Topical Issues
Issue 43
31 July 2011
Act now or you may be too late to claim 100% tax relief on £100,000 of capital expenditure.
Capital allowances are a form of valuable tax relief available primarily to those investing in Plant and Machinery for business use. However, it is also available on fixed items within buildings let commercially such as factories, rental units, offices, hotels and furnished holiday lets. Fixtures would include items such as lifts, water installations, air conditioning units, sanitary fittings as well as general mechanical and electrical installations. The relief, therefore, could be significant.
Until 1 April 2012 (6 April 2012 for individuals and partnerships) £100,000 of investment would secure 100% capital allowances relief to reduce profits chargeable to tax. Expenditure in excess of this would attract 20% or 10% depending on the nature of the fixture. Post 1 April (6 April) only £25,000 of investment will secure relief, the balance would secure 18% or 8%. As the £100,000 limit is reduced for accounting periods straddling April 2012, you should seek advice before incurring any capital expenditure in that accounts year.
Existing rules allow property investors to claim capital allowances for historically purchased fixtures so long as the item is still owned and used in the business. Therefore, even if a property was purchased 20 years ago and the owner had not previously claimed capital allowances, they could potentially make a significant claim for tax relief.
The level of relief varies depending on the property type and specification, with typically 20% - 30% of the purchase or refurbishment expenditure qualifying for capital allowances.
If you are late HMRC won’t wait
An HM Revenue & Customs consultation document released on 31 May 2011 includes proposals to restrict the ability to claim capital allowances on historic expenditure incurred. This is demonstrated in the example below.
Example:
Deficit Limited purchased an office block during 2010 for £5m. Capital Allowances relating to fixtures of the property have been identified as being worth £1.25m, providing cash tax relief at 26% of £325k.
Deficit has tax losses brought-forward of £500k and is not expected to pay tax until 2013 at the earliest. Under existing capital allowances rules, Deficit may postpone a capital allowances claim as long as they still own and use the item.
However, under new rules, if Deficit have not identified and ‘pooled’ all available allowances within one or two years (to be confirmed) of acquisition, the capital allowances would be lost entirely – thereby costing Deficit £325k in squandered tax relief.
If you have, bought, built, refurbished or renovated commercial premises and still own it, you should seek to have the expenditure reviewed for qualifying items by a specialist before the opportunity is gone for good. Please contact me for further information.
Business Evolution - critical in today’s market place
It’s been a difficult time for many clients over recent years, so this month we bring you a success story to show you that it’s possible to get through the toughest of times and come out smiling on the other side.
By Bob Lock
We spoke to our client Michael Thompson of R E Thompson, a precision engineering business based in Hampshire, about how his business has evolved for the better.
“The manufacturing industry has been going strong in the UK for hundreds of years but with advances in technology, I think it’s hugely important to change the way we work in order to make processes more efficient and cost-effective, as well as making the working day much more pleasant for employees.
“Four years ago, I took a good look at our business and decided that improvements had to be made. We were running day and night shifts which made the company feel like two opposing teams with lots of inefficient practices and interfaces - plus far too much stock and work in progress snarling up cash flow. At that point, there were 38 of us and we were turning over just over £2 million.”
All change on the finance front
“We decided to invest £3.4 million in new equipment which was quite an undertaking but I felt we would need to commit to such a step in order for the business to progress. We decided to move our banking and having left a fairly inflexible service which we’d had in place for 52 years, the new team has seen us through some of the toughest times, constantly reminding me how important the ‘people’ aspect is in any business relationship.
“We also changed an all-important part of our financial support – our accountants. The existing team had become too big, with every meeting involving representatives from multiple departments when I simply wanted a conversation with someone I could trust. Bob Lock and the Wise & Co team have met the brief perfectly.”
A huge cultural shift
“The biggest change, however, was to staffing and our company culture. The new automated equipment enabled the factory to operate 24/7, without having to employ night staff. As a result, our staff work much more flexible, sociable hours and are more empowered. Everyone at RE Thompson works together as a team now - we even have a cook on site so that we all have lunch together which although it may sound trivial, really alters the working dynamic and makes the facility a much nicer place to be.
“Of course, big changes can be difficult to implement and the initial plans to reform the business resulted in 18 of our 38 staff deciding to leave. It was a low point but even after listening to what everyone had to say, I just knew we had stick to our guns and carry on, for the best interests of all at the company. There were times during that period when the management team were working seven days a week, and often from 6.30am to 2am - we were all exhausted – but I’m happy to say it was all worthwhile.
“Today we are reunited as one extremely solid team – a real family business where we talk and work things through together. There are 24 of us now and all those who left have since reapplied to work for the company. That, alongside the fact that the business is now turning over £5 million plus, is testimony to the success of the changes we made.”
Looking ahead
“The continued success of RE Thompson has opened many more doors for us as a company, as well as allowing me to pursue new avenues and invest back into the community where I live and where the business is based.
“Over the last twelve months we have taken on many new staff members and are looking at employing another 12 individuals this year, in order to keep up with the expansion of the company. I’m very keen to keep things local – I’d rather bring skilled people from the area into the firm than have a team who need to commute long distances to get to work.
“As it turned out, when looking for new members, I soon realised that there was a real gap in the market for an online forum which serves communities outside city areas, so I decided to start a website on which people could post and search for jobs nearby. One year on, I have invested some of the profits from RE Thompson into developing the site, which now caters for free classified ads, cars, services and charity listings. The site sponsors a number of local sports teams and has affiliations with various worthy causes which are close to my heart, including the Dyslexia Research Trust which helped both of my children overcome some quite serious eye conditions.
“It’s a fantastic feeling to be running a successful business which also contributes back to the area. I’m lucky to work within a really supportive team of individuals who believe as passionately as I that there are huge advantages to building strong connections within our local communities.”
Gary made it to Paris and raised £2,000!
An update on our client Gary Cottrell who has now raised £2000 for the Samantha Dickson Brain Tumour Trust in memory of Andy Petersen.
“Well I’m back and still in one piece!!
I would like to say it was easy but that would be a lie. I wanted a challenge and that’s what this was but thanks to the many hours spent in the gym and numerous miles covered on the tarmac, it wasn’t a challenge too far … and I didn’t get off and walk once!! There were approx. 120 of us who left Crystal Palace on Wednesday and all of us made it, to what turned out to be an emotional finish at the Eiffel Tower. We were blessed with the most amazing weather from start to finish which was a great help.
With your kind help, I have managed to raise in excess of £2,000 and the funds are going to a very worthwhile cause. Thank you to everyone for your support!!
The whole experience, including the training, has been absolutely amazing and something that I will treasure forever.”
Gary Cottrell
Tax headlines
HMRC continue to focus in on penalties for late payments, online filing and now they even have new powers for adhoc checks on your record keeping. Please do check through the mini-articles below and make sure you are up to date.
Self assessment penalties
HMRC is incentivising each of us to get our tax returns in on time in the only way they know – by increasing the penalties for late filing! From £100 for being a day late to 100% of the due tax for being 12 months overdue. For non payment, fines of up to 15% of the outstanding amount will be levied – in addition to interest which is also due.
Business record checks
The Revenue has introduced a new business record check where they are entitled to literally turn up at your premises and ask to see your business records. From what we can see, there is no penalty for you to refuse them entry (for example, because the records are not available). If you do let them in, you can contact your agent (Wise & Co. for example) but they are entitled to start the checks within 30 minutes if no-one arrives.
If the records are thought to be inadequate, you could face a fine of up to £3000, as well as any tax penalties that may also be levied. Our recommendation would be to not allow the visit and ask for it to be rescheduled for a more convenient time when the records can be available and you have someone to represent you.
Electronic filing for Corporation Tax now mandatory ...
Since 1 April this year we are obliged to file Corporation Tax returns electronically and unfortunately, it is likely to create an extra charge to clients for the additional work involved for us to link the statutory accounts in the required iXBRL format.
In 2013, we will also be required to include the detailed Profit & Loss information and this is likely to add further time for the first year only, again assuming no major changes to the accounts.
Late PAYE payments catch some employers out ...
Monthly payments need to be with HMRC by the 22nd of each month when paid electronically (19th for cheques) and where this falls at the weekend, payment can sometimes be deferred by the bank till the next working day. HMRC is now saying it will charge up to 4% for this! The problem dates in the next year are October 2011, January and April 2012. So make a note in your diary!
New fuel scale charges
If you claim private mileage from your business, new scale charges were introduced in May this year and you need to introduce them for your financial period that starts on or after 1st May 2011.
The charges have been adjusted to encourage low CO2 emissions.
Electronic P60s for your employees
You can now deliver your employees’ P60 electronically if you’d like to. You may want to check that employees are happy to receive them in this way and you’ll need to ensure that systems are secure for delivery and printing. Alternatively you can send them to an email address provided by the employee.
Entrepreneurs Relief
One of the most welcome announcements in the Budget was the doubling of the lifetime Entrepreneurs Relief – going up from £5 million to £10 million. So if you make any form of capital gain through business, £10 million of it – over a lifetime – is taxed (CGT) at 10% - compared to a full rate of 28%. This is in addition to the tax free annual allowance of £10,100.
Revised minimum wage
Do you employ staff at the minimum wage? A shop, factory or bar perhaps?
The adult rate (over 21) is now £6.08 per hour and for 18 to 20 year olds it’s £4.98 per hour. 16 and 17 year olds can earn £3.68 and apprentices up to age 19 get £2.50 per hour. The accommodation offset has also increased to £4.73 per day.
A tax investigation – the reality ...
We often talk about the increased record checks and fines levied by HMRC – but it may all seem a bit distant until the investigators come calling. We asked our client – Vanessa Lanham-Day – to explain what happened when HMRC decided to do a random spot check last year.
“I’d say I’m pretty meticulous about record keeping and so was surprised when we were told that there was going to be an investigation but Partner, Treena Turner at Wise & Co. explained it was simply a random event and not to worry – I worried anyway though! We had three businesses at that time, plus we have three UK rental properties and an overseas property that we rent out and they seemed mostly interested in the property side of things for 2008-9.
“Of course they asked for justifications for everything and even though it was for just a year earlier, it’s amazing how suddenly perfect record keeping seems to fall short of the mark when you look more closely. I soon found bits I hadn’t claimed, things where we’d simply added it up wrong on the spreadsheet and so on. It really made me realise where we simply weren’t tight enough. My main fear was looking like we had something to hide and that it was worth them sending in the HMRC SAS for a full blown rummage!
“I couldn’t believe the level of detail they were looking for ... for example, mortgage statements weren’t sufficient and we had to produce all the letters showing every single change in interest rate that year (there were many!) plus loads more information. Every day seemed to bring a new demand; it took me HOURS – days probably. Which is hard to find when you are running three businesses! However, thankfully we’d taken out the Wise tax investigation insurance and our Wise & Co fees were covered – I don’t like to think what the bill would have been otherwise.
“We ended up with some additional tax relief being allowed bizarrely, so in the end we had nothing to worry about. But I really would warn other businesses of the potential impact of an investigation and urge you not to become complacent in your record keeping.”
”Lessons learned? Keep up the tax investigation insurance payments – worth every penny! And always assume that someone may come knocking at your door to ask you to justify your figures. Plus a big thank you to tax guys at Wise & Co. who got things sorted for me in double-quick time.”
Online VAT filing
By Steve South
Currently, only some VAT registered businesses are required to file online but from April 2012, all registered businesses must do so.
VAT amnesty
The Government is planning an amnesty campaign for businesses trading above the VAT threshold. If this applies to you we strongly recommend you take advantage and get your house in order. HMRC will publish more information in due course.
We are also told that eBay traders selling more than 100 items a year may soon be in the HMRC hit list for Income Tax and Capital Gains Tax!
R&D allowances
Allowances for companies that invest in Research & Development have always been generous but the numbers of smaller companies able to benefit has been limited by the £10,000 minimum spend, plus limiting the total tax credit to the amount of PAYE and NIC it pays.
However, the good news now is that as from 1 April this year, the total deduction is 200% of expenditure. From next year it will be 225% and the £10,000 minimum spend and the PAYE/NIC limit for obtaining R&D credits may be removed.
This will greatly improve the viability of R&D for SMEs. Claims still have to be applied for in some detail and following the correct procedure will definitely expedite the process.
Training is so important to us as a practice
By Mark Dickinson
Wise & Co has been training accountants for nearly forty years. We believe it is both an important part of our culture and of the service we offer to our clients.
We are accredited with both ICAEW and ACCA as a training organisation and we offer trainee accountants the option to work towards the professional qualifications of Chartered or Certified Accountant.
Students come to us either from school with A Levels and start their training with AAT, leading onto ACA or ACCA or they join us from university with a degree and start immediately with the higher professional qualification. Wise & Co provide the trainee accountants with courses and study support from leading professional study centres to give them the best opportunity to pass their exams. There is also an in-house mentoring system where our managers, who are qualified accountants, are able to pass on their knowledge and experience to trainees.
It is really important for our trainees to gain practical experience working with clients, as they cannot just learn this from a book or by taking exams. Trainees initially work on client records in our office supervised by our training manager and over time, progress to working independently in the office and at client’s premises doing a mixture of audit, accountancy, VAT and corporation tax work. Over a number of years, this enables them to fully understand exactly how accounting works in the real world with real businesses and gives them the opportunity to work with business owners and give them useful pro-active advice from the accounting picture they can see emerging. This is such an important career foundation from which their technical, advisory and consultancy skills will develop.
Our congratulations go to our latest newly-qualified accountants – Gemma, Hayley and Kim who all have all successfully passed their ACCA exams. I know they would tell you that it is a lot of hard work to get through all their professional exams – and they are absolutely right!
Congratulations to our three recently qualified Accountants
Kim Tanner, Gemma Stoneman and Hayley Pires
