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
2010 Autumn Statement
The Chancellor George Osborne delivered his Autumn statement on 29 November 2010, but this was NOT a Pre Budget Report full of tax information as we had come to expect from Gordon Brown.
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!
It's that time of year when staff parties abound, and you may be thinking of handing out small seasonal gifts to employees, customers or suppliers. Before you get too generous, make sure you know the tax implications.
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
The small profits rate of corporation tax will fall by 1% to 20% from 1 April 2011.This rate applies to profits of up to £300,000 if there are no associated companies. The corporation tax rate for large companies with profits over £1.5million will also fall by 1% to 27%, making the marginal rate for profits between those limits 28.75%. The main rate for larger companies will also fall by 1% in each of the following 3 years down to 24% in the year beginning 1 April 2014.
Capital allowances will be reduced with effect from 1 April 2012 (6 April 2012 for income tax purposes), as follows:
- 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.
From 6 April 2011 the rates for NI contributions will be increasing by 1% and the new rates become...
- 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
The tax-free personal tax allowances for 2011/12 have not been announced but we do know that the tax free allowance for those aged under 65 will be at least £7,475, although the increase of £1,000 from the present limit will only benefit basic rate taxpayers.
Child and Working Tax Credits
Working and Child Tax Credits are to be withdrawn at the rate of 41% from families with total income of £40,000 or more from 6 April 2011. Families with income of over £40,000 may no longer be eligible for the family element of £545 per year. The baby addition to the family element (also £545) will be withdrawn completely at the same time.
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.
From 6 April 2011 the state pension will be increased by the greater of: the annual increase in earnings or prices, or 2.5%.
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.
The overall tax-free ISA limit for 2011/12 will be £10,680, of which £5,340 can be saved in a cash form such as a bank savings account.
December Question & Answer Section
Q. My family has invested in rental properties over a number of years. Some properties are held in my name alone, others are owned jointly with my sister. The properties held with my sister have made losses in the last year. Can I set those losses against the profits made on letting the properties held in my own name?
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
19/22 PAYE/NIC and CIS deductions due for month to 5/12/2010
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
Much More from Mr P...
As the festive season gets into full swing even us envelopes need a few days off! The opening hours of Mazuma across the festive period are as follows:
Mazuma Milton Keynes will be closed from Wednesday 22nd December and will re-open on Tuesday 4th January 2011.
Mazuma North London will be closed from Wednesday 22nd December and will re-open on Tuesday 4th January 2011.
Mazuma Woking will be closed from Friday 24th December and will re-open on Tuesday 4th January 2011.
Mazuma Preston will be closed on 27th and 28th December and Monday 3rd January 2011.
Mazuma Cardiff North will be closed from Friday 24th December and will re-open on Tuesday 4th January 2011.
Mazuma Cardiff South & The Vale will be closed from Thursday 23rd December at 5pm and will reopen on Wednesday 5th January 2011.
Mazuma Hub will close at 4pm on Friday 24th December and will re-open at 8.30am on Tuesday 4th January.
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.
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