Tax Matters

Welcome to the first edition of Tax Matters, an e-bulletin that we will issue on a regular basis to keep you informed as to what is going on in the world of tax. There are certainly a lot of changes at the moment: the capital allowances regime is undergoing a major reform; there are changes (as yet not finalised) to the capital gains tax regime; and the treatment on non-domiciliaries is currently subject to consultation. We hope you find this bulletin informative and we would welcome any comments you have by emailing tax@tenongroup.com

December 2007, in this issue:

Capital Allowances – proposed changes

A “simplified” Capital Allowances regime is soon on its way. Sweeping changes have been put forward for consultation by HM Revenue & Customs and they will have a significant impact on many businesses.

The proposals:

• Introduction of a £50,000 Annual Investment Allowance for all businesses
• Changes to the rates of writing-down allowances for different types of plant and machinery
• Phasing out of Industrial Building and Agricultural Buildings Allowances (IBAs and ABAs) by 2011
• Wholesale revision to the basis of capital allowances on company cars with a new system based on CO2 emissions.

This is by no means an exhaustive list and remember that several of the changes are still proposals so we won’t know the final position until later this year.

The impact you feel from the changes will depend on your year end and on the amount and nature of proposed spending. Timing could be important – either spending sooner or delaying things could be the best option, depending on circumstances. You should also consider whether you have claimed everything on previous acquisitions – it is never too late – and whether previous expenditure has been correctly categorised. Allowances on plant left in the IBA claim will be lost after 2011.

Further guidance will follow but if you do have any concerns or intend to make any substantial capital acquisitions, please contact a Tenon tax adviser and they will be happy to help. You can also e-mail tax@tenongroup.com

Setting up a new business overseas

The first steps into a new market are an exciting and important time for any business. Although this may have become a more straightforward process in recent years, there is still much to think about, not least of which is the structure under which the business will operate. There are a number of options, determined by both the jurisdiction in which the business will operate and the nature of the activities to be undertaken. For example, to investigate a new country whilst undertaking market research etc a representative office may be most appropriate. When you start to make sales in the local market decisions will need to be made as to whether a branch or corporate structure will produce the best results.

In addition to the corporate structure the issues of investment into the new business and repatriation of cash and profits (once available!) needs to be thought out at the earliest opportunity. Legislation differs between jurisdictions, determining certain levels of capital, prescribed ratios of debt to equity (thin capitalisation) and retentions of certain accounting reserves, for example, to “provide for employees”.

A successful entry into a new market is one which has all relevant issues joined up and addressed. For the first time entrant overseas or even for the seasoned international business, reliance on your tax adviser to deal with the issues, in which he/she is the expert, giving you the time to focus on the commercial requirements is a winning formula.

Tenon has successfully helped many businesses to set up overseas providing practical and pragmatic advice.

If you are thinking about first steps into a new market or require existing structures to be reviewed contact tax@tenongroup.com

Construction Industry Scheme

‘Self employed sub contractor’ is a phrase that we would hear much less if HM Revenue & Customs successfully applied their interpretation of case law. The question is ‘what defence do we have?’ Well the answer is ‘plenty’.

The problem: Self employed is not defined within legislation, although employee is. However, when you read in s230(1) of Employment Rights Act 1996 that it defines an employee as “an individual who has entered into or works under a contract of employment” you know that this won’t help!

The guidance for deciding self employment is in case law and we should not view hourly rates, day rates, labour only or a long history with the same contractor as reasons for why an individual cannot be self employed. These factors, along with others, have all been considered by the courts. It is necessary to get the weight of their importance right and in our experience HMRC get this wrong all too often even though, and perhaps surprisingly, the case law is very positive for the self employed.

Maintaining a fluid and flexible workforce is often vital to your business and we can help you maintain that by risk assessing your exposure to claims for back tax and NI by HMRC and advising you on what needs to be done to reduce that risk.

Tenon has particular strength and expertise in the area of ‘worker status’; we offer best advice and are prepared to robustly defend our clients’ position if it is being challenged by HMRC.

tax@tenongroup.com

Enterprise Management Incentives

One of the major factors restricting the growth of Small and Medium sized companies is the attraction, retention and motivation of high calibre executives. These executives will have the knowledge, enthusiasm and drive to grow the business and their continued involvement with the business will be essential. There may not be sufficient cash available or maybe something more than just money is needed to provide the required motivation. By utilising a part of the company’s equity value, Enterprise Management Incentives (EMI) provide a flexible way of remunerating emerging executives in a tax efficient form.

Who is it for?

EMI is particularly suitable for New Companies and Growing Companies. EMI allows Small and Medium sized companies to award options over the company’s shares at a specified price and capable of being exercised within ten years. EMI will provide the maximum tax benefits where the potential for growth in equity value is greatest. EMI is open to most companies with gross assets of less than £30 million.

Features and Benefits

• A Corporation Tax deduction is available when the options are exercised
• Taper relief (whilst it is still available but note that this is likely to be abolished) starts from the date of the award of the options (and not date of exercise)
• Each executive can receive options worth up to a total of £100,000
• Total options must be less than £3 million
• No Income Tax or National Insurance Contributions on employee at grant or exercise if options are awarded at market value – profits made are liable to Capital Gains Tax
• Significant Tax saving benefits for executives compared to any other scheme – pay 10% CGT (possibly 18% from April 2007) and no NIC rather than 40% income tax and 1% NIC
• No employers NIC - a saving of 12.8%
• Specific performance criteria for each executive can be defined – sales targets for the sales director or production targets for the factory manager!
• Significant flexibility in deciding who participates, on what terms and on how to deal with leavers
• Safeguards to deal with takeovers and other changes in circumstances

tax@tenongroup.com

Are you missing out on tax relief?

Companies that are carrying on Research and Development ('R&D') activities may be missing out on tax savings.

If your company has been doing R&D for any tax periods ending in the period between 31 March 2002 and 31 March 2006 then that company only has until the deadline of 31 March 2008 in which to make a claim to HM Revenue & Customs. After this date it may be too late and those tax savings lost!

What is R&D?

It is not only companies with men in labs wearing white coats that qualify for R&D tax relief!

Companies across a wide range of industries and fields may qualify to make an R&D claim to reduce their tax burden with the assistance of Tenon Tax.

Where a company has achieved advancement in its specific field as a result of overcoming any technological or scientific uncertainty then there is a potential R&D claim to be made that can save the company tax.

Who can claim R&D?

The R&D regime applies to companies only. Both Small and Medium Sized Companies ('SMEs') (i.e. companies with less than 250 employees and with either a maximum turnover of 50m euros or a balance sheet total of 43m euros) and large companies. These balances are soon to be increased to 500 employees, 100m euros turnover and 86m euros balance sheet total.

What is the tax benefit?

For SMES, a company may claim 150% of its qualifying expenditure (to increase to 175% with effect from 1 April 2008). So for £10,000 of expenditure, the company may claim tax relief on £15,000. In addition, if an SME is loss making it may claim a tax refund via the R&D regime obtaining an immediate cash flow benefit.

For large companies, they can obtain tax relief on 125% of qualifying R&D expenditure (to be increased to 130% with effect from 1 April 2008). However, no tax refund can be claimed by large companies.

What should you do now?

If you consider that there is even just a remote chance that your company may qualify for R&D tax relief then please call your Tenon tax adviser.

You can discuss the tax opportunities arising from R&D with a dedicated corporate tax specialist.
However, time is running out so make sure you contact us today. tax@tenongroup.com

Are you a land dealer or an investor? Does it matter?

One recent VAT Tribunal case in the land and property arena involved Dartford Borough council. The Council had undergone preparatory works for developing a site at Dartford Bridge and had entered into a development agreement with a third party, as well as securing an agreement to lease to a major supermarket. The Council then sold the freehold interest in the land to a third party industrial investor who warranted that they had a fixed intention to let the property immediately after completion.

It was accepted that the Council had opted to tax the land, as had the institutional investor purchasing the land. Both parties felt that the specific conditions had been met to allow the land transfer to take place VAT free as the Transfer of a Going Concern (“TOGC”).

The benefits for the purchaser were that £4m additional cash to fund the VAT would not be needed, and the corresponding Stamp Duty Land Tax on top of the VAT would also be avoided.

However, HMRC did not see this as a “TOGC” and issued a VAT assessment of £4.3m to the Council. Their reason? Put simply, HMRC considered that the purchaser would not be using the asset in the “same kind of business” as the Council: HMRC contended that the Council was using the asset in the way a speculative dealer would, whereas the purchaser intended to derive rents as an investor.

The Tribunal upheld the appeal and agreed with the Council, implying that it was a false distinction to make between land held for the purposes of sale and land held for the purposes of rent.

So what do we learn from the case?

First, that TOGC is a powerful and legitimate tool for enhancing cash flow and reducing real cost.
Secondly, that HMRC are constantly vigilant to new means of challenging commercial arrangements to procure extra taxation. At the time of writing it is not known whether HMRC will appeal.

tax@tenongroup.com

New HMRC penalty regime

H M Revenue and Customs (HMRC) is changing its penalty regime for the submission of incorrect tax returns. The new system replaces the existing rules for Income Tax Self Assessment, Corporation Tax Self Assessment, PAYE/NIC (including the Construction Industry Scheme) and VAT. The aim is to create a consistent approach in the calculation of penalties across the various taxes.

The new regime, expected to apply to all return periods commencing after 31 March 2008, introduces a behaviour-based approach to penalties. There are three categories:

1. “Careless” behaviour (minimum penalty 15%/maximum penalty 30%);
2. “Deliberate understatement” (knowingly making incorrect returns) (35%/70%); and
3. “Deliberate understatement with concealment” (i.e. knowingly making incorrect returns and then covering the fact) (50%/100%)

A further reduction in the penalty can be obtained where an “unprompted” disclosure is made. This reduces the above minimum penalties to 0%, 20% and 30% respectively.

Under the new system, a penalty will not be charged where the taxpayer has taken “reasonable care”. Also, suspended penalties are introduced. These will only be used in the first category above. Where appropriate, HMRC will suspend all or part of a penalty for up to two years. Providing sufficient action has been taken by the taxpayer to correct problems, that part of the penalty which has been suspended will be waived.

Although the new regime was designed to create a more consistent approach it is not perfect. The level of penalties is far higher than are sought by HMRC under the current system. We envisage that there will be numerous discussions with inspectors as to whether a client has exercised “reasonable care”. If that cannot be demonstrated, then there will be negotiations to determine which category any particular offence falls into, as this has a significant effect on the level of penalty.

The message going forward is that extra care will be required when completing tax returns to avoid incurring the punitive penalties that can follow.

For further information about this subject, please contact taxinvestigations@tenongroup.com

The taper caper continues

The forthcoming changes to capital gains tax (‘CGT’) continue to dominate the tax world. Unfortunately, press coverage considerably outweighs the extent to which we have any meaningful published material.

To recap, during the Pre-Budget Report in October, the Chancellor announced proposals to make major changes to CGT. This included the abolition of ‘taper relief’; which after two years of ownership can potentially result in an effective CGT rate of 10% on the sale of shares. Instead, a new ‘flat rate’ of CGT of 18% is to be introduced, regardless of the nature of the asset involved and the length of ownership.

However, the Chancellor has announced that he is still not in a position to respond to the many concerns which have been raised, and that we cannot expect any firm proposals until the New Year. At this stage, it still appears that any changes will be effective from 6 April 2008, although representations are being made to delay the new regime.

Given the changes, planning opportunities will be available but there may also be pitfalls which would be easy to fall into. Our current view remains that specific action should not be taken at the moment to advance CGT liabilities. The situation is still far from clear and unnecessary tax liabilities could be created. Tenon continues to monitor the position and make representations to HMRC.

But remember...6 April 2008 is fast approaching, and therefore only a short window may exist in which to take advantage of the current regime whilst it lasts. Watch this space.

Have your say on CGT

The Chancellor claims that his proposed changes to the CGT regime are in response to the clammers for tax simplification. Is it possible to have a tax system which is simple but at the same time fair?

The results of our poll will be published in the next e-bulletin, click here to tell us your views http://www.tenongroup.com/Services/Tax/Tenon%20Tax%20Poll.asp

Introducing the Tenon Tax Doctor

Andrew Jupp, National Head of Tax at Tenon, attempts to unravel what's going on in the world of tax and how it might affect you and your business. Visit his blog at: http://www.tenongroup.com/Services/Tax/Tax%20Doctor/

Contact your local Tenon office at http://www.tenongroup.com/Contact/

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