Welcome to our Spring 2002 newsletter
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We are pleased to bring you our bumper spring 2002 newsletter including a special section on year end tax planning. Please spend a few moments reading through this as it may be that action before the tax year end on 5 April will reduce your tax bill.
The long awaited and well documented changes to the company car regime are almost with us. From April, the tax benefit on provision of a company car will still be calculated using the list price but the charge will be based on carbon dioxide emissions rather than level of business mileage or age of the car. Please talk to us soon if you still have any issues or concerns over the new rules. One of the less publicised consequences of the changes is that an increasing number of employees are giving up the company car and using their own cars for business purposes. In such cases, employees often receive a business mileage payment from their employer. The rules for such payments are also changing in April and we have included a summary of the consequences in this newsletter.
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The personal service company rules or ‘IR35’ rules as they are more generally known look set to stay. An ongoing saga found its way to the Court of Appeal at the end of last year. The Professional Contractors’ Group (PCG) which was originally formed to challenge IR35 argued that the rules contravened European legislation on two counts: illegal state aid and restriction of freedom of movement and should therefore be abolished. The Court of Appeal found against the PCG and so IR35 remains.
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STAMP DUTY..... did you know?
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Last year the Government announced its intention to abolish stamp duty on land in ‘disadvantaged areas’ as part of a package of urban regeneration measures. The intention was to attract developers to brownfield rather than greenfield sites.
The Government is taking a two stage approach to the abolition. In the first phase, there has been exemption from stamp duty since 30 November 2001 on all property transactions up to £150,000 if the property is in a disadvantaged area. The relevant areas are identified by ward or postcode and can be found on www.inlandrevenue.gov.uk/so There are some surprising areas included: Regents Park and Kensington and Chelsea in London for example. Although the chances of property changing hands for under £150,000 in either of these areas seems remote!
The second stage which is expected to take effect later this year will be a significant increase in the threshold or total abolition of stamp duty for all transactions in non-residential property within the same designated areas.
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Adding value to your business in times of uncertainty
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There is confusion about the economy in the financial press, and, most notably, since the events of September 11 2001, about the stability of the world economy. Certainly the Bank of England and just about everyone who is in business is asking ‘is there going to be a recession?’ If so will it be a short blip or a full blown 1990s hurricane that blew just about every business and financial institution well off course and some to complete disaster.
At the very least, you should consider the real possibility of a financial downturn and we suggest ten steps to review, revise, be resourceful and adapt to a recession.
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Project cash flow at least three months in advance and monitor actual spend against budget. |
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Put pressure on debtors for payment within the agreed credit period. Don’t forget, he who shouts loudest is the one who gets paid. |
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Review overheads and cut out waste in order to be cost effective and efficient. A good way to do this is by setting budgets. Is that expenditure really necessary? |
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Consider the minimum stock levels that can be held whilst still being able to provide products to customers. Don’t be left with residue that is unsaleable. |
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Ensure there is an effective accounting system to provide prompt and ‘reliable’ financial information. This cuts out customers’ queries that provide an excuse for not paying, as well as furnishing dependable financial figures to monitor trading. |
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Think hard before embarking on capital expenditure which, if financed, can lay a heavy burden on the bottom line. Where it is essential to buy equipment to be more competitive, then ensure there is an adequate payback. |
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Be aggressive in seeking new business and keep an eye on what competitors are doing. |
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Discuss overall business strategy with senior staff to get their feedback. Be open to constructive suggestions. Your staff may know more than you about certain aspects of your business. |
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To relieve pressure on cash flow, speak to suppliers to extend credit terms, with scheduled payments that can be made. With VAT and PAYE do not give empty promises, because you do so at your peril. |
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Do not compromise on quality and service. In order to survive you need that repeat sale. |
The small businessman is able to be adaptive, imaginative, inventive and creative, providing time is given to it, and the commitment is nothing but 100%. The lights may dim but they won’t go out!
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Business mileage rates
If you are an employee using your own car for business purposes, or are thinking of doing so, are you aware of the possible tax consequences?
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Employers often reimburse their employees for business mileage in their own cars. The Inland Revenue specifies the maximum rate that may be paid tax-free. Where an employer pays less than the specified rate the employee can claim tax relief on the balance. The scheme is voluntary and means that it is not necessary for the employee to keep detailed records of business motoring expenses.
Changes are being made so that the scheme moves on to a statutory basis in April. The old and new rates are summarised in the table below. The new regime is designed to provide an incentive to drive cars with smaller engines. As our examples show, drivers of smaller cars will certainly benefit under the new regime. Those driving cars with engines over 2,000cc will lose out and they no longer have the option of substituting actual business motoring costs for the authorised rates.
Mileage Rates
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| 2001/02 |
2002/03 |
| Engine size |
Up to 4,000 miles |
Over 4,000 miles |
All cars and vans |
Up to 10,000 miles |
Over 10,000 miles |
| Up to 1500cc |
40p |
25p |
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| 1501 - 2000cc |
45p |
25p |
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| Over 2000cc |
63p |
36p |
40p |
25p |
Example 1
Adam drives 7,000 business miles each year in his own 2,300cc engined car. His employer pays him 30p per mile. His tax position is as follows; |
| Authorised/Statutory rate |
2001/02
£ |
2002/03
£ |
| 4,000 @ 63p |
2,520 |
| 3,000 @ 36p |
1,080 |
| 3,600 |
| 7,000 @ 40p |
2,800 |
| Less: Received from employer |
(2,100) |
(2,100) |
| Tax deduction |
£1,500 |
£700 |
| The changes will cost Adam £176 if he is a basic rate taxpayer and £320 if he is a higher rate taxpayer. |
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Example 2
Rachael drives 7,000 business miles in her 1,200cc Renault Clio. She also receives 30p per mile from her employer. Her tax position is as follows: |
| Authorised/Statutory rate |
2001/02
£ |
2002/03
£ |
| 4,000 @ 40p |
1,600 |
| 3,000 @ 25p |
750 |
| 2,350 |
| 7,000 @ 40p |
2,800 |
| Less: Received from employer |
(2,100) |
(2,100) |
| Tax deduction |
£250 |
£700 |
| The changes benefit Rachael to the tune of £99 if she is a basic rate taxpayer and £180 if she is a higher rate taxpayer. |
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Call us soon if you wish to discuss any aspect of the new regime either because you are an employer making mileage allowance payments or because you are an employee using your own car for business mileage.
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Indirect Taxes
Businesses today face a wide array of indirect taxes. VAT and stamp duty are well known. However there are other less obvious indirect taxes which can represent a real cost to business. Read on for a summary.
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Insurance premium tax (IPT)
IPT was introduced in 1994 and represents a tax on general insurance premiums. The standard rate is 5% but a higher rate of 17.5% applies to travel insurance. Exemptions apply to long-term insurance, reinsurance and insurance for commercial ships and aircraft. Businesses pay IPT indirectly as part of the overall insurance premiums charged to them.
Air passenger duty (APT)
APT was also introduced in 1994. Businesses with employees doing a significant amount of air travel will find APT is a sizeable business expense. The rates are currently £10 per passenger (£5 in economy class) within Europe and £40 per passenger (£20 in economy class) to other destinations.
Landfill tax
Since 1996 all waste disposed of at a licensed landfill site has been subject to a charge by reference to the weight of the waste. There are two rates - £2 per tonne for inert waste such as bricks and rubble and a standard rate of £12 for all other waste. The standard rate will increase annually by £1 per tonne up to £15 in 2004. Although the tax is payable by the licence holder of the landfill site, businesses pay indirectly in the charges levied on them for disposal of their waste.
Climate change levy (CCL)
CCL is the most recent of the indirect taxes having only been introduced in April 2001. The Government has stated that the purpose of the CCL is to encourage energy efficiency and not to raise tax. The levy applies to the business use of electricity, natural gas, LPG, coal and similar products. The rate for electricity is 0.43p per kilowatt hour and for natural gas 0.15p per kilowatt hour. Registered suppliers eg British Gas charge the levy to their business customers and then pass it on to Customs. The quid pro quo for this is that businesses have benefited from a 0.3% reduction in employers’ NIC (from 12.2% in 2000/01 to 11.9% in 2001/02).
Aggregates levy
A further indirect tax is soon to be introduced in the form of an aggregates levy. The levy will be charged at a rate of £1.60 per tonne on sand, gravel or crushed rock when it is commercially exploited.
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Home (capital gains tax free?) is where the heart is
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Your home is your castle, your fortress or just a millstone around your neck depending on your circumstances and viewpoint. Whatever your situation, you hope that when you come to sell your home and move on it will have rewarded you with significant capital growth.
In many cases, such capital growth will be tax-free, being protected by the valuable capital gains tax (CGT) ‘principal private residence’ (PPR) exemption. The basic scope of the exemption is clear enough; no CGT on any gain, however large, made on the sale of your (main) private residence. However, as is so often the case with tax reliefs, there are sometimes issues or complications which can result in a restriction of the relief. Read on for a summary of some of the more important points.
Garden or grounds – the exemption covers your house and garden or grounds up to half a hectare (approximately 1.23 acres). The half a hectare includes the area on which the house itself stands. Larger gardens or grounds may be covered by the exemption but only if the larger area is needed for the ‘reasonable enjoyment’ of the property. As you can imagine this is a very subjective area and, furthermore, it is not generally possible to use the exemption when you sell off part of your garden for development the argument being that you clearly didn’t need it to enjoy the property.
Other buildings – if your home has a separate staff cottage or granny annexe this may or may not be exempt on sale depending on the geographical layout of your property.
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Two properties – if you own two homes and spend some time living in each of them - eg a flat in town during the week and a cottage in the country at weekends the exemption will only extend to one of the two. Broadly you have the choice as to which one benefits from the exemption but it is important to ‘pre-select’ your choice by notifying the Inland Revenue within certain time limits.
Business use – many of us have offices at home these days but if any part of your home is used exclusively for business purposes, the PPR exemption does not apply to the business part.
Occupation – broadly the exemption requires ongoing occupation of the property. There are complex rules which may operate to restrict the relief on sale if you have been away from your home for significant amounts of time during your period of ownership. However it is not usually a problem if there is a delay, of up to one year, in taking up residence on purchase of the property because, say, work is being done on the property. Likewise the final three years of ownership will be covered by the exemption whether or not you are living in the property. You may already have moved into a new property for example.
Other – the rules relating to PPR also cover a number of other situations - for example, how the relief operates for husbands and wives and what happens if a couple separate. We could go on! However we recommend that you talk to us soon if any of the points raised are of interest or concern to you.
After all selling your home is a stressful enough activity without having to add CGT concerns to your ‘to do’ list.
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In the same way as individuals should review their tax position as 5 April approaches, so the position for companies should be reviewed as their accounting year end approaches to identify and use any opportunities to mitigate tax liabilities.
It goes without saying that a tax review should take into account the commercial position of the company. In particular:
- the aims of the company
- the effect on liquidity or borrowing requirements
- the likely impact on the company’s credit ratings.
Companies pay corporation tax at the following rates (from 1 April 2001).
Profits
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Effective Rate
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| First £10,000 |
10% |
| Next £40,000 |
22.5%
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| Next £250,000 |
20% |
| Next £1,200,000 |
32.5% |
| Over £1,500,000 |
30% |
Notes:
1. The bands are reduced pro-rata where there are ‘associated’ companies – either companies in the same group or companies under common control.
2. It seems likely that the 10% band will be extended from 1 April 2002.
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Given this rate structure, it may be important to consider whether income could be deferred to a later period or expenditure advanced to an earlier one, if this would result in a reduction in profit taxed at a higher rate or at a ‘marginal’ rate. Check our useful summary which follows to see what can be done.
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Deferring income
Consider:
- Timing sales of goods and services so that they fall into a later period.
- Changing your accounting year end especially where your business is seasonal. The period could be shortened, or lengthened by up to six months. There are however restrictions on the number of times a company may extend its accounting period. Inevitably such changes bring with them administrative burdens and complexities.
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Advancing expenditure
Consider:
- Bringing forward expenditure eligible for capital allowances. For example, currently, small and medium-sized companies are eligible for a 40% allowance on plant and machinery purchases and 100% for a small company buying computer equipment.
- Bonuses to directors and staff. Remember that in order to be tax deductible for an accounting period, remuneration must be paid or made available no later than nine months after the end of the period.
- Making additional pension contributions. If there is a company scheme, tax relief for special contributions may be required to be spread over a period of up to four years. A company may alternatively contribute to its employees’ personal pension schemes.
- Use of specific provisions for bad debts and slow moving stock although careful evaluation is required as there is no relief for general items.
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Authors and creative artists
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Authors and others whose income comes wholly or mainly from the creation of literary, musical or artistic works or of designs are now able to average their profits over two consecutive tax years under provisions recently introduced.
Authors and artists are likely to have fluctuating income levels because a work can take more than a year to create or because a lump sum payment has been received. An averaging claim, as the example demonstrates, is intended to smooth the pattern of taxable profits and so save higher rate tax and improve cash flow. The first two years available for averaging are 2000/01 and 2001/02.
Joe is a musician and his profits are:
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£ |
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2000/01 |
10,000 |
| 2001/02 |
24,000 |
| 2002/03 |
7,000 |
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£41,000 |
Averaging is possible where the profits of the lower year are less than 75% of the profits of the higher year.
Averaging will result in the following pattern of taxable profits:
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£ |
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2000/01 |
17,000 |
| 2001/02 |
12,000 |
| 2002/03 |
12,000 |
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£41,000 |
(2002/03 can be averaged further with 2003/04)
Please talk to us if you wish to discuss the points raised in this article further.
Disclaimer - for information of users
This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.
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