Throughout this guide we have included tips and ideas for effective tax and financial planning, but it is important to remember that this planning should be an ongoing, year-round process, not something that is left until the last minute.

We can help you to reassess your plans regularly, and adapt them as your personal and business circumstances change. With our help, you can plan for a rewarding and financially secure future.

To open the full report in Word, please click the following link:   Budget Report – March 2012

Alternatively, the full text is available to read online below:

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Income tax and personal savings

Income tax rates

*Starting rate is for savings income up to the starting rate limit of £2,710 (£2,560) within the basic rate band. The rate applies to any balance of the limit remaining after allocating taxable non-savings income.

The personal allowance for those aged under 65 increases from 6 April 2012 to £8,105. The advantage to higher rate payers is countered by a lowering of the higher rate threshold, to £34,370 from 6 April 2012.

Married couple’s allowance (MCA)

Age-related allowances are reduced by £1 for every £2 that adjusted net income exceeds £25,400 (£24,000), to a minimum PA of £8,105 (£7,475).

The MCA is reduced by £1 for every £2 by which the income of the spouse or civil partner with the most income exceeds £24,000 (£22,900), subject to a minimum of £2,960 (£2,800).

Where adjusted net income exceeds £100,000, the PA, including the minimum age-related allowances, is reduced by £1 for every £2 that net adjusted income exceeds £100,000 until it is nil.

Individual Savings Accounts (ISAs)

The annual ISA subscription limit for 2012/13 will rise from £10,680 to £11,280, up to £5,640 of which can be invested in a cash-only ISA.

The subscription limit for Junior ISAs, which are available to those aged under 18 who do not have a Child Trust Fund account, will remain unchanged at £3,600.

Child Benefit

A new income tax charge will apply to taxpayers who receive Child Benefit themselves or whose partner receives Child Benefit. The charge will only apply to those whose income is more than £50,000 for the tax year. If both partners have income of more than £50,000 for the tax year, the charge will apply only to the partner with the highest income.

For this purpose, a partnership comprises: a married couple living together; civil partners living together; a man and a woman who are not married to each other but who are living together; or a man living with a man or a woman living with a woman who are living together as if they were civil partners.

For people with income between £50,000 and £60,000, the amount of the charge will be a proportion of the Child Benefit received. For those with income above £60,000, the amount of the charge will equal the amount of Child Benefit received. For example, Child Benefit for two children is £1,752. For someone whose income is £54,000, the charge will be £700.80 – i.e. £17.52 for every £100 earned above £50,000. For one whose income is £62,000, the charge will be £1,752.

The amount of Child Benefit payable will be unaffected by the new tax charge. However, Child Benefit claimants will be able to elect not to receive the benefit if they or their partner do not wish to pay the new charge. That election may subsequently be withdrawn if the circumstances change.

This measure is to come into effect from 7 January 2013. HMRC will contact people earning over £50,000 about the new charge from Autumn 2012.

Tax and travel

Car and fuel benefits

Mileage rates

The fuel only advisory rates relate to company cars only. They can be applied as a tax-free maximum rate for employees claiming for petrol used on business journeys and for employees reimbursing their employers with the cost of petrol used for private journeys.

HMRC will consider claims for a higher maximum rate, if it can be demonstrated that it is necessary for an employee to use a car with higher than average fuel costs.

Car costs – Vehicle Excise Duty (VED) rates

VED (‘Car Tax’) rates also reflect emissions, with lower scale rates for cars using alternative fuels. The following table shows the rates which apply from 1 April 2012 for cars registered on or after 1 March 2001:

*includes cars emitting over 225g/km registered before 23 March 2006.

Business tax and investment incentives

Corporation tax

Corporation tax rates and bands are as follows:

Taxable profits
First £300,000                              20%                              20%
Next £1,200,000                           25%                             27.5%
Over £1,500,000                          24%                              26%

The main rate of corporation tax will be reduced to 23% for the financial year commencing 1 April 2013 and to 22% for the financial year commencing 1 April 2014.

Capital allowances

From April 2012 there will be a reduction in the amount of expenditure on plant and machinery that qualifies for a 100% year one write-off (via the Annual Investment Allowance (AIA)), from £100,000 to just £25,000.

In addition, from 1 April 2012 (for businesses within the charge to corporation tax) and from 6 April 2012 (for businesses within the charge to income tax), the rates of writing down allowances will be reduced from 20% to 18% (main rate pool) and from 10% to 8% (special rate pool). For businesses with years straddling 31 March/5 April, there will be a transitional AIA and writing down allowance.

From April 2012 the availability of capital allowances to a purchaser of fixtures will be conditional on businesses following a new statutory mechanism for fixing a value for fixtures within two years of a sale.

As announced in the Autumn Statement, the Enterprise Zones in assisted areas will qualify for enhanced capital allowances. In these areas, 100% First Year Allowances will be available for expenditure incurred by trading companies on qualifying plant or machinery. The qualifying expenditure must be incurred between 1 April 2012 and 31 March 2017.

National Insurance Contributions (NICs)

*Exemption applies if state retirement age was reached by 6 April 2012.

Value Added Tax (VAT)

Standard rate                                                                                   20%

VAT?fraction                                                                                       1/6

Reduced rate                                                                                    5%

Current Turnover Limits

Registration – last 12 months or next 30 days over                £77,000 from 1 April 2012

Deregistration – next 12 months under                                               £75,000 from 1 April 2012

Annual Accounting Scheme                                                               £1,350,000

Cash Accounting Scheme                                                                  £1,350,000

Hot food and premises

The definition of ‘hot food’ will be clarified to confirm that the sale of all hot food, with the exception of freshly baked bread, is standard-rated. The meaning of ‘premises’ will be clarified by confirming that the sale of all food sold for consumption in areas adjacent to a retailer (such as a table and chairs outside a café) or in areas that are shared with other retailers (such as food courts in shopping centres) is standard-rated. The measure will have effect on supplies made on or after 1 October 2012.

VAT standard rate clarifications

It has been clarified that from 1 October 2012 the standard rate of VAT will apply to: self-storage, hairdressers’ chair rental, sports nutrition drinks and holiday caravans.

Duties

Air Passenger Duty

As set out in the 2011 Autumn Statement, Air Passenger Duty (APD) rates will rise from 1 April 2012.

Tobacco products duty

From 21 March 2012 the duty rates for tobacco products are increased by 5% above RPI. This is equivalent to adding:

• 37p to a packet of 20 cigarettes
• 37p to a pouch (25g) of hand-rolling tobacco
• 12p to a packet of 5 small cigars
• 20p to a pouch (25g) of pipe tobacco.

National Minimum Wage (NMW)

The NMW rates are as follows:

*Rate applies to apprentices under 19, or those 19 and over in the first year of apprenticeship.

Other measures announced

Real Time Information (RTI) and PAYE penalties

Currently, employers and pension providers send information about tax, NICs and other payroll deductions to HMRC after the end of each tax year. The result is that HMRC cannot correct mistakes until the employer sends this information. However, under RTI, employers and pension providers will tell HMRC about tax, NICs and other deductions when or before the payments are made.

The Government will consult before the Summer on a new model for PAYE late payment and late filing penalties.

Bank Levy rate

As announced at Autumn Statement 2011, the full rate of the Bank Levy is set at 0.088% from 1 January 2012. In the Budget it was announced that from 1 January 2013 the full rate of the Bank Levy will be increased to 0.105%.

National Loan Guarantee Scheme

Just prior to the Budget the Chancellor launched a new National Loan Guarantee Scheme (NLGS), designed to give smaller businesses greater access to cheaper finance by guaranteeing banks’ own borrowing.

Up to £20 billion of Government guarantees will be provided on unsecured borrowing by participating banks, enabling them to borrow at a cheaper rate. They will then pass on the entire benefit to businesses which, when taking out an NLGS loan, will receive a discount of one percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme.

The loans are available to all UK businesses with a company group annual turnover of less than £50 million. Banks currently participating in the scheme are Barclays, Santander, Lloyds and RBS, with Aldermore having also agreed to join in principle. Around £5 billion in guarantees will be made available in the first tranche.

2012/13 Tax Calendar

April 2012

5          Last day of 2011/12 tax year.

Deadline for 2011/12 ISA investments.

Last day to make disposals using the 2011/12 CGT exemption.

Last date for contracting back into the State Second Pension for 2011/12.

14        Due date for income tax for the CT61 period to 31 March 2012.

19/20   Quarter 4 2011/12 PAYE remittance due.

20        Interest will begin to accrue on unpaid PAYE/NI for 2011/12.

30        Normal annual adjustment for VAT partial exemption calculations (monthly returns).

May 2012

1          Start of daily penalties for 2011 online Tax Return not yet filed. Additional penalties may     apply for further delay.

3          Submission date of P46 (Car) for quarter to 5 April.

19        Last day for filing forms P14, P35, P38, and P38A – 2011/12 PAYE returns – without
incurring penalties.

31        Last day to issue 2011/12 P60s to employees.

June 2012

30        End of CT61 quarterly period.

Annual adjustment for VAT partial exemption calculations (March VAT year end).

July 2012

6          Deadline for submission of Form 42 (transactions in shares and securities).

Deadline for submission of EMI40 (EMI Annual Return).

File Taxed Award Scheme Returns, file P11Ds, P11D(b)s  and P9Ds. Issue copies of P11Ds or P9Ds to employees.

14        Due date for income tax for the CT61 period to 30 June 2012.

19/20   Quarter 1 2012/13 PAYE remittance due.

Final date for payment of 2011/12 Class 1A NICs.

Second payment due date for 2011/12 Class 2 NICs.

31        Second Self Assessment payment on account for 2011/12.

Annual adjustment for VAT partial exemption calculations (April VAT year end).

Liability to 5% penalty on any tax unpaid for 2010/11.

Deadline for tax credit Annual Declaration (if estimated, final figures required by 31/01/13).

August 2012

2          Submission date of P46 (Car) for quarter to 5 July.

31        Annual adjustment for VAT partial exemption calculations (May VAT year end).

September 2012

30        End of CT61 quarterly period.

Last day for UK businesses to reclaim EC VAT chargeable in 2011.

October 2012

1          Due date for payment of Corporation Tax for period ended 31 December 2011.

5          Individuals/trustees must notify HMRC of new sources of income/ chargeability in 2011/12 if a Tax Return has not been received.

14        Due date for income tax for the CT61 quarter to 30 September 2012.

19/22   Quarter 2 2012/13 PAYE remittance due.

31        Deadline for paper submission of 2012 Tax Return without incurring penalties.

November 2012

1          £100 penalty if 2012 paper Tax Return not yet filed. Additional penalties may apply for further delay.

2          Submission date of P46 (Car) for quarter to 5 October.

December 2012

30        Last day for online submission of 2012 Tax Return for HMRC to collect tax through
clients’ PAYE code, where they owe less than £3,000.

31        Last day for non-EU traders to reclaim recoverable UK VAT suffered in the year to 30 June 2012.

End of relevant year for taxable distance supplies to UK for VAT registration purposes.

End of relevant year for cross-border acquisitions of taxable goods in the UK for VAT registration purposes.

End of CT61 quarterly period.

Filing date for Company Tax Return Form CT600 for period ended 31 December 2011.

January 2013

1          Due date for payment of Corporation Tax for period ended 31 March 2012.

14        Due date for income tax for the CT61 quarter to 31 December 2012.

18/22   Quarter 3 2012/13 PAYE remittance due.

31        First self assessment payment on account for 2012/13.

Capital gains tax payment for 2011/12.

Balancing payment – 2011/12 income tax/Class 4 NICs.

Last day to renew 2012/13 tax credits.

First payment due date for 2012/13 Class 2 NICs.

Deadline for amending 2010/11 Tax Return.

Last day to file the 2012 Tax Return online without incurring penalties.

February 2013

1          £100 penalty if 2012 Tax Return not yet filed online. Additional penalties may apply for further delay. Interest starts to accrue on 2011/12 tax not yet paid.

2          Submission date of P46 (Car) for quarter to 5 January.

14        Last date (for practical purposes) to request NIC deferment for 2012/13.

March 2013

2          Last day to pay any balance of 2011/12 tax and Class 4 NICs to avoid an automatic 5%    late
payment penalty.

31        End of Corporation Tax financial year.

End of CT61 quarterly period.

Filing date for Company Tax Return Form CT600 for the period ended 31 March    2012.

This Budget Report was prepared immediately after the Chancellor’s Budget Statement based on official press releases and supporting documentation. The Budget proposals are subject to amendment before the Finance Act receives Royal Assent. This Report is for guidance only, and professional advice should be obtained before acting on any information contained herein. No responsibility can be accepted by the publishers or the distributors for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

After a number of positive and collaborative negotiations with a working party led by myself, Caroline Cope, Director of Tavara and the current Tavara Centre Manager, Chris Shennan, I am pleased to announce that I have agreed to the sale and transfer of a large portion of Tavara’s Thames Valley client base to a newly formed accountancy firm – Shennans Limited – which will be run with Chris at the helm and the rest of the current Tavara team continuing in their respective roles.

Tavara Limited will continue on a much smaller scale, managed by myself personally and comprising the current Northamptonshire client base and a small number of Thames Valley clients.

Reducing my client list means that I will be able to provide the kind of hands-on, personable and one-to-one service that I think my clients will really benefit from.  It also means that I can achieve a more family-friendly working pattern as a result of the reduced travelling commitments.

CONTACT DETAILS FOR TAVARA LIMITED WITH IMMEDIATE EFFECT

Darren Mobile:         07966 751619

Office Number:        0845 463 0718

Email Address:         dw@tavara.co.uk

Office Address:        Tavara Limited, Ringstead Business Centre, Spencer St, Northants, NN14 4BX

Note: all bank account numbers, tax agent numbers and enquiry insurance policies remain unchanged.

SPECIFIC SERVICE QUERIES

With all of the accountancy and business services Tavara currently provide, there should be no discernible change other than the contact details you need to use. Specifically:

If you currently have your weekly/monthly payroll prepared by Tavara, this will continue but please contact me personally rather than Lynne.

If we currently prepare your VAT returns, this will continue but please contact me directly with the relevant information.

If your company’s registered office is Tavara’s address, I will automatically update Companies House with the new address on your behalf.

With immediate effect, I will personally be available to answer any question or query you may have so please don’t hesitate to contact me to discuss any issues you are concerned about.

On a personal note, I would like to put on record my sincere thanks and appreciation to all clients for their loyalty and patronage thus far and thank you in advance for your continued support throughout this exciting new chapter.

Yours sincerely,

Darren Warren

Can you afford an increase in your staff costs? You may have no choice!

The March Budget introduced a number of measures intended to continue the policy of stimulating the economy by keeping public spending substantially above public revenue. The new Government takes the view that this policy is unsustainable and that the tax burden must rise in addition to expenditure being cut. The June Emergency Budget addresses the taxation side of this equation, although the Tax Credit proposals can be seen as part of the plans to reduce expenditure.

As widely anticipated, the standard rate of VAT is set to rise from 17.5% to 20%, but not until 4 January 2011. There will be corresponding changes to the Flat Rate Scheme percentages, and legislation is proposed to prevent larger businesses charging the existing rate by invoicing early. The 5% reduced rate remains unchanged, and there are no alterations to the definitions of exempt and zero-rated supplies.

The basic personal allowance for Income Tax will rise to £7,475 for the year, or £143.75 a week, from next April. This is a rise of £1,000 over the figure for the current year. It has been publicised as an increase for the under-65s. The position for the over 65s is unclear, as the enhanced income-related allowances available to them have not yet been announced, but it is likely that they will benefit from the increase if their income stops them from qualifying for the enhanced allowances.

There will at the same time be a reduction in the threshold for 40% tax, which will result in those on incomes above about £45,000 will not benefit from the allowance increase. The precise threshold figure will be announced later. The upper earnings limit for National Insurance will also be reduced, to avoid a situation where part of a taxpayer’s earnings is taxed at 40% plus standard National Insurance.

The special treatment of furnished holiday lettings is to continue for the time being, but there is to be consultation on future changes. There is also to be a review of the treatment of ‘non-doms,’ who seem at present to receive more favourable treatment in the UK than in most other countries.

The rates of Class 1 National Insurance for employees and employers and Class 4 National Insurance for the self-employed will, as proposed in the March Budget, increase next April by 1% (from 11%, 12.8% and 8% to 12%, 13.8% and 9% respectively). The threshold for employer’s contributions will, however, rise from the current level of £110 per week to £131 per week, subject to a further increase for inflation.

It was generally expected that there would be an increase in the rate of Capital Gains Tax. The change that has been brought in is not as bad as many commentators foretold, but it does apply to all gains arising after 22 June 2010. Capital Gains attract an ‘annual exemption’ of, currently, £10,100. The rates charged on gains in excess of this will be depend on income. If the taxable income is below the 40% threshold, gains up to the unused basic rate band will be taxed at 18%. Any remaining gains, and all taxable gains if the income reaches the 40% threshold, will be taxed at 28%. The exception will be gains on business assets, which will be taxed at 10%, subject to a lifetime ceiling of £5 million of gains.

Because the Capital Gains Tax changes are being introduced part way through the tax year, there are complications for people who realised taxable gains between 6 April and 22 June this year and realise further taxable gains during the rest of the tax year. This newsletter cannot detail these complexities.

The main rate of Corporation Tax was to be 28% from 1 April 2011, but will now be 27%. The small profits rate, chargeable on the vast majority of companies, will also reduce from 21% to 20%. These changes do not affect the current tax year.

There is to be a National Insurance ‘holiday’ for new businesses setting up in regions outside London, the South East and Eastern England. This will only apply to business start-ups after 22 June 2010 and will be a maximum of £5,000 for each of the first 10 employees. The target commencement date is 6 September with a duration of three years, but the necessary arrangements have yet to be made and the start may be delayed.

There are a number of proposals for tax credits, which are aimed at reducing the cost and focussing the benefit on the more needy. The ‘baby element’ is to be abolished from 6 April 2011, and the ‘over-50 element’ from 6 April 2012, whilst the proposed addition for children aged 1 and 2 will not now be paid. Annual uprating will be by reference to the Consumer Price Index rather than the Retail Price Index in future. The child element will be increased by £150 a year over the rate of inflation from 6 April 2011 and by £60 a year over the rate of inflation from 6 April 2012. On the other hand, the universal Child Benefit will be frozen at its present level until April 2014.1

For households with incomes over £40,000, the rate of withdrawal of tax credits will rise from 39% to 41% from 6 April 2011. This means that for every £1 of income above that point the household will lose 41p in tax credits, rather than the present 39p. The lower 6.67% rate of withdrawal for the family element of tax credits and the threshold of £50,000 for that withdrawal will disappear, and the 41% rate will apply to that element as well.

From 6 April 2012 the backdating period for tax credit claims will reduce from three months to one month. The income increase ‘disregard’ will fall from its present level of £25,000 to £10,000 in April 2011 and £5,000 in April 2013. In April 2012 an income reduction ‘disregard’ will be introduced. These changes will make it more likely that claimants will be faced with overpayments after the end of the tax year.

Finally, it is confirmed that the over 60s will qualify for Working Tax Credit from April 2011 if they work more than 16 hours per week.

The AIA has now been increased from £50,000 to £100,000 in the Finance Act 2010. This will be extremely valuable for larger businesses and some smaller plant intensive operations.

The increase will have effect for expenditure incurred from 1 April 2010 for companies and from 6 April 2010 for the self-employed in business.

It’s all a question of timing

Many businesses will have a chargeable period that spans 1 or 6 April, so the AIA will have to be calculated pro rata for the period before and after the increase. For a company that prepares its accounts for the year ended 31 December 2010, the maximum AIA available for the period overall would be £87,500. This is computed as 3/12 x £50,000 (£12,500) + 9/12 x £100,000 (£75,000).

To ensure the full potential of this relief is achieved the company will need to get the timing of the expenditure right. Only £50,000 can be allocated to expenditure before 1 April 2010 (6 April for individuals in business).

Where qualifying expenditure does exceed the AIA available, the balance from April 2010 only qualifies for Writing Down Allowance (WDA). This is 20% for the general plant pool and 10% for the ‘special rate’ pool which includes integral features. From 1 April 2009 to 31 March 2010 (2009/10 for the self-employed) a 40% first year allowance was generally available on any excess instead of the 20% allowance on general pool items only.

Example

Both Red Ltd and Blue Ltd make up accounts to 31 December 2010. They each have £87,500 AIA available.

Red Ltd intends to buy commercial vehicles for £85,000 on 1 September 2010. As this expenditure post dates the increase but does not exceed the overall amount available for the accounts period – 100% tax relief is available on the whole £85,000.

Blue Ltd has also spent £85,000 on qualifying plant. £60,000 was expended on integral features in March 2010 and £25,000 in May 2010. Only £50,000 of the expenditure incurred before 1 April 2010 will qualify for 100% relief. The 40% first year allowance is not available on the £10,000 excess as it relates to an integral feature but 10% WDA of £1,000 is available. This provides £76,000 allowances overall.

Keeping it under control

A good record keeping system saves time in the long run as up to date records will help you:

keep track of your expenses
ask for a bank loan or credit if you need to
see quickly what you are owed by others and how much you owe them
save accountancy costs
pay the correct amount of tax
receive the correct amount of benefits or tax credits
avoid paying any extra tax or penalties.
Why you need to keep records

The law says that you should keep all records and documents you need to support the entries on your tax return. If HMRC need to check your return, they may ask to see the records you used to complete it.

Record keeping penalties

If adequate records are not kept or you do not keep your records for the required period of time, you may have to pay a penalty.

Penalties for an inaccurate return

If an inaccurate return is submitted a penalty may be due unless you can show that the mistake was made even though reasonable care was taken.

Some of the ways in which you can show you’ve taken reasonable care include:

keeping full and accurate records which are regularly updated and saved securely
checking with HMRC or an agent or accountant if there is something that you don’t understand.
The records you need to keep

The records you need to keep will depend on the size and complexity of your business and the different taxes that you have to pay, collect or charge.

The HMRC website has a very useful help sheet with specific detailed guidance on records to keep in different situations, for example:

Self-employed – www.hmrc.gov.uk/sa/rec-keep-self-emp.htm
VAT – www.hmrc.gov.uk/vat/managing/returns-accounts/accounts.htm
How to keep your records

The law does not say how you must keep your records. You must keep some original paper documents which show that tax has been deducted. An example is form P60 (end of year certificate for PAYE). Generally it is recommended that you keep all original documents you receive.

Most other records can be kept electronically (on a computer or any storage device such as disk, CD, memory stick or microfilm) as long as the method you use:

captures all the information on the document (front and back) and
allows the information to be presented in a readable format if HMRC need to see it.
How long to keep records

As a general rule, you should keep your records for a minimum of six years. However, if you are:

an employer, you need to keep Pay As You Earn (PAYE) records for 3 years (in addition to your current year)
a contractor in the Construction Industry Scheme (CIS), you need to keep your CIS records for 3 years (in addition to your current year)
keeping records to complete a personal (non business) tax return, you only need to keep them for 22 months from the end of the tax year to which they relate.
You may need to keep records for other reasons, as well as tax purposes. For example, the Companies’ Act requires limited companies to keep specific records. Such records may need to be retained for different time limits, so be careful not to destroy any records you also use for tax purposes too soon.

The Carbon Trust in its financial year 2008/09 offered over £22 million in Energy-Efficiency loans to replace old equipment and they are interest free.

Financing energy reduction

The interest free loan facility is generally available to small and medium sized businesses (SMEs) where CO2 savings are made from the expenditure met by the loan.

The unsecured loans with no arrangement fee range from £3,000 – £100,000. However, the size of the loan and the duration is directly linked to the anticipated CO2 savings which is now set at 2 tonnes of CO2 savings per £1,000 of loan.

The maximum loan period is generally set at 4 years, the aim being that loan repayments are offset by energy savings.

Examples of energy saving projects include improved heating, refrigeration, lighting, and insulation processes.

Who is eligible?

An organisation, for example, a sole trader, partnership, company, club or charity, needs to have been trading for at least 12 months and generally to qualify as an SME. The definition of an SME currently used by the Carbon Trust is:

an organisation with less than 250 equivalent full time employees and where
either turnover does not exceed €50m or balance sheet total does not exceed €43m.
The business must not have a substantial holding in a non SME business nor be substantially owned by a non SME. Substantial means 25% or more of the shares or voting power.

As the loans are government funded some business sectors are not eligible due to European Union rules on state aid. Excluded business sectors include certain agricultural, fisheries, horticultural, transport, coal and export-related activities. However farmers in England can apply for a loan of between £3,000 and £20,000.

For more details about how to apply for an Energy-Efficiency loan contact us or see the Carbon Trust website at www.carbontrust.co.uk/cut-carbon-reduce-costs/products-services/business-loans/pages/loans.aspx

Gordon Brown wrote:

‘I have already made clear that no family currently in receipt of tax relief for their childcare vouchers will see any change in the support they receive. But following our discussions I can now also say that we will retain tax relief for new childcare vouchers issued in the future. However, there still remains a concern that a disproportionate benefit is accruing to higher rate taxpayers. So in order to ensure that this tax relief is given on a fairer basis to all families, we will ensure that all taxpayers get the same income tax relief as basic rate taxpayers do currently. This will take place from April 2011 and will not affect those receiving vouchers issued before that date.’

Subsequently, HMRC have issued more guidance on this proposed area of change.

The current position is that an employee in a childcare voucher scheme is entitled to £55 per week free of tax. This equates to a tax saving of £11 per week for a 20% basic rate taxpayer, £22 per week for a 40% higher rate tax payer and £27.50 per week for any 50% taxpayers.

However, from April 2011 all new recipients of childcare vouchers (including previous recipients who change employment) may only get the equivalent of basic rate tax relief. This means that for a recipient who is expected to have employment income chargeable at the 40% rate, only £28 will be received tax free, which saves £11 tax. This is the same tax saving as a basic rate tax payer. The respective tax free amount for a 50% taxpayer will be £22 tax free weekly.

If you would like to review your childcare provision options in light of the above please do get in touch.

The company perspective

A tax charge arises where a loan advance (or an increase in a loan) made to a director shareholder during the accounting period remains outstanding nine months and one day after the accounting period end. The tax rate is 25% of the amount of the loan which existed at the accounting period end and which is still outstanding at the due date.

If the loan is repaid in full (or in part) in a later accounting period, this tax (or part thereof) will then be repaid nine months and one day after the end of that accounting period. For example, if a loan was repaid on the first day of a 12 month period ending 31 December 2010, the tax relating to that loan would not be due for repayment until 1 October 2011 – nearly two years after the repayment of the loan! If instead the repayment was made on the last day of that same accounting period on 31 December 2010, the tax refund would still be due on 1 October 2011.

What happens if the loan is written off?

From the company’s point of view, the loan write off is essentially a bad debt for accounts purposes and is initially treated as an expense in the profit and loss account. But is it deductible for corporation tax? Such a bad debt has never been allowed as a trade deduction for tax purposes, but in recent years some have argued that a claim could be made for it to be relieved as a non trade debt under company loan relationship rules. There has always been a risk of HMRC challenge associated with this course of action but in any case this ‘loophole’ was closed by the Chancellor on 24 March 2010 in a Budget announcement now reflected in the Finance Act 2010. Essentially there is no corporate tax deduction for shareholder loan releases or write offs made on or after 24 March 2010.

What tax implications will there be for the director shareholder?

Firstly, if loans generally exceed £5,000 at any time in the tax year and interest is either not charged or is charged at less than the official HMRC rate (currently 4%), a taxable benefit will arise. This is generally calculated on an average basis, using average capital outstanding during the tax year and the average interest rate prevailing. Where there is significant fluctuation in loan balances and/or HMRC interest rates then an actual basis (amounts and rates) may apply instead. Whatever the resulting benefit, this is then charged to income tax at 20%, 40% or 50%, depending on the circumstances of the individual. The company as employer (but not the employee) will have to pay 12.8% national insurance contributions (NIC) on the employment benefit.

There is no taxable benefit if interest is charged at the official rate or for certain qualifying loans. There is also an exemption where non qualifying loans do not exceed £5,000 at any time in the tax year.

And a loan write off?

If a loan is written off, a director shareholder is assessed on the income as dividend income, as opposed to earned income. The total taxable income includes the amount written off grossed up for the 10% dividend tax credit available on all dividends. This is then charged at either 10%, 32.5% or 42.5%, depending on the individual’s circumstances. The associated 10% tax credit, (though non refundable) is available to reduce any tax liability.

Although from a tax view point the income is not assessed as earned income, it is generally considered to be subject to Class 1 employer and employee NIC.

Company as borrower

Of course, it may be that a loan account is not actually overdrawn, and the company actually owes money to the director shareholder. Clients who find themselves in this position can use it to extract money from the company in a tax efficient way.

From the director shareholder’s point of view, there is no reason not to charge interest on the amount lent to the company. If the company was borrowing the money from any other source, it certainly would have to pay interest. Commercial interest will generally be tax deductible for the company.

In the hands of the director shareholder, the income will be taxable as savings income, and will usually be taxed at 20%, 40% or 50%, depending on their individual circumstances. Exceptionally where an individual has less than £2,440 of other income (excluding dividends), some taxable savings income, may only be subject to a rate of 10%. Also, no NIC will be due as this only applies to earned income. This will benefit both employer and employee

One particular case illustrates some of the issues. HMRC wrote to the taxpayer, stating that the tax treatment for CIS purposes would change from a gross payment position to payment under deduction of tax with effect from 90 days from the date of the letter unless there was an appeal.

The reason for HMRC’s decision was stated as follows:

the self assessment first payment on account due on 31 January 2007 was not paid in full until April 2007 and
the contractor’s monthly return for 5 May 2007 was outstanding.
The individual stated that he was distracted by personal problems in the nature of serious health problems affecting both himself and his immediate family and then work commitments and that these were the causes of the payment being made late. The taxpayer was 61 years old and argued that the withdrawal of gross payment status was likely to result in his having to close down his business, with no prospect of employment.

The Tribunal held that the taxpayer had both shown a reasonable excuse for his failure and that he had made the payment on account without unreasonable delay after the grounds for the excuse had ceased. The excuse consisted of the inability to make the payment on account without prejudicing his business cash flow and the stress suffered by reason of his health and other personal problems in the nature of family illnesses. However, in many of the other cases taxpayers have not been so lucky and have lost their gross payment certificates.

If you are experiencing any difficulties in meeting your tax obligations, it is far better to talk to HMRC before they talk to you. Please do get in touch if you have concerns about this issue.