A Business Accounts & Taxation Service
For Small & Medium Sized Enterprises
Home pageInformation on some recent tax enquiriesCommon questionshow to contact usRecruitment


Common Questions: (click links)
Budget 2007
Incorporation or Self-Employment
Working from home
Audit Exemption Services for Qualifying Limited Companies
Tax Credits
Reporting Money Laundering
Keeping Business Records
Useful downloads


Budget 2007- Key Measures
Income tax:
Major simplification measures include:

* 10% starting rate band to be abolished from 2008
* basic tax rate cut from 22% to 20% by 2008
* Top rate band of income tax to rise to £43,000 by 2009
* Confirmation of the Carter proposal that the SA enquiry window will be aligned with the filing date.

The Chancellor proposes to reduce the basic rate of income tax to 20% with effect from 2008/9. It is also proposed that the starting rate be removed for earned income and pensions but not for savings or capital gains.

The upper earnings limited for employees Class 1 national insurance and the Class 4 national insurance upper profits limit for 2008/9 will be increased by £75 per week above indexation.

Income Tax Rates  
   
   
2007/08
2006/07
   
Starting rate band to
 
£2,230
£2,150
   
Tax rate
 
10%
10%
   
Basic rate band - next
 
£32,370
£31,150
   
Non-savings rate
 
22%
22%
   
Savings rate
 
20%
20%
   
 
 
 
   
UK dividend rate
10%
10%
   
Higher rate - income over
£34,600
£33,300
   
Tax rate excluding UK dividends
40%
40%
   
UK dividend rate
32.5%
32.5%
   
   
 
 
   
Personal Allowances
(Ages are as at the end of the tax year)
 
   
Allowances that reduce taxable income  
£
£
   
Personal allowance
under 65
 
5,225
5,035
   
65 to 74*
 
7,550
7,280
   
75 and over*
 
7,690
7,420
   
   
   
Allowances that reduce tax
 
   
Married couple's allowance (MCA)  
£
£
   
Age of elder spouse
73 to 74
 
628.50
606.50
   
75 and over*
 
636.50
613.50
   
minimum
 
244.00
235.00
   
   
   
National insurance
Upper earnings limit raised by £75 by 2008 and aligned with higher rate threshold by 2009
 
   
   
National Insurance Contributions  
   
Class 1 (not contracted out)
 
Employer
Employee
   
Lower earnings limit
 
£87
   
Payable on weekly earnings
£100.01 - £670
 
12.8%
11%
   
Over £670
 
12.8%
1%
   
Men 65 and over and
women 60 and over
 
As above
NIL
   
Employees' contracted-out rebate
 
1.6%
   
Married women's reduced rate between £100 and £670
 
4.85%
   
Employers' contracted-out rebate, salary-related schemes
 
3.7%
   
Employers' contracted-out rebate, money purchase schemes
 
1.4%
   
 
   
Class 1A (on relevant benefits)
 
12.8%
NIL
   
Class 1B (on PAYE settlement arrangement)
 
12.8%
   
 
   
Class 2 (Self employed)
 
£2.20 per week
   
Class 2 contributions - share fishermen
 
£2.85 per week
   
Class 2 contributions - volunteer development workers
 
£4.35 per week
   
Limit of net earnings for exception
 
£4,635 per annum
   
 
   
Class 3 (Voluntary)
 
£7.80 per week
   
 
   
Class 4* (Self employed on profits)
 
   
£5,225 to £34,840
 
8%
   
Excess over £34,840
 
1%
   
*Exemption applies if state retirement age was reached by 6 April 2007.
 
 
   
Maximum contributions
 
   
Class 1 or Class 1/2
 
£3,323.10 + 1% of earnings over £670
 
Class 4 limiting amount
 
£2,485.80 + 1% of profits over £34,840 a year
 
   
   
  

For those earning between £87 per week and £670 per week, employers receive a rebate of 1.4% on contracted out money purchase schemes or 3.7% on contracted out final salary schemes, and employees, a rebate of 1.6% for either scheme.

For children under 16, men over 65 and women over 60 there are no national insurance contributions payable, but employers' contributions remain payable.

 
   
   
   
   

Company tax          
Tax-motivated incorporation:
* The small company corporation tax rate will be raised in stages commencing with a 20% rate in 2007, 21% in 2008 and 22% by 2009.
* Dividends: "The government will continue to monitor the level and extent to which labour income is extracted by dividends"
Corporation tax rates and bands          
Financial Year to
  31 March 2008 31 March 2007    
Taxable Profits
         
First £300,000
         
Next £1,200,000
         
Over £1,500,000
         
Small companies marginal relief fraction:
         
£300,000 - £1,500,000
  1/40 11/400    

Managed service companies (MSCs)
     * Proposed provisions to apply to scheme promoters in order to target the legislation more specifically
     * PAYE to be applied to all payments received by individuals on or after 6 April 2007, as announced in PBR. NI will be due from date to be specified when Finance Bill receives Royal Assent
     * Approach to the proposed transfer of debts legislation to be modified and take effect from January 2008
     * Travel expenses to be restricted for those engaged via MSCs as previously announced.
      
      Mainstream corporation tax
     * The mainstream rate of corporation tax will be cut from April 2008 to 28%.
      

Capital allowances
Major modernisation of capital allowances:
* Allowances on long life assets to increase from 6% to 10% from 2008

* Intregal fixtures to become as long life assets and subject to 10% allowance from 2008, subject to consultation

* Phased removal of IBAs and ABAs by 2011, but balancing adjustments will be withdrawn from today.

* An annual investment allowance of £50k p.a. to encourage small business to invest to grow from 2008, following consultation, to replace first year allowances (FYA)

* 50% FYA to remain in place for 2007/08

* Reducing the short life writing down allowance from 25%to 20%

* From 2008/09 a payable tax credit for losses incurred on "green technologies" - subject to consultation on proposed design and scope

* The business premises renovation allowance announced in 2005 will apply to all expenditure incurred on or after 11th April 2007 to encourage renovation and conversion of vacant business properties.
 
Research and development
* 2008/09 (subject to state aid approval) the enhanced deduction for small companies to increase from 150% to 175%

* Payable credit to remain broadly the same

* Large company deduction increases from 125% to 135%
 
Capital gains tax
The annual exemption to be raised to £9,200
 
Inheritance tax
The threshold is to be raised from 3285,000 to £350,000 in 2010/11.
 
Pre-owned asset tax
New legislation is proposed to allow a late election for IHT treatment to apply instead of the pre-owned asset regime. This means that if you have missed making an election under the pre-owned asset rules you can apply for IHT treatment instead.
 
Stamp duty land tax (SDLT)
* Payment of SDLT will no longer be due when a land return is submitted, but on the return's due date instead. The measure will apply to transactions taking place on or after the date that the Finance Bill receives Royal Assent

* Proposals not to link SDLT rates in certain exchanges of property between connect persons - the rate will apply to each of the properties instead

* A general SDLT relief for disposal of surplus school land

* Relief from SDLT for new zero carbon homes to apply from 1st October 2007.

* Relief from SDLT for companies who under go certain reconstructions and acquisitions when overall share ownership remains unchanged. A company which purchases its own shares will no longer be regarded as a shareholder for the purposes of the overall ownership test. This would seem to apply to few transactions in practice.
 
Investments
*Change in recognition of stock exchanges and definition of "listed" for tax purposes.

*Increasing ISAs limit to £3,600 in April 2008

*A non-repayable tax credit to apply to foreign dividends
 
Foreign property ownership

*Changes to legislation in 2008 to ensure that individuals purchasing property overseas via a company will not suffer a benefits charage as "shadow directors".

*Transitional rules to ensure that individuals will not be caught prior to changes

 
Trusts
Certain changes to amend trust reform measures.
 
VAT
*Changes to turnover thresholds for registration
*Rate reductions to 5% for a variety of environmentally sustainable improvements and nicotine patches
*Amendments following ECJ judgements
 
Penalties for incorrect returns
New provisions set for 2008 in line with the consultation proposals in "Powers, deterrents and safeguards" to penalise according to the amount of tax understated and taxpayer behaviour.
 
Anti-avoidance measures
Measures to target specific schemes that HMRC have become aware of from DOTAS reporting - capital loss and gain buying, repros, sale of lessor companies etc.
 
Levies
*Landfill tax will rise by £8 each year.
*Aggregate levy to rise for the first time
*Climate change levy to increase
 

Employment
*National minimum wage to increase
*£2000 training help for training certain new employees

 
Cars
*Fuel duty increases, by increasing top bands, deferred until October
*Road tax from £220 to £400 on gas guzzling cars
*Extending bio-fuels incentives/"green" motoring.
 
Planning taxes and reliefs
*No announcements made in connection with the planning gain supplement
*A new consultations on tax relief for brownfield land regeneration and remediation of waste sites
 
Business property
Empty commercial property will no longer receive reduced business rates
 
Socialising
*Duty frozen on spirits, but raises 1p on beer, 5p on a bottle of still wine.
*Consultation announced on gift aid
*New fund to encourage local organisations
 
Welfare
*Increase in rate of Working and child tax credits, so that NMW will be effectively worth £7.70 p/hr
*Increase lone parents "in-work" bonus
*VAT reduction for older people's improvements
*New shared equity scheme to promote home ownership
*Child benefit - to be raised by 15% (£17.45 to £20) by 2010
*Tax credits will wipe out tax liabilities for working couples with children and an income of up to £440 per week
*Raising age allowances and married allowances for pensions
*Pension credit guarantee top increase
 
Insurance premium tax
A review of the tax is announced
 
Red tape removal
A new "risk based" approach to employment tribunals to streamline the process for employers
 
*** END OF INCOME TAX SECTION ***

 

INCORPORATION OR SELF-EMPLOYMENT ?
Overview - The Budget of 2002 pushed the tax savings balance in favour of the legal shelter of incorporation over other the other forms of businesses such as sole trader, partnership, or self employed individuals in self employment. However, The Chancellor of The Exchequer, attempted to equalise the situation in the 2004 Budget. By 2006 the taxation advantages had all but gone.
Other matters to consider are the compliance costs of operating a limited company. However this is not putting people off incorporation. According to Inland Revenue's Working Together publication 35,000 new limited companies per month were being formed by the start of 2004. Why?

Well here are a few reasons:
The business is legally sheltered in many ways, as a limited company, especially if it fails, your exposure is not one of personal liability, subject to guarantees given and other undertakings in law assumed to be observed by companies directors like; preparing financial accounts; employment rights; and statutory filing duties ; The relative ease of selling it on as a going concern or retaining some sort of involvement in it; The introduction of audit exemption; Converting one's un-incorporated business into a limited can create profit from the disposal. Subject to the Capital Gains Tax rules of course and agreement on the valuation used for a disposal; And finally; A family company must assist families with pension planning and succession issues. Inheritance Tax Planning with reference to the issued share capital is also simplified.

The Pros & Cons of Incorporation:

Possible advantages of incorporation
* Incorporation normally provides limited liability. If a shareholder has paid fully for his or her shares, he or she cannot normally be required to invest any more in the company. Although companies with bank borrowings often have to provide directors' personal guarantees, the protection of limited liability will generally apply in respect of liabilities to other creditors.
* A company enjoys legal continuity - it can own property, sue and be sued.
* Effective ownership or part ownership of the business may be readily transferred, subject to the provisions of the Articles of Association. Whilst such transfers may well be covered by inheritance tax business property relief, the capital gains tax position needs careful review.
* Normally a bank can take extra security by means of a 'floating charge' over the assets of the company, and this will increase the amount that can be borrowed compared with a sole trader or partnership.
* Shareholders can be paid in dividends (currently free of NICs) but strict company law formalities must be observed.
*The National Minimum Wage does not apply to directors (as they are office holders) unless they have a Contract of Employment.
* Growing businesses can re-invest profits after an corporation tax charge of 20% (if profits are below £300,000), compared with 40% income tax for higher-rate tax paying sole traders and partners together with a 1% class 4 National Insurance charge on profits over £34,840.
* Accumulated funds could be withdrawn on a sale of shares with the benefit of capital gains tax (CGT) business taper relief which reduces the effective CGT rate to 10% once shares have been held for two years.
* Corporate status is sometimes thought to add to the credibility or commercial respectability of the business.
* A company can establish a registered pension scheme, which may provide greater benefits than self-employed schemes.
* Employees may, with adequate safeguards, be offered an opportunity to buy their own stake in the business, reflecting their commitment and importance to the company.
* The liability of executors acting for deceased shareholders, or of trustees, is clearly defined.

Potential disadvantages of incorporation
* Formation of a company incurs legal and administrative costs, which may include new accounting records and possibly systems, new PAYE system, new business tax reference, new VAT registration, new stationery etc.
* Customers, suppliers and service providers must be informed of a change to limited company status.
* The tax position arising on the incorporation of an existing business needs careful analysis. It may be possible to defer capitals gains tax on the transfer of goodwill etc, but the timing and effect of cessation on income tax must be closely planned.
* Annual Accounts must comply with the requirements of the 1985 Companies Act. In most cases, a statutory audit is not required for companies with an annual turnover of £5.6 million or less. The statutory audit involves work over and above that which is normally carried out for a sole trader or partnership.
* A company's accounts must be filed on public view with the Registrar of Companies. An Annual Return must also be submitted to the Registrar of Companies together with a filing fee of £30 (£15 if filed online).
* The company will be taxed on its profits of each accounting period, as opposed to the income tax 'current year' basis for sole traders and partnerships. A company must file a corporation tax return.
* Funds withdrawn from a company normally give rise to tax liabilities, whereas owners of unincorporated businesses can generally introduce and withdraw cash without tax implications.
* Remuneration for directors is subject to both employee's and employer's National Insurance liabilities - currently up to 23.8%. For example on a remuneration of £12,000 there is a NI liability of £1,658. Both the company and its directors are liable to NIC on many benefits in kind, and a form P11D must be prepared for each director, whatever the level of earnings. This can lead to extra work in filing a tax claim for reimbursed expenses etc for which individual tax relief is available.
* Tax on directors' remuneration paid monthly is payable on the 19th of the following month (22nd for electronic payment) through the PAYE system, and corporation tax is payable nine months after the end of a company's accounting period. For a sole trader or partnership, tax is generally paid by instalments on 31 January and 31 July on the current year basis. The 'credit period' depends upon the choice of accounting date, and you should contact us for further advice on this.
* The 'IR35' legislation relating to personal service companies could be relevant, especially for IT contractors and other service providers who work for only one customer.
* Companies pay tax on capital gains at their corporation tax rate (19% for profits up to £300,000). In a company, a capital gain is reflected in the value of its shares and if these are sold a "double charge" to capital gains tax can arise. This may be avoided if assets that are likely to increase in value are owned either outside the company or within a self-administered pension scheme, or if a company is sold complete with its assets
* An individual has greater flexibility in dealing with trading losses.
* A company director is more at risk of criminal or civil penalty proceedings, eg for late filing of accounts or for breaching the insolvency rules.

WORKING FROM HOME
The Self Employed Home worker - These claims amount to both;
 
a) The space set aside to operate a business from home. 
 
b) The 'time basis' here. This time given over to running the business from home is a consideration.
 
It is particularly important to highlight the basis of the claim to the Inspector in the first year of the claim. The allowance represents something of an unwritten concession by Inland Revenue and as such should not be excessive. Anything over £104 p.a. is open to being interpreted as excessive!
 
Contact us for further advice. 

 
Employee Home workers - This area of economic activity continues to evolve due to computers, fax machines, and answering machines etc being common place in the home nowadays.
Either;
The employer may reimburse a proportion of home expenses and make a payroll adjustment; or
The employee may wish to claim all estimated expenses wholly, exclusively and 'necessarily' incurred by way of home working.
Note the use of the word necessarily. In other words the contract of employment must show that this home working is completely necessary requirement as part of the employer's business operations. Most claims are also restricted to heating and lighting costs. Inland Revenue interpret the legislation applying here very strictly.

As always contact us first before making a home worker claim.

Update:
 
HM Revenue & Customs updated their own guidance to Inspectors about using your own home for business purposes. (January 2007).  
 
Fixed costs and running costs
are now allowable either on the time given over to running the business, (usage), from home or as a proportion of floor space i.e. rooms used. The basis used is important as is the number of homes you own etc etc........
 
There may be capital gains tax implications on the sale of the house if claims are not subjected to some planning before hand - the due dillegence.
 
There is some debate at the moment whether or not retrospective claims for use of home as business should be re-submitted. Certainly this will have a bearing on any future tax enquiries where the return was submitted before the new guidance became common knowledge.



AUDIT EXEMPTION SERVICES (FOR QUALIFYING) LIMITED COMPANIES
Section 249A of the Companies Act 1985 provides that companies (with some exceptions at s249B) with a turnover below a certain level are not required to have a statutory audit of their accounts. The audit exemption threshold was increased in May 2000 (applying to financial periods ending on or after 28 July 2000) when it was raised from £350,000 to £1 million. This has been recently raised to £5.6m subject to statutory formalities in the House. Audit exemption is now therefore available to most incorporated businesses with turnover under £1m and/or on a transitional basis to those with £5.6m turnover and under. Subject to both qualifying as a small company by statute and providing the services normally exempt from a statutory audit.

Post 31st March 2004 , the turnover threshold is raised to £5.6m, if your financial accounting period ends after this date. This is in line with the EU's definition of a small company. This change takes place from January 2004 and is again expected to apply to all accounting periods ending on or after 31 March 2004 by statutory instrument, in line with UK acceptance of existing EU Law. The following EU company maxima was adopted by the UK on 13 May 2003 by acceptance of a binding EU Council Directive. These definitions of company size were made UK Company Law as of 15 May 2003 and led in no small part to the recent raising of the audit threshold:
Small Company Turnover £5.6* Balance Sheet Total £2.8m* Number of Employees 50*
Medium Company Turnover £22.8m* Balance Sheet Total £11.4m* Number of Employees 250 *

*Not more than
Effectively, most small companies may now qualify to have their financial accounts exempt from statutory audit as of January 2004 on a transitional basis.It will most certainly be the case for all qualifying companies with accounting periods ending in corporation tax year 2004/05. As usual please seek our professional advice, via the contacts given on this sites home page, before undertaking your company's audit exemption reports. Just referring to the general overview given here will not be enough. An audit performed by a Registered Auditor can also be legally more expedient if not just a statutory requirement.

TAX CREDITS
Around 1991 Independent taxation of spouses was introduced. By 6 April 2003 this was theoretically history but technically still the law of the land because of the governments tinkering with the concept of Tax Credits. Tax Credit Form 600 gives credit to people on low earnings and is not really dependent on tax paid or whether you are on state benefits or not in the case of Child Tax credit. It initially attempts to link all spouses/households to the children in their care in a parenting capacity. It attempts to make parents responsible for their offspring all their working lives and beyond by linking them up in the tax system. This should gradually help to cut taxpayers costs for state contributions made for errant parents undetected to date by the not too successful Child Support Agency. Most Child Tax Credits are paid directly into the female spouse's bank account. Another can be nominated but only in exceptional circumstances.

It you qualify for Child Tax Credit then you may get certain Child Care costs. A top up in your income in the form of Working Families Tax credit is also possible to guarantee a minimum standard of living. WFTC is given to all in work who qualify whether they are parenting, cohabiting or not. Most people now have at least 1 tax return per year due to the introduction of Tax Credits. You have 3 months to file one from April 5 each year before you start losing some of your entitlement.

If your accountant is not professionally appointed to complete your TC600 Form then it is your own responsibility to file it. Many accountants do not want to get involved because it is all covered by Social Security Legislation and outwith their sphere of competence. It also pushes up practice running costs and therefore chargeable hours to clients. It also has nothing to do with reducing your income tax at the tax collectors office. It is to be hoped that both the SA Tax Return and the TC600 Return Form are combined into one simple exercise for the self-employed and company directors etc, at some point in the future. At present it looks rather like you are being over taxed just to claim it back via the conceptually flawed misnomer known as the Tax Credits regime TC600 Form.

REPORTING MONEY LAUNDERING
Since 1 March 2004 the accounting profession and those holding themselves out to be accountants, is regulated by the Proceeds Of Crime Act 2003. Basically clients are now no longer theoretically protected by the professional ethic known as 'client confidentiality' in the accounting profession. There are procedures to follow when an accountant in practice has suspicion or knowledge about a client who may be involved in criminal activities due to the financial transactions they have enter into. It is not a simple 'de minimus' matter either. All transactions are reportable- where there is a suspicion be it 1p or £1,000,000,000! High value transactions of around £9,000 plus are automatically reportable in certain circumstances.

Basically the authorities are just following the money! An old tactic used to bring notorious American gangsters to justice around the Prohibition period. Since this is all still in its infancy it remains to be seen whether it will be the success, we all must hope for, if it can cut back on the criminal fraternity stealing this societies wealth. Policing clients is not as common as one may think and it will be business as usual for the majority.

KEEPING BUSINESS RECORDS
You must keep all business books and records for 6 years after the date they were normally due to be filed on time at Inland Revenue. 8 years for PAYE. Those who do not are leaving themselves wide open to spurious tax 'discovery' assessments), by an enquiring Tax Inspector, as well as avoidable personal grief. Business records can vary from the individuals 'shoe box' accounts to the requirements of a limited companies financial record keeping system under company law. It really is up to you to decide what's appropriate for your enterprise. Inland Revenue will expect records to be drawn up competently, whether you do your own return or not. Recognition of revenue and expenses must be both recorded carefully, matched on a wholly and exclusive basis, and then more usually incurred 'necessarily' in the course of a trade/enterprise.

'Cash businesses' are common amongst 'cash & carry' small traders and it is not illegal to conduct such a business so. However, where internal controls are weak, such as banking, and sales recording, an Inspector will immediately seek to prove that there is hidden or suppressed income because of the invisible nature of dealing in cash. Cash businesses run the risk of a full enquiry or even an Inland Revenue 'fishing expedition' into all their business and personal affairs. Not for nothing do Inland Revenue treat cash business record keeping systems with a great deal of cynicism. However many innocent traders get tarred with the same brush as those in the black economy. Do get a business bank account for all your business activity and resist using a personal or joint account. Keep your business spending separate from your personal or joint household/living bank accounts. For a full book-keeping service suitable to your business operations we can advise.

 

Please Note:
All information given in this section should not be taken as our advice applying to a particular situation that we have not first advised you upon. We therefore cannot accept any liability resulting on your reliance of this information, as fact, when it is applied to a tax, or accounting matter that we have not professionally advised you upon

Albasas Accountants Home Page Tax Enquiries Common Tax Questions Contact AlbasasAccountants Accountant Jobs Finance

 

Web design by Business Network (Scotland)