Typically, the spring Square Circular does the rounds a few weeks after the Budget. With the dust just beginning to settle we’d like to draw your attention to one or two Budget implications which didn’t attract the headlines at the time and to other items of news which tend to get buried in the welter of those Budget headlines at this time of year. You’ll see what we mean.
There’s also a distinctively foreign flavour to the spring Square Circular – of interest to those who hold assets abroad. If you want any further details about any of the matters we’ve mentioned in this issue, or indeed, about any matters we haven’t mentioned please do contact us on 0161 832 4841.
Jenny’s back as we’re sure you’ll be aware if we process your payroll for you. A special thank you to Matthew Santry who filled the position so well for us during Jenny’s maternity leave.
Congratulations to John Rowlands of our audit department who passed his final exams between the last Square Circular and this one.
And we can’t let this occasion go by without a word about Adrian’s holiday. For the good of our practice his partners have asked him to make his next holiday one that entails sitting in a deckchair rather than hurtling down a ski slope and being damaged by novices that should not be allowed anywhere near a pile of snow.
SHOULD I INCORPORATE?
When a sole trader or partnership takes a decision whether or not to trade through the medium of a limited company, there are many considerations to take into account. Tax is one of, and an important one of, these considerations, although perhaps somewhat over-emphasised. Whilst commercial considerations should take priority, it usually seems to be the tax implications which grab the limelight for the ordinary man in St Ann’s Square reading the Circular.
Now, everybody knows that the basic rate of income tax goes down by 2% next year. And everybody knows that we lose our 10% starting rate band (except for savings income and capital gains). And everybody knows that the basic/higher rate threshold will be higher. And everybody knows that the small companies’ rate of corporation tax will increase by 1% each year for this year and the next two years. But what difference does it actually make? Should it affect my decision to incorporate?
You’re wrong if you say ‘yes’ and you’re wrong if you say ‘no’. The correct answer is that the facts of each case can be different and you really have to ask us to do the number crunching for you to know how much tax you’re going to save and whether the added costs of company law compliance make the tax saving worthwhile. If you want a rule of thumb answer, the tax advantage of a corporate structure has tended to erode since 2003 and will continue to erode further in the next year or so. It should not deter larger businesses from incorporating but could well deter the smaller business.
Of course, if there are also capital gains tax issues involved, it’s another story and good tax advice can turn potential problems into advantages.
SALARY OR DIVIDENDS?
A similar question arises with regard to extracting profits from a company either as remuneration in one’s capacity of director or as dividends in one’s capacity of shareholder. We know what the Budget says but what is the practical effect?
Again the right answer is to ask us to do the number crunching for you because each set of circumstances can be different. In general terms if won’t immediately make a world of difference as to how to treat bonuses or dividends in a small company, a large company and an in-between one caught in the marginal rate band.
At the beginning of March, about 3 weeks before the Budget, the tax avoidance industry was taken by surprise when the Chancellor struck a blow against partnership loss schemes. Typically a high net worth individual might invest as a limited partner in a scheme which generates trading losses in the first year with those losses then being set sideways or backwards against other income. Film schemes were probably the best known of these strategies. At the beginning of March a £25,000 annual limit on such losses was announced, thereby killing off investment into most of these schemes which, typically, have high implementation costs. Sale and leaseback film schemes can still be implemented but these are being phased out.
It caused something of a sensation at the time and for some people the implications may be more serious than anything that’s in the Budget.
BARE TRUSTS FOR MINORS
Here’s another little publicised problem that you probably didn’t even know was a problem. Fortunately, the news is good. So why are we telling you about the problem that never was? Because it’s such a simple idea which isn’t used enough.
What is a bare trust for a minor? Money is set aside for a minor who does not have any capacity because he/she is under age. There is no question that the funds belong to the minor and not to the individual named on the account, who is so named for signatory purposes. Any income generated, e.g. interest on a bank deposit belongs to and is taxed on the minor except where the funds were supplied by a parent and the income exceeds £100. The minor is likely to be no more than a basic rate taxpayer and may have unutilised personal allowances.
Following last year’s wholesale changes to inheritance tax and trusts there was a suggestion, apparently taken seriously, that such an arrangement would be a ‘settlement’ for Ih.T purposes and could have implications for certain gifts making them potentially liable to Ih.T rather than a potentially exempt transfer. This problem and other associated problems only came to light in February and was investigated by certain professional bodies which were told on 23 March that HMRC had reverted to their original view regarding such trusts and these were no problem after all.
All’s well that ends well. But we do sometimes wonder why greater use of bare trusts for minors isn’t made.
HOLIDAY HOMES ABROAD
Holiday homes abroad, for example, in France, Spain and Portugal, are often bought through the medium of a limited company where this is advantageous as regards ‘local’ considerations. We have often warned, rightly so, it would seem, that this could give rise to a benefit in kind income tax charge.
The recent Budget removes this charge with retrospective effect where the sole activity of the company is the holding of the property for personal occupation or letting and the property in question is the company’s only or main asset.
Here’s another piece of news with a foreign flavour.
We told you last summer (Issue 14) that HMRC was able to gain access to the identity of the holders of offshore bank accounts with major banks. We told you in the winter (Issue 16) that HMRC was considering a tax amnesty for those wanting to ‘come clean’ about overseas income producing assets. Well, now the tax amnesty has become newspaper headlines.
The amnesty was announced on 17 April. In the most unlikely event that this could apply to you, you will have until 22 June to register and 26 November to ‘say and pay’. If you don’t use the amnesty you can expect no mercy. Incidentally, it seems that the amnesty will apply to onshore as well as offshore disclosures.
Of course, there may be many reasons why you legitimately have not told HMRC about foreign assets. You may have an interest bearing bank account but perhaps you’re not resident in the UK. Or maybe you’re not domiciled here and the interest is not remitted. Perhaps your villa/gite/ranch/dacha hasn’t been rented out but has been kept exclusively for your own use.
Putting it diplomatically, if you have a ‘friend’ who thinks he may be heading for trouble let us know before trouble becomes ‘big trouble’.
Apparently a letter from a taxpayer to a tax inspector read:
“Please correct this assessment. I have not worked for the past three months as I have broken my leg. Hoping you will do the same.”