Tax Simplification – There’s a long way to go!

See the latest edition of UK tax legislation on my desk. It runs to over 21,000 pages –  this does not include the recently published Finance Act 2010!

So if your tax advisor ever says

“….well, its not quite that simple….”

in response your straightforward question or otherwise perfectly logical suggestion, hopefully this well help you understand a little better why.

Tax needn’t be taxing – yeah right!

2010 Year End Tax Planning Tips for UK Entrepreneurs

Given that the 5 April 2010 UK tax year end is imminent, we are busy advising our UK entrepreneurial clients on ways in which they can arrange their tax affairs to pay the right amount of tax – and not a penny more!

Here are just some of the issues we’re discussing – remember, you should seek advice specific to your circumstances as these are general points only:

  1. For those typically earning more than £150,000 per year, the new 50% super higher rate of tax will hit hard when it is introduced on 6 April 2010. So we are advising those likely to be affected either to bring forward bonus payments or, where they are shareholders and sufficient distributable reserves exist in the company, to pay a dividend by 5 April 2010. An accelerated dividend payment is preferable in most cases as this is normally more tax efficient plus there are National Insurance savings. A word of caution – watch out for the pension anti-forestalling provisions if you are taking steps now that might increase your total income above £130,000….
  2. From 5 April 2010, the personal allowance available to all UK individuals will be tapered away for earnings in excess of £100,000. This means that for those with income falling between £100,000 – £112,950 in the 2010/11 tax year, the effective income tax rate will be a whopping 60%! Taking steps now either to advance salary payments to pay the current highest rate of 40% or to structure arrangements to fall outside these bands will save hard cash.
  3. Making pension contributions (either personally or via the entrepreneur’s company) can still make good financial and tax sense, however, beware of the restriction on higher rate tax relief for high earners from 6 April 2011 – in an attempt to stop savvy folk from piling cash into their pensions in advance of these measures, the Chancellor introduced some hideously complex rules called the pension anti-forestalling measures that limit higher rate tax relief on contributions for those whose income exceeds £130,000 (either now or in previous recent tax years) to £20,000 (or up to £30,000 in certain circumstances). Seek professional advice if you think you might be affected.
  4. Consider transferring income generating assets to spouses in cases where the spouse is a non-earner. Given that every individual receives a tax-free personal allowance and a 20% tax band up to c£45k it makes sense to consider splitting income where possible – be wary of splitting dividend income in husband and wife companies where only one spouse is active in the company.
  5. Every individual has a capital gains tax-free annual allowance of £10,100 (in 2010/11) so make use of this to crystallise gains where possible – if you don’t use it, you lose it.
  6. The highest rate of capital gains tax is still only 18% compared to 40% (soon to be 50%) for income. Also, compare the income annual personal allowance (c£7k) with the capital gains tax allowance (c£10k). Could this influence your investment strategies going forward to favour capital growth rather than income? Beware of the time horizon though as this gaping difference is unlikely to endure for long… [Update: 22 June 2010 Budget increased highest rate of CGT to 28%]
  7. Every individual (over 16) can invest in a tax-free wrapper called an Individual Savings Account (ISA) in which interest income on cash or capital growth and dividends on shares is tax free. Most have a £7,200 allowance to 5 April 2010 and this goes up to £10,200 from 6 April 2010. Drip-feeding savings provides the benefit of cost-pound-averaging which can provide better returns than piling in lumps sums on 5 April each year!
  8. Many entrepreneurs are unaware that they can invest in pensions on behalf of their non-earning children and still obtain basic rate tax relief up to £3,600 – so you need only invest £2,880 and HM Revenue & Customs will kindly top it up to £3,600!
  9. Those with furnished holiday lets that haven’t performed to expectations have a short window of opportunity to obtain business asset tax treatment on a sale of the property up to 5 April 2010 – this allows for more tax advantageous income and capital gains tax treatment but time is running short… [Update: 22 June 2010 Budget extended this opportunity for a further 12 months]
  10. Useful additions to an entrepreneur’s investment tools include Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) which offer differing but welcomed income tax and capital gains tax benefits.

Above are just 10 tax planning ideas that we are busy discussing with our entrepreneurial and family owned business clients. Hopefully your accountant is doing likewise. If not, please contact me and we can discuss your specific circumstances.

Take steps NOW to review your tax position. Time is running out for the 5 April 2010 tax year!

The above analysis is a general summary of some tax planning opportunities available for UK individuals in the run up to 5 April 2010 and should not be relied upon. Please seek professional advice specific to your circumstances.

Photo credits – Roll the dice

Tax holiday for business start-ups in Ireland

Welcome news if you’re a start-up business in Ireland is that a tax holiday is now granted for the first 3 years of trading.

This tax exemption is only available for start-ups that commenced trading on or after 1 January 2009. The only restriction is that the tax liability otherwise due for each year must not exceed €40,000 – hardly troubling for most start-up companies given that the current prevailing corporation tax rate in Ireland is only 12.5%!

Let’s hope that the UK government are keeping a watching brief…

Professionals serving clients via The Cloud

As a practising chartered accountant and tax advisor, I am finding that the ability to reach out and service clients via The Cloud is getting easier (and even more fun). 

Two recent examples from the past week:

  1. Sat at my Mac when I was pinged via Skype by one of my contacts “Steve, do you have a moment to help?”.  Within seconds he had sent me a link via Yuuguu for me to view his screen.  He was busy trying to file his company CT600 tax return online but was encountering some problems.  There is a further option on the screen that allowed me to take control of his screen so that I could quickly rifle through the online pages to determine if anything was wrong.  Meanwhile we could discuss via online chat.  A v slick experience and a glimpse into the way we will work in the future (now)!
  2. Leaving the gym, a client wanted me to check some recent accounting entries to his online business books.  With no time to get back to the office, I stopped by a local Pret-A-Manger and sat down with my laptop to hook up to the free wifi.  I tried to connect to Skype via my ipod Touch (as Skype is not installed on my work laptop) but unfortunately the connection was patchy.  A quick log-in to Twitter to apologise for the delay and my client sent an access link to his online accounting package, Xero, via a direct message in Twitter.  Within seconds I was logged into his Xero account reviewing the accounting entries.  The review was limited as I wanted to discuss some points with him (and a public place like Pret is not ideal), however, to get a heads up on the fly, this was great. 

Who would have thought this way of working would be possible only a couple of years ago? 

Example 1 could not have happened as I was not in the office at the time.  Example 2 would have meant a significant delay and frustration for my client awaiting my return to the office etc.   In both cases, these tools enabled me to be more responsive and allowed me to work without being chained to my desk. 

Professionals need to be out of the office supporting the business community and these tech tools are allowing this to become a reality. 

On a personal note, many of my clients are technology companies and they (quite rightly) expect their advisers to operate and work utilising similar tools – great news for me!

What might this mean for the way professionals work in the (near) future?