BHP Taxbreaks - February 2012

ESC C16 - The end is nigh!

In our Finance Bill 2012 update, issued on 7 December, we informed you of the Government announcement regarding the enactment of the extra-statutory concession (“ESC C16”). The concession allowed a final distribution to be made from limited companies subject to Capital Gains Tax before they could apply for the company to be struck off with Companies House. In the last couple of weeks there have been further developments.

In December the Government announced that ESC C16 (the concession that allowed us to informally wind up companies and obtain Capital Gains Tax treatment on the final distribution) will be enacted as of 1 March 2012 with severe restrictions. From that date, Capital Gains Tax treatment will only be available on final distributions up to a maximum of £25,000. For companies with assets in excess of this amount a formal liquidation procedure will be required if Capital Gains Tax treatment is to be secured.  

Following this announcement both the Institute of Chartered Tax Advisers (”CTA”) and the Institute of Chartered Accountants in England & Wales (“ICAEW”) amongst others wrote to the Exchequer Secretary David Gauke requesting that this proposal be withdrawn on the basis that the restriction is unnecessary and harmful to business. These requests have been ignored and the concession has been enacted in this restricted form. Therefore from 1 March 2012 companies with assets in excess of £25,000 will need to go through a formal liquidation procedure in order to be wound up if Capital Gains Tax treatment is to apply to the final distribution.

Capital Allowances – upcoming changes

As has been described in previous editions of taxbreaks, the 100% Annual Investment Allowance (AIA) for companies subject to Corporation Tax will be reduced from £100,000 to £25,000 with effect from 1 April 2012. There are also complicated transitional rules for businesses with accounting periods spanning this date.

As well as the reduction to the AIA, the rate of Writing Down Allowance (WDA) for chargeable periods ending on or after 1 April 2012 will also be reduced:

·        From 20% to 18% for the main plant and machinery pool.

·        From 10% to 8% for the special rate pool for integral features, cars bought after 31 March 2009 emitting more than 160g/km CO_2, and long life assets.

A hybrid rate must be calculated and used where the chargeable period spans 1 April 2012.

If you are expecting to spend more than £25,000 on plant and machinery and have a year end after 31 March 2012, talk to us now about whether any planned spend can be accelerated to prevent losing out on the current higher level of AIA.

Similar rules apply for unincorporated businesses, with effect from 6 April 2012. 

Recovery of HMRC debts through PAYE codings

In April 2012 HMRC will start to use coding notices to recover debts of up to £3,000; this will include any amounts that are owed to HMRC and over 6 months old.  These debts will include tax credit repayments, but these will require the tax-payer’s agreement to its inclusion.

Tax payers will be able to appeal the inclusion of a debt in the coding but they will then need to make (and keep to) an alternative arrangement.  If interest is running on the debt, the debt will be treated as being paid on the first day of the tax year in which it is coded out.  Interest will be calculated once the debt has been repaid.

Employee Share Schemes

Nick Clegg recently made the headlines when he praised the ownership structure of John Lewis and extolled the virtues of employee business ownership.  His comments generated a lot of interest in the media and highlighted the issue of employee share schemes.

Although Nick Clegg may have been referring to complete employee ownership, most entrepreneurs and business owners would not wish to give total ownership of their company to their staff. In most cases where the owner does desire for the staff to have some share ownership, it is usually either a select number of staff who the owner considers it desirable to have as shareholders, or the employee stakes are small enough to act as incentives for the employees without amounting to a shift in ownership structure.

With this in mind, HMRC’s approved share option schemes (especially the most popular Enterprise Management Incentive scheme) are designed to provide tax breaks for employees purchasing relatively small numbers of shares. If the Government is serious about creating an environment for complete employee business ownership it will need to re-examine the current HMRC approved share incentive plans for SMEs.

Using the HMRC authorised mileage rates for the self-employed – a word of caution

Using the HMRC authorised mileage rates is a simpler method open to the self-employed as an alternative to claiming the business use proportion of all motor expenses and Capital Allowances (the ‘actual’ basis).  It is also known as the Fixed Profit Car Scheme (FPCS) and is where mileage is claimed at the agreed rates, currently 45p per mile for the first 10,000 miles, 25p per mile thereafter.  This covers all running costs and depreciation of the vehicle.

However, this method is only available to small unincorporated businesses - it cannot be used if the annual business turnover exceeds the VAT threshold, irrespective of whether the business is actually required to register for VAT.

A claim using the mileage rates, once applied, must be used consistently and can only be changed to ‘actual’ when the car is replaced, so there will be instances where the mileage rate will continue to be used even when turnover exceeds the VAT threshold, but on the next change of car, the ‘actual’ basis must then be applied.

In most instances the claim would not be significantly different.  The main danger is that, if HMRC chose to challenge the claim, it may require motor expense details going back a number of years in order to substantiate a claim under the ‘actual’ basis.  This could be costly and time-consuming, and there is the danger that, if the records are not available, the claim could be disallowed entirely.

HMRC’s latest sector specific campaigns

Following on from their previous sector specific tax avoidance campaigns HMRC has announced the start of two new campaigns.

1. Electrician’s Tax Safe Plan

The first campaign focuses on electricians in order to identify tax underpayments and allow individuals to come forward and disclose irregularities. HMRC’s definition of an electrician is anyone who installs, maintains and tests electrical systems, equipment and appliances under stringent safety regulations.

To take advantage of the Electricians Tax Safe Plan, individuals must:

• Notify HMRC of their intention to take part in the campaign by 15 May 2012. This can be done online, by phone or by post.
• Make the disclosure and pay any unpaid tax by 14 August 2012.

HMRC has provided a ‘penalty calculator’ tool to enable taxpayers to calculate the level of penalty due by themselves.

2. E-marketplaces campaign

This campaign will begin on 14 March 2012 and will target eBay traders and anyone using e-marketplaces to buy and sell goods as a trade or business to make profits, and who are not declaring those profits and paying the resulting tax. 

In reaffirming its commitment to hunt down tax evaders who trade online, HMRC stressed that people who only sell a few items and are not traders are unlikely to be liable to pay tax and will not be targeted by the campaign.

3. Avon Ladies

Whilst not a formal “campaign” it is reported that HMRC are targeting those who earn money by selling, or gaining commission from party plan selling or through hand delivered home catalogues. For example, this would cover Avon ladies, Tupperware party hosts and the like.