Winters Newsletter Srping 2002

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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Risk Management

The management of business risk is one of the most important issues facing businesses of all sizes. Increasingly it is seen as key to business strategy and survival.

Do you effectively manage risk in your business? In reality, many businesses manage risk without proper co-ordination.

Why manage risk?

Risk management can enhance the value of your business. You can choose to react to risks as events occur but this can be inefficient and some events have the potential to destroy an organisation.

Look through the points that follow to see how you might improve the efficiency and effectiveness of your risk management.

First steps

Step 1 - Identify the risks
Some businesses fail as a direct consequence of risks that have not yet been identified. Begin by drawing up a list of risks facing your business. These will be both external (eg changing economic conditions, actions of competitors) and internal (eg production processes, actions of employees).

Step 2 - Measure the risks
You will need to assess:

Reduction Methods include:
- physical (eg burglar alarm)
- training
- health and safety procedures
- employee awareness
- dual sourcing of suppliers
- diversification.

However, review the costs involved. Clearly you should not spend more on controlling the risk than it warrants.

Transfer
- insurance is the main method: review your policies
- consider subcontracting a risky process/activity to a specialist.

Avoidance
Appropriate where the risk is too great to bear and reduction is not possible. An example might be a new product with a fault that cannot be rectified. The risk could be avoided by not launching the product.

Acceptance
Some risk will be retained in the business, particularly low likelihood and/or low impact risks. You need to decide how much.

Moving forward
Risk management is an ongoing process. Consider combining it with other strategic planning or budgeting exercises. Review when you undertake significant changes in your business.

All businesses take some risks in order to make profits but managing them sensibly can ensure commercial survival and add value. Don’t be caught out by the unexpected!

The table below shows how the rate is calculated.

Profits	Effective Rate
First £10,000	10%
Next £40,000	22.5%
Next £250,000	20%
Next £1,200,000	32.5%
Over £1,500,000	30%

So for many smaller companies if their annual taxable profit is below £300,000 they pay tax at 20%. If they have profits between £300,000 and £1,500,000 they pay tax at an overall rate of between 20% and 30% but in effect this is made up of a charge at 20% on the first £300,000 of profits and 32.5% on the balance. The 32.5% is often referred to as a ‘marginal’ rate.

However, the limits shown in the table (£10,000, etc) are proportionately reduced where there are ‘associated companies’. The rules are complex but companies are associated where one controls the other or both are under common control. The most frequently found examples are shown diagrammatically below.

In both cases there are two associated companies so that the annual small companies rate limit in each company is only £150,000 rather than £300,000.

The effect of this is that if profits are not evenly spread across those companies the corporation tax liability is likely to be higher than if the same profits had all been made within one single company. This can be a very important consideration when planning business structures or expansion.

Note that companies A & B in diagram 2 would still be treated as associated if Joe Smith owned 100% of company A and his wife owned 100% of company B. However if it is Joe Smith’s sister or brother who owns company B, the Inland Revenue will only treat them as associated if there is ‘substantial commercial interdependence’ between them.

On top of this, there has been a recent case which went all the way to the House of Lords and has focused the Inland Revenue’s attention on this area. Consequently you do need to think carefully if expansion is planned – is a separate company the way forward or would a separate division within an existing company be more tax efficient? What if you become involved in more than one company or other family members plan to set up companies? Will that make them ‘associated’?

Clearly this is a complex area where professional advice is needed. Talk to us if the article has raised any issues or concerns.

The Trustee Act 2000 became law last year. It places a greater onus of responsibility on trustees than previously. If you are already a trustee or considering becoming one, read on to ensure you are fully aware of the impact of the new Act.

The five main areas covered by the Act are:

We briefly consider each of these below:

Duty of care
All trustees have a duty to ensure that they manage and protect the assets of the trust diligently and prudently. The Act has made it a statutory duty to exercise the care and skill that is reasonable in all circumstances.

Investment powers
Investment powers are significantly broadened by the Act.

Duty to obtain and consider proper advice
Trustees must seek proper advice before exercising their powers of investment or reviewing the trust investments unless they conclude that it is not appropriate or necessary.

Power to appoint agents
If the trustees agree and provided the trust deed does not prohibit it, an agent may be appointed to undertake certain functions, eg asset management. Powers in relation to certain matters, eg distributions and the appointment of trustees cannot be delegated.

Power to acquire land
If the trust deed does not give the trustees power to acquire land, the Act now permits the acquisition of UK land.

If the trust deed does not give the trustees power to acquire land, the Act now permits the acquisition of UK land.

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 (currently after four years) and 24% for non-business assets (after ten years).

Business assets include assets used for trading purposes as well as certain shareholdings.

Gordon Brown is now set to make the CGT regime so attractive for holders of business assets that some are asking why he hasn’t simply done away with CGT on business assets altogether.

From April this year, the effective rate of CGT on business assets will fall to a maximum of 10% after just two years rather than the current four. The proposals are summarised in the table.

Whole years asset held	Proposed new rates (disposals from 6 April 2002)		Existing rates
Whole years asset held	Percentage of gain charged to tax	Effective rate of tax for higher rate taxpayer (%)	Percentage of gain charged to tax	Effective rate of tax for higher rate taxpayer (%)
Less than 1	100	40	100	40
1	50	20	87.5	35
2	25	10	75	30
3	25	10	50	20
4 or more	25	10	25	10

Example

Gordon acquired a business asset in June 2000. Under the existing regime he would have to wait until June 2004 to be eligible for maximum 75% taper on any gain. Under the new proposals, Gordon is eligible for 75% taper from June 2002.

Clearly these changes make an already generous regime more generous still. The gap between rates of taper relief on business and non-business assets therefore looks set to widen still further. The Government has said that they will consider whether changes to the regime for non-business assets should also be made to improve incentives for investment and help businesses attract finance.

The bad news
Do you run a trading company? Then this article is for you!

Does your trading company engage in any ‘non-trading activities’? The most common are letting out a property (or part of a property) and/or investing surplus company funds.

If so... then your company might not be regarded as a ‘trading company’ for taper relief purposes. This could result in significant tax liabilities on a sale of your company.

The Inland Revenue takes the view that if more than 20% of your company’s business relates to non-trading or investment activities then your company is not a trading company.

The 20% could be measured by reference to a number of factors including your turnover and/or your asset base.

At the very least you should proceed with caution and talk to us if you plan any investment activities within your trading company. We can help you plan to maximise the available reliefs.

Last year the Government announced its intention to abolish stamp duty on land in ‘disadvantaged areas’ as part of a package of urban regeneration measures. The intention was to attract developers to brownfield rather than greenfield sites.

The Government is taking a two stage approach to the abolition. In the first phase there has been exemption from stamp duty since 30 November 2001 on all property transactions up to £150,000 if the property is in a disadvantaged area. The relevant areas are identified by ward or postcode and can be found on www.inlandrevenue.gov.uk/so. There are some surprising areas including Regents Park and Kensington and Chelsea in London for example. Although the chances of property changing hands for under £150,000 in either of these areas seems remote!

The second stage which is expected to take effect later this year will be a significant increase in the threshold or total abolition of stamp duty for all transactions in non-residential property within the same designated areas.

‘Work/life balance’ is currently a much used expression and describes how employees divide their time between work and their personal lives. In a recent Institute of Management survey on the quality of working life in Britain, three quarters of respondents agreed that working excess hours or at weekends was the only way to deal with their workloads while nearly two thirds explained that it is part of their organisation’s culture. So how can employers help their employees? One initiative which is gaining popularity is home working. Employees can save valuable commuting time and employers can use office space more efficiently. But what are the tax consequences of such a policy? Some of the more common issues are outlined below. Please call us if anything we have said raises any issues or concerns.

Furniture and equipment
If furniture, photocopiers etc are made available to employees, generally they pay tax (each year) on a benefit equal to 20% of the asset’s original market value unless the asset is used only for business, or private use is not significant. With home workers this can be difficult to monitor. If employees provide the equipment then they may be able to claim a tax deduction for capital allowances based on the business use proportion of the asset.

Computers
Where computers are provided to employees for home working, once again private use is difficult to monitor. Since April 1999 the benefit on provision of computers (including modems, printers etc) is only taxable to the extent it exceeds £500. This is so provided the employee only borrows the computer and it remains the property of the employer.

Home telephones
Home telephone lines often cause problems. If an employee has both business and personal use of a home telephone and the employer reimburses the bill in full, income tax and class 1 NIC will be due on the line rental and the personal calls. The Inland Revenue does not accept that line rental can be apportioned between personal and business use.

If the employer installs a second dedicated business line in the employee’s home, no tax charge will arise. The company can meet the costs of the line rental and the business calls. However, itemised telephone bills should always be requested to ensure no element of private use.

Mobile phones
There is no taxable benefit on employer provided mobile phones. However, if an employee uses his own private mobile phone then any element of private use reimbursed by the employer is subject to income tax and class 1 NICs.

Place of work
It may be important to establish (through the employment contract for example) where the employee’s normal place of work is. If the employee is clearly home based then it may be possible for the employer to reimburse travel costs between the employee’s home and the employer’s premises without creating a tax charge. Of course there may be other non-tax issues arising from home working, relating to employment law or health and safety for example.

Home working is undoubtedly on the increase. If it creates happier, more productive employees and saves the employer money, it may be worth considering.

A national insurance (NI) number is a unique reference number that is used to record the NIC paid by (or credited to) the employed and self-employed. It ensures the contributions are recorded on the correct NIC account, which in turn ensures the right benefit and pension entitlement when a claim is made.

By the end of 2000 there were about 82 million NI numbers. It is rumoured that the Inland Revenue may soon run out of numbers in their present format.

A NI number is made up of two letters, six digits and a further letter which will be A, B, C, or D. A typical number would be AB 123456 C.

If you or one of your employees cannot remember their number, what should they do? You can begin by checking old payslips, tax returns, P60s or a P45 so see if the number is on any of those. If that doesn’t help then the Inland Revenue will do an automatic check if you need to send them a form P46. Failing that there is an Inland Revenue NI number tracing service. This requires you to complete a form CA6855 and the number will then be notified to you on form CA6856.

If on the other hand an employee has never had a number they will need to get one by arranging an appointment with their local Benefits Agency office. This may involve booking months ahead. The individual should take a valid passport, one other proof of identity, a contract of employment (or employer letter) and if appropriate, their work permit to the meeting. The meeting will take the form of a specialist interview during which form CA5400 will be completed together with a written statement. If the registration is successful the number will be issued between six weeks and three months later. Meanwhile a temporary number should be used. These take the form of TN followed by the employee’s date of birth and M or F denoting sex of the employee eg TN 16 07 60 F would be used for a female born on 16 July 1960.

Please talk to us if you have any concerns over NI numbers or any other NI issue.

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.