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Budgets 2010 … Mike Truman LLB FCA CTA (Fellow) Editor, Taxation Chris Jones BA CTA (Fellow) ATT Director of Tax & Accountancy, LexisNexis

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Budgets 2010 … Mike Truman LLB FCA CTA (Fellow) Editor, Taxation Chris Jones BA CTA (Fellow) ATT Director of Tax & Accountancy, LexisNexis 2 Bill or not 2 Bill? Finance Act 2010 already passed in three hours Second Budget now announced for 22 June ‘within fifty days’ of the election

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Budgets 2010…Mike Truman LLB FCA CTA (Fellow)Editor, TaxationChris Jones BA CTA (Fellow) ATTDirector of Tax & Accountancy, LexisNexis

2 bill or not 2 bill
2 Bill or not 2 Bill?
  • Finance Act 2010 already passed
    • in three hours
  • Second Budget now announced for 22 June
    • ‘within fifty days’ of the election
  • Coalition has outlined some of the key points
coalition tax proposals
Coalition tax proposals
  • Work towards £10,000 personal allowance
    • £7,100 next year, matching NI?
    • but focused on lower/middle incomes?
  • NI percentage increases go ahead, but move employer thresholds up
  • CGT at ‘close to income tax rates’ but with ‘generous exemptions’ for business
  • IHT threshold rise scrapped
income tax rates and allowances
Income tax rates and allowances
  • Existing rates and allowances unchanged
  • Removal of personal allowances over £100k and additional rate from £150k as announced
  • Complaints about personal allowance not increasing
    • RPI 3.5%
    • but negative back in September when this was set
employer funded childcare
Employer-funded childcare
  • Vouchers must be ‘open to all’
  • But cannot take employee’s income below NMW limit
  • Does that mean they are not ‘open to all’?
  • Will not be, and is backdated to 2005/06
  • But hurts the people it is meant to help
benefit in kind on cars
Benefit in kind on cars
  • 6 April 2010 – 5 April 2015
  • No charge on cars or vans which ‘cannot’ produce emissions
    • electric or hydrogen fuel cell
  • 5% charge if the emissions are 75g/k or less
  • Sounds difficult, but 165 g/k used to be the threshold
company car strategy
Company car strategy
  • By 2012/13 it will be:
    • 0% if no emissions (to 2015?)
    • 5% if under 75 g/km (to 2015?)
    • 10% if under 100 g/km
    • then 1% for every 5 g/km, 35% at 220
  • No discount for hybrids from 2011/12
  • Have the smallest family car on the co.?
company car
Company car
  • Cars are still a reasonable benefit providing a low emissions car is chosen
  • And why not consider a car for spouse
    • or where eldest child passes their driving test and client wants to help with their first car
  • Client can put spouse/child cars through the business and achieve very favourable tax breaks
  • Do record the car on the P11D though
tax efficient

C02 < 107gm/km

Tax efficient
  • A VW Golf 1.6TDi 105 Bluemotion SE costing around £16k would cost director £832pa in tax plus £266 Class 1A
    • with a 100% FYA in the company
    • and tax relief on all running costs
    • and full VAT reclaim on repairs etc
  • Is this better than providing a car for spouse out of taxed income?
  • The self employed cannot do this
    • As only business costs are deductible
  • Any ‘enterprise in difficulty’ is to be excluded
  • Qualifying trade in UK rule is removed
  • Substitute with a permanent establishment in the UK
  • Can be for the main company or for a subsidiary
  • From RA to second bill
annual investment allowance
Annual investment allowance
  • Increases to £100,000 from 1/6 April
  • Pro-rata if the accounting period spans the change
  • Anti-avoidance legislation to prevent property loss relief against general income
    • tax avoidance arrangements after 24 March
  • Calendar 2010
  • 3 months x £50,000 = £12,500
  • 9 months x 100,000 = £75,000
  • Total £87,500
  • BUT
    • no more than £50,000 prior to 1 Apr 2010
zero emission goods vehicles
Zero emission goods vehicles
  • 1 April 2010 – 1 April 2015 again
  • Zero emissions again
  • Goods vehicles will get a 100% first year allowance
    • in addition to the AIA
    • cap of 85 million euro over its lifetime
loans to participators
Loans to participators
  • Idea was to make a loan to the shareholder/director, and then write it off
  • They were taxed as a distribution, but arguably no NI, and arguably got a loan relationship write off
  • Will definitely now not get the write off
furnished holiday lets
Furnished holiday lets
  • Was to be abolished from 6 April 2010
    • would have allowed sales to 5 April 2013
  • Likely now to be retained
    • excluded from Finance Act 2010 by what are now the coalition government parties
  • But how will new ‘business’ CGT relief be defined?
corporation tax general
Corporation tax general
  • No change to main rate
  • Small profit rate left at 21%
    • will it be made permanent?
    • drop to 20%?
    • increase to a single 25% rate?
  • All distributions received by companies will be of an income nature unless specifically excluded
small companies
Small companies

Dividend is always the preferred method at small company rate of corporation tax

Can distribute 100% of the post tax profits as dividend with no tax liability on recipient up to profits of £49,188

assuming salary of £5,720 also taken to cover LEL

Effective rate is 18.56%


is it worth being a company
Is it worth being a company?

For modest profits of £50,000 there is a saving of £’000’s

The marginal rate at £50,000 is 40.75% compared with 41% as sole trader

But the savings in the company are in the basic rate band

Sole trader 20% + 8% = 28%

Company 21%

21% + (£79 x 25%)

tax burden salary v dividend
Tax burden – salary v dividend

At £50,000 pre tax profit in the company

Dividend (salary of £5,720 to use some personal allowance) – Tax is £9,459

Salary - Tax and NIC is £17,154

Best route is small salary and the balance by dividend

CT £9,299 + IT £160

worried about low salary
Worried about low salary?

Increasing the salary slightly clearly adds NIC burden

An idea of how the figures work out – still using £50,000 profit before tax

Salary of £10,000 – total tax charge £10,118 (20.2%)

Salary of £20,000 – total tax charge £12,020 (24.0%)

large company
Large company

Assuming full rate of corporation tax payable at 28%

In the medium term this is likely to reduce

This would erode the salary route even further

This time assessing the cost on a “net pay basis”

How much profit is needed to provide a desired net pay?

start with 65 000 net
Start with £65,000 net

Dividend only

Profit needed £102,089

Effective tax rate 36.3%

Salary only

Profit needed £111,475

Effective tax rate £41.7%

Mix with salary of £5,720

Profit needed £99,599

Effective tax rate 34.7%

86 000 net income
£86,000 net income

Dividend only

Profit needed £143,675

Effective tax rate 40.1%

Salary only

Profit needed £156,575

Effective tax rate £45.1%

Mix with salary of £5,720

Profit needed £141,187

Effective tax rate 39.1%

net income 125 000
Net income £125,000

Dividend only

Profit needed £220,836

Effective tax rate 43.4%

Salary only

Profit needed £243,929

Effective tax rate £48.8%

Mix with salary of £5,720

Profit needed £218,163

Effective tax rate 42.7%


At full rate of CT dividend is still better when looking at the package as a whole

NIC costs are still the issue

Whilst dividends remain free of NIC this will continue

But beware of persistent rumours of a “fairer system of taxation”

share incentive plans
Share incentive plans
  • Get a corporation tax deduction for value of shares transferred
    • no charge to employees
  • Been giving shares then stripping away value
  • Will not be allowed after 24 March
  • Meant to be a maximum of £30,000 value shares at time of grant
  • Been using this to provide ‘geared growth’ shares
  • Can no longer be issued over shares in a company controlled by a listed company
avoiding the 50 rate
Avoiding the 50% rate

Converting income to capital by holding in a company and looking to ESC C16 in due course

Income not distributed subject to lower CT rates

Closing company later with CGT at 10% or 18%

Transactions in securities legislation in ss 682 to 713 ITA 2007


A – Genuine commercial reasons

B – Tax advantage is not main object

Recent cases

Snell: tax was one of the objects

Ebsworth: taking tax advice does not mean avoidance

finance act 2010
Finance Act 2010
  • New rules apply from 24 March 2010
  • TIS rules will bite where all of the following are satisfied:
    • Shareholder is party to a TIS
    • Shareholder receives consideration which is not liable to income tax
    • The “fundamental change of ownership” exclusion does not apply
    • Main purpose was gaining of a tax advantage
fundamental change of ownership
Fundamental change of ownership
  • Essentially shareholder or connected persons hold 25% or less of the company’s ordinary shares in two years following the TIS
    • Giving no more than 25% of distributable profits or assets on a winding up
  • Based on current HMRC practice for granting clearances
  • Registration and deregistration limits change a little
    • £2,000 each
  • Postal services by Royal Mail only exempt if under ‘licensed duty’
    • so Parcelforce is now VATable

Sole trader buys a yacht in November 2008 for £100,000 plus £17,500 VAT

estimated private use 75%

Trader could follow s.24(5) and recover £4,375 (25% of £17,500) on VAT return

Or apply Lennartz

recover £17,500

difference of £13,125 is repaid to HMRC over five years

(£100,000 / 20 quarters) x 75% x 17.5%

changes from 22 january 2010
Changes from 22 January 2010

HMRC have confirmed that Lennartz does not apply to non-business use

Will affect charities more than any other entity

Those in the middle of a Lennartz calculation may continue to the end of their adjustment period

New purchases must be apportioned under s.24(5) VATA 1994

stamp duty
Stamp duty
  • First time buyers get a doubling of relief to £250,000
    • but what is a ‘first time buyer’?
    • only for two years
  • New rate of 5% for over £1 million residential properties
    • from April 2011
You have been listening to Mike Truman & Chris Jones…… goodbye, and thank you for your time and attention!