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 Winter 2001 newsletter!

Contents:

Please contact us about any of the matters raised in this newsletter
Remember - we're here to help!

Shared problems
Surprising though it may seem, small and large companies often experience similar problems. Many of the issues facing a small ‘two-man’ owner managed business will be the same as those facing a large multinational.
It is widely recognised that red tape is a major concern for small businesses. Of course smaller businesses don't have any more red tape or regulation to deal with than large companies. The difference is that larger companies have dedicated staff to deal with administration and regulation.
The same is not true for small businesses who often find the amount of red tape overwhelming. To make matters worse, the burden seems set to grow prompted at least in part by the need to conform to regulation emanating from Brussels.

However, recent research suggests that small businesses, although concerned about red tape, have other more pressing issues to deal with. In particular they want to find ways to grow their businesses and build value. In order to do this they appreciate that they need to recruit, motivate and retain key staff. This is often very difficult to do. Other important issues facing small businesses include the threat of recession, retirement and succession planning and (our old friend!) the tax burden.

Interestingly, turning to larger companies, similar concerns also emerge. Once again red tape is a concern but finding the right staff and skills seems to be as important an issue for large companies as it is for small businesses. Perhaps not surprisingly in the light of recent international events, the threat of recession is also a major concern.

We have to hope that during this parliamentary term there will be some attempt on the government’s part to tackle the problems of skill shortages and the regulatory burden. Only time will tell.

Trusts

Mention the word ‘trusts’ and many people switch off! They assume trusts are complex, old fashioned and only relevant for landed estates or the extremely wealthy. These are common misconceptions.

There are many reasons why you should consider a family trust, both fiscal and non-fiscal.

If a gift of assets is contemplated, the use of a trust rather than an outright gift will allow some control to be retained over the assets and flexibility as to their ultimate destination.

From a tax planning perspective there may be many varied reasons for using a trust. One of the main ones is to save inheritance tax (IHT) (and sometimes also achieve a capital gains tax advantage).

Take Alec (aged 68) with an estate worth £800,000 and his wife Florence (aged 64) with an estate also worth £800,000. Neither of them has given any capital away previously. They have three children aged 26, 29 and 32. If Alec dies, his estate passes to Florence under the terms of his will. There is no IHT on assets passing between spouses. When Florence dies she will have an estate of £1.6m which, assuming it passes to the children, will give an IHT charge of £543,200. (The first £242,000 is covered by the ‘nil rate band’ and the balance is charged at 40%.)

If instead on Alec’s death the first £242,000 of his estate passed directly to the children and the balance to Florence, IHT of £96,800 could be saved.

But Alec may be concerned that Florence will not then be adequately provided for. He could instead stipulate that £242,000 of his estate passes into a discretionary trust for the benefit of the children (and Florence). This gives greater flexibility whilst preserving the potential for a £96,800 IHT saving.

If Alec and Florence are also prepared to consider lifetime gifts they might for example both set up a discretionary trust for their children and each transfer in assets worth £242,000 (no IHT charge because the transfers are covered by the nil rate band) assuming that this leaves sufficient other assets for them to live on. If they live for at least seven years from setting up the trust, there is a possible total IHT saving (including the £96,800 referred to above) of £290,400!

Alec and Florence may decide that their children are well provided for but perhaps they have young grandchildren. They could transfer assets to them using a special type of discretionary trust called an ‘accumulation and maintenance’ trust. Such a trust is particularly useful where the aim is to skip a generation and benefit young grandchildren. It may also be beneficial if, say, school fees need to be funded.

Please talk to us soon if you are interested in setting up a trust or wish to discuss other aspects of estate planning. We look forward to your call.

Some common terms:
A trust is created by an individual (the settlor) transferring assets to one or more trustees. The trustees hold the assets for the benefit of others (known as beneficiaries). The rules of the trust (including how the trustees can invest funds and when and how the beneficiaries are to benefit) are usually set out in a legal deed.

Contents  |  Please contact us with any questions

E mail viruses have proliferated in the past year and viruses such as the ‘Anna Kournikova’ strain and ‘Navidad’ to name just two have infected many computer systems.

There are a number of preventative measures which can minimise both the risks of damaging the data on the computer system and the risks of passing the virus on with potential legal repercussions.

Top 10 ‘DO’ tips:

  • Invest in good anti-virus software and keep it up to date. Some anti-virus programs can be obtained free from the internet for example: Inoculan (www.antivirus.cai.com) or Anti-vir (www.free-av.com)

  • Ensure that suspect attachments are not opened, through enforcement of an e mail security policy. After all, no anti-virus software offers foolproof protection.

  • Install the latest versions and security patches from the e mail software vendor.

  • Sign up to virus alerts (available from the anti-virus software vendor).

  • Be vigilant.

  • Prevent staff from sending/ receiving personal e mails.

  • Prevent staff from using suspect websites, chat rooms etc.

  • Prevent staff from downloading screen savers and other software available which is in the public domain.

  • Use internet service providers who take preventative measures over suspect material.

  • Take regular server and local drive backups.

To find out more look at Cyberwalker’s Anti-Virus centre (www.cyberwalker.net)

Indirect taxes

Businesses today face a wide array of indirect taxes. VAT and stamp duty are well known. However there are other less obvious indirect taxes which can represent a real cost to business. Read on for a summary.

Insurance premium tax (IPT)
IPT was introduced in 1994 and represents a tax on general insurance premiums. The standard rate is 5% but a higher rate of 17.5% applies to travel insurance. Exemptions apply to long-term insurance, reinsurance and insurance for commercial ships and aircraft.

Businesses pay IPT indirectly as part of the overall insurance premiums charged to them.

Air passenger duty (APT)
APT was also introduced in 1994. Businesses with employees doing a significant amount of air travel will find APT is a sizeable business expense. The rates are currently £10 per passenger (£5 in economy class) within Europe and £40 per passenger (£20 in economy class) to other destinations.

Landfill tax
Since 1996 all waste disposed of at a licensed landfill site has been subject to a charge by reference to the weight of the waste. There are two rates - £2 per tonne for inert waste such as bricks and rubble and a standard rate of £12 for all other waste. The standard rate will increase annually by £1 per tonne up to £15 in 2004. Although the tax is payable by the licence holder of the landfill site, businesses pay indirectly in the charges levied on them for disposal of their waste.

Climate change levy (CCL)
CCL is the most recent of the indirect taxes having only been introduced in April 2001. The government has stated that the purpose of the CCL is to encourage energy efficiency and not to raise tax.

The levy applies to the business use of electricity, natural gas, LPG, coal and similar products. The rate for electricity is 0.43p per kilowatt hour and for natural gas 0.15p per kilowatt hour. Registered suppliers eg British Gas will charge the levy to their business customers and then pass it on to Customs.

The quid pro quo for this is that businesses have benefited from a 0.3% reduction in employers’ NICs (from 12.2% in 2000/01 to 11.9% in 2001/02).

Equity investment with tax breaks

The Enterprise Investment Scheme (EIS) gives tax breaks for individuals providing new equity finance to unquoted trading companies. The rules are designed to encourage ‘passive’ investors and ‘business angels’ who may wish to take a more active management role in the company. The EIS regime has a valuable part to play in attracting and providing tax-efficient finance for an owner managed business.

Using a case study we review the operation of the EIS and the conditions to be satisfied to obtain the available reliefs.

Case study
Charles has substantial capital and wishes to invest £80,000 by way of new equity in his brother Andrew’s company Windsor Ltd. Windsor Ltd is wholly owned by Andrew and manufactures royal memorabilia.

Windsor Ltd will issue 50,000 new £1 ordinary shares to Charles at £1.60. The issued share capital is currently 150,000 ordinary £1 shares. The company will use the funds raised to buy new machinery.

Charles will become a director of Windsor Ltd and Andrew hopes the company can be sold in a few years time.

In February 2001 Charles disposed of his Scottish holiday home and realised a capital gain of £35,000. He wonders whether the investment in Andrew’s company will enable the CGT liability to be deferred.

Charles will be able to claim income tax relief of 20% x £80,000 = £16,000 against his income tax liability for the tax year of the investment (although some measure of carry back to the previous year may be available). EIS relief can be claimed on a maximum investment of £150,000 in any tax year.

The following must be borne in mind:

  • Charles must subscribe for the shares wholly in cash

  • The cash must be used by the company for trading purposes

  • Charles can become a director of Windsor Ltd and receive ‘reasonable’ remuneration but must not be an employee

  • Charles must not own more than 30% of the company
    [(50,000 / 150,000 + 50,000) = 25%]

  • The company must operate a ‘qualifying trade’ – property development, running a hotel and farming are just a few examples of trades which do not qualify

  • Charles must hold the shares for three years to avoid his income tax relief being clawed back

  • Charles can defer the CGT liability on his holiday home. The CGT deferral claim is independent of the income tax claim and is not dependant on EIS income tax relief being available

  • Once Charles has held the EIS shares for three years, they are exempt from CGT although any loss would be allowable 

This summary provides only an overview of the position. We hope you find it helpful but please do not hesitate to talk to us if you or your company could take advantage of the EIS rules.

Contents  | Please contact us with any questions

The euro: changes imminent 

The single European currency, the euro, was launched on 1 January 1999. The 12 EMU member states are shown in the box. They are frequently referred to as ‘in’ countries and are collectively known as the eurozone. The EU countries outside the eurozone are Denmark, Sweden and the UK.

The eurozone countries will switch to the euro as their only currency from 1 January 2002. Euro notes and coins will be introduced in each country on 1 January 2002. 

References to European national currencies (known as legacy currencies) in existing contracts will automatically be read as references to euros from 1 January 2002. National currencies for the eurozone countries will cease to be legal tender on 31 December 2001 (Germany), 9 February 2002 (Ireland), 17 February 2002 (France) and 28 February 2002 for all other countries.

How will these changes affect my business?

If your business uses legacy currencies you should consider the implications in terms of your existing accounts, internal systems and processes. It will be sensible to convert all existing legacy currency accounts to euros if you have not already done so. You will need to give customers abroad details of your new euro account.

Your customers within the eurozone will find it easier to compare prices if you price in euros. If you import from the eurozone you may want to consider plans to pay suppliers in euros if you have not done so already.

Even if you have no direct dealings with the eurozone, your UK customers may have. Some larger companies, including American and Japanese multinationals operating in the UK, may expect to deal with all their suppliers entirely in euros. Retailers in tourist areas are expected to accept euros from consumers following the introduction of notes and coins in January 2002.

Assuring your customers that you are willing and flexible enough to price and be paid in euros could help you hold on to valued business, though it will expose you to currency risk.

Eurozone countries
Austria - Belgium - Finland - France - Germany - Greece - Ireland - Italy - Luxembourg - The Netherlands - Portugal - Spain

Further help and information

Please talk to us if you have any concerns or wish to discuss anything relating to the euro.

Boost for business gifts

Business gifts to customers are tax deductible so long as they

  • bear a conspicuous advert for the donor, and

  • do not consist of food, drink, tobacco or vouchers.

In addition, until this year, the monetary limit was £10. Businesses can now spend up to £50 and claim a tax deduction. The increase is significant more for the reduction in the administrative work involved in identifying disallowable gifts rather than for any substantial tax savings.

The £50 limit took effect for 2001/02 for unincorporated businesses and for accounting periods beginning on or after 1 April 2001 for companies and applies to all gifts to the same person in the same year.

The VAT limit for business gifts also went up to £50 (from £15) from 8 March 2001.

 

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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