Welcome to our
Summer 2001 newsletter
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Please contact us
if you have any questions or would like more information about any of the articles featured
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No small or medium-sized enterprise (SME) can have failed to notice the increasing mountain of regulations, paperwork, red tape and general rubbish with which they have to deal.
Well, now it’s official!
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A report carried out by one of the accountancy bodies estimates excessive regulation costs of around £1,700 for very small businesses, over £4,700 for small and over £10,500 for medium-sized businesses. The main reason given for the current state of affairs is that regulations have become harder to understand and often seem to be put together too hastily and with a lack of care.
For example, on the tax front alone, last April saw the shift of responsibility for paying the Working Families Tax Credit and Disabled Persons Tax Credit from the Inland Revenue to the employer. Furthermore, employers are also having to deal with significant changes to the national insurance regime now that the Class 1A charge has been extended to include most taxable benefits in kind. This April saw the introduction of Stakeholder pensions which places yet further administrative burdens on employers.
HELP IS AT HAND!
As ever, we are here to support and help you through this minefield. In the meantime, some of the business support groups that have been established may help. |
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Business support groups
The Federation of Small Businesses
Fighting for the rights of small businesses
www.fsb.org.uk
The Department of Trade and Industry
Designed to provide help for small and new businesses
www.dti.gov.uk
The Forum of Private Business
Aims to improve the climate in which all privately owned businesses operate
www.fpb.co.uk
The British Chambers of Commerce
Provides a national voice for local business
www.britishchambers.org.uk
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Did you know?
Suppose you put your house up for sale and, having found a purchaser, the sale falls through. If this happens after the prospective purchaser has paid his 10% deposit you get to keep it. All well and good, BUT ......... the law treats the forfeited deposit as the price of granting an option over the house so that the money is subject to capital gains tax (CGT). It does not count as a disposal of your house which would normally be exempt from CGT. It is taxable in full, with no taper relief, and the only deductions allowed are the legal costs you incurred in the abortive sale.
At worst this could mean an obligation to enter the deposit on your tax return and pay CGT at 40%!
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Stamp duty
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It was widely expected that Gordon Brown would announce a further hike in stamp duty rates in his March Budget. This did not happen; perhaps as a pre-election sweetener? We provide a reminder of the current rates and thresholds in the box below.
Remember that stamp duty at the appropriate rate is charged on the full price not just on any excess over a threshold.
Stamp duty exemption
As announced in the November 2000 Pre-Budget Report, an exemption from stamp duty is to be introduced on purchases of properties in certain disadvantaged parts of the UK.
Given that there is already a £60,000 exemption from stamp duty on property purchases, the new measure is unlikely to benefit individuals purchasing properties outside London. The main winners are therefore likely to be individuals purchasing properties in London above the £60,000 threshold and property developers.
| Stamp duty rates |
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Transfers of shares and
securities
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0.5%
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Transfers of other property
(from 28 March 2000)
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Price
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Up to £60,000
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Nil |
£60,001 - £250,000
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1% |
£250,001 - £500,000
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3% |
| Over £500,000 |
4% |
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| Flats for letting |
A new scheme is to be introduced to enable property owners and occupiers to claim up-front tax relief on the whole of their capital spending on the renovation or conversion of vacant or underused space above shops and other commercial premises to provide flats for rent.
The tax relief will be given in the form of 100% capital allowances. However, although the measure should encourage regeneration of towns and cities, numerous conditions will need to be satisfied before the relief can be claimed. We provide a useful summary of these below. Please talk to us if you think this scheme could benefit you.
Conditions to be satisfied
- Property built before 1980
- Maximum of five floors
- Originally constructed with floors above ground floor primarily for residential use
- Ground floor is a shop/other commercial premises
- Other floors currently empty/used for storage
- Converted flats are self-contained, have no more than four rooms and are not of high value
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The Long Awaited Children’s Tax Credit
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At last the children’s tax credit (CTC) has been introduced. The amount for the first year, 2001/02, has been set at £520 (ie £5,200 at 10%). It is available to families (single parents, married or unmarried couples) with one or more children under 16 living with them. It is only available in full to those who are not higher rate taxpayers.
The tax credit is reduced by £2 for every £3 of income chargeable at the higher rate. So, for 2001/02 no credit will be available where taxable income exceeds £37,200.
An anomaly still exists in that a couple where each has income of, say, £25,000 would be entitled to a full credit because neither of them is a higher rate taxpayer. On the other hand, a couple where one has income of, say, £50,000 and the other has no income would not be entitled to any credit because the claim has to be made by the partner with the higher income level and at £50,000 the higher rate taxpayer withdrawal rules would operate so that the credit would be reduced to nil! Gordon Brown assures us he will have resolved this anomaly by 2003!
An enhanced CTC will be introduced next April and will apply in the year of a child’s birth. On current figures the enhanced credit would be worth a maximum of £1,040 per annum but once again withdrawal provisions for higher rate taxpayers will apply.
Please contact us if you have any concerns or questions relating to the children’s tax credit.
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Human Rights Act - A Case for Panic?
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The Human Rights Act (HRA) finally became law last October. All sorts of horror stories have been circulating but is it really as bad as it seems?
For the private employer the effects will be felt as a result of courts and tribunals being required to interpret UK legislation in a way that is compatible with ‘convention rights’. We summarise the main convention rights and give some examples of the likely impact under the HRA.
Main Convention Rights
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- Right to a fair trial
- Right to respect for private and family life
- Freedom of expression
- Freedom of thought, conscience and religion
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Likely Impact
One potential problem area will be balancing the right to respect for private and family life with an employer’s desire to monitor staff behaviour. For example employers may want to monitor employees’ e-mails. This should not cause a problem under the HRA so long as the employer has a policy on the monitoring of e-mails which is well publicised amongst employees.
Freedom of expression has caught the media’s attention because it extends to the way a person dresses. In fact a dress code or restriction will be acceptable so long as it can be justified, eg where health and safety is an issue or where the employee deals with the public. But justifying a rule based just on your idea of smartness will pose more of a problem.
However, even where employers act reasonably, follow proper procedures and can, where necessary, prove justification, it will not stop an increase in the number of cases coming before courts and tribunals with more employees pleading the HRA. Only time will tell whether the courts and tribunals will take a tough line.
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Stakeholder Pensions
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What do the new rules mean for you?
Remember that the new Stakeholder pension regime came into force on 6 April 2001. Employers with five or more employees are legally obliged to offer them access to a Stakeholder pension by 8 October 2001. The only exemptions are employers who already have an Occupational Pension Scheme or a Group Personal Pension to which the employer contributes at least 3%.
The Occupational Pensions Regulatory Authority (OPRA) will police the operation and availability of such schemes with significant penalties for non-compliance.
Also from 6 April 2001 a new integrated tax regime applies to Stakeholder and Personal Pension Schemes. Check our question and answer session for the main implications. |
Questions and Answers on Stakeholder and Personal Pension Schemes
Q I am self-employed and have paid personal pension premiums for some years. How does the new tax regime affect my position?
A From 6 April 2001 you pay all your premiums net of 22% basic rate tax rather than gross as before. You will still be eligible for higher rate relief given as before.
The maximum contributions you can pay in any given tax year will be the higher of:
£3,600 (gross)
a percentage (dependent upon your age) of your profits (capped at £95,400 in 2001/02).
Q I have heard that people with no earnings (eg children or non-working spouses) can pay contributions under the new regime. Is this true?
A People with no earnings can pay up to £3,600 (gross) per tax year into a Stakeholder pension. Contributions will be paid net of 22% basic tax rate so that a maximum of £2,808 (ie £3,600 net of 22% tax) can be paid to the pension provider with the Inland Revenue paying £792 even where the contributor does not pay tax.
Tip: consider setting up Stakeholder pensions for children and non-working spouses.
Q I have heard that my ability to carry forward unused relief is lost under the new regime. Is this true?
A Under the old personal pension regime, if the maximum possible contribution was not paid in any given tax year, the unused relief could be carried forward for up to six years and used in later years as a valuable way to catch up on pension payments. This facility has now been removed, the effect being that 31 January 2002 is your final deadline for using up that carried forward relief or it will be lost forever.
Q I am self-employed and currently pay pension premiums under the old (pre-July 1988) retirement annuity rules. How does the new tax regime affect me?
A None of the new rules apply to old-style retirement annuity plans.
Please talk to us if you have any questions we have not answered.
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Recruiting the right staff
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For small businesses, hiring the right staff is critical for success. The recruitment process is in itself expensive so you need it to be as quick and efficient as possible. Use our checklist to make sure you are not missing anything.
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- Identify the tasks and write a job description.
- Person specification - outline the skills, knowledge and experience required in a suitable candidate.
- Consider whether a new full-time employee is really needed or whether the tasks can be undertaken by redistributing work internally or by using subcontractors or temporary staff.
- Consider carefully where to advertise and your choice of recruitment services.
- Develop an effective method for sifting through candidates, eg use application forms, ask for CVs and use initial telephone interviews.
- The interview - choose your interviewer carefully.
- Offer the job verbally and follow this up with a written offer. Always check references and send letters of rejection to the other interviewees.
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Capital Allowances - don’t miss out!
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Energy Saving Investments
Businesses will be able to claim 100% allowances on investments in designated energy-saving plant and machinery made on or after 1 April 2001. An Energy Technology List defining the qualifying technologies, the relevant energy-saving criteria and the products initially within the scheme has been published. Details of the criteria can be found at www.eca.gov.uk
IT Equipment
Last year, 100% allowances were introduced for expenditure incurred on IT equipment by small businesses between 1 April 2000 and 31 March 2003. Look at the list below to see the wide range of expenditure covered under this heading. Talk to us if you need any further help or advice.
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Small Business
One that satisfies two out of the following three conditions:
- annual turnover not more than £2.8m
- gross assets not exceeding £1.4m
- not more than 50 employees.
IT Equipment
Hardware - including
- laptop and palmtop as well as deskbound computers
- peripheral devices connected to or inserted into the computer - eg printers, fax modems (“connected” includes devices using the new infra red technology instead of cables)
- cabling and dedicated electrical systems
- consultancy costs to install the technology
Software - including
- costs of building and operating a web site
Phones - including
- WAP and internet-enabled mobile phones.
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ISA Update
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The Government has commented that “ISAs are a continuing major savings success story”. In 1999/00, the first year of ISAs, over £28.4 billion was paid into nearly 9.3 million accounts.
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As a consequence, the £7,000 annual ISA subscription limit has not been reduced to £5,000 as originally planned but will be retained at £7,000 until April 2006. However, it is important to remember that within the £7,000 limit, you can choose either a single Maxi ISA or up to three Mini ISAs. The limits are set out below.
Annual ISA Limits
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Maxi ISA
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Mini ISA
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| Overall limit |
7,000 |
7,000 |
| Stocks and shares |
up to 7,000 |
up to 3,000
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| Cash |
up to 3,000 |
up to 3,000 |
| Life insurance |
up to 1,000 |
up to 1,000 |
The Inland Revenue has identified around 85,000 investors who may have taken out “incompatible” ISAs - eg opened a Mini ISA in the same tax year as a Maxi ISA. Where this has happened, the investor will not be entitled to any tax relief in respect of the ISA he should not have opened.
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Capital Gains Tax
Taper Relief Gets Better Still
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Business asset taper relief will reduce gains made on disposals in the current tax year (2001/02) by 50% (so long as the asset has been owned since before 6 April 1998). In 2002/03 the rate of taper will be 75%.
The corresponding rates of taper for non-business assets are 10% in 2001/02 and 15% in 2002/03.
Clearly the benefit of business asset taper is very significant as the following examples demonstrate.
2001/02 disposal
Gain - say £100,000 |
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Business
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Non-business
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| Gain |
100,000 |
100,000 |
| Less: Taper @ 50%/10% |
(50,000) |
(10,000) |
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£50,000 |
£90,000 |
CGT @ 40%
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£20,000 |
£36,000
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| Effective rate |
20% |
36% |
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2002/03 disposal
Gain - say £100,000 |
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Business
£ |
Non-business
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| Gain |
100,000 |
100,000 |
| Less: Taper @ 75%/15% |
(75,000) |
(15,000) |
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£25,000 |
£85,000 |
CGT @ 40%
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£10,000 |
£34,000
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| Effective rate |
10% |
34% |
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The definition of business asset is extended (from 6 April 2000) to include employee shareholdings in non-trading companies so long as the individual does not own more than 10% of the company (including shares held by ‘connected persons’ such as relatives).
Read our case study and check the status of Jack’s company to see whether business asset taper is available.
Please contact us if you have any queries or wish to discuss planning in this area.
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Case Study
Jack owns 3% of the shares in his family’s unquoted trading company. The shares are a business asset. If the company begins to engage in substantial investment activity so that it is classified as non-trading, Jack’s shares will only qualify as a business asset if:
- he is employed (full or part-time) by the company; AND
- together with the shares held by his relatives (and other ‘connected persons’) his holding does not exceed 10%.
If the company becomes quoted, Jack’s shares will qualify if the company is trading and Jack is an employee. If the quoted company is non-trading, the position is as for the unquoted company above.
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Disclaimer - for information of users
This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.
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