January 2015 Newsletter

Welcome to the January 2015 Newsletter from Easterbrook Eaton Limited

Barely had the dust settled on Chancellor George Osborne's 2014 Autumn Statement Speech than a debate erupted over the likely need for significant spending cuts in the coming years. The consequent publication of Finance Bill 2015 also paved the way for the introduction of the controversial new tax on diverted profits, dubbed the 'Google tax'. Meanwhile, small business groups have welcomed the somewhat happier news of a new set of proposals aimed at tackling late payment.

We would like to wish all of our customers Season's Greetings and our best wishes for a happy and prosperous New Year.

Autumn Statement sparks debate over 'colossal' cuts and diverted profits

Following the recent 2014 Autumn Statement, the Institute for Fiscal Studies (IFS) has confronted Chancellor George Osborne regarding the need for deep cuts in public spending in the years to come.

An initial statement from the IFS warned of a 'fundamental re-imagining of the state', which Mr Osborne rebuked as 'totally hyperbolic'.

Trades Union Congress (TUC) Regional Secretary, Beth Farhat, said: 'Britain faces a profound challenge to reverse the tide of rising inequality and build a new economy that delivers fairness for working people'.

Shadow Chancellor, Ed Balls, said: 'Over two years he's revised up borrowing by £12.5bn... this means the chancellor will have borrowed in this parliament £219bn more than he planned in 2010.

'He promised to make people better off. Working people are worse off. He promised we were all in this together. Then he cut taxes for millionaires'.

Meanwhile, the Office for Budget Responsibility (OBR) confirmed that the proposed cuts would see the state reduced to its smallest size relative to GDP for 80 years. The OBR also stated that only 40% of planned cuts will have been made by the general election in 2015.

The Government has now published draft tax legislation to implement its 2014 Budget and Autumn Statement policies, in the form of Finance Bill 2015. The legislation paves the way for further anti-avoidance measures, via the introduction of a new tax on the diverted profits of large multinational enterprises, dubbed the 'Google tax'.

The new Diverted Profits Tax will target multinational enterprises with business activities in the UK who use tax planning techniques to divert profits from the UK. The tax will be applied using a rate of 25% from 1 April 2015 and is expected to raise £1.4bn over the course of the next five years.

However, the move has sparked criticism from business groups. Commenting on the new measures, John Cridland, director-general of the Confederation of British Industry, said: 'International tax rules are in urgent need of updating but there is already an OECD process underway to do this. It is unfortunate that the UK has decided to go it alone with a Diverted Profits Tax outside this process, which will be a real concern for global businesses.

'The legislation will be complex to apply, and if other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate, which risks undermining the whole OECD approach.'

A consultation on the draft legislation will run until 4 February 2015.

New proposals to tackle late payment culture

New proposals obliging large and listed companies to publish detailed information about their payment practices and performance were recently unveiled by the Business Minister Matthew Hancock.

The proposed changes, published in a consultation paper 'Duty to Report on Payment Practices and Policies', are designed to make it easier for small businesses to compare the payment practices of different companies, including their average payment time and the proportion of invoices that are paid beyond terms.

Business Minister Matthew Hancock said: 'Tackling late payment is at the heart of our drive to help small businesses. Coming from a small business background, I know just how critical late payment can be for small firms' cashflow. We know that small businesses are often reluctant to risk losing business by using the redress measures we've put in place, so we want to tackle the underlying culture by increasing transparency on payment practices and performance.

'The measures we are consulting on will make it clear to small businesses and consumers alike which large businesses behave properly, and those that think they can ride roughshod over their suppliers'.

The consultation paper proposes that companies report on the following metrics: the proportion of invoices paid beyond terms; the proportion of invoices paid within 30 days; the proportion of invoices paid over 30, 60 and 120 days; and the average time taken to pay invoices. It will close on 13 January 2015.

The Institute of Credit Management has welcomed the proposals, with Chief Executive Philip King saying: 'I applaud the measures in the Small Business Bill to drive change by allowing more visibility of how businesses behave in paying their suppliers. Small businesses need to make better informed decisions before entering into commercial relationships and this measure will be invaluable in helping them enter into such relationships with their eyes wide open'.

Late payment can have a significant impact on small businesses. We can help with all aspects of financial management, including improving cashflow - please contact us for further assistance.

ESSENTIAL TAX DATES FOR JANUARY

1 January

Due date for payment of Corporation Tax for period ended 31 March 2014.

31 January

Self assessment payment and filing deadline for 2013/14 tax returns.

Don't be late!

Autumn Statement 2014

Overview: Stamp duty reforms and business rates feature in pre-Election Autumn Statement

Notwithstanding the mixed economic news, the Chancellor unveiled a number of key measures with the stated aim of bolstering the economy and 'supporting aspiration'.

With tax receipts lower than expected despite strong economic growth, many had predicted that Chancellor George Osborne would have limited room for manoeuvre when presenting his last Autumn Statement before the 2015 General Election.

UK economic growth forecasts have been revised upwards to 3% for the current year, but the Chancellor conceded that the UK deficit 'remains too high' and that further 'very substantial savings' in public spending will be required. Revised forecasts from the Office for Budget Responsibility now predict Government borrowing of £91.3 billion this year, compared with its previous forecast of £86.6 billion.

The headline measure was a complete reform of stamp duty on residential property. The existing system will be abolished, with a new set of graduated rates - including a new 12% rate for the most expensive properties -applying with effect from Thursday 4 December.

The Chancellor's speech also confirmed a package of reforms affecting small and medium-sized businesses, including a £400 million Treasury pledge to extend Government-backed Enterprise Capital Funds, together with plans to back up to £500 million of new bank lending to SMEs under the Enterprise Finance Guarantee. The R&D tax credit will also be increased for SMEs, while employer national insurance contributions (NICs) for young apprentices will be abolished and the Employment Allowance extended to care and support workers.

Meanwhile, the Chancellor answered calls from leading UK business groups to review the business rates system, with some of the more immediate measures including an extension of the doubling of the Small Business Rate Relief by a further year from 1 April 2015 and extending the 2% cap on inflation-linked increases by another year.

Turning to personal taxation, the Chancellor confirmed plans to allow pensioners to take control of their pension pots from April 2015, adding that from this time the 55% 'death tax' on the annuities of those who die aged under 75 will also be abolished. The income tax personal allowance for 2015/16 will also see an additional increase, rising to £10,600, and will be accompanied by a corresponding increase in the higher rate threshold to £42,385.

In the run-up to the Autumn Statement, the Chancellor had already pre-announced a package of support for the NHS, UK road and rail infrastructure and flood defence schemes.

Other significant announcements included further anti-avoidance measures, an ongoing fuel duty freeze, and the abolition of Air Passenger Duty for under-12s from 1 May 2015.

Additional analysis is available on our website, see here for details

Saving tax on seasonal gifts

With the season of gift-giving fast approaching, it's important to be sure that you're up to date on the rules around gifts for clients and staff - and making the most of any tax-free opportunities!

In general, HMRC advises that businesses treat gifts in the same way that they treat entertainment. This means that, with a few key exceptions, gifts are not tax deductible. But what are those exceptions and how can you make the most of them?

The office Christmas party is of course a tradition, but did you know it is also tax deductible? Staff annual functions can be tax-free where the total cost per person attending is not more than £150 per year (including VAT).

This will apply to everyone attending the party, including employees and their guests. It can also be used for other expenditure which is part of the event, such as taxis or accommodation for the attendees.

A big caveat is that if you overspend the amount per head then the whole cost of the party is subject to tax, not just the proportion that exceeds the limit. This will need to be paid by reporting the benefit on the employee's P11D form, or the grossed up tax can be settled through a PAYE Settlement Agreement (PSA). A further national insurance bill will also be payable - so be sure to get the sums right!

Seasonal treats for clients and staff may also be deductible, but in order to qualify they must be seen as promotional gifts. This means displaying a ‘conspicuous advertisement' in the form of your company logo. But with many options available for personalisation, it's incredibly easy to give meaningful gifts while staying tax free. These could be anything from calendars and diaries to stress balls and festive snow globes.

Promotional gifts can be given to staff tax-free providing the overall cost does not exceed £50 per person per year. It's important to note that gifts of food, drink, tobacco and vouchers are specifically excluded from this scheme.

Tax efficient charitable donations can be made through Gift Aid, or in cash, stock or investments. There are various tax efficient schemes and incentives for individuals, sole traders and companies so it pays to make sure that your gifts are deductible depending on your business size. Detailed HMRC rules on the subject can be found here.

Third party gifts, which employers may receive from third parties such as business associates or clients, are exempt from tax providing their total value is less than £250. It is very important to be aware of anti-bribery rules when dealing with such gifts. In many cases simple ‘common sense' can be applied to tell when a gift should be accepted. Anti-bribery rules now mean that even those aware but not directly involved may be found culpable should such an illegal transaction take place.

National Insurance for Self-Employed People

The Social Security Advisory Committee (SSAC) has published a summary of its study of Social Security Provision and the Self-Employed. This notes the disparity between the National Insurance contributions payable by a self-employed person and an employee on similar earnings (especially if the employer’s contributions are also taken into account), and questions whether it is proportionate. At present, the main advantages enjoyed by employees in return for their higher contributions are access to Statutory Maternity Pay, etc, and the ability to accrue an Additional Pension – and that second advantage will be lost when the Single Tier Pension is launched in April 2016.

Apart from the simple question of equity – that the scheme is after all a National Insurance scheme, so the contributions should be proportionate to the unemployment, sickness and pension benefits bought – the SSAC puts forward four reasons for recommending the Government to review the contribution rules. First, the proportion of self-employed people in the national workforce is increasing – from 12 per cent in 2000 to 15 per cent at the beginning of 2014.  Accordingly, any under-contribution is growing in significance.  

Second, the range of people now working on a self employed basis is far wider than the ‘small shopkeepers, crofters, fishermen, hawkers and outworkers’ envisaged by the Beveridge Report. One needs to consider, therefore, whether the original assumptions still hold true.

Third, the law which determines whether an individual is employed or self-employed is complex and confusing, leading to what the SSAC terms a ‘permeable boundary between employment and self-employment’, so that people may be genuinely unsure about their own employment status, or that of the people working for them. The Committee recommends that ‘the Government should consider the extent to which it is possible to rationalise the definitions of who is (and who is not) self-employed for the purposes of employment, National MinimumWage, taxation, and Social Security law.’

Fourth, and perhaps most importantly, the disparity in contributions and the ‘permeable boundary’ have both encouraged and facilitated a growth in ‘false self-employment’.  Although the motivation is usually to reduce the National Insurance contributions payable, ‘false self-employment’ has other adverse effects, such as denying access to much of the employment protection legislation.

Looking forward to Universal Credit

The document also expresses concern about the proposed treatment of self-employed people under Universal Credit. It highlights the onerous nature of the monthly income reporting requirement, the confusing differences between the Universal Credit and Self Assessment rules for calculating earnings, and the disallowance of vehicle purchase costs, even where (as in the case of a taxi) the vehicle is the business.

Childcare Grant Scheme Extended

The Childcare Business Grant Scheme (which is available only in England) has been extended to 31 December 2014. Under the scheme, grants of £250 or £500 are paid to people setting up a new childcare business (which can include childminding in the childminder’s own home). The grant can be used as a contribution towards costs such as training and registration, Disclosure and Barring Service (DBS) clearance, health checks and certificates, and public liability insurance, as well as purchasing equipment and adapting premises.

The grant for a new childminding business (one looking after a child or children, not related to the childminder, in the childminder’s own home) is £250, doubled to £500 if either there are four or more childminders working on the premises (including the proprietor) or the childminder has incurred additional expenditure in order to provide care for disabled children.

The grant for childcare businesses operating in non-domestic premises, such as nurseries and out-of-school clubs, is £500.  The scheme also includes access (free of charge) to a business mentor.

Two points to watch are that grants will not be paid to anyone already operating a childcare business of any kind, even if the money is needed to open a new nursery in new premises, and that schools may not claim a grant for breakfast clubs, after school clubs, and other childcare provided by the school on school premises.

Further information is posted at www.childcarebusinessgrants.dcms.gov.uk.

October 2014 Newsletter

Welcome to the October 2014 Newsletter from Easterbrook Eaton Limited

The referendum on Scottish independence may have resulted in a 'No' vote, but with all the major political parties promising legislation on greater devolution, a constitutional debate affecting all parts of the UK is only just beginning. Here's our round-up of the latest tax and business developments…

Business reacts to Scottish 'No' vote and promise of devolution

The immediate reaction of the British business community to last week's rejection of Scottish independence was 'a collective sigh of relief', according to CBI Director-General John Cridland, who claimed that 'business has always believed that the Union is best for creating jobs, raising growth and improving living standards.'

The CBI's president, meanwhile, went further, suggesting that the two-year national debate in Scotland had delayed investment and 'damaged the image' of British business abroad. Sir Mike Rake, who lobbied for a No vote during the referendum campaign, said: 'There's no doubt that whilst investment north of the border has continued, some has been slowed or delayed… But this is the first positive step towards sanity being restored, towards thinking that the UK is open for business once more'.

The immediate aftermath of the No result saw the pound sterling hit a two-year high against the Euro, after several weeks in which it had fallen amidst fears that Scotland would vote to exit the Union. The FTSE 100 share index also rose, while banking group RBS confirmed that the outcome meant that it would not be moving its registered head office to England.

Pro-independence group Business for Scotland said that it was 'disappointed that the opportunity to improve Scotland through independence has been lost' but that it would 'do what we can to improve things as much as possible'.

Attention now turns to the prospect of further devolution for Scotland and the implications for the rest of the UK, particularly in regards to the ability of the Scottish Parliament to set its own tax rates. Existing agreements between Holyrood and Westminster mean from next year the Scottish government will be able to borrow up to £2.2 billion for capital spending and will be given control over stamp duty land tax, while from April 2016 it will have more powers to set income tax.

Experts have warned that divergence between tax rates within different parts of the UK will lead to tax and jobs 'arbitrage', as businesses could move between regions depending on such factors as local rates of corporation tax or minimum wage levels. 

High net worth individuals would also be keeping a close eye on income tax rates. There are estimated to be some 18,000 higher rate taxpayers based in Scotland, compared with around 200,000 in London and the South East. Scottish high earners could easily move south of the border if taxes were significantly raised, while lowering taxes to be attractive to wealthy individuals could have the opposite effect.

Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research, took a positive view of the possibility, saying:  'There would be competition to attract talent and entrepreneurs into the different regions. Some regions might want to copy what's been done in Ireland where you've got a low rate of corporation tax to attract companies. In the long term, there could be some real benefits from having that'.

RTI relaxation extended

HMRC has announced that it will exempt employers with fewer than 50 staff from Real Time Information (RTI) late filing penalties until 6 March 2015. Until that date, they will be allowed to submit PAYE information monthly.

RTI requires employers to provide information about tax and National Insurance deductions every time they pay an employee rather than annually. The original deadline for implementation by small firms was in 6 October this year.

The relaxation for small firms is the latest in a series of deadline moves since RTI was rolled out in October 2013.

HMRC's Ruth Owen said: 'We know that those who have had most difficulty adjusting to real-time reporting have been small businesses, so this staged approach means they have a little more time to comply with the new arrangements before facing a penalty'.

Employers with 50 staff or more will still be fined if they file PAYE returns late after the 6 October deadline.

Further information is available on our website.

Chancellor announces new tax regime for inherited pensions

In his speech at the Conservative Party Conference last month George Osborne, the Chancellor of the Exchequer, noted that, even following his reform of the tax regime for pensions announced in this year’s Budget, ‘there are still rules that say you can’t pass on to the next generation any of your pension pot when you die, without paying a punitive 55% of it in tax.’  He went on to say that: ‘I could choose to cut this tax rate. Instead, I choose to abolish it altogether. People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. 

Effective from 29 September 2014. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free.’

Briefing notes were published by HM Treasury the same day. These stated that the new regime will apply ‘from April 2015.’ Possibly this can be reconciled with the Chancellor’s announcement by assuming that the new arrangements will apply where the individual dies on or after 29 September 2014 and the payment is made on or after 6 April 2015.

The Treasury notes indicate that, ‘from next year’, anyone in a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to inherit his pension savings.

If he then dies before attaining age 75, the beneficiary ‘will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.’

However, if he dies after attaining age 75, drawdown payments will be taxed as the beneficiary’s income. Lump sum payments will be taxed at 45% in 2015/16, but thereafter at the beneficiary’s marginal rate. This delay is to allow time for details of a tax deduction scheme to be worked out with pension providers.

Neither the Chancellor’s statement nor the Treasury briefing notes mention the Inheritance Tax position.

Your Home and Capital Gains Tax

The Government seems to have a policy of whittling away at the traditional capital gains tax exemption for a homeowner’s own ‘principal private residence’. In April 2014, the rule that the last three years of ownership qualified for exemption, even if the homeowner no longer lived in the property, was amended to halve the qualifying period to eighteen months. And from April next year, the homeowner’s right to elect which, of two (or more) properties he owns, shall be treated as his ‘principal private residence’ is to be abolished. Instead, there will be a factual test - which property really was his main home? - but quite how this will work is not yet clear.

A homeowner should therefore bear in mind that circumstances may arise in which there will be a chargeable gain on what he now considers to be his main, or indeed only, home. That gain may be minimised by ensuring that records are kept of all allowable expenditure. For example, the base cost for capital gains tax purposes includes not only the price paid for the house, etc, but also the stamp duty, legal costs and survey fee. If the house was bought in a dilapidated condition, the cost of putting it right will also qualify, as ‘improvement expenditure’. Building an extension or a conservatory would also be an ‘improvement’; refreshing a tired kitchen or bathroom can be a grey area, but it doesn’t cost anything to keep the invoices in case they come in useful later.

Expenditure which enhances the owner’s legal interest in his home also qualifies - the most common example is where a leaseholder pays a capital sum to extend his lease.

Finally, additional relief from capital gains tax may be due if the house, etc, was at any time let to a tenant, so a record should be kept of the dates of any letting(s). This relief may seem paradoxical, but was originally introduced to encourage homeowners to rent out their properties, rather than let them stand empty.

Pension Planning Update

On Budget Day, the Chancellor announced that, from April 2015, ‘pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any-time they want. No caps. No draw-down limits. No one will have to buy an annuity.’ 

So far, so good, but in some cases pension savers will need to take care to protect their new-found right not to buy an annuity. For example, some pension plans provide that, if the plan holder does not give alternative instructions by a fixed date (usually the default retirement date specified in the pension plan documentation), his or her savings will automatically be used to buy an annuity. Cases have been reported of companies ignoring telephone conversations with plan holders and then, citing the lack of written instructions, using their money to buy unwanted annuities. There is a 30-day ‘cooling off’ period, but after that it can be difficult or impossible to unscramble the situation, so we would recommend all pension savers to check what their plans actually say.

Another point is that although pensioners will by statute be given ‘complete freedom to draw down as much or as little of their pension pot as they want, any-time they want’, individual pension plan providers will not be required to provide this facility (on the grounds that they may find it expensive and burdensome to set up the necessary systems to do so). So if your existing pension plan provider is unwilling to offer ‘flexible draw-down’, you will have to transfer your funds to one that will. No doubt a charge will be levied. And it appears that the transfer will have to be made before you reach the normal retirement age set by your existing scheme.

Final details of the new regime will not be available for another few months, but once they are, most people should probably be reviewing their pension planning arrangements.

Increasing your National Insurance Retirement Pension

It is possible to defer your State Pension, and in return receive a higher pension later. At present, the rule is that for every five weeks you defer your pension, it will increase by one per cent. After one year, the pension will have increased by ten per cent, and after five years, by just over 50 per cent.

The State Pension is index-linked, so if you defer now, in 2019 you will receive 152% of whatever the pension is for that year (including any entitlement you have under the State Second Pension, SERPS or Graduated Pension schemes), and so on in future years.

Especially considering the promise of index-linking, there is an argument for deferring if you can afford to do so, even if this means dipping into capital to pay living expenses in the meantime.

Last month some newspapers reported that the rate of increase is to be halved, with effect from April 2016. However, this was itself only half true. In fact, the rate of accrual is to be reduced from one per cent every five weeks, to one per cent every nine weeks, but only for those who reach State Pension age on or after 6 April 2016 - this means men born on or after 6 April 1951 and women born on or after 6 April 1953. Anyone born before those dates will continue to qualify for the ‘one per cent every five weeks’ rate of accrual, even after April 2016.

Tax free childcare

The Government has announced further details of the ‘Tax Free Childcare’ scheme, first announced in the March 2013 Budget and due to be launched in Autumn 2015. The current childcare tax reliefs - for workplace nurseries and for childcare vouchers - apply only to childcare provided, or partly paid for, by an employer. What is new about ‘Tax Free Childcare’ is that it will provide direct help with childcare costs, without involving the employer. Accordingly, it will be available without the co-operation of the employer, and to self-employed people on equal terms with employees.

How will Tax Free Childcare work?

Shortly put, the concept is that the parent(s) will open a special account with National Savings & Investments. If there is more than one qualifying child in the family, a separate account may be opened for each. Children will qualify until their twelfth birthday, or until their seventeenth, if they are disabled. It is possible that the scheme will be phased in - applying first to nurseries and playschools for very young children, and then being extended to after-school clubs, etc, for older children.

The parent(s) may pay up to £8,000 a year into each account, and for every £8 paid in, the Government will add another £2, so the overall effect is identical to giving tax relief at 20%. The parent(s) will then use the money in the account to pay their childcare provider. All payments into and out of the account will be made electronically.

There will be no additional relief for higher-rate taxpayers. Also, there will be no reduction in National Insurance contributions.

Will everyone be entitled to Tax Free Childcare?

Three groups will be excluded from the scheme:

• Tax Credit and Universal Credit claimants, who will continue to receive help with childcare costs as part of their Tax Credit claim. Universal Credit will cover 85% of childcare costs, compared with 70% for Tax Credit.
• Families which include a parent who is not earning (at least) an amount equal to eight hours a week at the National Minimum Wage (about £50 a week, at present).
• Families which include a parent with an annual income of £150,000 or more.

Once Tax Free Childcare is launched, parents already receiving childcare vouchers from their employer will be able to choose either to continue doing so, or to claim Tax Free Childcare. But the voucher scheme will close to new entrants.

However employers will be able, if they wish, to continue to operate a workplace nursery and their subsidy to the nursery will continue to be disregarded for both income tax and National Insurance purposes.

RTI late filing penalties from October

Employers should be aware that automatic penalties will apply if their RTI submissions are not up-to-date by Sunday, 5 October 2014 - and thereafter kept up-to-date. These penalties will be in addition to the automatic interest charge which has applied to late payments since April this year. Penalties will be imposed:

• Where a Full Payment Submission (FPS) is filed late - that is to say, is not filed by the day the employees are paid or, if the employer qualifies for the concession for some employers with nine or fewer employees, by the last pay day in the tax month; and

• Where an employer fails to file a nil Employer Payment Summary (EPS) - for a month in which no payments to employees were made - by the 19th day of the following month (so by 19 October for the tax month to 5 October).

The monthly penalty will be £100 if the employer has less than ten employees; £200 if he has between ten and 49; £300 if he has between 50 and 249; and £400 if he has 250 employees or more. However, the first default each tax year will be ignored. 

Penalty notices will only be issued every three months. It appears that the first penalty notices will be issued in October 2014, to cover any defaults for the current tax year that were not rectified by Sunday, 5 October.

Where a submission is three months late, HMRC will additionally be able to impose a 5% surcharge on the tax and National Insurance contributions payable. They say that this will be used ‘only for the most serious and persistent failures.’

From April next year, the screw will be tightened yet further, with the existing penalties for late payment of monthly or quarterly PAYE remittances being made automatic and applied in all cases. The penalty will be between 1% and 4% of the tax due, depending on how many times, in the tax year, the employer pays late.

Further Developments.......

HMRC has announced that the introduction of automatic penalties for late RTI submissions will be delayed another five months for small employers.

Under the revised timetable announced back in February, automatic penalties were due to start from 6 October. This date will still apply for companies that employ 50 or more people, but smaller companies will get an extra five months until the automated regime starts to bite from 6 March 2015. 


The Revenue said it will send electronic messages to all employers shortly to let them know when the penalties will apply to them, based on the number of employees shown in the department’s records.

September 2014 Newsletter

Welcome to the September 2014 Newsletter from Easterbrook Eaton Limited

The UK's entrepreneurial spirit is still very much alive and well, as new figures show a record number of claims from small businesses for research and development tax reliefs. These have become increasingly generous in recent years and for small firms there is a possible tax credit of 225% of R&D expenditure. Remember, we can advise on tax saving opportunities for you and your business ...

R&D tax credit claims reach record levels for SMEs

There were 13,010 claims for research and development tax relief under the SME scheme in 2012/13 - up 30% from the previous year and the largest number since the scheme was introduced in 2000 - according to official HMRC figures.

The amount claimed by small businesses reached almost £600m, up from £430m last year. Overall, the total number of claims, combining the SME and large companies schemes, rose 26% to 15,930.

The HMRC figures also show that R&D tax relief is not just the preserve of manufacturing companies. Although the manufacturing sector still has the most applications with 3,970 applications for relief of £165m, information and communications companies put in 3,585 claims, and professional, scientific and technical businesses accounted for 2,410 applications, for a total of £145m in relief.

Tax credits on R&D were introduced in 2000 in an attempt by the Government to encourage research and innovation. Since then the available tax breaks have become increasingly generous and HMRC has also broadened its interpretation of the rules to apply more widely and provide a greater stimulus to innovation. The level of corporation tax relief for SMEs has been more than doubled to 225% of the R&D expenditure over the last two years and the £10,000 a year minimum spending limit has been scrapped.

With more and more SMEs realising that R&D tax credits aren't just for large manufacturing firms or tech companies but for many other types of business working on innovative products or processes, could your firm benefit? We can advise on whether the relevant conditions can be met.

Current R&D tax relief rates - a brief overview:

Tax relief is available on research and development revenue expenditure at varying rates. Current rates of relief are as follows:

for small and medium-sized companies paying tax at 20%, the maximum rate of tax relief is 45% (that is a tax credit on 225% of the expenditure)
for small and medium-sized companies not yet in profit, the relief can be converted into a tax credit payment worth 32.63%
for larger companies paying tax at 21%, the maximum rate of relief is 27.3% (that is tax relief on 130% of the expenditure)
a 10% 'Above the Line' (ATL) credit exists for large company R&D expenditure incurred on or after 1 April 2013. The credit is fully payable, net of tax, to companies with no corporation tax liability. The ATL credit scheme will be optional until it becomes mandatory on 1 April 2016. Companies that do not elect to claim the ATL credit will be able to continue claiming R&D relief under the current large company scheme until 31 March 2016.
SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project will be able to claim the large company R&D tax credit. Therefore they will qualify for relief on 130% of their R&D expenditure. An SME may also be entitled to the large company R&D tax credit for certain work that has been subcontracted to it.

For more business and personal tax planning ideas, visit the Tax Strategies section of our website and contact us for more advice.

New car tax rules - avoiding a penalty

From 1 October 2014, the traditional paper tax disc will cease to be used in the UK. Those already in existence with some months left before renewal can be taken from vehicle windscreens and discarded, but, unfortunately, you will still need to pay vehicle tax!

The paper tax disc was first issued on 1 January 1921 and, according to recent figures, over 99% of motorists pay their vehicle tax on time. Some concern has been raised that not having to display a paper disc will increase the number of vehicle owners attempting to avoid the tax.

But the Government is confident that this will not be the case. In place of the disc, recognition cameras will be put in place on roads to track vehicle number plates. A central computer system will monitor the cameras, and any vehicles detected which have not been taxed will be liable for a fine.

The Driver and Vehicle Licensing Agency (DVLA) will send vehicle owners a reminder to renew, including a reference number, which individuals can use online to pay in instalments or set up a Direct Debit. As with the current system, owners will also need the reference number from their vehicle log book.

Direct Debits can be set up from 1 November, and certain factors must be taken into account when deciding which payment frequency to choose. For monthly and six-monthly payments, a surcharge of 5% will be applied. A yearly payment will incur no fees.

Certain exceptions apply when paying Direct Debit. The service will not be available to first registration vehicles, fleet schemes or HGVS paying the Road User Levy.

Important for those buying or selling vehicles: on the date of the changeover any vehicle tax owners currently have will not be transferred as with the current system. Instead, this will be refunded for the number of months already paid and they will have to get tax for their new vehicle.

A spokesperson for the Treasury said the new system would 'make dealing with Government more hassle-free'.

The status of your vehicle can be checked online here.

The sun is shining: let your business grow

Any company needs attention if it is to flourish. Many business owners fail to plan adequately, and seek help only once it's too late. Talking to a finance professional is the best way to a bright future, but there are very simple steps you can take to maximise your chances of growth and reap the benefits of a healthy business.

Planning and measuring

Be sure to make a plan and refer to it regularly. But it's also important to adapt to new circumstances. With new information and a constantly changing economic environment, you may have to significantly change your plans. It's not always a bad thing when the situation demands a re-evaluation.

Set up efficient processes for all staff to follow, to help maximise your time. Scheduling your week in advance, and keeping your diary close by, will help you stay on top of everything.

Knowing your trade

Don't overstretch yourself trying to be all things to all people. Focus on your core skills or products, aiming for quality where you know you can deliver it. Branching out can only happen with a stem strong enough to support it.

With this in mind, ask yourself if there are any areas of your industry that you could pursue in the future. Guide the business in that direction, and you could eventually become a onestopshop for your customers.

Tending to customers

Every manager knows customer service is the root of a healthy business, and employees who also understand this will help you succeed. Loyalty schemes and excellent communication are easy starting points.

Never forget that the best advert for your business is a happy customer. Getting referrals is an inexpensive way to expand your client base, and requesting them from a loyal client will not cost you anything either.

Pruning to perfection

Growth is a process of change, and no business begins fullyformed. Expect to make mistakes and learn from them - improving quality and making the next stage of your business development better than the last.

Stay relevant with new computer programs, innovations and processes. Strip away the obsolete. Instant perfection may be impossible, but decide now that you won't be left to wilt.

Using the right tools

Email is the most cost effective method of communication, and one of the most efficient. Embracing digital means, such as online advertising and social media, can be a cheap and simple way to promote your business.

Results may take time and effort, but a polished web presence is necessary for companies of every size that wish to succeed. In contrast, old methods may no longer be worth pursuing. A large sales team, door to door selling and cold calling are very expensive ways of generating business. Aim for efficiency over expansion.

Loving your business

It's easy for employees to see when a manager loves what they do. Your genuine enthusiasm is possibly the most inspirational tool you have. A happier team is hard working and focused, which leads to a quality end product. Consider the opposite effect a negative attitude can have. Leading through negative motivation and not loving the business, will ultimately create an unhappy workforce.

We can advise on a range of strategies to help you grow your business - please contact us for assistance.

The New ISA

The government announced at Budget 2014 that from 1 July 2014, ISAs will be reformed into a new simpler product, the "New ISA" (NISA) with equal limits for cash, and stocks and shares. From 1 July 2014 the NISA limit will be £15,000 - the biggest ever increase to ISA limits.

The limits for 2014-15 are being introduced in two stages:

• From 6 April 2014 to 30 June 2014, the previously announced changes set the overall ISA limit at £11,880 with a cash ISA maximum of £5,940
• From 1 July 2014 all existing ISAs automatically become NISAs, able to receive further money to either cash or stocks and shares components up to the new £15,000 limit

Individuals may open one Cash NISA and one Stocks and Shares NISA each tax year. However, once open the NISAs may be transferred between providers any number of times. It will be possible to hold tax-free cash within a Stocks and Shares NISA if the provider allows this. It is likely that many savers may prefer to hold separate accounts for cash, and stocks and shares.

Any money held in a Stocks and Shares NISA can be transferred to a Cash NISA and vice versa. Such transfers need to be done between the providers otherwise personal deposits may count as a fresh payment against the overall NISA limit of £15,000.

Savers aged between 16 and 18 can hold a Cash NISA with up to £15,000 but cannot open a Stocks and Shares NISA. This is in addition to any amounts paid into a Junior ISA, for which the annual investment limit has been increased to £4,000 for 2014-15.

August Newsletter

Welcome to the August 2014 Newsletter from Easterbrook Eaton

Glorious sunshine and the start of the Commonwealth Games have created a feelgood factor in recent weeks, and there has also been a lot of very positive economic news. However, one potential result of economic growth is the phenomenon of 'fiscal drag', whereby more and more income creeps into the higher rate tax bands.

Here's our August round-up of the latest tax and business developments…

Could one in three workers eventually be paying higher rate income tax?

Official forecasts suggest that if current trends continue some 10 million people will have been pulled into the higher rate income tax threshold by 2033, according to an analysis by The Telegraph.

The newspaper claims that 'one in three workers will be a higher rate taxpayer within two decades as the 40p band becomes the “norm” for millions of the middle class', following the publication of a report by the Office for Budget Responsibility forecasting the medium-term effects of 'fiscal drag'.

Fiscal drag as defined here by the OBR is the process by which the average tax rate rises if allowances and thresholds are indexed to prices rather than earnings, resulting in more taxpayers' income falling into higher tax bands. Current Government policy is to uprate tax thresholds and allowances in line with inflation, but because earnings are expected to rise more quickly than prices in the long term, more and more income moves into higher tax bands and the average tax rate rises steadily.

The OBR forecasts estimates the number of people who will pay the higher rates of income tax if the current £41,865 threshold rises in line with inflation. Currently, 4.6m people pay the 40p higher rate and 300,000 pay the 45p additional rate for those earning more than £150,000. By 2033 the OBR forecasts 9.2 million people will pay the higher rate and 1.7m the additional rate - more than twice as many as at present.

Furthermore, The Telegraph argues that the OBR forecast is likely to be an underestimate, since the Chancellor has restricted rises in the 40p threshold to below the level of inflation. From this year it will go up by a flat 1% until 2016, well below the current CPI inflation measure.

Chancellor George Osborne has resisted Conservative calls to increase the 40p threshold to take into account the rising incomes of 'middle class' workers such as teachers, senior nurses and other professionals not normally regarded as high earners, preferring instead to concentrate on raising the tax-free personal allowance in his Budget statements.

However, this analysis of fiscal drag is likely to give more ammunition to those in the party who want to see the higher rate threshold raised. Former chancellor Lord Lamont said: 'For the next parliament, raising the higher rate threshold should be a top objective for a Conservative government. It makes no sense that a rate that Nigel Lawson intended to be for the richest people in the country is now being paid by secretaries and middle management.'

When Lord Lawson introduced the 40p band twenty-five years ago, only one person in 20 was caught by it, while today it is just over one in six.

The OBR forecast does offer an alternative path. It calculates that if the higher rate threshold were to rise in line with earnings instead of inflation, 4.6 million fewer people would be dragged into it, in its own words 'effectively switching off fiscal drag.'

Energy in the UK: cost, complaints and competition

According to a forecast by the National Grid, the price of electricity for businesses and homes could double in 20 years. With the current wholesale price of electricity below £50 per megawatt hour, one 'high case' scenario sees the price going over £100 per megawatt hour by 2035.

Reports indicate that the cost of energy in real terms has already increased by 20% since 2009, with the National Grid citing the closure of numerous coal power plants as the reason.

This is being reflected in purchasing choices and complaints raised by consumers to the independent ombudsmen. Figures show that 22,671 official complaints were made in the first six months of 2014 - 84% of those were concerning energy bills.

Lewis Shand Smith, chief energy ombudsman, said: 'The spike in complaints is in part a result of the rising cost of living, but also as a result of consumers becoming more aware of their rights and feeling more empowered to act and fight for a fair deal. Addressing these concerns is crucial to restoring consumer confidence in this sector'.

In addition, 'Big six' energy supplier SSE has lost more than 110,000 customers since pledging a price freeze just a few months ago. Their domestic gas and electricity customers were reported down from 9.1 million to 8.99 million.

SSE group managing director, Will Morris, said: 'We operate in a very competitive market and, as you would expect, different supply companies take different approaches and have different propositions'.

Watchdog Ofgem proposed a full inquiry into the way the industry is run earlier this year, due to increasing prices - an issue SSE tried to sidestep with their price freeze promise until 2016.

The ongoing battle between the big six energy suppliers looks set to continue well into the future, which could mean eventual better value for their customers but Mark Todd, director of energyhelpline.com, said: 'Households are struggling with sky high energy prices and research shows that millions are now fearful of turning on the heating even when very cold'.

Further information can be found on our website here.

July Newsletter

Welcome to the July 2014 Newsletter from Easterbrook Eaton Limited

'Nothing is certain except death and taxes' the saying goes (usually attributed to Benjamin Franklin), but that truism doesn't deter optimists from regularly calling for the taxes to be abolished...

Corporation tax, CGT, IHT or stamp duty - which taxes would you like to see abolished?

In the last month there have been several high-profile demands for radical reform of the tax system. This week a group of backbench Conservative MPs urged the Chancellor to transform stamp duty and inheritance tax, with Nick De Bois MP and Dominic Raab MP calling for a manifesto commitment to raise the inheritance tax threshold and to scrap stamp duty on properties sold for less than £500,000.

This was following a report by the Telegraph suggesting that there will be 'more tax on savers than sinners' within the next two years. The newspaper's analysis of official Treasury projections claimed that by the end of the 2015/16 financial year, revenues from inheritance tax, stamp duty land tax and stamp duty on shares are projected to raise £21.9bn. That compares to £21bn raised through so-called 'sin taxes', including tobacco, wine, beer and cider duties.

Graham Brady, chairman of the 1922 Committee of Tory MPs, said: "Inheritance tax was designed as a tax for the rich, and is now paid by many middle-income families who have accumulated assets - usually their homes - paid for out of income that has already been taxed. I hope the next Conservative government will be in a position to change this." (In their 2010 election manifesto the Conservatives did pledge to raise the inheritance tax threshold to £1 million, but the policy was left out of the Coalition agreement.)

Meanwhile, the advertising magnate Lord Saatchi has argued that corporation tax and capital gains tax should be abolished for businesses with fewer than 50 employees.

In a report for the Centre for Policy Studies he observed that 90% of UK businesses have fewer than 50 employees, with the average firm having just five staff members. Removing corporation tax for these businesses and capital gains tax for their investors would, he suggested, increase GDP up to 3.1% inside five years, compared to official forecasts of a 2.4% increase. In addition, public sector net borrowing would drop by £2.8bn in 2018/19, compared to the Office for Budget Responsibility's prediction of a £1.1bn fall.

Around £43.8bn was raised through corporation tax in 2011/12, of which small companies on the small profits rate contributed just £8bn.

Businesses respond to Queen's Speech legislation

June saw the Coalition's final Queen's Speech before next year's General Election, and although it was dismissed as 'more of the same' by Labour, there were some noteworthy elements.

First and foremost was the Pension Tax Bill, which legislates for the radical overhaul of the pensions system, as trailed in the March Budget. New rules will allow individuals to withdraw cash from their retirement funds without having to buy an annuity. Separate legislation will allow workers to contribute to Dutch-style collective pension schemes shared with their co-workers.

The new Small Business, Enterprise and Employment Bill contained measures aimed at creating a 'fairer marketplace' for small businesses. These include new laws governing late payment, access to finance, regulation and procurement. The Federation of Small Businesses (FSB) described the bill as 'a significant piece of legislation that is, for the first time, specifically designed to address the needs of small businesses'.

Previously announced plans to offer working parents with children under the age of 12 a state-funded tax-free childcare subsidy worth up to £2,000 a year were also confirmed under the Childcare Payments Bill.

Speaking generally on the Speech, British Chambers of Commerce (BCC) director, John Longworth, said: 'Businesses across Britain will be relieved to see that the Government has opted for a streamlined legislative programme, meaning ministers can devote more time to delivering the best possible environment for economic growth and enterprise'.

FSB National Chairman, John Allan, said: 'It included measures that we have pushed for in our discussions with Government and indeed all political parties over the last twelve months to help them support their growth ambitions - such as action on late payment terms for smaller suppliers and to beef up scrutiny of unnecessary regulation'.

Visit our website

There is a host of information and useful features available on our website, including handy tax and financial calculators. However, remember that there is no substitute for professional, one-to-one advice. Make sure you contact us to discuss any issues for you or your business.

June Newsletter

Welcome to the June 2014 Newsletter from Easterbrook Eaton Limited

The 2014/15 financial year is in full swing, and UK businesses are looking forward to even more changes to come - including landmark reform of the pension system for employers and individuals. With a marked improvement in both weather and economic outlook, many are enjoying the benefits of a more confident market.

Economic growth 'bringing UK out of recession'

The early part of 2014 was filled with cautious rumours of an economic recovery, later confirmed by the Government and published figures. The National Institute of Economic and Social Research (NIESR) reported that the economy may already be larger than pre-crisis levels, with predictions that GDP will grow by 2.9% this year.

Jonathan Portes, director at NIESR, said: 'The end of the great recession, it is an important moment. The British economy is very close to being bigger than it has ever been. Symbolically, that matters, and it comes at a time when growth is entrenched'.

Inflation has also been in the news, having fallen to 1.9% in January - below the Bank of England (BoE) target of 2%. It has been suggested that a long period of low inflation could mean that average earnings will rise faster than the cost of living, which has also not happened since the financial crisis.

These reports seem to have bolstered faith in the city, although experts warn that growth is still contingent on consumer spending and that corporate investment needs to increase in order to secure long-term economic improvement.

But in contrast Mr Portes warned: 'But as far as individuals are concerned what really matters is how rich we are - per capita GDP - and that's well below the level of 2008 and won't get back to its previous level for a couple of years. Take home pay is about 6% lower than it was back then and won't get back to its previous 2008 peak before, we reckon, another three or four years'.

The BoE has again quelled rumours that interest rates are due to rise this year, despite predictions by the Confederation of British Industry (CBI). Rates are currently expected to increase by 0.25 percentage points in the first quarter of 2015.

Another factor contributing to the economic upturn is the surge in self employment. 4.5m people are now self employed in the UK. Concerns have been raised that this increase could be the real driving force behind the recent fall in unemployment figures, which the Coalition Government has been keen to promote in recent months.

Pension reform affects employers and individuals

The single-tier State Pension will be brought in on 6 April 2016, and will affect people who reach State Pension Age from that point onwards. Those who already receive a pension or those who reach pension age before this date will be treated according to existing rules.

Single-tier pensions will replace the basic State Pension and Second State Pension with a flat-rate pension that is set above the basic level of means-tested support. It will also replace additions such as the Category D pension and the Age Addition. The Savings Credit element of Pension Credit will also be closed to anyone coming of State Pension Age after the start date.

The new system will require 35 qualifying years of national insurance contributions (NICs) or credits if individuals are to receive the full amount. Those with fewer than 35 qualifying years but more than the minimum qualifying period will receive a proportionally smaller single-tier amount. Transitional arrangements will be put in place to take into account the NIC records of individuals before the implementation date.

HMRC says the single-tier pension will make it easier for people to understand what they need to save for their retirement. It will also support the introduction of automatic enrolment into workplace pensions.

Auto-enrolment has been phased in over a number of years, following ongoing concerns that individuals are not saving enough into their personal pensions. Auto-enrolment requires most UK employers to automatically enrol eligible workers into a qualifying pension scheme and to pay a minimum contribution into the fund.

But as the phased introduction of pensions auto-enrolment continues, recent research has suggested that more than 80% of employers are facing increased costs as a result of the new regime. These figures imply that while some of the increased costs are accounted for by employer contributions, preparing data and dealing with administration are also proving to be significant cost factors.

The state-backed provider National Employment Savings Trust (NEST) said there is a significant improvement in living standards among households with a retirement income of at least £15,000 per year, and that those whose state and personal pension funds are likely to be less than this amount should consider increase their pension contributions.

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