Finance and Business Blog

April 2011 saw the release of Notice Board Pro 1.0 - a free online notice / bulletin board that lets users post notices in the same way as on a physical notice board. For example, someone could advertise a room to rent, a car for sale, a holiday apartment, a service, and so on. Non-registered users are able to browse through the list of active items, either through all of the items that exist, or through a subset based on the selection of one or more item categories (for example, vehicles, accommodation, gardening, and so on).

As well as being able to browse through existing items, registered users can post their own items. Items can be set to expire on a particular date, they can be temporarily hidden, and they can be deleted. They can be also very easily edited. The application also supports the use of JPEG images.The web-based user interface is very easy to use, either when creating items or simply browsing through them, with screen-level context-sensitive help always available.Users can update their profiles at any time. If a user forgets his or her log-on details, new details can be emailed to them.

The application is written in PHP and MySQL, and is available as a free download. This enables users to not only install the application (on a web server), but to customize it to suit their own needs if they so wish. The supporting website for the application provides user documentation, access to a fully functioning demo version, a detailed guided tour of the application, access to the download version, and support information. Notice Board Pro is free software and is provided under the terms of the GNU General Public License (GPL). This enables people to download, modify and redistribute the software if they so wish.

For more information go to http://www.noticeboardpro.com

January 2011 saw the release of version 1 of MyBookkeepingManager - a bookkeeping application aimed at UK-based contractors, freelancers, and other very small (micro) businesses, typically those having less than five employees.

The application concentrates on the main bookkeeping activities performed by many such businesses, providing a simple, easy-to-use, software application. It can be either used online, or it can be downloaded and installed on a web server of your choice. MyBookkeepingManager enables monthly sales, loans, salaries, income tax, national insurance (both employees and employers), pension contributions, bank interest, bank charges, office or desk rental, and plenty of other expense amounts to be entered. The software then automatically calculates the amount of VAT owed (if you are using the VAT Flat Rate Scheme), and estimates the size of dividends that can be distributed to shareholders and the amount of corporation (business) tax due.

Figures are presented in a straight forward spreadsheet format, making it very easy to see, at a glance, how your business is doing.

For more information, go to http://www.MyBookkeepingManager.com

As part of the recently published Finance Bill 2011, the Government has moved to close a loophole that allows contractors to use Employee Benefit Trust (EBTs) schemes to reduce their tax bill.

Rob Crossland, chief executive of umbrella company Parasol, had this to say.

“It was no surprise that the Government has taken a hard-line with EBTs and other forms of tax avoidance as this has been discussed for some time.”
 
“There must be a distinction made between umbrella companies who work closely and openly with HMRC in order to protect contractors, and companies that exploit loopholes and make bold or unrealistic claims about take home pay. Correctly structured and compliant umbrella companies have nothing to fear from the Finance Act, and the reality is that this provides an opportunity to demonstrate that compliance and transparency to Government, contractors and the agencies that place them.”

“In the past, this industry has been tarnished by unscrupulous providers making unrealistic claims about the amount of take home pay a contractor can expect, by offshore providers not fully explaining the risks involved in using an EBT scheme or operating with a lack of transparency to a level that even the contractors involved in the schemes cannot fully explain how they work. Thousands of contractors have also been persuaded to join these schemes without being informed of HMRC investigations into them.”

“This had to stop and therefore the Finance Act 2011 should be welcomed by umbrella companies. It now remains the duty of leading umbrella companies like Parasol, and organisations such as the FCSA, to support and educate contractors and the agencies that place them, encourage further transparency, open discussion and compliance throughout the industry, and ensure that the bad practice of a few does not bring down the industry and prevent professional contractors from running their business and making a valuable contribution to the UK economy.”

MyBookkeepingManager - Bookkeeping Software for Freelancers, Contractors, and other Micro Businesses

With effect from 4th January 2011, the standard rate of VAT increases from 17.5% to 20%. The VAT Flat Rate Scheme (FRS) percentages will also change. For Computer & IT Consultancy, the rate will change from its current 13% to 14.5%.

The normal tax point rules will apply: date of invoice or date of payment, whichever comes first. So if the invoice or payment is made before 4th January, VAT will be at the rate of 17.5%; anything after that date will be at 20%.

More information is available on the HMRC website:

http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-increase.htm

PCG Chairman, Chris Bryce, has been invited to join the Coalition Government’s Office of Tax Simplification’s (OTS) Consultative Committee that will review small business taxation, including IR35. Since its inception in 1999, PCG has campaigned against IR35.

Accepting the invitation to join the OTS committee, Mr Bryce expressed his delight that the UK’s 1.4m freelance workers would be represented:

“PCG worked tirelessly with the Conservatives in opposition to ensure that a review of IR35 would be carried out following the expected change of Government at this year’s General Election. We produced a paper for senior members of the Party which put forward compelling arguments as to why IR35 was unfair and unworkable.  We also worked closely with the Liberal Democrats at this time.

Our paper has been seen by John Whiting, the Director of the OTS, with whom we have maintained a good relationship over many years. We are delighted that he recognised the importance of having PCG, the Voice of Freelancing, on this vital committee.”

Mr. Bryce added: “This is a crucial time for freelancers.  PCG will continue to offer the OTS every resource available to us and we will be advised by leading tax expert, Chris Sanger, from Ernst and Young. It is our objective that this process will produce a fair and effective solution for all small businesses.”

John Brazier, PCG Managing Director echoed those sentiments saying:

“PCG is a not-for-profit association and as such our views will not be influenced by commercial gain. We are on this committee to represent the needs of our members and we will strive to do this fairly and accurately.”

The OTS will be holding consultation events in locations around the country.  At least two of these, currently planned for Edinburgh and Manchester, will be exclusively for PCG members.  In addition PCG will organise their own regional meetings to ensure that the widest possible input is gathered from its membership.

Mr Brazier added: “By harnessing the views of our members we can deliver the true voice of the freelancer directly to the heart of the decision making process.”

For further information contact:

Jim Cassidy
Prima Communication & Media Limited
Phone: 0141 530 8144 or 0777 595 3990
Website: www.prima-media.co.uk

It’s good to hear that IR35 is to be addressed by the Government’s Office of Tax Simplification (OTS), in consultation with various contractor-related bodies. Lack of consultation was one of the reasons why IR35 was such a mess in the first place. I do, however, have a concern that the various bodies with whom the OTS will consult do not have the same incentive to get rid of IR35 as contractors themselves do.

Although it is widely accepted that IR35 does not raise anywhere near the amount of Income Tax and National Insurance income for HMRC as was originally thought, and that it probably costs more to administer than it raises in revenue, a whole industry has grown up around IR35 and I suspect many tax consultants and tax insurance providers have done very well out of IR35.

And this is where my problem lies. If, because of the uncertainty caused by IR35, a company offers tax insurance products to contractors, will that company really want to see the demise of IR35? Of course, they may well accept that IR35 is unworkable in its current form, but if it is replaced, they will almost certainly want the replacement to still cause contractors to require tax insurance. Without this requirement, the company may well go out of business - and that’s not what they want!

And then there’s also the various companies that offer contract reviews for £150 a shot. They won’t want that revenue stream to disappear. Even the Professional Contractors Group (PCG), which undoubtably has done a splendid job in lobbying the Government over the past decade to get IR35 repealed, does very well out of the existence of IR35.

OK, maybe I’m being a bit cynical and perhaps everyone with whom the Government consults really does want IR35 to go away and for contractors to be able to work in the way they did in the 1990s - without the need for tax investigation insurance and without the need for contracts to be reviewed … but I doubt it!

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.

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.