Transcript Slide 1

Tolley® Tax Training
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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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
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•
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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
£9,128/£49,188
up to profits of £49,188
– assuming salary of £5,720 also taken to cover
LEL
• Effective rate is 18.56%
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21% + (£79 x 25%)
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%
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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!