The View from No 50

 

 

 

 

May 2005

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

 

 


ARCTIC SYSTEMS LIMITED

 

You might not recognise the name but you will have heard or seen some of the media coverage of the decision in this case.

 

Arctic Systems Limited is a company which was formed and is owned by Mr and Mrs Jones.  Mr Jones is the fee earner.  Mrs Jones does the ‘back office’ work.

 

Mr and Mrs Jones paid themselves minimal salaries.  The remaining profit was taken out of the company as dividends.  As she owned half of the shares in the company, Mrs Jones received half of the dividends.

 

The essence of the dispute here is that the taxpayers maintain that they have the right to share their business profits in whatever combination of salary and dividends they choose.  The Inland Revenue maintains that the profits must be shared between the couple in a manner which reflects the value of Mr and Mrs Jones’s respective contributions to the business.

 

In a decision which has dismayed the profession, Mr Justice Park has sided with the Revenue.  If this decision is not appealed further it could have severe consequences for thousands of family businesses.

 

Since the introduction of independent taxation it has been universal practice for husband and wife businesses to share the profits in the most tax efficient manner.  This decision cuts right across this most basic of tax planning techniques.

 

Our Advice:  Whilst there is a prospect of an appeal, now is not the time to react.  We continue to monitor the situation and will let you know as and when we consider action to be necessary.

 

 

TAX EFFICIENT INVESTMENTS

 

We are all familiar with Individual Savings Accounts and pension schemes.  But soon there should be available a new tax efficient investment opportunity.  It is called the Business Premises Renovation Allowance (BPRA).

 

Briefly, the purpose of the BPRA is to encourage companies and individuals to redevelop former business premises in disadvantaged areas and to bring them back into business use.

 

The premises in question must have been vacant for at least a year.

 

The incentive to the investor is a 100% allowance for the cost of converting or renovating the premises.

 

So long as the investor retains the property for a period of seven years, the allowances are not clawed back.

 

To illustrate, suppose John identifies a suitable property which he buys for £75,000 and on which he spends £100,000 on conversion or renovation.  Once complete, he lets the building to a local business.  He holds the property for ten years then sells for £250,000.

 

John can claim allowances of £100,000.  If he wishes to do so, he can claim to offset this against his taxable income for the year.  If John is a 40% taxpayer this could save him as much as £40,000 in income tax.

 

John is taxable on the rental income he receives during his period of ownership of the building.

 

When he sells the property John is chargeable to capital gains tax on his gain of £75,000.  However, provided John has taken care to select a suitable tenant, his gain should be eligible for capital gains tax business asset taper relief.  This reduces his taxable gain to only £18,750.  Assuming no annual exemption John’s liability might be £7,500.

 

John’s cash profit is £107,500.

 

Actual gain                                  75,000

Income tax relief                         40,000

Capital gains tax                         -7,500

 

Cash profit                                107,500

 

 

The BPRA legislation is in draft form at the moment.  It can be viewed at

 

www.hmrc.gov.uk/pbr2004/sup_cap_allowance.pdf

 

A list of the English wards which are ‘disadvantaged areas’ for the purposes of BPRA can be viewed at

 

www.hmrc.gov.uk/so/england.pdf

 

For other countries of the UK simply replace England with the name of the other country.

 

The legislation will be introduced if and when the European Union approves it.  EU approval is required because the legislation represents ‘state aid’.

 

Our Advice:  As the legislation is not yet in place now is the time to seek out the best investment opportunities.  Once the legislation is introduced there will be a marked increase in interest and shortly after that a marked reduction in the number of opportunities.

 

 

CAN I PAY THEM CASH IN HAND?

 

Wouldn’t it be nice if we could just pay casual workers cash in hand?  Then we wouldn’t have to be bothered with all that inconvenient form filling and we could get on with running our businesses.

 

It is indeed tempting.  But this approach simply stores up problems for later.

 

Whenever you engage an employee to work for you there is always some procedure you must follow.  Here is a reminder.

 

Where you take on an employee to work for you for one week or less, he or she can be treated as a ‘casual’ employee.

 

If they are paid less than £82 then all you need to do is keep a note of their name and address and the amount of their pay.  You must enter these details on the year end form P38(A).

 

If they are paid more than £82 but less than £94 then you must complete a deductions working sheet (P11) as a nil return must be submitted to the Revenue for that person at the end of the tax year.

 

If they are paid more than £94 you must complete a deductions working sheet and deduct tax and national insurance contributions.  You should issue a P45 when the employment ceases.

 

Where the employee is taken on for more than one week you should treat them like any other employee.  When they start to work for you they should provide you with a P45 or you should ask them to complete a P46.  Any payments to them should be processed through the payroll with tax and national insurance deducted accordingly.

 

It’s a bind isn’t it?  But let’s consider the alternative.

 

You pay a casual employee cash in hand of £200 for five days’ work in January 2004.  You don’t bother with any of the above formalities.  The Revenue carries out an inspection and finds the payment to the casual worker, let us say, in May 2006.  What is the outcome?

 

Failure to submit returns P14 and P38(A) - penalty £100 per month from May 2004 to April 2005 - total £1,200 plus an amount equal to the tax and national insurance which should have been paid over on the earnings.  Combined total probably £1,250.

 

That is a steep price to pay for the convenience enjoyed.

 

 

Our Advice:  Don’t be tempted to take short cuts.  It isn’t worth the risk.  Make sure you operate the right procedures every time you take on an employee.

 

 

THE CHAIRMAN

 

One afternoon the football club chairman was riding in the back of his limousine when he saw a man eating grass by the side of the road.  He ordered his driver to stop and he got out to investigate.

 

“Why are you eating grass?” he asked the man.

 

“We don’t have any money for food” the poor man replied.

 

“Oh, come along with me then” said the chairman.

 

“But sir, I have a wife and two children!” said the man.

 

“Bring them along too!”

 

They all climbed into the car.  Once underway the man said, “Sir, you are too kind.  Thank you for taking us all with you.”

 

The chairman replied, “No problem.  The grass at my home is about two inches tall.”

 

Copyright:  K P Bonney & Co LLP 2005.  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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