The View from No 50





January 2004

K P Bonney & Co 

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston 

Ilkley LS29 6JA

Tel: 01943 870933 

Fax:  01943 870925 







The Chancellor is committed to balancing the books over the economic cycle.  The government is committed to delivering improvements in public services.  The money to fund these improvements can be obtained from borrowing (mortgaging all our futures), from raising taxes (politically dangerous) and from making savings elsewhere.


After years of trying, there is little more to be derived from the savings alternative.


So there is the government’s dilemma.  How to fund the improvements everybody wants without mortgaging all our futures and without putting up taxes?


When it comes to taxation the answer is raise tax without raising tax.  We looked at an example of this strategy in our November newsletter when we considered the Inland Revenue’s attack on husband and wife businesses.  Here is another example of the strategy.


In 2002 the Chancellor reduced the rate of corporation tax on the first £10,000 of company profits to 0%.  He hailed this as an incentive to enterprise.  The change led to a stampede of incorporations by existing sole trader and partnership businesses.  The average tax saving was about £2,000 per annum per business owner.  Although the tax profession recognised straight away that this would cost the Treasury billions, this fact has only just become clear to the department.  It is really quite puzzling that, having presented small businesses with a way to cut their tax bills, the Treasury should be surprised to find that thousands of people have done just that.


With the small business sector now contributing much less to its coffers than before, the Treasury has to find a way to restore its tax yield without doing an embarrassing U turn.


In his pre-budget statement in November the Chancellor announced that he is looking at ways to make sure that the owners of small companies pay ‘the right amount of tax…on profits extracted form their companies’.  In other words the Treasury is thinking of a way to extract more money from small businesses without increasing tax rates generally.  We shall not know what this means until we see the Finance Bill in March.  Until then the business community is left wondering whether it is more tax efficient to run a business through a limited company on the one hand or a sole trader or partnership on the other.


The tax profession is concerned that businesses which been enticed to incorporate could now face higher tax bills if they remain incorporated and could face significant capital gains tax bills if they revert back to sole traders and partnerships.  The profession is also concerned that the Inland Revenue will not release details of the new regime even though it will start in April 2004.  And this is a government which claims to be business friendly.


Expect much more on this in the media in coming months.


Our advice:  For those who have already incorporated their businesses and those who are thinking of doing so, the advice is the same.  Wait and see.  Until we know what changes the Finance Bill contains we cannot be certain whether it is better for you to run your business through a limited company or not.






With careful planning it is possible for married couples to use the tax rules to minimise the amount of tax they pay on jointly owned assets.


The basic rule of income tax is that if an income bearing asset is owned jointly by husband and wife, the income is taxed on them equally.  They can override this basic rule by filing an election (a ‘Form 17’) with the Inland Revenue.  In such an election they declare that they own the asset in some proportions other than 50:50.  They are then charged to tax on the basis of the split declared on the form17.  The split produced by a declaration goes on running for all later years without any further action until one of the following events happens


1   one spouse dies

2   the couple separate permanently

3   the couple divorce (where they have not already separated permanently)

4   the interest of either spouse in either the asset or the income it produces changes; for example, this can happen if one spouse transfers any part of the whole to the other or to a third party.

The couple cannot simply choose to end the split which results from a declaration.  It goes on running until one of the four events listed above occurs. But even the smallest change of interest (4 above) stops the declaration running. The standard 50:50 rule then applies again unless the couple make a fresh declaration.


The form 17 election only applies to assets which can be owned in different proportions.  Examples include land, shares and chattels.  Unfortunately bank and building society accounts cannot be the subject of an election.


The basic rule of capital gains tax and inheritance tax is that if an asset is owned jointly it is owned in the proportions recorded in the relevant legal documentation (for example the deeds of a property).


These basic rules can be used to good advantage.


Suppose a married couple own an investment property.  One partner has a high income and the other has no income at all apart from the half share of the income from the investment property..They make a form 17 election and declare that the low income partner owns 99% of the asset.  The result is that income tax is saved.


If the time comes for the property to be sold and it is advantageous for some other ownership proportions to apply a change of the kind described at 4 above can be triggered.


Interestingly, this planning can also be done in reverse.  Suppose one partner, let us say the husband, finds it difficult to trust his wife with wealth.  He is a higher rate taxpayer and his wife is a basic rate payer.  The couple own an investment in joint names, his share of which is 99% and hers 1%.  By purposely not making the form 17 election the husband keeps 99% of the asset but is taxed on only 50% of the income.  His wife’s tax bill on her half share of the income is relatively low so a tax saving is achieved by the couple without the husband actually giving anything away.


Our advice:  This is one of the less well understood tax planning techniques.  Time limits apply to the making of form 17 elections.  If you think there might be scope for you to save tax by changing the basis of ownership of assets or by making a form 17 election, contact us for further advice.





During recent divorce proceedings the solicitors and barristers involved began to suspect that part of the couple’s assets derived from the proceeds of the husband’s earlier tax evasion.  Concerned that, as legal advisers, they would face prosecution for not reporting this to the National Criminal Intelligence Service (NCIS), they sought clarification from the court.  The court ruled that they did, indeed, have to report their suspicions.  The husband will now face an investigation by the Inland Revenue’s Special Compliance Office for the suspected crime of tax fraud.


All professional advisers must now report suspicions of criminal activity to NCIS.  To fail to do so is itself a criminal offence.  The duty to report overrides any duty of confidentiality owed to clients.


In future it will not be uncommon for accountants to find themselves representing clients in tax investigations where they themselves have provided the information which has triggered the investigation.


Our advice:  Naturally we shall abide by the law and report any suspicions.  Do not give us any reason to report you.





Bill Shankley to a struggling striker “..if you’re in the penalty area and aren’t quite sure what to do with the ball, just stick it in the net and we’ll discuss all your options afterwards.”



Interviewer – “Did you underestimate them?”

Bobby Robson – “No….but they played better than we thought.”



Ron Atkinson – “I went down to the dugout to pass on some technical information to the team like the fact that the game had started.”





Copyright  Ó  K P Bonney & Co LLP 2004.  All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer  The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors  or the publishers.

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