Business Alert March 2011
Top tips for tax checks before the year end, important changes to capital allowances, tax advice for termination payments and a reminder about iXBRL which applies from April 1st 2011.
11.03.2011
Top tips for tax checks before the year end, important changes to capital allowances, tax advice for termination payments and a reminder about iXBRL which applies from April 1st 2011.
Please click on the links below to read each section of our March 2011 Business Alert.
Termination Payments tax rule changes
iXBRL approaches - a small reminder
The annual investment allowance (AIA), which gives a 100% deduction for capital expenditure on certain plant and machinery, will reduce from £100,000 to £25,000 in April 2012. Businesses anticipating significant capital expenditure should try to make the most of the higher AIA. For periods straddling April, the appropriate AIA is calculated on a pro-rata basis.
Reductions in the rate of writing down allowances (WDAs) are also on the way. The rate of WDA depends whether expenditure is allocated to the ‘general’ or ‘special rate’ pool. The general pool includes expenditure on plant and machinery, fixtures and fittings, commercial vehicles and cars with CO2 emissions below 160g/km. The special rate pool includes expenditure on long life assets, cars with CO2 emissions exceeding 160g/km, and integral features such as electrical and air-conditioning systems.
For accounting periods ending on or after 1 April 2012, the annual rate of WDAs for general pool assets will decrease from 20% to 18%, with the rate for assets in the special rate pool reducing from 10% to 8%. A hybrid WDA rate will apply to accounting periods spanning the relevant dates.
On a more positive note, environmentally-friendly assets continue to attract tax relief. A 100% first year allowance is available on zero-emission goods vehicles and cars with CO2 emissions of 110g/km or less.
End of year tax tips
What action do you need to take before the current tax year ends on 5 April 2011?
Pension contributions
For those earning less than £130,000 per annum in 2010/11 and the last two tax years, this is the last chance to pay in substantial contributions before the annual contribution allowance reduces.
Those earning more than £150,000 per annum can still receive tax relief of 50% on pension contributions of £20,000, and maybe more. A gross contribution of £40,000 would provide average tax relief of 35%.
Anyone earning between £100,000 and £113,000 can get tax relief of 60% by making a gross pension contribution to reduce their income below £100,000.
Venture Capital Trusts (VCTs)
30% income tax relief is available on any VCT investments up to a maximum of £200,000 for 2010/11. Dividend income is tax-free and, after five years, the eventual proceeds are also free of capital gains tax. VCTs are now available in a wide range of risk profiles, and some are suitable for the more cautious investor.
Individual Savings Accounts (ISAs)
Make sure you use your 2010/11 ISA allowance of £10,200 per person for this tax year which is lost if not used. This can be made up from a combination of a cash ISA and a stocks and shares ISA. ISAs provide tax-free growth and income.
Enterprise Investment Schemes (EISs)
20% income tax relief is available on any EIS investment up to £500,000, with last year’s allowance also available if not used allowing up to £1 million to be invested with 20% income tax relief available against 2010/11 income. EISs are also one of the few remaining investments that can be used to defer capital gains tax, and are also free from inheritance tax (IHT) if held for more than two years at the time of death. Any capital gains tax deferred will also be free of tax on death so an EIS is a very useful IHT planning vehicle.
Using the capital gains tax exemption
Consider realising investments standing at a gain to make use of the CGT annual exempt amount of £10,100. It may be possible to make use of your spouse’s exempt amount as well, by transferring assets before a sale. If you reacquire the investments within 30 days this will, broadly, make the exercise ineffective. However, you might be able to reacquire them in an ISA or you might suggest that your spouse acquire equivalent assets.
Crystallising capital gains tax losses
If you have investments standing at a loss, you may be able to realise them and set the losses against your gains – but be careful that you don’t lose the benefit of the exempt amount. A sale to a spouse or other relative will not be effective for this purpose.
Enterprise Zones (EZs)
This is the last year EZ investments are available. EZs invest in designated out-of-town retail warehouse parks and offer income tax relief of up to 50% on unlimited investment amounts. Very high capital allowances are available together with limited recourse loans which can often mean a £100,000 investment is available for a net capital outlay of as little as £6,000. A similar relief is available for investment in vacant or derelict property in city centres which is covered by the Business Premises Renovation Allowance.
Bringing forward expenditure
If you are considering incurring expenditure in your trade it may be beneficial to incur it before rather than after your accounts year end (whether that is 5 April or a different date), so that you gain the benefit of any capital allowances or other relief a year earlier.
Bringing forward income
If you expect your marginal tax rate this tax year to be lower than next year (for example 40% rather than 50%), consider bringing forward income from next year to be taxed earlier but at a lower rate. You might do this by closing deposit accounts in order to crystallise the interest early, or by seeking earlier payment of bonuses.
Income drawdown planning opportunities
If your pension payment year ends between now and 5 April 2011, asking for your maximum pension to be reviewed could allow you to take a higher pension for longer given the reduction from the current 120% maximum income limit to 100% of this limit from 6 April 2011 or whenever your next five yearly review ends.
If you are planning to draw on your pension in the next year or two, taking some income now could allow you to take more later.
If you are considering a transfer of a pension already in income drawdown, there are benefits in completing the transfer before 6 April 2011.
If you have a pension fund that might be worth more than £1.5 million by the time you start taking benefits, think about applying for fixed protection.
Childcare schemes
The income tax relief for employer-supported childcare schemes is to be restricted from 6 April 2011. Those already in the scheme will continue to receive the same level of tax relief, but taxpayers who are liable to the 40% or 50% rates and who join a scheme on or after 6 April 2011 will only obtain the same tax reduction as basic rate taxpayers. Therefore you might benefit by joining a scheme now rather than after the rules change.
Stamp duty land tax
If you are intending to buy a house with a value above £1 million you may benefit by completing the purchase before 6 April, when the rate of stamp duty will go up from 4% to 5%.
The inheritance tax (IHT) annual exemption and small gifts exemption
Consider using your IHT annual exemption of £3,000, or the small gifts exemption of £250 before the year end. The £3,000 exemption can only be carried forward for one year, so after 5 April it will no longer be possible to use last year’s exemption.
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Termination Payments changes to tax rules
The rules on the deduction of tax on termination payments are changing. At present, if the payment is made after the employment has been terminated and the P45 has been issued, the employer only has to deduct tax at the basic rate (from any balance above £30,000).
From 6 April 2011 - if the termination payment is made after the P45 has been issued - the employer will have to use the tax code OT and deduct tax from the termination payment at 20%, 40% or 50% on a non-cumulative (month 1/week 1 basis). In many cases this will mean that too much tax is deducted, and employees will have to make a tax reclaim at the end of the year. Making the payment before the P45 is issued, with tax deducted at the employee's marginal rate, may result in less tax being deducted.
For employers, it is therefore crucial to:
- ensure that payroll operators are aware of the change;
- check that Compromise Agreements involving terminations after 6 April do not provide for deduction of tax at basic rate.
A little reminder that from 1 April 2011 most companies will have to file corporation tax returns, computations and accounts with HMRC electronically using the iXBRL software format.
There are very few exceptions to the new requirement, which apply to corporation tax returns for accounting periods ended on or after 31 March 2010. We can help with all aspects of the filing process, from converting accounts into iXBRL format to producing tagged tax computations.
Contact:
Paul Renz, Head of Tax
