The View from No 50

 

 

 

 

January 2008

K P Bonney & Co

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston

Ilkley  LS29 6JA

Tel:  01943 870933

Fax:  01943 870925

Email:  keith@kpbonney.co.uk

www.kpbonney.co.uk

 

 


 

 

INCOME SPLITTING

 

In early December the government published a consultation document on the subject of income splitting.

 

Income splitting is the name given to arrangements under which partners in partnerships and shareholders in limited companies contrive to share the profits of the business in a way which does not reflect the contributions of labour and capital of the individual partners or shareholders.

 

Over the years income splitting arrangements have saved partners and shareholders substantial amounts of money.

 

The government tried to attack these arrangements using the settlements legislation.  It failed.  Its response to that failure is to introduce new law.  The new law will take effect from 6 April 2008.

 

The purpose of the consultative document is not to seek ideas for a better system of taxation of small businesses.  It is simply to find out whether the government’s solution to the problem of income splitting has any unforeseen consequences.

 

Assuming the draft law is approved by parliament the owners of small businesses will be placed in the difficult position of having to ask themselves whether they have made a sufficient contribution to the business to justify the profit share or dividend they have received.  If the profit share or dividend is too low the taxpayer will have to enter a higher amount on his or her tax return.  If the profit share or dividend is too high the taxpayer will have to enter a lower amount on his or her tax return.

 

It is for the taxpayer to make these judgements.

 

These will be difficult judgements.

 

HMRC will select a few thousand cases for enquiry each year and will scrutinise the profit sharing arrangements.  Some interesting negotiations will no doubt ensue.

 

What annoys me about this episode is that here we have a bunch of ministers, mandarins and officials, who know nothing about running a business, drawing up law which will only work in the perfect world which they seem to inhabit.

 

Where is HMRC going to find the thousands of highly qualified and experienced staff it will need to enforce this law with any degree of fairness and success?  It doesn’t have the resources to do the things it is already supposed to be doing.  Since the merger of Customs and the Revenue, HMRC has shed 12,500 jobs and it is under orders to lose another 12,500 by 2011.

 

I foresee a re-run of the IR35 (personal service company) legislation.  The cautious and the compliant will comply and will pay.  Everyone else will take a chance.  If they get caught they will suffer the pain.  If they don’t then they win.

 

This is bad law.

 

We need a complete re-think on small business taxation.

 

But it ain’t going to happen because the ministers, mandarins and officials know best.

 

 

BANKING INDEXATION ALLOWANCE

 

5 April 2008 will see a major change in the calculation of chargeable gains for the purposes of capital gains tax.  Out will go indexation allowance and taper relief.  In will come a flat rate of tax of 18%.

 

By now you will know whether you are a winner or a loser.

 

The potential losers have been dreaming up ways in which they can ‘bank’ their gains under the current regime and so lessen the impact of the change.

 

For those who expect to make a gain in the foreseeable future there are ways in which you can bank gains now without giving up the beneficial ownership of your assets.  That is not the subject of this article but please get in touch if you want to discuss this particular point.

 

For those who do not expect to make a sale in the foreseeable future there might still be some merit in banking your indexation allowance before it disappears in April 2008.

 

What is that all about?

 

Indexation allowance is a relief from capital gains tax.  It applies if you dispose of an asset which you owned at any time between March 1982 and April 1998.  The allowance is given as an uplift to the base cost of the relevant asset.

 

Rosie bought some shares in Sainsbury’s in April 1982 at a cost of £5,000.  She still holds them today.  Between April 1982 and April 1998 the Retail Prices Index increased by 100%.  This means Rosie is entitled to indexation allowance of £5,000.  The ‘indexed’ cost of her shares is £10,000.  If she sells the shares in the market today for £25,000 her chargeable gain (ignoring other reliefs and exemptions) is £15,000.

 

If Rosie hangs on to her shares and sells them after 5 April 2008 she loses her entitlement to indexation allowance.  The cost of her shares becomes £5,000 and, assuming she sells for £25,000, her gain is £20,000.

 

The gain is increased by the amount of the lost indexation allowance.

 

What if Rosie doesn’t want to sell her shares but she doesn’t like the idea of losing her indexation allowance?

 

There is a solution, so long as Rosie is married or in a civil partnership.

 

In these circumstances Rosie can transfer her shares to her partner.  That transfer is deemed to take place on a ‘no gain no loss’ basis.  In other words the transfer is deemed to take place at a value equal to the cost of the asset plus the indexation i.e. £10,000.  The deemed acquisition cost of the transferee partner is £10,000.  The indexation has been banked.

 

Our Advice: This tax planning only works for married couples and civil partners and where the asset concerned was acquired between April 1982 and April 1998.  If you meet these criteria and would like to consider the possibilities further then please get in touch.

 

 

JUST A NUMBER

 

As an accountant preparing a set of accounts for a client I am always reassured when I find amongst the business records a file of sequentially numbered sales invoices that runs uninterrupted from the beginning to the end of the year.  On the other hand it is always slightly worrying to be presented with a bundle or list of unnumbered invoices.  Then I am left wondering whether the information I have been given is complete.

 

H M Revenue & Customs no doubt experience similar sentiments when they carry out inspections of taxpayers’ records.

 

Happily, for some businesses, such worries are now a thing of the past.

 

From 1 October 2007 it has become a legal requirement for VAT registered businesses to allocate a sequential number to each sales invoice.

 

Our Advice:  Whether you are VAT registered or not, get numbering those invoices now.  I do not regard the new requirement as an inconvenience.  Quite apart from providing much needed reassurance to accountants and the tax authorities, it will help businesses to exercise greater control over their invoices.  At least now they will be able to work out exactly how many invoices they have lost!

 

 

TOILET HUMOUR

 

Half time at the Old Trafford and three superstars emerge from the toilets – the Scot, Darren Fletcher, the German, Michael Ballack and the Englishman, Wayne Rooney.

 

The Scot rinses his hands briefly and uses only one sheet of paper to dry them.

 

The German washes his hands several times and uses several sheets to dry them.

 

The Englishman just walks straight out.

 

A reporter stops them and asks them to explain their actions.

 

“Well”, says Fletcher, “I am a Scot and we are taught to be frugal and to make the best use of everything.”

 

Ballack says, “I am a German.  We are taught to be very thorough in all we do.”

 

And Rooney answers, “I am an Englishman and we are taught not to p**s on our hands.”

 

 

Copyright:  K P Bonney & Co LLP 2008.  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 publisher.

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