Tag Archive | "tax relief"

Government closes another tax avoidance scheme

Accountants may be interested to learn that the Government recently closed down another aggressive income tax avoidance scheme.

The scheme was being used by wealthy individuals to reduce the amount of tax they pay at the end of the year. It involved creating false transactions in order to generate tax relief from an artificial agricultural business. The land and property business owning it do exist, but the transactions do not. They are created solely to offset a loss against income, thus reducing the size of the individual’s tax liability.

New legislation was introduced into the Finance Bill on March 13th to close this scheme and this legislation came into immediate effect.

This is the third aggressive tax avoidance scheme that HMRC has unearthed recently and the Government realises that more similar schemes will probably emerge. Therefore it has introduced legislation to stop the artificial use of post cessation property relief.

The Exchequer Secretary to the Treasury, David Gauke, said the UK’s chief priority is to reduce the economic deficit and it is unacceptable for people to attempt to avoid paying their fair share of taxes. The Government has acted swiftly to close down this scheme and won’t hesitate to do the same as soon as it becomes aware of other tax avoidance schemes.

This latest move will not affect agricultural businesses that are trading legitimately and need to offset a loss from agricultural expenses against their general income.

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A contractor accountant could help you become tax efficient

According to a recently published report by Unbiased.co.uk, British taxpayers will pay an average £421 too much tax this year.

Contractor accountants will want to make sure they are not included in the 85% of Brits who gift a total of £12.6 billion to the Revenue in the form of unnecessary tax. Over the last ten years, British taxpayers have created a tax waste mountain worth £88.6 billion.

Unbiased.co.uk’s report discovered that £7.26 billion in income-related tax credits will go unclaimed and people failing to claim tax relief on their pension contributions will gift a further £2.45 billion to the Treasury. People who filed their self-assessment tax returns late will contribute £307 million to HMRC’s coffers, while about £83 million will be lost in unclaimed personal allowances and income tax.

The website’s study also discovered that 85% of taxpayers have taken no action to reduce their tax bill in the last 12 months. Half of them believe there is nothing more they could do to make themselves more tax efficient.

Of the 15% that have done something to reduce their tax liability, 40% have made changes to the way they invest or save their money and 22% said they had made a purchase or investment specifically as a tax efficiency measure.

Karen Barrett, Unbiased.co.uk’s chief executive, said British taxpayers should be devoting some time towards ensuring they are as tax efficient as possible. Of those people who have already done so, about 25% of them made use of the services of an accountant or other professional adviser, she added.

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Are pension rules set to change in the March Budget?

Contractor accountants may be concerned to learn that George Osborne is considering changing tax relief on pension contributions when he delivers the March Budget.

He has various options available to him. If he cut the relief on all contributions to 20%, taxpayers who pay the higher 40% rate would lose £20 for each £100 they invested and those paying the 50% top rate would lose £30 per £100 invested. On top of that, pensions are subject to tax so a taxpayer might have to pay tax at 40% or even 50% on their pension when they retire.

If this happened, a lot of people in defined benefit schemes might have to file a tax return because the pension benefits could not be determined as easily as they can with a defined contribution scheme.

PwC’s head of pensions, Raj Mody, explained that if tax relief on pensions was reduced, those people who pay a higher rate of tax could be better off if they received cash and paid income tax on it at the time.

The Chancellor is also considering reducing the annual allowance of £50,000. PwC says this would be easier to implement and people would still have an incentive to invest money in a pension fund.

Another option would be to reduce the tax-free lump sum people are entitled to on retirement. Those approaching retirement would then pay more tax than they expected on their pension pot.

Mody did warn that there have already been various changes to pensions in recent years and the public may lose trust completely if the Government implements further amendments.

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Will Chancellor bow to latest Lib-Dem income tax demands?

Contractor accountants may already be aware that Nick Clegg, the Deputy Prime Minister, recently urged the government to speed up its plans to increase the income tax threshold to £10,000.

However, PwC has warned that implementing such a plan would cost the country £11 billion. HMRC has estimated that raising the personal allowance by £100 costs the Exchequer a minimum of £0.5 billion. This has led to Alex Henderson, one of PwC’s tax partners, saying that raising the threshold faster than originally planned would be a heavy drain on the UK’s financial resources.

Part of the original pact between the coalition partners was that the income tax threshold would rise to £10,000 by the time of the next election in 2015. This was one of the demands made by the Liberal Democrats in return for joining forces with the Tories to form the current coalition.

Nick Clegg now wants to see the plan accelerated to help relieve some of the financial pressure facing families on low incomes. But Henderson points out that such a move would have to be paid for. Either tax receipts from borrowing or growth would need to improve, or we would see significant tax rises or cuts in existing reliefs if the government was to balance the books. To illustrate the scale of the gap, he explained that raising VAT to 22% from the current 20% would just about compensate for an increase in the income tax threshold to £10,000.

Under current plans, the Chancellor is expected to increase the income tax threshold to £8,105 when he gives his Budget on the 21st of March.

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Do online accountants’ clients need more help to grow?

Advisors have criticised George Osborne’s decision to restrict the 100% capital allowance to specific enterprise zones.

The Chancellor said that the 100% capital allowance would be available to companies in the Black Country, Humber, Liverpool, Sheffield and the Tees Valley. Firms in the North Eastern zone will also benefit and the relief might be extended to the Port of Blyth.

In his Autumn Statement last week, Osborne also announced a second enterprise zone in the Humber estuary and one in Lancashire to bring the total up to 24.

Stephen Herring from BDO said it was regrettable that the government has only granted the 100% capital allowances to less than a third of enterprise zones. He believes this tax relief targeting is unjust and all zones should be treated the same for tax relief purposes.

The 100% tax relief will only available on depreciation of plant and machinery expenditure, a measure that Harinder Soor from KPMG says is not as generous as enterprise zones in the 1980s and 90s received when tax relief was also allowed on buildings and structures.

The Chancellor also announced a National Loan Guarantee Scheme that should reduce the cost of borrowing for small businesses and an extension of the business rates relief.

Entrepreneurs welcomed the announcement of the National Loan Guarantee Scheme. The CEO of borro, Paul Aitken, said this was a positive step towards helping small businesses access much-needed finance. However, he was concerned that larger businesses would get the most benefit from the scheme, rather than small firms looking for immediate finance.

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More than 40% of annual earnings go to the state in taxes!

Contractor accountants and other UK workers spent an extra 3 days paying their tax bill this year, according to the Adam Smith Institute.

Tax Freedom Day this year was Monday the 27th of May. That means British workers spent the first 149 days of 2011 working for the state. The additional 3 days were mostly caused by the VAT increase at the beginning of the year.

It takes 39 days for the average British worker to earn enough to pay their annual income tax bill, a further 26 days to settle National Insurance liabilities and 29 days to pay VAT. Council tax takes up seven days of income and you need to complete a 5 day working week to pay the duty on alcohol and tobacco.

Sam Bowman, the think tank’s head of research, said it was no wonder that economic growth was so slow when we are slaves to the state for five months of the year.

Meanwhile, freelancers entering higher tax brackets could be tempted to increase the amount they pay into their pension fund.

The number of people paying higher rate 40% tax is expected to increase to 3.7 million this year, whilst 275,000 people will fall into the 50% bracket.

Bill Mackay, the marketing director of AJ Bell, pointed out that making pension contributions was one of the best ways to benefit from tax relief. His company witnessed a 179% year on year increase in the number of single contributions to two of its accounts in April.

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Cost saving ideas can win the day for contractor accountants

Contractor accountants may want to consider working alongside their clients to come up with cost saving measures after the ICAEW said this year promises to be extremely difficult financially for many companies.

The combination of low consumer confidence and public sector spending cuts will have a considerable impact on their revenue generating ability, the Institute warns.

ICAEW’s head of enterprise, Clive Lewis, said that despite the recent decrease, inflation is still high, but this is only one of many pressures facing companies at the moment.

In order to offset increased costs, the Institute has put forward a number of suggestions which could interest accountants, such as whether profit margins can be increased. It also suggests re-examining the fundamentals of products and services but warns against switching to cheap materials which could damage a brand and affect sales.

A lot of suppliers are offering incentives and there could be benefits to changing. There are now new suppliers with competitive prices in the market place and things could have changed significantly since a company’s supplier base was last reviewed.

Businesses should also tackle overheads such as energy costs, human resources and space. Significant improvements can be gleaned by more effective organisation of workloads and workspaces.

Leveraging the power of technology enables employees to work better, reduces the need for meetings and cuts down on communication costs, the Institute advises and companies can further cut down by taking advantage of all the tax allowances and reliefs they are entitled to.

KPMG recently reported that businesses could see £90bn added to their costs as the savings they made during the recession get wiped out. 80% of business leaders say the cost of finance is outstripping their cost-cutting efforts, whilst 76% blame salary inflation.

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Britain’s wealthiest to lose 3% of their income

The richest 10% of the UK’s population is set to lose an average 3% of their net income due to the complex tax changes that come into force this April, according to the Institute of Fiscal Studies.

750,000 more people will need to pay tax at the higher 40% rate because the government has reduced the threshold at which this rate takes effect. High earners will also need to pay more national insurance and will face restrictions on the tax free amount they can invest in their pension fund.

Contractor accountants earning over £150,000 now have to pay tax at 50% on all earned income above that amount and those with income above £100,000 have lost their personal tax allowance.

Child tax credit changes will also cause a large increase in marginal tax for the 175,000 adults who earn about £40,000 a year.

It’s not only employees that will be affected by these changes. High earning contractors should make sure they understand how the tax changes will affect them. One of the biggest changes, and one that a lot of people do not seem to be aware of, is the reduction in pension tax relief.

At present an individual can save £255,000 a year in their pension fund and obtain tax relief. As from April, that figure drops down to just £50,000. This new rule could have an adverse affect on people who pile a lot of money into their pension fund as they approach retirement age.

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Employer-supported tax relief restrictions branded unfair

The Chartered Institute of Taxation has branded the government’s proposals to restrict the tax relief on childcare supported by employers as unfair and unnecessarily complicated.

Both the CIOT and the LITRG voiced their criticisms in a pre-budget government consultation. The chair of the CIOT’s sub-committee on employment taxes, Colin Ben-Nathan, said the existing regulations are well established and reasonably simple to administer.

The government’s new plans will make matters more complicated and increase the administrative burden on employers even though the coalition has committed to a simplified taxation system. It will also mean that people with similar roles and similar incomes would be allowed different amounts of tax relief.

The technical director of the LITRG, Robin Williamson, pointed out that it is often advantageous to claim help with the cost of childcare through tax credits rather than the offered vouchers. However, there are complex calculations involved and the proposed alterations will make them even more complicated.

Furthermore, the current proposal is unworkable, he continued. It appears to rely on something similar to a ‘back of the envelope’ method of calculating income. The Low Incomes tax Reform Group is concerned that the model could be used in the future to restrict other tax reliefs such as the proposal to withdraw child benefit from high earners.

The LITRG would like to see a system that provides certainty for employees and is simple for people to understand.

The previous government initially proposed restricting tax relief on employer-supported childcare in the 2009 pre budget report. It was confirmed by the present government in the last budget and will apply to people joining employer schemes after the 5th of April this year.

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OTS recommends five tax reliefs for the axe

On the 13rd December, the Office of Tax Simplification published its interim review of 13 reliefs, providing some light reading for online accountants.

The interim review included CGT relief on the disposal of private houses, income tax relief on luncheon vouchers, tax relief on research and development and VAT relief on supplies and sales for charities.

Of the 13 reliefs, the OTS decided that five should be axed including the luncheon voucher relief and the tax break for workers who get a taxi home after working late. The OTS says the taxi break, which was introduced in 1987, is unfair. It is used frequently by financial services and legal firms who want employees to stay at work late to complete urgent projects, but it is not available for shift workers travelling at night unless they have to work later than usual.

Another relief that could go is the vaccine research relief which Gordon Brown introduced in 2002. It was designed to encourage research into HIV/AIDS, malaria and tuberculosis but only 10 companies are allowed to claim it. The OTS says the relief is very rarely used and there is no evidence that additional research into vaccines for the named diseases has been undertaken.

The OTS has identified a total of 1,042 separate tax reliefs and is now going to focus on 74 in a final review.

The Institute of Chartered Accountants of Scotland is also urging the OTS to recommend merging income tax and NICs. This would lead to less administrative costs for both HMRC and businesses, according to the Institute.

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Calls for the simplification of contractor pensions

Hargreaves Lansdown, the FTSE 250 investment company, partially backs the coalition’s proposals to change tax relief on pensions but suggests that further adjustments could make the system simpler.

Reducing the annual allowance to about £40,000 and reinstating marginal rate tax relief were definitely a lot better than Labour’s idea of restricting tax relief to high earners.

However, by restricting 50% tax payers to pension tax relief of just 40%, the coalition risks undermining the positive impact of the reform. Hargreaves Lansdown suggests that it would be a better idea to have a lower annual allowance but with full marginal rate tax relief. On average, individuals only contribute about £2,020 a year to their personal pension so an annual allowance of £35,000 for example is still more than enough for the majority of investors.

The Association of British Insurers says that the allowance should not fall below £35,000. Earlier this year the Treasury launched a consultation on tax relief for pension contributions. The ABI argued that the allowance should be £45,000, i.e. the top of the Treasury’s suggested range.

The ACCA is concerned that the changes will do more harm than good. The Assocaition would like to see a low allowance for people who are just starting their first job and a larger allowance for people aged over 50.

The secret to success here must be simplicity or else the government runs the risk of investor confusion. It has already been revealed recently that the majority of people nearing retirement age are not financially prepared for the consequences of retirement and any changes to the current pensions regime must be simple for the investor to understand and the taxman to implement.

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