Welcome to December’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
Following the Autumn Statement, we thought this would be a good time to also remind you of the main tax changes to come in 2011/12. Plus a very topical Christmas tax article!
If you need further assistance just let us know or you can send us a question for our Question and Answer Section.
Table Of Contents
2010 Autumn Statement
George Osborne was primarily responding to the report from the Office of Budget Responsibility (OBR) which was released earlier the same day. The OBR report is a forecast of the UK’s economic performance for the next few years. Previously this forecasting was performed by the Treasury and was not independently checked. The purpose of the OBR is to provide independent economic forecasts that are not influenced by political concerns.
The central message conveyed by George Osborne is that there is not going to be a double dip recession, as the UK economy is growing steadily at about 2% per year. Employment is forecast to grow, but the unemployment rate is expected to remain at around 8% for the next year. The apparent contradiction is due to more claimants being moved from long-term sickness benefit (Employment and Support Allowance) to unemployment benefit.
George Osborne mentioned tax only briefly in his speech, when he announced a series of consultations concerning the reform of corporation tax. Most of the areas under review are only relevant to multinational companies. However, there will be a review of the tax incentives for expenditure on research and development (R&D).
Currently enhanced R&D tax relief is available to large and small companies at different rates, but it can be very difficult to prove to HMRC that the work undertaken qualifies for the R&D tax relief. This system of R&D tax relief may be tweaked after this review to make it easier for small high-tech companies to claim the relief.
We are still waiting for a number of key tax figures to be announced for the tax year 2011/12, including the rates and allowances for income tax, and the thresholds for both NI and income tax. However, we do have details of a number of other tax changes in the pipeline which we have outlined below.
It’s Christmas Time Mr Taxman!
Entertaining your staff is tax allowable as long as the entertaining is not part of an event aimed primarily at your customers. The cost of entertaining customers or potential customers or suppliers is not tax allowable for income tax or corporation tax. Your accounting records need to distinguish between the cost of hospitality such as the provision of food or drink, and significant gifts to customers, from your other marketing expenditure. The amount classified as non-allowable entertaining is added back to your profits to calculate the total tax due.
You can reclaim the VAT on the cost of entertaining your staff, but a proportion of the costs must be disallowed for VAT purposes where non-staff, such as family members, customers or suppliers also attend the event. However, where customers from overseas are present the VAT can be reclaimed on their portion of the costs. This is because the Tax Office recently removed the block on reclaiming VAT on entertaining overseas customers. Note the VAT block is only lifted for overseas customers, not suppliers, or UK customers, or other third-parties.
An event laid on free or below cost for employees would normally be a taxable benefit for those staff who attend, but it is tax free if it is designated as an ‘annual event’. The other requirements are that the event is open to all staff and the cost does not exceed £150 per head, including VAT. If the cost exceeds this threshold, your employees will be taxed on the total cost of the event as a benefit in kind. You can pay this tax and NI on behalf of your employees using a payroll settlement agreement (PSA), which you need to agree with the Tax Office. So to avoid this hassle, keep the cost of the event, including all free transport and accommodation, below £150.01 per head.
Small seasonal gifts to staff, such as a bottle of plonk or a turkey, can be treated as ‘trivial benefits’. These trivial benefits can be excluded from the report of benefits and expenses (form P11D) provided to staff, if you agree a dispensation for these gifts with the Tax Office. Don’t push it with the Tax Inspector by trying to pass off expensive hampers or cases of champagne as trivial benefits.
Business Tax Changes 2011/12
– Main pool writing down allowance – reduced from 20% to 18%
– Special rate pool writing down allowance – reduced from 10% to 8%
– Annual Investment Allowance (AIA) maximum investment – reduced from £100,000 to £25,000
Where expenditure on integral features, plant and equipment (excluding cars) is within the annual investment allowance, the business can claim a 100% deduction for those costs in the year bought.
– Employer’s class 1 above secondary threshold: 13.8%
– Employee’s class 1 above primary threshold and below upper earnings limit: 12%
– Employee’s class 1 above upper earnings limit: 2%
– Self-employed class 4: 9%
– Self-employed class 4 additional rate: 2%
The reduced rates of NI for contracted out contributions for employers and employees have not been confirmed as yet.
From 6 April 2011 if you are self-employed you will be able to pay your class 2 NICs in two instalments on 31 January and 31 July, the same dates as your income tax payments on account are due. You can continue to pay your class 2 NIC by monthly direct debit if you wish, but there will be a break in DD requests by HMRC from April 2011 to August 2011.
Personal Tax Changes 2011/12
Child and Working Tax Credits
The change in income that can be disregarded for a tax credit claim will be reduced from £25,000 to £10,000 with effect from 6 April 2011.
The standard minimum income guarantee given under the Pension Credit will be increased by the same cash amount as the state pension.
From 2011/12 a member of a pension scheme can contribute up to £50,000 per year into registered pension funds, and receive full tax relief on those contributions. This £50,000 cap includes employer contributions and the deemed increase in value of defined benefit pension schemes. If contributions of less than £50,000 have been made for three immediate preceding tax years when the individual was a member of a pension scheme, the unused cap for each tax year can be carried forward up to three years.
December Question & Answer Section
A. Yes you can. All your UK property interests are treated as one property business. So the net income from your own properties is amalgamated with your share of income and expenses from the jointly held properties, and the total needs to be reported on the property pages of your tax return. The Taxman will not treat jointly held let properties as being a partnership, unless the letting of the property is ancillary to a proper trading business.
Q. I have a holiday cottage that just managed to qualify as furnished holiday lettings as it was let for 70 days in 2010/11. How will it be taxed in 2011/12 and what tax relief will I get for any loss I make on that property?
A. The Government is expected to announce changes to the way profits and losses from furnished holiday lettings are taxed, with effect from 6 April 2011. The proposals include increasing the number of days the property must be let per year from 70 to 140. Unless you manage to let your holiday cottage for the new number of qualifying days (expected to be 140) in 2011/12, it will be taxed just like any other let property. This means any loss you make on the letting can only be carried forward and set against a profit you make from your lettings business in the future.
Q. My company is planning to get a new Freelander car (emissions 185g/km). It will keep the car for three years and then trade it in. What tax allowances will the company get for the cost of the car over those three years?
A. As the vehicle has high emissions the full cost of the car must be allocated to the special rate pool for capital allowances. Currently 10% of the balance of the special rate pool is set against the company’s profits for tax purposes each year. However, from April 2012 only 8% of the balance in the special rate pool will be tax allowable. When the car is traded in after three years the trade-in value will be deducted from the balance on the special rate pool. However, if the company makes a loss on the car that loss cannot be deducted from the company’s profits for the year.
December Key Tax Dates
31 Deadline for 2009/10 self assessment online returns to be filed if you are an employee and want tax underpaid to be collected by adjustment to your 2011/12 PAYE code (for underpayments of up to £2000 only).
VAT reclaim deadline for submission of all claims for non EU traders wanting to reclaim VAT in the UK