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 Autumn 2002 Newsletter!

Contents:

• Did you know?

• Incorporation - Yes or No

• One Business or Two 

• Avoiding the Pension Pitfalls

• Deadlines and Penalties

• Employment Matters

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

The Chancellor’s 17 April Budget seems a very long time ago now. Some of the announcements he made have been very well publicised, in particular:

• prospective national insurance increases due next April

• reductions in corporation tax rates

• a two year holding period (previously four) for maximum capital gains tax taper relief on business assets.

But, some other generally favourable changes have been made which you might not know about. Scan through our list below and call us if you wish to discuss any of the points raised in more detail.

Charitable giving
Tax relief (for individuals and companies) on gifts of land and buildings to charity has been introduced.
From 2003 Gift Aid donations can be carried back to the previous tax year.

‘Cleaner’ cars
A 100% tax deduction is now given to businesses on the cost of a car in the year of purchase if certain conditions are satisfied: primarily new cars with CO2 emissions not exceeding 120gm/km.

Construction Industry Scheme (CIS)
Tax deducted from payments received by companies under the CIS can now be offset against PAYE, NIC and CIS liabilities, not just corporation tax.

Stamp duty
Stamp duty on goodwill was abolished with effect from 23 April 2002.

VAT bad debt relief
Changes are being made to make it easier to claim VAT bad debt relief after six months.

Community Amateur Sports Clubs (CASCs)
Certain tax breaks have been introduced for CASCs in an attempt to give them ‘parity with charities’.

One of the hot topics of the moment is the issue of incorporation - should you be running your business as a company or as an unincorporated sole trade or partnership? Many issues are relevant when considering this complex area. The potential tax savings available (see our example) will depend on a number of factors both tax and non-tax and we would need to discuss these with you. Attention has focused on the question of incorporation as a result of a number of changes made to the tax system in recent years. These are summarised in the box right. Corporation tax rates With effect from 1 April 2002, the corporation tax starting rate was reduced from 10% to 0% on annual profits up to £10,000. This, together with a reduction in the small companies rate from 20% to 19%, further widens the gap between corporation tax rates for many (smaller) companies and the 40% rate applicable to sole traders and partners whose profits push them into the higher rate income tax bracket. Extraction of profits Once profits have been earned (and taxed) in the company, the issue arises as to how best to extract them. Often there is a tax advantage in director/share-holders of such companies taking a dividend rather than salary or bonus. Increases in national insurance contributions (NICs) for employers, employees and the self-employed have added to the incentive to avoid these charges. Further increases are planned from April 2003. All NICs can be avoided by incorporating, taking a small salary up to the threshold at which NICs become payable and then taking the balance of post-tax profits as dividends. Clearly the national minimum wage requirements should be considered but company directors fall outside the provisions provided there is no formal employment contract. Personal (including stakeholder) pensions The new rules for personal pensions mean that it is necessary only to take a salary one year in six. Pension payments in each of the six years can be based on the salary paid in the one year.

Example John is a self-employed painter and decorator. During the year to 31 March 2003 he expects to make a profit of around £25,000. The figures below compare his tax position if he remains self-employed with the position if he forms a company, takes a salary equal to his personal allowance (£4,615) and the balance of profit as a dividend. Self-employed £ £ Income tax (2002/03) £ 4,615 @ nil 1,920 @ 10% 18,465 @ 22% £25,000 - 192 4,062 4,254 National insurance Class 2 52 x £2 104 Class 4 (£25,000 - £4,615)x7% 1,427 £5,785 Company £ £ Salary £4,615 : no tax or NI - Company profits (£25,000 - £4,615) = £20,385 Corporation tax (y/e 31.3.03) £ 10,000 @ nil 10,385 @ 23.75% £20,385 - 2,466 2,466 Post tax profits (£20,385 - £2,466) = £17,919 Pay out as dividend : no tax - £2,466 Tax saving: £3,319 Note that these calculations assume John has no other income and pays no pension premiums. Also, the precise tax effects of ceasing business in an unincorporated form have been ignored, as have the costs of forming and running a company.

In conclusion

Using a company to save tax has a few disadvantages, in particular the extra administrative requirements and costs. These should not be underestimated and we would be happy to talk to you about your own individual circumstances.

usion

Using a company to save tax has a few disadvantages, in particular the extra administrative requirements and costs. These should not be underestimated and we would be happy to talk to you about your own individual circumstances.

As a final thought, there may be many good reasons currently for considering use of a company as part of a tax planning strategy but the tax tail should not be allowed to wag the commercial dog!

One Business or Two?

Imagine you run a business where the turnover has recently risen above the VAT registration threshold. You now have to think about VAT registration and all that brings with it. But if instead there are two separate businesses run through different legal entities, both with turnover below the registration threshold, then you do not need to worry. Not surprisingly, Customs have always taken a very strict view of whether two businesses really are separate or whether in reality they are a single business that ought to be VAT registered.

In a recent tribunal case, a pub and restaurant had been treated as two separate businesses and the restaurant was below the VAT registration threshold. The decision went against Customs, ie the two businesses could continue to be treated separately. The tribunal made a couple of useful points. Firstly, that the perception of the public as to whether they are dealing with one business or two separate ones is of no real importance. Secondly, Customs’ view has always been that businesses have to be economically dissociated in order to be regarded as separate businesses for VAT purposes. However, the tribunal pointed out that inter-dependence of businesses is a common feature in commerce and one cannot assume that a business is not separate simply because it relies in effect on another business for its operation.

It is to be hoped that Customs will take these common sense observations to heart when dealing with similar cases in the future.

Avoiding the Pension Pitfalls

If your company operates an occupational pension scheme, or you act as an occupational pension scheme trustee, you may already be aware of the wide-ranging regulations that surround the scheme. If not, you may find yourself in breach of the pension regulations and facing a possible fine.

Company pension schemes in the UK are regulated by the Occupational Pensions Regulatory Authority or Opra as they are more commonly known. Opra’s role in the pensions industry is to protect pension scheme members’ interests by ensuring that those running occupational schemes meet their obligations under the Pensions Act 1995 and other related legislation.

Falling foul of pension regulations may prove to be an expensive mistake. Those breaking the law could face civil and, in extreme circumstances, criminal charges with the possibility of large fines being imposed. Where fraud or dishonesty is involved, those criminal charges could lead to imprisonment and/or an unlimited fine.

As these penalties could be imposed each time the law is broken, how can you ensure that you do not fall foul of the pension regulations?

The key is to be aware of your responsibilities. The full extent of these, whether you are a trustee or an employer with an occupational scheme, depends upon the particular nature of the scheme involved. We would be pleased to discuss these in more detail with you.

There are, however, for many schemes, a number of common pitfalls to avoid.

For trustees

• Failing to formally appoint scheme advisers. These usually include an auditor and an actuary, although this does depend on the nature of the scheme. The appointment of these advisers must be in writing and they must formally accept the appointment within a specific time frame. Failure to appoint the required advisers could result in individual trustees being fined up to £5,000.
• Failing to obtain audited scheme accounts or, for some schemes, a statement about contributions, within seven months of the scheme year-end.

For employers

• Failing to pay employee contributions to the trustees within 19 days from the end of the month in which they were deducted from pay. These must not be late, even by one day.
• Failing to pay all contributions over accurately and on time.

It is important to remember that the money involved does not belong to the company and if contributions are late or remain unpaid, employers are breaking the law. If an employer breaks this law, the trustees of the scheme usually have to tell Opra and may also have to tell the members of the scheme. Opra have fined many employers who have not paid contributions on time.

Where the law requires that a scheme is audited, the auditor and actuary are often required to inform Opra if they believe that the law has been broken by the trustees, the employer or any professional adviser. Even where trustees are not required to report to Opra on a specific matter, there are circumstances where the auditors must inform Opra that the law has been broken. Indeed, since April 1997 Opra have received thousands of reports from scheme auditors and other professional advisers about pension schemes with which they are involved.

Whether your responsibilities are as an employer or as a trustee, you need to be aware of the pension regulations.

Certain information has been reproduced with the kind permission of Opra. For further information see www.opra.gov.uk

Deadlines and Penalties

All companies, whether public or private, trading or non-trading, large or small must file accounts at Companies House.

The Registrar at Companies House has recently issued a reminder to all companies that their accounts must be delivered to Companies House by the filing deadline and particularly that delays in transit will not be accepted as grounds for waiving a late filing penalty.

To ensure that the filing deadline is met, we need to make the relevant arrangements for your company at an early stage - as you can see from the table below, missing the deadline can prove to be expensive. For example, if your private limited company has a year-end of 31 December 2001, its accounts must be filed at Companies House by 31 October 2002.

Other useful points to note

• Where the accounting period does not end on the last day of the month, the corresponding date in the due month applies. For example, a private company with a year-end of 21 September 2002 will have to file accounts by midnight on 21 July 2003.

• The key date is the date of delivery at Companies House and not the date of posting.

• There are a very limited number of reasons where an extension to the filing deadline may be claimed, provided this is requested before the normal due date.

• Where the accounts are delivered late, an invoice will automatically be issued to your registered office address.

• Late filing penalties are levied on the company and only apply to accounts. They do not apply to other documents that require filing.

Failure to file accounts

This is a different criminal offence which can result in the directors being fined personally in the criminal courts. In these circumstances, Companies House may seek to strike the company off the public record.

Employment Matters

Parental leave

Several changes will be made to the rules on parental leave. They will take effect in 2003 and the government estimates that the rules will affect around 800,000 new parents each year.

From April 2003, working mothers will be entitled to six months paid and a further six months unpaid maternity leave. At the same time the rate of statutory maternity pay will increase significantly to £100 per week.

Working fathers will be entitled to two weeks paid paternity leave at the same rate as statutory maternity pay. The new right to paternity leave is in addition to the existing provision for 13 weeks unpaid parental leave.

Parents who adopt a child will for the first time be entitled to paid adoption leave. One partner will be allowed the equivalent of maternity leave and the other will have paternity leave rights.

Any statutory amounts paid out under the new rules will be largely reimbursed by the state. Most employers will be able to recover 92% of what they pay out whilst the smallest employers will be entitled to a full recovery plus a compensatory element.

Pregnancy

One of your members of staff is going to be off on maternity leave for six months. So you hire a replacement on a six month fixed term contract. However, it turns out that the replacement is pregnant too and unable to work the full six months of her contract.

If you try to dismiss her you are likely to have a problem. The European Court of Justice recently ruled on this point. The employer argued that the employee was not dismissed because of pregnancy but due to the fact that she couldn’t perform part of the contract. The Court thought otherwise and held that the dismissal had been due to pregnancy and, as such, amounted to direct sex discrimination.

This confirms that in the case of pregnancy, dismissal is not an option. Employers must now accept, it seems, that in such a case they have unwittingly employed someone who is able to perform only part of the contract and who they must continue to pay as well as finding cover for them.

Employment tribunals

Where employees are in dispute with their employer they will in future have to raise their grievance internally before going to a tribunal. A fixed period of conciliation will be introduced to encourage quick settlement. All employers will have to include disciplinary rules and procedures in the written statement of the terms and conditions of employment. Only employers with at least 20 employees were previously required to do this.

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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