Finance and Business Blog

We all know that in the current economical conditions that in addition to reducing spending, taxes will have to increase.

Richard Mannion, national tax director at Smith & Williamson, had this to say:

“The reality is that the Government - whoever wins the election - will need to fill its fiscal bucket.

“A VAT rise must be top of the agenda, but perhaps not introduced until later in the year. Every one per cent increase in VAT brings in just under £5billion pa, making this a tempting option. The downside is that it has the immediate effect of adding to inflation.”

“Capital gains tax is almost inevitably set to rise - possibly from as early as April 6 - since the current rate of 18 per cent is much less than the higher rates of income tax, which encourages people to seek ways of converting income into capital.”

“The big earners for the government are income tax, national insurance and VAT. Together, these taxes typically represent around 75 per cent of the government’s annual revenue. So unless there are tax rises in one or more of these areas in the not too distant future, the government will have very little chance of balancing the books.”

“For example, the current 40 per cent higher rate of income tax could rise to, say, 43 or 45 per cent - although I would not expect to see this in the March 2010 Budget.”

Tax Avoidance

On the subject of tax avoidance, he had this to say:

“We can be certain of an increasingly hard-line approach from the authorities to complicated tax planning and a renewed emphasis on rooting out tax avoidance.”

“I anticipate the Chancellor will make few - if any - unappealing announcements in the Budget. The majority of tax increases, however, will emerge later this year or next year once the election has come and gone.”

“While the Chancellor needs to be realistic, it is important that we don’t stamp out nascent green shoots. Fiscal-raisers are necessary, but businesses and individuals need the Government to take a measured approach.”

Smith & Williamson’s round-up of possible changes to be included in the Budget are:

CGT - up, perhaps from April 6, 2010
It is only right that gains on long-term capital investments are taxed at a lower rate than income. However the decision to move to a flat-rate of CGT at 18 per cent in 2008 now looks at odds with a top rate of income tax of 50 per cent. This differential is encouraging taxpayers to seek out ways of re-designating income as capital.

Consequently the CGT rate on short-term gains could be increased from its current flat rate of 18% to make it less attractive to reclassify income.

There have been rumours that the generous treatment of second homes could be restricted following the unfortunate attention regarding MP’s arrangements, but a recent debate in the House of Commons indicates that no action is planned at this stage.

VAT - up, later this year
Although the standard VAT rate returned to 17.5% on 1 January 2010, there are likely to be further increases in the pipeline. As the average rate of VAT in the EU is almost 20%, and each 1% increase brings in just under £5billion, the Chancellor must be sorely tempted. However, any VAT rise will have an immediate impact on inflation.

Income tax - increases to 40 per cent rate, but not yet
We already know that a new 50% top rate of income tax will apply from April 6 2010 on taxable income over £150,000. The 40 per cent rate, which currently applies on earnings over £43,875 could be increased to 42% or even 45% but it would hit the mass affluent so would be unattractive politically just before an election.

Tax on transactions - possible introduction
Recent EU discussions have considered a levy on financial transactions or ‘tobin tax’. This could be a significant money-raiser for the government but success would require agreement across different jurisdictions to make sure that all countries apply the tax equally. Without a multi-lateral approach, markets could be severely distorted causing a loss of business to those financial centres that do apply the tax. Given that London accounts for around a third of all foreign exchange trading in the world, the UK economy could be suffer significantly.

Tax anti-avoidance, stricter application of existing rules
A harsher approach from HMRC is already evident, with rules and penalties strictly applied. Moreover, HMRC has improved powers of inspection and more information at its disposal, giving greater scope to pinpoint tax evasion.

We do not anticipate major rule changes in terms of tax avoidance, rather implementation of existing legislation. However, the Human Rights Act means that any penalties must be proportionate putting HMRC under pressure with regard to some of the current penalties which are charged irrespective of the gravity of the offence.

HM Revenue & Customs (HMRC) is phasing out paper VAT Returns. From 1 April 2010 you may have to submit your VAT Returns online and pay any VAT due electronically (for example, by Direct Debit, internet or phone banking etc). If you are affected by this, there are things you need to do now.

Who has to switch to online VAT Returns?

From 1 April 2010 you will have to submit your VAT Returns online and pay any VAT due electronically if either of the following applies:

• you have an annual turnover of £100,000 or more (exclusive of VAT)
• you register or should have registered for VAT on or after 1 April 2010 (regardless of your turnover)

If you fall into either of the groups mentioned above, you will have to file all your VAT Returns online (including nil and repayment returns) even if your turnover drops below £100,000 in the future.

Does this affect you?

If your annual turnover was £100,000 or more on 31 December 2009, HMRC should have sent you a letter in February 2010. This letter explains that you have to submit your VAT Returns online and pay your VAT electronically for all returns starting on or after 1 April 2010.

If your turnover is less than £100,000

You currently don’t have to submit your VAT Return online and pay VAT electronically if you registered for VAT before 1 April 2010 and your VAT-exclusive turnover stays below £100,000.

However, you should note that it’s likely that all VAT-registered businesses will have to file their returns online and pay electronically by 2012, at the latest. So, you might want to switch to using the online service sooner - it will save you time and, in most cases, will give you extra days to submit your return and pay the VAT due.

Submitting your VAT Return online

The online VAT Return is very similar to the paper version and there has been no change to the rules on how you complete your return or how you calculate VAT.

Also, you won’t have to change your existing record keeping system - you can still keep your records on paper if you prefer.

Getting ready for the changes

If you think you will have to submit your VAT Return online from 1 April 2010, you should take the following action now:

• Register and enrol for the VAT online service. (You will need to do this to submit your VAT Return online, whether you choose to use commercial software or HMRC’s free online service.)
• Talk to your accountant if they will be submitting your VAT Return online on your behalf and discuss what you both need to do, to ensure you meet the deadline for your first online return.
• Consider whether you need to change any of your business processes for checking and signing off your VAT Return.
• Identify your preferred form of electronic payment (eg Direct Debit, internet banking, etc) and set up the necessary arrangements. There are lots of electronic payment methods to choose from.
• If your business has to pay your VAT by cheque, make sure you order from HMRC the necessary Bank Giro paying-in slips (preprinted with your and HMRC details), which you will use when paying in your cheque at a participating bank or building society. For more information on how to order the paying-in slips see the link below ‘Read more about ordering Bank Giro paying-in slips’.

You might also want to set up the email reminder service (this is a free service which reminds you when your next online VAT Return is due). You set this up by filling in your email address on the ‘At a glance’ screen, once you have registered and enrolled for the VAT online service.

You can find more information at: http://www.hmrc.gov.uk/vat/vat-online/index.htm

The Federation of Small Businesses (FSB) is concerned that the amount of VAT paid by some sectors under the VAT Flat Rate Scheme has increased since the standard rate of VAT returned to 17.5% in January 2010, compared with how much was paid before the rate dropped to 15% in December 2008.

The aim of the VAT Flat Rate Scheme is to reduce the amount of red tape involved when accounting for VAT, whereby a fixed percentage of a company’s VAT inclusive turnover is paid to HM Revenue & Customs (HMRC). For IT Professionals, the rate is 13%, which is unchanged from before the decrease in the standard rate of VAT at the end of 2008. But for some businesses, for example, the agricultural services sector, the rate has not stayed the same. In fact, the agricultural services sector has seems its rate increase by 2.5%.

There are some winners though: estate agency and property management services will see their rate decrease by 0.5 per cent and computer repair services by 1.5 per cent.
 
In its Budget submission, sent to the Treasury this week, the FSB has called for the VAT flat rate scheme to be immediately reviewed.

John Wright, National Chairman of the FSB, had this to say:

“When VAT was lowered in December 2008 many rates stayed the same and some were reduced by up to 2.5 per cent. What has become apparent is that after VAT was put back to 17.5 per cent in January this year, nearly half of the flat rate schemes have seen the VAT level rise above the pre-decrease level.”

“While a few sectors have seen a decrease, the majority of businesses will see their rates rise, which is unacceptable at a time when cash-flow is limited. The FSB believes that this is a stealth tax, which will affect a firms overall profitability, deliberately directed at small businesses during the recession. The FSB believes there needs to be more openness in how these rates are calculated and when they rise.”

“The Budget is the Governments chance to put flat rates back to 2008-levels and remove the additional tax burden imposed on small businesses.”

Input Tax 

Input tax applies when a company buys goods or services from another supplier.  VAT is added to the purchase price - this is called input tax.

Output Tax

Output tax applies when a company sells its own goods or services. The VAT that is added to the price is called output tax.

The difference between output tax and input tax is payable to HM Customs and Excise. If input tax is greater than output tax, a refund can be claimed from HM Customs and Excise.

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A year ago the Business Secretary, Lord Mandelson, made a pledge that small businesses would be paid within 10 days of an invoice being submitted. It seems, however, that only 2% of invoices are in fact paid within this period, with 30% being paid more than one month after an invoice is submitted.

Martin Williams, MD of Graydon said: “Was this government pledge another example of government rhetoric aimed at calming the nerves of the business nation in the midst of a severe recession, without any real hope of proving deliverable?”

“Some would argue that this policy follows in the footsteps of the Top up Credit Insurance scheme and the Enterprise Finance guarantee Scheme- other “Made in Recessionary UK” products that really failed to deliver what they were meant to, to help the country through the downturn.”

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Conservative leader David Cameron has announced three new policies to encourage enterprise and those aspiring to start businesses:

• Ending restrictions on people starting a business in social housing.
• Increasing the statutory threshold over which the Government can petition to make a business insolvent.
• Reducing the number of forms needed to register a new business.

Mr Cameron had this to say:

“We are going to get out of this recession by trading our way out, by businesses deciding to create wealth and to go after new markets, to export. It takes 13 to 14 days to start a new business in this country, in America it’s half as long, we have the ambition of making us one of the fastest countries in the world to start up a new business.”

“The insolvency threshold is currently £750 we would lift that to £2,000 because when you look at the figures more small businesses have gone bankrupt in this recession than in previous recessions and a number have been pushed there by the Government itself. It may sound like a small thing but I think it’s significant, a huge number of small business are started in people’s homes but you know what, many social landlords forbid you to run a business from your home, we’re going to change that as well in discussion with social landlords.”

“So, these are three big changes to help small businesses. That’s where the wealth, that’s where the jobs, that’s where the enterprise has got to come from and to help with that we have to get rid of this anti aspiration, anti achievement culture.”

“The message that seems to be coming out of Labour at the moment is don’t start a business, don’t buy your home, don’t try and leave money to your children, don’t try and get on. They’ve made it so difficult to employ people, so difficult to start a business. All of that is going to change.”

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The PCG is encouraging government departments to reserve 10% of their budgets for freelance workers and the self-employed, which would demonstrate that ministers are committed, beyond just words, to ‘thinking small first.’

PCG’s managing director, John Brazier, had this to say:

“Flexibility in the labour market is the key to ensuring Britain’s future economic
success.”

“The next government should encourage freelancing as a flexible, innovative and entrepreneurial way of working that enables business to perform more cost-effectively, especially when recovering from recession.”

“There needs to be a clear recognition of freelancing as a valid way of working,” Mr Brazier added. “We want to see a pro-business climate fostered in the UK, a real commitment from policy framers to think small first, not just say it.”

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Theo Paphitis, the well known panellist from the popular Dragons’ Den TV show, has advised entrepreneurs to wait until after the General Election before starting up a new business venture.

Speaking on BBC2’s Working Lunch programme he said:

“We are in January 2010, there will be an election by May 2010. We are in no-man’s land, no one can make a decision because our polticians whether Labour or Tory won’t tell us what they are going to do about the economy.”

“If you have to invest, you don’t know whether VAT might go up to 20 per cent or what tax effects might be, if interest rates are going up - all this might have an effect on the bottom line or total survivial.”

“This is just temproary. Entrpreneurs spend their lives taking risks but they are calculated risks. When you can’t put the ‘calculated’ in to a risk, that’s a gamble - and you don’t want to be there just yet. Take your time.”

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The Professional Contractors Group (PCG) is calling on Government and policy framers to take a fresh approach to freelancing. 

John Brazier managing director of PCG said:

“All too often Government and policy framers have failed to pay adequate attention to the needs of the UK’s 1.4 million freelancers. Freelance businesses are part of the bedrock of the private sector, bringing a degree of flexibility and a skill set to the economy which is a real asset for UK plc. There needs to be a clear recognition of freelancing as a valid way of working; fairer taxation, better regulation, easier access to the market for the smallest businesses and a proper appreciation of the changing work patterns for millions of people.”

“We want to see a pro-business climate fostered in the UK, a real commitment from policy framers to think small first, not just say it. Fair regulation means regulation that is clear, accessible and not unduly burdensome. Fairness means allowing freelancers easier access to the market for their services. The Government needs to ensure regulatory barriers, burdens and costs to tendering are reduced, so freelancers can truly compete with larger businesses. Heavy handed and senseless laws weigh business down like a ball and chain. This is even more so with nano-businesses. Every hour spent complying with red tape is an hour not spent productively. We need to free up Britain’s talents to create wealth, not stifle them with top down bureaucracy.”

“It is PCG’s fundamental belief that flexibility in the labour market is the key to ensuring Britain’s future economic success. The next Government should encourage freelancing as a flexible, innovative and entrepreneurial way of working that enables business to perform more cost-effectively, especially when recovering from recession. The start of a new decade provides an opportunity for fresh, innovative thinking. We will be continuing to push this message up to the election and beyond.”

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As we all probably know by now, the VAT rate is returning to 17.5% on the 1st January 2010.

Consequently VAT Flat Rate Scheme percentages are also changing. It looks to me as though all the percentages are returning to the same levels as they were when VAT was last at 17.5%.

Here is a link on the HMRC web site, listing all the percentages:

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5a