EJBC Chartered Accountants

Personal Tax
Where the amount you owe to the company exceeds £5,000 at any time in the tax year, and you have paid interest at less than the official rate on this loan there will be an income tax charge on you personally. The official rate has been set at 6.25% since 6 April 2007 in spite of the massive cuts in the Bank of England interest rates since then.

Corporate Tax
Where the loan is still outstanding nine months after the company’s year end the company has to pay a tax charge equivalent to 25% of the loan, known as a ’section 419′ charge. When the loan is eventually cleared this section 419 charge can be reclaimed by the company, but only when its next corporation tax bill is due.

What to do
If you do owe your company a significant amount you could either:

1. Use other personal funds to reimburse the amount you owe; or
2. Get the company to pay you a dividend or a bonus that is set again the loan to bring the amount you owe back to zero; or
3. Ask the company to write-off the loan.

Implications
Option 1 creates no further tax charges for you or the company, so it’s the best in that respect.

Option 2 generates more tax for you, particularly if you already pay higher rate tax. In that case you will have to pay 25% of the net dividend in tax but you won’t have received a cash dividend to give you the funds to pay that tax. The company may have to pay you a higher dividend to give you enough cash to pay the higher rate tax due. The company must deduct PAYE and NICs from any bonus it pays, so can often be more expensive and it must have the cash to pay that tax and NI to the Taxman.

Option 3 the loan write-off, is treated as a distribution by the company at the date of the write-off. This is taxed as a dividend in your hands, complete with the 10% tax credit, but it is not actually a dividend. The company cannot claim a deduction against corporation tax for the amount of the loan written-off. The Taxman may also argue that NI contributions are due on the amount of the released loan, as if it was a payment of salary.

If you owe your company money please discuss the situation with us as soon as possible as the most tax efficient solution will vary depending on your circumstances.

- the purpose of taking out the policy is to cover the drop in profits that would arise from the loss of the key person;
- the policy only applies for the time that the employee is useful to the company; and
- the policy does not have an investment element such as a surrender value.

If the purpose of the policy is to pay off a business loan, like an endowment policy, then that would be a capital related purpose, and the premiums would not be tax allowable. Endowment policies also tend to have an investment element.

Generally where the premiums paid for a keyman policy have been correctly deducted as a business expense, if that policy pays out the proceeds are treated as part of the trading income of the business. The converse also generally applies that if the premiums paid were not tax allowable, the receipts from that policy are not treated as trading income of the business.

Unfortunately there is no law that lays down this clear principle, and there have been several cases that have been decided either way. Even where the premiums have not been deducted from profits, the Taxman may argue that the receipt of the policy allows the business to continue, and the proceeds should be taxed as business profits.

Whether there is tax on the receipt may affect the amount you need to be insured for, so please contact us if you need advice on whether the receipt would be taxable.

VAT
Where your turnover for the last 12 months has dropped below £65,000 you could deregister for VAT. This will not suit all businesses, but if you sell to the public you may gain a competitive advantage by being outside the VAT net.

Loss Claims
Once you have a definite loss figure from your accounts you can set this against your profits for the previous year to generate a tax repayment or tax reduction. If the current loss exceeds the previous year’s profits you may be able to carry the excess back a further two years, but this depends on when your loss making period ended. You may need to change your accounting period slightly to accelerate the loss relief available. Ask us to help you get your accounts finalised as soon as possible.

Tax and Pension Credits
If your business is your main source of income, a loss means you may be eligible to receive Tax Credits. Tax credits are particularly valuable for families with children under the age of 16 or who are in full-time education, but single individuals can also claim. Your claim can only be backdated up to three months, so don’t delay making your claim. If you are aged 60 or over you may be able to claim Pension Credit. You don’t have to be retired to claim this support and it is a much simpler system than Tax Credits.

However your trading loss arose, the best policy is to act quickly to reduce the business tax payments and generate tax refunds. The worst thing you can do is put your head in the sand!

If your business is not run through a company, your profits are taxed in the tax year in which your accounting period ends. Say your accounting period ends on 30 June 2008, the profits for that period are taxed in 2008/09, and the first instalment of that tax is due on 31 January 2009. Where this accounting period has produced much lower profits than the previous year, or even a loss, you can elect to reduce your 2008/09 tax payment on account. But please ask us to check your figures first as you will be charged interest on any tax that is later found to be underpaid.

It is very important to plan for this big tax payment, and if you think you won’t have the funds to pay the full amount due, you should contact the Tax Office as soon as possible. There is now a new helpline number devoted to these sorts of problems: the Business Payment Support Service on 0845 302 1435, which is open every day from 8am. This service is staffed by tax officers who can arrange to spread your tax payments over a reasonable period. They can also deal with payments of VAT, PAYE, NI and corporation tax.

Cars purchased by companies from 1 April 2009 (and by unincorporated business from 6 April 2009) will attract tax relief depending on the vehicle’s CO2 emissions:

- Up to 110g/km - 100% allowance in year of purchase
- Up to 160g/km - 20% deduction per year
- Over 160g/km - 10% deduction per year

Under this system it will take longer to achieve full tax relief for the cost of a car, particularly for the higher polluting vehicles. When a post March 09 car is sold the balance of the unclaimed cost remains in the pool of business equipment to be deducted at the normal rate of 10% or 20%. So full tax relief is not given even though the car is no longer owned.

Currently, on the disposal of a car that cost over £12,000 the unrelieved purchase cost is claimed as a balancing allowance. Cars that are acquired before 1 April 09 will continue to attract a balancing allowance on sale for a transitional period of five years. After 31 March 2014 all pre-April 09 cars will be added into the relevant pool for business assets. Therefore, if looking at purchasing this type of car, it could be advantageous to purchase before April.

Cars used by partnerships and sole-traders will attract tax relief at the same rates as for company owned cars. However, a balancing allowance will still be available on sale where the car has been used privately by the business owner. So ensuring some private usage may be beneficial.

From April 2009 all motorcycles purchased by businesses will qualify for the Annual Investment Allowance, which will normally give 100% deduction in the year of purchase.

Business rates are collected by local authorities, but the amount due is set nationally using a standard multiplier for all commercial properties. This multiplier is 46.2p in England for the tax year 2008/09. Scotland and Wales set separate multipliers and have slightly different versions of the SBRR that give different reductions. The Northern Irish Assembly still operates the pre-1990 old rates system for all domestic and business properties.

SBRR applies a lower multiplier (45.8p for 2008/09) to businesses that qualify and gives additional reductions as shown below:

If rateable value of building is…

- Less than £5,000: Relief given is lower multiplier + 50% reduction in resulting figure
- £5,000 - £9,999: Relief given is lower multiplier + 1% reduction from 50% for every £100 of rateable value above £5,000.
- £10,000 - £14,999 (£21,500 in London): Relief given is lower multiplier only

Example
A business using a property with rateable value of £6,000 would pay £2,772 in business rates at the full rate of 46.2p for 2008/09. If it successfully applied to use the SBRR it would pay £6,000 x 45.8p = £2,748 x 60% = £1,648.80. That’s a reduction of 41% from the original bill of £2,772.

However, you have to apply to use the SBRR from the billing authority that collects your business rates, it is not automatic. You can now make one application to cover all the years from 2007/08 to 2009/10, and reclaim any excessive business rates paid for those earlier years. Contact your billing authority for their claim form. Each authority has a different form, but some authorities have not updated their information to show the extended deadline for claims, which is now 30 September 2010 for the current valuation period.

One way to boost your pension fund is to liquidate some of your personal investments and pay the proceeds into your pension scheme. If your investments are worth less than their cost price you will make a loss on the sale, but this loss will be available for you to use in the future to reduce the taxable amount of your future capital gains. If you make a gain on selling your investments that gain will be taxable, but you can set your annual exemption of £9,600 against your total of your gains before the balance is subject to capital gains tax at 18%. The contribution you make into your pension fund will also attract tax relief at your highest rate of tax. If you pay tax at 40%, half of the tax relief is reclaimed by the pension fund and the remaining 20% by you. This tax relief could help you recoup the losses on your investments.

If you have a self invested pension scheme (SIPP) you can transfer your investments directly into the pension fund, with the agreement of the fund administrators. This sort of contribution is called an in-specie contribution. The transfer to the SIPP is still treated as a disposal by you at market value, so a gain could arise although you will have no actual proceeds. If the gain is less than your annual exemption no capital gains tax will be payable. The advantage of transferring investments to your SIPP is that you can claim tax relief at 20% on the market value of the assets transferred, and the investment remains under your control in your SIPP.

The following types of investments may be transferred as in-specie contributions into a pension fund:

- Commercial property in the UK or abroad;
- Hotels, guest houses and nursing homes;
- Riding stables;
- Forestry, woodland and agricultural land;
- Non-income producing land;
- Shares in unrelated companies, including;
    - VCT shares
    - EIS shares
    - Shares acquired from employee share schemes
    - Shares in Real Estate Investment Trusts (REITS)

The shares do not have to be quoted on a stock market, but unquoted shares must be valued on a fair market basis before the transfer. Some of the above investments may be held by your own company, in which case the company could make an in-specie pension contribution as your employer.

The value of the total contribution should not exceed the tax free annual allowance for the year, which is currently £235,000. Please seek advice before making a transfer of any investment, as there are detailed regulations to abide by in each case.

Most employees qualify for SSP from day one of their employment, if they are paid above the lower earnings limit for NI (currently £90 per week). If they qualify the employer should pay them SSP, or an equivalent amount from the company’s own sick pay scheme, from the fourth day of sickness. Note that all agency workers now qualify for SSP on the same basis as other employees, even if their contract is for less than three months. This change was brought in on 27 October 2008.

The employee is entitled to receive SSP for 28 weeks, where they are still sick throughout that period. If at the end of that period the employee is still unable to work he moves onto State benefits. A revised SSP1 form has been introduced because of the change in structure of the State provided sickness benefit, which is now called Employment and Support Allowance (ESA). To tell the employee he is no longer entitled to SSP the employer must complete the new form SSP1 and send it to the employee. The new version of this form can be downloaded form the Department of work and pension website at http://www.dwp.gov.uk/lifeevent/benefits/ssp1_08_print.pdf and it must be used where the SSP entitlement runs out from 27 October 2008.

A. The proposed income shifting rules were to supplement the existing settlement rules that tax the artificial transfer of income between spouses. If your spouse holds shares and receives dividends from your new company you may avoid higher rate tax, but you must also avoid being caught by the settlement rules. To do this give your spouse ordinary shares which have full voting rights, which you have subscribed for yourself. It is good practice for your spouse to also be a director of the company and take part in all major decisions, such as who to bank with, and when dividends should be issued. Whilst the Chancellor has said income shifting rules will not be introduced in the Finance Act 2009, we still don’t know that the law will not be changed the following year as the Chancellor has said it will be kept under review in the most tax efficient manner. However, for now it does work.

Q. My son built and maintained a few websites on behalf of local businesses. Before he started his university course in October he transferred the code and customer details to an established website creation company for £18,000. How should this money be taxed?

A. It seems your son has a bright future as an entrepreneur. The sum he received is a capital payment for selling his first business and it is taxed as a capital gain. The full gain of £18,000 (assuming no costs) should qualify for entrepreneurs’ relief, which will reduce it by 4/9ths, leaving £10,000. From this sum he can deduct his annual capital gains exemption of £9,600 leaving just £400 taxable at 18%, producing tax of just £72. He should declare the gain on the capital gains tax pages of his 2008/09 tax return.

Q. We raised some sales invoices in November 2008 with VAT charged at 17.5%, for services to be delivered in December 2008. The invoices have already been paid. Do we have to take any action now because of the decrease in the standard VAT rate to 15% from 1 December 2008?

A. You don’t have to make any adjustment to your invoices if you don’t want to, as the VAT was correctly accounted for in November. However, you may issue a credit note if you wish to amend the original invoices to show services supplied in December at 15% VAT. This will only be worthwhile where your customers are unable to reclaim the full amount of the VAT charged.

This is going to be very awkward for VAT registered businesses as you need to consider whether to, and how to pass on the VAT reduction. You do not have to change your VAT inclusive prices, but you must change your accounting system to record the correct standard rate of VAT as follows:

1. You must record the VAT due on all your sales at the correct rate from 1 December 2008. The zero and reduced rates have not changed. Only VAT at the standard rate has reduced to 15%, which amounts to 13.043% or 3/23 of the gross figure, whereas VAT at the old standard rate of 17.5% is 14.894% or 7/47 of the gross.

Example
A sale worth £470 including VAT at 17.5% on 28 November means you have collected VAT of £70 from the customer. The same sale of £470 made on 1 December including VAT at 15% means you have only collected VAT of £61.30, so you have kept an additional £8.70 profit from that sale.

2. Any invoices issued from 1 December 2008 must show the new standard rate of 15% for standard rated items. However, if your invoice is for something that was completely delivered before 18 November 2008, or you were actually paid for the complete sale before 1 December 2008, you should use the old standard rate of 17.5%.

3. If you have the sort of business that receives stage payments for long contracts, such as in the construction industry, there are particular rules to consider. The relevant date for VAT is normally when you issue a VAT invoice or receive a stage payment. So any invoices issued for stage payments received on or after 1 December 2008 must have VAT accounted for at 15%, even if some of the work was performed before 1 December.

4. If you use the flat rate scheme for small businesses you need to look up the new flat rate for your business sector in appendix E of the detailed VAT guide on the HMRC website at http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. Most, but not all of these flat rates have changed from 1 December 2008 and you must apply the new rate to your VAT inclusive sales if you want to stay in the flat rate scheme. We can help you calculate whether you should stay in the scheme with your new flat rate.

5. If you use the cash accounting scheme you need to be particularly careful about recording exactly when the sale was made and the invoice was issued. This is because you need to pay over VAT of 17.5% for sales made before 1 December 2008 even if you receive the payment on or after 1 December 2008.

Please ask us to run through the VAT rules in relation to your particular business. Remember this VAT change is only temporary, so all your systems will have to be changed again on New Years Eve in 2009 before the standard rate of VAT increases from 15% to 17.5% on 1 January 2010.

The rules will be different for companies and for unincorporated businesses such as sole-traders. In both cases the amount of loss carried back to year -1 will be unlimited as now, but the total loss which can be carried back to years -2 and -3 cannot exceed £50,000. Losses not used against profits in earlier years will be carried forward, assuming the business continues to trade.

- Companies. Where a loss is made in an accounting period that ends between 24 November 2008 and 23 November 2009, that loss may be carried back up to three years, subject to the £50,000 cap. Where the loss-making period is less than 12 months the £50,000 cap is reduced proportionately. The rules for surrendering a loss to another group company will not be changed.

- Unincorporated businesses. If you trade as a partnership or sole-trader you are taxed on the profits you make in the accounting period that ends in the relevant tax year. For example the profits or loss for the year to 31 March 2009 are taxed or relieved in the 2008/09 tax year that ends on 5 April 2009.

In order to claim the extended three year carry back of losses you must have a loss for the accounting period that is taxed in 2008/09. Young businesses in the first four years of trading already get a three year carry back of losses, so this extended loss relief is targeted at established businesses.

If you made a small profit in the year to 30 April 2008, taxed in 2008/09, but a large loss in year to 30 April 2009, taxed in 2009/10 you will not get the three year carry back. Because the loss has fallen into the ‘wrong’ taxed year: 2009/10 instead of 2008/09 it can only be carried back for one year instead of three years. In this situation you could change your year end to 31 March 2009 to capture the loss early and take advantage of the three year carry back.

Corporation Tax
Two years ago the rates of corporation tax for companies with ’small’ profits were set to rise on 1 April 2008 to 21% then on 1 April 2009 to 22%. The Chancellor has now decided to postpone the second of those increases to 1 April 2010.

‘Small’ profits are those that fall below the small company rate threshold of £300,000. This threshold is proportionately reduced by the number of companies associated with the main company. An associated company can be one run by your spouse or civil partner, or another company over which you have control.

Income Shifting
Last year the Government threatened to bring in legislation to deal with the problem of couples sharing business income to reduce tax. This was going to happen from April 2008, but was postponed until April 2009. It has now been put back on the ‘too difficult pile’ until at least the recession is over. So there are no immediate changes for family businesses.

Savings rate (on Savings income only) - 10%: £0 - £2,440
Basic Rate - 20%: £0 - £37,400
Higher Rate - 40%: Over £37,400

However, an additional higher tax rate of 45% is promised from 6 April 2011 for those with total income above £150,000. These individuals will also lose the benefit of the personal allowance (see below). The rates paid by Trusts will also increase to 37.5% for dividends and 45% for other income from 6 April 2011.

Personal Allowances
In May 2008 the Chancellor increased the basic personal allowance to compensate lower earners for the loss of the 10% tax threshold. This increase is carried forward into 2009/10.

There is a cap on the benefit of the personal allowances given to those aged over 64 where their income exceeds the income limit. A similar mechanism of reducing the benefit of the personal allowance is proposed for those with total income over the thresholds of £100,000 and £140,000 in 2010/11 and beyond.

Pension Contributions
The lifetime and annual allowance for pension contributions were set for the five years from 2006/07 to 2010/11. These allowances will now be frozen at the 2010/11 rates until at least 2015/16, which will restrict the tax relief available to very high earners:

- Life time allowance: £1.8 million
- Annual allowance: £255,000

Class 3 national insurance is a voluntary class normally paid by people who want to top up their NI contributions in order to receive the full state pension. This voluntary rate is increasing from £8.10 per week to £12.05 per week from 6 April 2009. So if you need to top-up your NI contributions it would be best to do this while the rate remains at £8.10 per week.

Car tax (vehicle excise duty)
There was a lot of fuss after the Budget in March 2008 over the proposed increases in car tax (VED) for older cars registered after 1 March 2001. These increases in VED have now been scaled back to £5 per car per year for most cars for 2009/10, but larger increases will apply for new polluting cars.

Excise Duties
Just to prove this was a real Budget the duties on cigarettes increased from 6pm on 24 November 2008. Duties on wine and spirits go up from 1 December 2008. To compensate for the reduction in VAT, fuel duties are also to increase from 1 December 2008 and then again on 1 April 2009!