Winters Newsletter Spring 2003

Please contact us about any of the matters raised in this newsletter
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Against a background of global economic slowdown made worse by the events of September 11 2001, the UK economy has performed relatively well. In 2001, the UK came top of the G7 growth table with 2%; ahead of France with 1.8%, Germany with 0.7% and the US with 0.3%. Activity during 2002 saw a recovery in the second half of the year but overall growth in the UK in 2002 was around 1.6%. Confidence however remains low due to the weakness of the stock market and concerns about the situation in the Middle East.

The overall growth figures do however disguise an imbalance in the UK economy. It is largely the continued high levels of consumer spending that are responsible for the growth in the economy while manufacturing continues to register year on year falls. With borrowing costs at a very low level, high earnings growth and low unemployment, it is possible that consumers will carry on spending. On this basis the fiscal picture is broadly positive. But the period of budget surpluses is over and there has been a return to budget deficits largely as a result of the planned increases in public expenditure announced in the 2002 Budget.

In addition, taxation continues to increase to help fund the spending programme. In April this year, national insurance contributions will rise for employers, employees and the self-employed. For employers, the rate is increased to 12.8% from 11.8% and for employees and the self-employed there is an extra 1% charge on all earnings or profits without limit. In addition, the main personal allowance for everyone aged under 65 is frozen rather then being increased in line with inflation.

It is important to consider ways of mitigating tax liabilities and it is with this in mind that we include a special year-end tax planning supplement with this newsletter. We would be delighted to talk to you about any of the issues raised. Happy reading!

On 6 April 2003 the new ‘Child Tax Credit’ will replace the existing ‘Children’s Tax Credit’. Although the two credits have very similar names they are rather different. Both are means-tested and available to families who have responsibility for one or more children but beyond that the similarities end. The present credit is a tax reducer and is either included in the PAYE code (for parents in employment) or factored into the annual tax liability for the self-employed.

The new credit will be paid direct to the main carer together with child benefit which will continue to be payable in the normal way. The new credit is much more widely available than the Children’s Tax Credit and is estimated to apply to nine out of ten families with children. Both credits are income related but entitlement to the new credit is by reference to the income of the family rather than the income of the higher earning partner. Claims for the new credit should be made in good time because only a limited amount of backdating is possible. Claims made after 5 July 2003 will cause some of the available credit to be lost.

The Inland Revenue has been running a publicity campaign for the new credit. Don’t underestimate it! The new tax credit comprises various elements and these will only be available in full to families with annual income not exceeding £5,060. Above this level the available credit is tapered. However it will not run out until total family income is well over £50,000. For example a family with children where one spouse earns £50,000 and the other spouse does not work would not currently be entitled to the Children’s Tax Credit. This family will be entitled to the ‘family element’ of the new credit which will amount to £545 in 2003/04. Not enough to change your life we admit but better than nothing!

Already the new regime has been criticised for its complexity, with a 47 page booklet supporting a long claim form, so please contact us if you have any questions.

Year end tax planning for companies
Make sure you’re not throwing money away!

In the same way as individuals should review their tax position as 5 April approaches, so the position for companies should be reviewed before their accounting year end to identify and use any opportunities to mitigate tax liabilities.

It goes without saying that a tax review should take into account the commercial position of the company. In particular:

Companies pay corporation tax at the following rates (from 1 April 2002).

Profits	Effective Rate
First £10,000	0%
Next £40,000	23.75%
Next £250,000	19%
Next £1,200,000	32.75%
Over £1,500,000	30%

The bands are reduced pro-rata where there are ‘associated’ companies - either companies in the same group or companies under common control.

Given this rate structure, it may be important to consider whether income could be deferred to a later period or expenditure advanced to an earlier one, if this would result in a reduction in profit taxed at a higher rate or at a ‘marginal’ rate. Check our useful summary that follows to see what can be done.

We remind you of the rules on business gifts. What is tax-free these days and what about the VAT?

You can have a tax deduction for ‘small’ business gifts against your profits so long as they carry a clear advertisement for your business. ‘Small’ means worth less than £50. But the deduction is denied if the gift is of food, drink, tobacco or gift tokens - the very things we most like to give and receive! So you’ll just have to stick with the calendars, diaries and pens to get your tax deduction. The £50 limit applies to the total value of gifts made to one person in a year.

You won’t be surprised to be reminded that the VAT rules are different. For VAT purposes you can reclaim the VAT on all small gifts you make to customers including tobacco and alcohol. Furthermore, small for VAT purposes means £50 plus VAT. So if you give away bottles of fine malt whisky or vintage champagne costing £40 plus VAT you can recover the £7 of VAT per bottle but there is no tax deduction for the £40. There is a VAT leaflet setting out the rules (700/35). However it is out of date. It still states that VAT cannot be recovered on any gifts worth more than £15, but this limit was increased to £50 plus VAT from 8 March 2001.

Are you involved with a local sports club? If so you will be interested to learn of a series of tax breaks introduced last year.

In simple terms the new rules mean that a ‘Community Amateur Sports Club’ (CASC) is exempt from corporation tax on interest, trading income up to £15,000 a year, rental income up to £10,000 a year and any capital gains on sale of the club’s assets. In addition, anyone making donations to the club will be able to benefit from Gift Aid Relief and inheritance tax exemptions.

For some clubs, Gift Aid is likely to be extremely valuable. Gift Aid is a scheme by which you can give a sum of money to the club and the club can claim basic rate tax on your gift back from the Inland Revenue. Imagine that your local football club is seeking to build a new club house. It needs to raise £35,000 to do this. If the club is a CASC and donations are made under the Gift Aid scheme it will only need to raise a net sum of £27,300. The balance of £7,700 represents the basic rate tax on these donations and can be claimed back from the Inland Revenue. To the extent that any donations are made by higher rate taxpayers they can claim relief on the difference between the basic and higher rates of tax.A club must register with the Inland Revenue Sports Club Unit for the above benefits to apply. This is only possible if certain conditions are satisfied including the club being open to the whole community and the facilities being available to members without discrimination.

Please talk to us if you would like to know more. Alternatively, the Inland Revenue website provides further guidance including a list of all approved sports at www.inlandrevenue.gov.uk/casc/index.htm

Subcontractor companies not holding a tax exemption certificate receive payment net of 18% (‘CIS’) tax. Until 5 April 2002, the CIS deductions could only be set against the company’s corporation tax liabilities. Since 6 April 2002, CIS deductions should have been set against PAYE, NIC and CIS liabilities of the company in priority to corporation tax. The effect of this change is to improve cash flow because PAYE, NIC and CIS payments are made during the year as opposed to corporation tax which is generally paid nine months after the end of the accounting period.

Regulations came into force last September allowing the Inland Revenue to renew subcontractors’ temporary registration cards (CIS4(T)) for a period of 12 rather than three months. In exceptional cases, this may be further extended to three years.

The new regulations also recognise that some individuals needing a CIS6 gross payment certificate may not have an NI number. This could be for example because they are subject to social security rules abroad whilst working in the UK. They may now be given a ‘substitute identifying number’ instead. This is likely to make the task of inspecting certificates for validity harder still!

Note also that the government is seeking views on a number of proposals to reform the Construction Industry Scheme. Watch this space.

Poor cash flow is one of the main reasons for business failure. For small and medium sized businesses in particular the key to success is maintaining a good flow of cash through the business. In this article we provide some tips to help keep the cash flowing. Some of them may seem obvious but many businesses forget to apply these simple rules. Remember that winning the order is only half the story - getting paid is just as important.

Credit checking
Set customers realistic credit limits. A new customer is often the result of a lengthy relationship building process. Checking the customer’s creditworthiness may seem to go against the spirit of the relationship. However, caution at this stage may help to avoid fraud. Sometimes a ‘too good to be true’ order will come from a customer who has exhausted lines of credit elsewhere. Aim to trade with customers who have a good track record of paying bills.

Make it clear
Make your business terms clear. It is good practice to have a standard written contract and your Trade Association or the Chartered Institute of Purchasing and Supply (01780 756777) can provide examples. Include your terms of trade with order confirmations, invoices etc.

Checking invoices
Boring but necessary! Make sure they are accurately addressed and for the correct amount to avoid them being returned.

Invoice promptly
An obvious point but so easy to put off when you are busy chasing that next order. Try to invoice immediately on completion and even consider a phone call to check that it has been received.

Something different?
Be aware of times when your customers start to behave differently. Suddenly they are hard to contact or send you post-dated cheques. In this situation forewarned is forearmed. If a customer has cash flow problems it is essential to recognise the problem early. Remember though that a remedy costing money is not advisable unless your customer is able to pay at least part of the debt. For the future, consider ceasing to supply or requiring cash with order. You could consider a collection service (costing somewhere between 5% and 15% of the debt), a solicitor’s letter or court action.

Credit control
Make sure you have a system whereby statements and reminder invoices are issued. Call your customers if they are late in paying.

Stock
Don’t hold more stock than you need - it is expensive. Try to get your suppliers to deliver more often so that you can keep lower stock levels.

Suppliers
How often do you shop around and try to negotiate longer credit terms or volume discounts?

Late payments
In cases of late payment remember the following.

All businesses can now claim statutory interest at 8% over base rate for the late payment of debts. In addition businesses have the right to reasonable compensation for debt recovery costs incurred as a result of late payment.

The VAT bad debt relief rules have been amended so that for supplies made from 1 January 2003 it will be possible to claim VAT bad debt relief automatically after six months. For supplies made before 1 January 2003 it is necessary for the supplier to write to the customer to let them know that VAT bad debt relief has been claimed.

The new company car regime is based on CO2 emissions levels. Diesels suffer a 3% benefit surcharge unless the car is a ‘clean’ diesel satisfying the ‘Euro IV’ conditions. Unfortunately, at the time of going to print, there are none on sale in the UK. However, some employers are importing Euro IV diesel cars from countries where they are already available.

Employers need to ensure that such cars have a ‘statement of conformity’ confirming that the vehicle does meet the standard. Note that this is not currently recognised on the V5 vehicle registration document. Employers providing such cars should be aware that when completing the form P46 (Car)(New) they need to enter fuel type ‘L’ on part 2 of the form. This will ensure that the PAYE code is correctly set without the 3% benefit surcharge being applied.

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.

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 2003 Newsletter!