Winters Newsletter Autumn 2001

PLEASE NOTE: This article was correct at the date of going to press, but details and rates described are liable to change over time – please check the tax rate section of our newsletter for up to date details.

Please contact us about any of the matters raised in this newsletter
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Preparing for a slowdown

Talk of recession is in the air. The R-word is back. It is a decade since Britain suffered a recession. However, the downturn in the USA together with a 10% slump on the London stock market and some depressing estimates for the impact of the foot and mouth epidemic on GDP lead us to wonder whether we are heading for another one.

Some hold the cautiously optimistic view that the UK will escape the worst. The CBI and Institute of Directors on the other hand both now expect growth of only 2% this year. Furthermore, according to Dun and Bradstreet, the business information service, London has suffered its first rise in company failures for nine years.

Whatever the future holds, you need to be prepared. If recession threatens, one of the most important issues for businesses is careful cash management.
Think about your cash flow forecasts for the next 12 months. Consider what your position would be if the worst came to the worst and the bank called in your loans. Make sure you have a healthy relationship with your bank. Look at your costs and decide where they could be cut. Consider doing without or going for a more flexible option - rent space short-term and use temporary rather than permanent staff. Take a look at your credit control (free guides are available from the DTI on 0870 150 2500 or visit www.payontime.co.uk). Check the credit-worthiness of new customers carefully and don’t extend too much credit to any one customer.

The keys to helping your business face a potential recession are flexibility and preparation but you never know, with any luck you may not need to put your plans into action.

Limited Liability Partnerships or LLPs were introduced into the UK from 1 April 2001. This represents the first major addition to the forms of legal vehicle available under UK law since the introduction of joint stock companies in 1844.

Originally intended for use by regulated professional partnerships the final legislation allows the adoption of LLP status by any two or more people in business together with a view to profit. As a result any business in the UK can now choose between unincorporated partnership (or sole trader/practitioner), LLP or company.

The first point to make clear is that even though the title LLP includes the word partnership, an LLP is not simply a partnership with limited liability. In fact the LLP legislation explicitly states that the law relating to partnerships will not apply to LLPs. Throughout the law and regulations introducing LLPs there is no mention of partners. Instead the term ‘members’ is used for those persons who would be partners if the business was a normal partnership.

In general terms it is much easier to think of an LLP as a company which is taxed in the same way as a partnership rather than as a slightly different form of partnership. The reason for this is that LLPs are regulated by company law with minor modifications to fit the structure of an LLP. The main effects are as follows:

Where an LLP gains over a company is in the way it is taxed. Even though it is a separate legal entity, this is not recognised for tax purposes and the aim of the tax legislation is transparency. As a result the tax law says that any business conducted by an LLP shall be treated for tax purposes as carried on in partnership by its members.

Each member will be taxed on his or her share of the profits of the LLP as if they were partners in a partnership. There is, however, some anti-avoidance legislation to prevent any perceived abuse of the rules.

The introduction of LLPs into the UK provides an interesting alternative to conducting business as a partnership or limited company. There will be significant advantages to some businesses which could benefit from limited liability but for whom limited company status may not be appropriate.

As our article highlights, it is not however a simple decision to make and there are many factors to consider. If you would like to discuss LLPs in more detail please speak to us.

Authors and Creative Artists

Authors and others whose income comes wholly or mainly from the creation of literary, musical or artistic works or of designs are now able to average their profits over two consecutive tax years under provisions introduced in this year’s Finance Act.

Authors and artists are likely to have fluctuating income levels because a work can take more than a year to create or because a lump sum payment has been received. An averaging claim, as the example below demonstrates, is intended to smooth the pattern of taxable profits and so save higher rate tax and improve cash flow. The first two years available for averaging are 2000/01 and 2001/02.

Please talk to us if you wish to discuss the points raised in this article further.

Jo is a musician, his profits are:

	£
2000/01	10,000
2001/02	24,000
2002/03	7,000
	£41,000

Averaging is possible where the profits of the lower year are less than 75% of the profits of the higher year.

Averaging will result in the following pattern of taxable profits:

	£
2000/01	17,000
2001/02	12,000
2002/03	12,000
	£41,000

(2002/03 can be averaged further with 2003/04)

Energy Saving Investments

Businesses can claim 100% allowances on investments in designated energy-saving plant and machinery made on or after 1 April 2001. An Energy Technology List defining the qualifying technologies, the relevant energy-saving criteria and the products initially within the scheme has been published. Details can be found at www.eca.gov.uk

IT Equipment

Last year, 100% allowances were introduced for expenditure incurred on IT equipment by small businesses between 1 April 2000 and 31 March 2003. Look at the list below to see the wide range of expenditure covered under this heading.

Small Business

One that satisfies two out of the following three conditions:

ISA Update

The Government has commented that "ISAs are a continuing major savings success story". In 1999/00, the first year of ISAs, over £28.4 billion was paid into nearly 9.3 million accounts.

As a consequence, the £7,000 annual ISA subscription limit has not been reduced to £5,000 as originally planned but will be retained at £7,000 until April 2006. However, it is important to remember that within the £7,000 limit, you can choose either a single Maxi ISA or up to three Mini ISAs. The limits are set out right.

The Inland Revenue has identified around 85,000 investors who may have taken out "incompatible" ISAs - eg opened a mini ISA in the same tax year as a maxi ISA. Where this has happened, the investor will not be entitled to any tax relief in respect of the ISA which they should not have opened.

It is now possible for 16 and 17 year olds to open mini-cash ISAs so that they can earn tax-free interest on an investment of up to £3,000 a year. This extension is really only likely to benefit those teenagers whose income exceeds their personal allowance of £4,535. Furthermore, the cash invested in such an ISA should not come from a parent, or the interest would remain taxable on the parent if it exceeded £100 a year. Teenagers will need to look to their grandparents, other relatives or trust funds to provide the necessary finance so that the parental problem is avoided.

Annual ISA Limits

Overall limit Maxi ISA

£

7,000

Stocks
and shares up to 7,000

Cash up to 3,000

Life insurance

up to 1,000

Mini ISA

£

Overall limit 7,000

Stocks
and shares up to 3,000

Cash up to 3,000

Life insurance up to 1,000

Property News

Stamp duty rates
Transfers of shares and securities	0.5%
Transfers of other property (from 28 March 2000)
Price
Up to £60,000	Nil
£60,001 - £250,000	1%
£250,001 - £500,000	3%
Over £500,000	4%

1. Did you know?
Suppose you put your house up for sale and, having found a purchaser, the sale falls through. If this happens after the prospective purchaser has paid his 10% deposit you get to keep it. All well and good, BUT ......... the law treats the forfeited deposit as the price of granting an option over the house so that the money is subject to capital gains tax (CGT). It does not count as a disposal of your house which would normally be exempt from CGT. It is taxable in full, with no taper relief, and the only deductions allowed are the legal costs you incurred on the abortive sale.
At worst this could mean an obligation to enter the deposit on your tax return and pay CGT at 40%!

2. Stamp duty
It was widely expected that Gordon Brown would announce a further hike in stamp duty rates in his March 2001 Budget. This did not happen. However, we may well see some further increases during this Parliamentary term, but for now we provide a reminder of the current rates and thresholds in the box left.

Remember that stamp duty at the appropriate rate is charged on the full price not just on any excess over a threshold.

3. Stamp duty exemption
An exemption from stamp duty is to be introduced on all property transactions in certain disadvantaged parts of the UK.

4. Flats for letting
A new scheme has been introduced to enable property owners, whether individuals or companies, and occupiers to claim up-front tax relief on the whole of their capital spending on the renovation or conversion of vacant or underused space above shops and other commercial premises to provide flats for rent.

The tax relief is given in the form of 100% capital allowances and will not be clawed back so long as the owner holds the same freehold or leasehold interest in the property for seven years after the conversion and the flats are available for letting during that period. However, although the measure may encourage regeneration of towns and cities, numerous conditions will need to be satisfied before the relief can be claimed. We provide a useful summary of these below.

Conditions to be satisfied:

It is vitally important for today’s busy executive to be in constant contact with the outside world and to be contactable by the outside world, whether in the office, or on a train or in a plane or car. This means that there is now a strong case for mobile technology. We no longer need to be in touch with the office just by phone. We also need, for example, to be able to send and receive e-mails, browse the internet, synchronise diaries and databases and have a look at the accounts system to review particular customer accounts. There are a whole range of devices which make this possible.

Choosing a mobile device

The choice of mobile technology can seem overwhelming. However the devices can be grouped into a relatively small number of categories.

Laptop PCs

Portable computers with a full size keyboard, hard disk and large screen. They are desktop replacements and allow users to run the same applications used on the office PC. Many now offer video and sound and the possibility of upgrading with plug in PC cards (eg modem and network cards).

Hand-held computers

These include PDAs – personal digital assistants – tablet based devices that use a touch screen and stylus. They are good for personal information management applications but not for writing large amounts of text. The latest hand-helds are equipped with a fold-out keyboard. Such devices are available from Psion, Palm, Handspring, Compaq and Hewlett-Packard and some now use Microsoft’s windows CE operating system, a cut down version of windows. It will clearly be important to establish whether it can run the range of applications you need.

Mobile phones

Mobile phones are currently going through major technological changes. The second generation ‘WAP’ phones have a built-in browser and can access specially developed websites but because WAP is a dial-up system it tends to be slow. There is consequently much interest in the emerging GPRS (General Packet Radio Service) phones. These offer a faster ‘always-on’ connection to the internet.

Smart phones

Smart phones attempt to combine all of the technology required into one unit. Still in their infancy, these devices combine a PDA and a mobile phone.

There are two key players in this emerging market, Microsoft and Symbian (a consortium formed by Nokia, Ericsson, Psion and others).

Compatibility

This may be a very important consideration. Many products include synchronisation software that allows users to link their mobile device to a PC or server but some products make this easier than others.

Will your mobile technology work anywhere in the world or are there geographical limitations? You need to check this too.

Finally, if mobile technology is going to be used away from a power point for any length of time, battery life is important. Most laptop battery packs will only last for a couple of hours but many hand-held computers have a much, much longer battery life.

Costs

In addition to the initial cost of any device, you will need to consider the cost of any add-ons or peripherals and software costs, call costs and internet access costs. Furthermore there will be training costs, administration back-up costs and the cost of any additional security required, not to mention on-going maintenance costs. All of these need to be considered at the outset.

Other issues to be considered include reliability, control, safety and the effect mobile devices will have on staff productivity.

Conclusions

It is clear that there is still some way to go before a single device will provide all our communication needs. There are technological solutions to some of the problems, such as voice and character recognition to minimise the need for a large keyboard. However, these solutions are only just beginning to appear all together in one single piece of hardware. So whilst there is a very exciting future in the mobile communications market, we may have to compromise in the meantime with a variety of different devices.

The Inland Revenue has launched a campaign to encourage those starting their own business to register immediately with them.

A new helpline (0845 9 15 45 15) is open seven days a week from 8am to 8pm and will take registrations over the phone.

The main purpose of the registration is for Class 2 (flat-rate) NIC purposes, but it will also count for Class 4 NIC and income tax purposes.

The deadline for registration is three months from the end of the month in which the self-employment began. Therefore someone beginning self-employment in September 2001 must register by 31 December 2001.

Failure to meet this deadline could mean a £100 penalty. This may not seem a lot but compared with the Class 2 NIC charge of £2 per week it represents almost a full year’s liability.

Individuals with earnings below £3,955 in the current tax year do not have to pay NICs and escape the £100 penalty if they are late in registering. If you are in this position you still need to register but should apply for the small earnings exception.

Disclaimer - for information of users
This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.