Welcome

Welcome to our spring newsletter. It may feel as though spring is still some way off but console yourself with the fact that as we went to print there were only 327 shopping days until Christmas! More seriously spring is the time to turn your attention to an annual tax review as the end of the tax year on 5 April approaches. Read our year end tax planning supplement to help you focus on areas relevant for you. We would be delighted to discuss a plan with you and any action you may need to take.

Last December’s Pre-Budget Report may seem a long time ago but a number of the important changes announced take effect later this year. Read our summary of the major changes most likely to affect you. We also summarise for you some significant recent changes to the Small Firms Loan Guarantee Scheme and point you in the direction of some useful guidance on making the most of your office space.

As ever, we hope you enjoy this quarter’s news and we would be delighted to hear from you if you have any questions or comments.

Delay not cancellation

Just as business was starting to gear up for the introduction of the new Construction Industry Scheme (CIS) due to start in April 2006, having already been deferred from April 2005, the government announced that the new scheme was to be delayed again until April 2007. The real problem was that the Revenue’s systems were nowhere near ready to cope with a launch this April.

Part of the (largely unreported) background to this was the considerable pressure brought to bear on the Revenue by the construction industry who indeed announced as long ago as last September that they had withdrawn from negotiations with the Revenue because of the Revenue’s refusal to delay the start date.

As we now know, the current scheme will continue until April 2007 and over the next year there will be a full joint testing programme for the new verification service and monthly contractors’ returns and an analysis of areas of non-compliance in the industry.

In the run up to April 2007, the Revenue will step up their compliance activity in the construction industry. The message seems to be that there will be no light touch from April 2007, as business is being given an extra year to put its house in order. Contractors should certainly not be lulled into a false sense of security by the delay.

Please contact us if you would like to discuss any aspect of the current or new CIS.

Energy efficient cars

The threat of ever increasing fuel prices is never far from our thoughts. This might serve to focus attention a little more closely on energy efficient cars. Since April 2002, a business purchasing a car with CO2 emissions not exceeding 120 grams per kilometre (gm/km) has been able to claim a 100% capital allowance. In other words the full purchase price can be deducted from business profits in the year of purchase unless the car is for the proprietor of an unincorporated business when the allowance will be restricted to take account of the proportion of private use. Back in 2002 the allowance whilst attractive was not a reality for many since very few cars qualified. However the list has now expanded and you may be pleasantly surprised to find the Audi A2 1.4 TDI on the list, as well as certain models of the Citroen C3, Renault Megane and VW Lupo. Try www.comcar.co.uk for a useful comprehensive list of qualifying vehicles.

A car costing say £14,000 would normally only qualify for a capital allowance in year one of £3,000 (being 25% of £12,000 since £14,000 constitutes an ‘expensive’ car). However the Audi A2 1.4 TDI with emissions of 116gm/km would qualify for an allowance of the full cost of £14,000.

Pre-Budget changes take effect

Last December’s Pre-Budget Report now seems like a distant memory. However a number of the important changes announced will shortly take effect. We provide a reminder of the major changes most likely to affect you.

Small companies’ 0% tax rate abolished

A starting rate of corporation tax of 0% was introduced in 2002 and applies to companies with taxable profits of £10,000 or less. Companies with profits between £10,000 and £50,000 currently enjoy a marginal relief from the small companies’ rate of 19%.

In 2004, the government thought the system was being ‘abused’ and introduced a ‘non–corporate distribution rate’ of 19% on companies to the extent that profits were distributed.

The result has been a complex system and the government has therefore decided to replace the non-corporate distribution and zero rates with a new single banding set at the current small companies' rate of 19%.

Many will welcome the abolition of a complex system but it does mean that all small companies will pay corporation tax at 19% whether profits are retained or distributed.

Pension loopholes closed

April 2006 (‘A’ day) will see the introduction of the long awaited new taxation regime for pensions. Due to concerns about potential abuse two new measures will be introduced at the same time as the new regime.

• The removal of the tax advantages for investing in residential property or certain other assets (such as fine wines, classic cars and art and antiques) from pension schemes which are ‘self-directed’ such as SIPPs and SSASs. The effect will be to remove all tax advantages from holding prohibited assets in these types of schemes.
• Pension ‘recycling’ will be blocked. This device works by taking a tax-free lump sum from a scheme which is reinvested back into another scheme giving further tax relief. This in turn allows a further tax-free lump sum to be paid out. The new rules will remove tax advantages in relation to lump sums which are artificially recycled in this way.

Tax spreading available for ‘contracts for services’ (UITF 40)

Changes were made in March 2005 which require income to be recognised as a ‘contract for services’ progresses, and before an invoice has been raised. This will mean that many businesses, including accountants and other businesses who work under service contracts, will be recognising income before an invoice has been issued to a customer and therefore before payment has been received.

Legislation will be introduced to allow businesses to spread any additional tax charged over three (or in some cases six) years. This is a most welcome response to lobbying by the professional bodies. Talk to us if you feel your business may be affected by these changes.

More certainty with tax credits awards

Claims are based initially on the previous tax year’s income. From April 2006 increases in income of less than £25,000 will be disregarded when finalising awards. The previous limit was £2,500. This change should mean that 90% of awards can be finalised without the need for adjustment.

VAT cash accounting scheme

Subject to EC approval the turnover limit for joining the cash accounting scheme will be increased from £660,000 to £1,350,000 with effect from April 2006. This is an increase of more than 100% and may benefit up to one million small businesses.

Please talk to us if you want to plan for any of the changes, most of which will be effective from April 2006.

If you run a small or medium-sized business then you may well have found yourself in the position of having plans for the future of your business but without the necessary funding to put those plans into action. It is often the case, particularly with a relatively new business, that a conventional loan is out of reach because there are no assets to offer as security.

The Small Firms Loan Guarantee (SFLG) was introduced to get over this problem by providing lenders with a government guarantee against default. It was established in 1981 as a joint venture between the Department of Trade and Industry (DTI) and participating lenders. Over 100,000 guarantees have been issued since the SFLG was launched supporting £4 billion of lending to over 90,000 businesses. The SFLG guarantees 75% of the loan and the borrower pays a premium of 2% of the outstanding loan per annum to the DTI.

Some important changes have recently been made to the SFLG. They are intended to widen use of the scheme and took effect in December 2005. Here are the main ones:

• introduction of a single lending limit of £250,000 (previously limited to £100,000 for businesses under two years old)
• an increase in the turnover limit for all eligible businesses to £5.6 million (previously £5 million for manufacturing and £3 million for other businesses)
• the availability of the SFLG now limited to businesses under five years old (previously there was no such restriction).

Please talk to us if you would like any further information on any aspect of the SFLG.

Proposed dividends - the new rules

UK companies have always been able to relate dividends declared after the year end but before the signing of the accounts back to the previous year’s profit and loss account. However this is no longer an option under new rules effective for accounting periods beginning on or after 1 January 2005.

The change follows the introduction of Financial Reporting Standard (FRS) 21, Events after the Balance Sheet date, and a corresponding change in company law. The two now require that dividends declared after the balance sheet date should not be reported as a liability in the previous year’s accounts.

The practical effects of the change

The directors of a company meet on 1 March 2006 to discuss the accounts to 31 December 2005. On that date they declare a dividend of £1 per share for 2005. As the company’s year end had passed when the dividend was declared, the dividend cannot be included as a liability in the 2005 accounts. Instead the dividend will be disclosed in a note to these accounts.

In order for the dividend to be included as a liability in the 2005 accounts, the directors need to declare the dividend and either pay it or have it approved by the shareholders in general meeting before 31 December 2005. This requires the relevant statutory procedures to be followed. A directors’ meeting should be held and the declaration of the dividend should be minuted. This would then need to be followed by the payment of the dividend or the formal approval by the shareholders which will also need to be minuted.

Tip
It would be possible for the dividend of £1 per share to be declared and properly authorised by the shareholders in December 2005 but not paid until March 2006 and the dividend still be included in the December 2005 accounts.

• This change only concerns the timing of the inclusion of the dividend within the company’s statutory accounts. It will have no effect upon when a dividend is actually paid to the shareholders. It will not have any tax consequences.
• If a company’s only income is a dividend from a subsidiary, the timing of the declaration and payment or authorisation by the shareholders of the dividend could be an important issue.
• If a company needs to ensure that part of its profit is distributed each year, the timing of the declaration of the dividend could be a particularly important issue this year. If no interim dividend has been paid, a dividend must be declared by the directors and paid or authorised by the shareholders by the year end in order for it to be included in the current year’s accounts.
• Finally, following the change in the rules, a prior period adjustment will have to be considered in the accounts for proposed dividends of previous years.

Please get in touch if you would like to discuss the new proposed dividend rules and how they may affect your company in more detail.

AIMing high

2005 saw the 10th anniversary of AIM, the London Stock Exchange’s market for growing companies. Since its launch in 1995 more than 1,900 companies have been admitted and more than £17 billion of capital has been raised.

The requirements for admission to AIM are less onerous than the main market with no requirement for a three year trading record and no need to place 25% of the shares in public hands. Furthermore the AIM structure is designed to support the requirements of smaller, growing companies.

The decision to float your company on AIM will mark a major milestone in its development. It can be exciting but also stressful and time consuming. Neither is it a cheap exercise; initial costs are likely to run into hundreds of thousands of pounds. There are many potential advantages as well as disadvantages and these are summarised below.

Advantages

• Access to a large pool of capital especially given the keen interest on the part of institutional investors.
• Possibility of financing expansion by use of shares as an ‘acquisition currency’.
• Creation of a market in the company’s shares together with an objective market valuation.
• Provision of an exit route for existing investors.
• Ability to broaden the shareholder base.
• Enhancement of the profile and image of the company.
• Ability to motivate employees by creating a share scheme.
• Tax breaks for investors.

Disadvantages

• Closer public scrutiny of the company and its performance.
• Increased accountability to shareholders for the directors.
• Institutional shareholder pressure on dividends and short term profitability.
• Uncertainty of market conditions which may affect the share price.
• Need to comply with regulatory requirements.
• Possible loss of control.

If you would like to find out more visit www.londonstockexchange.com/aim

Taper relief: the (il)logical song

Capital gains tax taper relief has been with us now for almost eight years, yet still there are illogicalities and points that are unclear in its operation. The joys of tax!

In this article we focus on a common scenario. If you own the freehold of a shop which you use in your business you would expect any capital gain on eventual sale to be reduced by business taper (maximum of 75% after two years of ownership). If you own a residential flat which you let out you would expect non-business taper (maximum 40% after ten years of ownership). Simple!

But what if you own a single property comprising a ground floor shop used in your business and the flat above which you let out?

Assume you bought the freehold of such a property three years ago and that 2/3 of the property represents the shop and 1/3 the flat.

You plan to sell off the flat now and the shop in a couple of years’ time.

When you sell the flat you might think that, logically, because the flat has been an investment, non-business taper would apply to the whole gain. Wrong! The Revenue treat the whole building (ie shop + flat) as a single asset so that 1/3 of the gain gets non-business taper but the other 2/3 gets business taper. Better than you might have expected.

When the shop is sold you might expect the whole gain to qualify for business taper – wrong again. The gain attributable to the first three years when you owned the shop and the flat (ie 60% of the gain) has to be apportioned on the 1/3, 2/3 basis and only the gain attributable to the last two years (when you owned just the shop) qualifies fully for business taper. Overall this means that 80% of any gain ((60% x 2/3) + 40%) qualifies for business taper and the remaining 20% for non-business taper.

Confusing isn’t it? That’s why we’re here to help. We can help you to plan to maximise the potential taper relief available. Give us a call if you have any questions or concerns in this area.

Out of space?

Not a lot of people know that...
...each of Britain’s 6.9 million office workers occupies over 14 square metres of office space at an annual cost to business of over £4,000 per person.

Royal Institute of Chartered Surveyors (RICS) research also found that property is the biggest business cost after staff and that businesses could boost profits by up to 13% annually with the right property strategy.

Are you making the best use of your available space?

Are your premises too small?
Think about new working practices such as open plan, hot desking, making minor alterations or simply taking a critical look at your office furniture.

Do you have too much space?
It might be possible to section off a part and sub-let it creating a valuable additional income stream.

Any business can take advantage of new guidance available from RICS designed to help improve business property management.

Student loans: changes afoot

Student loans taken out after August 1998 start to be repayable once the borrower has started work and has earnings (or profits if they are self employed) in excess of £15,000 per annum.

If an employee liable to make student loan repayments changes jobs the theory is that the old employer marks the appropriate box on the P45 and when this is handed to the new employer, student loan repayments continue uninterrupted.

The problem
All well and good except that over 70% of those changing jobs fail to give a form P45 to their new employer.

The solution
From April 2006 there will be a new style form P46 which will require a new employee to state whether they are liable to make student loan repayments. A ‘yes’ will give the new employer the necessary authority to deduct repayments from the employee’s pay.

And another thing…
There will also be a number of other changes to the P46 including asking the employee to state whether he or she has another job. This is so that tax can be deducted at the basic rate rather than using the Emergency Code. However it also means that the employee must declare to the ‘main’ employer whether there is also a ‘second job’.

Disclaimer - for information of users

This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.