12 New Year tax resolutions

George Bull
Senior Tax Partner

T: 020 3201 8000
F: 020 3201 8001

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Struggling with your New Year's resolutions? Here are 12 tax tips to help you save money and maximise your income for a financially prosperous 2010.

1. Maximise your capital allowances

Does your business have a 31 March 2010 year end? If it does, you may like to consider accelerating capital expenditure projects to obtain capital allowances in this accounting period.

Provided you have entered into a contractual commitment to purchase the assets by 31 March and you are required to make payment within four months from the commitment date, you can claim capital allowances on the eligible expenditure in the year ended 31 March 2010.
2. Tax savings for couples

Married couples should review their income generating assets for tax efficient ownership. If one of a couple owns all of the investments and pays higher rate income tax while the other's income does not use up all of their tax allowances and basic rate band, then between them they may be paying more tax than they have to.

Assets can generally be transferred between spouses and civil partners tax free and any income that the transferee receives will then be taxed on him or her.

This is especially useful for couples facing the prospect of the 50% additional rate of tax on incomes over £150,000. A transfer of investments producing annual dividends of £100,000, even to a partner who will pay 40% can save the difference between the tax rates, some £11,111.
3. Claiming VAT associated with share sales

The European Court of Justice opened the door for many UK companies to claim back VAT they had previously believed was irrecoverable. Could you be eligible for a repayment of VAT and potentially compound interest too?

HMRC currently views VAT on costs relating to share sales as irrecoverable. The ECJ ruled that the sale of shares in a subsidiary to which the holding company has provided management services constitutes a business activity so the VAT incurred on related costs is not automatically blocked. Businesses should move fast to maximise the potential for a reclaim.
4. Save money on employee expenses

Did you know that you can reimburse employees expenses for business trips, both in the UK and abroad, by reference to mileage rates and round-sum scale subsistence payments at rates published and approved earlier this year by HM Revenue & Customs? This can save much detailed record keeping and administration and should be considered by any employer whose employees travel on business on a regular basis.
5. Make bonus provisions tax deductible

Any business declaring a bonus in respect of its year end needs to take care to ensure that the provision is deductible for tax purposes.

The general rule is that a discretionary bonus will be deductible in the accounting period in which it is provided for in the accounts, provided it’s paid within nine months of the period end. Otherwise a tax deduction is only available in the period when paid.

The bonus provision must be made in accordance with approved accounting standards, otherwise HMRC could argue that the provision has not been validly made in the accounts. This requires there to be a constructive obligation by the year end to pay the bonus plus some genuine expectation amongst the employees that a bonus is likely to be paid. A provision made on the grounds that ‘the directors may decide to pay a bonus’ is insufficient.

We would strongly recommend that the directors produce a detailed board minute at the time they decide to accrue a bonus. The minute should specify how the bonus has been calculated and who the recipients will be. Evidence should be maintained to demonstrate that the relevant employees were aware before the year end that they would receive a bonus (even if the precise amount was unknown).
6. Bed and breakfast for my shares

Most investors are familiar with the arrangements that can be made to make full use of their capital gains tax annual exemption. Each UK-resident individual has the benefit of an annual exemption from CGT (unless that allowance is barred because they are non-UK domiciled and claim the remittance basis of taxation).

Any unused annual exemption (£10,100 for 2009/10) cannot be carried forward. However, if the person wants to reduce future CGT liabilities, triggering gains up to the available exemption will mean no tax to pay for 2009/10 but also sheltering future gains when the time comes to dispose of the shares finally.

There are rules that counter ‘bed and breakfasting’ by selling and reacquiring shares of the same class within thirty days but they don’t apply to sales where the shares are reacquired by a spouse or civil partner, or by another related entity, such as an ISA or a family trust.

That is one of the simpler but more effective forms of tax planning.

Where shares have fallen in value it is possible to take the planning one stage further by selling the loss-making shares to realise the losses now and carry them forward to use against future gains. Again, if one wishes to retain a holding of the shares, a spouse, civil partner, trust or ISA may be the re-acquirer of the shares.

Losses crystallised in this way don’t have to be carried forward: a person who has already made gains exceeding the annual exemption this year may use this technique to generate losses that can be set against those gains.

As ever, consideration needs to be given as to the commercial/investment merits of doing this.
7. Restructuring and refinancing arrangements

Will your New Year’s resolution include embarking upon restructuring or refinancing arrangements?

The VAT on professional costs associated with these arrangements is significant and will usually be irrecoverable. Recent case law (which, understandably given the revenue ramifications, is being appealed by HMRC) lends support to the recovery of VAT on these costs in certain circumstances. By planning ahead and by giving careful consideration to the substantive and the contractual position, the VAT on these costs could be recoverable.

You won’t receive any VAT refund immediately but, if you have incurred such costs in the past, then you should also consider whether a protective claim should be submitted.
8. Save tax, save the environment

Employers and employees can do the environment a favour and save tax by changing to a greener company car policy. A simple step is to insist that no employee may in future order a company car that has a CO2 emissions rating of 160g/km or more – this ensures higher capital allowances for the employer and keeps the employee's taxable benefit down to no more than 20% of list price (+3% for diesels).

Even greener would be one of the newer hybrids – Toyota Prius and Honda Insight – or an eco-diesel from the likes of VW and Volvo with a CO2 rating of no more than 110g/km. The employer can claim a 100% deduction for the purchase cost and the employee's taxable benefit is only 10% (+3% for diesel) of list price.

Combining the eco-cars with a salary sacrifice scheme could also get greener cars into the hands of employees' families at low cost.
9. Review the group structure
Group structures have a habit of evolving to meet immediate commercial demands with tax often left as an afterthought.

Undertaking a review of the group structure should highlight issues that need to be addressed. Key points include:
- Are valuable assets being protected from trading risk?
- Will tax incentives and reliefs (inheritance tax, share schemes, capital gains tax, corporation tax on share disposals) be lost because certain activities are being carried out in inappropriate structures?
- Reducing subsidiary numbers can produce cost savings by eliminating unnecessary administration costs and achieving a lower tax rate
Following new tax and company law changes, changing your group structure has potentially become a more straightforward and less expensive process. Spending a little time reviewing the group structure and thinking about where the various activities are carried on could be time well spent if future tax efficiencies can be achieved.
10. Inheritance trust planning

Planning for inheritance tax requires both a long view and annual reviews to make sure that the available reliefs are fully exploited.

First there are the annual exemptions of £3,000 for all gifts and £250 per person for 'small' gifts. In addition, if last year’s annual exemption has not been used, it is still available to use this year.

For people with estates greater than the nil-rate band of £325,000 (which can effectively be counted as double, i.e. £650,000, for couples to set against their combined estates), it is worth considering putting surplus assets into trust for the benefit of their heirs. This can be a momentous step because, to be effective, the settlor of a trust must relinquish all rights over the property in the future and the gift only becomes fully effective for IHT purposes after seven years. However, using a trust can help to save the next generation of a family from a heavy tax burden.

For people whose income exceeds their expenditure, a trust that receives the excess income can be highly IHT-efficient. Where an arrangement is set up so that surplus income is regularly transferred into a trust (again this must be a trust from which the settlor cannot benefit) there is no 'wait and see': the gift is exempt from IHT immediately it has been made. Care is needed to ensure that the arrangement is set up in a way that HMRC will recognise but this can be a very useful approach for saving tax.
11. VAT risk and compliance responsibilities

It is always a hard sell trying to convince someone to take action before the horse bolts but this really can save you money. The new penalty regime requires businesses to demonstrate that there has been proactive management of VAT risk and compliance responsibilities. In the event of even a simple mistake, reasonable care must be capable of being demonstrated and in the case of complex issues advice should be taken from a ‘competent advisor’. In the absence of being able to demonstrate this there is very little that can be done about punitive penalties under this new regime.

Did you know that businesses are obliged to disclose their errors to HMRC so that HMRC can then determine whether a penalty applies?

This really is a case for acting before the horse bolts. We have undertaken specific reviews of high risk areas (such as expense systems) and general reviews of VAT accounting procedures and have recommended regular VAT discussion meetings to discuss and explore areas of risk and change. We can cut our cloth accordingly.
12. Employee gifts

Most employees earn at a rate of more than £8,500 per year so, when they are given a gift by their employer, it's taxable, usually based on the cost incurred by the employer.

Many part-timers earn less than £8,500 per year and for them there's a special rule: the taxable value is the second-hand value, not the cost. What's the second-hand value? Who knows? It's so small that the taxman doesn't even care.

Even the more highly paid can often escape a tax cost on small gifts – what HMRC refers to as 'trivial' benefits. There's not even an unofficial limit on what can be treated as trivial, but in most businesses giving the staff a gift will be below the hazily undefined non-limit, unless there's a formal policy that all staff will be given something.

And, of course, employers can officially spend up to £150 per head on annual parties without triggering a tax cost. That's £150 for everyone at the bash, employee or guest, but you do have to take into account all the costs of the event – function suite, food, drink, DJ, taxis home, etc. Of course, employers who want to give their staff something a little more special can also agree to pay the tax next October via a PAYE settlement agreement, to avoid taking the shine off the benefit.

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