SME Blog

No short-term cancellation of 50% tax rate

Cathy Corns — Fri, 27 Jan 2012 11:45:33 +0000

The prime minister recently said the 50% rate of tax on those earning more than £150,000 would continue. He did not say for how long and it was intended to be temporary, so will it stay until the next election?

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

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Relaxation on late tax return fines

Cathy Corns — Thu, 26 Jan 2012 16:42:23 +0000

HMRC has apparently told the BBC that no fines will be levied on anyone who submits their self-assessment tax return online in the first two days of February. On a similar basis, those who have tax to pay will not face any interest on payments made on 1 and 2 February

The official deadline for submitting forms is 31 January, but a planned strike for that day is set to cause last-minute disruption, hence the filing extension. It would be nice though if HMRC were to update their website for this - the front page still says if you do not submit your return by 31 January a £100 minimum fine will be charged.

HMRC is introducing a a more stringent penalty system this year with a £100 penalty applying whether or not there is tax owed. Penalties then increase depending on how late the return or payment is, up to £1,300 after six months and £1,600 after a year.

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National Insurance Contributions (NIC) holiday - £50,000 saving

Cathy Corns — Wed, 25 Jan 2012 11:17:00 +0000

The regional NIC holiday for new businesses does not seem to have had a huge take up. Press reports indicate that in total only around 10,000 businesses have claimed the relief rather than the anticipated 40,000.

Just as a reminder, new businesses set up in qualifying areas, including Northamptonshire, can save up to £5,000 in NIC for each of the first ten employees for the first year of business.

The scheme applies to new businesses set up between 22 June 2010 and 5 September 2013. As ever, there are detailed requirements to be met, but the relief is generous and is certainly worth looking into.

Full details on the areas and businesses that can claim the relief can be found on HMRC's website.

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Prize for compliance?

Cathy Corns — Mon, 23 Jan 2012 13:24:40 +0000

The Behavioural Insight Team has suggested that HMRC create a prize draw, for those that file tax returns on time, to try and persuade people to file before the 31 January deadline. The proposal is for a prize of £100,000 for one lucky taxpayer who meets the filing deadline.

Apparently, similar schemes have been undertaken by some London local authorities that created a £25,000 prize draw for people paying their council tax by direct debit. The scheme seems to have been very successful.

HMRC has indicated that it is an interesting proposal. The new penalties on late returns could cost up to £1600 and if, in addition, people who file late are excluded from a potential £100,000 prize draw it may encourage compliance.

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Fraudulent emails

Cathy Corns — Fri, 20 Jan 2012 13:14:16 +0000

In the build up to the 31 January payment deadline, HMRC has confirmed that it will never ask for credit or debit card details in emails.

Apparently there are some fake tax emails being sent out by fraudsters, in the run-up to the self-assessment deadline of 31 January, asking for credit card or bank details. Legitimate emails from HMRC will never ask for these.

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HMRC request for pilot businesses needed for PAYE Real Time Information

Cathy Corns — Fri, 20 Jan 2012 12:06:17 +0000

HMRC is asking for more businesses to volunteer for the pilot of its PAYE Real Time information Initiative (RTI).

It appears that, currently, 300 businesses have agreed to pilot the scheme, which involves employers submitting PAYE returns at the same time as employees are paid. Testing will begin in April 2012 and RTI will be compulsory for all businesses in October 2013.

HMRC wants over 1,000 more businesses to volunteer to pilot the scheme and is looking for an additional 250,000 businesses to join RTI from November 2012, following initial findings.

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Deferral of attack on high-risk tax avoidance

Cathy Corns — Wed, 18 Jan 2012 11:58:02 +0000

The government has decided not to proceed with its proposal to list high-risk tax avoidance schemes and impose additional penalties for users of these. The difficulties of implementing such a list in a way that was proportionate proved insurmountable. Apparently the government will explore alternatives later this year.

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Tax Investigations - electricians and e-traders

Cathy Corns — Mon, 16 Jan 2012 11:41:14 +0000

HMRC has announced its latest series of disclosure campaigns for electricians and electrical fitters. The plan will start in February 2012 and is likely to have terms similar to those previously offered to plumbers and medical professionals. For the purposes of the disclosure facility an electrician can be defined as anyone who installs, maintains and tests electrical systems, equipment and appliances under stringent safety regulations.

As an incentive for disclosure under this campaign, HMRC has opened investigations into 600 plumbers in addition to making five arrests against people who did not take advantage of the last disclosure opportunity. It would appear that the chance of HMRC pursuing those who fail to make a disclosure has increased.

HMRC has also announced a further campaign, for later in 2012, for those who are using e-marketplaces to buy and sell goods as a trade or business.

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New company car fuel rates

Cathy Corns — Fri, 13 Jan 2012 11:20:54 +0000

HMRC has announced new fuel rates for company cars for all journeys on or after 1 December 2011.

The amounts are:

*Engine size*	*Petrol*	*LPG*
1400cc or less	15p	10p
1401cc to 2000cc	18p	12p
Over 2000cc	26p	18p

*Engine size*	*Diesel*
1600cc or less	12p
1601cc to 2000cc	15p
Over 2000cc	18p

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Tax penalties

Cathy Corns — Wed, 11 Jan 2012 13:20:47 +0000

HMRC has confirmed that it is preparing to appeal against a decision from last year on tax penalties in which it was criticised for being unfair and, in fact, for using its penalty regime as a “cash generating scheme”.

HMRC had levied penalties on late filing of a PAYE end of year return P35, but on appeal by the company, the penalties were cancelled because HMRC waited several months before sending out notices, by which time the penalty had increased. The judge stated HMRC could not be seen to be acting fairly where it deliberately refrained from sending a penalty notice for four months or more, knowing that the effect would be to impose a minimum penalty of £500. As part of the ruling, the judge also commented that it should be a simple matter for HMRC to program its computers to send out the P35 penalty notices in May rather than September, so the fines did not automatically increase.

HMRC described the arguments as “out of kilter” with the law and so are preparing to appeal. HMRC holds that it has no specific responsibility to remind people to put in their returns or when a trigger point for a penalty may be imminent and cannot provide a general reminder service. It's view is that the UK tax system works on the principle that it is a taxpayer’s responsibility to comply with their tax obligations and HMRC is entitled to charge penalties where those obligations are not met.

The appeal will be watched with interest and I have to hope that the ruling again favours the taxpayer or HMRC will be able, as it did last year, to issue penalties only after they have reached a substantial level.

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Capital Allowances on Fixtures & Fittings

Cathy Corns — Thu, 15 Dec 2011 12:23:04 +0000

It was proposed that, from April 2012, expenditure on integral features would have to be identified and included in a claim within two years of acquisition. This would cover items in buildings such as air conditioning, heating, lighting etc. During the consultation process it was pointed out that there were several problems with this, in particular the difficulties of identifying this expenditure in large construction projects which take longer than that to complete.

Draft legislation issued in early December is therefore more targeted on the mischief which the change was intended to address. There will be no time limit on the claim to bring in integral features, provided that this is done before the property is sold, but parties to a sale will still have to agree an apportionment between eligible and ineligible expenditure within two years of that sale.

It is good to see that government has listened to the serious concerns that were raised during the consultation process and reacted accordingly.

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Allowable expenses

Cathy Corns — Wed, 07 Dec 2011 13:09:55 +0000

A freelance journalist and author decided to write a book about spending a year on a boat. He claimed a deduction for expenses incurred in moving his boat to France and living there for a year. HMRC rejected the claim on the basis that the expenditure had not been wholly and exclusively incurred for the purpose of his profession as an author, but was partly incurred for personal reasons.

On an appeal, (eventually), it was held that the costs were allowable: the law states: “If an expense is incurred for more than one purpose, this … does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purpose of the trade.”

This is reassuring for those who are self-employed, or members of partnerships.

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Research & Development (R&D) Tax Relief

Cathy Corns — Wed, 07 Dec 2011 11:23:39 +0000

The Finance Bill confirms the changes to R&D with effect from 1 April 2012. The key changes are:

increasing the relief for a Small or Medium-sized Enterprises ("SMEs ") to 225%;
the PAYE cap on repaying R&D tax credits will be removed; AND
the requirement for minimum expenditure of £10,000 a year will be removed.

This is good news and, combined with the new patent regime makes the UK a great place for innovative companies to do business.

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Patent Box regime

Cathy Corns — Wed, 07 Dec 2011 11:17:35 +0000

The new regime will apply from 1 April 2013 to companies that actively hold UK or European patents and some other specified IP such as regulatory data protection, supplementary protection certificates and plant variety rights (”Qualifying IP”). A qualifying company can own the qualifying IP itself or an exclusive license to the IP

Such companies can elect to apply an effective 10% corporation tax rate to profits attributable to Qualifying IP whether paid separately as royalties or embedded in the sales price of products. The relief will apply to existing as well as new IP, and to acquired IP provided that the company has further developed either the IP or the product which incorporates it.

The draft legislation applies as to:

Companies selling patented products or licensing their patents, the calculation is based on the total profit from the sale of products incorporating or the licensing of the Qualifying IP.
Companies which use the IP to perform processes or provide services will benefit from the Patent Box up to the level of an arm’s length royalty for the use of the Qualifying IP.

The relief is being phased in from 60% of relevant profits in year 1 rising by 10% pa until 2017.

The provisions for calculating the relevant IP profits are formulaic and work through a number of steps. Companies have a choice between a Structured or a Streaming approach.

Where a company has losses in an IP trade the loss may be offset in the company or group against other qualifying IP profits or carried forward against future qualifying profits.

It appears that the interaction between this regime and the R&D credits could apply to provide for higher repayments on R&D credits on companies with losses.

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Changes to Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) regimes

Cathy Corns — Tue, 06 Dec 2011 16:44:38 +0000

The draft Finance Bill 2012 sets out the changes proposed to EIS and VCT reliefs with the stated aim of better focussing the schemes on higher risk activities and so helping smaller, higher-risk UK companies to obtain finance. The draft legislation offers some good news and some that is not as good

First the good news:

There is to be a relaxation of the rules that set out when an individual investor is regarded as connected to a company and so not eligible for EIS relief. Currently the law provides that the individual must not hold more than 30% of the company’s issued share capital or share and loan capital. The draft legislation will disregard holdings of loan capital.

Currently, qualifying shares must have no preferential rights to dividends or assets. The new law appears to permit preferential dividend rights that are non-cumulative, fixed dividends on ordinary shares.

From 6 April 2012 the £1 million limit on investment by a VCT in a single company will be removed other than for companies in a partnership or a joint venture

For investee companies certain changes will take effect for share issues on or after 6 April 2012, subject to EU State Aid approval. These are to increase:

the employee limit from no more than 50 to not more than 250 employees;
the size threshold for gross assets to no more than £15 million before (previously £7 million) and £16 million (previously £8 million) after the investment; and,
the maximum qualifying annual amount that can be raised by an individual company to £10 million (previously £2 million).
State Aid approval has already been obtained for the increase in the individual limit to £1 million pa from 6 April 2012 (previously £0.5 million).

The not so good news:

For share issues on or after 6 April 2012 a disqualifying purpose test designed to prevent relief applying to shares which are issued subject to arrangements whose main purpose is to generate access to the reliefs in circumstances where either the benefit of the investment is passed to another party, or the business activities would otherwise be carried on by another party.

For share issues on or after 6 April 2012 a restriction of relief on share acquisitions. Currently setting up a new company, under EIS, to acquire a target should qualify. Going forward this will not be the case.

Feed in Tariffs will be excluded from the list of qualifying trades for shares issued on or after 6 April 2012 and for shares issued between 23 March 2011 and 5 April 2012 where electricity generation has not started by 6 April 2012.

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Draft Finance Bill 2012 - Seed Enterprise Investment scheme (Seed EIS)

Cathy Corns — Tue, 06 Dec 2011 15:43:05 +0000

HMRC has now issued the draft legislation on the new relief that was trailed in the Autumn Statement. The new relief comes into effect for investments made on or after 6 April 2012. The relief has a 5 year life – it will stop on 5 April 2017.

The relief offers income tax relief at 50% on the amount subscribed for ordinary shares (although there are provisions to permit certain preferential dividend rights)up to a limit of £100,000. As with EIS, gains on the Seed EIS shares will be exempt providing certain conditions are met. Additionally gains made in 2012/13 that are reinvested into seed EIS shares will themselves become exempt. This is effectively a 78% tax relief, which is brilliant.

The target company can raise no more than £150,000 in total under Seed EIS. It must be a small company; one with less than 25 employees and assets less than £200,000 immediately before the share issue. Additionally it must have been incorporated in the two years before the share issue and be carrying on a new trade.

The 30% connection test and refusal of relief for employees but not directors, continue as with EIS. There are also provisions on return of value and on utilisation of Seed EIS funds.

Companies that have already issued shares under EIS cannot now issue shares under Seed EIS. It is, however, possible to issue shares under Seed EIS followed by an issue of shares under EIS.

As ever the legislation is lengthy and there are a lot of conditions to be met before relief can be certain. Nevertheless this is a generous relief that could well prove popular.

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PAYE - getting ready for Real Time Information

Cathy Corns — Mon, 05 Dec 2011 12:58:26 +0000

The new PAYE reporting system, Real Time Information (RTI), will be introduced between April and October 2013. It will require employers to report pay, tax, National Insurance and other prescribed details to HMRC every time they make a payment to an employee. The intention is that as the data is received it will be posted to each employee’s record and coding adjustments will be made on a real time basis. Forms P35s and P14 returns will be scrapped. In theory forms P45 and P46s will also be scrapped, although these are likely to be replaced by leaver/joiner statements so there may be little practical difference. P11D and P60 requirements will remain.

There are a lot of information requirements that need to be considered for each RTI submission, depending on the nature of the payment made to the employee. Some of these are new for RTI, e.g. hours worked. Whilst HMRC has said that the balance of information requirements is no different to that already required, the key difference is that the information is required each time a payment is made, as opposed to solely at the end of the tax year.

RTI will be adopted by large employers from April 2013, with a phased migration thereafter until October 2013 when all employers will be in the new regime.

Further information is expected fairly soon.

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PAYE penalties

Cathy Corns — Fri, 02 Dec 2011 11:45:12 +0000

Apparently, HMRC is reversing its policy of only sending out PAYE penalty notices at the end of the tax year. Currently, HMRC is sending out penalty notices for late monthly payments at the end of the year. This has led to some employers not being able to rectify errors on a timely basis and so building up penalties.

HMRC originally said that it does not know the total penalty until the end of the year because the penalty rate depends on how many late penalties were incurred throughout the year. However, as part of the Real Time Information initiative, from October 2013, employers will be required to submit returns and payments every month. HMRC will then send penalty notices as and when they occur.

October 2013 seems a long time away but this is certainly better than where we are now.

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Research and Development Relief - further help

Cathy Corns — Thu, 01 Dec 2011 11:30:47 +0000

HMRC has set up a pilot of a ‘Voluntary advance assurance’ scheme aimed at small companies; those with fewer than 50 employees, including start up companies, who are about to make their first R&D Relief claim.

Companies that take part in the pilot will have the support of a designated R&D specialist who will provide one-to-one support and advice. The company and HMRC will agree a basis for the first R&D claim, and claims for the two subsequent Corporation Tax accounting periods.

Providing the agreed basis is used, the first three years claims will normally be accepted as accurate without further query.

Additionally, during the agreed period, HMRC will provide businesses with a designated contact who will be available to discuss any aspects of your R&D Relief claim.

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Autumn Statement 2011 - Seed Enterprise Investment Scheme (SEIS)

Cathy Corns — Tue, 29 Nov 2011 14:10:07 +0000

Following the government’s consultation on its proposals to develop a new venture capital scheme targeted at seed level investment by business angels the Chancellor today announced some limited further details on the relief due to come into effect from 6 April 2012.

It is now proposed that the new relief – now termed Seed Enterprise Investment Scheme (SEIS) - will provide tax relief at 50% (a higher rate than the current 30% under EIS). There is also an undertaking that gains made in 2012/13 and reinvested under SEIS will themselves be exempt from tax on ultimate disposal.

The overall individual investment limit is £100,000 and the amount a company can raise under SEIS is capped at £150,000.

The information currently available is very limited but, hopefully, the draft legislation will be available in early December.