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Financial Monitor (January 2008)

Some relief for entrepreneurs in the new capital gains tax changes
The Chancellor has confirmed that his changes to capital gains tax which included the abolition of indexation allowance and taper relief and the introduction of a new 18% rate of tax will go ahead from 6 April 2008. However, pressure from the accountancy profession and trade bodies has resulted in the effective retention of a 10% rate for gains up to £1 million for certain business interests thus avoiding the 80% increase in tax payable where this new relief applies. The main features of the new relief are:

It will be available in respect of the first £1 million of gains accumulated during a business person’s lifetime. It is not clear whether this starts accumulating from 6 April 2008 or includes disposals already made
It applies to the disposal of trading businesses (not buy to lets), partnership interests and shares in trading companies and associated disposals of assets held by individuals in these businesses. There is a one year qualifying period of ownership
Where the disposal is of shares or securities (including loan notes and preference shares) in a trading company, then the individual must be a director or employee of the company and own at least 5% of the voting ordinary share capital
It is calculated by reducing the gain by 4/9 so that the tax rate is effectively reduced from 18% to 10%
The relief is not restricted by the age of the individual nor by non-trading assets held by the business, providing the trading status is maintained.

The draft legislation for this relief is due to be published next month and the ‘devil may be in the detail’. The Chancellor has stated that only ‘genuine investors’ should benefit from the relief and no doubt there will be a raft of anti-avoidance measures to ensure this is the case.

HM Revenue & Customs lose VAT repayment case
The then Customs and Excise introduced the three year cap on reclaiming overpaid VAT in 1996 and 1997 but did not follow the correct procedure. After an 11 year battle through the UK and European courts the House of Lords has confirmed that the capping rules were brought in illegally.

Claims for overpaid output tax paid prior to July 1996 and input tax not reclaimed prior to May 1997 can now be revisited. Claims for later periods remain subject to the three years cap. If you had claims restricted to three years prior to these dates or have VAT to reclaim which related to periods before these dates then please contact Peter Newsam.

Changes to VAT Invoicing Regulations
A number of changes to VAT invoicing regulations came into force on 1 October 2007, bringing domestic legislation into line with EU VAT law. Your business is most likely to be affected by the changes if you:

Use a margin scheme for second-hand goods, antiques, works of art and collectors’ items
Use the Tour Operators’ Margin Scheme (TOMS)
Sell goods or services to customers in other EU member states
Sell goods or services to customers outside the UK where the customer accounts for the VAT
Operate the Gold Scheme in the UK
Account for your supplier’s VAT under the new anti-fraud rules for sales of certain goods in the UK.

How will my business be affected?

All VAT invoices must now bear a unique reference as part of a sequential numbering system. As most businesses will already comply with this requirement, it should not have a major impact
If you use either a second-hand margin scheme or the Tour Operators’ Margin Scheme, your invoices must now include a statement specifying the VAT treatment. The invoice must also make reference to the appropriate UK or EU legislation. In the case of TOMS, this will only apply to sales made to other VAT registered businesses
If you sell goods or services to customers in other EU member states where the sales invoice is either zero-rated (goods) or outside the scope of VAT (goods or services), or your customer accounts for your VAT through their own VAT returns under a reverse charge, your invoice must now include a statement specifying the particular VAT-free treatment being operated – the choice of statement used is at your discretion. A reference to the UK or EU legislation will not be required in these circumstances
A reference to the appropriate UK or EU legislation will be required if you issue invoices for intra-EU supplies of goods in the following circumstances:

You sell goods to intermediate suppliers or agents in other EU member states
You sell goods as an intermediate supplier or agent
You supply and install goods in another EU member state.

The changes to VAT invoicing regulations came into force on 1 October 2007; however, HMRC have indicated that they will apply a light touch during the first year of the new regulations. For further details of the statements and legislative references required, please contact Peter Newsam.

Increased compensation limits
The cap on compensation available for unfair dismissal claims is being increased to £63,000 (previously £60,000) from 1 February 2008. The maximum weeks pay for calculating redundancy pay has increased from £310 to £330.

Restrictive covenants in Employment Contracts
The use of restrictive covenants in employment contracts to prevent employees from taking business away when they leave an employment has been fraught with problems because of the Courts’ reluctance to give effect to these covenants in the past.

Two recent employment cases have redressed the balance in favour of the employer if the covenant provides reasonable protection required by the employer, does not unreasonably prejudice the employee and the length of the covenant is reasonable. In both cases concerned this was 12 months. Those employers who have restrictive covenants in their contracts should have these reviewed in light of the recent cases and those that do not may wish to consider having the contracts amended.

Increase in Statutory Payments
From 6 April 2008:

Statutory sick pay will increase from £72.55 to £75.40 per week for those earning at least £90 per week
Statutory maternity pay, adoption pay and paternity pay will increase from £112.75 to £117.18 per week for those earning at least £90 per week. The rules allowing employers to recoup some or all of these payments remain unchanged.

End of year tax planning for individuals
It is important that consideration is given to maximising tax reliefs and allowances available on an annual basis before 5 April each year.

An individual is entitled to earn approximately £40,000 per annum before paying tax at higher rates. Those who are shareholders in family owned businesses should where practical ensure dividends are declared to provide maximum earnings at the basic rate of tax. No additional tax is paid by a basic rate taxpayer on dividends received.

The annual capital gains tax allowance (currently £9,200) should also be utilised whenever possible. Those with share portfolios who have not utilised this allowance should consider crystallising gains by selling shares. If it is wished to retain these shares in the portfolio, then they can be repurchased after 30 days or bought back immediately through a spouse or via an ISA investment.

Pension contributions can no longer be carried back into previous years so those wishing to make personal pension contributions or additional voluntary contributions into their employer’s pension scheme need to do so before 5 April 2008 if they want tax relief in the 2007/08 tax year.

Self assessment tax liabilities
Please remember that any balance of self assessment tax due for the 2006/07 tax year which is not paid by 31 January 2008 will accrue interest from that date. If payment is not made by 28 February 2008 a surcharge of 5% of the tax de will be applied in addition to interest. In practice surcharges below £50 are not raised.

Whilst every care has been taken in the preparation of these notes we can accept no responsibility for errors or omissions contained in them or for any loss arising from their use unless we have been consulted professionally prior to any action being taken.

UHY Wingfield Slater
Wellington House, 39 Wellington Street, Sheffield S1 1XB
Tel: 0114 275 1544 Facsimile: 0114 275 1366 Email: info@uhy-wingfieldslater.com Web Site: www.uhy-wingfieldslater.com
Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales

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