CIS details are finalised

In the Pre-Budget Report in December 2006, the government confirmed that the new Construction Industry Scheme (CIS) will be introduced on 6 April 2007, despite some doubts over whether HMRC will be ready.

Under the new scheme subcontractors may be entitled to receive payments without deduction of tax if they have satisfied certain criteria, such as a compliance test. Otherwise there is a standard deduction rate, currently 18%, for registered subcontractors. The government consider that an increasing proportion of subcontractors in the current scheme do not have their full tax and national insurance met by their deductions. To reduce the additional payments due after the end of the year, the new scheme will have a standard deduction rate of 20%.

A higher deduction rate is introduced in the new scheme which allows unregistered subcontractors to start work. The government has now confirmed this rate will be 30%. One of the purposes of the higher rate appears to be to encourage subcontractors to register.

To ensure that the correct rate of tax is deducted, all new subcontractors taken on after 6 April 2007 will have to be ‘verified’, which means that certain specific information has to be obtained from the subcontractor and checked with HMRC.

There are some transitional rules which state that if the subcontractor had been paid since April 2005 and had certificates or cards due to expire after 5 April 2007, they do not have to be verified on 6 April 2007. To aid this transition, contractors have already been sent lists of subcontractors who will not have to be verified and will be sent further, updated, lists before April 2007.

However these lists do not mean that the subcontractors shown on them are self-employed. This is a separate issue that must be considered whenever payments are made to subcontractors.

For contractors, the new CIS brings many additional compliance and administrative burdens. Contractors will have to:

• issue, monthly as a minimum, summaries to the subcontractors concerned of amounts paid and tax deducted
• submit monthly returns to HMRC
• confirm to HMRC that the subcontractors that are shown on these monthly returns are self-employed and not employees.

These rules are all backed up with automatic penalties. If you would like to ensure that your business is ready for these changes please contact us now.

An Arctic storm?

Some of you may remember the name of 'Arctic Systems' and the company's owners, Mr and Mrs Jones. Over the past couple of years, HMRC have been seeking to make an example of them and set a precedent which can be applied to others.

The case reads a bit like a soap opera. HMRC are concerned that individuals are incorporating their businesses and using dividends, rather than salaries, to extract profit. Combined with low rates of corporation tax, this creates substantial tax and national insurance savings. The savings can be increased by giving shares to a ‘non-working spouse’, which allows further tax savings by using that spouse’s personal allowance and lower rates of tax.

In April 2003 HMRC issued new guidance which attempted to stop this type of tax planning by using the so-called ‘settlements’ legislation, which dates back to the 1930s. The Arctic Systems case soon followed.

The taxpayers originally lost their case in front of the Special Commissioners but appealed against that decision and lost again in the High Court….but then won in the Court of Appeal!

It has now been announced that the case will be heard before the House of Lords in June 2007. Watch this space for the decision and its implications.

Tax reliefs for letting go

When you sell a property that you bought to let out, you may dread the large tax bill that must surely arise on the profit. It is true that property values have increased enormously over the last few years but there are legitimate ways of reducing the tax you pay on those gains.

If you have owned the property for at least two years, taper relief will reduce the gain by 5% for each complete extra year you hold the property, until 40% of the gain is relieved. If the property has been let to a business and used in its trade, perhaps as offices or storage space, the taper relief may be higher.

Where the property was purchased before April 1998 the original cost will be increased by the indexation allowance. This takes account of the change in general prices from the date of purchase to March 1998. Further rules apply if you acquired the property before March 1982. When working out the original cost don’t forget to include the legal fees and stamp duties you paid on purchase. Also if you have made improvements to the property, the cost of which has not been set against the rents received, now would be the time to take those costs into account.

If you are married, or in a registered civil partnership, but the property is held in your sole name, you may want to consider transferring it into your joint names before sale. This may allow you both to set your annual capital gains allowance (£8,800 for 2006/07) against the gain which may reduce the taxable amount by up to £17,600. However this transfer needs to be a genuine part disposal which is documented properly.

Taxing the food you eat

The end of 2006 saw the government pass two important new Acts, both of which have followed lengthy consultation processes.

The Companies Act 2006

This Act is the culmination of a company law reform process that started as far back as 1998. The aim of the Act is to simplify and modernise company law so that it better meets today’s business needs and provides flexibility for the future. While the reform process aimed to ‘think small first’, the new Act will in time have an impact on directors, auditors and shareholders of private, public and quoted companies.

The Act is the longest ever to have been passed by parliament. It repeals and restates most of the provisions in the existing Companies Acts.

At this stage many of the detailed requirements of the Act have yet to be determined and 2007 will see the government consult on these. The government has also stated that all of the Act’s provisions will be brought into force by October 2008 at the latest. Certain provisions, for example those in respect of electronic communications between shareholders and the company, have already been brought into force.

The Charities Act 2006

Five years after legislation was first proposed the Charity Commission (CC) has wholeheartedly welcomed the introduction of the Charities Act 2006.

The Act gives the CC more independence from government. Ultimately, it will help to reduce some of the existing bureaucracy that charities face.

Key areas covered by the new Act include:

• a new definition of a charity - the CC will consult on what it means to provide ‘public benefit’
• higher registration thresholds and changes to the requirements for ‘exempt’ and ‘excepted’ charities
• new thresholds for the independent examination/audit of charity accounts
• a range of methods providing opportunities to modernise and to lighten the load for trustee bodies.
  
  For example, it will be possible to pay trustees for additional services to the charity, if it is in the best interests of the charity, without prior CC authorisation.

Some of the new legislation takes effect early in 2007, although many other areas will require further consultation, secondary legislation or guidance.

Pre-Budget Report

The Chancellor presented his Pre-Budget Report in December 2006 and gave advance warning of some changes to come.

Individual Savings Accounts (ISAs)

The government is now making the ISA a permanent feature of the savings landscape. Changes include:

• the overall annual investment limit will be at least £7,000
• the mini/maxi distinction within the ISA will be removed
• individuals with funds saved in the cash component of ISAs from previous years will be able to transfer those funds into the stocks and shares component without affecting their annual investment limit
• Personal Equity Plans will be brought within the ISA ‘wrapper’.

Alternatively Secured Pensions (ASPs)

The pensions tax rules require an individual to secure an income before they reach the age of 75. Most people will have an annuity or scheme pension but an ASP was provided as an alternative. ASPs were designed for those who have a principled religious objection to annuitisation.

To restrict the use of ASPs to their original limited purpose the government is:

• introducing a minimum income requirement of 65% of the annual amount of a comparable annuity
• setting a higher maximum income withdrawal of 90% of the annual amount of a comparable annuity
• imposing an unauthorised payments charge where ASP funds remaining on the death of a member are transferred to pension funds of other members in the scheme.

There is currently an inheritance tax charge on left over ASP funds on the death of the scheme member and the government is considering how this will work and interact correctly with the new unauthorised payment provisions.

Managed Service Companies (MSCs)

In 2000 the government introduced rules to tackle the provision of services through Personal Service Companies (PSCs). PSCs were designed to ‘disguise employment’ by placing an intermediary, usually a company, between the payer and worker. This minimised the amount of tax and national insurance contributions (NIC) due by paying that worker predominantly with dividends.

MSCs attempt to avoid the PSC rules. The types of MSCs vary but are often referred to as ‘composite companies’ or ‘managed PSCs’. HMRC have encountered difficulty in applying the PSC rules to MSCs because of the large number of workers involved and the labour-intensive nature of the work. Even when the rules have been successfully applied, an MSC can often escape payment of outstanding tax and NIC as they have no assets and can be wound up.

The government has therefore decided to remove MSCs from the PSC rules and introduce new rules from April 2007. The intention of the new rules is to:

• ensure that those working in MSCs pay tax and NIC at the same level as other employees
  alter the travel and subsistence rules for workers of MSCs to ensure they are consistent with those for other employees
• allow the recovery of outstanding tax and NIC from ‘appropriate third parties’.

The proposals are a recognition by HMRC that they do not have the resources to enforce the PSC rules across the country. It will be interesting to see if the government takes further steps to tackle the tax and NIC savings that can be made by using dividends.

Other changes

Other changes announced include:

• flight costs increase - Air Passenger Duty rates have been increased from 1 February 2007
• capital losses - specific rules were introduced last year to target ‘contrived’ capital losses created by companies. These rules have been extended to individuals.

Please contact us if you would like any more details on these changes.

Is a second company car tax efficient?

Company cars are thought of as being a highly taxed perk and this is true if you drive an expensive car that has high CO2 emissions. So if you take on a second company car for a member of your family to drive, surely the tax cost would be horrendous? Well, not necessarily.

There is actually no penalty for having a second, third or even fourth company car for an employee or director. The taxable benefit of each car is calculated as a percentage of its cost when new, based on its official CO2 emissions. If you persuade the company to lease a small car for your partner, the extra cost to you could be a lot less than you would have to find out of your own pocket to run the same vehicle.

Assume the showroom price of the second car, before any discounts, is £10,000 and it has CO2 emissions of 160g/ km. This means 19% of its price (19% x £10,000 =£1,900) would be added to your salary as a taxable benefit. As a higher rate taxpayer you would pay an additional £760 per year in tax for this second car. If your top rate of tax is 22%, the additional tax would only be £418. For this relatively small cost to you the company would pay for the lease, all the servicing, repairs, insurance and the road tax. All that would surely add up to more than £760, even for a small car. If the company provides free fuel for the second car that would generate an extra tax charge and it is not normally tax efficient to take free fuel for private use.

The lower the CO2 emissions rating of the car the lower the tax charge but you should be aware that the tax charged on company cars has periodically increased from 2002 when the system was introduced. For example the taxable benefit for a car with CO2 emissions of 160g/km was 15% of its price for 2002/03 but from 6 April 2008 the same emissions will generate a taxable benefit of 20% of its price.

The final but nevertheless significant factor when considering a second car is whether the employer will fund the purchase without any commensurate change in salary!

Blooming Maternity Pay!

The Work and Families Act of 2006 introduces some fundamental changes to Statutory Maternity Pay (SMP) for babies due on or after 1 April 2007.

The maternity pay period, for which SMP is payable, is extended from 26 weeks to 39 weeks. This is paid for the first six weeks at 90% of average weekly earnings. The remaining weeks are paid at the lower of the standard rate of SMP or the earnings related rate.

From 6 April 2007 the standard rate of SMP is increased from £108.85 per week to £112.75 per week.

Women who became pregnant before they started to work for their employer or who do not earn the national insurance lower earnings limit (currently £84 a week rising to £87 per week from 6 April 2007) are not entitled to SMP. They may however be eligible to claim Maternity Allowance (MA) which is a state benefit paid directly by the government to the employee. The payment period for MA is also extended for babies due from 1 April 2007.

For babies due from 1 April 2007 all mothers will be entitled to 52 weeks leave whether or not they qualify for SMP.

Websites and electronic documents - additional corporate disclosures

At the very end of last year the government issued new legislation extending the requirements for companies to provide certain particulars about themselves to electronic documents and websites. As the legislation extends requirements in the Companies Act, it also applies to Limited Liability Partnerships (LLPs). Therefore all references to ‘companies’ below should be taken to apply equally to LLPs.

Company particulars

The Companies Act has for some time required companies to include certain details on corporate stationery and other hard copy documents. The main requirements are in respect of:

• Company name

This must appear on all business letters and other business documents including bills of exchange, cheques, receipts, invoices and notices and other official publications.

This requirement is specifically extended to include all company order forms.

• Other information

All business letters and order forms must include:

• the company’s place of registration (England and Wales, Scotland etc) and registered number
• the address of the registered office.

What’s changed?

The above requirements are now extended to also include the company’s website. The second change is that the reference to any ‘document’ is extended to include that document in electronic or any other form. This means that it is now an offence not to include:

• the company’s name
• its place of registration and registered number
• the address of its registered office

on all the company’s websites and all its business letters and order forms that are in electronic form.

The legislation became effective on 1 January 2007 and there are penalties for those who do not comply.

Action

If you have not already taken action in respect of the new requirements you should do so immediately. The legislation does not stipulate where the information should appear on your website but you could for example use the ‘about us’ or 'contact us' page.

As many of us now conduct business correspondence by email, emails are potentially business letters for statutory purposes. You could consider adding the required information to any ‘disclaimer’ that typically appears at the end of an email. Your email systems could be set up to include these automatically. Suitable extra wording could be along the lines of:

Budget trivia

With the Budget only weeks away we thought would share some lesser known facts from previous Budgets.

• Out of 20 post war Chancellors only 3 have gone on to become Prime Minister…. so far. (Harold Macmillan. James Callaghan and John Major).
• The Budget Box was first used by William Gladstone around 1860.
• When George Ward-Hunt opened his budget box in 1869 he found that he had left his speech at home!
• Geoffrey Howe named his dog Budget.

And finally....

Some excuses purportedly given to HMRC, first published in the Daily Mail, for not doing things:

• ‘Please send me a claim form as I have had a baby. I had one before, but it got dirty and I burnt it.’
• ‘I received your income tax form but had to go into hospital an hour afterwards.’

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.