IR 35 is here to stay
Before the Budget, there was much hopeful speculation that the new Government might abolish, or at least tone down, the notorious IR 35 legislation, which empowers HMRC to tax some freelance contractors, working through personal service companies, as if they were employees. Indeed, in their first policy statement last year, the Coalition had promised to review IR 35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures.
The Chancellor did not mention IR 35 in his Budget speech, but the printed Budget Report revealed that the Government had decided that abolishing the personal service company legislation would put too much revenue at risk. The research, reasoning and rationale behind this decision were not disclosed. No changes at all to the legislation are proposed. Instead the Government has promised to achieve simplification by asking HMRC to publish more guidance and set up a dedicated IR 35 Helpline.
However, the current problem is hardly that contractors and their accountants are unaware of HMRCs view that anyone earning money ought to be paying tax (and NI contributions) as if he (or she) was an employee. The point is that, so long as those working through a personal service company, or on a selfemployed basis, generally pay lower taxes and lower NI contributions than employees, HMRC must be predisposed to rule that just about anyone is an employee, or a quasi-employee subject to the IR 35 legislation. The fact that there have been so many successful challenges to HMRCs employment status and IR 35 decisions shows how difficult it is for them to give truly impartial advice.
The Office of Tax Simplification, set up by the new Government, suggested in a report published earlier in March that the way ahead would be to unify income tax and NI contributions, so that roughly the same amount would be paid whether an individual was employed, self-employed or working through a personal service company. In the Budget, the Government rejected this suggestion outright, saying that it was unwilling to extend NI contributions to dividends, rents or any form of income other than earnings. However, to simplify matters for employers, it will move towards aligning the definition of earnings subject to income tax, on the one hand, and to NI contributions on the other.
New disclosure opportunity
Any taxpayers who have some undeclared income should take a serious look at the latest opportunity offered by HMRC to get their tax affairs sorted out with usually no questions asked and lower penalties applying than would be the case if HMRC approached them.
Although this new opportunity is supposedly aimed at plumbers, (hence the name Plumbers Tax Safe Plan), HMRC makes it clear that in fact it is open to anybody whatever the source of income or capital gains and whether an individual or limited company.
To take advantage of this scheme there is a requirement to notify by 31 May with the actual disclosure plus payment being made by 31 August. Penalties will normally be 0%, 10% or 20%, depending on the circumstances. This is less than would normally be the case, and there is the added aspect that if the taxpayer can show that the extra tax to pay arose despite him or her taking reasonable care it means that HMRC can only go back 4 years.
We will be pleased to assist any taxpayer who has something to disclose.
The Chancellor did announce a new inheritance tax incentive to promote charitable giving, he said: If you leave 10 per cent or more of your estate to charity, then the Government will take 10 per cent off your inheritance tax rate. Two words of caution, the first is that the new relief will not be available until April 2012. The second is that the Budget documentation makes it clear that 10 per cent off your inheritance tax rate means a reduction from 40% to 36%, not to 30%.
On the other hand, the minimum 10 per cent donation to charity is 10 per cent of the estate after deducting the nil rate band (£325,000), any exempt bequests (for instance, to a husband or wife) and any reliefs (for instance, for business or agricultural property).
By way of example, take three estates, each worth £1 million. The first testator leaves his entire estate to his children, the second gives £67,500 to charity (ten per cent of the estate after deducting the nil rate band) and the third £200,000:
|Tax at 40% on £675,000||£270,000|
|(£1m less £325,000|
|Tax at 36% on £607,500||£218,700|
|(£932,500 less £325,000|
|Tax at 36% on £475,000||£171,000|
|(£800,000 less £325,000|
|Remaining for children||£730,000||£713,800||£629,000|
If exactly one-tenth of the estate (after deducting the nil rate band) is given to charity, the tax reduction pays for 76% of the gift and 24% comes from the childrens share. As the charitable gift increases (as a proportion of the estate), the amount covered by the tax reduction reduces to 49.5% of the gift in the third example above.
Child Trust Funds were introduced for children born on or after 1 September 2002 and discontinued for children born on or after 3 January 2011. The Funds were opened with a contribution from the Government, but one of their main advantages was that they also acted as a Childrens ISA, parents, grandparents and anyone else could contribute up to £1,200 in total a year to each childs Fund, and the investment was completely tax free. Where a Fund has already been set up, it will continue until the child is 18 and family members and other well-wishers may continue to make contributions.
Last year the Government promised to introduce a Junior ISA to allow families to save, tax-free, for babies born on or after 3 January 2011. Further details were recently announced, and one of the most important points is that it will be possible to open a Junior ISA for any UK resident, under the age of 18, who does not have a Child Trust Fund. Thus it will be possible for families to open Junior ISAs for children and young people born before 1 September 2002, as well as for babies born on or after 3 January 2011.
It is expected that Junior ISAs will be available from 1 November 2011, but this is subject to confirmation. The maximum annual investment will be £3,000 (again subject to confirmation), in either a Cash ISA or a Stocks and Shares ISA, or any combination of the two. Contributions may be made by anybody, but the Junior ISA must be opened and managed by a person with parental responsibility for the child. From age 16, the child will be able to manage his or her own account, but no withdrawals will be permitted until age 18 is attained.
It will not be possible to switch money between a Child Trust Fund and a Junior ISA. But as for a Child Trust Fund, neither the child nor his or her parents will be liable to income tax or capital gains tax on investments held in a Junior ISA.
It will be noted that the annual investment limit for a Junior ISA, at £3,000, will be more than twice that for a Child Trust Fund, which is only £1,200. It is possible, of course, that the Government may decide to level-up the latter, but there has been no announcement so far.
Tax allowances for machinery and commercial vehicles
Political ping-pong: one of the last acts of the outgoing Labour Government was to increase the ceiling on expenditure qualifying for the Annual Investment Allowance (the 100% write-off for most purchases of machinery and commercial vehicles) from £50,000 to £100,000 a year. Then one of the first announcements by the new Coalition Government was that the ceiling will be reduced to £25,000 but not until April 2012. Accordingly, there is still a window of opportunity to make major purchases before the Annual Investment Allowance is reduced by three-quarters. If you need to buy new machinery or vehicles, it is particularly important to take advantage of this window because, from April 2012, expenditure in excess of the reduced Annual Investment limit will qualify only for writing-down allowances at a maximum of 18% per annum.
Great care must be taken in timing the purchase, because for most traders the transitional rules mean that the window will in fact close before April 2012. This is because the £100,000 allowance is tied to the tax year, the year to 31 March for companies and the year to 5 April for other businesses. If the accounting date is other than 31 March, it will be necessary to apportion the Annual Investment Allowance between accounting years. For example, suppose a company makes up its accounts to 31 December annually. The Annual Investment Allowance ceilings will be:
|Year to 31 December 2011|
|January to March: 3/12 — £100,000 (ceiling for the year to 31 March 2011)||£25,000|
|April to December: 9/12 — £100,000 (ceiling for the year to 31 March 2012)||£75,000|
|Year to 31 December 2012|
|January to March: 3/12 — £100,000 (ceiling for the year to 31 March 2012)||£25,000|
|April to December: 9/12 — £25,000 (ceiling for the year to 31 March 2013)||£18,750|
However, of that £43,750, only £18,750 can be spent after 31 March 2012. Thus for this company, the maximum expenditure qualifying for an Annual Investment Allowance is:
|*or if less, £43,750 minus the amount spent between 1 January and 31 March|
|Year to 31 December 2011||£100,000|
|1 January to 31 March 2012||£43,750|
|1 April to 31 December 2012||£18,750*|
Similar computations have to be made in the case of an unincorporated business, unless the accounting date is 31 March or 5 April.
And as if that wasn’t enough, there are some very complicated rules for deciding when expenditure is incurred for the purposes of Annual Investment Allowance claims and as will be appreciated from the above, the exact day expenditure is incurred may make an enormous difference.
Accordingly, we would strongly encourage any clients considering major investments in machinery or commercial vehicles to contact us for individual advice on maximising their tax relief as soon as possible.
The end of the cheque guarantee card
Anyone accepting payment by cheque for retail sales or private transactions should note that the Banks are withdrawing the Cheque Guarantee Card scheme at the end of June. This means that payments made on or after 1 July 2011 will not be guaranteed, even if the purchaser produces a Cheque Guarantee Card.
This is so even if the Cheque Guarantee Card produced by the purchaser has an expiry date later than 30 June 2011. In fact, most cards will have a later expiry date, because they will remain valid for use as a debit card and / or as a means of withdrawing cash from machines. Businesses currently relying on the scheme will need to consider what their policy on accepting cheques will be from July.
Class 2 NIC new payment dates
From April 2011 Class 2 NICs quarterly bills will be replaced by two requests for payment for each tax year. For the 2011/12, the following applies:
- For the period 10 April 2011 to 8 October 2011, the payment request will be issued in October 2011, payment due by 31 January 2012.
- For the period 9 October 2011 to 7 April 2012, the payment request will be issued in April 2012, payment due by 31 July 2012.
Future six monthly payment requests will be issued in October and April with payment due in the January and July. The text on the payment requests will be changed to alleviate, where possible, some of the problems with taxpayers requesting explanation of the existing bills.
For taxpayers who pay by monthly Direct Debit (DD), the collection date of the DD will in future be four months in arrears rather than one month in arrears. To achieve this there will be a break in current Class 2 NICs Direct Debit collections following the collection in April 2011 (covering payment for the period March 2011 to April 2011).
Collections will restart in August 2011 covering payment for April 2011 to May 2011, Septembers collection will cover the payment due for May 2011 to June 2011, and Octobers collection will cover the payment due for June 2011 to July 2011, etc. The change in collection dates has no effect on the rate of Class 2 NICS applicable.
We advise people to check their bank statements carefully in the coming months.