John Harrison and Company - Charter Accounts

This briefing considers recent developments and announcements in the core area of plant and machinery capital allowances including the important forthcoming changes for 2012. Opportunities for maximising relief and avoiding pitfalls are highlighted, including the critical issues of timing and identification of qualifying capital expenditure.

1 April 2011 welcomed in a reduction of corporation tax rates of at least one percent for all companies. However, to pay for the cost of that reduction, two key changes to capital allowance rates on plant and machinery are set to impact from April 2012. These changes affect not only companies but all qualifying businesses that claim capital allowances.

Changes to the Annual Investment Allowance (AIA)

The AIA provides 100% tax relief on most types of plant and machinery (not cars) including integral features for all forms of qualifying business. ince April 2010 the maximum annual limit available has been £100,000 but this is to reduce to £25,000 for expenditure incurred on or after 1 April 2012 for companies and 6 April 2012 for the self-employed in business. An apportionment of the limits is required if the accounting period straddles 1 or 6 April 2012. This will be the case for many businesses.

However, a restriction is set so that, for expenditure incurred in the part of the accounting period falling on or after 1 or 6 April 2012, the maximum entitlement is given only by reference to the appropriate share of the £25,000 limit.

Using Company P in example 1 this would be £25,000 x 6/12 = £12,500.

 

Changes to Writing Down Allowances (WDAs)

Annual WDAs are available to relieve qualifying plant and machinery expenditure not relieved by other capital allowances such as AIA. There are two rates. A rate of 20% for plant and machinery generally. This includes cars up to and including 160 CO2 emissions and a 10% rate for the special rate pool which applies to integral features, long life plant and cars in excess of 160 CO2 emissions.

These WDA rates are to reduce from 1 April 2012 for companies and from 6 April 2012 for the self employed.

The annual rates will move from:

• 20% to 18% on expenditure allocated to the main plant pool and
• 10% to 8% on expenditure allocated to the special rate pool.

Hybrid rates apply for accounting periods which span 1 or 6 April 2012. The example below demonstrates the principle of how this operates but in practice this calculation has to be done on a strict daily basis.

The effect of these changes will mean that the period over which tax relief is obtained is longer than previously. In fact according to the Government - ‘It is estimated that approximately 2 million businesses could see an increase in their tax liability as a direct result of this measure.’ So, taking advantage of other opportunities, which may accelerate capital allowances and the corresponding tax relief, becomes more pertinent. One such way of obtaining more capital allowances earlier is to make a ‘short life asset’ election where this is available.

Short life assets (SLA)

An asset which qualifies to be treated as a SLA can be separately pooled. This means that it is isolated for tax relief purposes from the main plant pool. Initially it is eligible for the same allowances (AIA and WDA) as would have applied if placed in the main plant pool. However, on disposal, where there is unrelieved expenditure after taking disposal proceeds into account, an extra allowance can be claimed for the unrelieved amount. This equates to writing off the whole of the cost (less disposal proceeds) of the asset over the actual economic life of that asset to the business.

A change which improves the relief!

The SLA facility has been available for many years but in the context of the 2012 reductions considered earlier - a second look at what is eligible may reap benefits. Furthermore, a surprise announcement in the Budget earlier this year has improved the scope for using this relief.

Up until now it has only been possible to make a SLA election on assets with an expected useful life to the business of four years or less from the end of the accounting period of acquisition. Therefore if the commercial vehicle in example 3 had been retained for one or two more years in the company business then it would become ineligible for SLA treatment and no additional allowance would have been granted on disposal.

This lifetime period has now been extended to eight years from the end of the accounting period of acquisition for additions on or after 1 April 2011 for companies or 6 April 2011 for the self-employed. This makes it more useful as it means more assets could benefit from a SLA election.

Two points to watch

First, a SLA election should only ideally be made on assets which are likely to lose value quicker than they receive tax relief. This is because where assets hold their value well this could result in a ‘clawback’ of some or all of the tax relief given.

Second, not all qualifying expenditure qualifies. Some assets are specifically excluded. The key (but not only) exceptions are cars, integral features and long life assets. Please contact us for further guidance on exclusions.

Timing of capital expenditure

The impending AIA reduction sharply brings into focus the importance of identifying the correct date for qualifying capital allowance expenditure. The normal rule is that expenditure is incurred on the date on which the obligation to pay becomes unconditional. This will often be the date goods are delivered.

There is an exception to this general rule. If there is a gap of more than four months between the date on which the obligation to pay becomes unconditional and the date on which payment is required to be made, the expenditure is not incurred until the date on which payment is required to be made.

What AIA is due?

The knock on effect of the above is that instead of the £100,000 being wholly covered by AIA in the year to 5 April 2012, the following occurs:

• £50,000 AIA is available on the first £50,000 in the year to 5 April 2012 providing 100% tax relief.
• Only £25,000 of the second £50,000 will qualify for AIA (due to the reduction in the limit) and the balance will attract WDA only.

Ensure claims are not missed

One hot topical issue concerns ‘fixtures and fittings’ in second hand building purchases. The need for accurate allocation of expenditure to those elements and identification of eligibility for plant and machinery capital allowances means that claims can initially be missed.

However, due to the fact that there is currently no time limit on when expenditure on plant or machinery, including fixtures, needs to be pooled, this means that such expenditure on fixtures can be pooled some years after the fixtures were acquired.

This facility to make ‘late’ claims, several years after a property acquisition may mean, due to the lack of relevant information available to HMRC about the previous owner’s claims, that capital allowances are given to the current owner (as well as a previous owner).

Government may call time

Due to the above, the Government is considering the following proposals:

• a requirement that businesses must pool their expenditure on fixtures within a short period after acquisition, in order to qualify for capital allowances and
• that, in order to qualify for capital allowances, the purchaser of a second hand building must agree with the seller the amount of the sale price attributable to the fixtures, and that both the purchaser and the seller should record and formally notify this to HMRC within a similar timescale.

Further, in respect of expenditure already incurred on such fixtures, before any changes in the law come into effect, the Government is considering whether businesses should also be required to pool that expenditure within one or two years of the commencement of the mandatory pooling requirement for new expenditure.

If these proposals go ahead, early action to ensure that all relevant building purchases have been reviewed may become necessary to secure capital allowance claims.

Please do contact us for tailored capital expenditure and allowance advice for your business requirements so that tax savings can be maximised.

 

Disclaimer - for information of users - This briefing is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and 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 result of the material contained in this briefing can be accepted by the authors or the firm.

 

Our clients are reminded that if they use a business car for mixed business and private usage, the MUST keep a mileage log showing each journey and whether it is business or private so that the correct apportionment of expenses can be made.

If a private car is used for business purposes it is merely necessary to kep a log of business journies.By concession the self emplyed can claim the same 45p mileage rate that employed persons claim.

In our experience, in every case that H M Revenue and Customs investigate a taxpayer's affairs, motoring expenses are scrutinised and if proper records are not kept at least some expenses are bound to be disallowed and this enables HMRC to reopen all of the last six in date years, charge the additional tax and with interest and penalties this can add up to quite a sum of money.

At John Harriosn and Company we have a stocked of printed mileage record books available free of charge for our clients. If you want one, call us on 01909 472310.

In April 2010 HMRC introduced a new penalty regime for the late payment of PAYE and CIS. Although this does not appear to be news, HMRC have started to impose penalties of tens of thousands of pounds on employers under the regime.

How are the penalties calculated?

The penalties are based on a totting up procedure depending on the number of defaults during a tax year. A penalty will not be levied for the first default and rises as follows:

• up to three defaults - 1% of total amount of those defaults;
• four, five or six defaults - 2% of the total;
• seven to nine defaults - 3% of the total; and
• ten or more defaults - 4% of the total.

If any tax is unpaid six months after the penalty date, then a penalty of 5% will be levied and a further 5% can be levied after 12 months.

What do the penalties apply to?

HMRC charges late payment penalties on amounts due that are not paid in full on time, including:

• monthly, quarterly or annual PAYE;
• student loan deductions;
• CIS deductions;
• Class 1 NIC; and
• annual payments of Class 1A and Class 1B NIC.

Class 1A and 1B NIC

The 5% penalty above also applies to any Class 1A (on benefits in kind and due in July) and Class 1B (on PAYE Settlement Agreements and due in October) NIC paid late.

Will HMRC send us a warning?

HMRC may send you a warning letter if you do not pay on time. They may do this the first time in the tax year they think your payment is late.

However, the letter is only to let you know that HMRC think that you have made a late payment and that a penalty could be charged. It is not a penalty notice and you can’t appeal against it. Often, no letter is issued.

Are there any let-outs?

There may not be a penalty if HMRC agree that there is a reasonable excuse for the late payment(s) and you pay as soon as you reasonably could after the reason for the late payment ended.

HMRC do not usually accept pressure of work, lack of information, failure of HMRC to remind you to pay or ignorance of the law as an excuse. In addition,
HMRC cannot treat lack of funds as reasonable unless the shortage is due to events outside of your control.

The reality

Although the penalties apply to month on month failures and have done so since April 2010, it appears that HMRC are only reviewing the position after the end of each tax year ie months after the failures have arisen.

Bearing in mind that HMRC have two years to impose these penalties, it is critically important that your business makes its payments on time.

Please let us know

We are now seeing cases where HMRC are imposing penalties of £10,000 - £50,000, so if you are having difficulties paying your liabilities please do get in touch as soon as possible. It may then be possible to negotiate time to pay and possibly avoid the penalties.

Since April 2010 many VAT registered businesses have been required to submit their VAT returns online and pay any VAT electronically. This requirement is to be extended to all VAT registered businesses from 1 April 2012 apart from a very small number who will be exempt.

Who is affected?

Businesses with annual turnover of more than £100,000 (measured as the VAT exclusive amount for the 12 months ended 31 December 2009) already have to file their VAT returns online. In addition, those which have registered for VAT from 1 April 2010 have also been required to submit returns online irrespective of turnover levels.

From April 2012 all remaining businesses must start to file online and pay electronically if this is not already being done.

The only exemptions are if either of the following applies:

• You are subject to an insolvency procedure or
• HMRC is satisfied that your business is run by practising members of a religious society, whose beliefs prevent them from using computers.

What action does your business need to take to be ready for this change?

If we already act as your authorised VAT agent and file your VAT return, then we will contact you to discuss whether these changes have an impact on the services we provide. However, it is important that you are made aware of these important developments as you are still legally responsible for paying any VAT due and ensuring we have the relevant information to prepare the VAT return on time. You may also need to review the way in which you currently pay any VAT due (see below).

Do you currently prepare your own VAT return?

If you currently prepare and submit your own VAT return, you will need to ensure that you make the appropriate arrangements to make the online submissions as necessary. The precise actions you need to take depend on whether your business is already registered for other HMRC online services.

• If you have already registered for another HMRC online service then you should be able to add VAT online to the list of services which are available to you.

• If your business is not yet registered for any online services then you will need to register, sign up and activate the VAT online service. An account needs to be set up at least seven days before you can complete and file your VAT return online.

HMRC have issued a step by step guide for signing up which can be accessed at www.hmrc.gov.uk/vat/sign-up-for-online.pdf

When you enrol for VAT online services you can also arrange to receive free email reminders to let you know when your VAT returns are due otherwise you will not receive a prompt from HMRC and you will have to set up your own reminders.

If you would, alternatively, like more information on the services we offer in this area, please do not hesitate to contact us.

Payment of VAT

All businesses must ensure that payment is made to HMRC by the normal calendar month date.

Where payment is made by one of the approved electronic methods, an extension of a further seven calendar days is generally available. Exceptions can apply. In particular, if the due or extended date falls on a bank holiday or weekend, ensure the payment has cleared the HMRC bank account beforehand.

For those that file online, payments must be done electronically. In reality many businesses already do but you may need to check that you are using an approved electronic method.

Further, HMRC are now able to accept payments made using the Faster Payments Service. This will allow you to make faster electronic payments, typically via internet or telephone banking, enabling them to be processed on the same or next day.

Change is often difficult but we are here to help. Please do get in touch if you would like to discuss any of these matters in more detail.

Most business owners and managers are generally too concerned with how things are going today, to worry about how the business would function in the event of disaster tomorrow.

Although the day-to-day operation of the firm is undoubtedly important, businesses must also focus their attention on how to manage their operations in the event of an unforeseen event. It is understandable that when disaster strikes the regular operations of the firm will be disrupted. People may be unable to make it to work due to adverse weather, equipment can malfunction and data may be lost. In situations such as these you need to have a business continuity plan in order to make sure that the business can adapt quickly to the situation and continue to function.

The terms "disaster recovery" and "business continuity planning" are sometimes used interchangeably because their functions often overlap. When a disaster strikes, you need to have a business continuity plan to help you move forward. There are many simultaneous activities that you need to focus on depending on the priorities of your firm. You also have to manage the people in your firm who are affected and the customers and clients whose orders and business will be disrupted.

You can't afford to wait until a disaster happens before you develop a plan. You may do your planning internally with your managers or you can hire an outside consultant who specialises in business continuity planning. The first item on the list will be to designate the people who will assume leadership in the event of a catastrophe. When there's a designated leader it's easier to implement your plans because someone is taking charge. The second most important part is to evaluate the company's processes to determine which should be prioritised for restoration of its activities in order to minimise the effects of such disruption on the systems and on the company's staff and clients. The next priority will most likely be to determine backup recovery on systems and storage.

In order to ensure that your business continuity plan is ready to roll out in the event of a disaster, it is essential to have a practice run at least once a year – just like a fire drill. Involve your employees, staff and management so that everyone will become familiar with the routine and everything will run smoothly in the event of a disaster.

Inheritance Tax (IHT) is a tax that needs to be taken seriously by any individual with assets in excess of £325,000. Taking some basic steps can mean that your family may be able to avoid the worst ravages of an IHT bill after you die.

Significant steps can be taken in lifetime to pass on assets but it is not always possible to achieve this and so planning a tax efficient Will should be seen as a major part of the tax planning agenda. This briefing focuses on the need to make a Will and how to make it as tax efficient as possible.

Why bother with a Will?

A Will is a very personal document in which the person writing it (known as the ‘testator’) sets out how their estate should be distributed after their death. Where an individual dies without leaving a Will the rules relating to intestacy come into play. These rules are set out in law and provide a formula by which the estate is to be divided. Different rules apply in the different countries which make up the United Kingdom.

One particular point which runs through all the sets of rules is that under intestacy, provision is made for a spouse and for children. There is no provision for an unmarried partner which could cause significant problems for the surviving partner in such situations.

There may not be major financial matters to deal with in a Will but it is important to express direction about particular assets, to identify care issues for minor children and to express wishes about a funeral. If you have assets in another country outside the UK you should take advice on writing a Will in that country to deal with those specific assets. Legal problems could arise for your survivors if you do not.

Transfers between spouses

It is quite understandable that when one spouse dies they will want to ensure that their surviving spouse is financially provided for. The IHT rules recognise this and include a very important provision which allows transfers between spouses (including registered civil partners) to be exempt from IHT.

This exemption has been reinforced by legislation which allows the IHT nil rate band (NRB) to be transferred between spouses as well. Currently, the first £325,000 of any estate is taxable to IHT at 0% and it used to be the case that where assets were transferred between spouses on the first death, the couple were only able to use one NRB against their joint estate. This anomaly has been corrected by what is referred to as the ‘transferable nil rate band’.

It works like this. When the first spouse dies they can leave all their estate to their surviving spouse. That will be an exempt transfer. When the survivor dies, their estate can claim the benefit of any NRB not used at the time of the death of the first spouse. The unused percentage is added to the NRB of the survivor.

Example

George died in January 2008. He had total assets of £750,000 which he left to his widow Sheila. That transfer was exempt and so none of George’s NRB was used. Sheila dies in 2012 leaving a total estate of £900,000. The IHT bill will be just £100,000 (£900,000 – £650,000) x 40%. Under the old rules the IHT bill would have been £230,000 (£900,000- £325,000 x 40%).

If George had left £100,000 of his estate to his children it would be necessary to work out what percentage of his NRB was unused. In January 2008 the IHT NRB was £300,000 and so the unused percentage is (£300,000 – 100,000)/300,000 = 66.6%. On Sheila’s death the NRB available to her would be increased by that same percentage and would be 66.6% x £325,000 plus her own NRB of £325,000 = £541,450.

The rules apply to any couple irrespective of when the first spouse died. HMRC will want some documentary evidence to back up the claim. This will include copies of the death certificate of the first spouse, the marriage or civil registration certificate of the couple and details of the probate on the first death. It is important to have this information available as HMRC will not process claims without it.

Where a surviving spouse remarries it is possible that their estate in theory could have the benefit of NRBs from two deceased spouses. The legislation does not allow the collection of NRBs! The maximum additional allowance is 100% of the current NRB.

Should we automatically use the transferable NRB?

There is no doubt that the transferable NRB has simplified IHT planning for many married couples and registered civil partners. If the combined estate of the couple is below twice the current NRB and is not likely to grow significantly then the transferable nil rate band is the simplest route to take.

There are however two situations in which an alternative approach may be more desirable.

• The first is where there are assets which may qualify for one of the special reliefs for business or agricultural property.

• The second is where assets in the first estate are likely to grow significantly in value.

Dealing with business assets

Some assets such as shares in a private trading company and agricultural property are eligible important reliefs which can significantly reduce the IHT bill. Business Property Relief (BPR) can be up to 100% of the value of the business assets concerned and a similar percentage can apply for Agricultural Property Relief (APR). The precise conditions for these reliefs are complex and we can provide advice on your particular situation.

Very importantly, these reliefs are only available in situations which generate a chargeable transfer for IHT purposes and so they will not be used in situations where the qualifying assets pass directly to the surviving spouse or registered civil partner. This means that it is possible that the relief may be lost if the survivor decides to sell the asset concerned. Cash proceeds derived from a qualifying asset are not eligible for the relief.

Consideration should therefore be given to transferring these assets into a discretionary trust on the first death to ensure that the relief is utilised. Any subsequent sale will then be in the trust (this may require some careful planning for capital gains tax (CGT) purposes). The potential savings can be very significant as the following example shows:

Example

Keith holds shares (current value £900,000) in an unquoted trading company. The shares qualify for 100% BPR. Other personal assets for IHT total £500,000. Under Keith’s Will all the assets pass to his widow Linda.

The IHT position on Keith’s death will be a nil liability and all his NRB remains intact.

After Keith’s death, Linda sells the shares for £900,000. She dies with the cash and other assets still in her estate. The NRB at the time of her death is £350,000. The IHT position on her death will be: 


Value of estate £1,400,000
Less 2 x NRB (£700,000)
Taxable £700,000
IHT payable £280,000

If Keith had through his Will put the shares into a discretionary trust the situation on his death would have been:

Value of shares £900,000
Less 100% BPR (£900,000)
Taxable nil
IHT payable nil

His NRB would not have been used as the balance of his assets passed directly to Linda. On her death the IHT position would be: 

Value of estate £500,000
Less 2 x NRB (£700,000)
Taxable nil
IHT payable nil

The value of the shares net of CGT would be in the trust and a saving of £280,000 would have been made on the IHT bill.

Dealing with growth assets

The transferable NRB is fine where the assets passing on the first death grow at a rate no greater than the rate of growth in the NRB. A greater tax bill can arise if the growth in the value of the assets outstrips the NRB. This is currently of particular interest as the NRB has been frozen until April 2015 at £325,000.

The alternative is to redirect the asset away from the direct ownership of the surviving spouse on the first death. If the surviving spouse is not going to need the asset (or the income it generates) then a transfer to other family members of an amount up to the NRB on the first death will work. If the surviving spouse does need some access to the asset then the vehicle of a trust would be a better solution.

The trust in this case must be a discretionary trust where all decisions as to the distribution of capital and income are left to the trustees. The surviving spouse can be one of the trustees. A discretionary trust is treated as ‘relevant property’ for IHT purposes which means that the value of the assets in the trust cannot be added to other assets that a trust beneficiary may own. This means that if the assets in the trust grow significantly between the first death and the death of the surviving spouse all of that growth will not be chargeable to tax when the survivor dies. It should be pointed out that there are IHT charges which can arise within a discretionary trust but these should be significantly less than the equivalent charge if the asset remains in an individual’s estate.

Example

Ian has a property in his estate which is currently used only to generate rental income. Its current value is £325,000 but if the local development plan is adopted, the site will be in a key area and could be worth £750,000. Ian’s other assets are £500,000. Ian dies in 2012 when the NRB is £325,000.

He leaves all his estate to his widow Joy. The development plans proceed as they hoped and the property is sold for £750,000 (CGT would be due but is ignored for the purpose of this example). Joy dies in early 2016 with the cash from the sale of the property and the other assets inherited from her husband.

Her IHT position will be (NRB assumed to be £350,000 in 2016):

Value of estate £1,250,000
Less 2 x NRB (£700,000)
Taxable £550,000
IHT payable £220,000


If Ian had put the property into a discretionary trust the position on his death would have been:

Value of estate £325,000
Less NRB (£325,000)
Taxable nil
IHT payable nil

On Joy’s death the IHT position will be:

Value of estate £500,000
Less own NRB (no transferable NRB as all used on Ian’s death) (£350,000)
Taxable £150,000
IHT payable £60,000

The proceeds from the sale of the rental property held in the trust are not included in Joy’s estate and the IHT saving on her death is £160,000.

Passing on to a surviving spouse

There is a further issue of concern for some families. This is where it is desired that the ultimate recipients of the assets are other family members but at the same time ensuring that the surviving spouse benefits during their lifetime. This can be a particular factor where there are children of the marriage and it is possible that the surviving spouse could remarry. If all the assets are transferred directly to the survivor on the first death, then on the death of the survivor it is possible that some of those assets could pass to beneficiaries other than the children of the first marriage.

This position can be avoided by transferring the assets into another type of trust on the first death which gives an interest in the income of the estate to the surviving spouse for their life. On the death of the second spouse, the trust then passes the capital to specific beneficiaries (i.e. the children). The first transfer is still subject to the spouse exemption and in this situation (unlike the discretionary trust described earlier) the value of the assets in the trust are taxable on the death on the second spouse. In IHT terms there is no tax saving under this route but the fulfilment of a personal wish to direct assets ultimately for the benefit of the children can be achieved.

To sum up

Ensure that you keep your Will updated so that it reflects your personal wishes in terms of who you would like to benefit. This is particularly important if you and your partner are not married.

IHT planning should always be done on a personal basis because every estate and every family situation is unique. Taking advantage of the planning opportunities can make a huge difference to the value of your estate which eventually passes down to your children. We would be happy to talk with you about how these opportunities might be used in your situation.

Disclaimer - for information of users - This briefing is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and 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 result of the material contained in this briefing can be accepted by the authors or the firm.

Spring 2012