Finance and Business Blog

June 2010 saw the release of Earnings Tracker 7.

In version 7, updates have been made to the reporting sections, default data settings, and a “Log Out” menu option is now included.

It is now possible to generate a list of invoices for a particular client, generate a list of pension contributions, and generate a list of office/desk rental payments.

Monthly pension contributions are now included as “default” data, so they are automatically inserted when a month is added to the spreadsheet.
    
Finally, a “Log Out” menu option has been added. Previously, it was assumed that people would log out by closing the application. This still works, but for completeness, users can now log out properly.

To find out more about Earnings Tracker go to http://www.dixondevelopment.co.uk/earningstracker.htm

Now that the new Conservative-Liberal Democrat coalition government contains some of the high profile signatories of the Early Day Motion EDM 1124, namely Vince Cable (Business Secretary), David Laws (Chief Secretary to the Treasury) and Chris Huhne (Energy and Climate Change Secretary), perhaps IR35 will finally be reviewed and, hopefully, consigned to the rubbish bin !

For the past 10 years, contractors in the UK have been looking forward to the day when the Labour Government is toppled by the Conservatives. In the early days of IR35, the Tory line was that IR35 would be scrapped as soon as they returned to power. Gradually though, over the years, their attitude towards IR35 has softened, to the extent that they now state that a review of IR35 will form part of a bigger review of taxation for small businesses - this is a long way from stating that IR35 will be abolished.

The Tories seem to accept that IR35 does not in itself work, but it is now such a major part of the current tax regime for small businesses that simply dropping it would cause even more confusion in the tax system. Going back to the pre-IR35 days no longer seems like the most sensible solution for them.

In fact, out of the three main parties, only the Liberal Democrats are now committed to dropping IR35, and they even raised an Early Day Motion (EDM) a couple of years ago to get it scrapped. The EDM was signed by quite a few MPs, but most of them were Liberal Democrats.

If we end up with a hung parliament though, which seems quite likely, we may well be in an interesting situation with regard to IR35. I think the Labour party will win the election, but without an overall majority. This, I think, will cause them to form an alliance with the Liberal Democrats and I believe Vince Cable will be the next Chancellor. Dr Cable is one of the Liberal Democrats who signed the EDM, so we’ll get to see whether he puts his money where his mouth is, and scraps IR35 !

The era of the Additional Rate Tax has begun. Partners and the self employed, in fact all non-PAYE earners, who clock up income over £150,000 during the 2010/11 fiscal year will be hoping that the new 50% rate will go away, but it won’t and it is no use burying our heads in the sand. The countdown to the payment of this extra tax on 31st January 2012 has well and truly begun.

Just so we all understand the impact, for a partner earning £250,000 in both the 2009/10 and the 2010/11 tax years, the tax impact of the withdrawal of personal allowances together with the additional rate of Income Tax will be to create an additional liability of a staggering £12,590. This is the extra Income Tax that an individual will have to pay on the same level of income.

To add to the financial burden there will also be an increased payment on account to be made in respect of the 2011/12 tax year, so the additional tax payment due at the end of January 2012 will be £18,885 from the same level of income as the year before. That would total almost £100,000 for a small 5 partner GP practice or firm of lawyers.

Some may argue that the tax only affects the wealthiest in our society. The Office for National Statistics places earners over £150,000 at 0.6% of the population however their Annual Survey of Hours and Earnings excludes any analysis of the self-employed, the very group that will have to find this extra cash on 31st January 2012.

So if we assume it will affect a modest 1% of the population, at which level the tax changes will be effecting around 600,000 people and frankly this is a sufficient number to justify an examination of possible solutions to minimize the impact for so many of those hard working partners and self employed earners who fall into this upper bracket.

Incorporation of Partnerships

There has never been a better time for businesses to give serious consideration to the incorporation of their activities. As a separate legal entity a company is charged to corporation tax which is levied at 28% (small companies at 21%) which has been at similar levels for many years and is more likely to be reduced than increased in the near future. More importantly the incorporation provides an opportunity to crystallize the value of a business as a capital gain, allowing up to £2,000,000 to be allocated to each partner at a reduced Capital Gains Tax (CGT) rate of 10%.

Although this step triggers an unnecessary liability to CGT it will create a pool of tax paid reserves available to the owners to draw down, free of any further income tax or national insurance, as the business generates sufficient cash flow from its future trading profits. Provided the valuation of the business is sufficient, it should be possible for owners to maintain similar levels of net drawings before and after incorporation whilst keeping overall tax levels to 38%.

Income Splitting

Ever since HM Revenue and Customs lost its battle in the Arctic Systems case in July 2007 they have been trying to limit the impact of the ruling. The case brought to light the need for the Government to review the legislation to ‘ensure that there is greater clarity in the law regarding its position on the tax treatment of income splitting’. To date nothing has been legislated.

In today’s higher income tax environment it is important to try and bring non-earning or low-earning spouses and/or family members into family businesses and sole traders should give consideration to bringing in partners. Provided there is good economic justification for sharing the income and profits across a wider base of taxable individuals, such prudent use of allowance and thresholds must be given serious consideration.

In its simplest form a non-earning spouse undertaking modest administrative tasks for the business could take £20,000 of profits from a 50% partner and reduce the tax liability from £10,000 to £2,700. In incorporated businesses the use of dividends to reward a wider ownership base can keep taxable income levels below critical thresholds.

Deductible Expenditure

Contributions into pension schemes are not quite as dead as some would have us believe. Not yet anyway. Despite the pillage of our pensions by government over the last 12 years, there is still an opportunity, particularly where income is below the crucial £130,000 threshold, to attract higher rate relief until April 2011. After this date relief will be restricted to the basic rate.

The whole area of pension planning is highly complex and fraught with opportunity for missed claims and claw-back of reliefs, so advice from your financial advisor is essential. For the time being however, it remains true that wrapping your savings for the future in an approved pension environment does still provide some tax relief.

And Finally….

Since the Additional Rate Tax is supposedly a temporary measure, any strategy to defer income into future tax years is worth keeping in mind. This is often more easily said than done however there are many investment products available which will effectively ‘roll up’ income and gains to be taxed at a later date when either the tax rate or your income have declined.

As always time is of the essence so take action now if you want the January 2012 tax bill to be less than it might otherwise be. Speak to your accountant or tax advisor today and take the first positive step in lessening the burden that will be falling on your shoulders before you realize it.

Paul Windsor
WSM Partners LLP - Specialists in business tax advice.

Contacts:
Paul Windsor, WSM Partners LLP 020 8545 7606 paul.windsor@wsm.co.uk www.wsmproperty.com

Lauren Alexander, Maltin PR 020 7887 1357 lauren@maltinpr.com www.maltinpr.com

Notes:

Paul is a regular commentator on property and finance trends, including taxation.

Picture of Paul is available at www.maltinpr.com/paul-windsor

Paul has been a partner at WSM Partners LLP since 1985. WSM is a firm based in London, SW19 with a team of 30 professionals. The firm has two divisions, one specialising in the tax for individuals and small businesses and WSM Property specialising in UK real estate tax.

Version 6 of Earnings Tracker has just been released (end of March 10).

This latest release contains a few bug fixes and a bit of extra functionality.

When you add/edit a month, you can now enter up to six ‘other revenue’ amounts (previously you could only enter one). Other revenue refers to revenue that is not invoiced. For example, this might be revenue generated by Google AdSense.

More information about version 6 can be found at:

http://www.dixondevelopment.co.uk/features/version6.php

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.

FREE Software Downloads

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.”

FREE Software Downloads