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Where Taxpayers and Advisers Meet
Year End Tax Planning
01/03/2002, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - General
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TaxationWeb by James Darmon

Individuals and Companies - Pre 2002 Budget Tax PlanningAt this time of year, tax advisors get out their crystal balls to try to predict what will be in the Budget, and what action taxpayers should take before the year-end on 5 April, in order to secure a better tax position. In recent years this has been made easier by the Government’s pre Budget report, which means that much of the news is already known. The Budget is normally in mid March, before the tax year-end of 5 April. However, this year, for entirely understandable personal reasons, Gordon Brown is delivering his Budget on 17 April, one month late. This means that changes could be announced in the Budget, on 17 April 2002, which will be retrospective to 6 April, or 1 April (for corporate taxpayers).

Additional Revenue Required

The one thing we know this year is that the Government needs more money for schools and the NHS. The Government’s two biggest revenue earners are income tax and VAT, but the Government has tied its hands on both income tax rates and the zero rate of VAT.

So where will it get the money from? A rise in the standard rate of VAT, from 17.5% to 19% would raise some £5.5 billion. This would put the UK more in line with the average rate of VAT in Europe generally. The political difficulty with this is that, proportionately, it would hit the less well off more than the better off. This might be difficult for a Labour Government to present. The other possibility is a rise in the upper limit for employee’s National Insurance from its current £29,000 or thereabouts, to £34,500. This would only raise some £1 billion and would hit hardest at the very people who might be marginal Labour voters.

Predictions

Other predictions include possible easing of some of the restrictive rules on pensions. There is currently a great deal of controversy about pensions, caused by low annuity rates, companies abandoning their final salary schemes, and last, but by no means least, the abolition of ACT by the Government in 1997. This reduced pension fund income from dividends by 20%. The effect of this generally has been masked for some time because of good performance in the stock market. However this particularly “chicken” is now coming home to roost, following recent poor performance in the market, and low interest rates.

The expected reform of inheritance tax, which is mentioned every year, has still to take place. This is becoming increasingly urgent given the spiral in property prices, particularly in the South East of England. These drag many ordinary families, particularly in the South East, into the inheritance tax net. It is possible we may see the end of some reliefs for transfers into Discretionary Trusts, following a recent tax case.

A, perhaps, longer shot is the possibility of a windfall tax on bank profits. Unfortunately, such attacks would only result in higher bank charges to customers.

Lastly, we have it on good authority that no new taxes are to be introduced on accountants’ shredding machines!

There have already been a number of very important changes announced. These early announcements allow more time to plan for the introduction of new rules. The most important of these include the following:

· Company cars
· Capital gains tax taper relief/retirement relief
· Company share disposals
· Company purchases of intangibles

Each of these is considered in a little more detail below.

1. Company Cars

Up to now, company car tax has been based upon a percentage of the list price of the car. The basic percentage is 35%, but this reduces to 25% where the employee does over 2,500 business miles, and 15% where the employee does over 18,000 business miles. There are further reductions when the car is over four years old.

From 6 April 2002, company car benefits will still be a percentage of the list price of the car, but this percentage will vary between 15% and 35%, depending upon the level of CO2 emissions. The minimum charge, 15% of the car’s list price, applies to cars with a CO2 emission figure (in g/Km) of no more than 165 for 2002/03. The maximum, 35%, is reached at 265 g/Km. Subject to an overall maximum of 35%, you should normally add 3% for diesel cars. The discounts for high business mileage, and older cars, will now be abolished.

It should also be noted that the CO2 emissions figures decrease annually (so that the tax bill on a given car increases). For example, a petrol car, emitting 200 g/Km, is taxed at 22% in 2002/03, 24% in 2003/04 and 26% in 2004/05.

Remember that the employer must pay Class 1A National Insurance on the value of the car benefit.

The main losers from the change include those doing high mileage, and people with large cars with high emission levels; in other words, some of the very people who normally most need a company car. The people who benefit most are those who do very low business mileage, and drive “clean”, often low performance, “perk” cars.

The former Fixed Profit Car Scheme is now called the Approved Mileage Scheme, and has been put on a statutory basis. If you drive high mileage, and do not wish to have a company car because of the changes, the new rules allow an individual using his own car for business to claim:

· 40p per mile for the first 10,000 miles; and
· 25p per mile thereafter

These sums can be charged to the company tax-free.

Where the employee needs the car for business, it will often now be tax efficient to transfer ownership to the employee. The employee could either be given the car, or put in funds to purchase the car. If the employee is simply given his existing car, for tax purposes, he receives a benefit equal to the market value of that car. Given the fall in second hand values, this may be an appropriate way to reward him. The company should receive a balancing allowance on the motor car in those circumstances.

Alternatively, the company can simply sell the car to the employee at its current market value. The employee does not then have to pay tax on the benefit but he must find the money from somewhere.

2. Taper Relief / Retirement Relief

Individuals over 50, who dispose of assets used in a trade, or shares in a trading company, may be entitled to retirement relief. Most people think retirement relief was abolished some time ago, but for disposals on or before 5 April 2002, £100,000 of tax-free gain is still available, and the next £300,000 of gain is reduced by one half. These reliefs decrease to £50,000 and £150,000 after 5 April 2002.

However, in any disposal of business assets, the taper relief position has to be considered. Taper relief was introduced in the 1998 Budget, and has been improved for business assets ever since. The Chancellor has already announced that, for disposals after 5 April 2002, full, 75% taper relief will be available after the asset has been held for more than two years. For a higher rate taxpayer, this is equivalent to a capital gains tax rate of only 10%. In other words, if you are over 50, there is a trade off between retirement relief and taper relief in deciding when to make a disposal. There are many traps in the taper relief rules, and care must be taken in any planning.

3. Company Disposals of “Substantial” Shareholdings

At present, companies disposing of shares in subsidiaries and similar are charged to corporation tax on chargeable gains. This has made the United Kingdom an unattractive place to hold shares in international groups, by comparison with many continental countries, where capital gains are exempt from tax. The Government has recognised this, and has acted to improve the attractions of the United Kingdom as a location for international holding companies.

From 1 April 2002, disposals of “substantial” (at least 20%) shareholdings in trading companies (or the holding companies of trading groups) by other trading companies (or companies within trading groups) will be exempt from corporation tax on chargeable gains.

Therefore, if a trading group anticipates a profit, it should delay sale until at least 1 April 2002. Conversely, if it is likely to crystallise a capital loss, the disposal should be accelerated.

The new regime will also create an impetus towards disposals of shares by corporate vendors, rather than businesses. This may in turn create a tension between the vendor and purchaser of businesses. The vendor will want to dispose of shares (to obtain the exemption) whereas the purchaser will wish to invest in a business (buying assets), to obtain a write off of the goodwill under the new rules – see below.

4. Write Off of Goodwill and Intangibles

Until now, purchases and write offs of goodwill and most other intangible assets (such as agricultural quotas) have not been given any tax relief.

This is about to change, but only for companies. New rules from 1 April 2002 will allow the purchaser of goodwill and other intangible assets to amortise the cost of the asset. This amortisation will normally follow the accounting treatment, but, if the asset has an indefinite life, the cost is written off over 25 years. This is part of a general drive by the Government to align tax and accounting principles more closely.

Profits and losses on sales of intangible assets will also now follow the accounting treatment, and will be treated as income (rather than capital gains, as at present). This brings intangible assets within the scope of the Controlled Foreign Company rules, and may cause international groups to reconsider their strategy for holding such rights.

A new reinvestment relief will replace the former rollover relief, where sale proceeds are reinvested in new intangible assets (for any business purpose – the new relief is not restricted to trades). The reinvestment can be made within the period from one year before to three years after the date of disposal. The relief will also be available for investments in shares in a company that holds intangible assets within the new rules, where at least 75% of the company is acquired.

Finally, it will be possible to deduct royalty payments on an accruals, rather than a paid, basis, as at present. This applies whether or not the related right is within the new regime.

5. Speculation: Non Domiciliaries

All the reforms in paragraphs 1-4 have already been announced. There is considerable press speculation over the tax position of non-UK domiciliaries, but nothing definite yet.

People living in the United Kingdom who are of foreign origin, and have retained links to their country of origin, are generally regarded as not UK domiciled. This allows them not to pay tax on income and capital gains not remitted to the UK. There may also be inheritance tax advantages.

There are rumours that Gordon Brown may act to limit these advantages, in the wake of the Mittal affair.

Labour originally published a document attacking the tax privileges attaching to the non-domicile status in 1994. However since coming to power, they have taken no action to amend the position. This has led to suspicions in some quarters that the reason for inaction is substantial donations paid to the Labour party by UK non-domiciliaries.

Any UK non-domiciliaries who have not already done so should consider utilising Offshore Trusts to hold the majority of their assets from now.

This article covers the main changes expected in the 2002 Budget, both those already announced and those that are rumoured, and are based on the position as at 22 March 2002. The comments in this article represent the writer’s own views, and are necessarily of a general nature. We strong recommend that you seek appropriate professional advice before taking any action based on these comments. If you want to consider any action on these please contact Forbes Dawson for advice on 0161-245-1090.

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

Mark is now a consultant with The TACS Partnership,  an independent tax advisory firm that provides high quality, independent advice on all UK taxation matters.

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional) 

Mark is also co-author of ‘Incorporating and Disincorporating a Business‘ (Bloomsbury Professional).

He is Editor and co-author of ‘HMRC Investigations Handbook‘ (Bloomsbury Professional).

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’, which provides free information and resources on UK taxes to taxpayers and professionals, and TaxationWeb’s sister site TaxBookShop.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.

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