Time to Pay’ may be scrapped in Budget
HMRC has toughened its stance on VAT deferral requests and recent reports suggest ‘Time to Pay’ may be abolished altogether in next week’s Budget.
The average VAT deferral request agreed by HMRC under the ‘Time to Pay’ scheme is £18,840, compared to an average refusal amount of £117,216, according to figures from finance provider Syscap. This means businesses looking to defer more than £19,000 could run into difficulties.
The scheme has seen £5.3bn worth of tax payments successfully deferred since November 2008, helping more than 200,000 businesses ease their cash flow problems.
The previous government extended the facility by a further four years, but it could be axed in next week’s Budget as part of a public spending cull to tackle the public deficit, according to the Forum of Private Business (FPB).
“The Business Payment Support Scheme remains a real lifeline for many small firms struggling with cash flow and this will be the case for a while. Now is not the time for it to go,” warned the FPB’s head of campaigns Jane Bennett. “Re-balancing the economy is clearly a major priority but sacrificing genuine support like this will only jeopardise small businesses and hinder sustained recovery. The message is clear – it is important to preserve ‘time to pay’ and other viable small business support schemes in the Budget.”
An FPB poll conducted last year saw the scheme voted as the most popular of all the government’s business support programmes, and according to the organisation’s latest Economy Watch survey, almost 60% of business owners believe HMRC has been supportive in recent months.
This is despite 28% saying that levels of taxation are too steep, 19% reporting that they struggled to speak directly to a HMRC representative and others complaining of problems with making online payments and a lack of payment flexibility.
In all, only 3% of business owners surveyed said they have experienced difficulties in accessing the scheme and just 1% said that HMRC’s advice has been inconsistent.
AccountingWEB contacted HMRC to ascertain whether Time to Pay is likely to be scrapped in the Budget. An HMRC spokesperson told us: "We cannot speculate on what may or may not be included in the Budget, so can't make a comment".
Capital gains tax shake up requires careful planning for investors
Lesley Stalker and Paul Webb offer a technical summary of the key concerns for investors with regards to capital gains tax following the emergency Budget.
We can expect CGT rates for top earners to more than double for non business assets in the forthcoming Budget, and the exemption threshold to be cut from £10,100 to between £1,000 and £2,000.
These changes will be painful, especially since for the past two years, the flat rate of 18% has been extremely generous. But given the poor state of the Treasury’s coffers, the disparity between income and capital tax rates cannot be sustainable.
There have been many articles offering advice on what taxpayers should do in the light of these impending changes between now and the emergency Budget. Our advice is to tread very carefully, for a number of reasons. This article outlines steps one could take, depending on the type of investment held. In all cases, we recommend seeking professional advice to properly weigh up the implications of each.
Property investors
If you own a residential property which is not your principal private residence, the chances are that CGT on a future disposal will be payable at 40 or even 50%. Many groups are already lobbying about the implications of this to the already beleaguered property market. According to ARLA, the new CGT policy could create a shortage in rental property supply as investors look to sell off their portfolios and may also deter future investors from entering the sector. They are lobbying to have landlords’ residential properties treated as business assets but in our view this is unlikely as historically they have never been regarded as such, and there is no strong argument that they not pure investment assets.
One option therefore is to sell up and take the profit now. Although the current 18% rate can be secured if unconditional contracts are exchanged for a sale prior to 22 June, it is unlikely that selling in the coming few weeks is an option for most property owners. Alternative tax planning strategies available include making a gift or sale into an existing trust. By gifting or selling a residential property asset into a trust, CGT can be immediately triggered at the rate of 18%. Although this means paying CGT now with possibly no sale proceeds, it will increase the future base cost of the property and may be preferable to the alternative of taking one’s chances with the new tax regime. This would need careful consideration because inheritance tax may also be an issue.
Based on current reports of generous business reliefs, commercial property owners may be exempt from these issues and may hear some good news when the Budget is announced; whilst commercial property does not qualify for entrepreneurs’ relief, it did qualify for the previous business asset taper relief and so there are hopes that the business asset status of commercial property may be restored in the new regime.
Equity investors
If you own quoted shares, you may wish to sell some to utilise the existing rate and exemptions. It would not be possible to take advantage of the reliefs if you buy the same shares back again within 30 days, because of the ‘’bed and breakfasting’’ matching rules, but spouses could avoid this by buying and selling between each other. Doing this would also provide the ability to use your annual £10,100 exemption now by selling investments before the allowance is lowered, and being taxed on any excess gain at the rate of 18%.
The example below explains in more detail the rules concerning equity disposals:
If you dispose of shares and also acquire shares in the same company and of the same class, for capital gains tax purposes the disposal is matched with acquisitions in the following order:
- Acquisitions on the same day as the disposal.
- Acquisitions within 30 days after the disposal.
- Acquisitions made on or after 6 April 1982 on a ‘pooled’ basis.
These are the “bed and breakfasting“ rules and if you make a disposal and re-acquisition of the same shares in order to uplift the base cost of those shares, you need to be wary of falling foul of these rules. If you re-purchase the same shares on the same day or within 30 days of the disposal, the sale will be matched with the acquisition cost of the new shares, rather than the shares you originally bought, and you will not have achieved the tax saving. If you want to re-acquire the shares quickly, then a sale by a husband and re-acquisition by his wife, for example, will avoid the application of the rules.
Example of tax savings to be achieved by selling shares now and re-purchasing avoiding the above rules:
Share disposal proceeds £25,000
Original cost -£ 5,000
Capital gain £20,000
Less annual exemption -£10,100
Chargeable gain £9,900
CGT @ 18% £1,782
On a future disposal of those shares for £40000 the CGT position will now be as follows:
Share disposal proceeds £40,000
Original cost -£25,000 (assuming the shares have been re-acquired at the same price)
Capital gain £15,000
Less annual exemption -£ 2,000 (assumed)
Chargeable gain £13,000
CGT @ 40% (assumed) £ 5,200
Total CGT £ 6,982
If you had not uplifted the base cost of the shares with the earlier disposal, the total CGT would be:
Share disposal proceeds £40,000
Original cost -£5,000
Capital gain £35,000
Less annual exemption -£2,000 (assumed)
Chargeable gain £33,000
CGT @ 40% (assumed) £13,200
Total CGT £ 13,200
Looking ahead to the future, the impending changes to CGT may see investors focusing on different assets to reduce their liability. So for instance, spending more on renovations to their main residence with a view to recouping the benefits tax-free upon selling; investing in wines or classic cars. It may also be prudent to consider “wrapping” stock market investments in an offshore trust and so avoiding having to pay CGT on individual sales within that ‘’wrapper’’.
Our advice in a nutshell
Never make decisions purely on the basis of tax liability. Always dispose of assets to make a profit or because you genuinely no longer want them. For residential property owners and non-business assets, take advantage of the 18% rate now by exploring options for selling or gifting into a trust. For commercial property and business owners, weigh up whether you want to take a chance and wait for the business asset relief structures to be unveiled, or whether you would rather take the reliefs on offer now, if the opportunity to do so is available to you.
Lesley Stalker and Paul Webb are tax partners at small business specialists Robert James Partnership.
Eva Rosenberg outlines the key points tax advisers should address when engaging small business clients. 1. Do you have the expertise they specifically need? 2. Do your research 4. What experience do you have? 6. When are you available? 7. How do you address errors? 9. What additional services can you offer? A good tax adviser should be prepared to answer these questions. Have we missed any out? Post your comments below if there are any other questions clients should be asking.Ten new client questions tax advisers should be prepared to answer
Don’t waste time discussing experience you may have in fields or areas that aren’t related to their particular business (e.g., If they are a building contractor, or developer, what do they care if you know the entertainment industry?). Hearing stories may be entertaining, but telling them isn’t necessarily productive.
Be ready to answer questions specific to the client's enterprise (e.g., If they're a trucker, do you know about the tax rates for transportation workers?).
3. Be specific about what you can do
Clients need to know exactly what you can and can't do. Which services are you qualified and able to provide and what don't you do? One example is bookkeeping - do you provide this as part of your service or will clients have to go elsewhere for this? You'd be surprised how many clients assume you offer everything, so make sure you're specific about what they're getting.
How much experience do you have in the industries or areas they care about? I just watched a new enrolled agent (an individual licensed by the U.S. Treasury to prepare income tax returns) meticulously prepare tax returns that were technically correct in every way. However, when the same documents were prepared by a more senior agent with industry expertise, client insight, and more practical tax preparation experience, the tax liability was cut in half–and the return was still totally legal.) Making sure you're equipped to serve their specific needs is important.
5. How much tax audit experience do you have?
(This is a trick question. If you brag about how many audits you’ve handled or how good your results are, they may ask an additional question: How many of the audits were on returns you prepared?) If a tax adviser’s clients get audited frequently, there is either something wrong with their work or their clients are in industries that are frequently targeted for this. Personally, I’d be more comfortable with a tax adviser who knows how to prepare returns that don’t attract attention.
Are you open year-round? Five days a week? Have you got someone available to cover for you when you’re not there?
If you make mistakes, do you guarantee to fix the return for free? Will you pay any penalties generated by those mistakes? Do you know how to amend returns and file corrections?
8. How long has your average client (non-family member) been with you?
Can you provide references prospective clients can call? (If you’ve been in business for ten years, why does the average client only stick around for two years?)
In addition to tax preparation, can clients call you during the year to get planning advice? Retirement planning? Tax reduction ideas? Savings and budgeting assistance? Buying a home? Setting up new businesses or formats (corporations, LLCs, partnerships)?
10. Business advice
Can you advise or help clients with the operational aspect of their business? (Do you have contacts in their industry? Can you help them network? Are any of your clients successful at least partly because the you’ve helped them succeed? Share your success stories and opportunities with them).
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