Business Tax looking forwards

Some of the changes announced in the recent Pre-Budget report that affect business tax are highlighted below. Do call if you would like more information.

Corporation Tax - the small company rate of Corporation tax was due to rise from 1 April 2010 to 22%. The Chancellor announced that this rise would be once again deferred, so the rate remains 21% until 31 March 2011. The benefits of operating through a limited company remain slim for those with very modest profits although in difficult economic conditions the protection of limited liability is still a benefit. For those with higher income, the opportunity to shelter tax at corporation tax rates by retaining earnings in a limited company presents a tax planning opportunity for 2010, especially if you consider the impact of income tax rates of 50% and even 60% on the horizon. However there may be further changes in the 2010 Budget which necessitate reviewing this strategy.

R & D relief - Companies claiming SME R & D relief have previously been required to own the intellectual property deriving from the research and development activity as a condition of claiming the enhanced rate of R & D relief of 75% and the related payable tax credit. Finance Bill 2010 will abolish this requirement, opening up claims to enhanced R & D relief to more companies which engage in R & D but do not own the resulting intellectual property.

Employment costs, NIC - there will be no increase in employers NIC until April 2011 when employer´s contributions will rise by 1%.

Company Cars - company car benefits will rise in 2010, 2011 and 2012 based on existing announcements. Electric cars and vans, by exception, will be taxed at 0% for 5 years from April 2010.

Free fuel for private motoring - companies that still offer free private fuel to employees might like to reconsider their policy. There are alternatives that would be more beneficial to employers and employees. From April 2010 the tax costs to both parties are due to increase.

Election 2010 - There is no doubt that that we will likely see significant changes to taxation this year once the election has settled the political flavour of the next government. How this will affect business taxes is yet to be decided!

Personal Tax looking forward

Some of the changes that effect personal tax are highlighted below. Do call if you would like more information.

Income Tax - from the 6 April 2010 those with income over £150,000 will pay tax at a new super-tax rate of 50%.

National Insurance - the half percent increase that was already announced to apply from 6 April 2011 has been doubled to 1%. This will affect the self employed, employed and employers. The rates of Class 1 primary NIC will rise from 11% to 12%. Employers will see their contributions increase from 12.8% to 13.8%. Self-employed persons will see their Class 4 contributions rise from 8% to 9%, and 1% to 2% for the additional rate.

Pensions - we already knew from the Budget 2009 that tax relief on pension contributions for higher earners would be restricted from 6 April 2011. This affects those earning over £150,000 and tapers away the higher rate relief until, at an income level of £180,000, only basic rate relief is due. At the time, numerous anti-forestalling provisions were introduced to ensure that taxpayers could not easily act to take advantage of the relief before it disappeared.

The Chancellor has confirmed that the £150,000 threshold will now include employers´ pension contributions but he also introduced a ´floor ´of £130,000 so that individuals with earnings below this amount (excluding employer pension contributions) will not have their tax relief restricted.

While the clarification is welcome, it does bring within the rules taxpayers who earn between £130,000 and £150,000, many of whom previously thought they were not caught by the proposed changes. The tax charge in this income range will be calculated in the same way as those earning in excess of £150,000.

Election 2010 - There is no doubt that that we will likely see significant changes to taxation this year once the election has settled the political flavour of the next government. How this will affect your take home pay is yet to be decided!

Changes to VAT Flat Rate Scheme

If you presently use the VAT Flat Rate Scheme be sure to check that you are using the revised flat rate percentage for your trade. These rates were changed on 1 January 2010. A full list can be downloaded from HMRC’s web site at:

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5a

In revising the rates to coincide with the increase in the standard rate to 17.5% on the same date, HMRC have not simply reverted to the flat rate percentages in use up to 1 December 2008, when the standard rate was changed from 17.5% to 15%. In some cases rates have increased.

In reality, most of the increases in the flat rate percentages compared to 2008 are either 0.5% or 1%. The major changes are in the following categories (we have shown the 2008 rates in brackets):

• Agricultural services 10% (7.5%)
  
• Membership organisations 7% (5.5%)
  
• Post offices 4.5% (2%)
  
• Retailing food, confectionery, tobacco, newspapers or children’s clothing 3.5% (2%)
  
• Social work 10% (8.5%)

In some cases it may be beneficial to withdraw from the flat rate scheme. HMRC have graciously conceded to allow retrospective claims to quit, if it is discovered that the flat rate calculation no longer produces a satisfactory result.

Users of the scheme will be glad to know that it is still possible to recover the VAT input tax on capital expenditure goods costing £2,000 or more, including input tax.

The maximum turnover limit to stay within the scheme remains unchanged at £150,000.

Please call for assistance if you are unsure if you should either join the flat rate scheme, or leave due to an increase in the rate from 1 January 2010.

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DISCLAIMER - PLEASE NOTE: The ideas shared with you in this email are intended to inform rather than advise. Taxpayers circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this newsletter, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.