The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
PAY BACK TIME
The country’s finances are in a mess.
The government is raising taxes to get things back on an even keel. The measures include
· The withdrawal of the personal allowance for those with income of more than £100,000.
· The introduction of an income tax rate of 50% for those with incomes over £150,000.
· An increase in the rate of tax applicable to trusts from 40% to 50%.
· A restriction to the amount of tax relief given to those who make contributions to their pension schemes and whose income exceeds £150,000.
The first three measures come into effect on
The last measure comes into effect on
If you are affected by these changes you might like to consider measures to mitigate their effect.
It is one of those things that is easier said than done but individuals and trustees should consider switching their savings and investments from ones which produce income to ones which produce capital gains. The highest rate of tax on capital gains is a mere 18%. Up until the early part of this decade many investors achieved the aim of converting income into capital gain by putting their savings into zero dividend preference shares. This strategy still works. As those who suffered from the collapse in the ZDP market a few years ago can confirm, this is not a risk free investment. Always take professional advice before investing in shares.
Trustees who have discretion about whether or not to distribute income should consider making distributions of income to beneficiaries. Beneficiaries who have marginal tax rates lower than the trust rate (40% / 50%) will be able to recover some or all of the tax paid by the trust.
Do you have the power to influence when your income arises? If so, you might consider advancing income from 2010/11 to 2009/10.
Do you have the power to influence when tax deductible payments are made? If so, you might consider deferring payments from 2009/10 to 2010/11.
Employees caught in the 60% bracket between £100,000 and £114,000 might consider renegotiating their remuneration packages to replace taxable pay with non taxable benefits such as extra holidays and / or employer pension contributions. Care will be required when setting pension contributions, however, as anti avoidance measures are already in place here.
A rather more drastic but effective avoidance strategy is to leave the
Reflecting on the proposed tax hike in Accountancy magazine in June 2009, Emile Woolf said, “The latest rise to 50% is supposed to yield an additional £2bn in revenue. But will it? My own untutored guess, based on psychology rather than economics, is that the Treasury’s tax strategy will actually result in less tax, especially when considered as a package that includes adverse NIC changes and pernicious reforms in small print, notably relating to pensions. After all, when Nigel Lawson cut the top rate of tax from 60% to 40% the total tax yield went up. Why should the reverse not apply?
“Even if this hike, which gives
MORE FLEXIBLE LOSS RELIEF
Many small businesses are being hit by the recession and are making losses. Some of these businesses may have enjoyed profitable times in the recent past. These businesses could benefit from a recent change to the rules on obtaining relief for trading losses.
Up until recently an established business could only carry a loss back against the profits of the immediately preceding year.
The carry back period has now been extended to three years.
A company having a loss making period ending between
A sole trader or partner in a business can now do the same for a loss
making period ending between
The losses are relieved against the later years’ profits first.
And just to snatch defeat from the jaws of victory the government has decided the amount of losses which can be relieved in the two earliest years is capped at £50,000. Perhaps the government’s thinking is – we shall help those who are making modest losses but we shall not help those who lose so much they are probably doomed anyway.
Our Advice: If your business is making losses you could get a cash boost by making a claim to carry back your losses against profits of earlier years. The sooner you prepare your accounts and tax return the sooner you will get your money.
It comes as an unwelcome surprise to some new business owners to find, upon having their accounts explained to them, that expenditure on entertaining is not allowable as a business expense when computing profits for tax purposes. It was not always so. Up until 1965 entertainment was allowed as a business expense. But it was felt the allowance was being abused so a specific provision was enacted and since then business entertainment has not been tax deductible.
So next time you are planning a knees up for your business acquaintances remember, the taxpayer is not going to subsidise your party.
There are some exceptions to this rule, however, and it is worth knowing what they are.
The first exception is for entertainment provided in the ordinary course of the trade.
The obvious example is a publican. His trade is to provide hospitality. It would clearly be absurd to disallow his expenditure on beer!
But other less obvious trades can benefit from this exception too. For example, a conference organiser can claim for the cost of meals and refreshments provided to delegates.
In 1983 Celtic Football Club won a case in which it claimed for the cost
of feeding and accommodating visiting teams from
There have been occasions in the past when zealous officials have tried to deny relief for expenditure on tea and coffee provided at business meetings. Such challenges should not succeed as they are covered by the exception but this does serve to illustrate the point that what is and what is not allowable can be a question of what is reasonable in the circumstances.
The second exception is where entertainment is provided for employees of the business.
The second exception does not apply where entertainment is also provided for others and the provision of entertainment to employees is incidental to its provision to others.
So you can’t make the cost of a meal for business acquaintances tax deductible by inviting along a few employees.
Our Advice: Whether to entertain or not is a business decision and the tax consequences will rarely influence the decision. Not all entertaining is disallowable for tax purposes. To make sure your allowable entertaining is not inadvertently disallowed, distinguish allowable from disallowable entertaining in your accounting records.
An apprentice footballer walked into a bar and ordered two bloody Marys,
a black Russian, three fluffy ducks, a
Copyright: K P Bonney & Co LLP 2009. 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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