Investment incentives

One of the few increases in tax allowances disclosed in the Budget last month was a doubling of the Annual Investment Allowance (AIA), from £50,000 to £100,000. This increase is effective from 6 April 2010 (income tax ) and 1 April 2010 (corporation tax). The AIA is a capital allowance, an amount you can write off against taxable profits for purchases of qualifying plant and equipment; not cars.

Profitable self-employed business owners are facing a 50% income tax charge in 2010-11 on earnings in excess of £150,000 and a marginal tax rate of 60% on income between £100,000 and £112,950.

Judicious use of the AIA can have considerable benefits. Let’s consider a self-employed trader with taxable profits after all deductions, but before claims for capital allowances, of £250,000. For 2010-11 the 50% income tax charge, not the total tax charge, would be £50,000. (£250,000 - £150,000 at 50%) If the trader spent £100,000 on qualifying plant or equipment, that qualified for the AIA, he or she could write off the £100,000 against the £250,000 profits and all of the 50% rate income tax charge would be eliminated! A tax saving of £50,000.

It is interesting to note that the budget contains this incentive to invest. It may have encouraged some delayed capital expenditure to save 50% rather than 40% tax.

Highlights of 2010 Budget

With the country likely to go to the polls on 6 May, Mr Darling’s third Budget
was predictably as much a political exercise as a conventional set of
announcements.

While many of the measures had been set out in last December’s Pre-Budget Report, there were also some surprises. These included the increased stamp duty land tax rate on residential property over £1 million from 6 April 2011 and the doubling of capital gains tax entrepreneurs’ relief to £2 million only two years after its introduction.

The parliamentary timetable is such that much of the Budget will not become
law before the current session of Parliament ends (12 April for a 6 May
election). Past experience (eg 2005) suggests that there will be a relatively
short and noncontroversial Finance Act rapidly enacted before the election.
A longer and more contentious Bill will then be introduced in the new Parliament, whatever happens at the polls. The Conservatives are committed to introducing another Budget within 50 days of the election if they win.

This year there were over 70 supporting notes with the Budget, demonstrating how many changes need consideration. The most significant of these for businesses included:

• Restriction of higher rate relief for certain pension contributions.
• The new £100,000 annual investment allowance.
• The doubling of capital gains tax entrepreneurs’ relief to £2 million.
• Retention of the 21% small companies’ corporation tax rate.

We hope that this summary proves useful and, if any of the areas discussed seem likely to have an impact on your personal or corporate plans, we would urge you to contact us so that we can help you.

Budget prediction

With an election looming, the Chancellor seems certain to postpone the tax rises that many economists say are inevitable. Instead, a second Budget is likely after the election, whichever party wins – and this is when painful tax rises are expected. But some changes to the big revenue-raisers such as income tax are possible, experts say. We look at some measures the Chancellor could announce.

INCOME TAX
The basic and higher rates of income tax are unlikely to change in the Budget, experts believe, the Chancellor might be tempted to augment the 50pc income tax rate for high earners with a 'super tax' of, say, 60pc on income over £1m. Mr Darling could also be tempted to reduce the tax threshold for the new 50pc rate of tax from £150,000 to £130,000.


NATIONAL INSURANCE
No change is expected in National Insurance, given that all three rates – employers', employees' and the rate for high earners – were raised in the pre-Budget report, experts say. The increases take effect in April next year.

VAT
Analysts think VAT is unlikely to rise in this Budget – but is almost certain to be increased later in the year. Its scope could also be extended to items now zero-rated.

CAPITAL GAINS TAX
This is one tax that seems certain to rise, experts said. "With the 50pc rate of income tax due to take effect from April 6, many expect the current rate of CGT – just 18pc – to rise to counter tax avoidance by switching investments to generate capital gains instead of income," said Matt Coward, director of private client tax at PKF. "A CGT rate as high as 25pc or 40pc could be announced."

INHERITANCE TAX
Although the Chancellor has frozen the IHT nil-rate band for the next tax year at £325,000, he may make other changes to squeeze more revenue out of death duties. "Tightening the rules on gifts could bring more funds into the IHT net and higher rates of tax on larger estates, perhaps a 50pc rate on estates of over £5m, could raise significant amounts," Mr Coward said.

CAR TAXES
The Chancellor is thought unlikely to announce any new taxes given that duty on petrol is due to go up every April until 2013, by 1p a litre, plus inflation. He will probably announce the final amount of this year's rise, which could be about 2p a litre.

Keeping control of your company

Keeping control of your company through Company Voluntary Arrangements

The challenges that many businesses have recently faced as a result of the economy can often result in good businesses being severely affected by a downturn in sales, or by rising overheads.

This has placed additional pressure on businesses who may not know if they should continue to trade or not. One solution, which appears to be becoming more popular with Directors, is to look at Company Voluntary Arrangements. A CVA would enable a business to ‘ride the storm’ with their existing business, believing that they are sufficiently profitable to enable payment of their historical debts providing they are given the time to do so.

A CVA is a legally binding agreement between a Company and its creditors to pay back as much as they can afford over a given period of time. It enables the business to continue to trade and the contributions can be made through ongoing profits introduced monthly, or via a lump sum. Debts will also crystallise meaning that no further interest is likely to be accrued.

Main considerations for a CVA

* The outcome for the creditors

The proposal must ensure that what is being proposed would be better than the alternative.

* The attitude of the Creditors

75% of the unsecured creditors (by value) who vote in relation to the CVA need to accept the terms of the proposal in order for it to be deemed approved.

* Crown Liabilities

Although government legislation is intended to promote business rescue, H M Revenue & Customs may reject a CVA proposal on the grounds of a previous history of poor payment. Companies therefore need to ensure that every effort has been made to seek repayment plans with HMRC.

* Fit, feasible & fair

The CVA should represent a fair offer, which is capable of being achieved and is fit to be proposed and considered.


BENEFITS OF A CVA

The most important benefit of a CVA is that it is a formal method of business recovery, providing protection to the company and allowing the business to continue, whilst enabling a better outcome for creditors. Another benefit of a CVA is that it is a way of buying time to either cut unprofitable areas of a Company or to simply start seeing the benefits of rises in sales or increased spending on marketing.

An added benefit available to Directors when choosing a CVA is that less focus remains on them; limited investigations are undertaken and no report is submitted to the Insolvency Service on their conduct.

Using capital losses effectively

With the 5th April tax year end fast approaching, some investors will be looking to minimise their capital gains tax liability on assets (usually shares) sold at a profit. In the last 12 months, most shares have performed well but there may have been some shares sold at a loss. Using these losses effectively needs some planning.

As a result of the capital gains annual exemption, the loss will reduce the amount chargeable to capital gains tax but may not reduce the amount of capital gains tax payable.

So here are some rules of thumb:

1/. Only sell the loss-making assets to claim a capital loss in a tax year when your gains (before losses) are more than the capital gains annual exemption (£10,100 in 2009/10). You will not benefit from the loss claim if you would not have paid tax on the gains

2/. If you have sold assets at a loss and your planned disposals will generate capital gains lower than the annual exemption, consider not making any disposals at a profit in that tax year. The loss can be carried forward where it is relieved after the annual exemption is taken into account. When claimed, losses carried forward to a later year always reduce capital gains tax liabilities.

As you are aware, there are no capital gains tax liabilities for shares held in an ISA which is, therefore, very tax-efficient.

New PAYE penalties starting in May, 2010

Starting 19th May, 2010, HM Revenue and Customs have introduced a penalty for late payment of monthly PAYE liabilities including Tax, National Insurance contributions, Construction Industry Scheme deductions and Student loan deductions.

The new late payment penalties will apply to all employers. There is some respite to small employers since they pay quarterly.

The penalties will be a percentage of the amount paid late and start at 1% and increase to 4%, depending on the number of late payments in the tax year. There are also penalties of 5% if any of the PAYE due is still not paid after 6 months and again after 12 months.

There are heavy penalties for late payment of Class 1A National Insurance (from P11D returns) with a 5% penalty if paid 30 days late then a further 5% if 6 months overdue and a further 5% if 12 months overdue