HMRC have the legal right to enquire into any return and if they find that there is an error in that return which has caused tax to be underpaid, they have the power to levy a penalty which is usually based on the tax underpaid. It is these powers that are to change from April 2009.

New penalties

Under the new regime, there will be a presumption that every taxpayer has taken reasonable care in completing their tax return. What constitutes reasonable care will depend on the size of the case – a large company will be expected to have sophisticated accounting systems in place, whilst an individual will be expected to have records of all their income and expenses.

No penalty will arise if it can be shown that the error was due to a simple mistake by the taxpayer. The three levels of behaviour that will give rise to a penalty are defined as:

- careless action;
- deliberate action; and
- deliberate action with concealment.

Level of penalties

The legislation sets a maximum penalty for each type of offence. The rules then allow a certain level of reduction, taking into account only the level of disclosure, but there is a minimum penalty below which the Inspector will not be able to go.

These levels are considerably in excess of the levels which have, historically, been negotiated with HMRC for similar types of offence. It seems inevitable that the cost of making an error is going to increase significantly and the utmost care needs to be taken in keeping records to ensure that they are accurate and complete.

The future

We are expecting HMRC to finalise guidance on these matters in the next few months and we will keep you up to date with developments. We will also let you have details in due course of the other changes that are being introduced, such as powers to obtain information from taxpayers and third parties. In the meantime, if you have any queries about this area, please do not hesitate to contact us.

For personal contributions, if you have a lump sum that you are willing to invest, you are actually able to benefit from the very generous levels of tax relief afforded to pension contributions. For higher rate tax payers in particular it can make a VERY attractive investment opportunity with tax relief of up to 40% on personal contributions. In most cases the level of basic rate tax relief is reclaimed on your behalf by the pension provider, so in order to invest a single premium of £10000, you need only write a cheque for £8000, and if applicable the difference between basic rate and higher rate tax, is claimed via your tax return.

Tax relief can equate to quite a substantial amount of money, and while investment returns, and rates of interest on deposit savings have been poor of late it can appear an attractive proposition, subject to personal circumstances and attitude to risk of course!

Obviously rates and particulars are different dependent on tax status, or in the case of employer contributions, the company status and scheme type.

For more information we are available to discuss your personal situation or your companies situation in more depth. Please contact us on 01482 658989 or fill in or contact form and we will be in contact shortly: http://www.kirkellainvestments.co.uk/contact.asp

Shane Beardsley
Managing Director / Independent Financial Adviser
Kirk Ella Investments Ltd

One situation which helps to explain the complexity of the issue is as follows:

‘Treatment of tickets to events (theatre, football season tickets etc):

1. I am a concert promoter. I do not issue VAT invoices but received payment in October 2008 for a concert that will take place in April 2009. Can I adjust the VAT?

The short answer is no. The special rules for supplies spanning the change in the VAT rate apply where payment is received (or a VAT invoice is issued) before 1 December 2008 where the goods are to be supplied or services performed on or after that date.

In the case of tickets to a concert (or theatrical performance etc) what you are selling is the right to attend a particular event. As in this instance the right to the event was granted in October 2008, the supply does not span the change in the rate and VAT of 17.5% should be accounted for.

The same principle applies to football season tickets. If these were bought and paid for prior to 1 December 2008 they are subject to the 17.5% VAT rate with no scope for adjustment

Update 21 January 2009

Since the above guidance was published on 8 December 2008 it has become clear that a number of businesses were not aware of HMRC’s view of the correct VAT treatment of tickets to events. Some have assumed that where a ticket was sold prior to 1 December 2008 for an event due to take place on or after that date that the 15% rate should apply.

Where a business has mistakenly refunded its customers the difference between the 17.5% VAT originally charged on ticket sales and the 15% rate HMRC will operate a light touch and will not seek to recover the VAT that has been refunded. This treatment applies to refunds that were made up to the date of the publication of this update.’

Note that HMRC will apply a ‘light touch’ where businesses have incorrectly applied the rules up until the issue of the update on 21 January 2009.

As this particular situation illustrates, the change in the VAT rate is causing widespread confusion. If you have any concerns please do get in touch.

Visit HMRC VAT rate guidance for more details

The service is designed to help all businesses (large and small) that are struggling to pay their tax. The service is primarily available to self-employed people and companies but can be used by anyone who is having difficulty in meeting their tax liabilities. The service covers most taxes and duties including Income Tax, Corporation Tax, VAT, PAYE and National Insurance.

To qualify, the business/individual must be:

• in genuine difficulty
• unable to pay their tax on time
• likely to be able to pay if HMRC allow them more time.

HMRC have stated that ‘…we will look to be flexible and agree time to pay arrangements on a case-by-case basis to bring the businesses’/client’s tax back up to date on a timescale that is reasonable and appropriate to the situation.’

Allowances and rates

The 2009/10 personal allowance will be £6,475. The basic rate limit will be £37,400. Therefore an individual will pay 40% tax rather than the basic rate of 20% when their total income exceeds £43,875.

The 10% starting rate for savings income band (increased to £2,440) is only available where an individual’s non savings income (broadly earnings, pensions, trading profits and property income) does not exceed the starting rate limit.

Personal allowance changes for 2010/11

From 2010/11 the personal allowance will be subject to an income limit of £100,000. An individual’s personal allowance will be reduced by £1 for every £2 of gross income they have above the income limit up to a maximum reduction of half of the personal allowance.

For those with income of above a second income limit of £140,000, the amount of their allowance will be further reduced by £1 for every £2 above this income limit up to a maximum of the full amount of the personal allowance.

New tax rates for 2011/12

A new rate of income tax will be introduced of 45%. This will apply to taxable non savings income and savings income above £150,000.

Dividend income is currently taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. A new rate of 37.5% will be introduced for dividends which fall into the income band of above £150,000.

If you have any questions on this or any other accountancy / tax issue, you should contact your accountant.

The government will introduce ‘anti-forestalling legislation’ to prevent abuse of the reduction in the standard rate of VAT.

The percentages applicable to those businesses operating the flat rate scheme will be reduced with effect from 1 December 2008.

The transition to the new rate will cause issues for all businesses…..anyone with any concerns should speak to their accountant immediately.

The Council of Mortgage Lenders has welcomed today’s rate cut, and believe “it will help the wider economy, even if it cannot be reflected universally in lower mortgage rates.”

The impact this will have on borrowers, new and existing is yet to be seen, although many lenders have pledged to pass on the full extent of the saving. There is still the issue of collars being imposed by many mortgage lenders.

This will feature very heavily in the media over the coming days, as there has been an indication that possibly certain lenders will not be able to enforce these collars due to the lack of this information in the KFI’s issued at outset.

Shane

The LIBOR rate is the rate at which the banks lend to each other is related to the cost of mortgages to customers, and we are hoping that this latest fall may result in cheaper borrowing for customers, especially since the recent reduction in the Bank of England base rate had a lesser impact on borrowing costs as some would have hoped.

Those customers on Base Rate Trackers will be very pleased with the rate reductions, and those customers coming out of 2 and 3 year fixed rate mortgages should also be more relieved that the payment shock they were all expecting “should” have been reduced by this action. Fixed rate mortgages currently in place will of course be unaffected, the main obvious reason for a fixed rate mortgage of course!

The Council of Mortgage Lenders have been quoted as saying that that the “Libor was more important in determining the cost of mortgages than the Bank of England’s rate”, so lets see how these rate changes effect the product ranges of mortgage lenders.

The guidance has been updated in recognition that we are becoming increasingly global shoppers and may therefore benefit from some straightforward guidance.

The information includes warnings that although you may think that a website is quoting the full price for goods you may also have to pay Customs duty, Excise duty and / or import VAT.

An extract of the guidance confirms:

“If you buy goods online from within the European Union (EU)

You will not be charged Customs duty or import VAT.

Alcohol and tobacco products from within the EU cannot be sent to the UK unless arrangements have been made to pay UK excise duty in advance.

The 27 EU countries are the UK, France, Belgium, Luxembourg, The Netherlands, Germany, Italy, The Irish Republic, Denmark, Greece, Portugal, Spain, Sweden, Finland, Austria, Malta, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Slovenia, Cyprus, Bulgaria and Romania.

If you buy goods online from a country outside the European Union, for instance the USA, Canada, China, Australia

You will be charged:

• Customs duty if the amount of duty is €10 (£7*) or over
• Import VAT if the value of the goods is €22 (£18*) and over
• Excise duty for some goods like alcohol and tobacco.”

* The sterling value shown will be subject to an annual review, and may be adjusted, as a result of the Euro exchange rate announced in the European Commission Official Journal on the first working day in October to take effect from 1 January 2009.

For more information visit the links below.

Internet links: HMRC guidance

In response to pressure from the business community the Chancellor introduced a new ‘Entrepreneurs’ Relief’ which has the effect that the first £1m of gains qualifying for relief will be charged at an effective rate of 10%.

Gains in excess of £1m will be charged at 18%. An individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains.

The new relief is broadly based on the system which applied before taper relief, Retirement Relief, which some of you may remember. The rules for Retirement Relief required you to have been in business for a number of years but the new rules are designed to be simpler:

• there is no minimum age limit, and
• relief is generally available where the relevant conditions are met for a period of one year.

The relief will apply to gains arising on:

• the disposal of the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership,
• a subsequent disposal of assets in use in the business at the time of the cessation of the business; and
• the disposal of shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company.

In addition, certain disposals by trustees may qualify, as well as disposals which are associated with other disposals.

HMRC have amended their internal guidance to give further clarification of exactly when the relief will be due.

If you would like any clarification of the rules and how they will apply in your circumstances, you should contact a good accountant.