I come across interesting things from time to time and rather than start a new thread each time - I thought one to cover Tax would be more interesting.

Homeowners to be taxed in Budget proposals

 More criticism has been made of the proposals to impose a yearly income tax charge on people who enjoy the use of assets which they previously owned. The proposals are expected to be set out in the Budget on 17 March.

Citywire reports criticism of the proposed legislation from Gerry Brown of Scottish Life International.

Mr. Brown hits out at the retrospective nature of the proposals: 'For example, say a widow, with total assets of 150,000 gifted her house, worth 100,000, to her only daughter in 1999 and continued to live in it. The widow is the former owner of the flat and she is continuing to enjoy the benefit of using it. She is thus within the scope of the new tax.'

Mr. Brown calculates that the flat could attract an annual rent of 6,000 and that if the widow is a basic rate taxpayer, she would have an annual income tax charge of 1,320. This would increase year by year as the value of the flat increased.

Meanwhile the widow will receive no additional cash inflows to meet this tax charge. She will be much worse off in cash terms. She will also have to complete a self assessment tax return, possibly for the first time.

The new proposed treatment of 'pre-owned assets' will also catch those who have entered into inheritance tax avoidance schemes using trusts and loans. Not all of these will be capable of being unwound.

If the beneficiaries are minor children, the trustees would be failing in their responsibilities if they allowed the original donor to reclaim the assets put into the trust.

The proposals will impose a yearly income tax charge on people who enjoy the use of assets, which they previously owned. This charge is not intended as an alternative to inheritance tax but is an additional tax and one which will operate on arrangements set up for legitimate purposes, whenever established. The charge will have retrospective effect.

'We would urge the Inland Revenue to re-examine urgently the implications of its proposals and amend those aspects causing hardship, additional compliance costs and unwarranted tax charges,' said Brown.

Paper Boys - Scraping the Barrel

Evidence suggests that schoolchildren who deliver newspapers are the latest target of the Chancellor.

Newsquest, Britain's second biggest regional newspaper group, has been informed by the Inland Revenue that a form P46 must be completed for every paper boy or girl. The company's request for a dispensation for those aged under 16 was rejected.

As a result of this ruling and other regulation, all employees of the group, including schoolchildren, must also open bank accounts as a condition of their employment. Paper boys and girls unable to open a bank account or sign the P46 will 'have their employment terminated'.

A spokesman for the Inland Revenue has denied that the Department was mounting a campaign to target newspaper delivery boys and girls. Whether or not this is true, the big question is 'where will the Revenue strike next?' The Department might consider making sure that large multinational quoted companies pay 'the correct amount of tax'. Perhaps not, however, as the Revenue would be faced by opponents as big and powerful as itself. There are easier pickings elsewhere among individual taxpayers and the small business community

Budget on Wednesday

Interesting articles there LW. I wonder if the Chancellor has overlooked the possibility af taxing, dare I say it, people like myself who receive by email a free daily copy of The Scotsman, large potential there!! and what about all these computor terminals that we are all using, all going untaxed, except of course small items like VAT and corporation tax etc.
Yes I think we have a lot more obscure taxes to come from the present 'team'
Looking forward to Wednesday, I don't think!!

I received this a part of a editorial note from an accountancy newsletter:

... where there is insecurity, we can provide security, where
opportunity has been limited we can extend it, where justice has
been denied, we can provide it, and where there has been poverty,
we can ensure that there is prosperity," said Gordon Brown last
week at a conference in Manchester.

With the Budget just ahead of us, the Chancellor's words appear
a little empty when security for many has been crushed by tax
raids on pension funds, where opportunity is stunted by IR35,
s660A and now IR5.91, where justice is still denied men who
cannot claim the widower's bereavement allowance, where tax
credit claimants are reduced to poverty because the system
doesn't work, and where prosperity is held back by the growing
complexity of tax regulation.

But what really comes through from these annual mission
statements from the Chancellor is that while his tax plans
increasingly hinder the entrepreneurial spirit of the country,
public spending is spiralling out of control, and money is being
wasted on costly tax measures for which no results are ever
published, the tax burden keeps rising and the Budget spin keeps
rotating faster and faster.

So you never know - you could be right!

LW I think if we continue on the present trend we could become a 'Party Political Broadcast' Probably not a bad thing, but does anyone ever listen?

I wonder who listens because nobody seems to be paying attention. I recently shut the bulk of a uk office and moved it to another country because of the mess the UK is in. More will follow.

I see they are introducing a minimun wage for youngsters now. I don't employ people that young or pay that little. But I definately ain't now.

I would have thought that busineses outside the SE are going to suffer as I guess they must pay below minimun wage due to lower living standards, that's crazy.

Confirmation: (Are people going to have to return gifts?)

Pre owned assets

From April 2005 there will be an income tax charge on those who have owned assets (such as the family home) and have then gifted them away but retained some benefit in relation to them (such as continuing to live in it).

This proposal has been much criticised for being a tax on the elderly and for being retrospective in nature. Those criticisms remain. Quite why Gordon Brown prefers to use income tax rather than making a change to inheritance tax rules is unclear. Once again, the detailed rules are not available, and it really is unacceptable that the workings of such a dramatic new tax regime are being kept secret

A comment taken from a Small incorporated companies guide:

The Chancellor's solution is clearly targeted only at the small incorporated businesses with profits of up to 50,000. The proposals should not affect those with taxable profits consistently above that level. Thus, given that he was committed to doing something in this area, these proposals represent probably the least worst solution, although there are still a number of loose ends to tie up. It also seems that he took note of many of the representations made after the pre-budget report.

In essence the measure is intended to ensure that when profits are distributed after 31 March 2004 (to individuals or trustees) the profits out of which they have been paid will be subject to a minimum rate of 19% corporation tax. The maximum additional tax due under the new rules is expected to be 1,900 per year.

There will be rules, not yet specified, to cover situations where:

distributions exceed the profits for the period in which the distribution is paid;

newly incorporated companies; and

to deal with accounting periods that straddle 31 March 2004.

The 0% rate of corporation tax will only apply to retained profits and those distributed to other companies. Thus the new rules will not affect companies with profits wholly taxable at corporation tax rates of 19% or above. The proposals are also intended to incentivise even small companies to reinvest such that if they do so they will still benefit from the 0% rate on the first 10% of retained profits.

We understand that the rules are intended to operate as follows:

Compute corporation tax in the usual way and identify the effective rate on the profits for the period. (If this is 19% or above the new rules will not be relevant.) eg: Assume taxable profits of 30,000. Corporation tax would normally be 4,750, that is 10,000 at 0% and 20,000 at 23.75%. The effective average rate on the profits of 30,000 is 15.83%.

The profits available to distribute under the old rules would therefore be 25,250 (being 30,000 minus 4,750).

Assume that a dividend of 20,000 is to be paid. The company will be liable to 19% corporation tax in respect of this 20,000 and also 15.83% (in this example) on the remaining 10,000.

The total corporation tax payable on the normal due date would thus be 5,383 (being 3,800 plus 1,583). The increased charge is 633 being the difference between 19% and 15.83% tax in respect of the 20,000 dividend.

When will this new tax be payable?

The extra corporation tax payable because of the dividend will be due as part of the company's normal corporation tax liability. Thus the first payments under the new regime will fall due on 1 January 2006 (being 9 months and one day after the end of the 12 month accounting period ending on 31 March 2005).

What will happen with dividends paid out of brought-forward reserves?

Dividends paid after the end of the accounting period will apparently be treated as if they related to the period in which they are paid even if declared to be a final dividend for the previous accounting period. This is presumably to minimise the need for cumulative figures to be computed and means the rules will be less complex than they might otherwise have been.

Related issues

Finally, it is worth noting that the Chancellor's chosen situation means that two related issues are largely unaffected. That is, IR35 and the prospect of challenges under the settlements legislation (s.660A).

Is there more to come?

This may not be the end of the story however as, in a separate Budget press notice there is a related announcement: "To ensure that targeted tax incentives support the Government's objectives for growth, enterprise and productivity, the Government proposes to consider the issues raised by the interaction with the tax system of definitions of income of self-employment, and the remuneration paid to owner-managers, in a discussion paper which will be issued at the time of the 2004 Pre-Budget Report."

This may well mean that there are further changes to come although this time we are being promised a discussion paper beforehand.

Disincorporation

In the meantime any small incorporated companies that no longer consider that incorporation is beneficial should not attempt to simply disincorporate. In the absence of any new reliefs there remain a number of legal, commercial and tax issues to consider whenever a company's trade and business are transferred to a sole trader or partnership. Amongst the tax issues are:

the absence of any capital gains releifs such that corporation tax will be payable on the deemed market value of assets (including goodwill);

the absence of any loss carry-forward releifs; and

the prospect of the market-value of the assets (including stock, WIP and goodwill) being treated as a distribution or a benefit-in-kind.

The danger of overlooking such issues lies in the prospect of tax liabilities being identified and pursued possibly some time after the disincorporation takes place.

19% dividend tax made simpler:

The businesses affected the most are the small businesses with profits of under 10,000 who are subject to the nil starting rate for Corporation Tax and who because of the Chancellors increases in National Insurance extract their money from their businesses by means of a dividend. Such businesses with profits of 10,000 will see an increase in their Corporation Tax liability from nil to 1,900. This represents an extremely large increase for such small companies, who may now need to consult with their accountants to examine if it is still to their advantage to be incorporated.

The next category to be affected is the companies with profits in the marginal rates of between 10,000 and 50,000. Because it is a marginal rate the tax rate increases gradually from nil to 19%. Consequently the companies with profits closer to 10,000 will suffer a greater increase than those closer to 50,000.

For example the increase for a company with profits of 20,000 is 1,425 but the increase for a company with profits of 40,000 is only 475, again an indication of the affect on the smaller company.

The larger companies with profits over 50,000 will not be affected.