Government talk of simplifying the Tax system

George Osborne true to his word included most of the tax changes within his Budget speech, rather than hiding them away in the numerous documents that accompany the Budget. However the documents do include hints of what is to come, and talk of simplifying the tax system.

This is easier said than done with the complexity and size of the UK tax laws. The Conservatives have already tried to simplify the Tax system in the past. In 1996 the Conservatives commenced the Tax Law Rewrite to simplify the tax system. Although it was acknowledged that the size of the task was immense, it was expected to take a mere five years. In July 2009, some 13 years later, the project came to an end, although some areas had not been touched, such as Capital Gains Tax and Inheritance Tax.

As everyone's circumstances are different, and the rules are complex, we would be delighted to talk to you in detail about how the rules apply to you and how we could help you save tax. We want to help you pay your fair share of tax… and not a single penny more!

Online statements

It's not quite a tax saving tip, but taking the advice could save you money. Many banks and businesses are encouraging you to receive online bills and statements, rather than sending paper copies in the post. If any statements, bills etc are used to prepare your tax return you will need to retain copies to support the return.

You may not have access to the online statements and information indefinitely. Some businesses are only making a rolling six months of statements available. If you don't download and store copies of statements as you go than you may need to pay for copy statements at a later date. It can therefore save you money by getting into a habit of downloading statements and documents throughout the year, as well as storing them and backing them up.

When a mobile phone starts to cost

In theory where an employer provides a mobile phone to an employee the employee is not liable to tax on the benefit, nor is the employer liable to national insurance on the phone provided. Sounds simple, but as ever the rules are complex and there are a number of pit falls that will catch the unwary.

The main traps to be aware of are:

Where the contract is not between the employer and the phone company
Where the phone is a Personal Digital Assistant (PDA)
Where more than one phone is provided

Contract
In order for there to be no potential tax issues for the employee, the contract for the provision of the mobile phone and airtime must be between the employing business and the phone company. If not then there could be significant tax issues.

It is not always as simple as checking the bill. Although the bill may show the employers name and address, the mobile phone contract may be a personal one between an individual and the phone company (personal contract).

If the employer then pays these bills, the amounts paid are treated as payments of net salary to the individuals on which National Insurance will become due.

The tax treatment will depend upon whether the employer pays the bill directly or reimburses the employee for the phone bill. Either way the employee will suffer some tax on the amounts paid by the employer.

The only way to avoid this problem is ensure that the mobile phone contact is between the employer business and the phone company.

Personal Digital Assistant (PDA)
The phenomenal rate that technology has advanced has resulted in significant changes to the size and functionality of mobile phones. Unfortunately the tax legislation has not changed with the technological advances.

The tax rules treat mobile phones and computers provided to employees differently. If a mobile phone is provided then a tax benefit will not arise on the employee, irrespective of whether they make personal calls on the mobile phone or not.

If a computer is provided for purely business purposes then no benefit will arise on the employee. However if there is significant private use of the computer then a benefit in kind will arise on which the employee will pay tax. There is no definition of what is significant use and this will be decided on a case by case basis.

Why should we worry about computers? Well the legislation definition of a mobile phone is very tight. For the phone to be treated as a mobile phone it must have been designed primarily for transmitting and receiving spoken messages.

Mobiles that play music, surf the internet, receive emails and play games, such as a Blackberry or an iPhone, are considered by HM Revenue & Customs to be computers, rather than mobile phones.

Why is this a problem? If the mobile phone is classed as a computer then there is a chance of the employee being liable to tax on the phone, depending upon the amount of private use.

More than one phone
If an employer provides two mobile phones to an employee, extra care is required. If the phones provided are both classed as mobile phones per above, then the employee would be liable to tax on the second phone, assuming that the first phone met all the conditions and the contracts are between the phone company and employer business.

However if both phones are treated as computers, then the employee may be liable to tax on the two “computers” depending upon the level of private use. The interesting thing is that if one handset is classed as a mobile and the second as a computer then providing any private use is on the mobile only, or any private use on the computer handset (PDA) is not significant then the employee would not be liable to tax on the handsets.

Providing there is no tax bill for the employee then there will be no corresponding National Insurance liability for the employer business.

Furnished Holiday Letting rules with us a little longer

The favourable Furnished Holiday Lettings tax rules are to be with us until April 2011 at least. Rather than continue with the withdrawal of the rules proposed by the previous Government, the Chancellor has cancelled the proposals.

However, the Government is to publish a consultation document over the summer about plans to change the tax treatment of furnished holiday let property from April 2011. The consultation will look at issues that:

ensure the Furnished Holiday Letting rules apply equally to properties wherever they are in the European Economic Area;
increase the number of days that qualifying properties have to be available for, and
actually let as, commercial holiday letting; and change the way in which Furnished Holiday Letting loss relief is given.

We will know more about future changes as the consultation progresses. In the meantime there are a few things to remember:

Holiday accommodation in the European Economic Area that meets the conditions can be classed as a Furnished Holiday Letting, and perhaps save you tax. The conditions include the property being actually let for at least 70 days a year and not more than a continuous period of 31 days to the same tenant.
Losses arising from Furnished Holiday Lettings can be set against other income.
Should the property be sold then it may be possible to
- roll over the gain into a further property or business asset, or
- reduce the gain by Entrepreneurs Relief

If you have any queries about your circumstances or the changes please do not hesitate to contact us.

We can help

Despite statements about simplifying the UK tax system, the truth is that it gets increasingly complex each year. But we can help.

We can guide you through the complexities of the legislation and help you to pay much less tax.

So if you would like to discuss ways in which we can help you to make tax savings, or if you would like to discuss any of the issues identified in this edition of 'Pay Less Tax' please do not hesitate to contact us.

Petersons
Harvest Way House, 28 High Street, Witney,
Oxfordshire OX28 6RA

Tel: 01993 776476
Peter Hellawell
Email: peter@petersons.co.uk

George says “The country has overspent; it has not been under-taxed”

Despite the new Chancellor, George Osborne, telling us that the country has been over taxed and that he is going to raise ￡13 billion per annum by increasing the standard rate of VAT to 20%, he didn't scrap any of the labour tax increases announced just 3 months ago. We are still going to endure the 50p income tax rate, the loss of personal allowance at incomes in excess of ￡100,000 and the National Insurance increases from 2011 to name but a few.

Whilst the headline changes are the increase in VAT, a new Capital Gains Tax Rate of 28%, the phased reduction in corporation tax rates and the spending cuts, there were a number of measures that are worth knowing about so that appropriate action can be taken now to save tax.

Company Tax Rates to fall

The rates at which companies pay Corporation Tax are set to fall from 1st April 2011 by 1%, irrespective of the size of the company. This is a u-turn on the previous Governments' intention to increase the rate for small companies.

Annual Investment Allowance to reduce

From 2012 the Annual Investment Allowance is to be reduced from ￡100,000 to ￡25,000. This reduction in a valuable allowance will impact on businesses of all sizes. The allowance allows businesses to claim the full amount of their capital expenditure on most plant or machinery up to the maximum in the year when it is incurred.

Businesses are free to allocate the Annual Investment Allowance in any way they wish, leaving them free to maximise their tax savings by ensuring that the allowance is allocated against assets that would normally qualify for the lowest reliefs.

Capital Allowance rates to decrease

The Writing Down Allowances available on assets are set to decrease from April 2012. What it means is that less of the capital expenditure will be allowed against tax each year on certain assets acquired and not already covered by the Annual Investment Allowance. In theory the business will still get tax relief for the full cost of the asset over a longer period as follows;

The main plant and machinery writing down rates will reduce from 20% to 18% p.a.
Longer life and special rate plant writing down rates will reduce from 10% to 8% p.a.

The immediate impact will be cash flow and an increase in Corporation Tax bills for those businesses that heavily invest in plant and Machinery.

VAT rate to increase in January 2011

The standard rate of VAT is set to increase from 17.5% to 20% from 4th January 2011. This will have a significant impact on many businesses and individuals; From the retailer that will incur costs changing their prices next January, the businesses that operate the Flat Rate scheme and will need to use different flat VAT rates for their businesses, to the businesses or individuals that are buying or selling commercial property on which VAT is chargeable.

New Capital Gains Tax rate

With immediate effect, gains arising on assets disposed of from 23rd June 2010 will be liable to be taxed at either 18% or 28%, depending upon the individual's level of income. If their total income and gains (or part gains) exceed the higher rate threshold then the gains will be taxed at 28%, otherwise gains will continue to be taxed at 18%.

Gains arising as a result of disposals prior to 23rd June 2010 will continue to suffer Capital Gains Tax at 18% prior to any relief available, including Entrepreneurs Relief.

Entrepreneurs Relief increases

With immediate effect, the lifetime limit for Entrepreneurs Relief has been increased from ￡2 million to ￡5 million. Where individuals or trustees make qualifying gains on or after 23rd June 2010, they will be entitled to the new ￡5 million lifetime limit.

Where Entrepreneurs Relief does apply, the effective rate of Capital Gains Tax remains at 10%, irrespective of the level of an individual's personal income.