A guide to the technical highlights of the UK Spring Budget 2009One of the unwritten rules by which the annual Budget game is played is that there is always an important announcement hidden away in a single paragraph of the Budget Report, which is not mentioned in the Budget Notes or Budget Day Press Releases. This year it was paragraph 5.116, which said that: â€˜Budget 2009 announces the repeal of the Furnished Holiday Lettings (FHL) rules from April 2010. Until the repeal takes effect, the FHL rules will be extended to those with qualifying furnished holiday lettings elsewhere in the European Economic Area.â€™
At present, qualifying furnished holiday lettings are treated as a trading activity, which means that profits are earnings for pension contribution purposes and losses are available for relief against general income; that the usual capital allowance bar on plant and machinery used in a dwelling does not apply; and that the 50:50 rule for assets jointly owned by spouses or civil partners is disapplied. For capital gains tax purposes, furnished holiday lettings qualify for roll-over relief on acquisition or disposal, for hold-over relief as gifts of business assets, and for entrepreneurâ€™s relief. Whether they qualify for IHT business property relief does not directly depend on their status for income tax purposes.
The FHL rules have been extended to EEA countries with retrospective effect. Detailed information about claims for 2008/09 and earlier years has been published in an HMRC Technical Note In particular, HMRC will accept late amendments to 2006/07 SATRs (and to Corporation Tax Returns for accounting periods ending on or after 31 December 2006) until 31 July 2009.
Extended carry-back relief for trading losses
In his Pre-Budget Statement last November, the Chancellor announced that carry-back relief for trading losses would be extended, to allow a loss made in 2008/09 to be carried back not only to 2007/08, but also to 2006/07 and 2005/06. At the time we said that, in the case of an unincorporated business, the relevant loss would be the loss for the accounting year ending in 2008/09, and that many businesses would have accounting years which ended before the recession began to bite. For companies, the extended carry-back was to have been allowed for losses suffered in accounting periods ending between 24 November 2008 and 23 November 2009, which would have favoured a business with (say) a 31 October accounting date over one with a 30 November year end.
However, in the Budget, the Chancellor announced an extension to his original proposal, so that losses made by unincorporated businesses in either 2008/09 or 2009/10, or by companies in accounting periods ending between 24 November 2008 and 23 November 2010 (both dates inclusive) will now qualify for the three-year carryback.
As before, relief will have to be taken against the most recent available profits. Under the general law, a loss of any amount may be carried back for one year, but the temporary relief limits the loss which may be carried back for two or three years to Â£50,000. However, under the Budget extension to the temporary relief, the Â£50,000 cap is applied separately to the loss of 2008/09 and to that of 2009/10. For companies, the cap will be applied separately to accounting periods ending in the year to 23 November 2009 and to those ending in the year to 23 November 2010.
In a related move, where a business expects to make a trading loss in the current tax year, HMRCâ€™s Business Payment Support Service will take the potential loss claim into account when deciding whether to agree a rescheduling of payments for past yearsâ€™ income or corporation tax liabilities. However, it will still be necessary for trader or company to show both that the business remains viable, and that it is â€˜genuinely unableâ€™ to pay the tax immediately, or to enter into a â€˜reasonable installment time to pay agreementâ€™. The Press Release also announces that businesses which have already entered into a rescheduling agreement, but have found that their situation has become worse, may now apply for a revised agreement.
Tax defaulters and a new disclosure facility
Traders who incur a penalty for deliberate evasion will, if the tax at stake was Â£5,000 or more, be required to submit to â€˜close monitoringâ€™ for the next five years. In particular, they will be required to submit more detailed business accounts information, including details of the nature and value of any balancing adjustments in the accounts. It is not clear whether legislation will be required to implement this proposal.
The Chancellor reconfirmed that there will be a â€˜New Disclosure Opportunityâ€™ (NDO) for holders of offshore accounts, which will run between Autumn 2009 and March 2010. The penalty to be charged has not yet been announced.
Naming and shaming
The Finance Bill 2009 will empower HMRC to publish the name and address of any individual or company on whom, or on which, a penalty for deliberately understating their tax liability, or for deliberately failing to notify their liability to tax, has been imposed. However, there will be no publication where:
- The tax at stake did not exceed Â£25,000; or
- The penalty is for failure to take reasonable care, rather than a deliberate default; or
- The individual or company made a full and unprompted disclosure of the default, or a prompted disclosure within a timescale specified by HMRC; or
- The relevant default was committed before the new legislation comes into force.
Details will be published quarterly on HMRCâ€™s website, and will include the trade or profession of the defaulter (or the trade sector of a company); the amount of tax, interest and penalties; and the period covered. Details will be removed from the website after 12 months.
Tax rates and personal allowances
The capital gains tax annual exemption for
2009/10 will be Â£10,100 (Â£5,050 for most trusts). Otherwise, income
tax, capital gains tax, corporation tax and inheritance tax rates,
allowances and exemptions for 2009/10 remain as announced at the time
of the November 2008 Pre-Budget Statement, as do 2009/10 National
Insurance contributions and the figures used for calculating Working
Tax Credit and Child Tax Credit.
One change will be made to the calculations for Pension Credit: from November 2009 the capital disregard will be increased from Â£6,000 to Â£10,000. This will also apply to pensioner claims to Housing Benefit and Council Tax Benefit. Pension Credit claimants are expected to benefit by an average of Â£4 a week.
Corporation tax The main rate of corporation tax is traditionally announced one year in advance and the Chancellor confirmed that it will remain 28% for the Financial Year 2010 (begins 1 April 2010).
Income tax In his November 2008 Pre-Budget Statement the Chancellor proposed that, for 2010/11 and future years, people with an income over Â£100,000 a year should be entitled to only half the usual personal allowance, and those with an income over Â£140,000 should not be entitled to a personal allowance at all. He also proposed that, for 2011/12 and future years, there should be a new 45% rate of tax on income over Â£150,000 a year.
By the time of the Budget, he had decided that harsher measures were required and so announced that:
Â· For 2010/11 and future years, the income tax personal allowance will be reduced by Â£1 for every Â£2 that an individualâ€™s income exceeds Â£100,000 (and so will be reduced to nil at an income of Â£112,950). This replaces the originally-proposed two-stage reduction.
The new top rate, charged on incomes over Â£150,000, will also be
introduced in 2010/11, and will be 50% instead of 45%. There will be a
corresponding 42.5% rate for dividend income.
Â· Also from 2010/11, the trust rate will be increased from 40% to 50% (and the dividend trust rate from 32.5% to 42.5%).
Pensions and pension contributions
The Chancellor announced that, from April 2011, the tax relief on pension contributions paid by those with incomes of more than Â£150,000 will be tapered down until, at an income of Â£180,000 or more, it is reduced to relief at the basic rate only. There will be a corresponding â€˜benefit-in-kindâ€™ charge on employer contributions to occupational pension schemes (including defined benefit schemes). There is to be consultation on how this charge will be calculated, which is the main reason the proposal will not be implemented until April 2011.
Meanwhile, however, there will be anti-forestalling measures to prevent individuals with incomes of Â£150,000 or more obtaining a tax advantage by paying exceptionally high pension contributions between 22 April 2009 and 5 April 2011.
The Finance Bill 2009 will include provisions ensuring that where a pension is paid with assistance from the Financial Assistance Service (FAS) or the Financial Services Compensation Scheme (FSCS), it will be taxed as if it had been paid by a registered pension scheme (so that, for example, a payment in respect of a retirement lump sum will remain tax free).
Savings and investments
From 6 October 2009 the ISA investment allowance for 2009/10 will be increased, for those aged 50 or more on the day that the investment is made, to Â£10,200 (of which up to Â£5,100 can be saved in a cash ISA). For 2010/11 the ISA investment limit will be Â£10,200 for everybody (of which up to Â£5,100 can be saved in a cash ISA).The Finance Bill 2009 will include legislation to ensure that, where a bank or other financial institution has defaulted, compensation paid by the Financial Services Compensation Scheme (FSCS) in respect of accrued interest will be taxed as if it was in fact interest. This will be backdated to cover payments made since 6 October 2008. Where the FSCS pays accrued interest as if it were subject to deduction of tax, the taxable income will be the gross amount, with the tax notionally deducted being treated as a payment on account of the depositorâ€™s personal liability. If the depositor is a non-taxpayer, he will be able to claim â€˜repaymentâ€™ of the tax notionally deducted from HMRC in the usual way. The FSCS will not be required to provide a statement of the gross and net amounts unless so required in writing by the depositor.
Expenditure on plant and machinery, incurred in the Expenditure on plant and machinery, incurred in the year beginning 6 April 2009 (1 April 2009 for companies) will qualify for a 40% first-year allowance if it would otherwise have qualified for a 20% writing-down allowance (subject to the usual exceptions, principally motor cars and assets for leasing). Note also that assets which qualify only for a 10% writing-down allowance (such as long-life assets and â€˜integral featuresâ€™) will not qualify for the first-year allowance. The new first-year allowance will not affect a traderâ€™s or a companyâ€™s ability to claim a 100% Annual Investment Allowance on the first Â£50,000 of his expenditure.
Later this year one new technology â€“ uninterruptible power supplies â€“ and two new sub-technologies â€“ air to water heat pumps and close control air conditioning systems â€“ will be added to the list of designated technologies qualifying for 100% Enhanced Capital Allowances (ECAs). Three existing sub-technologies will be removed (air source: single duct and packaged double duct heat pumps; ground source: brine to air heat pumps; and water source: packaged heat pumps).
The Chancellor announced that, with effect from 6 April 2010, non-resident individuals will no longer be entitled to personal allowances solely on the ground that they are Commonwealth citizens. However, individuals will still be able to claim personal allowances on any of the other statutory grounds (EEA national, Channel Island or Isle of Man resident, Crown employment, etc) or under a Double Taxation Agreement. Accordingly, HMRC say the change â€˜will mainly affect citizens of the following countries: Bahamas, Cameroon, Cook Islands, Dominica, Maldives, Mozambique, Nauru, Niue, St Lucia, St Vincent & the Grenadines, Samoa, Tanzania, Tonga, Vanuatuâ€™.
Value Added Tax
The VAT registration and deregistration thresholds will be uprated as follows:
From 1 May 2009 Previously
Registration threshold Â£68,000 Â£67,000
Deregistration threshold Â£66,000 Â£65,000
For acquisitions from other
EC Member States Â£68,000 Â£67,000
The Chancellor confirmed that the standard rate of VAT will revert to 17.5% on 1 January 2010. The Finance Bill 2009 will include anti-forestalling legislation â€“ in the absence of such legislation, an organisation which is not able to recover all its input tax could pay tax at the 15% rate by creating a tax point before the end of 2009 for goods which are not to be delivered, or services which are not to be performed, until 2010 or later. (A tax point could be created by making a payment to the supplier, or arranging for an invoice to be issued.) The anti-forestalling legislation will apply where the supplier and customer are connected parties, or the supplier funds the purchase of the goods or services, or a VAT invoice is issued by the supplier but payment is not due for six months or more, or the customer makes a prepayment of more than Â£100,000, unless this is in accordance with normal commercial practice.
New fuel scale charges for use for prescribed accounting periods beginning on or after 1 May 2009 have been published for in Budget Note BN69: VAT â€“ Change in Fuel Scale Charges.
The 5% reduced rate of VAT will, with effect from 1 July 2009, be extended from childrenâ€™s car seats to include bases for such seats. in Budget Note BN69: VAT â€“ Change in Fuel Scale Charges.
To comply with international law, the Finance Bill 2009 will extend Agricultural Property Relief and Woodlands Relief to land in the European Economic Area (EEA). Property qualifying for the extended IHT relief will also qualify for the CGT holdover relief for gifts. Relief may now be claimed for past years.
Compliance checks and HMRC powers
The Chancellor confirmed that the Finance Bill 2009 will include legislation requiring HMRC â€˜to prepare and maintain a Charter [which] will set out standards of behaviour and values to which HMRC will aspire in dealing with taxpayers and othersâ€™. The deadline for implementation will be 31 December 2009, but â€˜HMRC plans to launch the Charter by Autumn 2009â€™. The legislation will also require HMRC to report annually on â€˜how well [it] is doing in meeting the standards in the Charterâ€™.
The Chancellor also confirmed that the Government will go ahead with three proposals made in the Consultation Paper Payments, Repayments and Debt:
- From Royal Assent to the Finance Bill 2009, any business may be required to provide addresses, etc, for
people with whom HMRC has lost contact. For example, an accountant could be required to provide addresses for his clients or former clients.
- From April 2011, taxpayers will be able to enter into â€˜managed payment plansâ€™ â€“ paying their income tax or corporation tax liability by monthly instalments, partly before and partly after the usual due date.
- From April 2012, HMRC will be empowered to collect small debts through the PAYE system.
It was also confirmed that the new record-keeping requirements and information and inspection powers, introduced with effect from 1 April 2009 for income tax, capital gains tax, corporation tax and VAT, will be extended to the environmental taxes, insurance premium tax, SDLT, SDRT, inheritance tax and petroleum revenue tax with effect from 1 April 2010. Time limits for claims and assessments will be aligned, for these taxes, a year later (1 April 2011).
Finally, the Chancellor announced a reformed system of penalties for late filing of Returns and late payment of tax. This will remove the rule that the penalty for late filing a SATR is waived if all the tax has been paid by the due date and include surcharges for late paid in-year PAYE and CIS remittances.
Stamp Duty Land Tax
The temporary increase (to Â£175,000) in the threshold at which Stamp Duty Land Tax (SDLT) becomes payable on residential property, which was to have expired on 2 September 2009, has been extended to 31 December 2009. It will then revert to Â£125,000 (Â£150,000 in Disadvantaged Areas).
The end of paper VAT returns
HMRC plans to phase out paper VAT returns with effect from1 April 2010, when it is expected that all VAT registered businesses with an annual VAT exclusive turnover of Â£100,000 or more, and all newly VAT registered businesses (whatever their turnover), will be required to submit their VAT returns on line and make payments electronically. Paper returns will still be an option for the remaining VAT registered businesses, but this will be reviewed in the run up to 2012.
Payment of your VAT return by credit or debit card
You can now pay your VAT online by credit or debit card. Go to www.billpayment.co.uk/hmrc and select â€˜Pay nowâ€™. You will need your card details and your VAT return details. For the full details, including how to get an extra 7 days to pay, go to www.hmrc.gov.uk/vat/pay-deadlines.htm. Credit card payments attract a 1.25% transaction fee.
Do you charge a membership subscription?
If you are a non-profit making membership organisation and charge a membership subscription you may use Extra-Statutory Concession 3.35 to apportion between standard-rated, zero-rated and exempt VAT elements. However, the concession may not be used retrospectively where you have previously treated the subscription as a single supply.
For more information see Revenue & Customs Brief 06/09. Go to www.hmrc.gov.uk and under â€˜quick linksâ€™ select â€˜Libraryâ€™ and â€˜Publicationsâ€™.
New time limits for VAT assessments and claims
From 1 April 2010, the time limit for both assessments and claims will be increased from 3 years to 4 years.
There will be transitional arrangements from 1 April 2009 â€“ claims and assessments will generally be able to go back to prescribed accounting periods ending on or after 1 April 2006. This will remain the case until 1 April 2010, when the 4-year time limit will apply. This will allow the time limit to move gradually from 3 to 4 years.
Further details and examples will be published in a Revenue & Customs Brief. Go to www.hmrc.gov.uk and under â€˜quick linksâ€™ select â€˜Libraryâ€™ and â€˜Publicationsâ€™.
Option to tax land and property
The option to Tax National Unit has relocated to:
Option to Tax National Unit
HM Revenue & Customs
7 Cochrane Street
Phone: 0141 285 4174/4175
Fax: 0141 285 4423/4454
Do you make taxable supplies of services to European Community Customers?
There is a new requirement that you need to provide HMRC with EC Sales Lists for certain taxable supplies of services from 1 January 2010. This affects all UK business customers that make taxable supplies of services to business customers in other EU countries where the customer is required to account for VAT under the reverse charge procedure.
For more information see Revenue & Customs Brief 02/09. Go to www.hmrc.gov.uk and under â€˜quick linksâ€™ select â€˜Libraryâ€™ and â€˜Publicationsâ€™.
Are you responsible for bringing goods into the European Community?
Businesses responsible for bringing goods into the European Community, for example, carriers, will need to be aware of the Import Control System. The key feature of this system will be the ability to handle pre-arrival information in the form of electronic Entry Summary Declarations.
You can find further information on the international trade and import and export guidelines on the internet, go to www.businesslink.gov.uk and under â€˜international tradeâ€™ go to â€˜Practical importingâ€™ and select â€˜Import Control Systemâ€™.
Tax Investigations News
More Banks to offer up offshore account details to HMRC
Three Special Commissioner decisions were published recently relating to information notices served on unnamed financial institutions. The notices require details of all customers with offshore accounts connected to UK addresses within the last six years to be handed over to HMRC. HMRC remains in discussion with a further 500 financial institutions with offshore banking facilities about the provision of similar material.
The information which HMRC is determinedly gathering from banks, building societies and others, underpins itâ€™s attack on offshore tax evasion, and is running in parallel with initiatives such as the new disclosure opportunity in the second half of 2009 and its intention to name and shame tax evaders. The likelihood is that many more third-party notices on financial institutions will be successfully granted.
Any individuals with offshore bank accounts or indeed any other offshore assets which may be subject to a tax charge, should seek appropriate advice from qualified tax professionals. The opportunity to make a voluntary disclosure of any undeclared tax liabilities arising from the offshore area needs to be acted upon before HMRC begins its compliance strategy in the coming months. Only then can an individual minimize the penalty HMRC will charge and, as Mr Hartnett said in his interview, â€œbe able to walk away with more money than those who do not come forwardâ€.
Tax & Finance
The Flat Rate VAT Scheme is supposed to simplify VAT accounting for small businesses, but it brings problems and complexities of its own.
It seems to be an immutable law of the universe that any attempt to simplify the tax system succeeds only in further complicating it. The Flat Rate VAT scheme for small businesses is, unfortunately, an outstanding example of this principle. In theory, life is made simpler for the trader, because he or she no longer has to record input tax purchases, or differentiate between standard-rated, zero-rated, reduced rate and exempt sales. Howeverâ€¦
Convenience apart, will the flat rate save or cost money?
The flat rates for the different trade sectors are supposed to ensure that, on average, traders are neither better nor worse off. This means that some will save money by adopting flat rate accounting and others will lose, so it would be sensible to make at least a rough calculation before joining the scheme, to estimate the cost or saving for the individual trader.
Oen trap for (say) a shoe repair shop is to look up the flat rate for â€˜Repairing personal or household goodsâ€™, see that it is 7.5%, and assume that their quarterly VAT payment under flat rate accounting will be half their current output tax. However, the 7.5% is charged on the total amount received from customers, and so is equivalent to 8.1% on net sales. The 11.5% headline rate for â€™Accountancy or book-keepingâ€™ and â€˜Labour-only building or construction servicesâ€™ (strange bedfellows) is equivalent to 13% on net sales.
It is also commonly thought that the 1% reduction is available for the first year the trader uses the flat rate accounting. In fact, it applies only for the first year a trader is registered (or should have been registered) for VAT.
When is a public house not a public house?
Traders are expected to identify the trade sector to which their business belongs when they join the Flat Rate VAT Scheme, and to review it annually. If a business carries on more than one activity, it is to be allocated to the sector which accounts for the greater part of its VAT-inclusive turnover.
One point which has been taken by visiting VAT inspectors is that many businesses, which the man on the street would unhesitatingly say were public houses, and in fact restaurants, because more than half their turnover comes from food sales. This is a growing problem, because the smoking ban and other factors have led to many public houses seeing their traditional trade falling away, so that they have to reinvent themselves as places to eat. Given that the flat rate percentage for public houses is 5.5% and for restaurants 10.5%, it will not take long for a substantial underpayment to build up.
One solution may be to split the business, typically with the husband running the bar and his wife the food sales. At first sight, this could cause a further problem, where two businesses are â€˜associatedâ€™. However where husband and wife are each separately VAT-registered in different types of businesses, they will not be treated as â€˜associatedâ€™, even if they share premises, provided this is charged at market rate.
Purchasing equipment for the business
Purchases of capital goods with VAT-inclusive value of more than Â£2,000 are dealt with outside the Flat Rate Scheme: that is to say, the trader can reclaim the VAT paid on those goods as input tax. The guidance confirms that this does not mean that each item must individually cost more than Â£2,000 â€“ input tax is reclaimable if the trader, in a single transaction, buys two or more pieces of equipment for his business, which together cost Â£2,000 or more (including VAT).
The wide, wide scope of flat rate turnover
Unfortunately, the wider than expected definition of relevant turnover for the Flat Rate Scheme is a major trap for the unwary. The regulation says that:
â€˜Your flat rate turnover is all the supplies your business makes, including VAT. The value of exempt supplies, such as rent or lottery commissionâ€¦â€™ whilst it confirms that: â€˜You exclude from your flat rate turnover private income, for example income from shares.â€™
However, the fact that a receipt will not be taken into account in calculating the profit for income tax purposes does not mean that it is not part of a traderâ€™s flat rate turnover for VAT purposes. For example, the guidance states that â€˜bank interest received on a business bank accountâ€™ should be included. In the context of the sole trader, it may not always be clear whether a bank account is â€˜businessâ€™ or â€˜privateâ€™, though at current interest rates, the point may not be very material anyay.
An example of income a business might receive, â€˜rent from a flat above the shopâ€™. More surprisingly, HMRC are of the view that all rents received by a VAT-registered trader count as part of his or her turnover for the purposes of the flat rate scheme, even if the rents come from a â€˜buy-to-letâ€™ or similar property unconnected with the VAT-registered business. Suppose therefore that an accountant, who uses the flat rate scheme for her own practice, also owns a â€˜buy-to-letâ€™ property. The rent from the â€˜buy-to-letâ€™ would count as part of her turnover on which her 11.5% flat rate charge is calculated. This rule would apply equally if the let house had been inherited rather than bought, or even if it had originally been the accountants own home, and had been let out because it was difficult to sell.
An EC Council Directive provides that:
â€˜The exploitation of tangible and intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.â€™
â€˜Economic activityâ€™ is Eurospeak for â€˜businessâ€™ so this broadly translates as: â€˜Renting out a property is a business for VAT purposes.â€™
Once the accountant is aware of the problem, she can perhaps avoid it, by arranging for the â€˜buy-to-letâ€™ to be owned by one legal entity and her practice by another. However as mentioned above, there is a rule that if two or more businesses are â€˜associatedâ€™, neither may adopt a flat rate accounting, and it is hard to see how two businesses run by the same individual can be other than â€˜associatedâ€™, even if one (presumably the accountancy practice) is incorporated. Accordingly, her real choice may be between accepting that rents, which would otherwise be exempt supplies, will be subject to the flat rate charge, and not using the flat rate scheme at all.
Of course, in
some circumstances, it could be helpful to include rents in the flat
rate computation â€“ for example, where a food retailer (paying 2% flat
rate VAT) lets out holiday accommodation that would otherwise be
If the buy-to-let house is a business asset, it follows that, if it is sold, the proceeds will count towards the traderâ€™s flat rate turnover. It is understood that even HMRC concedes that would be unfair, and so will allow the trader to withdraw from the flat rate scheme with retrospective effect. However, to the best of our knowledge, this concession has never been publicly confirmed.
Again, forewarned is forearmed, as the solution is simply to withdraw from the Flat Rate Scheme before selling the house (a trader can leave the scheme at any time, not necessarily at the end of the VAT Accounting Period). The only sanction is that he or she cannot then rejoin the Scheme for 12 months.
Driving into trouble
Most traders own a car which is used at least partly for business motoring. When they sell it, the VAT treatment of the sale proceeds depends on whether the car was originally purchased new or second-hand.
If the car was originally purchased new, the input tax would have been blocked. Where input tax has been blocked, any subsequent sale is an exempt supply. However, the consideration for an exempt supply is still part of the traderâ€™s turnover on which flat rate VAT is chargeable.
If the car was originally purchased second-hand, the onward sale is standard- rated. Outside the Flat Rate Scheme, a margin scheme applies, so that VAT is only payable in the unusual event that the car is sold at a profit. However, margin schemes cannot be used in conjunction with flat rate accounting, so again the whole sale proceeds will count as part of the traderâ€™s â€˜relevant turnoverâ€™ on which flat rate VAT is chargeable.
HMRC considers that this is fair because it is, apparently, taken into account in setting the flat rate percentages. However, for a professional man or woman, driving and regularly trading in an expensive car, the VAT cost could be significant. The solution, as for the buy-to-let discussed above, is simply to leave the Flat Rate Scheme before selling the car.
The good news for flat rate motorists confirms that Flat Rate Scheme users â€˜do not have to pay any road fuel scale charges since you are not reclaiming any input tax on the road fuel your business usesâ€™.
The HMRC guidance notes say that one of the advantages of flat rate accounting is â€˜Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.â€™ But itâ€™s the unknown unknowns that will get you in the end!
TWO WARNINGS ABOUT PENALTIES
Anyone running a company needs to be aware that the penalties for not filing the Statutory Accounts at Companies House on time have increased significantly. Private company and LLP accounts filed up to a month late will now attract a penalty of Â£150; this rises to Â£375 for accounts filed up to three months late; to Â£750 for accounts filed up to six months late; and to an enormous Â£1,500 for accounts filed more than six months late. Please forgive us when we chase you about your accounts, but the fines are now so big it really is important to keep up-to-date!
Secondly, all employers should note that penalties will now be charged wherever an inspector discovers that employees have been paid less than the minimum wage (hitherto, penalties have only been charged when an employer failed to comply with an enforcement notice, issued after an underpayment was discovered). The penalty is calculated as half the underpayment identified, subject to a minimum penalty of Â£100 and a maximum of Â£5,000. There is a 50% reduction if both the arrears of wages and the penalty are paid within 14 days. The penalty will not be a deductible expense for tax purposes. Also, arrears of wages are to be calculated at current NMW rates, not (as hitherto) at the rates in force when the work was done.
EMPLOYING FAMILY MEMBERS
There is a band of earnings which are subject to â€˜nil rate National Insurance contributionsâ€™ â€“ this apparent contradiction in terms means that no contributions are payable, by employee or employer, but the employeeâ€™s contribution record is still franked for pension and benefit purposes. For 2009/10, the â€˜nil rate bandâ€™ runs from the â€˜Lower Earnings Limitâ€™ of Â£95 a week (Â£412 a month) to the â€˜Earnings Thresholdâ€™ of Â£110 a week (Â£476 a month).
Where family members work part-time in a family business, it is important to remember that worthwhile pension rights can be accrued, at no cost, by paying them a salary just over, rather than just under, the Lower Earnings Limit. If you are already doing this, watch that the Lower Earnings Limit rises slightly each April â€“ this year from Â£90 to Â£95 a week â€“ so you must remember to increase wages accordingly.
So many changes have been made to the law governing pensions recently that it is hard to keep abreast of what is happening. As they will affect everybody, and as some people will have the opportunity of significantly improving their National Insurance Retirement Pension for relatively little outlay, we thought it was worth outlining the position for clients in this newsletter.
National Insurance pension deferred
Between April 2010 and April 2020, State Pension age for women (the age at which a woman can begin to draw her National Insurance Retirement Pension) will rise gradually until it equals that for men. Roughly speaking, for women born on or after 6 April 1950, State Pension age will be deferred by one month for every two months their 60th birthday falls after 5 April 2010 (for anyone wishing to know the exact date, there is a State Pension Age Calculator at www.thepensionservice.gov.uk â€“ type in your date of birth and the Calculator will tell you the date you become entitled to a pension). At the end of the phasing-in period, a woman born on 6 April 1955 will attain State Pension age on 6 April 2020 â€“ her 65th birthday.
Unfortunately, that will not be the end of the story, as between 2024 and 2046, State Pension age will increase from 65 to 68, for both men and women. This will affect people born on or after 6 April 1959.
Reduced contribution requirement for a full pension
Hitherto, it has been necessary for a man to pay (or to be credited with) National Insurance contributions for 44 tax years in order to qualify for a full National Insurance Retirement Pension (Â£95.25 a week for 2009/10) and for a woman to have paid or been credited with contributions for 39 years. However, for all those attaining State Pension age on or after 6 April 2010 (that is, men born on or after 6 April 1945 and women born on or after 6 April 1950), the contribution requirement was recently reduced to 30 years.
Anyone who has not yet paid sufficient contributions to gain entitlement to a full Retirement Pension, and who is unlikely to do so over the remainder of their working life, should consider the possibility of paying voluntary contributions to buy â€˜added yearsâ€™. The purchase of â€˜added yearsâ€™ in the National Insurance scheme has always offered good value for money, and even more so now, when the returns earned on other investments are likely to be very low. Also, of course, the National Insurance scheme is guaranteed by the Government.
The rules governing entitlement to pay voluntary contributions are complex in the extreme â€“ in some cases, for example, it is possible for further contributions to be paid by people who have already retired and begun to draw their pensions. Accordingly, it is impossible to provide a simple guide and so we would invite clients to contact us for individual advice.
New rules for the State Second Pension
Since 1961, there have been schemes to provide employees with an earnings-related â€˜top-upâ€™ to their National Insurance Retirement Pension. First there were Graduated Contributions, which from 1978 were replaced by the State Earnings-Related Pension Scheme (SERPS). Then from April 2002, SERPS was in turn replaced by the State Second Pension, also referred to as â€˜S2Pâ€™ or the â€˜Additional State Pensionâ€™ â€“ the terms are interchangeable.
At present, an individualâ€™s eventual S2P entitlement is built up from contributions based on his earnings. Until 5 April 2009, the definition of â€˜earningsâ€™ for this purpose was capped at the Upper Earnings Limit (UEL) for employeesâ€™ National Insurance contributions purposes, but from 6 April 2009 it will be capped at a new â€˜Upper Accrual Pointâ€™ (UAP). For 2009/10, the UAP is Â£770 a week and the UEL Â£844, so that on the band of earnings between the two, the employee will be paying additional contributions which buy no additional benefit. The UAP will remain Â£770 in future years, so that (with inflation) the ceiling on earnings taken into account for S2P purposes is expected to fall, over time, in real terms.
On 6 April 2012 (the date has not yet been finally confirmed), another change to the rules will take effect. Further accrual to S2P will no longer be entirely income-related: a â€˜floorâ€™ will be set so that those on lower earnings will build up an additional pension of at least Â£1.60 a week for every year (from 2012/13) they are in employment, or entitled to National Insurance credits as a carer, or are seriously ill or disabled. The other side of the coin is that from April 2010 the rate at which earnings-related contributions earn additional pension above the â€˜floorâ€™ will be reduced in stages. The overall effect of this, taken with the â€˜freezingâ€™ of the Upper Accrual Point already mentioned, is that from around 2030 the additional pension will accrue at a flat rate each year, irrespective of the individualâ€™s earnings.
Accordingly, the simple effect of a highly complicated series of changes is that, over a very long period, the earnings-related pension is to be abolished altogether, though the basic pension will be increased. But by 2030 the rules will no doubt have been changed all over again . . .
Pension plans for all employees
Since October 2001, employers have been obliged to offer their employees the opportunity to join a â€˜workplace personal pension schemeâ€™, unless the employer has less than five employees or offers an alternative company pension scheme. However, less than 40% of eligible employees have chosen to avail themselves of this opportunity and many small employers have found that no-one wanted to join the pension schemes they had been obliged to set up.
The Government is keen to encourage employees to join private pension schemes (because the alternative is that they will be claiming Social Security benefits when they retire) and so, from 2012, will require employers to enrol all employees (between age 22 and State Pension age) in a pension scheme, to which the employee will contribute at least 4% of his earnings between Â£5,035 and Â£33,540 a year (to be uprated annually) and the employer a sum equal to at least 3% of those earnings. For both employers and employees, minimum contributions will be phased in over three years.
These contributions will be payable on the employeeâ€™s full earnings (including overtime, commission payments, etc â€“ and even Statutory Maternity Pay) not, as is usually the case with pension contributions, only on his or her basic pay. The Government will â€˜contributeâ€™ 1% (in the form of the usual tax relief on the employeeâ€™s contribution) and the pitch will be that the employee â€˜gets Â£8 for Â£4â€™.
There will be no minimum length of service to qualify for membership of the pension scheme, and part-time and temporary employees will be entitled to join on the same basis as permanent staff. However, employees will be entitled to opt out if they wish. They would not then pay contributions themselves, but would lose the benefit of contributions paid by their employer.
Even employers with existing pension schemes may have to reconsider their arrangements before 2012, as membership may have to be opened to individuals currently excluded, and the definition of earnings for contributions purposes may have to be extended.
BETTER SAFE THAN SORRY
Because of the recession, it is quite likely that some people will find that their income falls sharply during the 2009/10 tax year. Also, some self-employed people may find that their taxable income is lower because of the availability of 100% first-year allowances for purchases of vans and equipment for their businesses. In some cases, they will find that they are, for the first time, entitled to claim Tax Credits.
There is a potential trap here, because of the interaction of two Tax Credit rules. The first is that income, for Tax Credit purposes, is averaged over the tax year (or, for self-employed people, is taken as being the income of the accounts year ending in the tax year). The second is that claims can only be backdated for a maximum of three months.
For example, suppose that an individual, who has not previously claimed Tax Credits, realises on 1 December that his income for 2009/10 is likely to be much lower than for 2008/09. If he submits a claim immediately, he will be entitled to Tax Credits for September onwards, but will lose the Credits he could have claimed for April to August.
If the same individual had submitted a protective claim, estimating a higher income, by 5 July 2009 (three months into the new tax year), he would in the first instance have been sent a â€˜nil awardâ€™ notice. However, if his income falls, that award can be adjusted retrospectively, and he will be paid Tax Credits backdated to 6 April 2009.
We would therefore strongly advise any clients not already claiming Tax Credits carefully to consider whether they should make a protective claim. Further information on how to do this is posted on HM Revenue & Customsâ€™ website at www.hmrc.gov.uk/taxcredits/claiming-early.htm.
Another point to watch is that if an individual claims Child Tax Credit, his claim to both Child and Working Tax Credit will be backdated automatically. However if he claims only Working Tax Credit, his claim will not be backdated unless he specifically requests this. Backdating can be requested by telephoning the Tax Credit Helpline.
This newsletter deals with a number of topics which, it is hoped, will be of general interest to clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases, so please contact us for personal advice on your own affairs.
Contact us via our contact form or call 01582 761121.