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Changes to Capital Allowances for Cars

The Pre-Budget Report has clarified the future tax relief available on the purchase of cars and motorcycles.

Cars purchased by companies from 1 April 2009 (and by unincorporated business from 6 April 2009) will attract tax relief depending on the vehicle's CO2 emissions:

• Up to 110g/km - 100% allowance in year of purchase
• Up to 160g/km - 20% deduction per year
• Over 160g/km - 10% deduction per year

Under this system it will take longer to achieve full tax relief for the cost of a car, particularly for the higher polluting vehicles. When a post March 09 car is sold the balance of the unclaimed cost remains in the pool of business equipment to be deducted at the normal rate of 10% or 20%. So full tax relief is not given even though the car is no longer owned.

Currently, on the disposal of a car that cost over £12,000 the unrelieved purchase cost is claimed as a balancing allowance. Cars that are acquired before 1 April 09 will continue to attract a balancing allowance on sale for a transitional period of five years. After 31 March 2014 all pre-April 09 cars will be added into the relevant pool for business assets. Therefore, if looking at purchasing this type of car, it could be advantageous to purchase before April.

Cars used by partnerships and sole-traders will attract tax relief at the same rates as for company owned cars. However, a balancing allowance will still be available on sale where the car has been used privately by the business owner. So ensuring some private usage may be beneficial.

From April 2009 all motorcycles purchased by businesses will qualify for the Annual Investment Allowance, which will normally give 100% deduction in the year of purchase.

Claiming Small Business Rate Relief

Are you missing out on a reduction in your business rates? The small business rate relief scheme (SBRR) can reduced your business rates by over 50% if your building has a rateable value of less than £5,000. The SBRR provides smaller discounts in business rates for properties with rateable values of up to £15,000, or £21,500 in Greater London.

Business rates are collected by local authorities, but the amount due is set nationally using a standard multiplier for all commercial properties. This multiplier is 46.2p in England for the tax year 2008/09. Scotland and Wales set separate multipliers and have slightly different versions of the SBRR that give different reductions. The Northern Irish Assembly still operates the pre-1990 old rates system for all domestic and business properties.

SBRR applies a lower multiplier (45.8p for 2008/09) to businesses that qualify and gives additional reductions as shown below:

Example
A business using a property with rateable value of £6,000 would pay £2,772 in business rates at the full rate of 46.2p for 2008/09. If it successfully applied to use the SBRR it would pay £6,000 x 45.8p = £2,748 x 60% = £1,648.80. That's a reduction of 41% from the original bill of £2,772.

The catch is you have to apply to use the SBRR from the billing authority that collects your business rates. You can now make one application to cover all the years from 2007/08 to 2009/10, and reclaim any excessive business rates paid for those earlier years. Contact your billing authority for their claim form. Each authority has a different form, but some authorities have not updated their information to show the extended deadline for claims, which is now 30 September 2010 for the current valuation period.

Increase Your Pension Fund Value

The recent downturn in world stock markets has reduced the value of many pension funds. If you are nearing your expected retirement date you may well want to boost the value of your pension fund for it to have sufficient future income to pay out the required level of pension.

One way to boost your pension fund is to liquidate some of your personal investments and pay the proceeds into your pension scheme. If your investments are worth less than their cost price you will make a loss on the sale, but this loss will be available for you to use in the future to reduce the taxable amount of your future capital gains. If you make a gain on selling your investments that gain will be taxable, but you can set your annual exemption of £9,600 against your total of your gains before the balance is subject to capital gains tax at 18%. The contribution you make into your pension fund will also attract tax relief at your highest rate of tax. If you pay tax at 40%, half of the tax relief is reclaimed by the pension fund and the remaining 20% by you. This tax relief could help you recoup the losses on your investments.

If you have a self invested pension scheme (SIPP) you can transfer your investments directly into the pension fund, with the agreement of the fund administrators. This sort of contribution is called an in-specie contribution. The transfer to the SIPP is still treated as a disposal by you at market value, so a gain could arise although you will have no actual proceeds. If the gain is less than your annual exemption no capital gains tax will be payable. The advantage of transferring investments to your SIPP is that you can claim tax relief at 20% on the market value of the assets transferred, and the investment remains under your control in your SIPP.

The following types of investments may be transferred as in-specie contributions into a pension fund:

• Commercial property in the UK or located overseas;
• Hotels, guest houses and nursing homes;
• Riding stables and golf courses;
• Forestry, woodland and agricultural land;
• Non-income producing land;
• Shares in unrelated companies, including;
  • VCT shares
  • EIS shares
  • Shares acquired from employee share schemes
  • Shares in Real Estate Investment Trusts (REITS)

The shares do not have to be quoted on a stock market, but unquoted shares must be valued on a fair market basis before the transfer. Some of the above investments may be held by your own company, in which case the company could make an in-specie pension contribution as your employer.

The value of the total contribution should not exceed the tax free annual allowance for the year, which is currently £235,000. Please seek advice before making a transfer of any investment, as there are detailed regulations to abide by in each case.

Statutory Sick Pay Changes

Some of the rules and forms for statutory sick pay have changed recently, so make sure you have the right forms to hand when the winter flu hits your office.

Most employees qualify for SSP from day one of their employment, if they are paid above the lower earnings limit for national insurance (currently £90 per week). If they qualify the employer should pay them SSP, or an equivalent amount from the company's own sick pay scheme, from the fourth day of sickness. Note that all agency workers now qualify for SSP on the same basis as other employees, even if their contract is for less than three months. This change was brought in on 27 October 2008.

The employee is entitled to receive SSP for 28 weeks, where they are still sick throughout that period. If at the end of that period the employee is still unable to work he moves onto State benefits. A revised SSP1 form has been introduced because of the change in structure of the State provided sickness benefit, which is now called Employment and Support Allowance (ESA). To tell the employee he is no longer entitled to SSP the employer must complete the new form SSP1 and send it to the employee. The new version of this form can be downloaded form the Department of work and pension website at http://www.dwp.gov.uk/lifeevent/benefits/ssp1_08_print.pdf and it must be used where the SSP entitlement runs out from 27 October 2008.

December Question and Answer Corner

Q. I see that the Chancellor has postponed bringing in a new law to tax family companies who share business profits between spouses, the so-called income shifting rules. I'm an IT contractor starting a new company through which I will provide my services. In light of this would you advise me to issue shares to my wife on the formation of the company to help avoid higher rate tax in the future?

A. The proposed income shifting rules were to supplement the existing settlement rules that tax the artificial transfer of income between spouses. If your spouse holds shares and receives dividends from your new company you may avoid higher rate tax, but you must also avoid being caught by the settlement rules. To do this give your spouse ordinary shares which have full voting rights, which you have subscribed for yourself. It is good practice for your spouse to also be a director of the company and take part in all major decisions, such as who to bank with, and when dividends should be issued. Whilst the Chancellor has said income shifting rules will not be introduced in the Finance Act 2009, there is no guarantee that the law will not be changed the following year as the Chancellor has said it will be kept under review in the most tax efficient manner. However, for now it does work.

Q. My son built and maintained a few websites on behalf of local businesses. Before he started his university course in October he transferred the code and customer details to an established website creation company for £18,000. How should this money be taxed?

A. It seems your son has a bright future as an entrepreneur. The sum he received is a capital payment for selling his first business and it is taxed as a capital gain. The full gain of £18,000 (assuming no costs) should qualify for entrepreneurs' relief, which will reduce it by 4/9ths, leaving £10,000. From this sum he can deduct his annual capital gains exemption of £9,600 leaving just £400 taxable at 18%, producing a tax liability of just £72. He should declare the gain on the capital gains tax pages of his 2008/09 tax return.

Q. We raised some sales invoices in November 2008 with VAT charged at 17.5%, for services to be delivered in December 2008. The invoices have already been paid. Do we have to take any action now because of the decrease in the standard VAT rate to 15% from 1 December 2008?

A. You don't have to make any adjustment to your invoices if you don't want to, as the VAT was correctly accounted for in November. However, you may issue a credit note if you wish to amend the original invoices to show services supplied in December at 15% VAT. This will only be worthwhile where your customers are unable to reclaim the full amount of the VAT charged.

December Key Tax Dates