Although some penalties have been available to HMRC regarding PAYE for some time (such as for late filing), penalties for late PAYE payments are mostly new.

Penalties will be applied after the second failure to pay on time in the year, and will be calculated as a percentage of the amount paid late (for up to three more late payments) at one per cent of each amount (paid late). Each penalty can rise to as much as four per cent if there are repeated failures, and additional penalties of five per cent can be applied for liabilities unpaid for more than six months, and another five per cent after 12. So for example, an employer paying a monthly liability of £3k but is late by a week paying five of those in the year will incur a penalty of £120 from next year.

No penalties are payable if employers can demonstrate a ‘reasonable excuse’, but this will no doubt leave the recipient with the prospect of having to deal with an automatically-generated penalty notice.

This new measure will cause headaches for a lot of people, especially when you consider that for years it has never been a problem to be a little bit late in making in-year PAYE payments. Our advice is to consider the matter now and be ready to prioritise the payment of PAYE liabilities come the new tax year.

The logic of this is very sensible, as it should allow that business to bolster it’s cashflows just after (by virtue of it having made a loss) a difficult trading period. The trouble however was that losses could only be carried back one year, with the remainder being carried forward. But an announcement made in the Pre-Budget Report in Nov 2008 stated that, with immediate effect, for a limited time and under certain conditions, trading losses could be carried-back up to three years instead of one. This extended relief is available under Finance Act 2009 sch6 para1.

The three-year relief is available for trading losses made either during the 2008/09 and 2009/10 tax years for unincorporated businesses, or for accounting periods ending between 24th November 2008 and 23rd November 2010 for companies. There is a maximum of £50k that can be carried back to years’ two and three, although still no limit on the losses that can be carried back one.

So for example, a business that has made a loss in its most recent accounting period of £100k could make a claim to carry-back £50k one year, and another £50k against the preceding two years, so carrying back a total of £100k. The tax repayable will depend on what was paid in the first place (in the three preceding profitable years), but should be paid back quickly and with interest from HMRC. Note that any outstanding liabilities must be paid (or offset) first, and it may be the case that the business will be better-off carrying back only some or even none of any losses it has accrued, and so professional advice is a good idea.

Overall, for any business that is eligible, this is a really worthwhile opportunity to materially improve cashflows relatively quickly and painlessly, and we would advise all that have or are about to end a loss-making period to seriously consider making a claim.

We can of course assist you in putting that together.

Trust Categories
Finance Act 2006 introduced a new Trust regime that brought about a great many changes. Existing Interest in Possession Trusts are ring-fenced if established before 22nd March 2006, but a contribution to one of these under the new regime will now be treated as a chargeable lifetime transfer (CLT) instead of a potentially exempt transfer (PET) as before (meaning that there may now be an immediate IHT charge to pay).

Existing Accumulation and Maintenance Trusts established before 22nd March 2006 are not ring-fenced, and fall within the new regime from 6th April 2008. Several new Trust categories were also created but discretionary Trusts continue, largely unaffected.

Possible Applications
A Trust may be used to defer incurring a CGT charge when an individual is holding capital assets (e.g. quoted or unquoted company shares) that have gained significantly in value since the time they were purchased. In such cases, using a Trust may allow holdover relief claims under s260 TCGA 1992 to be made so that the capital gains tax (CGT) charge is not crystallised on transfer, and instead deferred.

Additionally, by making use of an individual’s nil-rate inheritance tax (IHT) band, any subsequent gain in asset value while they are in Trust should be sheltered. Note that this arrangement is not generally suitable for land and property (e.g. in relation to gains in the value of a buy-to-let house).

Worked Example
An individual that has made no chargeable transfers to date, has owned some shares in a quoted plc for a number of years that cost £75k. If sold today, and assuming a gain of say £225k, the individual would be liable to incur a CGT charge of just over £40k, payable now. If the individual dies while still holding these shares incidentally, the IHT bill may be as high as £120k, or maybe higher if their value has increased by then.

If the individual decides to make an outright gift of these shares to an adult son (to perhaps avoid the IHT), the transaction would rank as a PET and, provided that the individual survived the gift by at least seven years, it would be ignored. Unfortunately however, holdover relief would not be available, the gift would have to be treated as a deemed disposal and therefore the CGT of around £40k would still be payable.

Alternatively, a non-settlor interested discretionary Trust may be set-up and the quoted shares transferred into it as a settlement. Although this would be a CLT, there will be no IHT, given that the individual’s nil rate band has not been exceeded. Additionally, the gain of £225k could be held over by making a claim under S260 TCGA 1992. Then if say, one year later, the trustees decide to appoint the shares, which are now valued at £380k, to the individual’s son, there will be no IHT to pay because the entry to the trust was zero-rated, and no CGT to pay because a further holdover claim can be made.

It’s a complicated area but the potential downsides for inaction can be quite onerous. If you have any questions on any of the above, please contact us and we will be happy to help in any way that we can.

Although we are confident that HMRC will use these powers with great care and restraint, there is now the chance that any business may be targeted in this way. We expect that, without warning, an unprepared business receiving a visit will most likely experience real difficulties in answering questions or providing all the information that may reasonably be requested, and so many issues are likely to remain unresolved on the day.

Happily, all clients that are subscribed to our Tax Investigation Service (TIS) will now be covered for such visits, which means that we are ble to provide help and advice on the day of the visit (remotely), and subsequently help deal with any issues raised as a result of the visit, without cost (subject to the terms of the TIS).

Generally, our advice would be to contact your professional advisor if you have any concerns over this issue, without delay.

Player/manager Bradley Leavy expressed his delight in the new deal that will provide the team with their kit this season. “In making our plans for our promotion challenge, it was important to secure sponsorship early.” he said just before last Sunday’s pre-season friendly.

The deal is in-keeping with Best4business Accountants’ existing policy of supporting local activities and groups whenever possible, and it is very likely that the firm will be looking to continue supporting Destiny FC and Bradley in future years.

The existing system of dealing with overseas VAT is based broadly on it not being incurred in the first place. This can happen either by applying the ‘reverse-charge’ principle (for purchases from EU countries), or more simply by treating the purchase as being outside the scope of UK VAT (for purchases from all other countries); in both cases, the UK purchaser should end-up not paying any VAT and therefore no need to make a recovery.

If however VAT is incurred (say on hotel accommodation when travelling to an EU country on business), the purchaser presently has no option other than to make an application on paper direct to the tax authorities of that country, which can be time-consuming, costly and difficult-to-understand. There are agents that can help in making large recoveries (for a commission) but for VAT incurred on smaller purchases by smaller businesses, this is not an option and the purchaser is left with the daunting prospect of making the recovery themselves (perhaps with the help of their accountants, which again, may be costly).

Needless to say, most of this recoverable VAT is simply never recovered due to the practical limitations of the present system.

Upcoming Changes
From 1st January 2010, there will be a new EU-wide on-line system in place, which should really improve the outlook for the smaller businesses now suffering VAT losses in this way. From that date, businesses registered in the UK will be able to submit claims for VAT incurred in other EU countries on a standardised form through a new web portal.

Briefly:

1. claims are made in English, and should be processed within 4 months (can be extended up to one year in total however)
2. payments made within 10 days once claim is processed
3. de minimis limit on claims of €50 or €400, depending on claim period

So all-in-all a very welcome and long overdue change, although clearly there are still significant practical limitations, especially in the time it takes to process claims and recover the VAT. Our advice therefore is to continue trying to avoid paying VAT on non-UK purchases in the normal way as now, but now also to look forward to being able to make applications to recover EU-incurred VAT in the future.

Please follow this link for more information, or contact us should you have questions on any of the above, and we will be happy to help in any way that we can.

• focus on business goals
• plan resources
• help control activities
• motivate themselves and their staff

Businesses involving just an owner, often referred to as ‘lifestyle businesses’, generally do not need to consider this topic formally and/or in detail; an informal assessment should suffice (preferably in collaboration with a professional advisor). Having said that, it is very unlikely that any business benefits from its owners not giving the matter of forward planning any thought at all; such businesses will inevitably be at a disadvantage to those that have, and so less likely to succeed.

Note also that inexperienced business owners are at particular risk of making the mistake of not taking the time to consider, take advice on, and understand this important topic.

The steps outlined below are therefore pertinent for all businesses, but aimed primarily at businesses with growth plans, and have or will have staff-members other than the owners. For these businesses, the steps below are vital, and will help ensure that any realistic and achievable goals are realised.

Strategic Planning
The first step is to prepare a medium term (3-5 year) strategic plan, which can form part of a general business plan. The strategic plan should focus on the specific key performance indicators (KPI’s) of the business, setting broader targets that need to be achieved in order for the business to get to where the owners want it to be at the end of the term. KPI’s are always business-specific and must be identified and understood by the business owners at the outset.

Once set, it is not a good idea to alter the strategic plan and/or its objectives too often, although by the same token, not adjusting it while things are materially not going to plan can also be counter-productive. It will depend on the particular circumstances and is a skill that the business owners must develop or bring-in as part of their management team.

Annual Budget
These are generally as essential as the strategic plan in our opinion, although very straightforward and highly profitable small businesses may choose not to have one in place. Budgets can be extracted or derived from the strategic plan, or built from scratch along the same principles.

Each budget should be prepared before the start of the financial period to which it relates, and will show line-by-line detail of the financial and KPI targets for that period. Depending on the skill of the business owners (and their advisors), the budget can be used to serve a range of purposes. For example, in periods of strong growth the budget can be set with aggressively high sales and/or new customer targets; for businesses experiencing difficult trading conditions the budget can be set to help ensure that cash does not run out. Also avoid altering the budget once set; in our view, it is a very important part of the overall process to compare the business actuals (what actually happened) with the budget at the end of each financial period – this exercise is devalued the more the budget is adjusted.

In all cases, the business owners need to ascertain and understand the various factors that drive the business (such as repeat business, new products or services, average prices, and so on), often referred to as the ‘business drivers’.

Forecasting
Business owners will often be able to predict what will happen in the coming three to six months with great accuracy. If this information is made available in a management report, and is updated at the end of each month or quarter, the business will be better-placed to react quickly to changing conditions, unforeseen circumstances or new opportunities as and when they arise.

Unlike the budget, which is necessarily based on the business’s strategic plan and can be considered an ‘active’ planning tool, the forecast does not take account of anything other than what is actually going to happen (good or bad); it is a ‘passive’ tool, although no less essential for it.

Overall, we advise all clients to spend as much time and effort on forward planning as they possibly can (experienced owners generally do not need reminding), and we are of course ready to help in this important subject.

Staff
This is the established exception to the general principle, whereby the net expenditure on regular events or gatherings involving staff members (such as for Christmas) should be tax-deductible, and any VAT incurred, recoverable.

Expenditure should be kept below £150 per staff member per year (ITEPA s264). See the HMRC guidance on expenses for more on their website.

Entertaining Overseas-Based Clients
HMRC are currently reviewing the input VAT treatment of business entertainment provided to overseas clients in light of a recent ECJ judgment in the joined case of Danfoss and AstraZeneca (Case-371/07). This ruling makes it likely that VAT will be recoverable on entertainment expenses going forward, so long as it involves an overseas client.

Additionally, any business that has incurred entertainment expenses in the past but has not recovered the VAT may submit a reasonable claim, providing:

• details of the overseas clients (not overseas suppliers)
• the type of expenditure (e.g. meal, drinks, etc.)
• evidence that the VAT had not previously been deducted

Separate to the question of VAT, it is not yet clear whether the net cost will be tax-deductible for income tax purposes, although it does seem logical to presume so.

Pending the outcome of HMRC’s review, our advice is to consider recovering VAT on such expenditure from now on, in the expectation that HMRC will have to allow it. Additionally, consider whether it would be worthwhile putting together and submitting a claim for past expenditure, going back at least three years.

Entertaining UK-Based Clients
Although we haven’t yet read the updated legislation ourselves (ITTOIA s57A), we are reliably informed that the cost to the business of a representative (such as it’s owner) entertaining clients may now be considered tax-deductible, and the VAT recoverable. Recently updated HMRC guidance appears to support this (BIM37670).

The circumstances allowing such treatment broadly consist:

• a deductible travel cost should have been incurred (in getting to the ‘venue’)
• the trip, and thereby the entertainment, is itinerant in nature i.e. outside the normal pattern of work for the representative

It is also a good idea to ensure that the cost specific to the business representative involved can be clearly demonstrated, such as by splitting the bill. Note that the cost of entertaining the (UK-based) clients themselves remains ‘blocked’.

Our advice is to ensure that all such expenditure (from 1st/6th Apr09) is treated as deductible, and the VAT recovered.

This scheme has been available to newly-registered and small businesses for a number of years, promoted to varying degrees by HMRC as a way to reduce administrative burden and potentially save on VAT payments. Instead of working out how much sales (output) VAT has been received then deducting how much purchase (input) VAT has been spent in the normal way, it works by simply applying a set percentage to total sales to work out the VAT due. Input VAT is on the whole totally disregarded.

It can be operated on a cash-accounting basis, and there is a 1% discount if enrolling for it in the first year of VAT-registration. You must leave the scheme if turnover increases above £225k.

A closer look at the details reveals some troubling aspects however:

1. the percentage is applied to all sales, including to the EU, zero-rated and exempt (but not outside the scope of VAT sales, such as to non-EU countries)
2. the percentage is applied to gross sales amounts, not net. That means an 11% FRS rate would actually cost 12.65% of your net sales (and not 11% as you might have first thought)
3. input VAT on large capital purchases can only be claimed-for separately, meaning that a large purchase of anything else (such as stock) would be lost in the overall scheme
4. the percentage is set according to the sector(s) your business belongs to (see: Applicable Rates), and can be changed at any time at the discretion of HMRC
5. complications may arise if your business straddles more than one sector or if the rate is changed by HMRC mid-way through a quarter

Good for some, not for others
HMRC advises that it is not for all businesses, for a number of reasons. Our advice is firstly that this scheme is not something to be particularly excited about: logic dictates that the percentages are carefully set to ensure that HMRC does not lose out overall.

If you are interested, try to quantify the financial benefit as there is a real chance that your business would be worse-off under the FRS. You can do this by comparing your last few returns against what you would have paid if you had been enrolled, then weigh-up that advantage (if there is one) against the relative inflexibility of the scheme. We can of course help you to do that.

Full details of the FRS can be found in the relevant VAT notice here: VAT Notice.