) or the Financial Services
Compensation Scheme (FSCS), it will be taxed as if it had been paid by
a registered pension scheme (so that, for example, a payment in respect
of a retirement lump sum will remain tax free).

Savings and investments

From 6 October 2009 the ISA investment allowance for
2009/10 will be increased, for those aged 50 or more on the day that
the investment is made, to £10,200 (of which up to £5,100 can be saved
in a cash ISA). For 2010/11 the ISA investment limit will be £10,200
for everybody (of which up to £5,100 can be saved in a cash ISA).The
Finance Bill 2009 will include legislation to ensure that, where a bank
or other financial institution has defaulted, compensation paid by the Financial Services Compensation Scheme (FSCS) in respect of accrued interest will
be taxed as if it was in fact interest. This will be backdated to cover
payments made since 6 October 2008. Where the FSCS pays accrued
interest as if it were subject to deduction of tax, the taxable income
will be the gross amount, with the tax notionally deducted being
treated as a payment on account of the depositor’s personal liability.
If the depositor is a non-taxpayer, he will be able to claim
‘repayment’ of the tax notionally deducted from HMRC in the usual way.
The FSCS will not be required to provide a statement of the gross and
net amounts unless so required in writing by the depositor.

Capital allowances

Expenditure
on plant and machinery, incurred in the Expenditure on plant and
machinery, incurred in the year beginning 6 April 2009 (1 April 2009
for companies) will qualify for a 40% first-year allowance if
it would otherwise have qualified for a 20% writing-down allowance
(subject to the usual exceptions, principally motor cars and assets for
leasing). Note also that assets which qualify only for a 10%
writing-down allowance (such as long-life assets and ‘integral
features’) will not qualify for the first-year
allowance. The new first-year allowance will not affect a trader’s or a
company’s ability to claim a 100% Annual Investment Allowance on the
first £50,000 of his expenditure.

Later this year one new
technology – uninterruptible power supplies – and two new
sub-technologies – air to water heat pumps and close control air
conditioning systems – will be added to the list of designated
technologies qualifying for 100% Enhanced Capital Allowances (ECAs).
Three existing sub-technologies will be removed (air source: single
duct and packaged double duct heat pumps; ground source: brine to air
heat pumps; and water source: packaged heat pumps).

Non-residents

The
Chancellor announced that, with effect from 6 April 2010, non-resident
individuals will no longer be entitled to personal allowances solely on
the ground that they are Commonwealth citizens. However, individuals
will still be able to claim personal allowances on any of the other
statutory grounds (EEA national, Channel Island or Isle of Man
resident, Crown employment, etc) or under a Double Taxation
Agreement. Accordingly, HMRC say the change ‘will mainly affect
citizens of the following countries: Bahamas, Cameroon, Cook Islands,
Dominica, Maldives, Mozambique, Nauru, Niue, St Lucia, St Vincent &
the Grenadines, Samoa, Tanzania, Tonga, Vanuatu’.

Value Added Tax

The VAT registration and deregistration thresholds will be uprated as follows:

                                                          From 1 May 2009            Previously

Registration threshold                                  £68,000                 £67,000

Deregistration threshold                              £66,000                 £65,000

For acquisitions from other

    EC Member States                                   £68,000                 £67,000

The Chancellor confirmed that the standard rate of VAT will
revert to 17.5% on 1 January 2010. The Finance Bill 2009 will include
anti-forestalling legislation – in the absence of such legislation, an
organisation which is not able to recover all its input tax could pay
tax at the 15% rate by creating a tax point before the end of 2009 for
goods which are not to be delivered, or services which are not to be
performed, until 2010 or later. (A tax point could be created by making
a payment to the supplier, or arranging for an invoice to be issued.)
The anti-forestalling legislation will apply where the supplier and
customer are connected parties, or the supplier funds the purchase of the goods or services, or a VAT invoice is issued by the supplier but payment is not due for six months or more, or the customer makes a prepayment of more than £100,000, unless this is in accordance with normal commercial practice.

New fuel scale charges for use for prescribed accounting periods beginning on or after 1 May 2009 have been published for in Budget Note BN69: VAT – Change in Fuel Scale Charges.

The 5% reduced rate of VAT will, with effect from 1 July 2009, be extended from children’s car seats to include bases for such seats. in Budget Note BN69: VAT – Change in Fuel Scale Charges.

Inheritance Tax

To
comply with international law, the Finance Bill 2009 will extend
Agricultural Property Relief and Woodlands Relief to land in the
European Economic Area (EEA). Property qualifying for the extended IHT
relief will also qualify for the CGT holdover relief for gifts. Relief
may now be claimed for past years.

Compliance checks and HMRC powers

The
Chancellor confirmed that the Finance Bill 2009 will include
legislation requiring HMRC ‘to prepare and maintain a Charter [which]
will set out standards of behaviour and values to which HMRC will
aspire in dealing with taxpayers and others’. The deadline for
implementation will be 31 December 2009, but ‘HMRC plans to launch the
Charter by Autumn 2009’.  The legislation will also require HMRC to
report annually on ‘how well [it] is doing in meeting the standards in the Charter’.

The Chancellor also confirmed that the Government will go ahead with three proposals made in the Consultation Paper Payments, Repayments and Debt:

• From Royal Assent to the Finance Bill 2009, any business may be required to provide addresses, etc, for
  
  people with whom HMRC has lost contact. For example, an accountant
  could be required to provide addresses for his clients or former
  clients.
• 
  From April 2011, taxpayers will be able to enter into ‘managed payment
  plans’ – paying their income tax or corporation tax liability by
  monthly instalments, partly before and partly after the usual due date.
• From April 2012, HMRC will be empowered to collect small debts through the PAYE system.

It
was also confirmed that the new record-keeping requirements and
information and inspection powers, introduced with effect from 1 April
2009 for income tax, capital gains tax, corporation tax and VAT, will
be extended to the environmental taxes, insurance premium tax, SDLT,
SDRT, inheritance tax and petroleum revenue tax with effect from 1
April 2010. Time limits for claims and assessments will be aligned, for
these taxes, a year later (1 April 2011).

Finally, the
Chancellor announced a reformed system of penalties for late filing of
Returns and late payment of tax. This will remove the rule that the
penalty for late filing a SATR is waived if all the tax has been paid
by the due date and include surcharges for late paid in-year PAYE and
CIS remittances.

Stamp Duty Land Tax

The
temporary increase (to £175,000) in the threshold at which Stamp Duty
Land Tax (SDLT) becomes payable on residential property, which was to
have expired on 2 September 2009, has been extended to 31 December
2009. It will then revert to £125,000 (£150,000 in Disadvantaged Areas).

The end of paper VAT returns

HMRC
plans to phase out paper VAT returns with effect from1 April 2010, when
it is expected that all VAT registered businesses with an annual VAT
exclusive turnover of £100,000 or more, and all newly VAT registered
businesses (whatever their turnover), will be required to submit their
VAT returns on line and make payments electronically.  Paper returns
will still be an option for the remaining VAT registered businesses,
but this will be reviewed in the run up to 2012.

Payment of your VAT return by credit or debit card

You can now pay your VAT online by credit or debit card.  Go to www.billpayment.co.uk/hmrc
and select ‘Pay now’.  You will need your card details and your VAT
return details.  For the full details, including how to get an extra 7
days to pay, go to www.hmrc.gov.uk/vat/pay-deadlines.htm.  Credit card payments attract a 1.25% transaction fee.

Do you charge a membership subscription?

If
you are a non-profit making membership organisation and charge a
membership subscription you may use Extra-Statutory Concession 3.35 to
apportion between standard-rated, zero-rated and exempt VAT elements. 
However, the concession may not be used retrospectively where you have
previously treated the subscription as a single supply.

For more information see Revenue & Customs Brief 06/09. Go to www.hmrc.gov.uk and under ‘quick links’ select ‘Library’ and ‘Publications’.

New time limits for VAT assessments and claims

From 1 April 2010, the time limit for both assessments and claims will be increased from 3 years to 4 years.

There
will be transitional arrangements from 1 April 2009 – claims and
assessments will generally be able to go back to prescribed accounting
periods ending on or after 1 April 2006.  This will remain the case
until 1 April 2010, when the 4-year time limit will apply.  This will
allow the time limit to move gradually from 3 to 4 years.

Further details and examples will be published in a Revenue & Customs Brief. Go to www.hmrc.gov.uk and under ‘quick links’ select ‘Library’ and ‘Publications’.

Option to tax land and property

The option to Tax National Unit has relocated to:

Option to Tax National Unit

HM Revenue & Customs

Cotton House

7 Cochrane Street

Glasgow

G1 1GY

Phone: 0141 285 4174/4175

Fax: 0141 285 4423/4454

Do you make taxable supplies of services to European Community Customers?

There
is a new requirement that you need to provide HMRC with EC Sales Lists
for certain taxable supplies of services from 1 January 2010.  This
affects all UK business customers that make taxable supplies of
services to business customers in other EU countries where the customer
is required to account for VAT under the reverse charge procedure.

For more information see Revenue & Customs Brief 02/09.  Go to www.hmrc.gov.uk and under ‘quick links’ select ‘Library’ and ‘Publications’.

Are you responsible for bringing goods into the European Community?

Businesses
responsible for bringing goods into the European Community, for
example, carriers, will need to be aware of the Import Control System. 
The key feature of this system will be the ability to handle
pre-arrival information in the form of electronic Entry Summary
Declarations.

You can find further information on the international trade and import and export guidelines on the internet, go to www.businesslink.gov.uk and under ‘international trade’ go to ‘Practical importing’ and select ‘Import Control System’.

Tax Investigations News

More Banks to offer up offshore account details to HMRC      

Three
Special Commissioner decisions were published recently relating to
information notices served on unnamed financial institutions.  The
notices require details of all customers with offshore accounts
connected to UK addresses within the last six years to be handed over
to HMRC.  HMRC remains in discussion with a further 500 financial
institutions with offshore banking facilities about the provision of
similar material.

The information which HMRC is determinedly
gathering from banks, building societies and others, underpins it’s
attack on offshore tax evasion, and is running in parallel with
initiatives such as the new disclosure opportunity in the second half
of 2009 and its intention to name and shame tax evaders.  The
likelihood is that many more third-party notices on financial
institutions will be successfully granted.

Any individuals
with offshore bank accounts or indeed any other offshore assets which
may be subject to a tax charge, should seek appropriate advice from
qualified tax professionals.  The opportunity to make a voluntary
disclosure of any undeclared tax liabilities arising from the offshore
area needs to be acted upon before HMRC begins its compliance strategy
in the coming months.  Only then can an individual minimize the penalty
HMRC will charge and, as Mr Hartnett said in his interview, “be able to
walk away with more money than those who do not come forward”.   

Tax & Finance

Feeling Flat

The
Flat Rate VAT Scheme is supposed to simplify VAT accounting for small
businesses, but it brings problems and complexities of its own.

It seems to be an immutable law of the universe that any attempt to
simplify the tax system succeeds only in further complicating it.  The
Flat Rate VAT scheme for small businesses is, unfortunately, an
outstanding example of this principle.  In theory, life is made simpler
for the trader, because he or she no longer has to record input tax
purchases, or differentiate between standard-rated, zero-rated, reduced
rate and exempt sales.  However…

Convenience apart, will the flat rate save or cost money?



The flat rates for the different trade sectors are supposed to ensure
that, on average, traders are neither better nor worse off.  This means
that some will save money by adopting flat rate accounting and others
will lose, so it would be sensible to make at least a rough calculation
before joining the scheme, to estimate the cost or saving for the
individual trader.

Oen trap for (say) a shoe repair shop is to look up the flat rate for
‘Repairing personal or household goods’, see that it is 7.5%, and
assume that their quarterly VAT payment under flat rate accounting will
be half their current output tax.  However, the 7.5% is charged on the
total amount received from customers, and so is equivalent to 8.1% on
net sales.  The 11.5%  headline rate for ’Accountancy or book-keeping’
and  ‘Labour-only building or construction services’ (strange
bedfellows) is equivalent to 13% on net sales.

It is also
commonly thought that the 1% reduction is available for the first year
the trader uses the flat rate accounting.  In fact, it applies only for
the first year a trader is registered (or should have been registered)
for VAT.

When is a public house not a public house?



Traders are expected to identify the trade sector to which their
business belongs when they join the Flat Rate VAT Scheme, and to review
it annually.  If a business carries on more than one activity, it is to
be allocated to the sector which accounts for the greater part of its
VAT-inclusive turnover.

One point which has been taken by visiting VAT inspectors is that many
businesses, which the man on the street would unhesitatingly say were
public houses, and in fact restaurants, because more than half their
turnover comes from food sales.  This is a growing problem, because the
smoking ban and other factors have led to many public houses seeing
their traditional trade falling away, so that they have to reinvent
themselves as places to eat.  Given that the flat rate percentage for
public houses is 5.5% and for restaurants 10.5%, it will not take long
for a substantial underpayment to build up.

One solution may
be to split the business, typically with the husband running the bar
and his wife the food sales.  At first sight, this could cause a
further problem, where two businesses are ‘associated’.  However where
husband and wife are each separately VAT-registered in different types
of businesses, they will not be treated as ‘associated’, even if they
share premises, provided this is charged at market rate.

Purchasing equipment for the business



Purchases of capital goods with VAT-inclusive value of more than £2,000
are dealt with outside the Flat Rate Scheme: that is to say, the trader
can reclaim the VAT paid on those goods as input tax.  The guidance
confirms that this does not mean that each item must individually cost
more than £2,000 – input tax is reclaimable if the trader, in a single
transaction, buys two or more pieces of equipment for his business,
which together cost £2,000 or more (including VAT).

The wide, wide scope of flat rate turnover



Unfortunately, the wider than expected definition of relevant turnover
for the Flat Rate Scheme is a major trap for the unwary.  The
regulation says that:

‘Your flat rate turnover is all the supplies your business makes,
including VAT.  The value of exempt supplies, such as rent or lottery
commission…’ whilst it confirms that: ‘You exclude from your flat rate
turnover private income, for example income from shares.’

However,
the fact that a receipt will not be taken into account in calculating
the profit for income tax purposes does not mean that it is not part of
a trader’s flat rate turnover for VAT purposes.  For example, the
guidance states that ‘bank interest received on a business bank
account’ should be included.  In the context of the sole trader, it may
not always be clear whether a bank account is ‘business’ or ‘private’,
 though at current interest rates, the point may not be very material
anyay.

An example of income a business might receive, ‘rent
from a flat above the shop’.  More surprisingly, HMRC are of the view
that all rents received by a VAT-registered trader count as part of his
or her turnover for the purposes of the flat rate scheme, even if the
rents come from a ‘buy-to-let’ or similar property unconnected with the
VAT-registered business.  Suppose therefore that an accountant, who
uses the flat rate scheme for her own practice, also owns a
‘buy-to-let’ property.  The rent from the ‘buy-to-let’ would count as
part of her turnover on which her 11.5% flat rate charge is
calculated.  This rule would apply equally if the let house had been
inherited rather than bought, or even if it had originally been the
accountants own home, and had been let out because it was difficult to
sell.

An EC Council Directive provides that:
‘The
exploitation of tangible and intangible property for the purposes of
obtaining income therefrom on a continuing basis shall in particular be
regarded as an economic activity.’

‘Economic activity’ is Eurospeak for ‘business’ so this broadly
translates as: ‘Renting out a property is a business for VAT purposes.’

Once the accountant is aware of the problem, she can perhaps avoid it,
by arranging for the ‘buy-to-let’ to be owned by one legal entity and
her practice by another.  However as mentioned above, there is a rule
that if two or more businesses are ‘associated’, neither may adopt a
flat rate accounting, and it is hard to see how two businesses run by
the same individual can be other than ‘associated’, even if one
(presumably the accountancy practice) is incorporated.  Accordingly,
her real choice may be between accepting that rents, which would
otherwise be exempt supplies, will be subject to the flat rate charge,
and not using the flat rate scheme at all.

Of course, in
some circumstances, it could be helpful to include rents in the flat
rate computation – for example, where a food retailer (paying 2% flat
rate VAT) lets out holiday accommodation that would otherwise be
standard-rated.
If the buy-to-let house is a business asset, it
follows that, if it is sold, the proceeds will count towards the
trader’s flat rate turnover.  It is understood that even HMRC concedes
that would be unfair, and so will allow the trader to withdraw from the
flat rate scheme with retrospective effect.  However, to the best of
our knowledge, this concession has never been publicly confirmed.

Again, forewarned is forearmed, as the solution is simply to withdraw
from the Flat Rate Scheme before selling the house (a trader can leave
the scheme at any time, not necessarily at the end of the VAT
Accounting Period).  The only sanction is that he or she cannot then
rejoin the Scheme for 12 months.

Driving into trouble



Most traders own a car which is used at least partly for business
motoring.  When they sell it,  the VAT treatment of the sale proceeds
depends on whether the car was originally purchased new or second-hand.

If the car was originally purchased new, the input tax would have been
blocked.  Where input tax has been blocked, any subsequent sale is an
exempt supply.  However, the consideration for an exempt supply is
still part of the trader’s turnover on which flat rate VAT is
chargeable.

If the car was originally purchased second-hand, the onward sale is
standard- rated.  Outside the Flat Rate Scheme, a margin scheme
applies, so that VAT is only payable in the unusual event that the car
is sold at a profit.  However, margin schemes cannot be used in
conjunction with flat rate accounting, so again the whole sale proceeds
will count as part of the trader’s ‘relevant turnover’ on which flat
rate VAT is chargeable.

HMRC considers that this is fair
because it is, apparently, taken into account in setting the flat rate
percentages.  However, for a professional man or woman, driving and
regularly trading in an expensive car, the VAT cost could be
significant.  The solution, as for the buy-to-let discussed above, is
simply to leave the Flat Rate Scheme before selling the car.

The good news for flat rate motorists confirms that Flat Rate Scheme
users ‘do not have to pay any road fuel scale charges since you are not
reclaiming any input tax on the road fuel  your business uses’.

The
HMRC guidance notes say that one of the advantages of flat rate
accounting is ‘Peace of mind.  With less chance of mistakes, you have
fewer worries about getting your VAT right.’  But it’s the unknown
unknowns that will get you in the end!

TWO WARNINGS ABOUT PENALTIES

Anyone running a company needs to be aware that the penalties for
not filing the Statutory Accounts at Companies House on time have
increased significantly. Private company and LLP accounts filed up to a
month late will now attract a penalty of £150; this rises to £375 for
accounts filed up to three months late; to £750 for accounts filed up
to six months late; and to an enormous £1,500 for accounts filed more
than six months late. Please forgive us when we chase you about your
accounts, but the fines are now so big it really is important to keep
up-to-date!

Secondly, all employers should note that penalties will now be
charged wherever an inspector discovers that employees have been paid
less than the minimum wage (hitherto, penalties have only been charged
when an employer failed to comply with an enforcement notice, issued
after an underpayment was discovered). The penalty is calculated as
half the underpayment identified, subject to a minimum penalty of £100
and a maximum of £5,000. There is a 50% reduction if both the arrears
of wages and the penalty are paid within 14 days. The penalty will not
be a deductible expense for tax purposes. Also, arrears of wages are to
be calculated at current NMW rates, not (as hitherto) at the rates in
force when the work was done.

EMPLOYING FAMILY MEMBERS



There is a band of earnings which are subject to ‘nil rate National
Insurance contributions’ – this apparent contradiction in terms means
that no contributions are payable, by employee or employer, but the
employee’s contribution record is still franked for pension and benefit
purposes. For 2009/10, the ‘nil rate band’ runs from the ‘Lower
Earnings Limit’ of £95 a week (£412 a month) to the ‘Earnings
Threshold’ of £110 a week (£476 a month).

Where family members work part-time in a family business, it is
important to remember that worthwhile pension rights can be accrued, at
no cost, by paying them a salary just over, rather than just under, the
Lower Earnings Limit. If you are already doing this, watch that the
Lower Earnings Limit rises slightly each April – this year from £90 to
£95 a week – so you must remember to increase wages accordingly.

PENSIONS LEGISLATION


So many changes
have been made to the law governing pensions recently that it is hard
to keep abreast of what is happening. As they will affect everybody,
and as some people will have the opportunity of significantly improving
their National Insurance Retirement Pension for relatively little
outlay, we thought it was worth outlining the position for clients in
this newsletter.

National Insurance pension deferred



Between April 2010 and April 2020, State Pension age for women (the age
at which a woman can begin to draw her National Insurance Retirement
Pension) will rise gradually until it equals that for men. Roughly
speaking, for women born on or after 6 April 1950, State Pension age
will be deferred by one month for every two months their 60th birthday
falls after 5 April 2010 (for anyone wishing to know the exact date,
there is a State Pension Age Calculator at www.thepensionservice.gov.uk
– type in your date of birth and the Calculator will tell you the date
you become entitled to a pension). At the end of the phasing-in period,
a woman born on 6 April 1955 will attain State Pension age on 6 April
2020 – her 65th birthday.

Unfortunately, that will not be the end of the story, as between
2024 and 2046, State Pension age will increase from 65 to 68, for both
men and women. This will affect people born on or after 6 April 1959.

Reduced contribution requirement for a full pension



Hitherto, it has been necessary for a man to pay (or to be credited
with) National Insurance contributions for 44 tax years in order to
qualify for a full National Insurance Retirement Pension (£95.25 a week
for 2009/10) and for a woman to have paid or been credited with
contributions for 39 years. However, for all those attaining State
Pension age on or after 6 April 2010 (that is, men born on or after 6
April 1945 and women born on or after 6 April 1950), the contribution
requirement was recently reduced to 30 years.

Anyone who has not yet paid sufficient contributions to gain
entitlement to a full Retirement Pension, and who is unlikely to do so
over the remainder of their working life, should consider the
possibility of paying voluntary contributions to buy ‘added years’. The
purchase of ‘added years’ in the National Insurance scheme has always
offered good value for money, and even more so now, when the returns
earned on other investments are likely to be very low. Also, of course,
the National Insurance scheme is guaranteed by the Government.

The rules governing entitlement to pay voluntary contributions are
complex in the extreme – in some cases, for example, it is possible for
further contributions to be paid by people who have already retired and
begun to draw their pensions. Accordingly, it is impossible to provide
a simple guide and so we would invite clients to contact us for
individual advice.

New rules for the State Second Pension



Since 1961, there have been schemes to provide employees with an
earnings-related ‘top-up’ to their National Insurance Retirement
Pension. First there were Graduated Contributions, which from 1978 were
replaced by the State Earnings-Related Pension Scheme (SERPS). Then
from April 2002, SERPS was in turn replaced by the State Second
Pension, also referred to as ‘S2P’ or the ‘Additional State Pension’ –
the terms are interchangeable.

At present, an individual’s eventual S2P entitlement is built up
from contributions based on his earnings. Until 5 April 2009, the
definition of ‘earnings’ for this purpose was capped at the Upper
Earnings Limit (UEL) for employees’ National Insurance contributions
purposes, but from 6 April 2009 it will be capped at a new ‘Upper
Accrual Point’ (UAP). For 2009/10, the UAP is £770 a week and the UEL
£844, so that on the band of earnings between the two, the employee
will be paying additional contributions which buy no additional
benefit. The UAP will remain £770 in future years, so that (with
inflation) the ceiling on earnings taken into account for S2P purposes
is expected to fall, over time, in real terms.

On 6 April 2012 (the date has not yet been finally confirmed),
another change to the rules will take effect. Further accrual to S2P
will no longer be entirely income-related: a ‘floor’ will be set so
that those on lower earnings will build up an additional pension of at
least £1.60 a week for every year (from 2012/13) they are in
employment, or entitled to National Insurance credits as a carer, or
are seriously ill or disabled. The other side of the coin is that from
April 2010 the rate at which earnings-related contributions earn
additional pension above the ‘floor’ will be reduced in stages. The
overall effect of this, taken with the ‘freezing’ of the Upper Accrual
Point already mentioned, is that from around 2030 the additional
pension will accrue at a flat rate each year, irrespective of the
individual’s earnings.

Accordingly, the simple effect of a highly complicated series of
changes is that, over a very long period, the earnings-related pension
is to be abolished altogether, though the basic pension will be
increased. But by 2030 the rules will no doubt have been changed all
over again . . .

Pension plans for all employees


Since
October 2001, employers have been obliged to offer their employees the
opportunity to join a ‘workplace personal pension scheme’, unless the
employer has less than five employees or offers an alternative company
pension scheme. However, less than 40% of eligible employees have
chosen to avail themselves of this opportunity and many small employers
have found that no-one wanted to join the pension schemes they had been
obliged to set up.

The Government is keen to encourage employees to join private
pension schemes (because the alternative is that they will be claiming
Social Security benefits when they retire) and so, from 2012, will
require employers to enrol all employees (between age 22 and State
Pension age) in a pension scheme, to which the employee will contribute
at least 4% of his earnings between £5,035 and £33,540 a year (to be
uprated annually) and the employer a sum equal to at least 3% of those
earnings. For both employers and employees, minimum contributions will
be phased in over three years.

These contributions will be payable on the employee’s full earnings (including overtime, commission payments, etc
– and even Statutory Maternity Pay) not, as is usually the case with
pension contributions, only on his or her basic pay. The Government
will ‘contribute’ 1% (in the form of the usual tax relief on the
employee’s contribution) and the pitch will be that the employee ‘gets
£8 for £4’.

There will be no minimum length of service to qualify for
membership of the pension scheme, and part-time and temporary employees
will be entitled to join on the same basis as permanent staff. However,
employees will be entitled to opt out if they wish. They would not then
pay contributions themselves, but would lose the benefit of
contributions paid by their employer.

Even employers with existing pension schemes may have to reconsider
their arrangements before 2012, as membership may have to be opened to
individuals currently excluded, and the definition of earnings for
contributions purposes may have to be extended.

BETTER SAFE THAN SORRY


Because of the
recession, it is quite likely that some people will find that their
income falls sharply during the 2009/10 tax year. Also, some
self-employed people may find that their taxable income is lower
because of the availability of 100% first-year allowances for purchases
of vans and equipment for their businesses. In some cases, they will
find that they are, for the first time, entitled to claim Tax Credits.

There is a potential trap here, because of the interaction of two
Tax Credit rules. The first is that income, for Tax Credit purposes, is
averaged over the tax year (or, for self-employed people, is taken as
being the income of the accounts year ending in the tax year). The
second is that claims can only be backdated for a maximum of three
months.

For example, suppose that an individual, who has not previously
claimed Tax Credits, realises on 1 December that his income for 2009/10
is likely to be much lower than for 2008/09. If he submits a claim
immediately, he will be entitled to Tax Credits for September onwards,
but will lose the Credits he could have claimed for April to August.

If the same individual had submitted a protective claim, estimating
a higher income, by 5 July 2009 (three months into the new tax year),
he would in the first instance have been sent a ‘nil award’ notice.
However, if his income falls, that award can be adjusted
retrospectively, and he will be paid Tax Credits backdated to 6 April
2009.

We would therefore strongly advise any clients not already claiming
Tax Credits carefully to consider whether they should make a protective
claim. Further information on how to do this is posted on HM Revenue
& Customs’ website at www.hmrc.gov.uk/taxcredits/claiming-early.htm.

Another point to watch is that if an individual claims Child Tax
Credit, his claim to both Child and Working Tax Credit will be
backdated automatically. However if he claims only Working Tax Credit,
his claim will not be backdated unless he specifically requests this.
Backdating can be requested by telephoning the Tax Credit Helpline.

This newsletter deals with a number of topics which, it is
hoped, will be of general interest to clients. However, in the space
available it is impossible to mention all the points which may be
relevant in individual cases, so please contact us for personal advice
on your own affairs.

Contact us via our contact form or call 01582 761121.