Issue 22

Issue 22

Soda and pretzels and beer and the summer issue of a Square Circular are what one associates with Nat King Cole’s lazy, hazy, crazy days of summer.

If you are in a lazy hazy mood you’ll be pleased that the Square Circular, as usual, does not get too bogged down in any one topic and, hopefully, the variety of topics chosen and the brevity with which they’re treated will provide some interesting snippets of information.

If you want more than a snippet 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.

DEMIBOURNE

Sorry to send you scurrying back to the Square Circular archives but we should bring you up to date on things we’ve mentioned in the past.

Issue 16 mentioned the Demibourne case and the problems arising. A taxpayer who had regarded himself as self-employed and had paid tax on that basis was reclassified as an employee. His employer had to pay the tax which should have been paid under the PAYE system without necessarily getting a credit for the tax wrongly paid under self-assessment by the employee which the employee could then recover.

HMRC have announced that from 6 April 2008 amended PAYE regulations will allow a transfer of the PAYE liability to the employee’s self-assessment where, in addition to other conditions, the tax has been assessed on the income in the employee’s self assessment.

CAPITAL GAINS CAUTION

Do you trade through a partnership or limited company and do you own the premises from which your partnership or company trades? If so, do you charge a rent for the use of the premises?

If you did charge rent it was a pretty smart move. If you take the example of the trading company, you could get money out of the company as payment of rent without also paying NI contributions on it. Better than a salary!

The eagle-eyed reader will have spotted our use of the past tense. Yes, it was a smart move in the halcyon era of CGT taper relief. You could have your cake and eat it. You got your rent but it made no difference to your CGT position. The premises still qualified as trading premises and you got all the CGT ‘goodies’ associated with that status.

Not so with the new Entrepreneurs’ Relief. Charge a commercial rent and the premises become an investment asset. When you come to sell it you may pay 18% tax rather than 10%. Charge a less than commercial rent and you’ll get some restriction although Entrepreneurs’ Relief might not be denied entirely.

That’s not to say that you should blindly just stop charging rent. It can get more complicated than that. But it may be time for a re-think. Give us a call if you want us to think it through with you.

VAT MISTAKES

Nobody’s perfect; have you ever made an error on a VAT return? If so, you probably know that it can either be corrected on a subsequent return or separately disclosed to HMRC. Which you do depends on the amount of the net error.

Until now the limit above which you had to make separate disclosure rather than just adjusting a later return was £2,000. From 1 July 2008 it went up to £10,000 or 1% of the VAT turnover for the accounting period in which the error is discovered whichever is the greater.

Of course, you can still make a separate disclosure for errors below that level which is exactly what you’d want to do if the error means you’re entitled to a refund and you don’t want to wait until the end of the quarter.

WHAT A DIFFERENCE A DAY MAKES

Talking about VAT, here’s a minor planning point but one which is particularly helpful when cash flow is tight.

Quite often, the tax point for VAT purposes is the date of the invoice. Suppose your VAT quarter ends 31 July. If you issue an invoice with a 31 July date the VAT output tax has to be paid in respect of the 31 July quarter. Issue the invoice on 1 August and you postpone paying the output tax on it until 3 months later when you do the return for the October quarter.

Just a word of warning. Don’t shoot yourself in the foot by having ‘silly’ payment terms like 30 days after the end of the month in which the invoice is rendered. That’ll delay your payment by a month, always assuming your customers do pay on time. Just make the payment terms 30 days from the date of the invoice.

Of course, it catches up with you in the next quarter but it can still be a useful little trick if you’re a sole trader or partnership with a quarterly ‘stagger’ which coincides with your chunky direct tax payments at the end of January and July.

AIA

Talking about tax payments, have you thought what havoc can be caused by AIA?

First, what is AIA? No, we don’t mean an Associate of the Institute of Actuaries; nor is it anything to do with artificial insemination. It’s all about Annual Investment Allowance which refers to expenditure on plant and machinery for your business incurred after
1 April 2008 (if you’re a company) or 6 April 2008 (if you’re an individual). Expenditure up to £50,000 will be allowed in full against your profits in the year in which you spend the money.

How about this scenario? Suppose you start in business and make £50,000 profit in the first year. You buy all the equipment you need for the business in that first year. It costs £50,000 and you collect your £50,000 AIA. Therefore, the taxable profit is nil. Result…happiness! No tax to pay for that year. Not even a payment on account to be made for next year.

The profit in year 2 is also £50,000. There is no capital expenditure. Taxable profit is £50,000. Result…misery! You have a high tax bill that year, payments on account to make for the following year and no payment on account made against any of this because your first year taxable profits were nil.

Just remember to do some budgeting.

LOOK ON THE BRIGHT SIDE

Sorry, we’ve made AIA sound like a problem. Let’s not forget the good points.

One advantage is that investment in plant and machinery with what is, in effect, a full 100% allowance (up to £50,000) can create losses which can be set off against other income to generate a tax refund. There can be particular advantages in the opening years of a business.

And what about tax credits. Low income for a year can increase a claim to tax credits providing a welcome boost to cash flow. Imagine the headlines, “Buy a van for your business. Let HMRC pay for it!”

MAKING ALLOWANCES FOR YOUR CAR

A new capital allowances regime for cars is also being introduced, based on a car’s CO2 emissions. We’ll give you more details in a later Square Circular. One important by-product of the new regime will be the pooling of cars with medium and higher emissions. It will mean that when you sell your car after say 3 or 4 years you won’t get the balance of your capital allowances but it will effectively be written down over many more than 3 or 4 years, especially if your car is an expensive gas guzzler.

Yes, we know it sounds complicated. Give us a call if you need more explanation at this stage.

ON THE UP

Note that the national minimum wage rate increases next October from £5.52 to £5.73 per hour for adults. The rates for 18-21 year olds will also increase from £4.60 to £4.77, and for 16-17 year olds from £3.40 to £3.53.

ALSO ON THE UP (SORT OF!)

If you live on planet Earth you’ll be familiar with the recent furore over the abolition of the 10% starting rate band of tax and the Chancellor’s method of putting things right by belatedly increasing this year’s personal income tax allowance from £5,435 to £6,035.

By putting things ‘right’ in this way a basic rate taxpayer is going to be better off than he expected after Budget Day to the tune of £120. That’s the £600 increase @ 20%. But don’t get too excited just yet. Self employed taxpayers don’t ‘feel it’ until they pay tax in January and July, while employees on your payroll won’t get any benefit until September when they’ll get an adjustment for the first 6 months of the year i.e. £60. Jackpot!

Each month after that they’ll be £10 better off but what’s that compared to the £60 bonanza? So, employers, when these crazy days of summer culminate in a £60 windfall on the September payroll you might want to remind your employees that, to quote Simon and Garfunkel, autumn winds blow chilly and cold.

NORMAL GIFTS OUT OF INCOME

This can be quite a useful Inheritance Tax effective exemption. Not everyone who is able to make liberal gifts out of income appreciates the value of making such gifts as a way of mitigating Inheritance Tax.

Perhaps we’ll deal with the subject in greater length in a future issue. In the meantime, if you do want to know about this or other Inheritance Tax exemptions call Simon Topperman or your usual contact partner.

AND FINALLY…..

A quotation:

“We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two”
(Erwin N Griswold – Dean of Harvard Law School 1946-1967, Solicitor General of the United States 1967-1973)