Financial Monitor (December 2007)
Income Shifting – HMRC’s response to The House of Lords judgment in the Arctic Systems case
The Revenue have proved themselves very bad losers in connection with the Arctic Systems case. The House of Lords had effectively confirmed that it was acceptable for spouses to organise company shareholdings and dividends as they wished, irrespective of their contribution to earning the profits out of which dividends were paid. This enabled married couples to minimise their combined tax liabilities.
In response HMRC proposes to introduce legislation to prevent income shifting through payment of dividends and the allocation of partnerships profits. The legislation applies to all individuals not just married couples. It also applies to all businesses whatever their size.
In deciding how to calculate how dividends or partnership profits should be allocated HMRC draft guidance indicates that the following factors need to be taken into account.
- The work undertaken for the business by each individual
- The capital invested in the business by each individual and the interest foregone had the money been invested elsewhere
- The risk taken by each individual with particular reference to assets, such as the matrimonial home, being used to guarantee borrowings.
The practicalities of assessing the above factors has been the main thrust of the professions’ comments on the above proposals.
The proposed legislation will not apply where the allocation of dividends or partnership profits is based on a genuine commercial arrangement, ie. on arms length terms. Nor will it apply where no tax savings have been made or if ‘it would be reasonable to draw the conclusion from all the circumstances of the case’ that the avoidance or reduction of tax was not the main purpose.
If the above legislation is enacted then it will have a significant effect on the planning previously used in many of our family owned companies and partnerships.
The consultation period will end on 28 February which gives little time for amendments to be made before the Finance Bill is issued in April.
Business Journeys in Company Cars
Where an employee provides a company car but the employer pays for the fuel, then the employer may pay a tax free mileage allowance for business journeys. The new rates from 1 January 2008 are:
Engine size Rate per mile
Petrol Diesel LPG
Up to 1400cc 11p 11p 7p
1401 to 2000cc 13p 11p 8p
Over 2000cc 19p 14p 11p
HMRC have announced that the rates will in future be reviewed twice a year on 1 January and 1 July and may be changed at other times if fuel prices fluctuate by 5% or more.
Is Your Cash Safe?
The run on the Northern Rock bank has made investors more aware of the compensation scheme available to FSA authorised institutions through the Financial Services Compensation Scheme. Deposits are fully guaranteed up to a ceiling of £35,000 or £70,000 for a joint account.
However, many bank and other deposit takers while trading under their own names are often part of a larger group. In some cases there is a single FSA authorisation for the whole group, or sub group and if banks etc. covered by the same authorisation fail then an individual depositer’s savings with both or all are only guaranteed to an overall ceiling of £35,000.
In case of doubt it is possible to check the position by telephoning the FSA Consumer Contact Centre on 0845 606 1234.
Business Premises Renovation Allowance
Full tax relief on conversion and renovation costs is available for those that own or lease property that has been vacant for a year or more in a designated disadvantaged area. This relief enables the property to be brought back into business use.
The designated disadvantaged areas are Northern Ireland and areas specified as Assisted Areas. These can be identified by accessing the following website www.dtistats.net/regional-aa/aa2007.asp
Certain business uses are not allowed for this purpose so please contact us if you are considering such an investment in a property for business use.
Research and Development Tax Relief Claims
The time limit for companies to make claims for enhanced relief for expenditure on research and development was changed in 2006 so that the claim needs to be made within 2 years of the company year end.
A transitional extension of the time limit is available. It is only available for accounting periods ending after 31 March 2002 and before 31 March 2006 but allows relief to be claimed for any of these years by 31 March 2008.
The relief provides an additional tax relief of 50% of certain costs, primarily salary and related costs, incurred in research and development.
If you have not claimed such relief in the past and have incurred at least £10,000 in expenditure in a year on research and development please contact Peter Newsam to discuss making a retrospective claim before the deadline of 31 March 2008.
Proposed Capital Gains Tax Changes
The Chancellor has indicated that the proposed legislation relating to the capital gains tax changes for individuals will not be issued until the New Year because of the need to consider the response to the proposals from the accountancy profession and others. It is still therefore difficult to advise clients on this matter but in broad terms:
- Business assets including shares in unquoted companies and some commercial business premises, where a disposal is contemplated in the short term, then consideration should be given to accelerating the sale so that contracts are exchanged prior to 5 April 2008
- Sale of non-business assets – eg. buy to let – it will often be better to delay sales until after 5 April 2008. Consequently if any sales are likely to proceed to contract before 5 April 2008 then professional advice needs to be taken on the tax consequences
- Any asset held prior to 1998 for which a sale is not envisaged before 5 April 2008 needs to be reviewed to see if it would be beneficial to transfer the asset from one spouse to another (or between civil partners). The transfer will enable indexation relief accrued between 1982 and 1998 to be preserved as it will be lost on 6 April 2008. Please contact Peter Newsam if you wish to discuss any of these capital gains tax issues.
Tax Payments for Individuals and Partnerships
Please remember your balancing income tax payment for the tax year 2006/07 and first payment on account for 2007/08 are due on 31 January 2008. If you are not sure what is due to be paid and have not received a demand by 18 January 2008 please contact our tax department for assistance. If you are likely to have difficulty making the payment due by 31 January please contact the Collector of Taxes (Receivables Management) in advance of that date to make arrangements to pay by instalments. This can only be arranged for those genuinely unable to make payment of the amount due. The telephone number is 0845 3667816 for those in the Sheffield area.
Christmas Greetings
The team at UHY Wingfield Slater wishes you a very Happy Christmas and a Prosperous New Year.
Our offices will be closed on 24 December, 25 December, 26 December 2007 and 1 January 2008.
Whilst every care has been taken in the preparation of these notes we can accept no responsibility for errors or omissions contained in them or for any loss arising from their use unless we have been consulted professionally prior to any action being taken.
UHY Wingfield Slater
Wellington House, 39 Wellington Street, Sheffield S1 1XB
Tel: 0114 275 1544 Facsimile: 0114 275 1366 Email: info@uhy-wingfieldslater.com Web Site: www.uhy-wingfieldslater.com
Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales
A member of the UHY Hacker Young Group of independent UK partnerships. A member of UHY, an international association of independent accounting and consulting firms.
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