“So when you hear this autumn song; remember the best times are yet to come.”
We’re not quite sure what the Manic Street Preachers were referring to when they said the best times are yet to come. Isn’t that what you say when you turn over the first page of a Square Circular (some would say the last page). This Issue contains troubling news about penalties and Time to Pay arrangements so perhaps you will be glad to get to the back page but do give some thought to the articles about Income Protection and looking after your investments.
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.
Let’s begin by welcoming two new graduate recruits to our Accounts and Audit Department, Heather Jones and Anna Moylan. We hope their stay with us will be enjoyable (yes, it’s work we’re talking about) and beneficial all round.
Next, a word about the Square Circular following the note about our plans in Issue 34 earlier this year. We are pleased to say that the Square Circular will continue in exactly the some form as hitherto. However, we will also be producing the Square Circular Extra which we hope to issue electronically once a month. Our current Square Circular format does not really allow much space to dwell for long on any particular subject. The monthly Extra will choose a topic on which we’ll particularly focus; hopefully it will be both interesting and informative.
HERE’S A BIT MORE NEWS
The Pre-Budget Report is scheduled for 29 November 2011 and on 6 December 2011 we can expect to see some draft clauses for legislation in the Finance Bill 2012. All part of the trend towards having a better idea of what’s coming in advance of its arrival.
No, we’re not talking about the football field although the subject may be just as foul as the fouls committed on the pitch. We’re not talking about shoot-outs either.
What we are talking about are the fines and impositions piled on lackadaisical citizens who can’t get their tax returns or accounts or VAT returns in quickly enough or who make errors in the process. With the filing date for personal tax returns submitted on paper being 31 October (now, where did I put my diary) and the date for online returns being just three months away we couldn’t have chosen a better time to raise the subject.
We’ve told you (in Issue 33) about the new penalties for late filing of personal tax returns. We’ve told you (in Issue 29) about the penalty and interest regime for PAYE. We’re sure we don’t also need to tell you that companies are penalised for the late submission of corporation tax returns. And it’s not only the taxman. Companies House will get you if you submit your accounts late.
The penalty strategy is smart in that it enables government to collect £millions without the embarrassment of increasing taxes. The point is: it’s so easily avoided just by filing the necessary paperwork on time. Let others, rather than you, be the ones to pay the penalty.
TIME TO PAY
In the past, we’ve also talked about Time to Pay (TTP) arrangements. That’s when you tell the taxman that you can’t afford to pay your tax and would he mind acting as your banker for a while. The golden rule has always been to approach him before the due date for payment. Then you may be in with a chance that he’ll accept your proposal, as long as it’s reasonable. After the due date, no chance.
It has been getting progressively harder to cut TTP deals. When TTP was first introduced as a recession easing measure a brief phone call did the trick. Subsequently HMRC have not been quite so willing to do deals. Maybe they think the recession is over. So what do you think about this little bit of, admittedly anecdotal, evidence?
We’ve heard that companies which have paid dividends are refused TTP arrangements as a matter of course on the basis that they’ve chosen to give spare cash to shareholders rather than paying their tax debts. Quite often in small companies where the directors and shareholders are the same people dividends are paid in preference to salaries as part of sensible remuneration planning rather than because there happens to be spare cash around. It seems that the TTP implications may be a new factor to consider in dividend/remuneration planning.
Which brings us to …
THERE ARE SO MANY THINGS TO THINK OF
From time to time we look at the dividend/salary conundrum for people who are both shareholders and directors of their company. Is it better to take your reward as a dividend or a salary?
The answer is usually the same. For most individuals and their companies, if you’re looking at nothing more than tax implications the dividend route is usually to be preferred. But, if there are a few directors/shareholders with different circumstances it can get more complicated. No substitute for doing the arithmetic is what we usually say. And then there are also the side effects of your choice; the unintended consequences, to borrow the title of John Ross’s novel.
One such side effect is Income Protection. An Income Protection policy pays an income to you if you’re off work as a result of sickness or disability. The maximum claim is linked to earned income and normally protects 50% of your earnings. It’s tax free and continues until you return to work. If you haven’t got such a policy, perhaps you should have. Like most insurances we hope never to have to implement the policy.
Now, what about this scenario? You take out £50k per annum salary and £50k dividends. You take out Income Protection on your £50k. Next year you change the balance to £5k salary and £95k dividends. Not only will any claim be limited to a paltry amount of £2,500 but you will have overpaid premiums as well. Oh dear, aren’t there just so many things to think of?
If you want to know more about Income Protection policies why not get in touch with your usual contact partner who can arrange a meeting for you with Paul Stones, our Pareto Alexander expert.
SAVE CGT THROUGH A PENSION CONTRIBUTION
We know that you can save income tax by making a pension contribution. But, CGT? What’s a pension contribution got to do with capital gains?
Well, suppose you have income of £40k and a capital gain of £30k. You’d pay CGT at 28% on most of the gain rather than 18%. Since you’re a higher rate taxpayer you pay the higher CGT rate. However, if you make a personal pension contribution not only do you get income tax relief on the pension contribution but you also pay a lower rate of CGT on part of the gain by virtue of the pension contribution reducing your taxable income.
Now, that’s a result.
ENTERPRISE INVESTMENT SCHEMES (EIS)
It seems ages since we mentioned EIS to you so here comes a brief and not too detailed refresher.
Tax reliefs are offered as incentives for investment in qualifying companies, typically small unquoted trading companies. These incentives include:
• income tax relief at (currently) 30% of your investment up to a maximum of £500,000;
• CGT deferral relief if a gain is invested into an EIS investment within three years of making the gain;
• potential CGT relief on disposal of the EIS investment;
• potential Inheritance Tax relief if the shares attract Business Property Relief.
As is often the case when government sponsored tax breaks are on offer there are conditions to be met. When qualifying individuals can get relief on qualifying shares in qualifying companies carrying on a qualifying trade, don’t you just know that’s an awful lot of qualifications you need.
Actually it’s not as bad as it sounds. If you just want to invest in an EIS portfolio or EIS fund, Pareto Alexander can advise you on that. Tax breaks are all very well and good but not if the investment is such a dud that you lose your money. And if you’re looking on a more personal level setting up your own company or investing in a company being set up by a family member, friend or acquaintance we can guide you as to what kind of shares you need to hold, how many shares you should hold and what trades the company can or can’t get involved in.
Don’t forget about what can be a useful government approved “tax reduction scheme”.
“Income tax returns: the most imaginative fiction written today”