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.