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 2002 Newsletter!

Contents:

• Environmentally friendly car could save tax

• Franchising

• Company cars...and vans...and fuel

• Inheritance tax

• Lights, Camera, Action

• VAT changes

• Businesses forced to make website and e mail changes

• UK200 update

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

Making the cars in your business environmentally friendly could save tax

Historically, a car purchased by a business has been eligible for a tax deduction by way of capital allowances. However, these have been restricted to 25% per annum and, in the case of cars costing £12,000 and over, to an annual maximum of £3,000. In order to encourage investment in ‘cleaner’ cars, new rules have been introduced which allow a 100% up front tax deduction, provided certain conditions are satisfied. We summarise the conditions and give an indication of some of the cars that qualify.

Conditions to be satisfied

• the car must be new and first registered on or after 17 April 2002

• the car must have CO2 emissions of not more than 120gm/km or be electrically propelled.

Some of the cars qualifying for the new 100% allowances…

Warning! Be careful that your precise desired specification has CO2 emissions not exceeding 120gm/km. For example an automatic as opposed to a manual can add significantly to the emissions.

A final word

Remember that if the car is for the proprietor of an unincorporated business the allowances will be restricted to take account of the proportion of private use.

Note that 100% allowances are also currently available for the following:

• expenditure on certain energy saving plant and machinery (eg boilers and refrigeration equipment)

• for small businesses, expenditure on computers, software and internet-enabled mobile phones (until 31 March 2003).

Franchising - risk or business certainty?

Franchising is becoming increasingly popular in Britain with an annual turnover of over £9 billion and nearly 700 franchised brands. The business community now takes franchising very seriously and it is accepted across a range of sectors. The advantages of owning your own business are obvious but so too are the risks. The franchisee is taking less of a risk than starting his or her own business. Less than one in ten franchises fail. This is because they are operating under an established and proven business model and supplying or producing a tested brand name.

Franchising is essentially the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisor’s name, trade marks and business system in return for an initial payment and further regular payments.

The advantages of franchising

These include:

• someone else has already had the bright idea and tested it too

• there will often be a familiar brand name which should have existing customer loyalty

• there may be a national advertising campaign

• some franchisors offer training in selling and other business skills

• some franchisors may be able to help secure funding for your investment as well as discounted bulk-buy supplies.

Some disadvantages

Of course there are potential disadvantages. It is not always easy to evaluate the quality of a franchise especially if it is relatively new. You should make extensive enquiries to ensure a franchise is strong and not take on one that doesn’t have a proven pilot operation.

Who is in control?

Each business outlet is owned and managed by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.

The costs

The franchisor receives a fee from the franchisee together with on-going management service fees. These will be based on a percentage of annual turnover or mark-ups on supplies. In return, the franchisor has an obligation to support the franchise network with training, product development, advertising, promotional activities and a specialist range of management services.

Choosing a franchise

Consider the following:

• your own strengths and weaknesses - make sure they are compatible with the franchise

• thoroughly investigate the business you are planning to buy

• research the local competition and make sure there is room for your business

• give legal contracts careful consideration

• last but not least, talk to us about the financial projections for the business - cash flow, working capital needs and profit projections will form the core of your business plan.

If this is something you want to think about further contact the British Franchise Association at Thames View, Newtown Road, Henley-on-Thames, Oxon RG9 1HG. Telephone 01491 578050. Alternatively visit their website at www.british-franchise.org

Company cars...and vans...and fuel

The new company car regime whereby the benefit in kind for tax purposes is based on the CO2 emissions of the car rather than the level of business mileage and the age of the car has been in force since April 2002. The scheme was well publicised in the run up to its introduction. However that didn’t stop the Inland Revenue getting many PAYE coding notices wrong! The purpose of this article is not to remind you of the rules on company cars but to let you know of a couple of associated points.

Vans

When the new rules for cars were introduced the Inland Revenue said that they were reviewing the position on company vans. Currently the maximum annual taxable benefit for a company van is £500 whatever its list price and CO2 emissions.

So for example a vehicle with a list price of £20,000 and CO2 emissions of 190gm/km will give rise to a taxable benefit of £4,000 if it is a car but only £500 if it is a van. This represents an additional tax cost of £770 for a basic rate taxpayer and £1,400 for a higher rate taxpayer. You would have thought it would be clear whether any given vehicle is a van or a car and therefore which rules to apply. Not so! Some vehicles particularly those commonly referred to as ‘double cab’ pick-ups have given problems. The Inland Revenue would like to treat them as cars but is this correct? To cut a long story short, they have decided to review the position for the next tax year beginning on 6 April 2003. But for the current year they have decided that if a double cab pick-up can legally carry a payload of one tonne or more then it will be treated as a van. Below that level it will be treated as a car. Furthermore, the addition of a hard top to such a vehicle will be deemed to reduce the payload by 45kg. Therefore the addition of a hard top to a double cab with a payload of 1,010kg will reduce the payload to 965kg and turn the vehicle into a car. Confused? It’s not surprising really. Please talk to us if you have any concerns on this point. The Inland Revenue adds that you can obtain advice about the payload of a particular model from the manufacturer or dealer.

Free fuel

The current rules give rise to a further taxable benefit if, in addition to a company car, you are provided with fuel for private motoring. The benefit is determined by reference to the engine size of your car. This is set to change from 6 April 2003 when the benefit will be determined by reference to the CO2 emissions of your car. The calculation will require you to take the same percentage as that used for your car benefit and for 2003/04 apply it to a figure of £14,400. This means that the maximum benefit for the provision of private fuel next year will be 35% x £14,400 - ie £5,040. Generally you would need to be doing rather more than 10,000 private miles a year for the benefit to be worth bearing. At lower private mileage levels, the alternative of paying for your own private fuel could be cheaper and you would be saving the company some Class 1A national insurance contributions.

Inheritance tax

An increasing problem?
An efficient Will may be the answer

Rising house values in particular have contributed to the increasing inheritance tax problem. Currently the tax is charged at 40% on everything in an estate above a £250,000 threshold.

Consider Mr and Mrs Smith. They both have assets worth £250,000 made up of the family home in which each of them owns a half share and various investments. Mr Smith dies first and leaves everything to his wife. There will be no inheritance tax to pay at this stage because gifts between spouses are exempt. Mrs Smith dies two years later worth £500,000. Her estate passes to the children and the inheritance tax payable at current rates amounts to £100,000. The liability arises because Mr Smith’s ‘nil rate band’ of £250,000 was not used on his death.

There is a way of leaving all of your wealth directly to a spouse on death which still enables use of the £250,000 nil rate band. It can be done by each spouse writing a tax efficient Will including a discretionary Will trust with a ‘debt-charge’ arrangement. Such a Will is sometimes referred to as a Loan Plan Will. In essence the plan works by leaving everything to the surviving spouse as before but in addition leaving £250,000, typically in the form of a charge on the house, to a discretionary trust. On the death of the first spouse there is no inheritance tax liability. On the death of the second spouse, his or her estate is reduced by the £250,000 owed to the trust. Such an arrangement for Mr and Mrs Smith would save the whole £100,000 inheritance tax liability. The children then inherit everything free of tax when Mrs Smith dies but she has had use of all the assets without restriction during her lifetime. She could have sold the house and purchased another one. Furthermore, a local authority cannot make a charge against any portion of a home owed to a trust should the surviving spouse need to go into long-term care.

Inheritance tax can be complex but often a technique such as the one described above can be very effective. £100,000 of potential tax saving on an estate of £500,000 is hard to ignore.

We would welcome the opportunity to talk to you about inheritance tax planning. Please get in touch if this is an area of concern for you.

Investing in British films has, since 1997, provided tax breaks although the relief has been restricted by some changes made in the April 2002 Budget. How does a typical scheme work and are the tax benefits worth having?

The majority of people investing in films do so through film partnership arrangements. Individuals invest in the partnership and the partnership then uses the funds to purchase a film from the producer. The film is then leased back to the distributor in return for an annual income stream typically lasting 15 years. The investment is financed partly through cash and partly through bank borrowings arranged for the purpose.

The tax break comes because the cost of buying the film is fully tax deductible and so the partnership makes an initial tax loss which the partners can claim against their income (and in some cases capital gains) so giving 40% tax relief on the initial investment. In later years the initial tax benefit reverses. The partnership starts to receive rental income which is used to repay the interest and capital on the loan. The excess of rental income over interest payable represents taxable income.

However, if the benefit of the scheme is merely a tax deferral, what purpose does it serve? The tax break on its own is not enough. For the scheme to have real benefit, it will be necessary to put the tax refund to good use and invest it so as to earn a return in excess of around 4%. The precise figure depends on the particular circumstances but the required return is generally referred to as the ‘hurdle rate’. Assuming this is possible, a film partnership may look very attractive. Remember however that the schemes are unregulated investments so there is no investor compensation if things go wrong.

In summary the schemes still work and are in great demand. Since the restriction earlier this year whereby, broadly, relief is only available for films intended for the cinema rather than television, the supply of qualifying investment opportunities is likely to reduce. We may find it is a case of too much money chasing too few qualifying films.

Please talk to us if you would like any further information.

VAT changes

Bad debt relief

If you sell to a customer and account to Customs for the VAT on the sale but the customer fails to pay you, you can claim a refund of the VAT paid. Currently this requires you to wait six months and in addition to write to your debtor customer advising that a claim for VAT bad debt relief has been made. For supplies made from 1 January 2003, relief can be claimed automatically after six months without having to write to your customer. This change is designed to make claiming the relief easier and removes any commercial barrier to claiming relief in circumstances where the late payer is a valued customer.

As a quid pro quo for this, where a customer has not paid a supplier within six months, VAT previously claimed as input tax must be repaid to Customs. Previously this only needed to be done following receipt of a notice from the supplier who was claiming bad debt relief. This change does mean that you will need to keep a careful check on any payments you make late and not rely on the supplier reminding you. Otherwise you may find Customs chasing you for recovery of input tax!

VAT repayments

Marks and Spencer has had a long running dispute with Customs over VAT repayments going back to the introduction of the tax in 1973. Customs had argued that any repayment must be limited to three years by virtue of the capping provision introduced in 1996. However, the European Court of Justice has decided that although the three year cap is lawful it should not have been introduced retrospectively. The consequence is that some businesses may now be entitled to further VAT repayments and Customs is inviting claims where:

• claims were made before 31 March 1997 which were capped or

• claims were fully repaid but Customs later clawed part of it back or

• no claim was made but an error was ‘discovered’ before 31 March 1997 AND

• in all cases the overpayments were made before 4 December 1996.

All such claims say Customs must be made by 31 March 2003. Further details can be found in Business Brief 22/02 which can be found at www.hmce.gov.uk

Businesses forced to make website and e mail changes

New rules introduced in August 2002 are designed to boost consumer confidence in e commerce.

Businesses with commercial websites may need to make changes as a result.

You should read this article if your business:

• advertises goods or services online, ie via the internet, interactive television or mobile phone

• sells goods or services to businesses or consumers online

• transmits or stores electronic content or provides access to a communication network.

The new rules cover the provision of information, electronic marketing and forming contracts. Failure to comply could mean the cancellation of orders, payment of damages for breach of contract or even a ‘stop now’ order forcing a business to change its procedures. We summarise the new requirements below.

Summary of new requirements

Businesses are required to:

• provide full name and contact details including postal and e mail addresses so that customers can get in touch easily

• provide their VAT number and details of any trade associations to which they belong

• give a clear indication of prices if relevant with details of any associated taxes and delivery charges

• clarify what steps are involved to conclude a contract and the point at which the purchaser is committed to it

• acknowledge receipt of an order electronically and promptly

• give customers the chance to check an order and correct any errors before committing to it

• ensure customers can store and reproduce any terms and conditions, eg by putting them in a format in which they can save them and then print them out

• tell customers how they can access any codes of conduct

• make sure that any marketing e mails promoting goods or services are clearly identifiable as a commercial communication

• make sure that unsolicited marketing e mails can be easily identified perhaps by marking them ‘unsolicited advertisement’

• clearly identify any discounts or promotions.

The DTI website has further detailed information on how to comply with the new regulations.

UK 200 Group News

The UK 200 Group has developed a marketing action plan - 'Marketing for Success' - which was presented at the Group's annual November conference held in Manchester. As usual, the conference was attended by partners from most UK 200 member firms. There will be a wide strategic review of the UK 200 Group in 2003 and renewed focus on our products and services.

More than ever, in the light of recent events, UK 200 member firms' core strength remains a commitment to quality assurance and high professional standards, exemplified by independent peer reviews of every member firm's practice and procedures. No firm can become a member of the UK 200 Group without passing this peer review, or remain a member unless annually it achieves the same high standards.

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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