Winters Chartered Accountants and Registered Auditors
29 Ludgate Hill
London EC4M 7JE
England, UK
Tel:
+44 (0) 20 7919 9100
Fax:
+44 (0)
20 7919 9019
e-mail:
info@winters.co.uk
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.
Welcome to our Spring 2001 newsletter!
Please contact us about any of the
matters raised in this newsletter
Remember - we're here to help!
The Key to Survival
Many small and medium sized businesses rely on one or two key
individuals for success yet only a small proportion have key man
policies in place. A key person is any individual whose
premature death or total disablement would cause financial
difficulties for the business because their expertise cannot
easily be replaced. Key man insurance acts to provide protection
in such circumstances against loss of profits and the expense of
finding a replacement. The policies are either in the form of
temporary insurance if the cover is only necessary for a limited
period or whole life insurance where the cover is needed for
longer.
As to the appropriate level of cover, it will usually be set at
a multiple of earnings or a multiple of contribution to profit.
Earnings are likely to be the more appropriate measure where the
main objective is to find a replacement employee, while profit
accurately reflects the effect of the loss of an individual on a
business’s performance.
Tax can play an important part in the planning process with key
man policies. The position is complex but, in the case of
temporary insurance, the premiums are tax deductible if certain
conditions are met. No tax relief is available for premiums
under whole life policies. Any amounts received will be taxable
where tax relief was given on the premiums paid. Indeed, the
Inland Revenue seek to argue in some cases that the proceeds are
taxable even where no tax relief was given on the premiums paid.
Please contact us if you
wish to consider a key man policy in more detail.
More and
more new right-hand drive vehicles are being
purchased on the continent. However, despite the
significant cost savings that may result, company
car drivers in the UK won’t be surprised to
learn that the Inland Revenue ignore such cost
savings. The tax charge on an employee with a
company car will, in most cases, be based on the
UK list price of that car irrespective of the
actual price paid by the employer.
Even when the company car system changes in 2002,
the charge will still be based on the list price
rather than the actual cost....... ALTHOUGH, a
recent DTI report suggested scrapping the concept
of list prices..... SO WATCH THIS SPACE!
Beat
the competition and still recover the VAT
Remember that the VAT position hasn’t changed.
VAT can only be recovered on car purchases if they are used wholly for business purposes e.g. by private taxi firms.
It has
proved extremely difficult to deduct VAT on a car
that shows any signs of being potentially used for
even the most occasional private use. However, in
a recent tribunal case, recovery of VAT on the
purchase of a Lamborghini was allowed. The car was
wholly used in the business which involved selling
stock for cigarette vending machines. The
businessman explained to the tribunal that success
in this business was largely related to giving the
appearance of conspicuous success (since success
breeds success). The car one drives is the
clearest indication of this, and, as his
competitors had moved up to Aston Martins (a
marque he had originally owned), he had little
choice but to purchase the Lamborghini in order to
put yet more distance between himself and his
competitors. In his private circumstances, he had
no use for a private car, and in practice the only
mileage he could conceivably clock up would be
related entirely to his business activities -
which also took up 100% of his time, bar the time
he spent sleeping and eating.
The tribunal commented in conclusion that this
case turned entirely on its special facts, and
does not represent a loophole through which car
drivers can recover the not inconsiderable element
of VAT incurred on the purchase of their cars!
Contents | Please contact us with any questions
Proposed
changes to the VAT system for small and medium
sized enterprises (SMEs) were announced by the
Chancellor in November 2000. They are designed to
ease the burden for SMEs and are summarised below.
Please talk to us if you wish to discuss any of
the points raised.
The cash accounting scheme will be extended by
raising the turnover limit from £350,000 to
£600,000.
More businesses will be able to file VAT returns
on an annual rather than quarterly basis by
raising the upper turnover limit for qualification
from £300,000 to £600,000.
There will be consultation on a possible ‘flat
rate’ scheme whereby SMEs could calculate their
VAT as a percentage of turnover, rather than
accounting for VAT on all purchases and sales. A
lower SME turnover limit of £100,000 would apply
to this scheme. Such a scheme could be of
considerable help to many small businesses,
although, the percentage rate set would need to be
very low to provide any real incentive.
Enterprise Management Incentives (EMI)
The EMI scheme was introduced in July 2000. It allows small
higher-risk trading companies to grant tax-advantaged share
options to up to 15 key employees. Each employee can be
granted options over shares worth up to £100,000 at the time
of the grant.
The Government is proposing to relax the EMI rules so that
there would be no maximum number of employees to whom options
could be granted, simply an upper monetary limit of £2.5m
(increased from the current £1.5m) on the total value of
shares under EMI option. This could completely change the
nature of the scheme. Currently it is ideal for rewarding a
small number of key employees. If the new proposal is enacted,
the scheme could potentially benefit the entire workforce.
Taper
Relief Extended
| Capital
gains tax (CGT) taper relief was introduced in
1998. It reduces the CGT charge the longer an
asset has been held prior to disposal. Different
rates of taper apply to business and non-business
assets. Maximum taper relief reduces the effective
CGT rates for a higher rate taxpayer to 10% for
business assets and 24% for non-business assets. Business assets taper is to be made available, subject to consultation, to more employees by allowing employees of certain non-trading companies to benefit. The change will be effective from 6 April 2000. However, the extension of business assets taper in this way will be subject to some restriction - probably only applying to quoted companies - and it seems likely that owner managed businesses will still need to be trading companies in order that their shares qualify for business assets taper. Most businesses are treated as trading, but investment companies and property investment companies are not. Companies which are mainly trading, but have more than an insubstantial amount of non-trading activities are also treated as non-trading. |
The definition of business assets was
broadened with effect from 6 April 2000 to
include:
|
Contents | Please contact us with any questions
National Minimum Wage - guidance for directors
Did you know that under the National Minimum Wage (NMW) rules, there is an exemption for family members working in a family business and living at home?
However,
the exemption does not apply where the business is
incorporated and run as a company. In that
situation, family members should be paid at least
the NMW. This applies even where, for example, the
company is making a loss. The position for
directors though is different. The Inland Revenue
which administers the NMW as agents for the
Department of Trade and Industry has confirmed
that where a director does not have an explicit
employment contract with his company then it is
highly unlikely to apply the NMW legislation even
when the director carries out a wide range of
activities. Such activities can be done in his
capacity as a director rather than as a ‘worker’.
Where there is no written employment contract or
other evidence of an intention to create an
employer/worker relationship, there will be no
contention of an unwritten or implied employment
relationship between a director and his company.
The guidance is helpful in that it clarifies the
position, and beneficial in that directors who do
not comply with the NMW legislation because, say,
they are taking dividends from their companies in
preference to remuneration can continue to do so!
At the same time, a publicity campaign has been
launched to make employers and employees more
aware of the NMW. To provide additional support, a
new internet based help package is now available.
It is aimed primarily at employers, and enables
the user to tailor a question using the exact
terms under which an employee works, including
travelling time, and allowances for accommodation
supplied. The user will then be able to identify
the amount that the employee should be paid to
comply with the requirements of the law. The
facility is called TIGER which stands for Tailored
Interactive Guidance on Employment Rights, and has
been developed with the help of Citizens Advice
Bureaux and the National Hairdressers Federation.
TIGER is available at www.tiger.gov.uk
It is important to have a well drafted will as
part of your financial planning arrangements.
Despite this, many people do not have wills or
have not reviewed their wills for many years.
In making provision for their families many people
wish to ensure that their spouse will benefit from
most, if not all, of their estate before their
children take their interest. Many people assume
that if they do not make a will this happens
automatically under the laws of intestacy. They
are wrong. Without a will the surviving spouse
would receive outright only the first £125,000 of
the estate and the right to receive the income for
life from one half of the balance. The other half
of the estate would pass to the children.
This demonstrates the importance of making a will
to ensure that your spouse is well provided for.
However, do not fall into the trap of leaving
everything outright to him/her on your death. This
could be a financial disaster for your family,
although the Inland Revenue would be very happy.
You and your spouse can each pass on assets to the
value of £234,000 (the ‘nil rate band’)
without paying inheritance tax. Therefore,
£468,000 of the family wealth is effectively
inheritance tax-free. But if you leave everything
to each other, only one of you will use your
tax-free amount. What you can do is structure your
wills so that the nil rate band is left in trust
for the surviving spouse with the balance of the
estate passing to him or her absolutely. This
fairly simple technique can save tax of almost
£100,000.
You may be aware that it is possible for the terms
of a will to be varied after death. It is also
possible to vary the laws of intestacy when there
is no will. By entering into a Deed of Variation
the family can ensure that the estate is dealt
with in accordance with their wishes and the tax
exemptions are maximised. However we believe that
it is a dangerous strategy to rely upon this. For
a number of years it has been rumoured that the
Government will introduce legislation to remove
the advantages of Deeds of Variation, or at least
those which relate to tax.
Clearly, the best strategy is to get it right
first time.
If you wish to seek advice on your will or
inheritance tax please contact us.
Contents | Please contact us with any questions
Human Rights Act - a case for panic?
The Human Rights Act
(HRA) finally became law last October. All sorts of horror stories have been circulating but is it really as bad as it looks?
For the private employer the effects will be
felt as a result of courts and tribunals being
required to interpret UK legislation in a way that
is compatible with ‘convention rights’. We
summarise the main convention rights and give some
examples of the likely impact now that the HRA is
law.
Main Convention Rights:
-
Right to a fair trial
-
Right to respect for private and family life
-
Freedom of expression
-
Freedom of thought, conscience and religion
Likely Impact
One potential problem area will be balancing the
right to respect for private and family life with
an employer’s desire to monitor staff behaviour.
For example employers may want to monitor
employees’ e-mails. This should not cause a
problem under the HRA so long as the employer has
a policy on the monitoring of e-mails which is
well publicised amongst employees.
Freedom of expression has caught the media’s
attention because it extends to the way a person
dresses. In fact a dress code or restriction will
be acceptable so long as it can be justified, e.g.
where health and safety is an issue or where the
employee deals with the public. But justifying a
rule based just on your idea of smartness will
pose more of a problem.
However, even where employers act reasonably,
follow proper procedures and can, where necessary,
prove justification, it will not stop an increase
in the number of cases coming before courts and
tribunals with more employees pleading the HRA.
Only time will tell whether the courts and
tribunals will take a tough line.
Contents | Please contact us with any questions
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.
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