“Puff the magic dragon lived by the sea
And frolicked in the autumn mist in a land called honah lee”
(Peter, Paul and Mary)
The only autumn mist frolicking we get tends to be the Chancellor’s pre-Budget Report and over the last couple of years the PBR has tended to be as momentous as the Budget itself. This Square Circular comes a bit too early for comment on the PBR but if there is anything important to tell you in due course we’ll be in touch on an individual basis. In the meantime we have lots to tell you anyway.
If you want more details about any of the matters we’ve mentioned in this Issue, or indeed, about any of the matters we haven’t mentioned please do call us on 0161 832 4841.
A HINT OF THINGS TO COME?
We all know the difference between tax evasion and tax avoidance.
Evasion is when you dishonestly put a fiver of your business takings in your back pocket and it escapes your mind to mention it to the taxman. Avoidance is when you arrange your affairs in such a way as to legally minimise your tax liabilities. However, there’s avoidance and avoidance. Contributing to a pension or making Gift Aid donations to charities which can reduce your tax liability is perfectly acceptable. But what about where a strategy to reduce your tax liability is based on an ambiguity or loophole in tax legislation? Is it acceptable to use a tax mitigation scheme?
In previous issues of Square Circular we’ve mentioned the disclosure regime in force for tax avoidance schemes. We would have thought that the regime in force gives HMRC a fair crack of the whip when it comes to finding out quickly about such schemes, challenging them and blocking them for the future. Just weeks ago, on 21 October, new rules were introduced to stop “sideways loss relief” for tax-generated losses.
A couple of months ago a Government Financial Secretary denounced tax avoidance as “morally wrong” and said that the Pre-Budget Report will seek to strengthen the disclosure regime and give HMRC more information on who is using the schemes to help clamp down on those “playing a game” with the tax authorities by trying to find ways round the rules. HMRC have promised to “distinguish between legitimately trying to pay the lowest amount and bending the rules through tax avoidance”. Whilst this does seem to accept the role of legitimate tax planning, isn’t it a little disturbing to see the lines between the objective “legal” and the subjective “moral” getting a little blurred?
MORE THINGS TO COME
Employers will be aware that over the last few years online filing for PAYE has gradually been introduced. As a practice we now tend to file the vast majority of personal, trust and partnership tax returns online. There are occasional exceptions when we feel it beneficial not to do so. Although there were teething problems in the first couple of years of online filing (that’s why we held back before embracing the new technology) online filing is, for the most part, quicker and more efficient. So what comes next?
Next year will see more compulsory online filing for two other taxes. One is corporation tax. There’s talk of HMRC and Companies House having a unified online filing regime in what’s called iXBRL format. Whilst the changes may be far-reaching the problems are probably going to be more significant for tax agents than for companies themselves. It tends to be only the very large companies who file their own accounts and tax returns. We have until 2011 to get ready for that.
What might be of greater significance to the average trader is the online filing of VAT returns. After 1 April 2010 online filing will be compulsory for newly registered businesses and for any business with an annual turnover over £100,000. We’ve been told that for the first year, if you don’t do it, HMRC’s emphasis will be on alerting businesses to the change and advising businesses rather than issuing penalties but after March 2011 businesses filing on paper when they should file online will be penalised. Better to start thinking about it sooner rather than later.
What momentous event happened on 1 August 1989? True, it was the last day of the Old Trafford test match against Australia. The Aussies won by 9 wickets so there’s nothing momentous there! And it was the day on which the VAT option to tax property and the 20 year rule was introduced. Now why didn’t I think of that?
The VAT option to tax means that a property owner can, if advantageous, choose to apply VAT to property transactions which would otherwise be exempt. The 20 year rule means that the option could only be revoked after 20 years. So, three months ago, 1 August 2009 was the first opportunity to revoke an option to tax assuming that the option was exercised at the first opportunity.
Why might you want to revoke the option? Well, typically an intended change of tenant from one carrying on a taxable activity to one carrying on an exempt activity could be the motivation. Or a Stamp Duty Land Tax saving on a sale may be behind it. If you opted to tax more than 20 years ago it may be worth considering whether or not to revoke. If your 20 years is coming up soon it may be worth making a diary note to review the position when the time comes. Let us know if you need help considering the “options”.
Unless Alistair Darling produces a rabbit out of a hat in the Pre-Budget Report, the standard rate of VAT which was reduced from 17.5% to 15% last December is due to revert to 17.5% from 1 January 2010.
How do you deal with the rate change? Dead easy, you might say; just charge 17.5% on invoices instead of 15%. If only life was that simple. What happens if you supply a service which straddles the change-over date? What if your supply of services is continuous and you invoice in January for what you’ve done in December? What if you take deposits? What if you want to bill in advance and does it matter how long in advance? What if you fall foul of the anti-forestalling legislation to stop large transactions gaining an unfair tax advantage?
This little spot of bother won’t affect you if all your supplies are made to businesses that can fully recover the VAT. But if you make supplies to members of the public or businesses that can’t fully recover VAT and you need help, let us know.
STAMP DUTY LAND TAX
Talking about things in January getting back to what they were, don’t forget the SDLT holiday for residential properties costing less than £175,000 finishes on 31 December 2009 and the temporary £175,000 limit reverts to £125,000. Again, this assumes no further changes in the Pre Budget Report.
So if you buy a property, for example to rent out, on Thursday 31 December for £150,000, that’s what it will cost you. Leave it until after the New Year holiday weekend and it costs you £1,500 SDLT into the bargain.
And don’t think that you’ve got another two months to consider the position; as you know, you don’t get to the completion stage of a house purchase overnight.
TIME RUNNING OUT
Talking about time running out, don’t forget the proposed increase in tax rates on high incomes to be introduced next April. A number of clients have spoken to us about this. If you haven’t, and you think it will affect you, get in touch,
A MATTER OF ATTITUDE
Many companies are not thriving at the moment. Many have put the block on pay increases this year and share option schemes and plans to give shares in the company to employees have been put on a back burner. After all, who’d want shares in a company that’s in the doldrums?
What’s your attitude? Are you one of those who see the glass as half empty or half full? Do you see only the thorns or also the rose between the thorns? Can things only get worse or are they going to be better next year?
If you have a positive attitude and are looking forward to better times ahead for your company there might be no better time than the present to incentivise that most valuable of assets, human resources, with share option schemes. For a start, it could be a useful substitute for this year’s pay rise which isn’t going to happen. What’s more, if share values are currently depressed it should be possible to grant options now at low valuations which will increase the surplus when the options are subsequently exercised and the shares are sold for a higher value once the good times have started to roll again. Better still, if that surplus is taxed as a capital gain at just 18%. Come to think of it, those currently holding unapproved share options might want to consider the tax position if they were to exercise their options in 2009/10 rather than later.
If you’re an employer thinking about granting options or an employee thinking about exercising options, calling either Simon Topperman, our tax partner, or your usual contact partner might be a good starting point.
“Like mothers, taxes are often misunderstood but seldom forgotten.”