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IT WAS TOUCH and go whether to bother tuning in or not. So much of the Budget had already been released, officially or unofficially, in the past few weeks that the real thing was beginning to look about as exciting as a television repeat of the last few weeks' National Lottery shows. In the end, I decided to watch to see if once again sufficient spin could be put onto a £5 billion tax increase to make it appear to be a tax relief, as in 1997.
As always, the Budget paperwork was more enlightening than the Speech itself. The Budget press notices harp on at great length about 'building a fairer society', with fairness for pensioners, a fair deal for transport, a fair tax system and the like, although conspicuous by its absence is 'a fair deal for those with earned income', as the burdens of renovating the National Health Service rest entirely on their shoulders. So the wealthy living on income from investment portfolios and family companies paying dividends instead of salaries escape scot-free. It must be a sort of unequal fairness I suppose.
The advantages of incorporating a business now become even greater with a retrospective cut in corporation tax. For the financial year 2002 companies with profits up to £10,000 will pay no tax at all; could the same please be extended to sole traders? This is not all the good news for companies. There is to be a consultation on the wider reform of corporation tax, and to quote, this will look 'at rationalising the schedular system, the scope for greater alignment between the treatment of investment and trading companies and the case for bringing the remaining taxable gains made by companies into an income régime'. This is revolutionary stuff and, like working mothers, the Internet and small-engined cars, it seems that small companies are the bees' knees in the Chancellor's eyes. Sole traders will see this as yet more unequal fairness.
The first thing I did with the Budget press pack was to search for the most important item of all. No, this was not the one about bingo, or the other one about beer. I was looking for domicile. In fact, it took the full search engine on my computer to find anything about it in the Budget papers; little wheels and cogs inside it nearly fell off their spindles in the effort. But eventually up popped Chapter 5 of the Treasury's Budget Book and, like bad news on 11 September, buried deep in this is the following statement:
'The Government is reviewing the residence and domicile rules as they affect the tax liabilities of individuals. The Government believes that modernisation of these rules needs to be based on clear principles: the rules should be fair, clear, easy to operate, and support the competitiveness of the British economy. As this is a complex area, all those affected should have the opportunity to contribute to the discussion. The Government will report on this issue in time for the Pre-Budget Report.'
That's all you had! So it is not just domicile but also residence which is being examined and a firm policy decision to 'modernise' the rules has already been taken. It is simply a question of what should be done and at present there is not even a consultative document, although apparently consultation is now open. I believe that the impetus for change here came from a challenge by a very well known and wealthy non-domiciled owner of a London store whose case against the Revenue was to be heard late last year but the trail on it seemed to go cold. The case was to examine his contract with the Revenue for payment of a fixed sum each year in respect of his remittances of money to the United Kingdom.
There was, however, a press release on 'removing structural defects' for Lloyd's underwriters. This one looked to be a hopeful candidate, as three out of the four Lloyd's underwriters I know are not only very upset about their losses, but are even more bitter about the tax régime which effectively denies them any immediate tax relief. Unfortunately the press release was not about removing this structural defect at all, but rather some other problem I have never heard of. The three aggrieved underwriters have only investment income aside from their underwriting income and of course the dividend tax credits are not available for repayment. They can of course set their trading losses against capital gains, but only after wasting them against the dividend income first. An item in the capital gains tax press release then looked hopeful. It was entitled 'trading losses and taper relief' but unfortunately it was another one of the Chancellor's tax increases by means of something appearing to be a relief! Trading losses are now to be set against gross capital gains, where an appropriate claim is made, and not against the capital gains as reduced by taper relief.
The same capital gains tax press release announced that the capital gains tax rollover relief on incorporation of an entire business in exchange for shares (section 162, Taxation of Chargeable Gains Act 1992) is no longer to be mandatory but will become a true relief which can be disclaimed if it is not advantageous. Perhaps a better idea is, however, to sell your business to the company leaving the proceeds outstanding on loan account. The loan account could provide years of tax free income and the capital gains tax charge might be as low as 10 per cent, instead of income tax on drawing the company's profits as dividends. Another Budget day press release lends a further hand here. A document transferring goodwill is to be exempt from stamp duty where it is executed on or after 23 April 2002 and so those incorporating no longer need to look at means of selling the goodwill in their business to the new company without incurring stamp duty.
Finally, another item of unequal fairness. United Kingdom branches of foreign companies are no longer to be treated as if they are United Kingdom branches. Instead they will be treated as though they are subsidiaries of the foreign company. If that sounds like a difference without a distinction, given that both branches and subsidiaries are within the United Kingdom corporation tax régime, then the mystery is solved by the Budget day press release which explains that this will result in the deemed subsidiary having a certain degree of equity financing so that not all its interest payable can be claimed for tax purposes. I have a suspicion that it will be another item along the lines of the transfer pricing régime whereby branches will have to conduct bureaucratic internal exercises themselves in order to operate the new provision and keep all the necessary records. I expect the Revenue's role to be no more than to sit back and at some inconvenient moment ask for all the paperwork. That of course is the modern idea of a fairly dividing administration work between the Revenue and the taxpayer.
Half-hearted anti-avoidance
By Elizabeth Wilson, barrister, of Pump Court Tax chambers
Three matters in the Budget press releases caught my eye. The first is the (successful) blocking of an income tax scheme. The second is the (partial) blocking of the Melville schemes, and the third is the absence of any measure to block the loophole in section 90, Taxation of Chargeable Gains Act 1992.
The amendment to Schedule 23A to the Taxes Act 1988 means that relief for manufactured interest payments will be restricted to cases where actual interest would be eligible for relief or where an equivalent amount is brought into charge to tax in respect of the same securities. This could put an end to one successful scheme whereby an individual combines a short sale of gilts cum interest with a 'repo' transaction requiring the individual to make a payment of manufactured interest.
The second was the anti-Melville provision. The Court of Appeal decided in Melville v Commissioners of Inland Revenue [2001] STC 1271 that a settlor's right to call for property was 'property' for inheritance tax purposes and thus should be taken into account in valuing the settlor's estate. The effect of the decision was, first, the Melville scheme worked but, second, a settlor who thereby reserved a benefit in his trust could 'double up' his estate. The Budget Notes say that in the double tax case the valuable right will not be treated as 'property'. However, this will not apply in tax avoidance cases. Does this mean that the Melville scheme still works? What of all the other ways of doing the Melville scheme?
The third matter was how many ideas remain unaffected by the Budget. There is nothing to counter the idea for extracting funds from a trust within section 87, Taxation of Chargeable Gains Act 1992 (if there are no stockpiled gains) without making a capital payment.
The Budget for SMEs
By David Whiscombe of Berg Kaprow Lewis
The increase in National Insurance rates, allegedly to fund the National Health Service, must be one of the most widely leaked Budget announcements of recent years. For employers, it will plainly increase payroll costs across the board by about 1 per cent, which will be unwelcome but not disastrous. But by increasing the 'jobs tax' to almost 13 per cent from next April, Gordon Brown will be pushing more employers into looking for ways in which the burden can be reduced. For employees (including directors) and the self employed the main impact is not so much the increase of 1 per cent in the rates as the fact that the existing upper limits do not apply to the 1 per cent increase. With an effective maximum tax rate of 41 per cent, earned income is generally more highly taxed than what used to be denigrated as 'unearned income' but which has nowadays become the much more acceptable 'savings income'. This, coupled with the surprising introduction of a zero rate of corporation tax for the first £10,000 of profit, must make incorporation even more attractive for small businesses: on my arithmetic a trader making £50,000 a year can save close to £4,000 a year in tax and National Insurance contributions by incorporating. Further, the new ability to preserve taper relief by opting out of section 162, Taxation of Chargeable Gains Act 1992 on incorporation removes one other little hurdle on incorporation (though with the maximum taper period shortened to two years the problem of re-starting the clock on incorporation is now much less of an issue anyway).
There is much in the way of welcome tidying up of anomalies on the small business capital gains tax front. The sometimes perverse operation of the matching rules will be changed so that employees selling shares acquired under options will now usually be treated as selling the block of shares they thought all along they were selling. Transactions that sensible people have always treated as reorganisations will now be treated by statute as reorganisations, with codification of Statement of Practice SP5/85 dealing with what are commonly called 'press release reconstructions'. Most welcome of all, the paranoiac paragraph 11 of Schedule A1 to the Taxation of Chargeable Gains Act 1992, which could deny taper relief in the most innocent of circumstances, receives its long-overdue quietus and is replaced by a measure that simply suspends relief for any period during which a company is not 'active'. We suspend judgment on the new rule, but it can hardly be as ill-drafted as the old one. As expected, the taper period is shortened to two years and the Budget Note does contain final confirmation that there is effectively no transitional rule limiting the value of the new relief, as some had feared might be the case.
Amortisation of intangible assets is to be tax-deductible and correspondingly sales are to be treated as giving rise to income. One effect of this is to remove a difficulty sometimes encountered by start-up technology companies where start-up losses that cannot be capitalised have accumulated as intellectual property rights are developed, the rights are subsequently sold for a capital sum, and a chargeable gain arises that cannot be sheltered with the historic trading losses. For the time being, the old rules are preserved for intangibles held at 1 April 2002 but running two sets of rules in tandem will be messy and it can surely only be a matter of time before all assets are moved onto the new basis.
The remaining two employees in the country whose private mileage is large enough to warrant paying tax on the fuel scale charge will note that from next April the charge will be based on CO2 emissions and not on engine size: but by then their employer will presumably have taken advantage of the 100 per cent capital allowances on low emission cars and the paraphernalia required to refuel them, which is available from Budget day. For the same good ecological reasons, the 100 per cent allowances on energy-saving technologies last year is now extended to purchase of such technologies for leasing: some of us never understood the logic of denying the relief for lessors in the first place.
Domicile review promised
By Lisa Spearman ATII and Francesca Lagerberg ACA, barrister, of Smith & Williamson
Bowing to considerable media pressure, the Chancellor has announced that there will be a review of the complex rules on residence and domicile. The Treasury Press Notice HMT 1 indicates that a report will be issued in time for the Pre-Budget Report, which is expected in November 2002. However, whether this will give rise to a formal consultation document, a discussion paper, or some firm proposals, is unclear. One would assume that considerable informal soundings will take place before November. The announcement should also act as a spur to ensure that clients' affairs are in good order before any change.
The real problem is that the nature of any changes is unclear: will there be a wholesale abandonment of the remittance basis or merely an extension of the inheritance tax 'deemed domicile' idea to income and capital gains tax? The latter idea is the easiest to implement with no particular resultant legislative changes required. If, for example, the threshold was set so that ten fiscal years' residence equated to obtaining a United Kingdom domicile, one would have certainty as to the taxpayer's position and decisions could be made accordingly. Arguably this is a better fit with the objective requirements of the self-assessment system than using the general law of domicile with its tests of intention, manifest opportunity for debate, and inherent lack of clarity.
This raises the issue of what one can do to protect a client who might be caught by any enforced change of domicile. Much will depend on the way in which any new legislation is drafted but typical techniques are:
Inheritance tax - At the end of the client's sixteenth tax year of residence in the United Kingdom, their worldwide estate would become subject to inheritance tax (at 40 per cent). This can be avoided by transferring their property to a trust before they become 'deemed domiciled' in the United Kingdom. Under present law, such a trust means that the property is taken out of the inheritance tax net completely even if the domicile position subsequently changes.
Capital gains tax - Offshore trusts created by, and for the benefit of, those domiciled outside the United Kingdom can be an effective means of deferring or eliminating capital gains tax. Care is needed if there is to be a change in the domicile of the settlor or the beneficiaries. It would be worth considering if there was anything to be done to extract benefits before any change was implemented.
Income tax - Arranging for income to arise outside the United Kingdom can also offer opportunities for deferring tax until the income is needed in the United Kingdom. There may also be opportunities for eliminating the tax altogether by converting income into capital - by closing a source of income, for example, or settling the income onto a trust for other family members.
Changing the situs of an asset - If the client was intending to be in the United Kingdom for less than 16 years, it is possible to preclude inheritance tax arising on a United Kingdom asset in the event of an unexpected death by holding United Kingdom property through a company resident outside the United Kingdom. There can be capital gains advantages to this proposal too. However, if the client becomes United Kingdom domiciled while holding such a structure, the implications can be expensive.
None of these strategies is failsafe and, of course, could be adversely affected by a change in the law but we cannot say that we have not been warned. There is also a sense of déjà vu about the review in that there have been several previous attempts to change the domicile rules, most recently in 1995. However, each time the consultation process has led to the issue being left on the 'too difficult' pile.
The reference to a review of residence in the Budget is also something of an enigma. The 1998 Finance Act introduced the concept of short term residence to deal with capital gains tax avoidance. Is it possible that a more rigid and objective day count system could be used, removing the problems of establishing intention or defining ordinary residence?
Finally a consultation paper is promised on offshore funds. This labyrinthine legislation was introduced in 1984 to counter the conversion of income into capital but the changing investment and taxation climate makes it, at best, unclear if the legislation still meets any objectives. There was no timescale published for this consultation so we will have to see when this appears.
Corporation tax and stamp duty
By Philip Ridgway FTII, BA(Hons), LLM, Barrister, partner M&A Tax Group, Deloitte & Touche
Although the Chancellor had already announced a number of Budget measures (relief for substantial shareholding, tax relief on goodwill and intangibles and changes to the forex and corporate debt regime), there were still a number of surprises tucked away in the press releases.
For small companies there was a reduction in the rate of tax from 20 per cent to 19 per cent. Companies with profits below £10,000 are to pay no tax at all.
More surprising, although in many ways in line with tax relief being given on goodwill and intangibles, is the abolition of stamp duty on goodwill. Often, the major stamp duty cost on the sale of a business has been that on goodwill, which in larger deals could give the purchaser a cost of £40,000 per £1 million of consideration. This often prohibitive cost meant that devices such as the 'offer letter' were used to avoid the charge. The abolition should also reduce the actual transaction costs.
Transfers of debts are also to be removed from the stamp duty régime from 2003. Currently, in order to be exempt, debts need to be 'loan capital' or private company debentures. This has meant that devices have been needed to avoid the duty on debt factoring and debt portfolio securitisations, otherwise the 4 per cent duty would mean that such transactions would not be economic. Again, abolition of duty on such transactions will also reduce the transaction costs of such deals.
On the capital gains front, transactions which are treated as reconstructions under the Revenue's Statement of Practice SP5/85 are to be treated as such under new legislation. The rules which apply where shares and debentures are exchanged for those of another company are to be extended to companies without share capital. This will facilitate cross-border acquisitions of foreign companies such as United States limited liability companies. It will also cover transactions with United Kingdom companies limited by guarantee.
There were two changes to the structure of corporation tax, one involving United Kingdom branches of foreign companies and one involving controlled foreign companies.
Where a foreign company operates a branch in the United Kingdom, new rules are to be introduced to ensure that the branch will be treated as having an amount of equity that it would need if it were a company operating here. This is effectively a thin capitalisation rule for branches and will limit the amount of debt and therefore the interest deduction. In future, 'branches' will be 'permanent establishments' in line with many double taxation agreements.
The Treasury is to reserve power to designate jurisdictions in which controlled foreign companies will automatically fall within the charge to tax on such entities. The exercise of such power would require the express consent of Parliament. The exercise of such a power will affect all controlled foreign companies regardless of whether they would satisfy one of the exemptions and will obviously make such jurisdictions unattractive. The measure is probably intended to bolster the armoury for use against those countries on the Organisation for Economic Co-operation and Development harmful tax competition blacklist. It would make it very expensive for any company to operate in such a jurisdiction.
The press releases contained a number of anti-avoidance provisions. Usually these do not get a mention in the Budget Speech. This year, however, stamp duty received a mention in dispatches.
A number of devices have been used recently which has meant that for larger property transactions stamp duty had become a voluntary tax. These devices were so widespread that there was a question mark over whether an adviser was negligent not to recommend them. There are four measures.
First, there is to be clawback of duty where relief is given under section 42, Finance Act 1930 for the transfer of a property to another group company and within two years the recipient company leaves the group.
Secondly, there is to be a clawback of relief under section 76, Finance Act 1986 if within two years of the transfer of the undertaking to another company in exchange for shares that other company leaves the group. Section 76, Finance Act 1986 reduces the charge on the transfer of the undertaking from up to 4 per cent to half of one per cent.
Thirdly, documents executed offshore are to come within the penalty régime. Currently the contract only attracts interest on the duty. This measure will make the commercial gamble of offshore execution more costly if the documents are needed in the United Kingdom.
Finally, contracts for the sale of interests in land are to be charged to duty where the market value is greater than £10 million. This will prevent the split interest scheme where the legal title is transferred to a nominee and the parties then 'rest on contract'. Such contracts previously were not stampable.
The Inland Revenue has also issued a consultation document entitled 'Modernising stamp duty on land and buildings in the UK'.
Notwithstanding all the attention on raising taxes to fund the National Health Service, there was still plenty to keep corporate tax practitioners busy, if not happy.
An April Budget
By John Jeffrey-Cook FTII, ATT, FCA, FCIS
Last year Gordon Brown surprised us by having the Budget on a Wednesday. This year he has stuck to Wednesday but has surprised us again by having the Budget in April for the first time in over twenty years.
From 1923 to 1970 the main Budget was almost always in April, with only three exceptions: 'Rab' Butler's first Budget on 11 March 1952, James Callaghan's second Budget on 3 May 1966 (after the election of 31 March) and Roy Jenkins' first Budget of 19 March 1968.
Tony Barber's three Budgets, 1971 to 1973, were all in March. Denis Healey fluctuated between March (1974 and 1977) and April (1975, 1976, 1978 and 1979); his last Budget on 3 April 1979 was followed by a General Election on 3 May and Geoffrey Howe's first Budget on 12 June. Geoffrey Howe and his successors stuck to March, until Kenneth Clarke changed to November from 1993 to 1996, a move which Gordon Brown reversed.
Perhaps the Chancellor will surprise us next year by opening the Budget in the morning instead of at 3.30pm!
Personal tax
By Keith Gordon ACA, ATII of ukTAXhelp Ltd
All rates of National Insurance will rise by one per cent (there was no mention of the flat weekly Class 2 and 3 contributions). Not only will this mean employees paying 11 per cent contributions, but their employers will pay 12.8 per cent from 6 April 2003. For the self-employed the rate will be eight per cent. The novelty will be the new one per cent rate on all earnings above the upper earnings limit; in other words the old ceiling has sprung a leak.
Employees
One key change is the revision to the tax charge on fuel provided by employers. From 6 April 2003, the charge will cease to be based on the car's engine size but will be a percentage of a figure to be announced each year. The percentage will be the same as used to calculate the car benefit from 6 April 2002 and will depend on the car's carbon dioxide emissions. Another change is the relaxation of the rule that any free fuel in a tax year results in a year's charge notwithstanding its disproportionate effect. From 6 April 2003, a proportionate charge will generally be available if the employee starts to pay for private fuel during the tax year.
For employees of larger companies, the exemption from tax for subsidised buses will be extended to cover employees travelling at reduced fares.
For individuals who acquire shares in different transactions on the same day, the rules in section 105, Taxation of Chargeable Gains Act 1992 treat them as acquired in a single transaction. This rule is to be relaxed from 6 April 2002 with the main gainers being members of company share schemes.
Charitable giving
Further incentives to make charitable donations will be introduced including the ability to carry back gift aid contributions, donations of tax repayments and the ability to obtain income or corporation tax relief on gifts of land.
Small businesses
The Chancellor introduced an effective annual allowance of £10,000 for small companies (profits previously taxed at ten per cent) and a 19 per cent tax rate (previously 20 per cent) on profits between £50,000 and £300,000. These changes will further increase the benefits of incorporation.
For businesses that are incorporated, the previous business owner will be able to opt out of relief under section 162, Taxation of Chargeable Gains Act 1992. Whilst this means that the incorporation will trigger an event for capital gains tax, the availability of taper relief might make this a better option for many individuals if the company is sold shortly thereafter. It remains to be seen whether this will be extended to cover partnerships that incorporate.
One welcome change was made to the calculation of section 72, Finance Act 1991 loss relief. Now, the loss relief will be given before taper relief leaving less of the loss available to be relieved later.
Other capital gains proposals
The introduction of the maximum rate of taper relief for business assets after two years was confirmed, but any relaxation of the rules for employee shares that were not treated as business assets before 6 April 2000 (or shares held by former employees) was ruled out by the government in a response document published on Budget day.
Settlors of settlor-interested trusts will from 2003 be able to set-off personal losses to some gains attributed to them.
The anti-avoidance provisions in paragraph 11 of Schedule A1 to the Taxation of Chargeable Gains Act 1992 will be replaced by a rule that discounts periods of inactivity of a close company. The definitions of holding and trading company will be changed in line with the substantial shareholding provisions and will be focused on the activities of the company rather than its purposes.
How was it for you?
Allison Plager trawls various firms of accountants to discover what they thought of the Chancellor's 2002 Budget
The National Insurance increase is overwhelmingly the headline measure in the Chancellor's 2002 Budget. While some kind of change had been widely trailed, it is the nature of the change that has come as a shock. As Loughlin Hickey, United Kingdom head of tax at KPMG, said, 'the biggest surprise of the Budget was for the Chancellor to ask large employers to bear the brunt of funding the National Health Service'. He said that this effectively was a new tax, namely, 'a tax on jobs'. Derek Jenkins, tax partner at PricewaterhouseCoopers agreed that this was a significant measure, particularly as there was 'no built-in limit to the one per cent'. For higher rate taxpayers the increase was effectively an increase in the higher rate band of 40 per cent to 41 per cent, only with none of the deductions or reliefs available to income tax rates. The National Insurance increase amounted to a 'two per cent tax on all employees and one per cent on the self-employed' said David Norton, corporate tax partner at Andersen, and added that the increase was 'more than enough to pay for the National Health Service'.
It could have been worse, was Jim Yuill's, director of social security services at Ernst & Young, opinion given that change had been widely anticipated. He said that the lifting of the ceiling for employees signalled the 'end of National Insurance as we know it', and left the way clear for future rises.
The fact that the increase was a political measure was generally agreed.
Kitchen sink credit
The new child tax credit are considered by Jim Yuill to be 'unduly complicated', particularly as many of those likely to be claiming them are not particularly financially sophisticated. He suspects that the burden is likely to fall on the employer. Francesca Lagerberg, national tax director at Smith & Williamson, agrees that these credits should be simple and streamlined, but reckons that bearing in mind that a large proportion of the population is supposed to be entitled to some form of child tax credit, the Government will need to undertake considerable publicity to help people claim them.
Good news
The abolition of stamp duty on goodwill was welcomed. David Norton said that this gave 'neutrality on share deals and asset deals' in respect of acquisitions and mergers, as up to now, only share deals had been realistic. Ernst & Young's director in charge of stamp duty, Kevin Griffin said that the abolition made everything 'much more simple administratively' and made a lot of sense given that the amount of duty raised in this particular respect about to around £50 million out of the total stamp duty take of some £8 to £9 billion.
The review of stamp duty in general was given the thumbs up by Kevin Griffin, who said that this would be 'the biggest reform of the tax in its 300 year life', and that the idea of making it an assessable and notifiable tax as opposed to one based on documentation was long overdue.
Giving with one hand …
Some major measures in the Budget, such as tax relief on disposals of substantial shareholdings and the new rules for intellectual property had been flagged up well before the actual date of the Budget. However, both Roger Muray, tax partner at Ernst & Young and KPMG's Loughlin Hickey said that the cost of these measures were counteracted by others. Both pointed to the change in the rules to the taxation of foreign companies operating in the United Kingdom which would raise substantial revenue. PricewaterhouseCoopers' Derek Jenkins said that the new rules would bring the United Kingdom into line with international practice, and indeed had been discussed as long as 20 years ago. Roger Muray mentioned that the subject has been under 'discussion between the banks and the Organisation for Economic Co-operation and Development but that as yet no agreement had been reached'. The fact that the United Kingdom Revenue is 'pushing ahead with changes despite this was perhaps jumping the gun', and as David Norton said 'it is not initially clear whether the Revenue will follow the Organisation for Economic Co-operation and Development'.
The other Revenue raising measure, said Loughlin Hickey, was the ten per cent windfall tax on North Sea oil companies, to be paid in addition to the 30 per cent corporation tax.
The Chancellor's announcement that the research and development tax credit was to be 25 per cent as opposed to the 20 per cent suggested was 'good', said Derek Jenkins, but '40 per cent would have been better, and more in line with the rate in Germany and the United States'. Regardless of this, David O'Keefe, tax partner at KPMG said that the proposals should 'be effective in encouraging more research and development spend in the United Kingdom which should be good for the economy'.
Any losers?
Employers were clearly the losers in terms of National Insurance, but Loughlin Hickey suggested that the City would also be a loser. For instance, he said that it would 'not benefit from the research and development tax credit or changes in intellectual property rules', but that the National Insurance changes would hit because of the 'high earners' in the City, and potentially the outcome of the domicile and residence review could have an impact.
A mixed bag
By John T Newth FCA, FTII, FIIT, ATT
The Chancellor of the Exchequer made great play about tax measures to assist small businesses, and undoubtedly the lower corporation tax rate and 'nil rate band' will be very valuable to small companies. But what about the thousands of small businesses which do not want to incorporate, for whatever reason? The Government has conveniently forgotten that, if they did incorporate, many of them would be caught by the IR35 legislation. One wonders whether this has something to do with National Insurance contributions. After all, a self-employed individual only pays £2 a week Class 2 contributions and Class 4 within a specified band, whereas a director and his company pay secondary and primary Class 1 contributions.
As a new pensioner, I was intrigued by the Chancellor's concessions to pensioners. A cynical view was that this was unashamed vote-catching. I entirely appreciate the increases in the State pension, and 'non-freezing' of the age-related personal allowances. But that is only one part of the story.
Has the Chancellor conveniently forgotten the abolition of tax credit relief and its profound effect on private pension funds? The private pensions industry is now in a parlous state, partly as a result of this tax measure and partly because of low interest rates. Life has a way of catching up with you and the professional firm which apparently advised the Government on this measure is now facing its own 'meltdown'.
However, pensioners who invested in Equitable Life and other companies which have reduced their bonuses dramatically will not forget the tax credit relief fiasco so readily. Its consequences are one of the reasons that I am now working full time after retirement age. One suspects that the Government does not like the private pensions industry.
No VAT surprises!
By Jim Johnson of Smailes Goldie, Hull
With rumours, not least from within the tax profession, of increases in VAT on anything from a new lower rate on postage stamps to a general hike, the enigmatic Chancellor struck again by surprising no-one! Here are the main announcements.
Flat rate scheme
The discussion paper last year set the scene and is part of the package of measures to reduce the burden on small businesses. The limit is turnover of £100,000 in the next 12 months and no more than £125,000 business income, excluding VAT and capital asset sales. Total business income includes taxable, exempt and non-taxable. The scheme comes into being on 25 April 2002 and no applications will be accepted before this date.
The scheme works by charging a flat rate - not surprisingly - on the VAT inclusive value of sales in a tax period. No sales or purchases are recorded and VAT is accounted for on a percentage of the total sales. Businesses are broken down by type so the flat rate for a hairdresser is 13 per cent and a pub 6 per cent.
Many readers will be familiar with the discussion document and will want to compare this with Information Sheet 2/2002 which outlines the scheme. A new Public Notice 733 will be published on 25 April 2002, which hopefully will fill in the gaps and the scheme remains optional.
Partial exemption standard method over-ride
A new term 'over-ride' enters the world of VAT anti-avoidance, aimed at those who abuse the standard method of partial exemption, whoever they are! This is aimed at 'larger' businesses advised by some accountancy firms - to quote VAT Information Sheet 4/2002. Customs say it will rarely apply, except in deliberate cases of 'abuse'.
Customs must think that substantial amounts of revenue are at risk. Approved special partial exemption methods will not be affected. It will apply to businesses with residual input tax of more than £50,000 a year, who are partly exempt and the standard method does not give a 'fair and reasonable' reflection of use. There is a limit of £25,000 for group undertakings (section 259, Companies Act 1985).
The over-ride applies once a year and where purchases are used in different tax years or out of proportion to the values of taxable and exempt supplies. The mechanism is a calculation of the difference between input tax deductible under the standard method and use. Examples are provided, but this is likely to be a contentious issue for any business where it might apply.
Construction
The urban regeneration measures announced in last year's Budget have been continued with additions to the 5 per cent lower or reduced rate. The details are included in Information Sheet 3/2002 and extend the measures as well as amending interpretations. The changes cover various areas, taking effect from 1 June 2002. Multiple occupancy dwelling is redefined. Conversions of buildings intended for use for a relevant residential purpose are extended to include buildings, or parts of buildings, previously never used for a relevant residential purpose. Annexes used for a relevant charitable purpose can be zero rated; this is extended to allow only a part of an annexe. The same information sheet covers changes to the zero rating of charitable buildings. Charitable and residential buildings which have received zero rating by virtue of the issue of a certificate can be subject to a self-supply if within a ten-year period there is a change, to a non-qualifying use.
Bad debts
There is welcome simplification removing the requirement for the claimant to write to the debtor informing it of the claim. The claimant should then adjust the input tax previously claimed. Regulations will still require the customer to repay input tax where it has not paid the outstanding debt after six months. This will take effect from a date to be announced after Royal Assent.
The administrative concession, announced in December 2001 attributing bad debt claims between a supply of goods and credit under hire purchase and similar agreements, will be included in the VAT Regulations 1995.
Self-supply of printing matter
Partly exempt businesses which produce printed matter will no longer need to account for VAT. Transitional provisions will apply to stop any avoidance by pre-payment means. The change takes effect from 1 June 2002.
