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2012 Year end planning

Long term plans are not likely to be much affected by the nearness of the end of the tax year. Nevertheless, with 5 April 2012 approaching, consider the following tips which may be useful in saving tax before it is too late.

Make use of your ISA allowance. Up to £5,340 can be invested in cash and up to £10,680 overall. Both gains and income in the ISA are tax free. Any unused ISA allowance is not carried forward to the next year. If unused by the 6 April it will be wasted.

Use the capital gains tax allowance. Similarly, if unused the allowance would be wasted. Tax can be saved by disposing of an asset over different tax years than all at once. If you hope to repurchase the asset, however, you have to wait 30 days or the allowance could still effectively be wasted. Consider also that gains can be taxed much less in a year where income is lower. Gains can also be effectively transferred to spouse via the 'nil gain/ nil loss' rule, so potentially two lots of allowances are available to a couple.

Invest in a pension up to £50,000 per year. Once more, unused allowance cannot be rolled forward. Especially if you are anticipating retirement, spreading contributions to £50,000 per tax year will be more tax efficient.

If you own a company, consider taking dividends to use up the basic rate tax, or delay profit extraction to avoid higher rates. It may be a suitable time of year to contact your accountant for year-end tax planning.

If you are a business owner, review the opportunities to delay income, bring forward expenses and outlay on capital and write off stock, assets and bad debts. The tax will be effectively relieved a year sooner, where profits are reduced before the end of the accounting year. On the other hand, where your effective rate of tax for 2012/13 is less favourable, lower profits this year would be less favourable.

For inheritance tax, gifts of up to £3,000 per year are tax free, and the unused allowance for the previous year can be brought forward. A gift of up to £6,000, or potentially more on the occasion of a wedding, could escape any eventual inheritance tax at 40%.

Consider when to cash in investment bonds, as the profits will increase your overall income, potentially bringing you into higher rates of tax.

The advice in this article is of a general nature not intended to be acted upon. Please contact your accountant to discuss your particular circumstances and the opportunities for tax saving that may be available. Coman & Co. Chartered Tax Advisers would be pleased to assist with any queries.

2012 Budget

The 2012 budget has introduced tax measures and outlined proposals to advantage small and medium sized businesses, increase the taxation for the wealthiest homebuyers and reduce tax for people on the lowest incomes.

The decrease in the 50% rate to 45% on incomes over £150,000 will take effect after the 6 April 2013.  There is a corresponding decrease in the top rate for dividends to 37.5%.  Due to the tax credit, the effective rate of tax on dividends which take income over 150,000 will reduce from 36.5% to 31.25%.

For top earners the announcement presents an opportunity to defer income to April 2013 through planning, say, on pension contributions, extraction of business profits, remuneration and investment in income producing assets.

The personal allowance will increase from £7,475 to £8,105 on 6 April 2012 and to £9,205 on 6 April 2013.  There will be a corresponding decrease in the basic rate band from £35,000 to £34,370 on 6 April 2012.  However, the basic rate band will decrease to £32,245 from 6 April 2013.  The outcome will be a reduction in the level of income before reaching higher rate tax for 2013/14.  Currently, incomes are not taxed at the higher rate until they reach £42,475, however this will fall to £41,450 from 6 April 2013.

The raise in the personal allowance also lifts the income level at which it is withdrawn.  The personal allowance reduces by £1 for every £2 of income over £100,000, so that the allowance would not be fully abated until income reaches £116,210 for 2012/3 and £118,410 for 2013/14.

The age related allowances will also be fixed at their current levels until they eventually align with the increasing personal allowance.  Currently, people above 70 with higher incomes do not benefit from the extra allowance which is withdrawn by £1 for every £2 that the allowance exceeds £24,000.  The new measures will therefore affect the lower income by freezing the allowance against inflation.

With effect from 22 March, the government has lifted the stamp duty land tax (SDLT) from 5% to 7% on properties with a value over £2 million.  A SDLT rate of 15% will be applied to these expensive properties acquired through companies, including overseas companies, trusts and other structures.  This is a method previously used by wealthy individuals to avoid stamp duty.  The government also proposes to introduce an annual charge to existing structures used to purchase properties valued over £2 million. 

The chancellor also intends to make non-UK companies subject to capital gains tax on the sale of UK residential properties.

The registration limit for VAT will be increased from £73,000 to £77,000 of turnover from 1 April 2012.  The limit for simplified reporting of profits on Tax Returns, also known as three line accounts, will be aligned with the new VAT limits.  Businesses which are not established in the UK currently trading below the registration limit may be required to register, as the turnover test for these businesses will be eliminated from 1 December 2012.

The government has opened a consultation on a cash basis for calculating tax which is expected to apply to unincorporated business with turnover below the VAT threshold.  A similar scheme of cash accounting is already available to VAT registered businesses with a turnover under £1.6 million.  Through the scheme businesses account for VAT based on cash paid and received rather than when income is accrued.  The scheme prevents small businesses from being out of pocket to HMRC and gives immediate relief from bad debt.  A similar measure for calculating other tax applicable to small businesses could offer similar benefits.  The scheme also has the potential to significantly reduce the accounting burden for business owners.

The value of shares that can be granted under the Enterprise Management Incentive Scheme is set to increase to £250,000, up from £120,000.  The measure, which allows employees to exercise shares in their company without any charge to income tax, will improve the incentive available to key staff in small and medium sized businesses.  The government also intends to extend entrepreneur’s relief to gains on shares acquired through the Enterprise Management Incentive scheme.  Both the above announcements aim to benefit unquoted companies that meet the requirements.

The full rate of corporation tax will fall from 1 April 2012 to 24%. This is 1% lower than previously announced.  The small companies’ rate remains at 20%.

Coman & Co. Ltd. are chartered tax advisers and specialist accountants for individuals and business owners.  Please contact us if you have any further enquiries.

HMRC may reverse penalties for Tax Returns filed on 1 and 2 February

HMRC workers held a one day strike on 31 January over the part-privatisation of some of their operations.

As a result HMRC has indicated that it may accept the inability to reach the helpline on 31 January 2012 as a 'reasonable excuse' for not filing on the deadline, provided the Tax Return is filed before midnight on 2 February.

Please contact us for if you have further queries relating to your tax affairs.

Tax Enquiries

Once they have received your Tax Return, HMRC may respond with queries. Typically, HMRC will request that you provide evidence and explanations to support the information on your Tax Return.

HMRC are permitted to enquire into your Tax Return anytime within one year of receiving it. The period can be slightly longer where you have filed the Tax Return late. You can amend your Tax Return within twelve months of the filing deadline. Similarly, HMRC can enquire into any such amendments within twelve months of receiving them.

HMRC do not need to give any reason for making an enquiry. Although the main purpose of an enquiry is to identify mistakes on your Tax Return, your Tax Return is not necessarily inaccurate just because an enquiry has been opened.

You must keep your records until HMRC can no longer raise an enquiry. If you have trading or rental income, you must keep your records for a further four years.

HMRC also have the power to make an assessment of your tax liability based on information they discover that was not made available through your Tax Return. The time limit for a discovery assessment is four years after the tax year end. The time limit is extended to 20 years for information deliberately concealed.

A tax investigation is unwelcome and we offer a specialised tax enquiry service to reduce the costs involved. Please contact us for a free, initial meeting to discuss your requirements.

Penalties for late Tax Returns

The penalty system for individuals could land you with a far higher liability to HMRC than necessary.

From the year ended 5 April 2011, a new system of penalties has been introduced. There is still an automatic penalty of £100 for filing of a Tax Return after the deadline.

Up to the 2009/10 tax year, however, penalties charged could not exceed your liability for a tax year. Under the new penalty system, the fine cannot be reduced, even if you have no tax liability.

There is an additional penalty of £10 per day for every day that the Tax Return is late over three months. The daily penalty continues for up to 90 days adding up to £900 to the fixed penalty of £100.

Once more than six months late a further penalty is added to the above of either £300 or 5% of the tax due, whichever is the greater. Once over 12 months late, HMRC have the power to impose a penalty of up to 100% of the tax outstanding.

The new penalties which will be issued after 31 January 2012 could be considerably higher than those which preceded them.

In addition to penalties, HMRC also have the power to make determinations of tax where you have not filed a Tax Return on time. A determination is effectively an estimate of your tax liability. HMRC can make a determination within three years of the filing date. There is no right of appeal against a determination. A determination can only be replaced by the actual tax due as stated on the Tax Return.

In certain cases, however, it may be too late to alter a determination to the actual tax due. You have four tax years in which to adjust your liability for an earlier year, and make a claim for Overpayment Relief. As such, HMRC may have made a determination relating to a tax year for which it is too late to send in a Tax Return.

Where the above applies, HMRC may allow Special Relief on account of the taxpayer's family bereavement or medical condition. Special Relief is not guaranteed and protracted to obtain. Where you have Tax Returns more than four years old, you are at real risk of being liable for an estimated liability much higher than the tax you would have owed.

Coman & Co can help you avoid the consequences of filing your Tax Return late. We are specialists in personal tax and aim to make the process of filing a Tax Return less daunting. We can:

• Advise on complex areas of tax.
• Deal with HMRC on your behalf as your agent.
• Send you Tax Return reminders well ahead of the deadline.
• Respond to queries that may be delaying a decision to file your Tax Return

Please contact us for an initial consultation.

Paying tax under self-assessment

Where possible, tax will be collected on your income before you receive it. This mainly applies to employment, pension and savings income. However this is not always possible, for instance where you have self-employment or rental profits. In this case, you will have to pay your tax to HMRC under self-assessment. This tax due is calculated on your Tax Return.

Self-assessment tax and Class 4 national insurance is due by 31 January after the end of the tax year. However, payments towards the following year's tax liability can also be payable on 31 January in the tax year and 31 July after the end of the tax year. These are payments on account towards next year's tax liability. Payments on account are half of the previous year's liability. When your actual tax has been calculated, any balancing payment is due by the following 31 January, or a repayment is issued if the payments on account are more than the tax owed.

If 80% of your tax liability has been deducted at source, or the liability is less than £1,000, you will not need to make payments on account.

If you expect your current year income to be lower than that of the previous year you can request that your payments on account are reduced accordingly. If your profits are higher than the reduced amount then interest will be charged on the difference.

You will be also charged interest on any underpayments of tax. If the balancing payment is still overdue by 28 February following the tax year an extra 5% surcharge will be imposed, rising to 10% on any amount which is still outstanding on the following 31 July.

If you are taxed through PAYE you can arrange for additional tax to be deducted at source from your pay. Tax of up to £3,000 (or £2,000 for 2010/11 and earlier years) can be deducted in this way, provided you send your tax return online by 31 December following the end of the tax year.

The system of paying tax through self-assessment can be complex particularly where payments on account are involved. With our Tax Return service we aim to:

• Minimise your tax
• Clear up any queries you have regarding your payments
• Remind you well in advance of deadlines the tax you have to pay, so reducing the chance of being charged by HMRC for late payment.

Please contact us and we would be pleased to help.

Tax Returns: An overview

Most people in the UK do not have to complete a Tax Return. There is often no need to file a Tax Return if your only income comes from employed earnings, state benefits or a pension.

Typically, a Tax Return is due if you are self-employed, receive rental profits, investment income or you earn over £100,000.

It is your legal obligation to let HMRC know that you have to complete a Tax Return for any tax year. The tax year runs from 6 April to the following 5 April.

The time limit for notifying HMRC of your chargeability to tax is 31 January after the end of the tax year. If HMRC have to prompt you to notify them to complete a tax return after the deadline, the penalty can be as high as 100% of the tax owed. On the other hand, there may be no penalty for notifying HMRC after the deadline if you do so voluntarily.

Although you may avoid a penalty for late notification, there will be a fixed penalty, of at least £100, for filing the Tax Return late.

The deadline for submitting your Tax Return online is 31 January following the end of the tax year.

There are a number of reasons that you may have to complete a Tax Return. In many cases, a Tax Return may no longer be necessary, even though it is still requested by HMRC. Seek professional advice from us. We offer a free, initial consultation and can help you determine the best way forward.

Tax relief on capital costs

Capital expenditure is that required for the business to run long term. Capital costs are distinguished from revenue costs which are those used up by the business immediately. The tax system attempts to tax profits so the income is matched with costs required to generate that income, in each period. Therefore revenue costs, such as on workforce and premises, are straightaway deducted from profits. By contract, capital costs, such as on furniture and vehicles can be deducted from profits over several years. Capital allowances are the amounts taken off tax adjusted profits for capital outlay.

The rate of capital allowances has varied frequently in recent years. At present, an annual investment allowance permits a 100% deduction in year one on most capital expenses up to a limit of £100,000 (or £25,000 from April 2012) to be deducted from taxable profits. However, the 100% annual allowance rarely applies to cars. The rate of allowance given to a car depends on its CO2 emission, so that the less a car emits the faster the business will benefit from tax relief. A deduction of up to 20% is made from taxable profits each year for capital costs which have not been relieved by the annual investment allowance.

It is possible to deduct certain costs on features which are integral to a building, such as lighting, heating and air conditioning systems. This can apply even to commercial premises which are not new builds. The annual investment allowance can apply to integral features and the balance could receive an allowance of 10% per year. The tax reliefs can be significant and should be considered when planning the premises for your business.

If an asset is sold for more than the capital allowances left to deduct from profits, the surplus could be treated as extra profit for the year. It could be worthwhile considering the timing of disposals of assets which are likely to increase profits.

Where a company makes a loss as a result of investing in certain types of capital, such as green technology and research and development assets, a tax credit may be claimed. This could result in a payment to the business, even before it has paid over any tax.

There are incentives for certain types of investment that the government wishes to promote, such as for converting empty spaces above commercial premises into flats.

Various tax planning opportunities are available with capital allowances. It is possible to obtain allowances separately on assets which are expected to have a life of less than five years. This can accelerate capital allowances. It is also possible to disclaim capital allowances, which can be an advantage where your tax free allowances would be wasted if the capital allowance was all used in the first year.

Discuss with us a budget for capital expenditure, which is aligned to business goals and optimised for tax.

Harsher rules on late Tax Return penalties

HMRC have toughened the penalty system for late tax returns. With effect from the tax year ended 5 April 2011, automatic penalties now apply regardless of your tax liability. As such, even if you have no liability, or were due a refund, you are still liable to a minimum £100 if you were supposed to file a Tax Return and have missed the deadline. Penalties increase more sharply where a tax return is over three months late.

Coman & Co. Ltd. can help you avoid unwanted fines. We offer an efficient, online service. With our system you will be reminded well in advance of any relevant deadlines.

Please contact Coman & Co. Tax Accountants for advice on your tax situation. We are Chartered Tax Advisers and pleased to help with all your personal taxes no matter how straightforward or complicated.