The economic downturn

I caught a few moments of Robert Peston's program last night. It seems that some people did know that a "market correction" was coming, but did not realise quite how bad it was going to be.

The wonder is that so many people thought that borrowing more than you could afford from your current income would all come right in the end, because house prices were still rising.

But perhaps we should not blame individual consumers for believing what they are told, and should look at the people lending to them - the mortgage salesmen. Surely they should have known better than lending more than someone could afford. But of course, their income would have been based on mortgage sales, so we cannot blame them.

So perhaps the blame should lie with the people setting up the rules for who can borrow how much - namely the bank and building society boardrooms and technical experts who have over the years made it so much easier to borrow money.

Why apportion blame at all? Because we dont want this to happen again (at least most of us dont - there are a few who will have made a profit out of this). So finding a root cause to the problem is a good idea if it means we can do something about it.

The difficult bit is then coming up with something which will work. This may come down to the Bank of England or a similar body supervising the banks and other lenders much more closely than they do at present.

Christmas is coming

For accountants, Christmas is traditionally a time of long hours and hard work. Something to do with the January deadline for filing tax returns!

Still, even we need to take some time out, so there will be a few days of rest before coming back and telling all the profitable clients what they need to hand over to the tax man in January.

So if you are reading this before Christmas, have a good holiday.

If you are reading this after Christmas, I trust 2009 will be an even better year for you

Let's be fair to the Chancellor

I have just been looking through the budget press releases again and am reminded about the "simplification" in the capital allowances rules which will produce greater "fairness" to business owners of company cars.

Under the old rules, you had to list every car which cost over £12,000. But at least you would get full tax relief for the cost of the car once you had sold it.

Under the new rules, it is much simpler. All cars go into a single pot rather than being listed separately.

The problem is, you never get your tax relief. I looked some figures up - a £15,000 Mondeo bought four years ago was worth about £3,500 in November. So if you had sold it your real loss over the four years would have been £11,500. Under the new rules, the most tax relief you would receive is £8,850 over the same period. And of course a Mondeo does not necessarily have a low CO2 emission, so the tax relief could be even less - actually a lot less - just £5,160.

Is this fair? Alistair Darling tells us it is, so it must be true.

Can you avoid these tax consequences? Yes, but only by insisting employees buy and fund their own cars, or perhaps by closing your company down every few years (since you would then get the rest of the allowances).

Stock up for Christmas

There will be a lot said about the Chancellor's report today. Will the reduction in VAT have the desired effect or will it just mean a lot of work changing prices for a short period and then putting them all back again in January 2010.

But there is an old-fashioned budget point to note:

• Ciggies and other tobacco products go up in price straight away


• Alcohol prices go up at the weekend.

So if you are planning to buy in something for Christmas it is likely to cost more next week.

Or is this the economic boost that Alistair Darling is aiming for - a quick boost in alcohol sales?

Can we trust HMRC with our data?

This morning's news was talking about the number of computers which might have contained data which were lost by government departments. The question was asked - should we be going ahead with an ID card containing even more information about us if the government cannot be trusted to keep it safe.

This afternoon I received a note referring to an apology from HMRC to taxpayers who have been charged a penalty for failing to submit a payroll form to the Revenue when they had submitted that form using the online service.

Given the difficulties using computer systems, should we ask the government to go back to using pieces of paper and filing cabinets?

Tax doesnt have to be taxing

I have just picked up a press release from the CIoT (Chartered Institute of Taxation). Sorry for borrowing their title, but it does make sense - when the farming and related industries went through crises because of foot and mouth etc, they were given time to pay. The latest crisis and the fact that you cannot borrow even if you want to, should mean similar treatment for cash-strapped businesses.

Tax cut? Change what? VAT?

Yesterday the Chartered Institute of Tax issued a warning to the chancellor Gordon Brown Alistair Darling to be careful about any tax cuts to stimulate the economy out of a downturn. Whilst conservative and liberal spokesmen can say what they like knowing that they can change their minds before there is any chance that their proposals would be implemented, labour must be much more careful.

The warning is simple - get it wrong and you could create problems for the future.

The idea put forward is to reduce the rate of VAT temporarily (which is apparently allowed under European Law).

The problem is that even if it is a very good idea (and a reduction in the VAT rate probably helps those on lower incomes more than those on higher incomes and is therefore a sensible measure when unemployment is rising), it does not have the same political benefit as a 1p cut in income tax, which we all understand.

An alternative suggestion from small businessmen is a reduction in employer’s national insurance - what employers have to pay in addition to gross salaries. This could be a temporary measure as well and could help keep a few people in jobs. But the government is more likely to pay employers something to take on new employees as an obvious way of trying to reduce unemployment

What is the world coming to

Recent news has all seemed to be bad with the stock market falling and more banks facing more difficulties over the "credit crunch" (which to you and me means bad lending decisions by the banks).

And then we look at energy prices and find that petrol is going up yet again and all our fuel bills are going to rise.

So what can we do?

How about looking for some advice on saving money on energy bills? Oh know, the Government has decided to close down energy watch so we will have to find advice from someone else!

So what is to be done? The answer is almost certainly as simple and difficult to implement as applying common sense.

Simple questions like "do I really need that?" "Could I buy a cheaper brand?" are going to be the sensible questions to ask.

For longer term decision making businesses have more of a problem - whether to keep staff ready for the upturn or whether the upturn is so far away that they will not be able to afford staff in the meantime.

You should also make sure you are claiming the reliefs that are available - for example making sure you make the most of tax allowances and claim tax credits, particularly if your income is likely to fall (perhaps because of the tax allowances you are claiming).

And if the worst comes to the worst, you could always ask your accountant.

This accountant would however like to advertise an associated business which may help you save money on your utility bills. So do have a look at the utility warehouse and if you click through from this link you will be supported by agents in your local area.

Service companies - a question too far?

For those of you who have yet to complete your self assessment tax return for the year to April 2008, there is one question which was not very clear the first draft of the form. After discussion, HMRC have now issued some new guidance which explains when the box headed "service companies" needs to be filled in and what number needs to go in there.

A little background - the Government does not like a lot of one man companies since it sees them as a device for reducing tax bills from the high levels paid by sole traders to the more modest levels paid by small companies. Of course the difference is not in the rate of tax but the fact that sole traders have to pay national insurance as well as income tax.

The Government want to know how big the problem is and therefore, as well as asking questions directly related to tax liabilities, they have also added a further question on the form to find out how many people are involved in personal companies and how much they are getting from them.

Unfortunately the question on the tax return form is not very well targeted and will need to be filled in not only by people who run their own small companies but also by share holder / employees of a lot of services companies (Accountants, Lawyers etc).

What will the Government do with the information? Perhaps there will be so much of it that they cannot cope with it. They already have "IR35" on the statue book which will allow them to collect PAYE and NIC from companies instead of the corporation tax which has been paid so far. Of course this is subject to them being able to prove that IR35 does apply to the company concerned.

Also we are awaiting proposals for "income shifting" rules which will come in from 6 April 2009. These are rules to make sure that, in husband and wife companies, any dividends are taxed on the person with a higher rate of tax rather than on the person legally entitled to the dividend under company law.

So be warned - HMRC assure us that they can gather this sort of information on the tax return even though it does not directly relate to the current year’s tax liability - and they may well have a few follow questions to see whether they could ask for a little bit more tax in future.

What are the rules -

1. You are the shareholder in a company

2. That company provides your professional services

3. More than half of the company’s turnover is derived from providing the services of shareholder / employees

This means the rules cannot apply to wholesale and retail operations since the turnover is derived from the sale of goods and not services. It also means that employees who work behind the scenes rather than providing services direct to the company’s customers do not need to disclose anything (since they are not providing any services themselves).

For some more details on what needs to be disclosed look at the Inland Revenue press release at www.hmrc.gov.uk/sa/service-companies-question.htm

Could do better

The BBC report that OFSTED are worried that too much maths is "taught to test". They are complaining that too many maths lessons are designed to help the children pass maths tests rather than helping them to understand the mathematics. Surely this is a fault of the system which measures schools.

But I am much more interested in the judgement of OFSTED that only 40% of lessons are "satisfactory" and satisfactory is not good enough. Perhaps we ought to test OFSTED on their use of English!

The same could also be true about the Treasury Ministers responsible for drafting tax legislation. A recent exchange between the Financial Secretary to the Treasury, the Right Honourable Jane Kennedy, and the Chartered Institute of Taxation also suggests that there could be a misunderstanding of some basic English. The correspondence is about one of the clauses in the latest Finance Act which changes what legislation drafted in 1987 says, with effect from 1987 - in other words backdating the change by some 21 years.

Whilst there is no problem in the Government changing the rules and indeed changes are welcome where they are countering obvious abuse, changing rules which have been in effect for over two decades does not appear to be "proportionate".

The Financial Secretary implies that the rules have always worked as intended and that the comment in HMRC manuals that some people might interpret them differently does not cast any doubt on their effectiveness.

Surely the comment in the manual does tell us that there has always been some doubt about the interpretation of the legislation and the fact that the legislation has now been changed confirms that there must have been some doubt.

The reason for making a change now seems to be something to do with the amount of tax at stake - the value of the transactions which rely on an alternative interpretation of rules is now big enough for the Government to need to do something. Whilst there is no objection to the change being made, back dating that change does seem to be unnecessary if, as the Treasury says, it is no more than a clarification - making clear what the rules actually say.

Perhaps if legislation were drafted more carefully and possible misinterpretations were dealt with immediately, rather than leaving it until the amount of money at stake became important, the tax system would work better.

I am not sure if the Treasury explanation for why they need to back date the change even meets the "satisfactory" standard that OFSTED would want to see.

The summer is coming

Summer is a chance to take some time out and reflect.

Over the last few weeks the major issue seems to have been the credit crunch. There is still more bad news coming from the banks, with the Bradford & Bingley suffering a lack of funds, and mortgages difficult to obtain.

The chancellor’s first budget has proved difficult particularly with his attempts to sort out the 10p rate withdrawal left to him by his predecessor. Over the summer months we are looking forward to this budget becoming law when Her Majesty the Queen is due to sign off the Finance Act. We will then have a chance to review all the changes to the legislation over its course through Parliament and in particular the new capital gains tax rules and the entrepreneur relief which was introduced to reduce the outcry for many smaller businesses expecting the sale of their business to fund a large part of their retirement.

We are also looking forward to the draft rules for taxing families on income from small family businesses. The first draft of these (issued in 2007) was recognised as being too difficult to introduce on 6 April 2008; we can only hope that the next attempt will produce something which small businesses can cope with.

Alistair Darling’s second budget of 2008

After reviewing his options, Alistair Darling has now come up with a plan to avoid most of the backlash from the abolition of the 10p tax rate which his predecessor had introduced in his final budget in 2007.

The changes Mr Darling is proposing to introduce are all tax changes rather than the complicated offsets of tax credits and winter fuel allowances which had originally been suggested.

From that point of view the changes are much simpler to understand but they will still have winners and losers. One wonders whether he might not have been better to simply reinstate the 10p tax rate!

The changes are to increase the personal allowance and to reduce the level at which higher rate tax will become payable. The additional higher rate tax will then offset (to some extent) the reduction in overall tax bills which will result from the increase in the personal allowances.

There are, of course, some practical difficulties. These changes will not come into effect immediately but only later in the tax year. In other words we will all know how much tax we should be paying but will be paying more (or less) until the changes come into effect in the autumn.

So much for "simplifying" the tax system by abolishing a rate of tax!

The poor banks?

From time to time every business suffers a set back and the banks appear to have suffered two major blows in recent months. Not only have they suffered from the "credit crunch" which is said to have started in the USA, but now they cannot borrow money to be able to lend on to us as mortgages.

The result is that mortgage rates are going up even when the Bank of England base rate is coming down.

There is, of course, another way of looking at this. We could look at the banks and say that they have brought this crisis on themselves. One recent comment suggests that this may well be the case. The comment was along the lines of "they need to increase rates to build their reserves back up again because recent business has not been profitable". If I have understood this correctly (and I may not have done) this suggests that mortgages were being offered at such a low rate that the bank were only covering the interest cost they were paying themselves rather than making much profit.

As Alan Sugar said to one of the apprentices, sometimes you need to turn down a sale because it is not good for the business as a whole. Higher turnover is not the only measure of success of a business.

Husband and Wife companies

One change which Alistair Darling threatened to introduce but has postponed until April 2009 is an additional tax on husband and wife businesses. The tax authorities were incensed by the way in which Mr and Mrs Jones had set up their family company "Arctic Systems Limited". The problem was not that there was a family company but that the Revenue thought that Mr Jones had earned all the profits and therefore should be taxed on all of the dividends (or almost all of the dividends) coming out of the company whereas the shares were owned equally by Mr and Mrs Jones and therefore she had an equal share. The case went through the courts and the conclusion last year was that what Mr and Mrs Jones did was perfectly legitimate and that they should be taxed in accordance with their legal entitlement to dividends paid by the company.

As a result, draft legislation was produced at the end of 2007 to try and make sure that circumstances such as the Jones' would give rise to higher tax liabilities.

The problem with the draft legislation was that it was so simple that it would catch almost any family business and would open those businesses up to an investigation by the tax authorities which would involve arguments about how much each member of the family had contributed to the profits of the company and therefore their entitlement to their share of those profits. We could foresee an enormous amount of paperwork simply justifying the dividends and salaries paid to husbands and wives. And the legislation was sufficiently widely drawn that it would not just apply to companies but also to any other form of family business, such as a partnership.

Given the stated importance of family businesses to the UK economy it seems a little strange that tax and administrative burdens are being placed on them when they are working hard (and sometimes struggling) to make a profit. The situation for the wealthy however is very different.

Some people may remember when households were taxed as a unit on the husband - so that he would be taxable on any income his wife might receive. Ever since the rules were changed so that husbands and wives are taxed separately, there has been a simple tax planning opportunity for households to make sure that the spouse with the lower income receives any passive income (income from savings).

The tax authority recognises that this is perfectly legal and correct.

It therefore seems strange that the Chancellor is now proposing legislation which says that the very wealthy are entitled to arrange their investments to reduce the overall tax burden but the family business will be penalised for doing exactly the same thing.

Presumably the difference is there are not that many families with sufficient wealth to make a difference to the exchequer whereas there are lots of family businesses for the tax authorities to have a go at.

Happy New Tax Year

A new tax year a new tax form.

As part of its updating of the self assessment system, HMRC have produced a new self assessment form. This form is designed to be scanned into the Revenue computers rather than the old fashioned method of someone reading and typing the relevant numbers in. Unfortunately this means that the form is now designed with computers in mind, instead of human beings and is going to be much more difficult to complete - you must get the figures in the boxes or it will be rejected.

The alternative to hand writing one of these new forms is to complete the information online and this is definitely the way the tax authorities want us to move. There are a new set of tax return deadlines for this year which will require some tax payers to submit their hand written returns much earlier than they are used to. However the online form can still be submitted at any time up to 31 January.

I am pleased to say that our own tax software works exactly the same as it used to - we put information into our system under headings that we can understand and which have not changed from previous years and leave the software to decide which page to print the numbers out on. For tax payers who complete returns by hand, they are going to have to learn their way around the new form which is very different order to the old one.

April Fools Day

1 April is the day on which we renew our insurances against the costs of tax investigations by HMRC. CCH (the company we are insured through) have produced a 6 minute video clip to help clients appreciate the value of this insurance and it can be seen at http://www.dragontree.tv/Video/gk5gj9/CCH/3rdpartyplayer3.html.

Tax investigations have been a part of the UK tax system for many many years and can be inflicted on innocent tax payers as well as those who are trying to avoid paying all the taxes that are due.

Our own experience has included a case involving a whole year persuading the Inland Revenue that the motor expenses claimed by our client were properly deductible.

Budget Day

Alistair Darling has released his first budget on the world (or should we just say Britain) and it has ended up being a rather dull affair. There is plenty of detail behind the budget, but we already knew what the major changes were going to be because he told us last Autumn.

Despite a great deal of lobbying he has decided to introduce “fat cat” taxes to Britain. “Non-doms” will now have to pay £30,000 for the privilege of keeping their world wide assets a secret from the UK tax authorities. For substantially wealthy people living in the UK with a large fortune abroad, this may be a small price to pay. The legislation is not going to bestraight forward - (but then the existing legislation is not that easy either).

His other main fat cat tax is to charge all capital gains at 18%. This appears to have been aimed at those successful entrepreneurs who managed to buy or set up a business and then sell it on within a few years at a substantial profit. For those less successful entrepreneurs (and that means those whose gains are less than £1m) the previous tax rate of 10% still remains.

To achieve this tax on entrepreneurs, Alistair Darling has completely rewritten the capital gains tax rules which means that there will be both winners and losers.

The winners are those who would otherwise have paid capital gains tax at 40% and will now pay it at the new flat rate 18%. The losers will be those who would have paid tax at a lower rate because they did not have sufficient other income and also those who have owned assets for a substantial period of time who will lose out on the inflation reliefs (indexation and taper relief) which are being abolished from 6 April.