Commenting on today’s Pre-Budget Report, Tim Gregory, partner in the private wealth group at accountants Saffery Champness says: 

“In what may well be his last Pre-Budget Report, the Chancellor announced a surprisingly large package of measures.  Whilst there was some welcome news, there were sadly also some missed opportunities and one or two initiatives that could well back-fire.

”A new one-off tax on bankers’ bonuses over £25,000 of 50%, to be charged to the employer, on top of the individual’s tax liability.  Whilst some action in this area was only to be expected, this massive increase in tax seems very likely to lead to people who really are top banking talent to relocate abroad and continue working from a place where their income may not be taxed in the UK at all.  Further, the fact that the tax will be levied on the employer means that the banks can only be expected to encourage this activity.

”The Stamp Duty Land Tax holiday for properties with a value of up to £175,000 will end on 1 January 2010, as previously planned.  This is a missed opportunity for the revival of the UK property market.  An extension of this holiday, together with a substantial increase in the limit below which it takes effect, would have cost relatively little, but could have inspired enormous confidence.

”Small companies corporation tax rate, which was to increase in 2010/11 to 22%, will remain at this year’s 21%, and this is clearly helpful for a very small number of struggling companies.  However, it clearly does not help any businesses that are currently making short term losses, which are in real need of some help.  Deferring tax rate increases on profits that are currently dwindling will cost the economy little, and is principally a soundbite.

”The Inheritance Tax nil rate band, above which IHT is charged, is to be frozen at £325,000 for next year, instead of the planned increase to £350,000.  This will lead to yet more middle-income people being drawn into the net of this tax that was initially introduced with regard to the very wealthy only.

”Anti-avoidance measures to protect £5 billion of tax revenue.  This received arguably the biggest reaction from the House, and there is no doubt that people should not be illegally evading their tax responsibilities.  However, this amount of tax is around a half of 1% of each of both tax revenues and the UK’s total debt.  Solving this problem is clearly necessary, but it is not going to make very much difference.

”A reduced 10% corporation tax for profits derived from patents is intended to boost innovation, but not all innovators operate through limited companies, and this tax incentive will lead to more regulation for creative people as they find themselves forced to incorporate.

”VAT will return to a rate of 17.5%, and the Chancellor said that he had no further announcements to make on VAT.  This is welcome news in the light of recent concerns that there might have been an increase to 19% or even 22% or 23%.”

What will be included in the Pre-Budget Report when it is presented to Parliament? 

It has been announced today that the current Chancellor’s third Pre-Budget Report (PBR), will be unveiled on 9 December. PBR 2009 will be the last of its type before next year’s General Election, and will reveal the Government’s latest tax and economic forecasts, departmental spending plans and planned changes to the fiscal framework. 

With the country still deep in what is now officially the longest recession since records began, TIM GREGORY and CLARE CROMWELL, partners at Saffery Champness Chartered Accountants, set out eight measures that could help assist the economy and potentially encourage a return to growth: 

• Deferral of National Insurance increases.

To start with, Tim proposes suspending these planned increases: “With unemployment at alarming levels, another cost of creating and maintaining jobs is the last thing the workforce needs.” 

• Reverse the restrictions on tax relief for pension contributions.

“The Chancellor should not be afraid to think again on tax relief for pension contributions,” says Tim. “With a proposed increase in the top rate of tax to 50% (51.5% for earned income), top earners and entrepreneurs are going to shoulder a large burden of tax increases in the coming years, which will inevitably discourage some from putting 100% into helping to rebuild the economy.” 

“The new rules that effectively increase their taxes further just because they wish to save for their retirement are simply unfair. The termination of the ‘quid pro quo’ of full tax relief on money going into a pension in exchange for full taxation of an annuity coming out amounts to double taxation, and should be reversed before it takes full effect.” 

Clare Cromwell adds, “For years the government has been encouraging people to build up their pension pots but there is now a decreasing incentive for people to add to their pensions.” 

• Don’t tinker further with CGT!

Tim Gregory says: “The prospect of an increase in Capital Gains Tax is a real fear, given the very large difference between the 18% flat rate and the proposed 50% top rate of income tax. At the extreme, some have spoken of an equalising of the rate, although this seems extremely unlikely to happen, as part of the package in the introduction of a flat rate for CGT was the abolition of any allowance for price increases.” 

“For many years, personal taxpayers had the indexation allowance, and then in 1998, taper relief was introduced. The abolition of these was accompanied by a reduction in the top CGT rate from 40% to 18%, similarly recognising that you just cannot put a heavy tax burden on general price increases.” 

• Extend the Stamp Duty holiday

“A Stamp Duty “holiday” for properties less than £175,000 was extended in the 2009 Budget to the end of this year,” says Tim. “It was introduced to help stimulate a housing market that is still barely showing signs of any real recovery. 

“A further extension of this holiday, and perhaps including higher value homes, could get this market moving again without any significant loss to the Exchequer.” 

• Remove the restriction on personal allowances

Clare Cromwell says: One of the stranger announcements in the last PBR was the disclosure that the basic personal allowance would be subject to income limits. 

“The effect of this restriction is to create a marginal income tax rate of 61.5% for those earning between £100,000 to £113,000. This anomaly should be looked at again.” 

• Reform of Inheritance Tax.

Tim says: “All of the main political parties are looking at changes for Inheritance Tax (IHT). It was originally introduced to tax only the particularly wealthy who chose to hold onto their wealth well into their old age. But even with the current state of the property market, there are many people who are pushed into the IHT net purely because of the value of their home.” 

Tim proposes that the level above which IHT is charged could be increased substantially, or a possible alternative could be to exempt the main home from IHT altogether. 

• ‘Stick with the programme’ on VAT.

“There has been some speculation that the anticipated increase in VAT from January may be revised so that it goes beyond a return to the previous 17.5%, with fears that it may be increased to 19% or even as much as 22%. I hope this does not occur,” Tim says. 

“Although there would be obvious extra revenue for the Exchequer, at least initially, it would do nothing to stimulate retail demand. It would very likely reduce retail sales (net of VAT), and would probably reduce demand. Whilst a reduction in demand might curb fears of inflation in the short term, it clearly could not assist in the general economic recovery.” 

• Give companies a break on Corporation Tax.

“It is often said that lower taxation promotes growth more effectively and there can be no doubt that now is a time to stimulate enterprise,” Tim concludes. 

“A reduction in the rate of Corporation Tax could well help companies to grow whilst not impacting on the total tax take, since more profits would be taxed.”

In spite of the worldwide recession, globalisation continues within businesses, within families, and within and across tax regimes. Getting the right tax and other business and financial advice around the world has never been more important.

With offices in almost 100 countries around the world, Nexia International is currently the10th largest network in the world. Its member firms have representation in 520 offices worldwide, and the organisation is and one of the most flexible of similar independent ‘mid-tier’ global networks.

Saffery Champness’s membership of Nexia International means that whenever the interests of our clients acquire an international dimension, we are able to put them in touch with appropriate tax and business advisers to provide the local expertise that may be needed to progress their plans, whilst we continue to work with both the clients and these additional advisers in relation to UK taxation or other applicable issues arising from their overseas activities.

Differences in regional taxation treatment, reporting, culture and other factors particular to that jurisdiction can potentially impede international mobility and, in such circumstances, access to reliable sources of professional knowledge can be invaluable. Nexia International offers our clients a valuable resource that can help them “get things done” at reasonable cost and to timetable, whenever their plans acquire an international dimension.

Our firm also plays a highly visible role in the future development of the network, with partners of our firm serving on its International and European Boards of Directors, the International Tax Committee, and as Nexia’s Deputy Chairman.

If you feel that this might be of use, please do get in touch with your usual client partner or Saffery Champness contact for more information.

The proposed 50% tax rate for 2010/11 and beyond is now well-known, but the headlines often hide the detail. The effect of the various recently-announced tax changes will be much more costly, and affect many more people, than might first be apparent.

Boosting the higher tax rate, and then boosting it a little more

Those who are fortunate enough to have income of £150,000 or more will have the new additional rate of tax to contend with. For 2010/11 onwards 50% will be levied on income, other than dividend income, above £150,000.

For dividend income otherwise taxable at the new 50% rate, the rate will be 42.5%. This means that dividend income above the threshold which is currently taxed at an effective rate of 25% after the notional tax credit will be taxed at an effective rate of just over 36%. This is an increase of more than 44% in the effective tax rate on dividends.

For trustees, the impact is even worse, since they will have to pay the 50% tax rate (42.5% on dividends) on virtually all trust income. Whilst this is mitigated where a beneficiary can reclaim tax in relation to distributions made, retained funds in trusts will suffer a huge additional tax burden.

The personal allowance – now you see it…

From 6 April 2010 the full personal allowance will be restricted for those with income of more than £100,000, by £1 for every £2 that the income exceeds £100,000.

This means that an individual with income of £112,950 or more (based on the 2009/10 personal allowance) will not receive any personal allowance in 2010/11. The consequence of this is income between £100,000 and £112,950 will be taxed at a marginal rate of 60% in 2010/11.

Not just the rich

The future tax landscape has been portrayed by many parts of the media as an attack on the wealthy, and the two changes above can certainly be seen as that. However, the changes to National Insurance contributions (NICs) have been underplayed by both the media and the Government, but these will hit everyone, from the highest to the lowest of earners.

It is proposed that from 6 April 2011, the main rates of Class 1 and Class 4 NICs will be increased by 0.5% to 11.5% and 8.5% respectively. The additional rate (payable on income over the Upper Earnings Limit, £43,875 for 2009/10) will also increase from 1% to 1.5%.

The Class 1 employer rate of NICs will be increased by 0.5 per cent to 13.3% and this increased rate will also apply to Class 1A and Class 1B contributions on benefits in kind and PAYE settlement agreements.

A half of one percent may not sound very much, but for those struggling on a low income, any reduction in their take home pay will clearly have an impact.

Perhaps more crucially, the extra half percent on employers at a time when it seems likely the economy will still be struggling could have serious implications for reducing unemployment levels.

In addition to the proposed increase in rates, the Upper Earnings Limit for NICs has already been amended. For 2009/10 the point at which an employed higher earner starts to pay 1% Class 1 NICs as opposed to 11% Class 1 NICs was aligned with the level at which people started to pay higher rate income tax.

This means that a higher rate taxpayer will pay £383.50 more in Class 1 NICs in 2009/10 than they would have done in 2008/09. For people who pay Class 4 NI, the increase is £268.45.

These amounts are the same for any higher rate taxpayer, regardless of how much more than the threshold their income is, and so clearly has a greater impact for those with incomes nearer the bottom end of the scale.

It is clear that the UK Government has a big financial hole to fill, and is seeking to do so in any way it can. However, it is interesting that the Treasury itself has forecast that most people will find a way in due course to reduce the impact on them of the new 50% income tax rate.

This article first appeared in the September edition of Saffery Champness’s ‘Private Client’ newsletter.

Changes brought in by the 2009 Finance Act to the taxation of Furnished Holiday Lettings (FHLs) create a number of opportunities and issues for anyone with qualifying holiday accommodation, whether in the UK or the EEA.

Furnished Holiday Lettings have for a number of years attracted a very favourable tax treatment. The income is treated not as rental income, but as trading income.

This means that the expenses of running the property and any associated capital allowances can be set-off against other personal income to reduce an individual’s tax liability. In addition FHL properties attract favourable capital gains tax rates and reliefs upon sale or other disposal.

Most of the beneficial aspects of this tax treatment will be abolished from 6 April 2010 but, in the meantime, the FHL rules are being extended to include qualifying properties not just in the UK, but anywhere within the European Economic Area (EEA, being the 27 EU Member States plus Iceland, Liechtenstein and Norway).

This extension has retrospective effect, so that amended tax returns for the years 08/09 and 07/08, and potentially earlier years, can be submitted to treat any income and expenses from qualifying properties within the EEA under the same terms that have previously benefited UK properties.

This may result in a worthwhile tax refund for some people, especially where a property that now qualified has since been sold. The treatment can also be applied for the current tax year.

In order for a property to qualify as an FHL, a number of conditions need to be met: the property must be available to let as furnished holiday accommodation for a minimum of 140 days per year, and must actually be so let at commercial rates for at least 70 days.

In addition, the property must not normally be let to the same person for more than 31 days throughout a period of 7 months in each year.

This still means that there is a significant proportion of the year during which the owner (or anyone else) can use it for their own private, longer-term use without losing the property’s ‘FHL’ status.

The changes in the rules not only create a potential tax refund for past years in respect of EEA properties, but also present a window of opportunity for the immediate future in respect of properties both in the EEA and the UK.

This should encourage owners of furnished holiday accommodation to consider very carefully their future intentions with regard to their properties.

If they are holding the property with the intention of future resale then the removal of the significant Capital Gains Tax savings may encourage some to look to sell the property in this current tax year to benefit from the advantageous tax treatment whilst they can.

It is unlikely that the current depressed state of the property market in most countries would encourage a new decision to sell, but if the intention exists in any case, then an adjustment to the timetable could save a significant amount of tax.

On the other hand, if the property is being held as a long-term ‘family’ asset and the current owner’s intention is to pass it on to their children then the removal of the FHL rules means that the property will no longer qualify for CGT holdover relief after 5 April 2010.

It may well be worth considering gifting the property to a younger family member before the end of the current tax year, even if this was not something that was intended for another few years.

Although there has also recently been a tightening up on the rules that allow holiday accommodation to qualify for Business Property Relief from Inheritance Tax (distinct from the FHL rules), there is no indication as yet that this relief might also be in danger of being withdrawn.

This article first appeared in the September edition of Saffery Champness’s ‘Private Client’ newsletter

In a groundbreaking deal, HM Revenue and Customs (HMRC) has this week signed an agreement with Liechtenstein, so the Alpine principality will try to force UK citizens with money hidden in its banks to come clean with the UK’s tax authorities.

This is a significant breakthrough in the negotiations, which have been continuing since the G20 Summit in early April where an international co-ordinated approach was adopted in pressuring tax havens such as Liechtenstein to provide information to the tax authorities.

If they did not co-operate they would be put on a “black list” which could have caused them certain difficulties in terms of international cooperation, trade, and so on.

As a result of the agreement Liechtenstein will be the first of the offshore tax havens to offer transparency on UK individuals holding bank accounts there.

Next in line?

It remains to be seen whether other tax havens will follow suit. However, this is the first breach in the wall of secrecy surrounding tax havens and there is no doubt that it spells the beginning of the end for tax dodgers operating offshore accounts.

HMRC estimates that approximately 5,000 British investors own bank accounts in Liechtenstein and estimates of the unpaid tax due to the Exchequer range up to £3bn.

To that figure may be added interest and penalties, so the potential return to the Exchequer could be very substantial indeed.

If these figures are reliable, the sums recoverable on a worldwide basis should all other tax havens follow Liechtenstein’s example will be eye watering.

Under the recently announced second amnesty to holders of offshore bank accounts, HMRC has offered relatively generous terms by capping penalties at 10% of the tax due whereas, in the most serious cases, these could be as high as 100% of the tax due.

The interest chargeable on unpaid tax is however non-negotiable and given that the Revenue will be looking back at the previous 10 years, the interest sums alone could be very substantial.

The Revenue is adopting a stick and carrot approach to this initiative and for those who decide not to avail themselves of it, the stick could be very hard indeed because the Liechtenstein bank accounts risk being frozen.

Movement

No doubt many tax evaders will attempt to move their cash out of Liechtenstein in the short term.

However, it would be naive of them to expect that HMRC will not pay very close attention to those who do.

A Revenue spokesman said it had many sources of information on tax dodgers and that these people could not hope to slip away undetected by simply closing their accounts in Liechtenstein and moving their money elsewhere.

The Revenue’s counter-evasion tactics have proven hugely successful, particularly in the period since the introduction of self-assessment when many Revenue staff have been retrained to look at investigatory work.

To put this into context, the yield from the Revenue’s counter evasion work has increased dramatically over the past 15 years, having gone from £1.13bn in 1991/92 to more than £12.8bn in 2007/08.

Encouraged by this success, the Revenue has now announced that it intends to spend £1bn, equal to 25% of its entire budget, on enforcement and compliance this year.

The world is becoming a very much smaller place for tax evaders and time is running out. They would be well advised to come clean with the Revenue and prepare a full disclosure report.

This article first appeared on the BBC’s website on 12 August 2009

Ronnie Ludwig

Partner, Saffery Champness

OWNERS of overseas holiday properties have been given a window of opportunity in which to claim valuable tax perks.

In the 2009 Budget the Chancellor announced that the tax treatment of qualifying furnished holiday lettings (FHL) is to be extended to all properties in the European Economic Area until 2010. After that date this treatment will be abolished for all properties, whether in the UK or elsewhere, and so clearly this represents an opportunity for owners of qualifying foreign property.

Property qualifies as an FHL if it is available for holiday letting on a commercial basis for at least 140 days a year, and is actually let commercially for at least 70 days in a twelve month period. It must not be let continuously to the same person for more than 31 days in a seven month period.

The extension of the rules means that owners of qualifying properties will be treated for UK tax purposes in exactly the same way as those who own qualifying properties in the UK, and gives owners the chance to claim capital allowances and loss relief against other income or capital gains.

It also means that UK taxpayers who have sold overseas properties in recent years may be able to claim reliefs such as business asset rollover relief. This is where the gain arising on the disposal of a property may be rolled over into the acquisition of a new qualifying property or other business asset if the new property is acquired within three years of the disposal of the old one.

Assuming that the property qualifies as a FHL, it should be possible to offset any losses arising on the foreign property against general UK tax liabilities, but only up to 6 April 2010. The earliest year which can be opened up to claim FHL tax treatment is 2006/07 or, for corporation tax, accounting periods ending on or after 31 December 2006. However the deadline for lodging an amendment to the 2006/07 tax returns expires on 31 July, so prompt action is necessary.

Other tax reliefs which may be claimed include relief for pension fund contributions, entrepreneurs’ relief (which means that on sale any UK capital gains tax will be limited to 10 per cent on the first £1 million of gains), loss relief carried forward to set against future profits, and terminal loss relief where losses on termination of the trade may be carried back to set off against profits up to three years earlier. Unfortunately, if the foreign property would not qualify as an FHL, it will not be possible to offset any losses arising against general UK tax liabilities, or indeed to claim many of their reliefs referred to above.

Professional advice should be taken however, especially where the ownership has been structured through a foreign company.

Ronnie Ludwig is a Partner in the Private Wealth Group at Saffery Champness.

This article first appeared in The Scotsman

Extension of carry back of trading losses

A company may normally carry back trading losses arising in an accounting period for twelve months, and set that loss off sideways against its profits from any other source. In the pre budget statement last November, new rules were introduced in relation to losses of accounting periods ending in the window from 24 November 2008 to 23 November 2009 to allow trading losses to be carried back for more than one year in certain circumstances, effectively giving a three year carry back period. The government has announced further extensions to this support by extending the enhanced relief for two years rather than one.

Foreign profits

The tax exemption for most foreign dividends received by UK groups of companies has been confirmed and will be supported by a restriction on interest deductions combined with the replacement of the Treasury Consents rules with a new post transaction reporting requirement. This will herald the changes to the controlled foreign companies rules and is intended to improve the competitiveness of the UK as a location for multi national businesses.

VAT – change of standard rate

There is to be no extension to the period for the reduction in the standard rate of VAT which was reduced from 17.5% to 15% in the pre budget report. The rate will revert to 17.5% with effect from 1 January 2010 and legislation will be introduced to prevent any manipulation of the rules in relation to this.

Stamp duty

The stamp duty holiday for all houses costing up to £175,000 is to be extended until 31 December 2009.

Support for savers

The government has announced that the ISA investment limit is to be increased to £10,200, of which £5,100 can be saved in cash. The new limits are to be introduced for those aged 50 or over for the tax year 2009/10 but only for deposits being available from 6 October this year. The higher ISA limits will then apply to everyone from 6 April 2010.

Offshore disclosure

The much anticipated new disclosure opportunity for those with offshore bank accounts will run until March 2010, giving owners of these accounts the opportunity to disclose relevant details to the tax authorities of their own accord in exchange for lower penalties. This is in line with the coordinated international approach being taken towards undisclosed offshore bank accounts as outlined at the G20 Summit meeting recently.

Company car tax

In recognition of the ever lowering CO2 emissions from modern cars, on which benefit in kind tax charges are calculated, the government has announced that it is again moving the goalposts on these with effect from 6 April 2011, by shifting the CO2 emissions thresholds down by 5grams per kilometre with effect from 6 April 2011.

It has also announced that the current £80,000 cap on company car list prices for the purposes of calculating company car benefit will be abolished such that the drivers of the most expensive company cars will pay a tax charge based on the full list price of the car when new.

The old discounts available for different types of vehicles will be completely abolished and replaced by a single system which simply rewards lower CO2 emissions.

Income tax rates and allowances

The income tax personal allowance for 2009/10 remains at £6,475, as announced in the pre budget statement last November. However, rather than gradually reduce the basic personal allowance for income tax for individuals whose gross income is more than £100,000, the Chancellor has decided to fully withdraw the allowance for those with incomes over £100,000 with effect from 6 April 2010.

A new 50% top rate of income tax will be applied to those with incomes above £150,000 with effect from next April. This represents a two fold change from the pre budget statement where the Chancellor announced a top rate of 45% on incomes above £150,000 effective from 6 April 2011.

Tax rate on dividends

From 6 April 2010 there will also be a new higher rate of tax for dividend income. The new rate of tax of 42.5% will apply to dividends, which would otherwise be taxable at the new income tax rate of 50%.

Tax rate applicable to trusts

From 6 April 2010, the dividend tax rate will be increased to 42.5% and the trust rate of tax will be increased to 50%.

Tax relief on pension fund contributions

Higher rate tax relief will continue to be available on pension fund contributions until the end of the tax year 2010/11, however thereafter relief is to be restricted to those with incomes over £150,000 the effect of which will be to taper the relief to 20%.

The Chancellor has announced that he intends to consult on the implementation of this restriction but has already flagged up that prior to the change, the government will also introduce legislation to prevent higher rate tax paying individuals from taking advantage of the pensions relief by making substantial additional contributions prior to the restriction coming into effect on 6 April 2011.

Further extension of carry back of trading losses

The November 2008 pre budget report announced a temporary twelve month extension of loss carry back for business from one to three years, and this is to be extended for two years rather than one. It will be effective for the 2008/09 and the 2009/10 tax years.

The rules allow only trading losses to be carried back, but certain furnished holiday letting losses are treated as trading losses for these purposes.

Enhanced first year capital allowances.

The government has doubled the first year capital allowance from 20% to 40% for one year, introduced retrospectively with effect from 5 April 2009.