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Tonight's leaders' debate - a plea for honesty about the economic situation

I have tried very hard not to blog about the General Election, but with a week to go I have crumbled at last. The occasion for this is the final leaders' debate scheduled for tonight, on the subject of the UK economy.

Even on the relatively superficial level on which the debate will probably be conducted, judging from the previous offerings, this is an intriguing prospect. In the red corner we have Gordon Brown, acknowledged as one of the most formidable Chancellors in living memory, whose grasp of economics is formidable, but who has the problem of defending his record as Prime Minister, and particularly the regulatory lapses that allowed the banks to get themselves (and the rest of us) into so much financial strife. In the orange corner we have Nick Clegg, clearly a nice enough bloke, but whose real economic powerhouse, Vince Cable, will only be an onlooker tonight. And in the blue corner we have David Cameron, faced with the problem that the Conservatives have been less than forthcoming about their economic strategy to get us out of this fine mess. My tax colleague who moves in Tory circles in Cameronland (aka Witney, Oxfordshire, not Houston misspelt) assures me that DC understands fiscal policy, but it is difficult to tell when he says so little in detail about it. And it is worrying that he thinks George Osborne is the best potential Conservative Chancellor when he has the likes of Kenneth Clarke and William Hague on his front bench; this suggests he thinks there are more important front bench roles than Chancellor, and believe me, there aren't!

But is it fair to level that accusation solely at Her Majesty's Opposition? There has been a marked reluctance shared among all the main UK political parties to admit to, respond to, and set out policies to deal with, the true magnitude of the economic crisis facing this country, which is, at least from the perspective of sheer scale of the government deficit, by far the biggest ever to face this country. And that is saying something given that we have fought two World Wars in the last 100 years and experienced the Great Depression.

Of course it is palpably obvious why no-one has grasped this particularly poisonous nettle. Announcing that we will all be paying for the banking crisis for the short, medium and long term is hardly likely to attract huge numbers of votes, particularly if you set out in detail the tax rises and public expenditure cuts that would be necessary to effectively deal with the matter at hand. John Smith and Gordon Brown's experiment along those lines in 1992, widely credited with snatching defeat from the jaws of victory, is sufficient evidence to dissuade any but the bravest politician from too detailed an analysis of our economic woes prior to an election.

But the trouble is, if you are unwilling to parade your economic and fiscal strategy before the electorate for fear of frightening the horses, you run the risk of leading those of us who consider these matters in depth (admittedly, I fear, a tiny proportion of the electorate) to assume that you are saying nothing because you have nothing to say, and have no idea how to cope with a crisis of this magnitude. Thus I run the risk of being very depressed by tonight's debate, if all we are offered is vacuous sound bites rather than real solutions to an all too real problem. And nothing much in this campaign so far leaves me at all optimistic in this respect.

Which takes me sailing off the subject of the economy and onto more general observations about the election, because I like elections, recognise their vital importance and like to think that everyone else does too.My thoughts after 3 weeks of this campaign are as follows:

1. I think a lot of old political affiliations have been shaken by such issues as MPs' expenses, and that there is thus increased volatility among the electorate, and consequent increased unpredictability about what will happen on May 6th.

2. I also think, partly as a consequence of the above, that an awful lot of people have yet to make up their mind how to vote, which makes opinion polls even more than usually unreliable. I have a feeling that many will vote for the least of a number of evils, rather than actively voting for the party they wholeheartedly agree with.

3. The phenomenom of tactical voting has been with us for a long time now, again as a symptom of a greater desire to vote against parties than for them, and continues to increase in importance election by election. To my mind this is on balance regrettable, both because it encourages negativity and because it enhances a highly noticeable tendency, perhaps inevitable in the modern media-saturated age, to look upon one's vote as a factor in the national picture rather than a factor in one's own constituency. We are not, after all, electing a President, but 650 local MP's, and it might be preferable for more people, particularly in the media, to remember that. Of course it might help in this respect if most people's vote was not a complete irrelevance. I am careful not to plaster my own political allegiances, such as they are, all over this blog, but they are actually pretty meaningless in any event, as I live in Altrincham and Sale West, not only the sole Conservative seat in the North West but a pretty safe one too (they even held it amidst the carnage of 1997). So I could vote Red, Orange, Blue or any other colour under the sun (actually UKIP would be the only other colour under Altrincham and Sale West's sun, and I don't think we'll be going there on May 6th - Greens, wherefore art thou?) without it making the slightest difference to Graham Brady's future job prospects. Given that more than half of the UK electorate appears to be in the same position, perhaps we are deluding ourselves about the importance of our participation. "If Voting Changed Anything, They'd Make It Illegal", said Emma Goldman; a bit cynical even for me, but you can see where she was coming from.

4. I think the apathy and uncertainty arising from the above factors has made this a two-tier election campaign. Visit a local marginal such as Manchester Withington (Lab / Lib Dem) or Warrington South (three way) and you will see large numbers of election posters, reminiscent in some respects of 1997, when my late mother's home town of Dawlish turned orange overnight. But walk around a more predictable constituency like my own or Stretford & Urmston, and you could be forgiven for not noticing there was an election campaign taking place.  

5. I also suspect that the minority parties will perform better at this election than they have for some elections past, both because of the fracturing of old party allegiances that I mention above, and because there may be some sense of inevitability about a hung Parliament (depending how the polls move, particularly after tonight) and thus a feeling that now may be a good time to be more adventurous with your vote. Tactical voting may also be a factor here. Thus I could envisage Nigel Farrage winning Buckingham for UKIP (the Conservative hierarchy loathe John Brecow with a passion, so he shouldn't count on massive Tory support in what was a very safe seat). I would also like to think that the Greens had a chance of winning Brighton Pavilion, but I do wonder whether its status as a potential Labour / Conservative marginal might get in the way of that. As for Barking, surely not? If the loathsome and ineffectual Mr Griffin got into Parliament I really would lose faith in the political system. And I am sure we will have a few more Scottish and Welsh Nationalists knocking around Westminster for the next 4 or 5 years too.

6. I suppose we should expect the two main parties to huff and puff about a hung parliament, given that the electoral system has led them to expect their turn next, and to exercise unfettered power once they get that turn. It does seem to be something of an indictment when the best reason you can come up with for not voting Liberal Democrat is "it will let the other lot in", let alone "we will have the IMF here in a matter of weeks". But actually, given the magnitude of the crisis we face, might it not be helpful to have more brains engaged in finding the right solutions? How about a government of national unity, involving all three main parties? Now there is an idea to conjure with, but not, one imagines, this side of the election.

So all-in-all it promises to be an interesting election, with the outcome seriously in doubt entering the last week of the campaign> I just hope that the economic aftermath demonstrates that the politicians do indeed have some far-sighted and sensible ideas for ameliorating the dire economic situation. We can hope.....

Mark Simpson

29 April 2010

24:7 Gathering almost upon us - tax tips for theatre actors, writers and directors

One of the most fulfilling of my many extra-curricular activities is my non-executive directorship of 24:7 Theatre Arts Network Limited, the company that runs the 24:7 Theatre Festival here in Manchester. This is a festival of new writing, performed in non-theatre venues around the last week of July (in the week containing the 24th, in fact). To find out more, visit The 24:7 Theatre Festival website.

One of the highlights of the pre-Festival schedule takes place on 10th May at 6pm at New Century Hall on Corporation Street, Manchester, when a substantial part of the Manchester acting community gathers to meet the writers of the selected scripts to begin the casting process. This event typically attracts hundreds of people, and is understandably lively as a result.

Although, sadly, other commitments will limit my attendance to the early part of the evening, Simpson Burgess Nash directors and staff will be on hand to give handy tax planning advice to the participants. So here is a summary of useful tax advice for theatre professionals of all descriptions:

General tax issues

 

Business structure

 

Once the level of profits reaches £15,000 or so, there are significant tax advantages in trading as a limited company, which effectively employs you as a director in your creative capacity. This gives great flexibility in terms of your level of personal income and how you choose to take it, either as salary or dividend on your company shares.

 

Loss reliefs

 

If you find yourself at the other extreme, and making tax losses, remember you can offset them against other income of the tax year of loss and the previous year. Also, if you make the loss in your first 4 years of trading, you can carry it back 3 years to offset against other income. You need to be trading with a view to, and a reasonable prospect of, profit though.

 

Tax deductions – general

 

In theory expenses need to be wholly and exclusively for the purposes of your trade, which is quite restrictive. But in practice you can often apportion partly business expenses. A good example is use of home as office. If you have a room at home that you use to write, learn scripts etc., you can claim an element of your domestic expenses (electricity, gas, council tax, rent or mortgage interest, telephone etc) as a business expense. Never use a room at home 100% for business purposes though, or you could pay some capital gains tax when you sell the house.

 

If you trade through a company, some expense opportunities are open to you. For instance, if you have childcare costs, the company can pay up to £55 per week of those for you tax and national insurance free. Similarly, it can provide and pay for your mobile phone as a tax-free benefit. It can also pay you business mileage at 40p per mile (for all those trips to auditions, performances etc, again free of tax and NI.

 

Actors

 

Are you employed or self-employed?

 

The taxman accepts that in many cases actors will be self-employed, which means no PAYE and a more generous expenses regime (not the MPs’ kind, but the tax deductible kind). The main exception to this rule, where an employment is likely to exist, is where an actor is engaged to perform in a series of productions over a period of time, in roles to be stipulated by the engager, with a minimum period of notice before termination of the contract. This would typically apply to a permanent member of a theatre company, but given the modern pattern of acting work it is much more likely that each separate acting engagement will be treated as a self-employed engagement. This does of course mean you have to look after your own tax affairs and submit a self-assessment tax return in most cases.

 

Specific expenses

 

Clothing

 

As a general rule, clothing suitable for everyday as well as stage wear will not be an allowable expense, but the acquisition of a costume which is not part of your everyday wardrobe will be an allowable expense. Typically this would apply to period costumes for use in a particular play, or for general use in your professional capacity. It can, however, apply to any clothing that you genuinely use solely for acting purposes as a matter of fact.

 

Costs of costume and ‘grooming’ (e.g. hairdressing and make up) are allowable if incurred by an actor making ‘personal appearances’ for the sole purpose of promoting their business activities.

 

Your purpose at the time of acquisition of the clothing is vital, and thus to note that purpose at the time of acquisition is essential where the purpose is purely business.

 

Medical expenses

 

Health related medical expenses are disallowable, even if incurred to allow the treatment to take place at a time convenient to your acting schedule.

 

It is possible, although generally unlikely, that cosmetic surgery may in some cases be an allowable expense, but only if you can show that the sole purpose of the surgery was a professional purpose. An example given by the taxman is of a radio performer offered TV work who has irregular teeth. This has never concerned her, but she is advised to have the teeth corrected for the purposes of her TV work. This would be an allowable expense. Some evidence would be required, however.

 

Agents’ fees

 

In the case of a self-employed actor full deduction should be available. Employed actors can claim a deduction of up to 17.5% of earnings for agent’s fees.

 

Writers

 

In general a writer’s taxable profits will include that from all sources, including sales of copyright, which might more usually be seen as capital receipts subject to capital gains tax.

 

Awards and bursaries

 

These would usually be treated as trading income, but literary prizes which are unsolicited, and awarded as a mark of honour, distinction or public esteem, are not taxable.

 

Tax deductions

 

Include the reasonable costs of producing literary works and the expenses (including agent’s commission) of putting them on the market.

 

Averaging for creators of literary works

 

It is possible for writers to claim to average the profits of any two consecutive tax years for tax purposes, provided the lower profit figure is not more than 75% of the higher. It is no longer necessary to have been engaged in creating a particular work for a period in excess of a year. Averaging cannot apply to the year of commencement or cessation of the writing trade.

 

This can be most useful, given the often sporadic nature of writing income, and can result in using otherwise wasted allowances, or avoiding or reducing higher rate tax liabilities. The author has in the past persuaded HMRC that a ‘soap’ scriptwriter was eligible for this treatment.

 

 

Mark Simpson

 

23 April 2010

 

'GREEN STICKS' - THE OTHER SIDE OF THE ENVIRONMENTAL COIN

It occurred to me whilst updating the 'Green Carrots' post that I had never blogged about the other side of the coin, namely the disincentives to poor environmental behaviour that the Government uses to seek to control the polluting behaviour of UK taxpayers. So for the sake of completeness, here goes:

1. Vehicle taxation

The Government uses a number of means both to reward those who drive zero or low emission cars and to punish those who do not take that option. I dealt in my previous post with the car benefit regime, which applies a 35% of list price when new annual benefit charge to cars emitting more than 225 grams per kilometre, and also applies higher percentages for fuel benefit purposes to higher emitting vehicles. A similar principle applies for VAT car fuel scale charges also.

The government also uses vehicle excise duty to influence choice of vehicle, as revealed by the following 2010-11 duty rates:

Standard Rates - The following table contains the rates of vehicle tax for already registered cars.

Petrol car (TC48) and diesel car (TC49)

Band	CO2 emission (g/km)	12 months rate	6 months rate
A	Up to 100	Not applicable	Not applicable
B	101-110	£20.00	Not applicable
C	111-120	£30.00	Not applicable
D	121-130	£90.00	£49.50
E	131-140	£110.00	£60.50
F	141-150	£125.00	£68.75
G	151-165	£155.00	£85.25
H	166-175	£180.00	£99.00
I	176-185	£200.00	£110.00
J	186-200	£235.00	£129.25
K*	201-225	£245.00	£134.75
L	226-255	£425.00	£233.75
M	Over 255	£435.00	£239.25

* Band K includes cars that have a CO2 figure over 225g/km but were registered before 23 March 2006

Alternative fuel car (TC59)

Band	CO2 emission (g/km)	12 months rate	6 months rate
A	Up to 100	Not applicable	Not applicable
B	101-110	£10.00	Not applicable
C	111-120	£20.00	Not applicable
D	121-130	£80.00	£44.00
E	131-140	£100.00	£55.00
F	141-150	£115.00	£63.25
G	151-165	£145.00	£79.75
H	166-175	£170.00	£93.50
I	176-185	£190.00	£104.50
J	186-200	£225.00	£123.75
K*	201-225	£235.00	£129.25
L	226-255	£415.00	£228.25
M	Over 255	£425.00	£233.75

* Band K includes cars that have a CO2 figure over 225g/km but were registered before 23 March 2006

First year rates - Cars registered on or after 1 April 2010 (based on fuel type and CO2 emissions)

From 1 April 2010, anyone buying a new car will pay a different rate of vehicle tax for the first tax disc. These are known as 'first year rates'.

From the second tax disc onwards, the standard rate of vehicle tax will apply. This will send a stronger signal to the buyer about the environmental implications of their car purchase and will only apply to new cars, not already registered cars.

Please note that the rates in the table below are only payable for a vehicle’s first tax disc taken out at first registration. All other tax discs will be charged according to the standard rate tables shown above.

Petrol car (TC48) and diesel car (TC49)

Band	CO2 emission (g/km)	12 months rate	6 months rate
A	Up to 100	Not applicable	Not applicable
B	101-110	Not applicable	Not applicable
C	111-120	Not applicable	Not applicable
D	121-130	Not applicable	Not applicable
E	131-140	£110.00	£60.50
F	141-150	£125.00	£68.75
G	151-165	£155.00	£85.25
H	166-175	£250.00	Not applicable
I	176-185	£300.00	Not applicable
J	186-200	£425.00	Not applicable
K	201-225	£550.00	Not applicable
L	226-255	£750.00	Not applicable
M	Over 255	£950.00	Not applicable

 Alternative fuel car (TC59)

Band	CO2 emission (g/km)	12 months rate	6 months rate
A	Up to 100	Not applicable	Not applicable
B	101-110	Not applicable	Not applicable
C	111-120	Not applicable	Not applicable
D	121-130	Not applicable	Not applicable
E	131-140	£100.00	£55.00
F	141-150	£115.00	£63.25
G	151-165	£145.00	£79.75
H	166-175	£240.00	Not applicable
I	176-185	£290.00	Not applicable
J	186-200	£415.00	Not applicable
K	201-225	£540.00	Not applicable
L	226-255	£740.00	Not applicable
M	Over 255	£940.00	Not applicable

Fuel excise duty is also used by the Government as a check on mileage driven, albeit a rather crude one. Current and proposed rates of duty are as follows:

 

Fuel Current duty From 1/10/10     From 1/1/11

 

Unleaded petrol 57.19p    58.19p  58.95p

 

Diesel   57.19p    58.19p  58.95p

 

Leaded petrol 66.91p    67.91p 68.67p

 

Biofuels    57.19p    58.19p 58.95p

 

Biodiesel made from

waste cooking oil   37.19p  38.19p 38.95p

 

Road fuel natural gas 22.16p   23.60p    23.60p

 

Liquid petroleum gas  27.67p  30.53p    30.53p

 

From 1 April 2011 the duty on most types of fuel will increase each year by 1% above the rate of inflation. The 20p discount on biodiesel made from waste cooking oil will continue until April 2012. From 2011 to 2014 the differential between unleaded petrol / diesel / biofuel rates and RFNG rates will be maintained, whilst LPG rates will fall by 1p per litre per year in comparison.

 

2. Landfill tax

 

The standard rate of landfill tax is £48 per tonne, and this will rise by £8 per tonne for each of the next 3 years, to £72 per tonne in 2013-14. This rate applies to active waste, such as food waste and grass clippings, which generates greenhouse gases whilst decomposing. The rate applicable to inactive waste, such as bricks) is currently £2.50 per tonne.

 

There are exemptions for waste from contaminated land, quarried materials and pet cemeteries (the so called 'dead dog exemption').

 

3. Climate change levy

 

This is a tax on end-use of "taxable commodities" (princiopally electricity, gas and coal) by commercial users. It is charged on the amount of commodity charged rather than the value. There are a number of exemptions to encourage environmentally-friendly power generation, as follows:

 

Electricity from renewable resources (but not nuclear);

 

Electricity used in recycling processes;

 

Electricity produced in Combined Heat and Power Stations; and

 

Electricity produced by auto generators

 

The optimum use of a CHP station is burning waste which would otherwise go to landfill.

 

4. Aggregates levy

 

This is charged on the commercial expolitation of taxable aggregate, and falls principally on quarry operators. It is currently charged at £2.10 per tonne of aggregate. Quarries are not levied on the production of stone, but are charged on the sale of off-cuts arising from the quarrying process. There are credits for the use of agrregate in prescribed industrial processes such as iron and steel manufacture, and for export of aggregate.

 

5. Air passenger duty

 

This is another blunt instrument, levied on passenger fares for flights, on the following scale:

 

Journey length Air passenger duty (premium /economy class)

 

> 6,000 miles £110 / £55

 

> 4,000 miles £100 / £50

 

> 2,000 miles    £90 / £45

 

< 2,000 miles    £22 / £11

 

Of course, recent events have demonstrated that, if you wish to discourage people from flying, an erupting Icelandic volcano is far more effective than air passenger duty!

 

These, then, are the 'sticks' used by Government to encourage envrionmentally responsible behaviour, which of course have the added attraction of being revenue raisers for the Treasury. Just as we can expect an increase in the number of environmental 'carrots' dangled by the tax system, so we can expect an equivalent increase in the number of environmental 'sticks' wielded by the government, as we move slowly but inevitably, in my view, toward a tax system built on taxing the use of scarce or environmentally harmful resources and rewarding environmentally friendly behaviour.

 

Mark Simpson

 

20 April 2010

 

'GREEN CARROTS' 2: UPDATE ON 'GREEN' INCENTIVES UNDER THE UK TAX SYSTEM

Two and a half years ago I blogged about the above subject. Much has changed since, so the time has come to update that post.

Much publicity has been given to the sticks with which the Government discourages business behaviour impacting negatively on the environment - climate change levy, landfill tax, aggregates levy and air passenger duty spring readily to mind. So, in the interests of the balance on which this site prides itself, this article deals with the carrots used, or to be used, by the Government to encourage taxpayer behaviour beneficial to the environment.

I will deal with eight such 'carrots', as follows:

1. Thermal insulation of buildings (other than dwelling houses)

This relief has been in place for a considerable period, and takes the form of the identification of expenditure on thermal insulation of industrial buildings as plant for capital allowances purposes. This now becomes of particular importance, as industrial buildings allowances ("IBAs") are being phased out, whilst capital allowances on plant remain, albeit in a revised form. Thus a business which has in the past claimed IBAs on such expenditure might now find it beneficial to reconsider that approach, and seek to establish a claim to plant & machinery capital allowances instead. It may or may not be possible for this to be retrospective, depending upon the specific circumstances.

The relief only applied to industrial buildings prior to April 2008, but can now apply to any building, other than a dwelling house, used in a trade or property letting business. The rate of writing down allowance is that applicable to integral features, namely 10% per annum.

2. External solar shading

Expenditure on such shading is now eligible for 10% per annum writing down allowance as an integral feature, which was not the case prior to April 2008.

3. Enhanced capital allowances ("ECAs")

An enhanced capital allowance is a 100% up-front tax deduction for investment in designated energy saving and environmentally beneficial plant and machinery. Full details of eligible items can be found on a dedicated website, such items falling into three categories:

i. Energy-saving plant and machinery

Items eligible for relief are listed on either the Energy Technology Criteria List or The Energy Technology Product List, managed by the Carbon Trust on behalf of DEFRA. The lists cover such items as:

Air to air recovery technology

Combined Heat and Power

Radiant and warm air heating

Solar thermal systems

The list is updated on a regular basis. In the 2010 Budget, for instance, permanent magnet synchronous motors and biomass fired warm air heaters were added to the list, whilst compact heat exchangers and liquid pressure amplification were removed.

ii. Environmentally beneficial plant & machinery (water technology)

Items eligible for relief are listed on the Water Technology Criteria List or the Water Technology Product List. The list covers items such as:

Efficient taps, toilets and showers

Leakage detection equipment

Efficient industrial washing machines and cleaning equipment

Vehicle wash waste reclaim units

iii. First year tax credits

Companies (not LLPs, partnerships or sole trades) incurring expenditure on the above categories of asset may, instead of claiming a 100% enhanced capital allowance, surrender that allowance for a 19% cash tax credit, up to a limit of the greater of £250,000 and the company’s PAYE & national insurance deductions for the accounting period. This is intended to be of benefit to loss-making companies. The relief has run since April 2008 and will run until March 2013.

iv. Low CO2 emission goods vehicles

The 2010 Budget provides for a 100% first year allowance on new and used zero-emission goods vehicles, to operate for 5 years from April 2010. It applies to vehicles which cannot under any circumstances produce CO2 emissions when driven, and which are of a design primarily suited to the conveyance of goods or burden. The maximum funding for this measure is 85 million euros.

v. Electrically-propelled cars or cars with carbon dioxide emissions below 110 grams per kilometre

This relief is similar to the low emissions goods vehicles relief, again applies to new and unused vehicles, and operates until April 2013.

vi. Expenditure on plant and machinery installed at a gas re-fuelling station for use in connection with refuelling vehicles with natural gas, biogas or hydrogen fuel

 Again the relief applies to new and unused plant and machinery, and runs until April 2013.

4. Car and fuel benefits

The Government approach in this area has elements both of carrot and stick. The level of car benefits has since April 2002 been measured by reference to CO2 emissions, and fuel benefits were brought into line in this respect in April 2003. From May 2007 a similar system applies to VAT fuel scale charges. This has certainly been a significant factor in car manufacturers radically reducing the CO2 emissions of their vehicles, and also dramatically improving fuel efficiency, as the government has gradually reduced the emissions levels at which particular percentages apply for benefits purposes. Currently a 15% rate applies to the list price when new of cars not exceeding 130grams per kilometre CO2 emissions, with 1% steps for each additional 5 grams, subject to a maximum benefit of 35% of the list price of the car when new. There is a 3% supplement for diesel cars, subject to the overall 35% ceiling.

There is also a 10% of list price charge for cars with CO2 emissions of 120 grams per kilometre or below. There is also a discount of 3% on the applicable percentage for cars capable of being driven using electricity, a 2% discount for cars capale of being driven using liquefied petroleum gas (LPG), using the lower of the percentage figures relating to the car running on petrol and on LPG. This same discount also applies to cars manufactured to run on E85 fuel; this is a road fuel that is 15% petrol and 85% ethanol.

Budget 2010 introduced a nil benefit in kind charge where a company car or van is incapable of producing CO2 emissions in any circumstances, and a 5% charge where a car has a CO2 emissions figure of 75 grams per kilometre or less.

5. Contaminated land

Where a company (not a sole trade or individual) incurs costs on remediating contaminated land, it can claim a 150% corporation tax deduction for the cost.

The land (or buildings) must be in the UK, and must have been contaminated prior to acquisition (not by the purchaser!) Relief is available for employee, subcontractor and materials costs, and extends to asbestos removal.

6. The Landlord's Energy Saving Allowance ("LESA")

This is a 100% up front allowance for expenditure on energy-saving items in a UK property business. It covers the following items:

Cavity wall insulation

Loft insulation

Hot water system insulation

Draught proofing

Floor insulation

The maximum available LESA is £1,500 per property,

LESA applies only to residential property, and does not apply to property under construction, furnished holiday lettings or property eligible for rent-a-room relief.

7. VAT on installation of energy-saving materials

The 5% reduced rate of VAT applies to the installation of such materials in residential property. Materials covered include:

Insulation material

Central heating controls

Solar panels

Wind and water turbines

Ground source heat pumps

Biomass boilers

8. Stamp duty land tax on carbon neutral homes

Until September 2012, the first sale of a carbon neutral home will be stamp duty exempt where the sale price is below £500,000. For sales at prices above that level, the SDLT charge will be reduced by £15,000.

To qualify for the relief it will be necessary to demonstrate zero carbon emissions for all energy use over the period of a year. This will require a high level of insulation and the provision of on-site renewable heat and power. There will be a certification process in this respect, with an appropriate certificate to be provided to the homebuyer by the housebuilder.

Summary

Whilst the above does not yet represent a comprehensive environmental tax code, the accelerating pace of change in this respect reflects the Government's genuine commitment to reduction of greenhouse gases. In this respect the reliefs currently available, and the taxes currently levied, may prove to be only the tip of the iceberg. In March 2007 the EU Commission published a Green Paper on the future of green taxation, which proposed that the overall basis of tax should shift from labour based taxes to environmental taxes, and thus we can expect there to be a lot more environmental carrots and sticks in the years to come.

Mark Simpson

 20 April 2010

 

BUDGET 2010 – MAIN CHANGES

 

Slightly late on the scene with this, but better late than never.

 

A. Personal tax

 

1. New additional rate of income tax

 

It was confirmed that income in excess of £150,000 will suffer an income tax additional rate of 50% (42.5% on dividends, treated as the top slice of income)

with effect from tax year 2010-11.

 

2. Phased withdrawal of personal allowances

 

For tax year 2010-11 onwards, those with income in excess of £100,000 will suffer a phased withdrawal of personal allowance (£6,475 for 2010-11), on the basis of the withdrawal of £1 of allowance for every £2 of income in excess of £100,000, until the allowance is withdrawn completely at an income level of £112,950. This gives a marginal rate of income tax on income between £100,000 and £112,950 of 60%.

 

3. Restriction on higher rate relief for pension contributions

 

Taxpayers with total annual income (before deduction of relief for pension contributions and charitable donations, and including employer pension contributions) of £150,000 or over will face a restriction on the tax relief available on pension contributions made by them or on their behalf by their employer, with effect from 6 April 2011.

 

The mechanism for achieving this will be a new high-income excess relief charge to income tax. The effect of this will be to taper relief for contributions for those with income in excess of £150,000, so that higher rate relief on such contributions disappears entirely at income levels of £180,000 or higher.

 

This regime is effectively already with us in the form of forestalling charges where high-income taxpayers seek to advance pension contributions into 2009-10 or 2010-11.

 

4. Furnished holiday lettings

 

The beneficial tax regime for furnished holiday lettings is abolished with effect from 6 April 2010, and such lettings will cease to be treated as a quasi-trade and become taxable in the same way as other property income. This has negative income tax and capital gains tax implications.

 

5. Stamp duty land tax on residential property

 

First time buyers acquiring UK residential property with a value below £250,000 will pay no stamp duty land tax on purchases prior to 25 March 2012.

 

Purchases of UK residential property valued at £1 million or more will now be subject to a 5% stamp duty land tax rate (previously 4%).

 

6. Car and van benefits on low and zero emission vehicles

 

Company car benefits are assessed by applying a percentage based on the car’s CO2 emissions to its list price when new. Traditionally this percentage has been between 15% and 35%. Where those CO2 emissions are 75 grams per kilometre or less, the percentage in question will now be 5%.

 

Where a company car or company van is made available to an employee for private use (other than home to work travel in the case of a van) and the vehicle is incapable of emitting carbon dioxide (i.e. it is an electrically-propelled vehicle), the percentage applied to the car for the above purposes will be 0%, and no van benefit will arise.

 

7. New penalty regime for offshore tax evasion

 

There is a general new penalty regime applicable (broadly) for tax years 2009-10 onwards. This defines inaccuracies in tax returns as arising in one of eight circumstances, with maximum and minimum penalty levels as follows:

 

	Unprompted disclosure	Prompted disclosure
Inaccuracy despite taking reasonable care	0%	0%
Careless inaccuracy	30% / 0%	30% / 15%
Deliberate inaccuracy	70% / 20%	70% / 35%
Deliberate and concealed inaccuracy	100% / 30%	100% / 50%

 

Where the inaccuracy arises in respect of income arising outside the UK, the above percentages may be increased on the following by the following percentages:

 

Status of country as regards exchange of savings income information with the UK	Percentage increase in penalty levels
Automatic exchange of information	0%
Non-automatic exchange of information	50%
No exchange of information	100%

 

Thus the maximum penalty for a deliberate and concealed inaccuracy, for instance, becomes 200% where the inaccuracy arises in a country with which the UK does not exchange savings information.

 

8. Deficiency relief – losses on investment bonds

 

Such relief will be available in 2010-11 against the 50% and 42.5% rates of income tax where applicable.

 

B. Business tax

 

1. Changes to corporation tax rates from 2011-12

 

Income level (stand alone company)	2010-11	2011-12
Up to £300,000	21%	22%
£300,001 - £1,500,000	29.75%	29.5%
Over £1,500,000	28%	28%

 

2. Annual investment allowance

 

From tax year 2010-11, the amount of expenditure on plant and machinery eligible for 100% annual investment allowance will increase from £50,000 to £100,000.

 

3. Enhanced carry back for trading losses

 

There is provision for a three-year carry-back of trading losses up to £50,000 against previous profits of the same trade. Whilst the period for which individuals may do this expires on 5^th April 2010, companies may continue to do so for losses arising in accounting periods ending prior to 24 November 2010.

 

4. Corporation tax relief on write-off of loans to participators

 

Where a loan to a close company director or shareholder was written off, some tax advisers claimed that this gave rise to corporation tax relief for the company. The position in this respect has now been put beyond doubt, and no such relief will be available in future.

 

5. VAT car fuel scale charges

 

There are new rates of VAT car fuel scale charge, applicable from the first VAT quarter beginning after 30 April 2010.

 

6. VAT registration and deregistration thresholds

 

These have been increased from £68,000 to £70,000 in the case of registration, and £66,000 to £68,000 in the case of deregistration.

 

7. New VAT late filing & payment penalty regime – quarterly returns – effective from a date to be confirmed

 

i.     Late filing

 

Automatic £100 penalty

 

Starts a penalty period, set for a year

 

Further failures within the penalty period escalate the penalty by £100 each time, up to a maximum £400, and extend the penalty period to a year from the date of the latest failure.

 

If any of the failures extend to 6 months a 5% penalty based on tax due is charged, and if a penalty extends to 12 months a 10% penalty is charged.

 

If the failure is deliberate, in order to prevent an accurate assessment of the tax due, a penalty of up to 100% of the tax due may be charged.

 

ii.   Late payment

 

The first late payment attracts no penalty, but starts a penalty period, set for a year.

 

Any further failures within that period attract a 2% penalty, and extend the period to the anniversary of the latest failure.

 

A third failure within the period attracts a 3% penalty, and extends the period on the above basis. Further failures attract a 4% penalty, with extension of the period.

 

Prolonged failures will attract 5% penalties after 6 and 12 months.

 

8. Security for payment of PAYE & national insurance

 

With effect from 6 April 2011, HMRC will be allowed to seek financial security from an employer where amounts due under PAYE & NIC obligations are deemed to be seriously at risk. This will typically be demanded in similar circumstances to those under which VAT security is currently demanded, which usually involves an individual acting as, or associated with, an employer, who has previously been involved in a material loss of tax to HMRC as a result of a business failure.

 

9. Childcare vouchers and employees paid national minimum wage

 

It will now be possible to provide such employees with childcare vouchers under a salary sacrifice arrangement without breaching the national minimum wage legislation.

 

C. Capital Taxes

 

1. Entrepreneurs’ relief

 

The amount of gains eligible to be reduced by 4/9 for capital gains tax purposes on the disposal of business assets will be increased from £1 million to £2 million for 2010-11.

 

2. Inheritance tax threshold

 

This was intended to increase to £350,000 for 2010-11, but is instead held at £325,000 for all tax years up to and including 2014-15.

 

 

 

D. Other Tax and sundry issues

 

  1.   HMRC time to pay scheme

 

This has been extended to cover the lifetime of the next Parliament.

 

2. Business rates

 

Businesses occupying property with a rateable value up to £6,000 will pay no business rates for the period October 2010 to September 2011. Those occupying properties with a rateable value of up to £12,000 should obtain significant reductions in business rates under the tapering regime.

 

3. Settlor-interested trusts

 

Where the settler of such a trust receives a tax repayment because his or her income tax rate is lower than that of the trust, he or she will be obliged to pay the repayment over to the trustees.

 

 

Mark Simpson

 

19 April 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TAX PLANNING ISSUES ARISING FROM CHARTERED INSTITUTE OF TAXATION RESIDENTIAL CONFERENCE – 9TH TO 11TH APRIL 2010

The excitement of life as a chartered taxation practitioner knows few bounds, so the weekend before last I was in Cambridge all weekend discussing and learning about all that is new and exciting in the world of tax planning. I am sure you would not believe me if I said it was an exciting weekend, but it was very stimulating, and the best such conference for a number of years, in my view. Here are some of the highlights:

 

1. Effective tax planning for high net worth individuals

 

Consider using a company owned by the partners as a partner with them in an LLP. The idea is to allocate the majority of the income profits to the company, and the majority of the capital gains to the individuals, to take advantage of the balance of respective tax rates.

 

This will need to be commercially justifiable, and profit shares will need to be allocated in advance. Tax charges would potentially arise on converting existing corporate structures to such an LLP (effectively a disincorporation).

 

The use of Enterprise Management Incentive Schemes for high paid executives holding less than 30% of the company shares is now extremely attractive, as it offers an 18% tax charge as opposed to a 41% or 51% charge. There needs to be a market for the shares, such as an employee shareholding trust.

 

It has now become vital on claiming non-resident status to demonstrate that the taxpayer has actually left the UK, which typically involves making a clean break with this country. This has implications for family residence and ownership of property available for occupation. Whilst not precisely the same, this can be seen as not dissimilar to the change of lifestyle required to establish a change of domicile of origin.

 

2. Inheritance tax business property relief

 

It is important to charge borrowings on non-BPR assets, otherwise the benefit of the relief is lost as the borrowing is offset against 100% relievable property.

 

Elderly taxpayers might consider acquiring an AIM portfolio, which can now be obtained with insurance against falling investment values. Such an investment will attract 100% BPR after 2 years’ ownership.

 

BPR is not usually available on furnished holiday lettings businesses, except where the owners provide a comprehensive range of services to guests.

 

Eligibility for BPR, in terms of whether a company is wholly or mainly a trading company, is determined by reference to the overall impression derived from applying a variety of tests, as follows:

 

Value of assets

Management time expended

Profitability

History

Turnover

 

The timing of trust distributions of BPR-eligible property is key. On a transfer within 10 years of the settlement’s creation, BPR will not be available to offset against the value of the property distributed. However, if the trustees wait until after the first trust 10-year anniversary date, BPR will be available to offset the value transferred.

 

The use of pilot trusts can be hugely effective in terms of maximising BPR. The idea is to set up a number of trusts, each holding a nominal sum in cash. Each such trust will have a full IHT nil rate band for the purposes of the trust IHT regime. Thus BPR equal to the value of the nil rate band can be transferred to each of the trusts prior to a sale of the business. Even though the property held by each trust will cease to be BPR on sale, each can make a pre-10 year anniversary distribution of its assets without any IHT charge arising. Thus there is no limit to the amount of BPR that can be sheltered by this method, providing sufficient trusts are used. For practical purposes the trusts can be merged after creation, and they will still be deemed to be separate for IHT purposes.

 

3. Use of trading losses

 

Remember the possibility of restricting capital allowances to avoid or minimise the waste of personal allowances arising from the offset of losses.

 

Loss carry forward is now more attractive in the light of increasing income tax rates, but cash flow considerations still make loss carry back or sideways relief an attractive proposition.

 

In order to claim unlimited 3-year carry back for opening year losses, a trading profit must be expected within a reasonable timeframe.  

 

It may be advantageous to incorporate a sole trade, partnership or LLP to trigger terminal loss relief (unlimited 3-year carry back of trading losses against profits of the same trade).

 

A capital loss on the disposal of subscriber shares in a trading company that would have qualified for EIS treatment can be treated as a trading loss for income tax purposes.

 

Given that the 3-year £50,000 loss carry back provisions for companies apply to accounting periods ending on or before 23 November 2010, consider a change of accounting date to bring a loss-making period within the provisions.

 

4. Topical Tax Issues

 

The abolition of the favourable tax regime for furnished holiday lettings has been omitted from the Finance Act; whether it is in fact ultimately enacted is likely to depend upon the election result.

 

The stamp duty land tax £250,000 first time buyer exemption applies only to those who have never owned an interest in a property anywhere in the world (which could make for some interesting enforcement issues). If a first time buyer acquires a property and later transfers an interest in that property to a non-first time buyer, there will be a retrospective stamp duty land tax charge if the original cost of the property was between £125,000 and £250,000, always assuming that the taxpayer realises this and self-assesses the liability.

 

I made the terrible mistake of assuming some logic in Treasury decisions as regards childcare vouchers and employees paid at or just above National Minimum Wage. My assumption that the Treasury would seek to benefit such low paid employees by allowing them to treat childcare vouchers as part of NMW was inaccurate; in fact they have allowed employers to exclude such employees from childcare voucher schemes without breaching the condition of tax relief that the scheme has to be made available to all employees.

 

The amount of Annual Investment Allowance available for an accounting period straddling 31 March 2010 is determined by time apportionment. In addition, the amount of plant & machinery expenditure pre-1 April 2010 in such a period eligible for AIA cannot exceed £50,000.

 

It appears that the scheme for writing off directors’ loan accounts pre-Budget was partly successful, in that it appears to have attracted a corporation tax deduction under the loan relationship rules (now blocked by the Finance Act) but not to have escaped national insurance contributions.

 

The pension forestalling rules for 2010-11 can in some circumstances kick in at an income level of £130,000 rather than £150,000, due to a change in the relevant legislation.

 

5. Planning for the family home

 

A sale of land without an accompanying sale of the house will usually only attract CGT principal private residence exemption if it is made due to financial constraints or is a sale or gift to other family members.

 

Entitlement to occupy a property as a beneficiary of a trust can be as a result of the exercise of the trustees’ discretion, and not solely as a result of a life interest.

 

If planning by way of a nil rate band discretionary will trust is to be effective in respect of a main residence where the surviving spouse owns the other half of the property and continues to live in it, the trustees must be given power by the will to allow the beneficiaries to occupy the property.

 

To be effective for IHT purposes, a gift of an undivided share in property must be to a donee who occupies the property, not necessarily as their home, but with some degree of control (e.g. holding keys and keeping belongings there). The donor must pay at least their share of expenses of the property. If the donee leaves the property within 7 years of the gift this will create a reservation of benefit unless a market rent is charged for the donee’s share of the property.

 

If the deceased leaves a main residence to spouse by will, and spouse varies the will to leave the house to the children, there is no reservation of benefit or pre-owned assets charge. However, the children are potentially liable for CGT on growth in value post-death, and there is a security of tenure issue for the surviving spouse. If instead the deed of variation created a discretionary trust, of which surviving spouse was a beneficiary, capital gains tax relief could be safeguarded, provided the trustees actively exercise their discretion to allow surviving spouse to occupy the property.

 

6. Income splitting

 

It does not matter whether shares held by an inactive or less active spouse are subscribed for or gifted in the first instance.

 

Provided they are lawful, partnerships and LLP’s work for income splitting purposes, in the former case because of joint and several liability for partnership debts, and in both cases because of the entitlement to assets on dissolution of the partnership.

 

Spouses do not need to worry about paying dividends into separate bank accounts, but unmarried couples should do so, to demonstrate that all of the income does not find its way back to the active spouse.

 

Diversion of income to adult children is effective for tax purposes, but will give rise to issues if they are employed by the business, in terms of the value of the shares they are provided with and the income tax and NI impact.

 

It is not necessary in principle to restrict the inactive spouse to a 50% shareholding, but higher percentages risk losing the sympathy of the relevant tribunals and courts.

 

Use of different share classes is risky if the dividends do not reflect the capital contributions.

 

7. VAT accounting and cash management

 

More business-to-business international services are, with effect from 1 January 2010, deemed to be supplied where the customer belongs. This applies to management services, office, bookkeeping and clerical services, transport, work on goods and veterinary services. It will also apply to cultural and educational services with effect from 1 January 2011. Suppliers of international services will now be required to complete EC sales lists in respect of their supplies, where their customer is VAT registered in another EU country.

 

It does not apply to services in respect of land, which continue to be supplied where the land is situated.

 

The system for reclaiming non-UK input VAT is now electronic, and administered for UK taxpayers by HM Revenue & Customs.

 

The wording of adverts can have a significant impact on the status of input VAT on their cost for partial exemption purposes. Emphasis on taxable supplies can be highly beneficial compared to emphasis on exempt supplies.

 

Various simplifications of partial exemption procedures have been introduced, as follows:

 

i. it is permissible to provisionally use the prior year’s VAT recovery percentage, subject to an annual adjustment at the end of the VAT year;

ii.    it is now permissible to enter the annual adjustment on the last VAT return of the VAT year rather than the first return of the next year;

iii.   it is permissible to assume that you are de minimis for a VAT year if you were de minimis for the previous year, subject to an annual adjustment at the end of the VAT year;

iv. where the standard partial exemption method gives a distorted VAT recovery in the opening VAT year of registration, it is permissible to opt for a use-based method instead.

 

There are two new de minimis calculations for partial exemption purposes, as follows:

 

i. if total input tax is less than £625 per month and more than 50% of sales are VATable, de minimis applies;

ii.    if total input tax not attributable to taxable supplies is less than £625 per month and VAT-exempt income is less than 50% of total income, de minimis applies.

 

In each case an annual adjustment is required.

 

It may well be the case that VAT recovery on building projects costing more than £2,000 may not be possible under the flat rate scheme, on the basis that the supplies may well be services as opposed to goods, certainly if performed by a contractor.

 

The new 17.5% table of flat rates is not the same as the previous one. A taxpayer who is disadvantaged by a change of rate between the two tables may withdraw from the scheme retrospectively.

 

The two ‘catch all’ categories of flat rate, “any other activity” and “other business services”, have now been combined.

 

The FRS cannot be used where there are associated businesses.

 

For the March, April and May 2010 VAT periods, just prior to the introduction of compulsory on-line VAT payment, cheques are required to clear by the end of the month rather than being received by HMRC by that date. Apparently a ‘sympathetic’ view will be taken by HMRC for default surcharge purposes where a cheque is received by the end of the month.

 

8. Planning for disposal of owner-managed businesses

 

Where as holding company sells its only trading subsidiary, it can obtain substantial shareholdings exemption provided it is placed into liquidation without unreasonable delay following the sale.

 

Entrepreneur’s relief continues to apply the taper relief ‘80% trading’ test for companies and groups. HMRC should form an overall view based on turnover, management time and value of assets (including intangibles). Where cash has come from may also be an important factor; was it generated from trading activity or not?

 

The 5% shareholding level is now key for employees. Those with holdings below this level could be partners in an LLP structure featuring the company as a partner, but this can cause problems with EMI share options.

 

On a management buyout, employee shareholders will only get interest relief on loans to buy their investment if they have influence on management of the company, which may be a problem in some cases.

 

Where an unincorporated business is to be sold, it may be worthwhile to incorporate pre-sale, deferring capital gains on assets against the base cost of the shares, and then sell the assets out of the company, their base cost being the value at date if incorporation. This works best if there is some ongoing use for the company (such as another trading activity) so that there is no need to wind it up and trigger the deferred gains.

 

Care needs to be taken in valuing contingent deferred consideration for capital gains tax purposes. In general it is advisable to value at full potential receipt where entrepreneurs’ relief is available to cover the whole gain (now £2 million lifetime rather than £1 million). This is because a gain on the realisation of deferred consideration will not be eligible for entrepreneurs’ relief, whilst a loss can be referred back to the original computation to generate a repayment of tax. The same applies to warranty or indemnity claims, and to consideration not received (perhaps because of the purchaser’s insolvency).

 

A qualifying corporate bond is a normal commercial loan expressed in sterling with no provision for redemption or conversion to equity or for conversion into a foreign currency. Exchange of shares for a QCB defers the gain on the shares, which crystallises on disposal of the bond.

 

A non-qualifying corporate bond is convertible into shares, redeemable or capable of expression in a foreign currency. It is a capital gains tax asset in its own right, and exchange of shares for a non-QCB reduces the cost of the QCB for CGT purposes by the cost of the shares. Thus if the non-QCB is ineligible for entrepreneurs’ relief, as it often will be, the overall CGT cost of the disposal may be increased.

 

Mark Simpson

 

19 April 2010

 

 

 

 

 

 

THE TOP 20 – LABOUR’S 13 YEARS IN POWER AND ITS IMPACT ON THE TAX SYSTEM

 

 

“History repeats itself, first as tragedy, second as farce”

 

Karl Marx

 

One of the relatively few compensations of getting older is that it lends one a certain perspective on things. And whilst I might not go all the way with the bearded one, it does become possible to see patterns emerging, and to assess the success or otherwise of government initiatives and reforms.

 

“Few, if any, ministers believe Labour can win an outright majority in this election” said the BBC’s political correspondent Nick Robinson in his blog on 7 April 2010, perhaps a little surprisingly. Still, if even key Labour party insiders are not convinced they will be able to form a government on 7 May, this looks like a good time to consider their 13 years in power and their lasting impact on the tax system, and through that on the people of this country. So here are my thoughts on 20 aspects of Labour party tax policy and measures since 1997.

 

1. Dividend tax credits

 

One of the first measures introduced by Gordon Brown in his 1997 Budget was a wholesale revision of the dividend taxation system, with the following key features:

 

·     Abolition of advance corporation tax

·     Introduction of a specific dividend tax rate of 10%, covered by a non-payable and non-repayable tax credit

·     No tax on dividends for basic rate taxpayers

·     No tax credit repayments for charities and pension schemes (see below for more on the latter)

 

With hindsight we can see that the key effects of these changes have been:

 

• The development of the ‘standard’ small company model of nominal salary topped up by dividends up to the limit of the basic rate band. No doubt at considerable cost to the exchequer, given the extreme tax efficiency of this model.
• The beginning of serious problems for pension schemes, particularly final salary schemes, coupled with a naïve belief among trustees that the stock market would go on rising indefinitely.

 

2. Pensions tax regime

 

“The House of Lords, throughout the war,

  Did nothing in particular,

  And did it very well”

 

WS Gilbert

 

Which brings me neatly to pensions. Possibly the most irritating aspect of Labour tax policy over the past 13 years has been an irresistible urge to meddle with the tax system, resulting in ever longer Finance Acts (see ‘scrutiny of tax legislation’ below) and increased complexity in the tax system. A good example of this has been the treatment of pensions tax relief. Having created significant problems for pension scheme trustees with the abolition of repayable dividend tax credits, the government then sought to redeem itself with a wholesale reform and simplification of the pensions system in 2006, which for once appeared to do ‘what it said on the tin’, replacing a multitude of different tax regimes with a single comprehensive system.

 

But then they complicated things again by restricting higher rate tax relief for pension contributions for those with income over £150,000 (or do I mean £130,000) and introducing a complex system of forestalling to prevent taxpayers flooding money into pension schemes before the new legislation comes into force next year. Given that we are simultaneously being told how vital it is that we make our own pension provision rather than relying on the state, this appeared to be odd timing, driven more by the exigencies of economic meltdown than any coherent tax philosophy. I think it is fair to say that overall the government has not helped the pensions industry over the past 13 years.

 

3. Complexity and scrutiny of tax legislation

 

The desire to tinker, coupled with an obsession with anti-avoidance (see below), has resulted in longer and longer Finance Bills being put before Parliament, which has been coupled with a reduction in the time available to the Treasury Committee to subject Bills to detailed review. This is a very dangerous combination, and has resulted in a number of ill thought out pieces of tax legislation reaching the statute book. On the positive side, the government has been prepared to consult in advance of much new tax legislation, but has not always listened to the professional advice it receives and has still tended to spring controversial changes on us by surprise, suggesting that it does not trust the tax profession to deal honourably with prior consultation on controversial tax issues, which is more than a little insulting, to be honest. It would also help if one had the impression that all of the Treasury Committee members, not to mention Treasury ministers, actually understood the tax system.

 

4. IR35

 

More than once, faced with a perceived problem in the tax system, the government has sought indirect solutions which have appeared ill thought-out and have been largely ineffective. Cue IR35, a response to an increasing tendency, particularly affecting computer technicians, to operate on a freelance basis through limited companies. Leaving on one side the fact that some of the main perpetrators of this practice are government departments (possibly including the Treasury), IR35 is a complex regime, it is inconsistently applied (fuelling suspicions that it was solely aimed at computer technicians) and has been largely ineffective in stemming the perceived abuse it was designed to stamp out, mainly because the ingenuity of the tax profession tends to outstrip that of the Treasury and HMRC. Not a success, in short.

 

5. The ‘greening’ of the tax system

 

A significant number of, largely piecemeal, reliefs have been introduced to encourage more environmentally friendly behaviour by taxpayers, reflecting in my view a genuine concern about and understanding of the critical importance of environmental issues. But in one area the government deserves great credit for helping to bring about a sea change in manufacturer and consumer behaviour, and that is the area of motor vehicle taxation. The CO2-based company car regime, coupled with vehicle excise duty incentives to drive cleaner cars, has resulted in dramatic improvements by the motor trade in the cleanness and fuel efficiency of the internal combustion engine, not to mention the introduction of radical alternatives to that traditional means of propulsion. I think it is fair to say that government action in this area has forced the motor trade to proceed at a much faster rate down these lines than would otherwise have been the case, which is to the government’s great credit.

 

BREAK

 

6. Research and development tax reliefs

 

The government has recognised that the future of the British economy is innovation and hi tech product development. Accordingly it has introduced a very generous enhanced tax relief regime, administered by the most helpful and enlightened group of HMRC employees it has ever been my privilege to encounter in the specialist R & D offices. So shame on the accountancy profession for not ensuring that more of its eligible clients take up these reliefs, but credit to the government for positive action to stimulate a vital area of the modern UK economy.

 

7. Anti-avoidance

 

"The difference between tax avoidance and tax evasion is the thickness of a prison wall."

 

Denis Healey, Labour Chancellor of the Exchequer 1974 to 1979

 

“Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

 

Lord Tomlin, 1936

 

“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.”

 

Lord Clyde, 1929

 

Here we have the government’s obsession, and a significant missed opportunity to seize the tide of public opinion and take effective action in this area. It was clear from an early stage that the government would tackle avoidance on a piecemeal basis, which resulted in its early days in a rather farcical game of catch up, whereby the government’s ability to legislate against tax avoidance schemes always appeared to lag behind the ability of the extreme end of the tax profession to dream up new ones.

 

This ultimately led to the very sensible innovation of the obligation to disclose tax avoidance schemes, and also to the growing distinction between tax mitigation (using the tax system for the purpose intended to reduce tax liabilities) and tax avoidance (increasingly artificial schemes designed to thwart the purpose of the legislation). If it was the latter, it needed to be disclosed.

 

One of the few silver linings of the banking crisis and ensuing recession for the government should have been the opportunity to seize on a sea change in public and tax professional opinion regarding tax avoidance. Given that much of the most flagrant avoidance was perpetrated by the banking sector, and given that the scale of the economic crisis concentrated minds on the need for government to raise revenue, public opinion appeared to be, as never before, ripe for a concerted attack on artificial tax avoidance. Here was the chance to introduce a general anti-avoidance rule, or general anti-avoidance principle, outlawing the use of tax legislation other than for the purpose intended; the subversion of tax legislation, if you prefer. The majority of the tax profession would have welcomed this with open arms, had HMRC been prepared to resource a clearance procedure to give certainty in advance about tax planning proposals. But the opportunity to end artificial tax avoidance was lost, because the Treasury would not undertake to resource such a procedure. I believe this to be a very short-sighted decision, which this country may come to regret.

 

8. The corporation tax nil rate band fiasco

 

The Chancellor introduces, to a great fanfare, an effective exemption from tax for the first £10,000 of corporate profits (admittedly subject to a complex marginal tax regime to withdraw the relief at profit levels of £50,000 and above). Thousands of businesses rush to incorporate to take advantage of what, with a £5,000+ personal allowance, amounts to a £15,000 tax exemption. The Chancellor realises what is happening and withdraws the nil rate band, announcing it as an anti-avoidance measure. Yes, this really happened in the UK in the 21^st century, hard as it is to believe. Not Gordon Brown’s finest hour.

 

9. Income splitting

 

“I will have such revenges on you both,
That all the world shall -- I will do such things --
What they are, yet I know not: but they shall be
The terrors of the earth!”

 

William Shakespeare, King Lear

 

So you take a piece of legislation that has lain, virtually dormant, on the statute book since the 1930s, and in respect of which categoric assurances have been given in 1990 that income splitting between spouses is regarded as acceptable tax planning. You use it to hound a computer contractor (spotting the theme here?) through the courts for several years, and you quite rightly lose. You put up a spokesman the day after the House of Lords decides against you and threaten dire retribution on those who dare to split their business income with their spouse (or civil partner). You produce unworkable and subjective draft legislation, and then withdraw it, citing the recession. Yes this happened in the 21^st century UK too; not Angela Eagle’s finest hour either.

 

10. Stamp duty land tax

 

Stamp duty on land appeared at times to be a voluntary tax. The new stamp duty land tax, introduced by the Labour government, is not perfect, but it is a lot better than what it replaced.

 

BREAK

 

11. Pre-owned assets tax

 

Never in a tax professional’s wildest nightmares had a government addressed a fundamental problem with one tax (inheritance tax) not by improving that tax but by introducing an entirely different tax (a sort of income tax). Not only that, but it appeared to be retrospective (or retroactive, if you believed the government). Has anyone ever paid pre-owned assets tax? And was anyone ever intended to pay it, or was it just a disincentive to future inheritance tax planning schemes involving the family home? How to bring the tax system into disrepute in one easy lesson.

 

   12. VAT flat rate scheme

 

"Whenever I hear [the word] 'culture'... I remove the safety from my Browning!"

 

Hans Johst, Schlageter (often misattributed to Hermann Goering, as “I reach for my revolver”)

 

And whenever I hear the word ‘simplification’ from a Chancellor, I assume the tax system is about to get more complicated. But the VAT flat rate scheme is actually a simplification, and a worthwhile one at that. We have many small business clients who use it, and it saves them time and money. Wonderful!

 

13. Inheritance tax – transferable nil rate band

 

More simplification! A sensible, practical, easy to understand change which avoids couples needing to make complex wills to ensure they do not waste an inheritance tax nil rate band, and also avoids setting the threshold at a ridiculously high level.

 

14. Capital gains tax – where simplification won’t work

 

“In a democracy, the people get the government they deserve”

 

Alexis de Tocqueville

 

More attempted simplification, thwarted by the taxpayer.

 

One of Gordon Brown’s early moves as Chancellor was to abolish capital gains tax retirement relief (age based total or partial exemption of gains on disposal of or retirement from a business) with business assets taper relief, an increasingly generous, non-age related, partial exemption for gains on disposal of a business. Give or take a few arguments about what was wholly or mainly a trading company, and all was reasonably well.

 

Along comes Alistair Darling, and decides to simplify capital gains tax by breaking the link with income tax rates and creating a flat rate of 18%. Cries of horror ensue from the small business community, and the Chancellor backs down and creates entrepreneurs’ relief, a sort of hybrid of retirement relief and business assets taper relief, designed to ensure that £1 million (now £2 million) of gains still attract tax at 10%. So who says taxpayers want a simple tax system?

 

Perhaps of more far-reaching importance is the severing of the link between income tax and capital gains tax. Given the huge disparity between the top rates of the two taxes, avoidance (or mitigation) activity is now centred on converting income to capital. General anti-avoidance rule anyone?

 

15. Domicile

 

Pardon me if I am being unfair. You remove the ability for taxpayers to avoid UK income tax on non-UK income kept outside the country (fair enough, you might say). But then you allow the mega-rich to buy their way out of this system for £30,000 a year, regardless of how many millions they save by so doing. Is this any way to run a tax system based on fairness and equity? And in case you think this is a party political point, this was originally George Osborne’s idea, and it stinks to high heaven. And the thought of George Osborne as Chancellor frightens me to death. Are we all equally offended now?

 

BREAK

 

16.  ‘Pursuit’ of tax evaders / disclosure schemes / HMRC merger / HMRC staffing

 

I throw these apparently disparate issues together because there is a theme running through them.

 

Harking back to Denis Healey’s prison wall, tax evasion is illegal, punishable at the extreme by imprisonment and fine. However much of a problem tax avoidance might be, the first priority must be to bring everyone into the tax system, kicking and screaming if necessary. Is that a reasonable principle? I think so.

 

The trouble is, it is difficult, it is time consuming and it is frustrating. And the government is trying to radically reduce the number of civil servants, at HMRC as much as anywhere else. So attention turns to easier targets, and many of the criminals evading UK tax get away scot-free. It wouldn’t be tolerated in any other area of the criminal law, would it?

 

And then to complicate matters further, a series of court decisions release a windfall of information about offshore bank accounts held by hundreds of thousands of UK taxpayers. But HMRC is not resourced to follow up the mountain of information and collect the huge harvest of unpaid taxes, interest and penalties waiting to be collected. So you offer a series of disclosure schemes, prompting taxpayers to come forward with broad hints from HMRC and banks (the latter is, I believe, called ‘tipping off’ in money laundering terms and is itself a criminal offence punishable by imprisonment or fine) and offering them a fixed 10% penalty, this in a world where the absolute minimum penalty for tax fraud is supposed to be 25%. I know the world isn’t perfect, but aren’t someone’s priorities getting seriously distorted here?

 

17. Capital allowances

 

The government undertook a wholesale reordering of the capital allowances legislation, which for the vast majority of business represents a major simplification, as they can get full tax relief in year of purchase for £50,000 (and now £100,000) of expenditure on plant and machinery, which also gives a major cash flow advantage compared to the previous partial claims available under the first year allowance system. On the other hand, tax relief for expenditure on industrial buildings disappeared (a bit like British industry, you might say if you were feeling cynical). On the whole though, the changes made sense and represented a genuine simplification of the capital allowances regime.

 

18. The time to pay initiative

 

The streamlined process for agreeing time to pay arrangements with HMRC introduced in the wake of the financial crisis was a godsend to many hard-pressed taxpayers, and particularly businesses. This was a timely and well thought-out idea, which has now been extended to cover the next Parliament. It is a highly efficient procedure, and it works.

 

19.  Personal allowance restriction (the 60% marginal income tax rate)

 

This is a complex change, and it creates a 60% marginal income tax rate in the middle of the 40% tax band, which is frankly bizarre. A more gradual tapering of the personal allowance would have given a more sensible rate structure, and perhaps made it less likely that taxpayers and their advisers would seek to bend their ingenuity toward keeping income below the £100,000 level where possible. This is the sort of change that encourages avoidance, or mitigation, of tax.

 

20.  Higher income tax rate

 

Promises, promises. It is a dangerous thing as a politician to be too specific about what you will and will not do in a highly uncertain future. Promising not to raise the rates of income tax became an unsustainable hostage to fortune in the wake of the recession, and even before then gave rise to widespread accusations of ‘stealth taxes’, a phrase that is a tribute to the spin doctor’s art. Pretending that you can predict how the economy will perform over the next 4 to 5 years is not a wise thing to do at the best of times, and making unsustainable commitments is the likely result.

 

Summary

 

It is inevitable than any government’s legislative programme in any significant area will get a mixed report after 13 years in office. Despite occasional commendable flashes of simplification, the overall trend was toward more complex legislation, and a tendency to tinker was also damaging. Relations with the tax profession, which are actually key to the successful operation of the tax system, were put at risk by a clear lack of government trust in us, and a tendency to attack easy targets rather than get to grips with the major malaise of the tax system has also at times been apparent.

 

We should not, however, discount the bursts of simplification. Capital gains and inheritance tax in particular have benefited from this, along with VAT, whilst I suspect future generations wil have cause to thank the government for the revolution they have helped to bring about in the motor industry in the areas of emissions and fuel economy.

 

In the same way that Gordon Brown reaped the whirlwind of the banking crisis and recession following Tony Blair’s departure, so Alistair Darling has suffered from following Gordon Brown at the Treasury, with inevitable thoughts of ‘after the Lord Mayor’s Show’. “Be careful what you wish for", said Mother Teresa of Calcutta, which Gordon Brown might ponder, given that his political reputation following his stint as Chancellor stood rather higher than it does at present. Indeed, this assessment of the government’s tax policy would probably have been more positive on balance if made, say, 3 years ago, which I am not sure is entirely Mr Darling’s fault. “Could have done better” would probably be a fair assessment, but whether the Labour government will get the chance to try remains a very open question.

 

Mark Simpson

19 April 2010

New Balls, Darling?

One of the more intriguing sidelines to the recent cabinet reshuffle was the suggestion that Gordon Brown wished to replace Alastair Darling at the Treasury with Ed Balls, but could not risk doing so in case Mr Darling resigned from the Cabinet, a story that Mr Brown of course flatly denied. Apart from casting doubt upon the degree of confidence inspired at #10 Downing Street by the occupant of #11 (the Prime Minister probably thinks, with considerable justification, that Mr Darling is a bad case of 'after the Lord Mayor's Show'), this story does inspire the thought that the Prime Minister may have been toying with the thought of appointing as Chancellor the one man whose surname makes for even better headlines than the current incumbent!

However, the purpose of ths blog is actually to recount a story I heard told some years ago by Ed Balls against Gordon Brown, which went as follows:

One Sunday morning, when Ed Balls was part of his Treasury team, Gordon Brown phoned Ed Balls about the Sunday Times list of 100 key policy makers, which had been published that day. The purpose of the call was to congratulate Ed Balls on being number 2 on the list. Gordon Brown went on to say that he had expected to be below Tony Blair ("this was before Iraq", said Ed Balls) but was disappointed to be below Margaret Beckett. "Gordon, who is number 1 on the list?" asked Ed Balls. "That's another funny thing" replied the Chancellor "it's Gerry Adams". "Gordon, the list is in alphabetical order" announced Ed Balls.

So this whole blog is just really an excuse to tell this particular anecdote!

Mark Simpson

11 June 2009

So how complex is our tax system, Darling?

"Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't."
Mark Twain

 

Occasionally a news story will come to light that reminds us just how right Mark Twain was. A classic example is the news that Alastair Darling, among around half of his cabinet colleagues, not only had to pay an accountant to complete his tax return, but then claimed back the cost of the accountancy fees as a deductible expense.

 

So let's start with the marginally less amazing aspect of this, namely the fact that MPs can apparently legitimately reclaim the cost of professional fees associated with completion of their tax returns. I had never previously come across a case where an employee has successfully established such a claim for income tax purposes, or indeed would even have considered the remotest possibility of such a claim being successful. And yet I had understood that, in applying what passed for the expenses system for MPs, the employee income tax test of being incurred 'wholly, exclusively and necessarily in the performance of the duties' was applied. And indeed, this would be a very sensible approach, as otherwise MPs would end up potentially being taxed on large amounts of the expenses that they reclaimed.

 

However, the test has been applied in a very odd manner in the case of advice on tax returns. In what sense are professional fees expended on this basis incurred 'wholly, exclusively and necessarily in the performance of the duties'? I have sometimes had occasion to argue with the taxman over one aspect (normally the 'necessarily' test in practice), and have had doubts over some MPs expenses claims in respect of one or the other of the tests, but I cannot for the life of me see that fees for tax return completion meet any of the tests, let alone all of them.

 

Wholly

 

One does not complete a tax return in the performance of one's duties; rather it is a by-product of the performance of those duties that one needs to complete a tax return. So this test is clearly not met.

 

Exclusively

 

The principal reason for completing a tax return is to enable HM Revenue & Customs to satisfy themselves that the correct amount of tax has been paid. Given that MPs may well have other forms of income than their MPs' salary (rental income seems to have been a favourite here), the exclusivity argument falls at the first hurdle.

 

Necessarily

 

One might of course choose to complete one's own tax return, and not incur professional fees at all, and thus such expenditure can hardly be necessarily incurred in the performance of the duties.

 

In the performance of the duties

 

It is no part of the duties of an MP to complete a tax return, as stated above.

 

I think this analysis helps to explain why the claim of dozens of MPs that it was the system that was to blame for the current scandal, and not the administration of that system, simply does not hold water. To my mind the system was based on the soundest of principles, namely that MPs should only be able to reclaim those expenses that they would be legitimately entitled to claim for tax purposes as employees. I think that is an excellent system, and would have no problem with it had it been properly applied. The trouble is that it clearly has not been, and MPs have been allowed to claim many items that clearly do not meet this test, which is a notoriously restrictive one. 

 

For this reason I would expect HM Revenue & Customs to have a field day in pursuing those MPs who have claimed items which are ineligible for a tax deduction, which may be why we are seeing a rush to repay some of the more controversial claims. But even in such cases, if the amount concerned exceeded £5,000 it seems to me that MPs have had beneficial loans from their employer, which would also have tax consequences.

 

Which brings me to Hazel Blears, whom I defended robustly when this story first broke, but who subsequently did something rather odd, which merits comment here. She announced that she was paying the capital gains tax that she had avoided by electing for her London property to be her main residence, and indeed I believe brandished the cheque in front of photographers. However, I don't see how she can do that. She had legitimately elected for the London property to be her main residence, and legitinmately claimed the resulting tax exemption. Thus I suspect that HMRC will send her cheque back, or credit it against her next tax liability, in which case she will not have paid the tax at all. Just a thought........

 

 Of course the more amazing aspect is that the Chancellor, the man responsible for the design of the tax system, finds the tax return completion responsibility he places upon millions of taxpayers so demanding that he has to employ someone to complete his own tax return for him. So much for claims of simplification of the tax system. If you made this sort of thing up, no-one would believe you, which means, I guess, that Mark Twain was right all along.

 

 

Mark Simpson

 

26 May 2009

 

 

 

Don't Rain on My Parade - please engage brains at Town Halls

I usually make a habit of only blogging about tax, but when an elected authority (or in this case two) does something really stupid I have to make an exception.

I like the location of our offices - they are the right side of Manchester for where I live, and I have a 6-lane motorway to drive the busy bit, and we are right next door to my beloved Lancashire County Cricket Club. However, next Thursday I may well wish that our offices were anywhere else in the world other than where they are, thanks to an incredibly short-sighted and frankly inexplicable decision by Manchester and Trafford Councils.

There was great controversy last season when Manchester United were refused a victory parade for winning the Champions League, following the carnage wreaked by Rangers fans in the city a couple of weeks earlier before, during and after the UEFA Cup Final. Whilst I hold no candle for Manchester United, that decision was wrong in my view; after all United fans were hardly likely to trash their own city (cue jokes about London, Belfast & Dublin) in the way that Rangers fans had. But I think the legacy of that misguided decision is now coming back to haunt us.

I can remember the 1999 parade, and the utter chaos that ensued in trying to escape from Salford, where I then worked. However, the arrangements for this appear to be designed to cause even greater chaos, and to have been made without any thought for businesses in the area at a time of considerable economic hardship. Let me explain.

The parade (should United win) is scheduled to take place in late afternoon on the Thursday after the final on Wednesday evening. There will be no parade if they lose. So for a start it is impossible to make any concrete plans to deal with the disruption, because we don't know whether there will be any. Not a good start, but it gets much worse.

The timing is frankly incredible. Our offices are more or less opposite Trafford Town Hall, a centrepiece of the celebrations. Not only does this mean that our offices will be effectively inaccessible at evening rush hour (due to road closures and sheer mass of people), meaning that our staff will be unable to get home by car, but it has also been arranged to coincide with a 20:20 cricket match at the other Old Trafford, so that thousands more people will be trying to get to pretty much exactly the same place for the 5.30 start of that match. On pure public safety grounds this is madness, and should never have been contemplated by the Councils, or indeed the police.

Most of our staff live north of Manchester, and will be faced with trying to get from Stretford through central Manchester and out to the north in the face of hundreds fo thousands of people doing the opposite. By car this appears likely to be utterly impossible, and the option of using the Metro is more than complicated by the fact that the line between St Peter's Square and Victoria is closed for maintenance work. So how do the leaders of the two councils concerned suggest our staff get home that evening please? Personally I 'merely' have the problem of getting from a speed networking event in Salford that I am organising (finishing about 5pm) via the office to a 7.30 meeting in Poynton, which looks likely to be equally impossible. Why should people going about their lawful business have their lives utterly disrupted in this way?

By all means have a parade, but why not at the weekend, when it will not disrupt business (I haven't even talked about the temptation for employees to sneak an afternoon off work to attend the parade) and would not clash with a popular cricket match? The fact that Manchester City Council was so embarrassed by its mistaken decision last year is no basis on which to make another wrong decision this year. In common with, I suspect, all non-MUFC supporting business people in the area, I will be ditching English patriotism and hoping that they lose next Wednesday. I think we are entitled to expect more thought and consideration from our elected local leaders, to whom I will be copying this post for their comments.

Mark Simpson

21 May 2009