“Summertime and the living is easy
The Budget’s been and the taxes are high
Your daddy was rich before the recession
So hush little tax payer, don’t you cry.”
Not quite what Dubose Heyward said (he wrote the lyrics for Gershwin), but perhaps appropriate for now. No surprise that this Issue of the Square Circular focuses on the recent Emergency Budget; not so much the facts and figures but rather one or two planning angles.
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 contact us on 0161 832 4841.
For a start, Liz Hollingsworth’s baby, Oliver. You can’t get much newer than just a couple of months old. Congratulations to Liz and her husband. Oliver has already made his first visit to our office (together with Liz, of course).
Everybody knows the standard rate goes up from 17.5% to 20% on 4 January 2011. What may not be quite so well known is that Anti-Forestalling Measures are being introduced to counter manipulation of the changeover rules.
Meanwhile, we’ve thought of a really clever tax saving wheeze for those who are not able to claim back VAT and send us the details to complete their personal accounts and tax returns just before the submission date of 31 January. If you get your information to us in November or earlier rather than January we may be able to cut your VAT bill by 2.5%!
CGT, IT MAY NOT BE OVER YET
CGT rates to increase to perhaps 40% or 50%. Annual CGT exemption to be abolished. Those were the rumours and warnings before the Emergency Budget.
And what happened? Rates increased only, yes only, to 28%. What’s more, lifetime Entrepreneurs’ Relief increased from £2m to £5m. If you happen to be in the process of selling a trading business or company for somewhere between £2m and £5m you would even be better off post Budget Day.
Tucked away in a Questions and Answers publication from HMRC on 22 June was the question whether, if CGT rates were to be more closely aligned with income tax rates, would the 28% CGT rate increase next year. The answer was that the Chancellor will decide the rates of CGT for 2011-12 in the Budget in 2011.
It is possible that next March we’ll see the same panic over CGT rates as we saw in the last few weeks leading up to the 22 June Budget. Planning is not something to be forgotten; contact us as soon as possible if you are intending to make a disposal in the near future.
FURNISHED HOLIDAY LETTINGS (FHL)
This could be another case of wait and see.
Proposals by the last government to scrap the FHL reliefs in 2009/10 were never enacted. The new coalition government has now repealed the proposal to scrap these reliefs. Right?
Well, sort of. Certainly the position for 2010/11 is the same as it was for 2009/10. However, for the future, we are promised a consultation exercise. Whilst we may not see the repeal of the FHL reliefs we may see a tightening of the rules as to what qualifies as a furnished holiday let.
Corporation tax rates start to decrease from April 2011.
The quid pro quo is that allowances on capital expenditure will fall. The big drop is in the Annual Investment Allowance. Instead of the first £100,000 of expenditure being allowable in full, only £25,000 will be fully allowable in future.
The “future” does not begin until April 2012. So if your annual capital expenditure is typically between £25,000 and £100,000 call our tax partner, Simon Topperman, for more details.
INHERITANCE TAX (Ih.T)
Do you remember what we said in the last Square Circular? Wait until after the General Election and if nothing happens to alleviate your Ih.T position, get in touch with us with a view to doing some planning.
Nothing has happened. The time to think about Ih.T may well be now.
ON THE SUBJECT OF Ih.T
A typical businessman knows that he should keep a record of business transactions. Not everyone is sufficiently meticulous when it comes to personal transactions. Was that sum of money I gave to so and so a gift or a loan? If the latter, how much of it has been repaid?
Such questions can have an impact on your Ih.T position. We would just emphasise the importance of having proper documentation in place.
BE CAREFUL WHO YOU ASSOCIATE WITH
Suppose Mr Butcher controls a limited company, Butchers Ltd, which makes annual profits of £200,000. What rate of tax does it pay? It pays the 21% small companies rate of tax because its profits are less than £300,000, or so you might think.
Suppose his wife, Ms Baker (she’s kept her maiden name) has her own company, Bakers Ltd, which also makes £200,000 profit. 21% tax rate you might think. Well, for the time being, in both cases, think again.
Since they’re married, his control of Butchers Ltd is attributed to her and her control of Bakers Ltd is attributed to him. As a result the lower tax rate of 21% applies to just the first £150,000 of profit for both companies and thereafter they pay at an effective marginal rate of 29.75%. It matters not that Butchers deals in meat and Bakers in bread. There is absolutely no connection between the two companies. Mr and Mrs don’t even discuss business matters with one another. With 7 kids to look after, they don’t have time for that. The extra tax that the companies have to pay is just a cost of blissful matrimony.
Well, that’s probably going to change; the tax rules that is, not the blissful state of matrimony. A consultation document published in October 2009 proposes to only be tough where the companies are interdependent and fragments of a wider whole. So if the butchering and baking businesses were originally one and have since been split or if they trade from the same premises or trade with one another or are in some way commercially interdependent, there’s no change. But if the one has nothing to do with the other you won’t be penalised just because your spouse is as much of an entrepreneur as you are.
The change in the rules should happen from April 2011 by means of next year’s Finance Bill. If you’re in this position your company could pay less tax next year on the same level of profits quite apart from the proposed small reduction in corporation tax rates.
From time to time we’ve updated you on the world of tax avoidance. We’ve told you before about the introduction of the DOTAS regime a few years ago. DOTAS stands for Disclosure of Tax Avoidance Schemes. There is now talk that at some time in the not too distant future we’ll see the introduction of a General Anti Avoidance Rule. That’s what GAAR stands for, just in case you were wondering.
Whilst tax avoidance may be perfectly legal it is certainly discouraged, to put it mildly, by HMRC. Steer clear of anything which is artificial has to be the message. But that does not rule out tax planning, even at a sophisticated level, especially when the planning is devised and executed by leading tax barristers.
Strategies and solutions (they’re not schemes!) exist to extract profits and cash from companies and partnerships, reward key employees, mitigate corporate and personal capital gains, mitigate Ih.T and restructure pensions. Perfectly legitimate, non-discloseable, commercially based solutions exist, albeit that they may be rather sophisticated.
If you want to know whether this more sophisticated planning is suitable to your circumstances contact our tax partner, Simon Topperman, or your usual contact partner.
A quotation which was brought to our attention:
“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” (Cicero)
Some things don’t change much over 2,000 years.