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Newsletter December 2012

Welcome to this month's newsletter,

This month's articles provide ground rules for ensuring you get tax relief for the cost of your Christmas party, an update on the relaunched Business Record Check campaign, details of HMRC initiative to target the rag trade and alcohol industry, and a warning for Swiss bank account holders.

George Osborne delivered his Autumn Statement yesterday and it looks as if there continue to be challenging times ahead. Even so, we wish all of our readers a very happy Christmas and prosperous New Year and sincerely hope that you manage to take a well earned rest over the holiday period.

Our next newsletter will be published 9 January 2013.

UKTW Autumn Statement

Confirming what we all knew to be the case, George Osborne advised in his Autumn Statement that the UK economy is forecast to shrink in 2012. The actual percentage rate is small, just 0.1%. In the subsequent 5 years to 2016-17 we are advised that the UK should achieve modest growth as the present factors holding back the economy fall away. Next year, growth is forecast to be 1.2% rising to 2.8% in the year 2017.

The changes announced in the Autumn Statement are fiscally neutral - any savings are matched by new expenditures.

There are a number of initiatives to be implemented from April 2013 that are aimed to reduce loss of tax revenue due to tax evasion. These are explained in more detail in the notes that follow together with details of other expected tax changes.

Personal tax and benefits

  1. The basic Personal Allowance, due to anyone born after 6 April 1948, will increase in April 2013 to £9,440 (2012-13 £8,105). The increase in the Personal Allowance is £235 more than expected and will save basic rate tax payers up to £267 in a full tax year.
  2. For those born between 6 April 1938 and 5 April 1948 the Personal Allowance is unchanged at £10,500 from April 2013. The equivalent allowance for those born before 5 April 1938 is unchanged at £10,660 from April 2013. The income limit, above which the increased allowance for the elderly are reduced, is increased to £26,100 (2012-13 £25,400) from April 2013.
  3. The basic rate of Income Tax remains at 20% and will apply to the first £32,010 of taxable income (2012-13 £34,370). If your taxable income exceeds £32,010 you will pay tax at the higher rate of 40% until your income exceeds £150,000 when the additional rate of 45% kicks in.
  4. The threshold for the 40% rate of Income Tax is to rise by 1% in 2014 and 2015 from £41,450 to £41,865 and then £42,285.
  5. Capital Gains Tax annual exempt amount will be increased by 1% in 2014-15 and a further 1% in 2015-16 reaching £11,100.
  6. Child Benefit rates are frozen for 2013-14 and will increase by 1% in 2014-15 and 2015-16.
  7. Tax credits disability elements are increased in line with Consumer Price Index (CPI). Other elements are either frozen or will increase by 1% in 2013-14. All rates are increased by 1% in 2014-15 and 2015-16.
  8. Guardian's Allowance is increased in 2013-14 in line with the CPI.
  9. State pensions will increase by 2.5% to £110.15 per week from April 2013.
  10. For 2013-14, there are no changes to the percentage rate of contribution for Class 1 and Class 4 National Insurance Contributions (NICs) but there are changes to all of the thresholds and limits.

Pensions Savings - tax relief

The expected decrease in tax relief on pension contributions was confirmed. However, the change will not be applied until 6 April 2014. For the tax year 2014-15 onwards:

  1. The annual allowance for pensions tax relieved savings will be reduced from £50,000 to £40,000.
  2. The standard lifetime allowance for pensions tax relieved savings will be reduced from £1.5 million to £1.25 million.
  3. A transitional 'fixed protection' regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance.

The lifetime allowance is the maximum amount of pension contributions you can make that benefit from tax relief. If the lifetime allowance is exceeded, a lifetime allowance charge is levied on the excess. This is presently 55% if excess is paid as a lump sum and 25% is paid as a taxable pension.

Legislation will be introduced in Finance Bill 2013 to make these changes and will be published in draft on 11 December 2012.

This is one of the few measures introduced to increase the tax take from higher income earners.

Business tax

Corporation Tax

In addition to the Budget 2012 announcement, the main Corporation Tax (CT) rate for Financial Year 2014 will be reduced by a further 1% to 21%. As already announced, the main CT rate for Financial Year 2013 is 23% and the Small Profit rate is 20%.

Annual Investment Allowance

In the hope that businesses will increase investment, the Annual Investment Allowance will be increased from £25,000 to £250,000 per annum for a 2 year period commencing 1 January 2013. This is a tenfold increase. The Annual Investment Allowance provides a 100% write off for purchases of qualifying equipment. This could include plant, computer equipment, furniture, vans and other fixtures and fittings. For profitable, self-employed business people, who need to invest in this type of asset, tax savings could be considerable as the relief will impact their higher and additional rate liabilities.

Simplified tax scheme for small unincorporated businesses

A simpler Income Tax scheme for small unincorporated businesses will be introduced for the tax year 2013-14 to allow:

  1. Eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. In essence, they will not have to distinguish between revenue and capital expenditure.
  2. All unincorporated businesses will be able to choose to deduct certain expenses on a flat rate basis.

Small Business Rate Relief

The present Small Business Rate Relief Scheme is to be extended for a further year to April 2014.

Other Taxes - Fuel Duty, Air Passenger Duty (APD), Inheritance Tax (IHT)

  1. In a move that will delight motorists the 3.02 pence per litre Fuel Duty increase that was due to take effect on 1 January 2013 will be cancelled and the increase that was planned for 1 April 2013 will be deferred until 1 September 2013.
  2. From the 1 April 2013 APD rates will increase based on the Retail Price Index increase for September 2012.
  3. The IHT nil-rate band was frozen at Budget 2010 at its current level of £325,000 until April 2015. For 2015-16 the band will be increased by 1% rounded up to £329,000.

Anti-Avoidance and tax evasion

The Government accepted the recommendations of the Aaronson report that a General Anti-Abuse Rule targeted at artificial and abusive tax avoidance schemes would improve the UK's ability to tackle tax avoidance. The Government has committed to bringing forward legislation in Finance Bill 2013 to enact this measure.

Earlier this week, the Chancellor of the Exchequer and the Chief Secretary to the Treasury announced that the Government is investing a further £77 million in HMRC to increase revenues raised from tackling tax avoidance and evasion.

This investment will be used to:

  1. Accelerate resolution of avoidance schemes.
  2. Expand HMRC's Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million.
  3. Increase specialist resources to tackle offshore evasion and avoidance of inheritance tax.
  4. Improve HMRC's risking technology, including increased use of third party data.

Additionally, five further measures have been announced in a Written Ministerial Statement. They are effective from 5 December 2012 and cover:

  1. Foreign bank levies - there are no longer allowable deductions for Income Tax or Corporation Tax purposes.
  2. Tax mismatch scheme - which reduces Corporation Tax liability by artificial tax treatment of loans or derivatives.
  3. Property return swaps - which convert capital losses into income losses.
  4. Manufactured payments - schemes involving stock lending arrangements.
  5. Payments of patent royalties - relief for non-trade payments to be abolished.

Other Announcements

Individual Savings Account (ISAs)

From 6 April 2013 the overall limit is increased to £11,520 (2012-13 £11,280), of which £5,760 can be invested in cash (2012-13 £5,640).

The junior ISA is increased to £3,720 (2012-13 £3,600).

Fuel benefit charge

From 6 April 2013 the car fuel benefit multiplier is increased to £21,100 (2012-13 £20,200). This figure is used to tax company car users whose employers pay for their private petrol usage. The charge can be legitimately avoided if the employee reimburses the cost of private fuel used. The equivalent van fuel benefit charge is increased from the same date to £564 (2012-13 £550). Reducing tax credit error, fraud and debt

A number of initiatives have been announced aimed at reducing the levels of tax credit error and fraud and recovering tax credit debt. They include:

  1. Requiring claimants to provide more evidence to support certain claims for tax credits for children and childcare.
  2. Trialling the use of debt collection agencies to collect tax credit debt.
  3. The announcement of legislative changes to enable the collection of existing tax credit debt from a new tax credit award.

Recovering debt

New initiatives aimed at recovering debt owed to central government include:

  1. Trials and pilots with the Department of Work & Pensions and Debt Collection Agencies.
  2. An increase to HMRC's debt management resource for the rest of this year and for 2013-14.

Digital services

Over the next three years, HMRC will significantly expand the range of digital services to include:

  1. 20 million taxpayers receiving a Personal Tax Statement, showing how their tax is calculated and spent by government, and
  2. A more joined-up digital experience for taxpayers providing an overview of their HMRC 'account'. This will include: links to all their online transactions, a facility for accessing tailored help and asking HMRC questions.

Swiss bank account holders beware

UK residents with Swiss bank accounts should be aware that new taxation arrangements are scheduled to come into force on 1 January 2013.

The new tax agreement between the UK and Switzerland means that account holders must either provide full details to HM Revenue & Customs (HMRC) or pay over a proportion of the money in their account and a future withholding tax.

Jennie Granger, HMRC Director General, Enforcement and Compliance, said:

"Swiss banks or accountants are writing to people affected by the agreement. Some may be asking customers to close their accounts. If this happens, UK residents must ensure that any outstanding tax liabilities are paid. Anyone in these circumstances is strongly advised to contact HMRC as soon as possible."

The agreement includes a withholding tax to deal with the tax on income and gains. Rates currently range from 27 per cent on capital gains up to a maximum of 48 per cent for interest or other non-dividend income. Where the payment option is chosen, any past liability to specified taxes will be dealt with by paying a one-off charge of up to 41 per cent of the total value of the account.

Merry Christmas...

The cost of a staff party or other annual entertainment is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of unincorporated organisations.

Also, as long as the criteria below are followed, there will be no taxable benefit charged to employees:

  1. The event must be open to all employees at a particular location.
  2. An annual Christmas party or other annual event offered to staff generally are not taxable on those attending, provided that the average cost per head of the functions does not exceed £150 p.a.. The guests of staff attending are included in the head count when computing the cost per head attending.
  3. All costs must be taken into account, including the costs of transport to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.
  4. VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.

A final note on 'Trivial' gifts for employees.

Employers may find the following Revenue concession useful - we have copied the note directly from the HMRC handbook:

"An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned."

One final cautionary note regarding VAT and staff gifts, VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys however, are zero rated for VAT purposes!

Rag trade and alcohol industry targeted

The first taskforces to tackle tax cheats in the rag trade and alcohol industry were launched on 19 November by HMRC.

The specialist taskforce teams will target those who do not pay the right amount of tax in:

  1. the rag trade in the Midlands, North Wales and North West, including manufacturing, wholesale, retail and textile recycling;
  2. the alcohol industry in Scotland, including Aberdeen and Inverness;
  3. the rental property sector in the South East;

They are expected to recover around £17 million.

David Gauke, the Exchequer Secretary, said:

"The vast majority of people play by the rules. We will not tolerate tax evasion and will crack down on the minority who choose to break the rules.

It cannot be fair that, while most people are paying the right tax, a tiny minority are not paying what they should.

HMRC is on target to collect more than £50 million as a result of taskforces launched in 2011-12."

Business Records Checks

HMRC relaunched its Business Record Check (BRC) initiative on 1 November 2012.

When the program was first unveiled in January 2011 HMRC intended to visit 50,000 small businesses across the UK. A year later the whole process was reviewed and subsequently suspended following concerns raised by professional bodies and accountants. According to HMRC:

"Up until 17 February 2012, 3,431 BRC had been carried out. These found that 36 per cent of businesses had some issue with their record-keeping of which 10 per cent had issues serious enough to warrant a follow up visit.

Following a review, HMRC announced a fresh approach to its pilot BRC programme on 3 February 2012.

The review of the pilot programme, which included discussions with trade and professional bodies' representatives, found clear evidence that the programme was effective in improving record-keeping practices amongst SMEs. However, it recommended that the checks were better targeted in future, and linked to wider education and support activities.

In order to implement the review's recommendations all new BRC activity was paused from 3 February to 31 October 2012 to allow HMRC to redesign the BRC process."

Essentially, a BRC is just what it says on the tin, an enquiry from HMRC staff to make sure that record keeping is adequate. The relaunch has introduced a change of emphasis:

HMRC now intends to:

  1. Write to those SMEs selected for a BRC.
  2. Telephone the selected SMEs to talk through their business record keeping. The call is expected to last 10 - 15 minutes.

Based on the responses received:

  1. The HMRC officer will assess whether a face to face BRC visit is required.
  2. If the business records are deemed to be adequate, the HMRC officer making the call will tell the SME and then confirm the decision in writing.
  3. If the business records are deemed to require improvement, an HMRC officer from the Business Education and Support Team will make contact with the SME.
  4. If the business records are deemed to be inadequate and a visit required, the HMRC officer will ask one of their colleagues on the booking team to call to make the arrangements.

This appears to be very similar to the traffic light system used by HMRC prior to the suspension. Adequate records were given the green light, records in need of improvement were given the amber light and inadequate records awarded a red light.

Tax Diary December 2012/January 2013

1 December 2012
Due date for Corporation Tax due for the year ended 29 February 2012.

19 December 2012
PAYE and NIC deductions due for month ended 5 December 2012. (If you pay your tax electronically the due date is 22 December 2012.)

19 December 2012
Filing deadline for the CIS300 monthly return for the month ended 5 December 2012.

19 December 2012
CIS tax deducted for the month ended 5 December 2012 is payable by today.

30 December 2012
Deadline for filing 2011-12 Self Assessment online where claiming for under payments (under £3,000) be collected via tax code in 2013-14.

1 January 2013
Due date for Corporation Tax due for the year ended 31 March 2012.

19 January 2013
PAYE and NIC deductions due for month ended 5 January 2013. (If you pay your tax electronically the due date is 22 January 2013.)

19 January 2013
Filing deadline for the CIS300 monthly return for the month ended 5 January 2013.

19 January 2013
CIS tax deducted for the month ended 5 January 2013 is payable by today.

31 January 2013
Last day to file 2012 Self Assessment tax returns online.

31 January 2013
Balance of Self Assessment tax owing for 2011-12 due to be settled today. Also first payment on account for 2012-13 due today.

Rates & Allowances

Rates and allowances for income tax, corporation tax, capital gains tax, inheritance tax and the pension scheme earnings cap are set out below.

Alexander Probin
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