Tolley ® Tax Training Budgets 2010… Mike Truman LLB FCA CTA (Fellow) Editor, Taxation Chris Jones BA CTA (Fellow) ATT Director of Tax & Accountancy, LexisNexis

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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.?

Tolley ® Tax Training 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

Tolley ® Tax Training 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 C02 < 107gm/km

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training Example Calendar 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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?

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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%)

Tolley ® Tax Training 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

Tolley ® Tax Training 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%)

Tolley ® Tax Training 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?

Tolley ® Tax Training Dividend route The tax rates on the dividend vary according to the total income of the taxpayer –The calculations assume no income from other sources Basic rate taxpayer – no tax charge Higher rate taxpayer – 25% of dividend paid (32.5% less tax credit) Additional rate taxpayer 36.11% of dividend paid (42.5% less tax credit)

Tolley ® Tax Training 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%

Tolley ® Tax Training £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%

Tolley ® Tax Training 50% tax rate Referred to as the “additional rate” Reached at taxable income of £150,000 Thus no personal allowances are available Dividend rate in this band is 42.5% This is 36.11% of the net dividend –A significant increase (44%) from 25% on a higher rate taxpayer

Tolley ® Tax Training 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%

Tolley ® Tax Training 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”

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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

Tolley ® Tax Training 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%

Tolley ® Tax Training 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

Tolley ® Tax Training 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

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