Income tax increase

Currently income is taxable at either the basic rate of 20% on taxable income up to £37,400 and the higher rate of 40% applies to taxable income over that level.

Today’s budget has announced an additional higher rate of income tax of 50%, effective from 2010/11 for individuals with taxable income above £150,000.

Not only is this higher than the 45% tax rate initially announced in the 2008 pre Budget report but it will come into effect one tax year earlier than was expected.

The increase affects all income and therefore dividends otherwise taxable at the new 50% will be taxable at the new rate of 42.5%. The rate increases apply also to income of trusts and therefore the trust tax rate will increase to 50% and trust dividend rate will be 42.5%.

Loss of personal allowance

The basic personal allowance which provides an amount of tax free income will be gradually eliminated where a person’s total ‘adjusted net income’ is more than £100,000 by reducing the allowance by £1 for every £2 that the income limit is exceeded. Therefore, if the adjusted net income is £105,000, this exceeds the £100,000 limit by £5,000 and £2,500 of personal allowance would be lost.  

Comment on this blog in the space provided below. Barry Hallam is a Senior Tax Manager at Mercer & Hole. 

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With less than a week until Chancellor Alastair Darling’s second Budget statement the speculation as to what may be announced on Wednesday 22 April 2009 is mounting.

Political  commentators such as www.politics.co.uk suggest that on one hand it should be a neutral Budget, but on the other hand spending is now part of the Government’s DNA. The British Retail Consortium (BRC), is reported in The Telegraph as saying that, “the high street is in need of some retail therapy”.

The Times reports that, “the Budget will make or break renewable energy” and the BBC is giving its own predictions here.

From a tax perspective much has already been announced in respect of the current tax year, but there may be changes announced for later years. Those dealing with the taxation of non-domiciled UK residents would welcome some simplification of the horrendously complex new rule introduced in Mr Darling’s first Budget last year. 

As usual, we will just have to wait and see! 

We will of course be blogging on SME Plus Blog and Tax Plus Blog, providing analysis on the key highlights next Wednesday.    

If you do not already subscribe to our blogs click here for SME Plus Blog or here for Tax Plus Blog to ensure you get our comment and analysis as and when it happens. 

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The Chancellor will make his Budget statement on Wednesday 22 April 2009.  We will be providing analysis of Budget announcements on the day.
 

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HMRC Revenue & Customs announced yesterday that they are taking steps to close a “highly contrived” tax avoidance scheme. The arrangements involve complex structures including both companies and trusts (possibly offshore). Some details can be found on the HMRC website and a ministerial statement will be made in Parliament today.

Maybe this will help plug the shortfall in tax receipts discussed in The Times on Saturday. The article indicates that HMRC are stepping up there investigations into Self Assessment Tax returns. The returns for the year to 5 April 2009, if not already filed, are due by the end of the month.

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In a recent posting on sister blog SME Plus, it was highlighted that effective from 9 December 2008 taxpayers can settle their self-assessment tax bills by credit card (for an extra fee of 1.25%).

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There are 8 Consultation documents issued alongside the PBR documents which are to a greater or lesser degree related to the new powers and penalties regime which comes in from 5 April 2009. The documents refer to the proposed new customers charter (reference the previous taxpayers charter of the 1990s) and there is also particular attention paid to ensuring that returns are filed and tax is paid on time…slightly at odds with the 2 pages of FAQs on the HMRC website offering support to distressed businesses. We will review the consultation documents and respond to them in detail as necessary.

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Chancellor Alistair Darling has announced in his Pre-Budget Report that the top rate of income tax is to be increased to 45% - but not until April 2011 and only on income over £150,000. This applies to income other than dividend income which will be taxed at 37.5% (up from 32.5%)

This is part of a package of proposed tax increases to help fund the short term measures announced elsewhere in his report.
 

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One of the Press notices confirms that the rules on income shifting will NOT now be introduced in Finance Act 2009 despite their deferral from the 2008 Bill. The income shifting rules had been proposed as a method of dealing with the Arctic Systems type situation where a lower rate paying spouse benefits from the earnings of a higher earning spouse. The matter is being kept under review which – it is to be hoped – is code for being forgotten about….

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The High Court has overturned a Special Commissioners decision in the case of Commissioners of Revenue & Customs v Grace. According to Taxation magazine this is the first time in 100 years that the court has overturned a Special Commissioner’s ruling.

The case involved an airline pilot who claimed he was non resident in the UK as he had settled in South Africa even though he returned to the UK regularly to carry out the duties of his UK employment.

The case bucked the trend in recent resident cases in that the taxpayer won in front of the Special Commissioners, and he represented himself. Mr Justice Lewison ruled in the High court that that the Special Commissioner (Dr Nuala Brice) had “made errors in arriving at her decision” adding that “the only possible conclusion” was that Mr Grace was resident in the UK.
 

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HM Revenue have confirmed to the Chartered Institute of Taxation, and other members of the Compliance Reform Forum, that there will be a second Offshore Disclosure Facility, or “opportunity” as it now being referred to as, some time next year. The exact details have yet to be agreed and HMRC are enlisting the help of the CIOT and other professional bodies to make a contribution to the design of the new opportunity”

The HMRC statement on this can be found on the CIOT website. There may be a more public announcement in the Pre Budget Report.
 

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This is a general reminder that the period in which repayment claims can be made is to reduce from 6 years to 4 years. The Irish revenue have issued a reminder for their purposes and it is important that UK claims for older years are made as soon as possible to avoid missing the cut off date in the UK.

 

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Back in July we reported that a second “Tax Amnesty” was being seriously considered by HM Revenue & Customs. Since then we have heard nothing further until a report in Accountancy Age which confirms that HMRC are still considering this but are looking for a high profile prosecution to act as deterrent but are apparently having difficulty finding one.

With a new Chief Executive, Lesley Strathie, in charge at HMRC a second amnesty might be one of her first announcements. Alternatively it might turn up in the 2008 Pre Budget Report which is now expected to be in mid November.

If you find yourself in the position of having undisclosed income (overseas or UK) it probably makes sense to approach HMRC before they come to you. You should seek professional advice on this subject as a disclosure (and the subsequent enquiry by HMRC) needs to be managed carefully and can be fraught with difficulties.

A new penalty regime is being introduced which, in some circumstances, is much tougher than previously. It is unlikely that a prompted disclosure under the new regime would incur a penalty of less than 35%. If HMRC have already written to you about an offshore account they may take the view that you have been prompted!
 

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It has always been a worry that those who buy holiday homes abroad through a company could be liable to a tax charge as a benefit in kind. In the 2007 Budget it was announced that the Government would introduce legislation to remove this possibility provided that there was no tax avoidance involved and all that the company did was hold the property.

The legislation has finally made the statute book in the Finance Act 2008 and provided the conditions are met the exemption is deemed to have always had effect. H M Revenue & Customs have indicated that if tax has been paid in the past on such a property then a claim for a refund can now be made.

Details of how to make a claim can be found here.
 

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According to the Sunday Times HM Revenue & Customs are planning another go at trying to persuade those with undeclared overseas bank accounts to come forward. This time they are not expected to be as generous as the first time and in some cases they will be tough. Dave Hartnett, the acting Chairman of HMRC is quoted as saying:

“Some people will go to jail — I have no doubt about that, for example where they have lied to us during a previous investigation. We do not tolerate that at all.”

There are no details as yet of the mechanics of the new arrangements but if you have something you think should be disclosed you should contact your professional adviser before HMRC contact you.

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HM Revenue & Customs (HMRC) have warned of a number e-mail scams inviting people to provide credit card details in order that a tax refund can be sent to them. The latest example includes an official looking form requesting full details of a credit card with the instruction that it must be returned within 2 days or the tax refund will be declined!

It even covers the situation where you do not have a credit card by inviting you to provide details of a nominee.

As HMRC say on their website:

HMRC would not inform customers of a tax rebate via email, or invite them to complete an online form to receive a rebate of tax.

Do not visit the website contained within the email or disclose any personal or payment information.

Email addresses used to distribute the tax rebate emails include:

service@hmrc.gsi.gov.uk
claims@hmrc.direct.gov.uk  
notice@hmrc.gov.uk  
hmrc@hmrc.gov.uk  
admin@hmrc.gsi.gov.uk  
info@hmrc.gsi.gov.uk  
no-reply@hmrc.gsi.gov.uk  

HM Revenue & Customs (HMRC) does not send out emails using these email addresses.

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Now the dust is settling – a little – on Finance Act 2008, HMRC has issued an updated version of IR20.

The revised booklet has some deletions from the previous versions and an extended text about the operation of the new remittance basis charge. Most usefully there is a flow chart which shows how the charge works. I have a copy pinned to my office wall for quick reference!

There will undoubtedly be continuing uncertainty about the new rules but at least we will know what HMRC’s view is in the main areas. Nonetheless so much of the rules relating to residence are a matter of interpretation and it is wise to seek advice if you are unclear about your personal situation.

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This year’s Finance Bill is close to gaining Royal Assent and the Chartered Institute of Taxation (CIOT) has already submitted its “wish list” for the 2009 Budget. One of the suggestions put forward is that income tax and National Insurance Contributions (NIC) should be merged into one tax. Failing that “radical” change, the CIOT suggests that there should be further alignment between the two taxes.

The wish list forms part of a submission by the CIOT to Dave Hartnet the acting head of HM Revenue & Customs. Other items on the wish list include:

• A Statutory Residence Test,
• A small benefits exemption (£25) so that trivial employee benefits are tax free and need not be reported,
• An “Elderly Care Vouchers” exemption based on the current Child Care Vouchers system,
• An extension of the Gift Aid system to include non-UK charities, and a similar extension for inheritance tax purposes, and
• A suggestion that the proposed “income shifting” provisions, currently postponed until next year should be “quietly dropped”.
  

Full details of the CIOT’s submission can be found here

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Under current rules taxpayers generally have up to five years and ten months, after a particular tax year, to correct errors and make claims that may have been overlooked. Similarly, except when there is fraud or neglect, HM Revenue & Customs (HMRC) can only raise assessments for outstanding tax for a period of six years after the year in question. Buried deep in the Finance Bill are proposals to reduce and align these limits to only four years in both cases.

Where there has been “fraudulent or negligent conduct” under the current rules HMRC can raise assessment for up to twenty years. The proposals are that where there is a “loss of tax brought about carelessly” the limit will be reduced to six years but will remain at twenty years where this is “deliberate”

Whilst the general shortening of the time limits are welcome the Low Income Tax Reform Group has picked up on the point that there are many cases where HMRC have been “careless” with a taxpayer’s affairs and will have six years to recover any tax. However HMRC will only make repayments going back four years.

The proposals are due to be debated in Parliament in the coming weeks and, if they remain unchanged, will form part of the Finance Act which should receive Royal Assent later this summer. The rule changes will come into effect once the Treasury issue the relevant Statutory Instrument which could be soon after Royal Assent.

This means that any outstanding claims for the tax year 2002/2003 and 2003/2004 which are currently “in-date” will become “out of date” overnight (unless some transitional rules are also introduced). Such claims might include:

• Age related personal allowances (including married couple’s allowance)
• Blind person’s allowances
• Pension contributions
• Qualifying loan interest
• Capital losses.

If there are any outstanding claims for these years it would be prudent to consider these sooner rather than later.

There is one situation where the proposal is to increase the time limit. In the case where someone dies HMRC currently only have three years and ten months after the year of death to raise an assessment and this will be extended to four years.

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Today is the day that you stop working for the government and start working for yourself. This is one day earlier than last year according to the Adam Smith Institute but generally Tax Freedom Day has been getting later and is now a full week later than it was in 2002 and more than five and half weeks later than in 1963 when it was first calculated.

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Please find below a blog which you might find of interest from my colleague Cathy Corns, who writes for our sister blog SME Plus...

HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm

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It is not often that the worlds of taxation and sport coincide but every now and then they do. Many years ago there were tax cases about whether the proceeds of benefit matches for cricketers were taxable and in 1991 England Goalkeeper Peter Shilton was the subject of a case relating to signing-on fees. More recently we have had a case involving Andre Agassi relating to sponsorship. Earlier this month the decision in a case before the Special Commissioners was published which concerned a professional Rugby Union player.

Simon Emms formerly of Llanelli Scarlets and Bath claimed income tax relief for almost £13,000 in respect of additional food and nutritional supplements that he needed to maintain the…

“required level of physical fitness for his employment as a professional rugby union prop forward”

It is a long established rule that for an expense to be allowable against employment income it must satisfy four conditions, namely it must be expended

• Wholly
• Exclusively and
• Necessarily
• In the performance of the duties of the employment.
  

Unsurprisingly Emms’ appeals against income tax assessments for 1999/2000, 2000/2001 and 2001/2002 were rejected on all four counts by the Special Commissioner. Full details of the decision can be found on the Tax Tribunals website.

 

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Please find below an interesting blog from my colleague Cathy Corns who writes for our sister blog SME Plus Blog...

You may well recall that the Chancellor announced some changes to personal tax from April next year, the main one being the reduction in the basic rate from 22% to 20%. Whilst the latter may seem to be nothing but good news there is unfortunately a knock-on effect on charities. At present if you are a higher rate taxpayer and give £100 to a charity it can reclaim basic rate tax at 22/78 increasing the value of your gift to £128 in its hands. The cost to you, after higher rate tax relief, will reduce to £77.

Continue Reading...

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Just about a year ago there was much media coverage to the Special Commissioners case of Robert Gaines-Cooper v Revenue & Customs Commissioners which highlighted the question of whether days of arrival and departure should be included when calculating whether someone is resident in the UK for tax purposes. In that particular case the Revenue said that these days should be included but subsequently announced that in most cases they would not include them. However it was announced in the Pre-Budget report that, from April next year, the rules will be changed and days of arrival and departure will be counted in future. Continue Reading...

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An announcement has been widely expected and commented on in this and other blogs (see SME blog) following on from the Revenue’s defeat in the House of Lords. This is a case of the dog that didn’t bark or at least not yet…. Continue Reading...

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The immediate reaction to the Chancellor’s speech is that much of what he said was smoke and mirrors – The Inheritance Tax doubling of the nil rate band is not quite what it seems – 2 x 300,000 is still 600,000 so far as I know…

The capital gains tax simplification represents a significant increase in tax in a number of cases and if you are non UK domiciled and UK resident then keep checking this page. We are writing frantically as I type and a more detailed and coherent response will follow shortly….

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As mentioned on my colleagues SME plus blog , The Chancellor of the Exchequer, Alistair Darling, will be presenting his 2007 Pre-Budget Report and the outcome of the Comprehensive Spending Review on the afternoon of Tuesday 9th October.

Cathy Corns will post details of important announcements here shortly after the end of his speech.

Subscribe today to receive regular email updates on the latest business news and views from the partners of Mercer & Hole.

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Last month the American version of HM Revenue and Customs, the IRS published a radical “technical advice memorandum” (TAM) which set out its view that US beneficiaries of offshore (i.e. non US) trust / holding company are taxable on a corporate reorganisation within the structure under the Passive Foreign Investment Company (PFIC) rules.

Continue Reading...

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It was reported yesterday The Observer , and in both The Guardian and The Independent today that The TUC has joined the campaign to abolish the current tax rules for those resident but not domiciled in the UK.

The Sunday Times on the other hand ran a report about a poll that suggested that “two people in every five are either planning to move abroad or have seriously considered doing so”.

Maybe the new Chancellor will touch on this in his first Pre-Budget report next month.

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HMRC have tightened up their interpretation of rules which can enable employers to pay for taxis for late working employees without incurring a tax liability.

If an employee works later than usual at night it is not uncommon for an employer to pay for a taxi home. Is this a taxable benefit? In general – Yes – but there is an exemption in certain circumstance provided by the tax legislation (section 248 Income Tax (Earnings and Pensions) Act 2003).

The circumstances are:

Continue Reading...

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You may recall that earlier this week Cathy Corns, Corporate Tax Partner at Mercer & Hole wrote an article on the Jones v Garnett case for her SME Blog.  Following on from this piece Cathy has submitted an additional blog on the topical "Arctic Systems Ltd" case.

The House of Lords issued their judgement in the case of Jones v Garnett (also known as the “Arctic Systems Ltd” case) on 25 July 2007. To much rejoicing the case was decided in favour of Mr and Mrs Jones. However, the Revenue is a bad loser.

On 26 July a written Ministerial statement was issued by the Exchequer Secretary to the Treasury, announcing the intention to change the law.

Using the standard “the Government is committed to maintaining fairness in the tax system” statement the Government now believes it needs to do something to “ensure that there is greater clarity in the law regarding its position on the tax treatment of income splitting”. Actually, in my opinion, the law is now clear – it may not say what the Revenue wants it to, but that is unfortunate (for them) rather than unclear.

Continue Reading...

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Cathy Corns, Corporate Tax Partner at Mercer & Hole wrote this article for her SME Blog earlier today.

This all seems to have been going on for so long you may need reminding of what all the fuss is about; so 

 - Mr and Mrs Jones ran a small IT company of which Mr Jones was the sole director. They each owned one share in the company took a small salary and extracted the majority of their required funds by way of dividend. These, of course, were paid in line with the shareholdings, on a 50:50 basis.

Continue Reading...

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It has been announced that the House of Lords Judgement on the case of Jones v. Garnett will be released on 25 July. I had been expected that this would not be available until after the Summer recess.

Watch this space for further details next week.

Subscribe by email to be informed as soon as any updates appear on our Tax Plus Blog

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There has been further press coverage in the The Times online newspaper over the weekend about the taxation of non domicilaries in the UK.  The debate was sharpened when the director of the CBI, Richard Lambert, raised questions about the fairness or otherwise of the UK’s tax laws.

Continue Reading...

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Where an individual is subject to an income tax charge under the pre-owned assets tax (POAT) rules it is possible to elect for the assets from which the benefits derive to be treated as forming part of their estate for inheritance tax purposes.

The time limit for such elections is currently 31 January following the year of assessment in which the POAT charge first arises. For those individuals who first became liable to the charge in 2005/2006 the deadline came and went on 31 January this year.

Continue Reading...

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With less than 10 days to go to the first deadline of the Offshore Disclosure Facility of 22 June HM Revenue & Customs clearly think that not enough people are taking advantage of the so-called “amnesty”. HMRC are taking the unprecedented step of writing to and estimated 200,000 people suggesting that they might want to make a disclosure. The letter will be posted tomorrow and should dispel any reservations people may have had about whether HMRC already know about their accounts. Further details can be found on the BBC News website.

If you receive one of these letters – speak to your accountant without delay.

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The long running tax case of Jones v, Garnett has reached the House of Lords today. The story so far is summarised in the Times and a more technical summary can be found on accountingweb. I will keep you informed of developments in what is sure to be a landmark judgement either way.

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There has been much press coverage recently about HM Revenue & Customs targeting residential landlords particularly those in the Buy-to-let market.  This originated from a piece in The Times which was picked up by several other papers.

There is nothing new in this which serves to highlight the need for landlords to seek professional advice to establish their tax liabilities.  The Chartered Institute of Taxation have received a “message” from the Revenue stating that there was no intention of having a “crackdown” on landlords as implied by The Times.  The message stated:

 'By way of background, HMRC is not planning a tax crackdown in the way implied by the Times article. HMRC is planning to take a concerted approach to helping landlords of all descriptions (not just in the buy to let market) to understand and comply with their tax obligations in what they recognise to be a complex area. In taking this approach the explicit presumption will be that the majority of landlords want to make a correct return but that many may need some help to understand exactly how to do so.”
The full text can be found on the CIOT website.   As pointed out in The Times article if someone has undisclosed tax liabilities they can currently take advantage of the special disclosure facility  but action must be taken by 22 June.

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 Today – 1 June 2007 - Is Tax Freedom day

- that point in the year when the average taxpayer has finally earned enough to cover all their taxes and at last can start earning for themselves.

Each year the Adam Smith Institute calculates when Tax Freedom Day falls and this is becoming later every year. More details can be found here.

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On 6 March 2007 the European Court of Justice handed down its judgment in the Mielicke case. The Court decided that it was contrary to the free movement of capital for the German government to deny a tax credit on dividends from companies outside Germany. This echoes the decision in the Manninen case a few years ago which dealt with the tax system in Finland. Although both Germany and Finland have since changed their rules the systems at the time were similar to the UK system of taxing dividends.

Currently the recipient of a UK dividend is entitled to a notional tax credit to set against the tax due on that dividend. Recipients of dividends from non-UK companies are entitled to no such credit.

Significantly, the court in the Meilicke case has restricted the use of temporal limitation powers which open the door for other similar cases. As yet there has not been a case by a UK taxpayer but it must just be a matter of when rather than if.

HM Revenue & Customs have yet to comment on the case but they remained silent on the Manninen case. The CIOT even went as far as making a request under the Freedom of Information Act to find out the Revenue’s policy on Manninen.

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