Budgets 2010
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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


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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


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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


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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


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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


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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


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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.?


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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


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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


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EMI

  • 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


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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


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Example

  • 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


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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


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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


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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?


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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


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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%

£9,128/£49,188


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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%)


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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


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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%)


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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?


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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%


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£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%


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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%


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Conclusion

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”


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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


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CSOP

  • 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


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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

Conditions

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


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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


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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


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VAT

  • 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


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Lennartz

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%


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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


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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


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You have been listening to Mike Truman & Chris Jones…… goodbye, and thank you for your time and attention!


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