Welcome to our Summer 2002 newsletter
Contents
One Business or Two Going Cheap Employment Matters Health and Safety
and the
Small Business
Buy-to-let -
an Investment
Opportunity?		 Work/Life Balance and the Tax Implications! Finance Update National Insurance Numbers

Please contact us about any of the matters raised in this newsletter
 Remember - we're here to help!
One Business or Two?

Imagine you run a business where the turnover has recently risen above the VAT registration threshold. You now have to think about VAT registration and all that brings with it. But if instead there are two separate businesses run through different legal entities, both with turnover below the registration threshold, then you do not need to worry. Not surprisingly, Customs have always taken a very strict view of whether two businesses really are separate or whether in reality they are a single business that ought to be VAT registered.

In a recent tribunal case, a pub and restaurant had been treated as two separate businesses and the restaurant was below the VAT registration threshold. The decision went against Customs – ie the two businesses could continue to be treated separately. The tribunal made a couple of useful points. Firstly, that the perception of the public as to whether they are dealing with one business or two separate ones is of no real importance. Secondly, Customs’ view has always been that businesses have to be economically dissociated in order to be regarded as separate businesses for VAT purposes. However, the tribunal pointed out that inter-dependence of businesses is a common feature in commerce and one cannot assume that a business is not separate simply because it relies in effect on another business for its operation.

It is to be hoped that Customs will take these common sense observations to heart when dealing with similar cases in the future.
Going Cheap

The number of businesses for sale is on the increase. With nervousness about the state of the economy, many owners are looking to sell and banks and investors often want their debt repaid. Now might seem like a good time to buy but remember:
  • more than 70% of acquisitions fail to generate the anticipated returns
  • 20% of acquisitions are disastrous for the purchaser.

Having said this there are still good reasons to buy; for example, the ability to add mass to the business and the need to acquire new products or technologies so that the business can grow.

Whatever the reason, the acquisition of a business should be part of a long-term strategic plan. Buying simply because it was going cheap is a recipe for disaster. Beware the price. Where a business has debt to repay or investors looking for an exit route, the suggested price might be much higher than the business really warrants. Walk away!

The key to acquiring a business is always the detailed implementation plan. Acquire the right business at the right price and it will help your business to move forward. Get it wrong and…..the statistics speak for themselves. Happy hunting!
Employment Matters

Parental leave

Several changes will be made to the rules on parental leave. They will take effect in 2003 and the government estimates that the rules will affect around 800,000 new parents each year.

From April 2003, working mothers will be entitled to six months paid and a further six months unpaid maternity leave. At the same time the rate of statutory maternity pay will increase significantly to £100 per week.

Working fathers will be entitled to two weeks paid paternity leave at the same rate as statutory maternity pay. The new right to paternity leave is in addition to the existing provision for 13 weeks unpaid parental leave.

Parents who adopt a child will for the first time be entitled to paid adoption leave. One partner will be allowed the equivalent of maternity leave and the other will have paternity leave rights.

Any statutory amounts paid out under the new rules will be largely reimbursed by the state. Most employers will be able to recover 92% of what they pay out whilst the smallest employers will be entitled to a full recovery.

Pregnancy

One of your members of staff is going to be off on maternity leave for six months. So you hire a replacement on a six month fixed term contract. However, it turns out that the replacement is pregnant too and unable to work the full six months of her contract.

If you try to dismiss her you are likely to have a problem. The European Court of Justice recently ruled on this point. The employer argued that the employee was not dismissed because of pregnancy but due to the fact that she couldn’t perform part of the contract. The Court thought otherwise and held that the dismissal had been due to pregnancy and, as such, amounted to direct sex discrimination.

This confirms that in the case of pregnancy, dismissal is not an option. Employers must now accept, it seems, that in such a case they have unwittingly employed someone who is able to perform only part of the contract and who they must continue to pay as well as finding cover for them.

Employment tribunals

Where employees are in dispute with their employer they will in future have to raise their grievance internally before going to a tribunal. A fixed period of conciliation will be introduced to encourage quick settlement. All employers will have to include disciplinary rules and procedures in the written statement of the terms and conditions of employment. Only employers with at least 20 employees were previously required to do this.
Health and Safety and the Small Business

The Health and Safety Executive now has a web page covering health and safety information that is particularly relevant to small businesses. It can be found at www.hse.gov.uk/startup/index.htm The website considers a range of issues including worker rights, controlling of dangers at work and accident reporting.
Buy-to-Let - an Investment Opportunity?
Property has always held an attraction for the UK investor because of its permanence, security and ability to generate capital growth. Currently, buying residential property to let is being considered as a serious alternative to other investments, including pensions, due to the poor performance of the stock market, low annuity rates and the perceived inflexibility of pension funds in retirement. We consider some of the relevant factors to take into account when considering buy-to-let.

The costs involved in purchasing a property will obviously be variable and dependent on individual circumstances. However, when buying property to let it is important to ensure that the property is attractive to the letting market. For example, is it close to good travel networks, in a university town or a commuter belt? The likely maintenance costs of the property should also be considered.

Buying property to rent out usually involves some level of borrowing. The interest paid on the loan can be deducted from the rental income for tax purposes but of course there is no deduction for any capital repayments. With a repayment mortgage, the interest paid on the loan will decrease over time as the capital balance decreases. All other things being equal, the gap between rents and interest will increase as will the tax charge on the rental income. It may be worth considering an interest only loan on the buy-to-let property particularly if you have some other loan, for example on your main residence, the interest on which is not tax-deductible. Then out of the rents earned you could redirect the loan payments you would have made on a repayment mortgage against your residential mortgage. The result of this will be less interest on your residential mortgage which is not tax-deductible and more interest on the buy-to-let mortgage which is tax-deductible.

Inflation will have an impact both on the real value of the property and any outstanding loan. The two major concerns with buy-to-let will be future interest rates and the ability to let the property for 52 weeks of the year. It is often suggested that the figures should be calculated on the basis that the property is only let for 11 out of every 12 months. Also bear in mind the effect on mortgage repayments of an increase in interest rates.

Any increase in the value of your buy-to-let property is potentially subject to capital gains tax on sale, albeit that non-business asset taper relief may reduce the taxable gain. For inheritance tax purposes the property will be treated as part of your estate, although any outstanding loan on the property will reduce the value for this purpose.

We have only had room in this article to mention some of the relevant factors. Please talk to us if you would like any further advice or information on buy-to-let. We look forward to hearing from you.


‘Work/life balance’ is currently a much used expression and describes how employees divide their time between work and their personal lives. In a recent Institute of Management survey on the quality of working life in Britain, three quarters of respondents agreed that working excess hours or at weekends was the only way to deal with their workloads while nearly two thirds explained that it is part of their organisation’s culture. So how can employers help their employees? One initiative which is gaining popularity is home working. Employees can save valuable commuting time and employers can use office space more efficiently. But what are the tax consequences of such a policy? Some of the more common issues are outlined below. Please call us if anything we have said raises any issues or concerns.

Furniture and equipment

If furniture, photocopiers etc are made available to employees, generally they pay tax (each year) on a benefit equal to 20% of the asset’s original market value unless the asset is used only for business, or private use is not significant. With home workers this can be difficult to monitor. If employees provide the equipment then they may be able to claim a tax deduction for capital allowances based on the business use proportion of the asset.

Computers

Where computers are provided to employees for home working, once again private use is difficult to monitor. Since April 1999 the benefit on provision of computers (including modems, printers etc) is only taxable to the extent it exceeds £500. This is so provided the employee only uses the computer and it remains the property of the employer.

Home telephones

Home telephone lines often cause problems. If an employee has both business and personal use of a home telephone and the employer reimburses the bill in full, income tax and Class 1 NIC will be due on the line rental and the personal calls. The Inland Revenue does not accept that line rental can be apportioned between personal and business use.

If the employer installs a second dedicated business line in the employee’s home, no tax charge will arise. The company can meet the costs of the line rental and the business calls. However, itemised telephone bills should always be requested to ensure no element of private use.

Mobile phones

There is no taxable benefit on employer provided mobile phones. However, if an employee uses his own private mobile phone then any element of private use reimbursed by the employer is subject to income tax and Class 1 NICs.

Place of work

It may be important to establish (through the employment contract for example) where the employee’s normal place of work is. If the employee is clearly home based then it may be possible for the employer to reimburse travel costs between the employee’s home and the employer’s premises without creating a tax charge.

Of course there may be other non-tax issues arising from home working, relating to employment law or health and safety for example.

Home working is undoubtedly on the increase. If it creates happier, more productive employees and saves the employer money, it may be worth considering.
Finance Update

While you have probably considered the more traditional sources of finance available to your business, have you considered some of the latest initiatives on offer? Choosing the right finance can be a complex process and certain types of finance have been traditionally difficult for small businesses to obtain.

With this in mind, the government, keen to promote small and medium sized businesses (SMEs), has set up the Small Business Service (SBS) to ‘champion the interests of small businesses’. A key service that the SBS offers is the Loan Guarantee Scheme. If your business has found it difficult to obtain a conventional loan from the banks because of a lack of a track record or security but has a viable business proposal, this scheme may be of interest to you.

If your business needs to make better use of technology and intends to develop technologically innovative products and processes then the SMART initiative may be of interest. Again managed by the SBS, this provides grants and awards through a number of different arrangements to technology-based small firms. Other targeted funds are also available, for example, aimed at disadvantaged areas in the UK.

For the more entrepreneurial businesses, venture capital may be of interest. Traditionally this type of finance has been difficult for SMEs to obtain. There are a number of initiatives such as the UK High-Tech Venture Capital Fund, the Regional Venture Capital Funds and the National Business Angel Network which aim to provide both debt and equity finance to SMEs. For the more adventurous there may even be European Funding available!

Another important role of the SBS is the management of the national network of Business Links. The network provides a grant search facility to help identify grants and awards that may be available to your business.

To discuss the financing needs of your business and ways in which we can help you obtain the right type of finance, please get in touch.
National Insurance Numbers

A national insurance (NI) number is a unique reference number that is used to record the NIC paid by (or credited to) the employed and self-employed. It ensures the contributions are recorded on the correct NIC account, which in turn ensures the right benefit and pension entitlement when a claim is made.

By the end of 2000 there were about 82 million NI numbers. It is rumoured that the Inland Revenue may soon run out of numbers in their present format. A NI number is made up of two letters, six digits and a further letter which will be A, B, C, or D. A typical number would be AB 123456 C.

If you or one of your employees cannot remember their number, what should they do? You can begin by checking old payslips, tax returns, P60s or a P45 so see if the number is on any of those. If that doesn’t help then the Inland Revenue will do an automatic check if you need to send them a form P46. Failing that there is an Inland Revenue NI number tracing service. This requires you to complete a form CA6855 and the number will then be notified to you on form CA6856.

If on the other hand an employee has never had a number they will need to get one by arranging an appointment with their local Benefits Agency office. This may involve booking months ahead. The individual should take a valid passport, one other proof of identity, a contract of employment (or employer letter) and, if appropriate, their work permit to the meeting. The meeting will take the form of a specialist interview during which form CA5400 will be completed together with a written statement. If the registration is successful the number will be issued between six weeks and three months later. Meanwhile a temporary number should be used. These take the form of TN followed by the employee’s date of birth and M or F denoting sex of the employee eg TN 16 07 60 F would be used for a female born on 16 July 1960.

Please talk to us if you have any concerns over NI numbers or any other NI issue.

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.