The View from No 50

 

 

 

 

September 2007

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

FOR THE LAST TIME

 

A look back at past issues of The View from No 50 shows this has been our most frequently reported news story.

 

The good news is that the case has been decided in favour of the taxpayer.

 

The bad news is that the Treasury announced on the day of the decision of the House of Lords that it would bring forward legislation to make the law do what it, the Treasury, wants it to do.

 

Without going into too much detail here is the background.

 

The case is all about income splitting.

 

Since independent taxation was introduced, it has been common practice for married couples to run their businesses as partnerships or limited companies.  The profit shares of the partners (dividends in the case of company shareholders) have not always reflected the relative work contributions made to the business by the partners / shareholders.

 

In the case of Geoff and Diana Jones, the shareholders in Arctic Systems Limited, it was he who went out and earned the fees and she who stayed at home and took care of all the administration services.  They each took modest salaries and, as they owned the shares equally, they took the rest of the company’s profits as dividends fifty, fifty.

 

The law says that provided each spouse has outright ownership of his or her own shares then the dividends are the income of the shareholder.

 

The Revenue sought to argue that the law allowed them to treat the dividends of one shareholder as though they were the dividends of the other.  In this case they claimed the dividends of Diana Jones should be taxed as though they were the income of Geoff Jones because it was by virtue of his efforts that the company made profits.  This would have increased the family tax bill by about £7,000 per annum.  With six years at risk the Joneses and families like them were looking at tax and interest somewhere north of £50,000.

 

The sickening fact is the Revenue had not, until this case was taken, ever sought to place this interpretation on the law.

 

Quite simply the authorities picked a fight with

Arctic Systems in order to raise tax from everybody using income splitting arrangements.

 

The Joneses lost before the Special Commissioners and the High Court and won before the Court of Appeal and the House of Lords. 

 

The record of defeats and victories suggests the case exercised some great minds.

 

How wonderful it would be to be able to advise now that income splitting is effective.

 

What a shame the Treasury has decided to change the law.

 

Income splitters face a more taxing future after all.

 

I cannot better the comments made by Charles Russam in a letter to the Financial Times (11/12 August 2007) so I close with this.

 

“How can the government encourage enterprise and entrepreneurship on the one hand while planning punitive tax regulations for small businesses on the other?  Why is H M Revenue & Customs so vindictively focused compared with the prospect of such niggardly net returns?

 

With our ever shrinking manufacturing base and increased global competition, the UK economy is crying out for new entrepreneurs.  Future entrepreneurs may well feel it is better to stay on someone else’s payroll with all the many statutory protections rather than taking the risk of setting up their own businesses.

 

As an interim management supplier for the past 25 years, I have seen first hand the risks our interim managers take in order to set up limited companies and leave behind the security of full-time employment.  These new tax plans will have a detrimental impact on their businesses.

 

Worse still, I fear it will discourage others from setting out on their own – which would be a complete travesty for the UK economy.”

 

 

SCAMMERS

 

Are there no depths to which scammers will not stoop to relieve us of our hard earned cash? 

 

As if it wasn’t bad enough paying tax and NI to the real H M Revenue & Customs, the scammers are now posing as HMRC in order to deprive us of our post tax savings.

 

If you get tapped up for the Tax Rebate scam or any of the others described at

 

www.hmrc.gov.uk/security/fraud-attempts.htm

 

get in touch with us before you respond.

 

Our Advice:  Speak to us before responding to communications from HMRC.

 

As we are being told by everybody these days – be vigilant!

 

 

ADVISORY FUEL RATES

 

The rates have changed yet again. 

 

Who would be an employer?

 

From 1 August 2007 the fuel element of the authorised mileage rate is

 

                                           Petrol         Diesel

 

1400cc or less                     10p             10p

 

1401 – 2000cc                    13p             10p

 

Over 2000cc                        18p             13p

 

VAT registered employers can reclaim VAT on these rates.  The VAT is 7/47ths.  Thus

 

                                           Petrol         Diesel

 

1400cc or less                     1.49p          1.49p

 

1401 – 2000cc                    1.94p          1.49p

 

Over 2000cc                        2.68p          1.94p

 

Remember you must hold a VAT receipt which shows VAT of an amount equal to or greater than the amount of VAT reclaimed.

 

 

COMPANY PENSION CONTRIBUTIONS

 

Company pension contributions are a great way to reduce an employer’s profits and to get value out to an employee free of tax and national insurance.  Of course the downside is the employee can’t generally get his hands on the money but you can’t have everything.

 

Since the pension regime was ‘simplified’ in April 2006 the limits on employer pension contributions have been all but lifted which means employers can contribute almost any amount they want.  For owner managed businesses this is wonderful.

 

But for some time after April 2006 there was uncertainty (not uncommon with legislation passed by this government) as to whether contributions to the pension schemes of owner managers would be fully tax deductible for the company.

 

HMRC now accepts, for controlling directors who are the driving force behind their businesses, the level at which their remuneration (including pension contributions) is set is a commercial decision.  As such the pension contributions are tax deductible for the company.

 

For others such as members of the family of the controlling director there remains some uncertainty as to the deductibility of contributions.  Here it may be necessary to convince HMRC that the contribution has a genuine trade purpose.

 

Our Advice:  For controlling directors who are attracted to pensions, company contributions represent a most tax efficient way of extracting funds from a business.

 

 

GAME OVER

 

The manager and the chairman are out hunting deer on the chairman’s estate.

 

The manager slips, strikes his head on a rock and falls down a steep cliff.

 

The chairman climbs down the cliff and finds his friend in a terrible state.  He grabs his mobile phone and calls emergency services.

 

“I think my friend is dead.  What should I do?”

 

The operator replies, “Calm down sir.  First of all you have to make sure your friend is dead.”

 

There is a pause followed by a gunshot and then the chairman says “OK, what now?”

 

 

Copyright:  K P Bonney & Co LLP 2007.  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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