SOME GOOD NEWS FOR ENTREPRENEURS | 20/07/10
In the coalition government’s emergency Budget, the Chancellor of the Exchequer announced that the lifetime allowance for entrepreneurs’ relief was to be increased from £2 million to £5 million pounds from 23 June this year. This article explains the significance of this increase and summarises the principal features of entrepreneurs’ relief. This topic is complex and it is therefore important that those readers who feel that they are able to claim the relief, or are likely to do so at some time in the future, contact us before making any decisions so that we may provide timely advice.
Entrepreneurs’ relief was first introduced in April 2008 by the Labour government in an effort to assist owners of small businesses when they came to dispose of business assets. The relief takes the form of a reduction in the rate of capital gains tax (CGT) which, at the time of the introduction of the relief, stood at 18% for all taxpayers. The net CGT payable after a disposal was reduced to 10% which represented a reduction of 8%. However, in the emergency Budget the rate of CGT for higher rate and additional rate taxpayers was increased from 18% to 28%, but the net CGT after entrepreneurs’ relief remained at 10%. This saving of 18% in CGT has naturally been welcomed by those higher rate taxpayers disposing of or thinking of disposing of their business assets.
The maximum gain to which the disposal of business assets can apply is now £5 million. Remember that this is a lifetime limit so if a person makes disposals of a number of businesses the aggregate gains on all disposals will be subject to the overall £5 million lifetime limit. The maximum relief for a basic rate taxpayer is therefore the difference between the CGT rate of 18% and the rate for entrepreneurs which is 10%. Applying this reduction in tax to the lifetime limit results in a maximum saving of £400,000 whilst the saving for a higher rate taxpayer is now 18% x £5 million = £900,000.
Entrepreneurs’ relief applies to three types of business – sole traders, partnerships and companies.
Sole traders
In the case of sole traders, the relief is available if the sole trader disposes of the whole business or a distinct part of the business. It is not available if the owner sells some of the assets of the business. What is deemed to be a “distinct part” of the business will be judged according to the circumstances of each case and so it is not possible to lay down any specific rules.
It is interesting to note than the relief is available if the sole proprietor sells his business as a going concern to a company which is owned by him. In this case, any gain in value of the assets of the business when sold will benefit from the relief. However, any valuations made of these assets will be closely scrutinised by the taxation authorities.
Note that the relief also includes furnished holiday lettings but not other types of lettings,
Partnerships
The conditions for claiming entrepreneurs’ relief when an outgoing partner sells his or her share in a partnership are complex as the sale of a partner’s share in a partnership is effectively the sale of part of the goodwill of the partnership, as the partnership itself will continue. Once again, each case will be considered on its own merits but the general rule is that provided that the partner sells his share in the partnership and the sale generates a capital gain, then the relief is available to that partner.
Companies
Entrepreneurs’ relief in relation to companies will relate to the sale of shares or other securities in the company. In order to qualify for the relief the company must be a trading company, the definition of which can be complex, but basically the company must carry on trading activities and there must be no substantial non-trading activities.
The company can be the holding company of a trading group but must have been so for at least 12 months prior to the disposal.
The most important condition attaching to the relief is that the person disposing of the shares must own at least 5% of the ordinary share capital of the company and his shares must have entitled him to at least 5% of the votes. So non-voting shares will not count. In addition, the person disposing of the shares must be an officer of the company or an employee. In relation to both the above conditions, they must have existed for at least 12 months prior to the disposal. It is important to note that provided the minimum holding of 5% of shares has been held for 12 months, the relief will apply to all shares that are subsequently disposed of. So, for example, if a director of the company has held 5% of shares for at least 12 months but in the last 12 months he had purchased a further 20% of the shares, the relief will apply to his total 25% holding.
Of course, not all disposals will be shares sold by a shareholder in a company which continues to trade after the disposal. In the case of a company which is wound up the relief can still apply, provided that the distribution of the assets on the winding up is deemed to be a capital distribution for tax purposes and not income. The relief will only apply if the distribution takes place within 3 years of the company ceasing to trade, provided that the required conditions have been met for a period of at least 12 months prior to the cessation of trade.
Care should be exercised if shares are disposed of and the consideration for these shares is shares in another company to whom the shares have been sold. There can be problems if the shares given in the new company are less than 5% of the shares of this company.
NEW GOVERNMENT – FIRST BUDGET | 20/07/10
So we have a new government. Following the inconclusive results of the May 2010 general election and the first hung parliament since February 1974, we have a coalition government comprising the Conservatives and the Liberal Democrats.
Against a backdrop of the worst economic crisis for decades (and some would argue, in history) both in the United Kingdom and globally, the Chancellor of the Exchequer, George Osborne delivered the coalition government’s emergency Budget on 22 June.
For the first time, the forecasts which supported the Budget measures were prepared by the newly constituted Office of Budget Responsibility (OBR) instead of the government. The OBR now forecasts economic growth of 1.2% in 2010, rising to 2.3% in 2011 due to the impact of the tax increases and spending cuts announced by the Chancellor in the emergency Budget.
The government’s principal aim, both in this Budget and in its overall monetary policy, is to reduce the budget deficit. The deficit is now forecast to reduce from £149 billion to some £37 billion by 2014/15. The reduction in the budget deficit will be tackled in the main by proposed cuts in government spending as opposed to increases in taxation.
The government spending cuts announced in the emergency Budget include a £113 billion squeeze on public spending over a five year period (some £40 billion more than planned by the last government), with government departments being told to cut their budgets by some 25%.
For businesses, initial concerns proved, to a large degree, to be unfounded, except for the proposed increase in VAT from 17.5% to 20% from 4 January 2011 which will have a marked impact on businesses, especially in the retailing sector, as spending by the public declines.
The increase in the entrepreneurs’ lifetime relief from £2 million to £5 million was especially welcome, as was the announcement that the rate of corporation tax will be reduced in future years.
The proposed banking levy, to be introduced in January 2011, has caused concern amongst the banks, but it is suggested that the banks’ reaction will find little support from the public at large.
For individuals, the Budget contained a mixed bag, with a proposed increase in personal allowances in April next year and the much heralded increase in capital gains tax being less than was originally feared, remaining at 18% for basic rate taxpayers and rising to 28% for higher rate taxpayers. However, the higher rate income tax threshold will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance.
However, the increase in VAT will cause concern to many, especially the lower paid, and the government’s intention to cut welfare spending by £11 billion will impact many benefit claimants, including those claiming child benefit, housing benefit and tax credits.
The government and the nation will now have to hold its breath and wait to see if this historic emergency Budget will fulfill its objectives.
THE “FIT NOTE” REPLACES THE SICK NOTE | 11/06/10
Prior to 6 April this year an employee’s state of health when off work due to illness was assessed by that individual’s doctor in the form of a doctor’s certificate (often referred to as a “sick note”). From this date the “fit note” has replaced the sick note and it is important that all employers are aware of the rules and regulations relating to the new fit note.
The main characteristic of the fit note is that the doctor will certify whether, in his opinion, the employee:
• may be fit for work;
• may be fit for some work; or
• may be fit for no work at all.
Note the use of the word “may” above. The doctor is not given the option of stating that an employee is fit for work, only that the employee may be fit for work.
In addition, the doctor will now be allowed to (but does not have to) make suggestions as to how the employer could adapt work procedures or the work environment so as to assist the employee in returning to work. Such procedures could include altering or shortening the hours of work, adapting the workplace or amending the duties undertaken by the employee.
The employer does not have to follow the advice given by the doctor in relation to any suggested changes to work procedures etc but the employer would run the risk of an action for disability discrimination if the suggested changes were not made and it later transpired that the employee had a disability.
There are time limits which relate to the duration of a fit note. The maximum duration has been reduced from 6 months in the case of the old sick note to 3 months. However, do not confuse this duration period with the period specified by the employee’s doctor as the period for which he considers the patient may not be fit for work. This can be for any period or for an indefinite period of time.
COMPLIANCE CHECKS AND PENALTIES | 11/06/10
Hardly a week seems to go by without news of H M Revenue & Customs (HMRC) becoming more and more vigilant in relation to the computation and payment of taxation. Recently legislation has been introduced to standardise the powers, deterrents and safeguards across the taxes in the United Kingdom and HMRC has summarised these measures on its website, as follows:
Compliance Checks
Every year HMRC carries out checks to see if the correct tax has been paid. From 1 April 2010 there will be one system across many of our taxes:
• to obtain information about your tax
• to inspect your business records
• for the amount of time you have to make tax claims
• for the amount of time we have to make tax assessments
New penalties
From 1 April 2010 there will be:
• an inaccuracy penalty for inaccurate tax documents and returns across most taxes
• a failure to notify penalty across most taxes when people don't tell us about a relevant obligation at the correct time, e.g. to register for a tax
• a new VAT and Excise wrongdoing penalty
Publishing details of deliberate defaulters
From 1 April 2010 under strictly controlled circumstances HMRC can publish the details of taxpayers who are penalised for deliberately evading more than £25,000 of tax.
PAYE late payment penalties
From 6 April 2010 new penalties will apply to all employers who do not pay PAYE, NICs, Construction Industry Scheme deductions and student loan deductions on time and in full. It replaces an existing penalty under the Mandatory Electronic Payment (MEP) scheme, which affected employers with 250 or more employees.
What you can do if you disagree with HMRC decisions
In most cases if you disagree with HMRC decision's, including the decision to charge a penalty, you can appeal. From 1 April 2009 HMRC has also offered the option of an internal review of tax decisions that can be appealed, with the aim of resolving issues as quickly as possible.”
INCREASE IN CAPITAL GAINS TAX – A WORRY FOR SAVERS | 11/06/10
It is highly likely that the new Conservative-Liberal Democrat government will increase the rate of capital gains tax (CGT) in the forthcoming Budget. It is also the wish of the Liberal Democrats to reduce the tax-free threshold for CGT from the present level of £10,100 to just £2,000. It is estimated that if the threshold is reduced to this level an additional 750,000 individuals will pay CGT.
In addition, it would appear to be the government’s intention to levy CGT on what are termed as “non-business assets” which could include second homes, shares and buy-to-lets. Note that furnished holiday lettings are not included as a non-business asset.
Since April 2008 the rate of capital gains tax has been 18%, with a reduced rate of 10% of up to £2 million within your lifetime being available in the form of entrepreneurs’ relief, ie for a person who owns 5% of the shares of a company for whom he or she has worked and who has held the shares for one year or more. This reduced rate also applies to holiday lettings.
At present no one knows to what level the interest rate of CGT will be increased but many commentators believe that there will be a top rate of 40%. Another unknown factor is when the increased rate and reduced thresholds (if introduced) will take effect. The two possible start dates would be immediately after the emergency Budget on 22 June or at the start of the next tax year, ie 6 April 2011.
The above measures will affect many individuals, but those who will be hit the hardest will be savers. Many such individuals will have put aside savings in the form of shares or other assets only to see the net worth of these assets slashed by swinging increases in CGT. Once again, those who have in the past been encouraged by government to be prudent and save for their old age, will now suffer.
ELECTRONIC FILING OF VAT RETURNS | 21/04/10
Those clients that are registered for VAT should be aware that from April 2010 HM Revenue & Customs (HMRC) is phasing out paper VAT Returns. From this date a number of businesses may have to submit their VAT Returns online and pay any VAT due electronically. The payment methods include Direct Debit, internet or phone banking.
Businesses which are affected are those which have an annual turnover of £100,000 or more (exclusive of VAT) and you register or should have registered for VAT on or after 1 April 2010 (regardless of your turnover).
These businesses will still have to complete their VAT returns online and paying electronically even if their turnover drops below £100,000.
Those businesses whose annual turnover was £100,000 or more on 31 December 2009 will have been sent a letter by HMRC in February explaining the new regime and informing these businesses that they will have to submit their VAT Returns online and pay their VAT electronically for all returns starting on or after 1 April 2010. The letter includes a guide on how to register to complete returns on line and make electronic payments.
BUDGET 2010 – A SUMMARY OF THE TAXATION PROVISIONS | 21/04/10
Set out below is a summary of the main contents of the Chancellor’s Budget statement presented to the House of Commons on Wednesday 24 March 2010. We have concentrated on the taxation aspects of the Budget that are most likely to affect individuals and smaller businesses. Should you have any queries relating to the contents of this summary or require advice concerning any aspect of the Budget, please do not hesitate to contact us.
Introduction
This was the last Budget in this Parliament before the forthcoming general election, which is likely to be held in May. It is Labour’s thirteenth Budget since coming into power in 1997 and Alistair Darling’s third Budget.
The Chancellor explained that this Budget was taking place as the UK economy was emerging from the deepest global recession for over 60 years.
He stated that this Budget is fiscally neutral and confirms the Government’s plans to more than halve the deficit over four years.
The Chancellor reported that the economy had contracted by 6% during the recession. However, he predicted growth of 1% to 1.25% in the year 2010 which was in line with forecasts. For 2011 the forecast had been lowered from 3.5% growth to 3% – 3.5%.
Borrowings for the current year were forecast to be £167 billion, £11 billion lower than originally forecast in December. He forecast that in 2010/11 borrowings would fall from £163 billion to £74 billion by 2014/15
He expected public sector net debt to reach 54% of gross domestic product this current year increasing to 75% in the year 2014/15.
Individuals
Income tax rates
The main rates for income tax for 2010/11 will remain at 20% for basic rate taxpayers and 40% for higher rate taxpayers. A new additional rate of tax of 50% will apply on incomes over £150,000.
Personal allowances
The Chancellor confirmed that income tax allowances will be frozen in 2010/11 at a time when RPI is negative.
National Insurance Contributions
In a similar approach to that adopted for income tax rates and allowances, the Chancellor froze all but two figures for National Insurance contributions. The increases are £2 per week on the lower earnings limit and 10p on the special Class 2 rate for volunteer development workers.
Tax Credits
Child element
The Child Element of Tax Credits will be increased for those families with children aged one or two by £4 per week from April 2012.
Over 60s
From 6 April 2011, people aged 60 and over will qualify for Working Tax Credits if they work at least 16 hours per week.
Rates and thresholds
As announced in the 2009 Pre-Budget Report, from 6 April the child element of the Child Tax Credit will rise by £20 above indexation in April 2010. This represents an increase of £65 in cash terms.
An increase by 1.5% in April 2010 will be made in relation to the following benefits:
• Child Benefit
• Guardian’s Allowance
• The disability elements of the Child Tax Credit
• All elements of the Working Tax Credit (apart from the childcare element)
The threshold for the receipt of the maximum Child Tax Credit award will be increased to £16,190. All other rates and thresholds in tax credits are unchanged.
Stamp Duty Land Tax
The Chancellor announced that no Stamp Duty Land Tax will be payable for first time buyers who purchase residential properties up to £250,000 between 25 March 2010 and 24 March 2012.
A new Stamp Duty Land Tax rate of 5% on residential property sales over £1 million is to be introduced from April 2011.
Capital gains tax
The standard rate for capital gains tax remains at 18%.
The annual exemption threshold for capital gains tax will be frozen at £10,100.
The lifetime limit for Entrepreneur’s Relief is increased from £1,000,000 to £2,000,000 for 2010/11.
Inheritance tax
The Chancellor announced a freezing of the nil rate threshold at £325,000 for individuals and at £650,000 for married couples and civil partners. This threshold will be frozen for until 5 April 2015.
Pensions
In April 2010 the basic State Pension will increase by 2.5%. A full basic State Pension will then be worth £97.65 a week. A full couples’ rate will increase to £156.15 a week.
There will be an increase in the Pensions Credit’s minimum income guarantee to £132.60 for single pensioners and £202.40 for couples.
Pensions tax relief
The Chancellor announced changes to the tax relief on pension contributions which had previously been announced in the 2009 Budget. At that time the Chancellor announced that tax relief on pension contributions would be restricted from April 2011 for individuals with incomes of £150,000 or more. The Government has now announced that the restriction will apply to those with gross incomes of £150,000 or more, where gross income incorporates all pension contributions, including the value of any pension benefit funded by, or eventually funded, by an individual’s employer.
Winter fuel allowance
The amounts paid in winter fuel allowance are to be extended for another year.
Individual Savings Accounts (ISAs)
For all individuals, irrespective of age, the maximum annual ISA investment in 2010/11 is £10,200, up to £5,100 of which can be saved in cash.
Vehicle excise duty
Vehicle Excise Duty for cars registered on or after 1 March 2001
column 1 = VED band
column 2 = CO2 emissions (g/km)
column 3 = Standard rate 2009-10*
column 4 = Standard rates 2010-11*
column 5 = First year rate 2010-11*
| A | up to £100 | £0 | £0 | £0 |
| B | 101 - 110 | £35 | £20 | £0 |
| C | 111 - 120 | £35 | £30 | £0 |
| D | 121 - 130 | £120 | £90 | £0 |
| E | 131 - 140 | £120 | £120 | £110 |
| F | 141 - 150 | £125 | £125 | £125 |
| G | 151 - 165 | £150 | £155 | £155 |
| H | 166 - 175 | £175 | £180 | £250 |
| I | 176 - 185 | £175 | £200 | £300 |
| J | 186 - 200 | £215 | £235 | £425 |
| K** | 201 - 225 | £215 | £245 | £550 |
| L | 226 - 255 | £405 | £425 | £750 |
| M | Over 255 | £405 | £435 | £950 |
*Alternative fuel discount: 2009-10, A-I £20, J-M £15; 2010-11, £10 all cars
** Includes cars emitting over 225g/km registered before 23 March 2006
There have also been increases in Vehicle Excise Duty for vans registered on or after 1 March 2001 and for cars and vans registered before 1 March 2001. In addition, increases have been announced for motor cycles and for Heavy Goods Vehicles.
Fuel duty rates
The increase in Fuel Duty will be implemented in three stages: 1 pence per litre on 1 April 2010, 1 pence per litre on 1 October 2010, and 0.76 pence per litre on 1 January 2011.
Alcohol and tobacco
Alcohol duty rates on beer, wine and spirits will increase by 2% above inflation. Cider duty rates will increase by 10% above inflation. These changes come into force at midnight on 28 March 2010.
From midnight on 28 March 2010 duty on tobacco will increase by 1% and by 2% in real terms each year until 2014.
