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Emergency Budget 2015 – What to expect

Osborne admits the Summer budget is “unusual” but sees no point in hanging around following the Conservative’s General Election victory. He has declared that he “does not want to wait to deliver on the commitments” laid out in the Party’s election manifesto.

In a recent speech to the Confederation of British Industries he said the July budget would be for ‘working people’ with a “laser-like’ focus on making the UK economy more productive.So what can we expect from the first post-coalition Conservative budget of the decade?

One of the main Conservative pledges was not to increase VAT, Income Tax or National Insurance Contributions during the next 5 year Parliament term so workers could keep more of their hard-earned cash. So it is likely that this so-called Tax Lock will be legislated in the Summer Budget.

 Indeed, depending on how bullish Osborne feels and to what extent he wants ‘working people’ to be boosted, he may commit much earlier than expected to plans of raising income tax personal allowance to £12,500 a year and the 40% tax threshold from £42,385 to £50,000.
However these may be held back for the more difficult ‘rainy days’ of mid-Government.Osborne is likely to seal the commitment to raise the inheritance tax threshold to £1 million for married couples and civil partners.

With an aim of eradicating the public deficit by 2018-19 the Chancellor will no doubt have focus on ‘cash grabbing’ alongside the giving and public spending cuts.

The amount of pension tax relief available to the highest earners may be reduced to £10,000 from the present £40,000 a year either instantly or more likely from April 6 next year, and don’t rule out a rise in Capital Gains Tax as occurred in the post-election budget of 2010.

We will almost certainly see the introduction of the tax-free minimum wage law where the personal allowance will be set at a level that ensures that those working 30 hours a week on the national minimum wage are not subject to income tax.

Tax perks for landlords in the form of offsetting the cost of mortgage interest may also be axed.

Expect more action on curbing “aggressive” tax avoidance, especially the annual tax charges paid by non-doms and a continued cracking down on corporate tax evasion, such as failure to disclose offshore income, by imposing larger penalties.

But what about other areas of business and the curious case of productivity?

Despite a generally improving economy and unemployment, at the end of 2014, figures were still below pre-recession levels and it is an area Osborne is desperate to improve. More money for infrastructure and education is part of solving the puzzle but ensuring that businesses work better is another area of focus.

Expect the Chancellor to keep corporation tax levels at 20% and at least give an indication of what the new “significantly higher” permanent annual level of Annual Investment Allowance will be. We already know it is not going to return to its basic £25,000 from the current £500,000 level but more clarity will help businesses including SMEs invest. Also look for better access to research and development credits for SMEs.

The ICAEW has called on the Independent Office of Tax Simplification to be given the resources it needs to deliver on tax simplification such as the “complexity and length of the tax code”. It also wants the pension auto-enrolment process for SMEs to be simplified and explore a National Insurance Contribution exemption for apprentices of all ages.

Expect the Chancellor to talk about pension auto-enrolment given its high profile but those other wishes may have to wait.

Osborne may however also revisit a proposal to bring in a statutory tax exemption for trivial benefits in kind on spends up to £50. It had been expected to form part of the Finance Bill 2015 but was dropped pre-election. The exemption would have been for items such as tea and coffee or Christmas gifts.

Like Christmas, be prepared to expect the unexpected on Budget Day. We will be here after the speech to run through the announced changes and look at the ramifications for all.

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VAT on Pre-trading Expenses

When we register your businesses for VAT they can reclaim the VAT charge on goods you acquired within the previous four years, and on services provided to the business within the last six months. As long as the items were used for the business, and you still held the goods (as stock or business assets) at the date of the VAT registration, they can claim back the VAT on your first VAT return.

However, the VAT man has recently changed his view on exactly how much VAT you can reclaim in this situation. He now says that any use of assets in the business in the period before you registered for VAT should be discounted. This is best explained by an example.

Example

Chad has a livestock transport business. On 1 April 2012 he purchased a lorry for £90,000, including VAT of £15,000, which he expects to use for 10 years. He registered his business for VAT with effect from 1 April 2015, exactly three years into the lorry’s life.

The VAT helpline advised Chad to reclaim 7/10ths of the VAT incurred on the lorry: £10,500 (7/10 x £15,000), as the first three years of the lorry’s life were used for sales for which VAT was not charged.

Since VAT was introduced to the UK in 1973 the rule has always been that ALL the VAT on assets in use at the VAT registration date could be reclaimed. In the example above Chad would have reclaimed £15,000 in respect of his lorry.

The new interpretation of the VAT law has not been included in the VAT notices and leaflets published by HMRC. So if you have previously reclaimed all the VAT on goods (up to four years old) held at the date your business became VAT registered, you don’t have to alter your previous VAT claims.

Employment allowance and care-workers

People who employ care-workers in their own homes can claim the employment allowance for 2015/16 which is worth up to £2,000 to set against the employer’s national insurance contributions (NIC). The allowance wasn’t available for such employers in 2014/15 due to the general block on using it against class 1 NIC due on the pay of domestic workers, but the law changed in April 2015.

Your parents may also qualify for state support such as the Attendance Allowance and Disability Living Allowance which are not taxable. If your mother is aged under 65 she may qualify for Personal Independent Payment (PIP) contact info@cloudbookkeepr.co.uk now for more info

Staff Clothes

If your clients provide clothes for their staff to wear at work they need to be aware of the tax and VAT implications which may vary according to the items provided.

Where the items provided constitute a uniform or protective clothing which is needed to perform the job, the cost is tax deductible for the business and the VAT can be reclaimed. There is no taxable benefit in kind for the employee.
If the clothes are not considered to be a “uniform” and can’t qualify as protective clothing, the tax treatment depends on whether the employees are permitted to keep the items.

Where ownership of the items effectively passes to the employee you should generally treat the provision of the clothes as a sale at cost price, in which case you must account for VAT as if the clothing items had been sold at the cost to you. This can apply when sales staff in a clothing store are given clothes to wear from the store’s range, and are not required to return those clothes if they leave the company’s employment. The value of the clothes provided may also be a taxable benefit for the employee, which needs to be accounted for either on the annual form P11D or as part of a payroll settlement agreement (PSA).

Where the value of the items provided to any one employee is less than £50 in the tax year, the provision can be treated as a business gift by the employer. In this case the employer does not treat the value of the clothes as a sale. The taxman may also agree that the value of the clothes is a trivial benefit which is not taxable on the employee. However, it is best to establish this position with the tax office in advance.

A change to holiday pay

Following an important case at the Employment Appeal Tribunal, the rules that govern the amount of holiday pay that is due to an employee have changed.Under EU Law, workers are entitled to four weeks holiday pay a year but there are no details on how it should be calculated. Up until now, the UK Government has interpreted the EU Working Time Directive as saying that holiday pay should be at an employee’s basic rate of pay, which means any additional payments for regular overtime aren’t included.

As a result, most employers have not included regular overtime in their calculation of holiday pay. Basic pay is taken to be that which is identified in a contract of employment, or in the absence of such a written contract, a period of 38 hours work (there are precedents from three UK employment tribunal cases -Tarmac, Bamsey and Lotus – where the employees’ contracts stipulated that “normal working hours shall be taken to be 38 hours per week).

Historically, for example, if a weekly paid worker was paid for 38 hours at £9.50 per hour then, regardless of any overtime, bonuses or commission earned, the amount of holiday pay would be calculated at 38 x £9.50 = £361.00

However, the Tribunal [2014] UKEAT 0047_13_0411 has made a ruling on three separate cases: Bear Scotland (a road maintenance company) v Fulton, Amec (an engineering firm) v Law, and Hertel (an industrial services group) v Wood. The employees in all three cases originally won their claims for a higher calculation of holiday pay and the tribunal has now rejected appeals from the companies. The Tribunal also ruled that workers can make backdated claims, but only for a limited period.

In coming to a decision, the Tribunal referred back to a number of cases testing Article 7 of the Working Time Directive (2003/88) that made their way to the Court of Justice of the European Union (CJEU). However, a final decision on these matters could be a number of years away if the ruling is referred to the Court of Appeal.

Under the ruling, businesses will have to calculate the amount of holiday pay that is due, not just on the basic wage or salary as outlined above, but on total earnings averaged over a particular period of time. However, having made the decision, the Tribunal did not give any directions on how holiday entitlements relating to periods of overtime were to be calculated or administered through payroll and HR systems.

According to the government one-sixth of the 30.8m people in work, around five million workers, get paid overtime and they have said they would be setting up a task force to look into the impact of the ruling. Further information will be issued as it becomes available.

Non-resident Capital Gains Tax

If your involved with sales of UK residential property where the buyer or seller is tax-resident outside of the UK, you need to be aware of a new tax that came into effect on 6 April 2015: non-resident CGT (NR CGT).

The NR CGT charge is applied at different rates according to whether the seller is a non-resident closely-held company, fund, individual, personal representative or trustee. It applies to gains made in the period from 6 April 2015 to the disposal date of the property, so a small amount of tax likely to be payable on property sales made in 2015/16.

However, when such a sale is made a NR CGT return must be submitted to HMRC within 30 days of the conveyance of the property, and this must be done online. The return must be made whether there is any NR CGT to pay or not, where there is a loss on the disposal, and even where the taxpayer is due to report the disposal on their own personal or corporate self-assessment tax return.

Where the vendor is not registered for UK income tax, corporation tax or the annual tax on enveloped dwellings (ATED), the NRCGT charge must be paid within 30 days of the conveyance date. This payment can only be made once the NRCGT return has been submitted and HMRC have replied with a reference number to use when making the payment. There are penalties for failing to file the NR CGT return on time, and failing to pay the tax on time.

If the taxpayer is registered for UK tax they can opt to pay the NRCGT due at the same time as the tax due for their normal personal or corporate tax.

Conveyancing solicitors need to be aware of the very tight tax reporting and payment deadlines. Property developers need to warn non-resident customers that they will be liable to tax on any gain made when they sell the residential property and that gain includes any discount in the price achieved by buying “off-plan”.

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