Petersons - On Track

At Petersons we believe in giving added value by our proactive approach to servicing our clients. For example, for our personal clients we offer a Remuneration Planning Review to ensure that income is taken in the most tax-efficient way, and an updated Inheritance Tax Review. Our business clients can already benefit from our Benchmarking Report and Financial Performance Review, and now we are delivering the On Track Report suggesting key improvement possibilities.

As part of this report we provide a checklist of a number of areas where we suggest you speak with us before you undertake transactions and where we can help by considering the most tax efficient ways of proceeding.

Do contact us if you would like further details of these reports before we next see you and we will be very pleased to meet up and run through things with you.

Buying or
leasing business
equipment

If you are planning to buy or lease some new business equipment over the next year, you should consider the changes to the tax reliefs known as capital allowances, which are due to take effect from April 2008.

First the good news

All items that qualify as plant or machinery, including fixtures in buildings and vans, will be eligible for the new Annual Investment Allowance (AIA) of £50,000 if purchased on or after 1 April 2008 for companies, and from 6 April 2008 for unincorporated businesses. The allowance will give immediate tax relief for the cost of equipment within the annual limit of £50,000, which is much better than the spreading of tax relief over several years, which applies to equipment purchased before April 2008.

Where your accounting year does not start on 1 April or 6 April the first AIA limit will be proportionally reduced. If a company year runs from 1 January 2008 to 31 December 2008 it will get nine months' worth of the AIA (£37,500) for purchases made between 1 April 2008 and 31 December 2008. Purchases made before 1 April 2008 will qualify for the existing First Year Allowances of 50% for small businesses and 40% for medium sized businesses.

Now the not so good news

The writing down allowances for plant and machinery are being reduced from 25% to 20% and this will affect all equipment that has already been purchased and not fully relieved for tax purposes. This means it will take longer to achieve full tax relief for any equipment purchased before 1or 6 April 2008, or bought after that date if it is not covered by the AIA limit of £50,000 per year. This adds some complications, so we will need to do some calculations to see if you should purchase your new equipment before or after 1or 6 April 2008, or before your current year end. Please talk to us before you buy.

Another change will affect the tax deduction for the cost of certain fixtures in buildings (referred to as integral fixtures). Currently many such fixtures qualify for a 25% writing down allowance but for purchases on or after 1or 6 April 2008 the rate of the allowance will only be 10% (if not covered by the AIA). We don’t know exactly which assets will be classified as integral fixtures, but if you are considering buying a building containing a lot of fixtures, it may be worthwhile sealing the deal before 1 or 6 April 2008.

Is it better to lease?

If you lease equipment you can claim the capital allowances on the effective capital cost of the asset if the agreement is a hire purchase contract. Otherwise the capital allowances will normally be claimed by the lessor, unless special rules apply. If you lease a car the lease rentals you can set against tax are restricted where the car costs over £12,000.

If you are planning to incur capital expenditure or to take on a lease of plant over the next few months please talk to us before you do so. We can help you with the calculations.

Age discrimination

On 1 October 2006 the government introduced legislation to protect people from being discriminated against on the grounds of age. The regulations include both employment and vocational training and cover people of all age ranges, both young and old.

The upper age limits for redundancy and unfair dismissal were removed and compulsory retirement under the age of 65 was made unlawful. All employees were given the ‘right to request’ to work beyond the default retirement age of 65 with employers being required to follow a stringent procedure to ensure that all such requests are considered. Employees can be retired at the default age of 65 by the employer provided the correct procedure is followed by notifying the employee between 6 and 12 months prior to their expected retirement date. The employee's contract must be terminated on the grounds of retirement only. An Employment Tribunal in Southampton recently found in favour of an employer who dismissed an employee on the grounds of retirement at the age of 65 as they had followed the statutory procedure. Age Concern believes that this part of the legislation is in fact unlawful as it contravenes European Law and currently has a case going through the European Court of Justice (the ‘Heyday’ challenge). A ruling on this case is not expected until 2009. Although this claim may change the UK age discrimination law it is unlikely that any employer currently following the current age discrimination law will be held liable for retrospective claims. Figures published by The Tribunals Service (September 2007) indicate that out of 132,577 age discrimination cases lodged only 972 were accepted with no clear decisions on the implementation of the age discrimination policy. The newly formed Commission for Equality and Human Rights are likely to issue a code of practice which may clarify some of the aspects of the age discrimination regime.

New employees but no P45?

An employee who starts work without a form P45, showing the pay, tax deductions and ‘tax code’ from their last employment, has to complete and sign a form P46. This form enables the new employer to decide on the appropriate tax code to be used. This will be used until the individual’s records arrive at the new employer’s tax office at which point a new tax code may be issued to reflect their circumstances.

The employer will use the tax code 522L which means that the employee can receive pay of £435 a month without paying any tax. As the code is applied cumulatively, back to the beginning of the tax year, if they start working in December they can receive 9/12ths of the full tax year’s allowances of pay (£3,915) before paying any tax at all.

- The employee has another job or receives a pension. They will be taxed at the basic rate of tax (22%) on their pay.

The loan repayments are not due unless the employee earns £1,250 a month. The repayments are due on pay above £1,250 at a rate of 9%.

When employing someone new the last thing you want to do is to take too much or too little tax from them. By using the P46 form correctly this ongoing problem should be avoided.

From 1 October 2007, the rates of National Minimum Wage (NMW) increased again:

• the adult rate (workers aged 22 and over) increased to £5.52 (£5.35)
• the development rate for 18-21 year olds increased to £4.60 (£4.45)
• the development rate for 16-17 year olds increased to £3.40 (£3.30).

HMRC do not have the resources to tackle non compliance in every business around the UK at the same time, so they are addressing the issue by business sector. HMRC have let it be known that they are interested in three particular sectors so far - hairdressers, the childcare sector and the hospitality industry.

This stance has been supported by some high profile cases. In February of this year, the Court of Appeal ruled that Butlins and Haven holiday camps were in breach of the NMW legislation. It was found that some seasonal workers, such as bar staff and receptionists, were charged for gas and electricity when they lived on site between 2004 and 2005. In his judgment, Lord Justice Buxton said "if the sum of £3 per week were to be deducted from their wages that would reduce remuneration below the national minimum wage level.

In the first NMW criminal prosecution in August 2007, a children's nursery owner was fined £2,500 and £500 costs. The judge commented that the owner had "demonstrated a clear and deliberate intent to obstruct officers and this was a scandalous breach of the National Minimum Wage legislation."

Andy Millican, Criminal Investigation Team Leader for HMRC, said "we have a duty to ensure workers receive their salary entitlement. The majority of employers do assist us with our investigations, but if they don't we will pursue cases through the criminal courts."

It is clear that HMRC are serious about NMW non-compliance, so don’t be caught out. The NMW rules can be complicated, so please get in touch if you have any concerns about the legislation.

VAT on home computers

In 1999 the government introduced an exemption which allowed employers to lend a computer to their employees, tax free even if there was only private use of the computer. In 2004, the government launched the Home Computing Initiative (HCI), which encouraged employers and employees to take advantage of the exemption.

Inheritance tax (IHT) worries a lot of people because the IHT threshold, known as the nilrate band, has not been increased in line with house prices over recent years. On death, all your wealth, including the value of your house, is taxed at 40% on all amounts above the nil-rate band, which is currently £300,000.