The Fizz! Blog

Conservatives to abolish IR35?

The Conservatives have today said that, should they be elected in a few weeks time, they'll look at IR35 (the rules that aim, but have largely failed, to collect more tax and National Insurance from IT contractors and others working through their own limited companies) as part of a project to simplify tax.

As things stand, getting rid of IR35 is the only sensible thing to do.  It generates next to no income for the Treasury (£9m last year apparently) while causing a vastly disproportionate level of worry and professional fees for contractors.  

The alternative to getting rid of IR35 would be to enforce it properly, but it's just too unclear a set of rules for that to be feasible.  Any attempt by HMRC to use it to collect extra tax ends up in a dispute taking years, which they often lose in the end anyway.  As a result, HMRC appear to have pretty much lost interest in IR35 as a tool to increase the tax take.

We're happy with anything that simplifies a tax system that has mushroomed in complexity over the last 10 or 15 years.  But, at the same time, the tax take is going to have to be upped somehow.  So we won't be holding our breath on this possible change quite yet.

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Chancellors' debate - the verdict

Last night's debate between our three would-be post-election Chancellors wasn't that interesting really, but then again I doubt anybody really expected it to be.  In reality, their policies really aren't that far apart, and that none of them really showed any inclination to attack the others with any marked degree of robustness or incision.  You suspect that they actually all get on with each other quite well.

Vince Cable seems to have generally been judged the "winner", and the audience certainly liked him the most, but he's in a pretty easy spot, really.  Darling and Osborne were so intent on attacking each others' policies and positions that Cable's didn't have to come under any scrutiny at all, so he could get the occasional round of applause for a bit of populism without actually having to answer any hard questions.  But he couldn't really have done a lot more.

Darling came across, as usual, as a decent, straightforward chap (admittedly that's by the standards of politicians, so not exactly that difficult).  It's hard to dislike him, I think.  And, impressively, he managed to spend the first third of the programme attacking George Osborne over the national debt, with Cable joining in, as if somehow Labour had not been in power over the relevant period in time! 

Osborne was probably the weakest of the three over the hour, but he wasn't bad.  That might be enough - coming across as plausible and electable is perhaps all he needs to do.  Because of his relative youth and inexperience, of the three he has the hardest job of convincing voters that he can do the job.

So, they all did fine.  At the end of the day, I imagine that most floating voters will have come away with the view that any of them would do the Chancellor's job adequately.  In that sense, Osborne, who didn't produce a storming performance but was starting from the weakest position, may have benefited from the show most.

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The first 2010 Budget

Here's a whistlestop tour of the bits of the budget that we think are of most significance to small and medium sized businesses and their owners.  We'll keep it short - but if there's anything you've heard about that may affect you that we've not mentioned here, drop us a line.

Caveat

We'll almost certainly be having another budget within a few months.  An incoming Conservative goverment is committed to a budget within 50 days of the election.  A further Labour government would almost certainly make some changes too.  So bear in mind that all this may change before long.

Income Tax, Corporation tax, National Insurance

All of these are as previously announced.  So, if you've planned your salary or dividends for the next year based upon the anticipated thresholds and rates, it's full steam ahead with that schedule.

Entrepreneur's Relief

This is a relief that potentially reduces your Capital Gains Tax bill on the sale of a business, effectively reducing the rate of tax you pay from 18% to 10%.  Until now, that's been available on the first £1million of such gains that you make in your life, representing a potential tax saving of £80,000 (because you'd pay £100,000 of tax on the gain, not £180,000).  Now, it's going to be available on the first £2million of gains, so could be worth £160,000.

Annual Investment Allowances

For the last couple of years, you've been able to deduct the first £50,000 of new kit you've bought (plant and machinery, computers, vans etc - not cars) from your business profits before working out your corporation tax or income tax bill.  That's been increased to £100,000.  This was announced as being of benefit to small businesses, but of course the vast majority of small businesses are spending nothing like £50,000 a year on new equipment in any case.  The old threshold covered the full capital expenditure of 97% of businesses - the new threshold covers 99%.

VAT

The annual turnover threshold at which a business is obliged to register has gone up to £70,000.  The VAT rate stayed the same, hurray!

Something that hasn't been widely mentioned in budget coverage is a proposal to introduce late filing penalties for VAT returns at some point in the next year.  The proposal is a fine of £100 for the first return that's late during a year, escalating by £100 for each subsequent late return.

Business Rates

The Small Business Rate Relief scheme is being extended so that, for a year from October, many small businesses will pay lower business rates - or none, in some cases.

Stamp Duty

As has been very widely publicised, the stamp duty threshold on houses has been increased to £250,000 for the next couple of years.  Note that it's for first-time buyers only, which is fair enough.

Overall, there was very little to affect the behaviour or outlook of business owners - but this close to an election, that's only to be expected.  The second budget of the year may be more interesting.

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Company car or not? Be careful

The rules on company cars, broadly speaking, are pretty clear.  If a company provides an employee or director with the use of car, the employee or director has to pay some personal tax, the amount being based upon the list price of the car and the cleanliness or otherwise of its emissions.  If the company pays for the employee or director's private fuel, there's more tax to pay. 

Sometimes you come across arrangements where a director has found that his company can lease a car for a lower monthly rate than he can - lease companies generally charge less for a commerical lease than a personal one.  However, the director doesn't want a company car- he just wants to take advantage of the lower monthly rate - so he gets his company to lease the car he wants, then reimburses the company for the monthly payments.  So he has the car, he's met the cost himself, and the company isn't out of pocket by a penny.

Unfortunately, there's always the risk that HMRC will take a dim view of this arrangement, and apply the strict letter of the law, which say that the company car rules kick in if a car is "made available" to a director by a company.  A recent case confirmed that, if HMRC take this approach, they will win.  In the case of A Whitby v HMRC a group of directors had got their company to lease cars on their behalf, and had then reimbursed the company for every penny of the lease costs.  The tax tribunal found that, despite the reimbursement, personal tax was due on a company car benefit.   The cars were leased in the name of the company, and hence the company was "making them available" to the directors.

To make things worse, they'd been claiming 40p a mile in mileage payments from the company to cover their motoring costs.  That's only available when it's your own car, not a company car, so they had extra tax and NI to pay there as well.

What the directors had done was entirely fair to any reasonable person.  But tax isn't always based on fairness.   They fell foul of the letter of the law and paid a heavy penalty as a result.

Lots of people have these arrangements.  If you're one, review them.

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If I were Chancellor

I have to concede that I'm unlikely to hold the position in the near future, but if I were Chancellor, I'd be increasing Capital Gains Tax (CGT) in today's budget.  Taxable capital gains always used to just be added on to your income and taxed accordingly - so if you were a higher rate taxpayer, they'd be taxed at 40%.  Then, a couple of years ago, in a confused fudge typical of many tax changes over the last few years, CGT was reduced to a flat 18% for everyone.  Given that, generally speaking, capital gains are the preserve of the relatively well-off, this largely represented a significant reduction in tax for the wealthier members of society.  Why should income tax go up for the better off as they earned more, but not capital gains tax?  What was the logical reason for the change?

It made no real sense then, and it doesn't make any more sense now that the coffers are empty and tax needs to be raised somewhere.  So the obvious thing to a non-politician would be to put CGT back the way it was, so that next year people will pay it at 0%, 20%, 40%, 60% or 50% depending in their income.  Whether the Chancellor will risk the headlines that might follow from effectively doubling a tax for some people remains to be seen, though.  We'll find out this afternoon.

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Budget announced for 24th March - but can you rely on it?

Gordon Brown announced yesterday that the budget will be on 24th March.  Generally a month's notice is given, but political maneouvering meant that the government had delayed confirming the date.

So, once the next year's budget has been delivered, we can all commit to our tax planning for the next year, right?  Well, no, it's probably not as easy as that.  Because we're quite likely to have two budgets this year.  If, as looks perfectly feasible at the moment, we have a change of government in a couple of months, the incoming government is almost certainly going to immediately set a new budget of their own.

So be careful - you might want to put off any major tax-sensitive decisions that rely upon the first budget until the summer, when the position should be clearer.

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The end of the tax year's approaching - go shopping!

Lots of businesses have 31 March or 5 April year-ends.  If that's the case, and you're thinking of making new capital purchases for your business (computers, plant and equipment, vans, that kind of thing) you should consider buying them *before* your year-end rather than after.  That will benefit most businesses, as you'll be able to deduct the costs from *this* year's profits when your tax bill is calculated and you'll pay less tax as a result.  If you delay the purchase a few days into the next year then you'll get that tax relief in *next* year's accounts - you'll still save some tax, but 12 months later.

On top of that, some commentators are speculating that the currently generous tax reliefs for the capital purchases of small businesses might be withdrawn for the next tax year, so that's another reason to consider bringing purchases forward.

On the other hand, surprising as it may seem, some people might prefer higher profits this year and lower profits next year - for example, those exposed to the 50% tax rate next year, or some claimants of tax credits.  So if you think that might include you, tread carefully - talk to us if you're not sure.

And never buy things just to save tax!

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