The Autumn statement
One of the headline announcements in the Chancellors recent Autumn Statement was that the income tax personal allowance, which is £8,105 at present, will rise to £9,440 for the 2013/14 tax year. For a basic rate taxpayer, the saving will be £267 over the year, or just over £5 a week. However, the income point at which 40% tax becomes payable will fall, so that the net benefit for higher rate taxpayers will be just over £1 a week.
The rates of National Insurance contributions for employees and directors will remain unchanged for 2013/14, though there will be small adjustments to the income bands to which they apply. In general, assuming income remains constant, there will be a tiny reduction in the contributions payable. The Class 2 contributions paid by self-employed people will rise by 5p, to £2.70 a week; minor changes to the income bands for Class 4 contributions mean that, on a given income, the charge will reduce by between £13 and £85 a year (the highest savings being enjoyed by those on the highest incomes).
As announced in the Spring 2012 Budget, the higher income tax allowances for older people will be frozen for 2013/14, at £10,500 for those born on or before 5 April 1948 and £10,660 for those born on or before 5 April 1938. However, the income limit (above which the age allowance begins to be reduced) will rise by £700, to £26,100. There will also be a small increase in the married couples allowance (which can only be claimed if at least one spouse was born on or before 5 April 1935).
Pensions and pension contributions
Under some pension plans, it is possible for a pensioner to make regular withdrawals from his or her pension fund, instead of buying an annuity (a process known as pension drawdown). Hitherto, the maximum amount the pensioner could withdraw each year was a sum equal to the annuity that could be bought with the pension fund. From a date to be announced, this will be increased to 120% of the annuity which could be bought.
One change that has been highlighted in the newspapers is that the Chancellor reduced the Annual Allowance for pension contributions, from £50,000 to £40,000. Of course, very few people are able to make such large contributions. One group which may be affected is people in final salary pension schemes who receive a major promotion, as their pension entitlement for past years service will be recalculated at the new pay rate, creating a deemed pension contribution for tax purposes. However, they will be able to bring forward any unused allowances from the three previous years, so a charge is still unlikely.
The reduction is said to apply from 2014/15, but in fact it will apply for contributions made in the pension schemes accounting year (known as the pension input period or PIP) which ends in the tax year 2014/15. Accordingly, depending on the schemes accounting date, it could apply from as early as April 2013.
There will also be a reduction, from £1.5 million to £1.25 million, in the Lifetime Allowance. There will be special arrangements, the details of which are still being worked out, for those whose pension savings already exceed £1.25 million.
Capital taxes and savings
The capital gains tax annual exemption, which is £10,600 for 2012/13, will be £10,900 for 2013/14. The maximum ISA investment will rise from £11,280 in 2012/13 to £11,520 in 2013/14 (with a maximum Cash ISA of £5,640 and £5,760 respectively).
The inheritance tax nil rate band will remain £325,000 until 6 April 2015, when it will rise to £329,000.
Capital allowances for machinery and vehicles
The Chancellor announced that, for two years from 1 January 2013, the annual ceiling on Annual Investment Allowances (AIAs) will be increased from £25,000 to £250,000. Broadly speaking, AIAs allow the whole cost of machinery and vehicles (other than cars) to be written off, for tax purposes, in the year of purchase.
However, this does not necessarily mean that a company (or an unincorporated business) will be able to go out in January and buy even £100,000 of machinery that will qualify for the increased allowance. This is because special transitional rules apply where the companys (or the traders) accounting date is other than 31 December. For example, if the accounting date is 31 March, the maximum qualifying expenditure for the whole of the year to 31 March 2013 will be:
|9/12 (months) — £25,000||£18,750|
|3/12 (months) — £250,000||£65,500|
|Maximum qualifying expenditure||£81,250|
Of that £81,250, only £25,000 may be spent before 1 January 2013
The full £250,000 allowance will then be due for qualifying expenditure in the next accounting year (to 31 March 2014).
That was a very simple example, and in practice the calculation can be much more complex. Furthermore, there are some complicated rules for determining when the purchase is treated, for Annual Investment Allowance purposes, as being made it is not usually either the day you sign the order or the day you sign the cheque. Accordingly, if you are contemplating a major purchase, or a programme of capital expenditure, we would strongly recommend you to contact us for individual advice.
Shares for employment rights
The Autumn Statement also confirmed that the Government intends to go ahead with the employee-owners plan, first proposed by the Chancellor in his speech to the Conservative Party Conference last October. In outline, the proposal is that individual employees should be allowed to give up their longstanding rights to redundancy payments and to protection from unfair dismissal in exchange for shares, worth at least £2,000, in the company for which they work.
In his speech, the Chancellor described the scheme as voluntary. However, it soon became clear that, while no company will be obliged to offer shares under the scheme, and no existing employee may be required to give up any employment rights, both established companies and new start-ups will be able to require new hires to accept employee-owner terms.
At the beginning, it was thought that the scheme would be rejected out-of-hand by most small companies, because the existing shareholders would not want to dilute their equity. But when the draft legislation was published, it became apparent that the shares issued to employee-owners need not be ordinary shares they may be a special class of shares with restricted voting and dividend rights. Nor do they have to be shares in the master company they can be shares in a subsidiary, providing it is the legal employer of the people participating in the scheme.
And finally, the shares dont even have to be worth £2,000. They only have to be worth £2,000 ignoring any restrictions imposed on the employees right to dispose of them. In practice, the real value will usually be depressed because the employees only option will be to sell his shares back to the company.
The likely start date for the employee-owner scheme is 6 April 2013. The drawbacks, from the employers point of view, are firstly that setting-up and running the necessary share plan are likely to be expensive and secondly that requiring or even encouraging people to join may sour employment relations. Even if it all starts well, the scheme may later backfire, if it gives employees unrealistic expectations about the influence on decision making, or the prospect of participating in profits, that their shares will give them.
When the draft clauses for the Finance Bill were published, a week after the Autumn Statement, it became known that the Government had decided to remove one of the tax charges which may arise when a small company ceases trading and its business is taken over by one or more of the shareholders. The draft clauses show that the relief, which will apply from 1 April 2013, will take the form of rolling over the notional but taxable gain that would otherwise arise on the transfer of the companys goodwill and premises to the shareholders, so that no tax is payable by the company immediately, but more tax may be payable by the shareholders when they eventually dispose of the business (or the business premises).
To pause there for a moment, in reality the trading premises are often held outside the company, by the shareholders personally, by a family trust, or by the directors pension scheme. In such a case, no transfer of the premises will be required and so the new relief will apply only to the goodwill.
To continue, the relief will not be available unless the combined value of the goodwill and the premises (if currently owned by the company) does not exceed £100,000. Not only does this limit the relief to very small companies, it also means that the shareholders will have to value the goodwill (always a difficult task) before they know whether they are eligible for the relief.
Another problem is that, if the company has claimed Annual Investment Allowances on its machinery and vehicles, a substantial part of that tax relief may be clawed back by way of a balancing charge at the time those assets are transferred to the shareholders. Other tax problems may arise and, all in all, the whole process is likely to be very complicated and the new relief will by no means be a magic bullet for solving the problems of disincorporating a business.
The shareholders themselves are also likely to suffer a tax charge, because if they do not pay full value for all the assets they take over (premises, goodwill, stock, equipment, vehicles, etc), they will be deemed to have received a benefit from the company which in most circumstances will be taxable either as income or as a capital gain.
We can only conclude by saying that whether a disincorporation can be achieved at an acceptable tax cost will depend on all the circumstances of the individual case. If you have a company that you wish to wind up, we would be pleased to advise on the best method of disincorporation and on the likely tax and other costs of doing so.
Real time information
Most employers will be aware that HM Revenue and Customs will be introducing the Real Time Information reporting system for PAYE from 6 April 2013. In recent weeks we have been contacting clients affected to check that the information currently held for you is correct and complete.
It is essential that this is checked thoroughly and promptly as any discrepancies between our records and HM Revenue and Customs may mean that the submission is rejected which will result in penalties.
Changes as a result of real time information
It is required that HM Revenue and Customs receive notification of payments on or before the payment date. Therefore, you will need to ensure that we receive details of intended payments before they are made.
In addition, temporary workers and student employees must be included on the payroll and will be taxed in the same way as other employees. There will no longer be special tax treatment for students.
Although the penalty system has not yet been finalised it is clear that non-compliance with any aspect of the real time information system, whether through late notification of payments made or employees not included in the payment submission, will result in penalties and so it is very important that all clients ensure that their payroll matters are dealt with in advance in order to avoid this!
Have you reached the Registration Threshold?
If you are in business, you must register for VAT if your VAT taxable turnover for the previous 12 months is more than £77,000. Remember that your VAT taxable turnover includes only the goods and services that you sell that you have to charge VAT on, even those that are zero-rated. It does not include sales that are exempt or outside the scope of VAT. Since the VAT registration threshold reflects the previous 12 months rather than the last set of completed accounts, you should regularly check your turnover against the current limits. Penalties and interest will be applied if you fail to register your business for VAT when turnover has passed the threshold. New rules on VAT invoices From 1 January 2013 new rules take effect to make UK legislation compliant with the EU VAT Invoicing Directive. The aim is to simplify and harmonise existing rules, remove the obstacles to the use of electronic invoices and reduce the administrative burden on EU businesses in meeting VAT invoicing obligations. The key points are:
- Individual member states may no longer impose additional conditions on taxpayers wishing to use electronic invoicing. Instead, individual businesses may decide the method used and the only condition imposed is that the customer must agree to the use of electronic invoicing.
- All VAT registered businesses will be able to use a simplified VAT invoice when they make a supply in the UK to a taxable person where the value of the supply does not exceed £250.
- The rules on the time limits for issuing a VAT invoice are being aligned. The amended UK Rules will require the invoice to be issued by the 15th day of the month following that in which the goods are removed or the services performed. This will in some cases, reduce the timescale for UK businesses to issue a VAT invoice.
Child benefit changes
You will be aware of the decision in the Budget that child benefit will be withdrawn from high earners, i.e. those with income of more than £50,000. However close examination of the details of the Finance Bill show that behind this simple proposition lie a multitude of complex technical and professional difficulties.
The first point to note is that, unless an individual elects not to receive child benefit, it will still be paid regardless of the level of earnings.
HMRC have confirmed that if you elect not to receive child benefit it will not have implications for entitlement to benefits or income-related credits. The claw back of child benefit will operate through the tax system via a new tax charge.
The claw back rules operate by reference to partners not individuals. Partners are married couples (or civil partners) living together, but also couples (including same sex couples) who are living together as man and wife or as civil partners. Where one partner has income in excess of £50,000, child benefit is clawed back by 1% for every £100 of excess income, so that when income reaches £60,000, all of the child benefit is clawed back.
The income limits are annual but, the partnership test operates weekly, i.e. it will be necessary to determine each week whether or not the person in receipt of the child benefit is in a partnership. It will be the existence of a partnership for that week which will determine whether or not there is a claw back, and critically who bears the claw back charge.
Thus, in future, it is clear that the amount of tax a partner has to pay will depend on the precise week in which they entered into partnership. Which means, that we, in our role as your tax adviser will have to ask some questions which may seem intrusive!
Child benefit for the week commencing 7 January 2013 will fall within the new regime, and so we shall need to take account of this when preparing your 2013 self-assessment tax return.
Business record changes
HMRC have launched a programme of Business Records Checks. Essentially, they are aimed at seeing whether traders (we think mainly small traders) are keeping sufficient records to calculate their profits accurately.
What is new is that Business Records Checks do not set out to check the accuracy of a Tax Return that has already been submitted. A Check may be carried out even though the trader recently started in business and has not yet submitted a Tax Return at all.
Candidates are selected by the computer, no-one knows on what basis. HMRC will then write to the trader, telling him or her to expect a telephone call. The agent making the call will ask a series of questions about the business and the records kept, and also some rather odd questions such as: Do you need help understanding official forms?.
Again on an unknown basis, some traders are then selected for a visit, where the HMRC agent will inspect the records. If he is not satisfied, he will tell the trader what needs to be done, in his opinion, to improve them. Three months later, the agent will come back and, if he is still not satisfied with the records, the trader will be fined £500 (£250 if the business has been trading for less than a year).
We very strongly recommend that you dont play this game. As soon as you receive the initial letter, let us know at once! If somebody telephones from the Tax Office, or even turns up on the doorstep, refer them to us and do not enter into any further discussion.
We understand that HMRC are anticipating an escalation of reviews into IR35 compliance over the coming year. If you have any concerns about this, please contact us.
Where an employer provides a company car, but the employee pays for the fuel, the employer may pay a mileage allowance for business journeys. HMRC accepts that payments not exceeding the advisory fuel rates are reimbursements of expenses, not subject to income tax or Class 1 National Insurance contributions.
The advisory fuel rates (AFRs) are now reviewed quarterly and the AFRs for journeys taking place on or after 1 March 2013 are as follows (old rates in italics):
|Rate per mile|
|* Including petrol hybrid cars|
|Up to 1400cc||15p||15p||10p||11p|
|1401cc to 2000cc||18p||15p||12p||13p|
|Rate per mile|
|Up to 1600cc||13p||12p|
|1601cc to 2000cc||15p||15p|
These rates may be used to reclaim input VAT in respect of fuel used for business journeys (remembering that VAT receipts to cover the amount claimed are required).These rates are scheduled to change quarterly and the current rates can be found on the HMRC website.