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Issue 6


Welcome

Les NutterApologies in advance if, at first glance, this edition seems to be shrouded in a cloud of doom and despair. We report with concern about the prospect of further increases in tax administration for businesses, new threats of personal tax enquiries and, if that wasn’t enough, one-off tax hits. There is, however, a silver lining, in the shape of pensions freedom from A-Day and the success story of a family business we’ve shared a great relationship with for some 15 years.

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Les Nutter



Contents

What's new at Cassons?
Support for fledgling barristers
"It's a no-brainer!"
Deal successes!
Stop press! Budget 2006
Your business
Brace yourself… it's coming!
Do you use subcontractors?
Audit standards go international
In brief...
You and your family
Thought about your will recently?
A-Day brings new life to pensions
Dividends & pensions - an unhealthy combination
In brief...
Ask Cassons
Two homes and capital gains tax
Residential property and SIPPs
Client profile
Nationwide Produce PLC

What's new at Cassons?


Support for fledgling barristers

Cassons are proud to sponsor the prestigious annual Bar Providers Mock Trial Competition being held in Manchester for the first time. The competition, organised by Manchester Metropolitan University, gives the opportunity for would-be barristers from bar course providers around the country to compete in mock trials. The final is to be judged by His Honour Judge David Maddison QC, Honorary Recorder of Manchester.

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"It's a no-brainer!"

…was the comment from a client recently, when faced with the choice of administering a weekly payroll for 30 employees himself or outsourcing it to our Payroll Department. The department now handles the payroll for just short of 1,000 individuals.

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Deal successes!

Our Corporate Finance team found the buyers and negotiated the sales in three recent deals. They were Maxim Industries Ltd, a specialist in the sourcing of engineering components, as well as meat processors, Jack Hardacre Ltd, and employment consultants, Neville Gee Ltd.

We also created the management buy-in of the music software business Et Cetera Distribution. Here we found a business that fit the buyer’s criteria, negotiated the purchase and helped arrange the funding.

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Stop press! Budget 2006

Our website has a user-friendly guide to the Budget, new rates and allowances and a handy tax calendar for 2006/07.

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Your business


Brace yourself... it's coming!

A tax time bomb in the shape of “UITF 40” was introduced last year. This is accountancy guidance saying that income should be recognised in annual accounts by reference to the full contract price and the proportion of the contract actually performed by the year-end. This is in stark contrast to the previous accounting treatment, requiring income to be recognised, in most cases, only when a contract was completed. The change affects all businesses with a year-end after 21 June 2005.

The consequence of this new accounting treatment is that income is accelerated. Tax is of course due on this income, despite the fact that there may be no entitlement to raise an invoice until after the year-end, if and when the contract is actually completed. The first year this change in accounting policy is implemented will, in many circumstances, bring about a large increase in profit, with a consequential large one-off tax “hit”.

Not surprisingly there was significant pressure on the Revenue to bring in measures to smooth this tax burden. Rules will be introduced to spread the impact over three years, rising to six years for those cases worse affected.

The proposed new spreading rules apply to businesses of any size, both companies and unincorporated businesses. The additional profits need to be calculated and a proportion will be taxed in the first year i.e. in relation to the first accounting period ending after 22 June 2005. The remainder will be taxed equally in each of the next two years. These additional profits will be spread over 3 years, but subject to a further test that may extend the spreading period for up to six years.

For unincorporated businesses, the interaction of these rules with the system of income tax payments on account may well mean that they do not receive the full benefit of the spreading relief.

For example, an unincorporated business with a year-end of say 31 December 2005 is liable to tax on those profits in the tax year 2005/06. If we simply assume normal recurring profits of £100 and a “UITF 40 adjustment” of £60, the adjustment is taxable over three years at £20 per annum. The first tax payment would be the balancing payment for 2005/06 payable on 31 January 2007 being tax on £20. There would also be the first payment on account for 2006/07, payable on 31 January 2007, and effectively calculated on half of the adjustment of £10. This means that out of the total adjustment of £60, tax on £30 (50% of the total adjustment) is payable on 31 January 2007. Continuing with this example, tax on the remaining £30 would be payable in July 2007, January and July 2008.

The example demonstrates that, although the spreading is calculated over a minimum period of three years and a maximum of six years, in many circumstances the tax will be payable over an eighteen month period, in our example from 31 January 2007 to 31 July 2008. Worse still, in our example half of the extra tax is payable by 31 January 2007. It is extremely important to recognise these increased tax payments and care certainly needs to be taken to ensure that the business has sufficient funds to deal with them. It will be wise to ensure that the first UITF 40 compliant accounts are prepared without delay after the year-end and that future profits are forecast in order to plan for the extra tax.

Of concern to some individuals is that they might have reduced their payments on account for the 2005/06 tax year on the basis that profits were expected to fall. Application of this accounting quirk might well lead to an increase in profits and consequently an increase in the tax due. The first instalment of this extra tax would strictly have been due on 31 January 2006, with the second instalment due on 31 July 2006; the consequence will be automatic interest charges.

As an aside, the Accounting Standards Board had originally set out to review the way some very large, mainly quoted, companies were trying to enhance their profits. The concern was that these companies were pushing the boundaries of accepted accounting practice to increase turnover and the value of the company shares. It is perhaps ironic that the change results in those many “innocent” businesses that were acting in accordance with accepted practice finding themselves with bigger tax bills to comply with the new guidance! Accounting practices themselves will be particularly vulnerable to the change. The phrase “scoring an own goal” springs to mind!

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Do you use subcontractors?

All businesses have an obligation to consider whether a worker is employed or self employed and to account for tax accordingly. For contractors, this responsibility will become much more onerous when the new construction industry scheme (‘CIS’) takes effect on 6 April 2007.

Does the CIS apply to my business?
The scheme covers businesses that pay subcontractors for construction work. All businesses whose trade includes construction operations are caught as are, in certain circumstances, other businesses with an average annual expenditure on construction work over a three year period of £1m.

How will my obligations change under the new scheme?
The current scheme, based on registration cards and payment certificates, will be replaced by a verification service operated by HMRC. HMRC will advise whether payments to subcontractors should be made gross or after deduction of tax, at either the standard or higher rate (expected to be 18% and 30% respectively). Contractors will need to make a monthly return to HMRC with details of all payments made to subcontractors.

For the first time, contractors must also sign a ‘status’ declaration to the effect that the employment status of the workers listed on the monthly return has been considered and none is an employes.

What should I do now?
If you think the scheme applies to you, you should be developing systems to be in place by 6 April 2007.

You should also carefully consider the employment status of your subcontractors, so that you will be confident in your ability to sign the status declaration.

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Audit standards go international


International Standards on Auditing (“ISAs”) have now been introduced in the UK and affect the conduct of company audits. Companies with December 2005 year ends are the first to be affected.

ISAs replace UK auditing standards, with the intention of creating unified world-wide standards and also as a response to the lessons learned from large corporate failures such as Enron, WorldCom and Parmalat. The ISAs, however, make no distinction between large and small or public and private companies. Whether these lessons need to be applied to companies other than large public companies is highly questionable, but sadly there are no exceptions.

As auditors, the ISAs have a significant effect on the way we must plan, conduct and document our work. We now need to go to a much greater level of detail when we are assessing the risk of the accounts being misstated, with a specific focus on fraud. We need to obtain from our audit clients a detailed understanding of the systems and controls that they have put in place to run their businesses and this must be fully evidenced by us on the audit file.

Application of the ISAs will therefore have cost implications for the audit, not just in the first year that the changes take effect, but also in future years.

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In brief...

Husband & wife take on HMRC
In the “Arctic Systems” case, HM Revenue & Customs (HMRC) alleged that income from the Jones’ family company was diverted from Mr Jones, who was actually the “main earner” of that income and a higher rate taxpayer, to his wife, Mrs Jones, who paid tax at lower rates.

The facts of the case are not unusual. Mr and Mrs Jones set up in business as a limited company, Arctic Systems Limited. They each bought one £1 share in the company. Mrs Jones was the company secretary but not a director; Mr Jones was a director. Mrs Jones did the bookkeeping and provided secretarial services to the company and was a basic rate taxpayer. Mr Jones was the main fee earner for the business and a higher rate taxpayer. Remuneration was taken from the business by each of them in the form of a small salary and the balance in dividends.

HMRC is not looking to bring in any new legislation, simply to apply the settlements legislation that has been around for a long time. HMRC is keen to use this legislation to look beyond the legal structure, to insist that income is taxed on the main earner, in this case Mr Jones, where it appears to them that there is a transfer of income from one to the other to create a tax saving. In this case HMRC has tried to demonstrate that the company was set up essentially to transfer income from Mr Jones to Mrs Jones, through the dividend mechanism and by paying salaries at other than a market rate.

Although it is common practice for husband and wife companies or partnerships to be structured so that each spouse owns shares, care must be taken when tax planning until this case has been resolved. HMRC actually lost at The Court of Appeal on all counts, but the uncertainty still continues because HMRC has appealed to the House of Lords. If HMRC wins, expect tax demands going back for up to the last 6 years. If HMRC loses again, perhaps we should prepare for a change in the law!


VAT on mileage allowances
Employees using their own cars for business travel will typically claim a mileage rate from their employers. Until recently it has not been necessary for the employer to have VAT invoices in order to reclaim the VAT element. The EU forced a change of rules from 1 January 2006.

Now businesses wishing to recover VAT on the fuel element of the mileage rate they pay to employees must hold VAT invoices. In future, when employees submit their expense claims, they must also provide VAT receipts to their employer, sufficient to cover the VAT on the fuel element of the mileage claim.

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You and your family


Thought about your will recently?


If you have a will it should be regularly updated to reflect your current circumstances and future plans. As examples, marriage invalidates a previous will, new grandchildren may need to be provided for, or the value of your estate may increase to a level where you want to carry out tax planning to mitigate inheritance tax liabilities.

You also need to take into account external factors, such as changes to the tax regime. The recent Budget, for example, has fundamentally changed the inheritance tax treatment of certain types of trusts. Whilst the basic, but very effective, ‘nil rate band discretionary trust’ is not affected, you should review your tax planning if you had intended to use other types of trusts.

Do you think that trusts are devices used by other people, and in any case your affairs are too simple to need a will? If you die without a will there are rules that dictate who will inherit, and you may be surprised at how they work. Unmarried partners have no rights under these rules, but what if you have a wife and family?

For example, suppose a man dies leaving his wife, a daughter aged 19 and a son of 15, but no will. Then his wife gets £125,000 plus the chattels (eg cars, jewellery and household goods). The remainder is split as follows:

Is this what you would have planned? If you want a say in who inherits your estate, or if you want to minimise your exposure to inheritance tax, then you need to write a will and keep it updated.

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A-Day brings new life to pensions

From 6 April 2006 (A-Day), the tax rules governing all different types of pension scheme were rolled into one simplified set of tax rules for all pension schemes. Pension scheme members are now able to join any type and number of pension plans. And members of all pension schemes will be able to start drawing benefits before they actually retire from working, something that was previously impossible for directors and employees in occupational pension schemes (including Small Self-Administered Schemes).

The link between an individual’s earnings and pension benefits has been severed. Instead, every individual is entitled to build up a pension fund to a lifetime limit, with a single annual limit on contributions eligible for tax relief. Pension funds continue to grow entirely tax-free and it will be possible, on reaching pension age, for members to draw benefits direct from the scheme for their lifetime, without having to buy an annuity from an insurance company at age 75. This means, subject to the taxman taking a share, that any fund remaining on death can now be retained for the benefit of the family

These are just some of the changes. Ten of the most important A-Day changes are highlighted in our A-Day guide.

There is, however, no substitute for taking advice on your specific pension issues. Clients should speak to their relationship partner or contact our Pensions Manager, Peter Ingham.

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Dividends & pension contributions - an unhealthy combination

Post “A-Day”, pension contributions made by employers will attract tax relief only if they are made “wholly and exclusively” for the benefit of the trade.



The taxman dealing with the employer’s tax affairs will be able to challenge pension contributions, as indeed he can any other expense, by using this test. Before A-Day, tax relief was guaranteed by simply applying statutory limits.

Contributions made for most employees will not be a problem; the problem is likely to be with contributions for director-shareholders, particularly where the director is remunerated predominantly by way of dividend. The only guidance is that a contribution will be allowable if it can be demonstrated that it would be normal to make such a payment for an “unconnected employee” in a similar situation.

This is fraught with difficulty; most business owners cannot reasonably be compared with an unconnected employee. Business owners typically work longer hours, take more responsibility and fulfil far more roles than an unconnected employee. This does seem to be a case of the Revenue taking the opportunity to deter companies from paying pension contributions without also paying salaries, which attract national insurance contributions. The prospect of extracting tax-efficient dividends, whilst at the same time paying large pension contributions, is therefore limited.

For most businesses the new rules are already in place (but the guidance has only recently been issued) as they apply to periods of account ending after 5 April 2006. In some cases, however, there is still scope for a business to change its year-end to 31 March 2006 to avoid the rules for one more year.

Unfortunately, tax planning with pensions in the future will be affected by the retrospective decisions of local tax inspectors and this uncertainty is extremely undesirable.

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In brief...

Shutters lifted on offshore accounts
The Revenue has won the right to obtain information from a bank about its customers’ offshore accounts, linked typically to credit cards. From a sample, the Revenue believes only a small proportion of customers has declared the interest received from these accounts on their tax returns.

It will be launching enquiries based on the information it now holds, presumably starting with the larger amounts. It is expected that other banks will now be asked for similar information, leading of course to more tax enquiries.

Filing deadline tightened
This year we filed 65% of client tax returns online. The likelihood is that virtually all returns will be filed online in the future, especially following the recent proposal to bring forward the filing deadline from 31 January to 30 September for paper returns from 2008. The proposed deadline will be extended to 30 November for online filing, but clients will still need to be extremely efficient in gathering and sending information to us to avoid a fine.

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Ask Cassons

This issue we are featuring some of the questions which have been generated via the Ask Cassons facility on our website…


Two homes and capital gains tax

“My fiancée and I each own a house. We intend to move into my house or buy a new one, then either sell them both or rent one of them out. Is there any capital gains tax?”
In most cases your home is exempt from capital gains tax as your only or main residence.

Married or civil couples can have only one main residence between them, but with unmarried couples such as you each party can have a main residence for tax purposes.

When married, it’s a question of fact which house is your main residence. If you actually live in both, you can jointly elect (within 2 years) which one is treated as your main residence.

The last 3 years’ ownership of a main residence is always treated as tax exempt, so if you sell either or both within 3 years the profits should be tax-free. If you rent out either house, any profit in excess of the main residence relief could be tax-free up to a maximum of £40,000. Or, if you need to move away to work, the main residence exemption may still apply. But it is important that you move into your house within a year of buying it, or you run the risk of part of the eventual profit on sale being taxable.

If you bought either house solely with the intention of selling at a profit, or spend money improving it in order to sell at a profit, the exemption may be wholly or partially unavailable, even if you’ve lived there! You may even be regarded as trading in houses. It’s extremely important in these cases to be able to demonstrate the motive behind a purchase or sale to get the tax exemption.

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Residential property and SIPPs

“I’ve heard that I can’t invest in residential property through my SIPP. I’ve also heard that I can, provided that the SIPP doesn’t own the property outright. Is this true?”

The Government has now produced draft legislation for the introduction of real estate investment trusts (REITs) in early 2007.

REITs will not pay corporation tax provided that they distribute 90% of their net taxable profits to shareholders. This is likely to mean much higher dividend returns than can be obtained from most property investment companies at present. The intention is for the new regime to be open to companies resident in the UK which are publicly listed on a recognised stock exchange.

REITs are designed to give individual investors more access to property, mainly commercial but also residential, without the risks of direct ownership.

Despite the Government withdrawing the proposal to allow residential property as a permissible investment category for pensions, the Chancellor has made it clear that he is keen for people to invest in property through their pension schemes, provided it is accessed through indirect schemes. The reason for this is that a fund with a significant number of properties, with a variety of classes of tenants, will create more stability than owning just a single property.

The draft legislation also revealed that the Treasury is likely to allow savers to put REITs into investment schemes such as Individual Savings Accounts (ISAs), personal equity plans (PEPs) and child trust funds (CTFs) as well as pensions.

If REITs are included in these schemes, they will enjoy a double tax benefit. Not only will the trust save on corporation tax, the investment manager will be able to reclaim the 22% basic rate tax deducted from the distribution to shareholders.

We will have to wait for the legislation to be published, but the green light for this investment vehicle will offer a tax efficient exposure to property investment and a valuable addition to a balanced investment portfolio.

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Client profile


Nationwide Produce PLC


Nationwide Produce PLC
The government’s ‘five portions of fruit and veg a day’ initiative is good news for the health of the nation. It is also healthy news for produce marketing company Nationwide Produce PLC, whose turnover was over £40 million last year – a 22 percent increase on the previous year. When the firm became clients of Cassons back in 1991 turnover was £3 million. For three years running, the company won the Independent newspaper award for being one of the fastest growing companies in the UK.

Group chairman Bernard O’Malley established the Southport-based company in 1975. He started off from home selling local potatoes, carrots and onions to the nearest wholesalers. His three sons Anthony, 41, Tim, 39 and Patrick, 37 (pictured above) have joined him in the business. Nationwide now supplies produce to independent wholesalers, restaurants, airlines, cruise carriers, blue chip companies such as McCains and Heinz, and even oil rigs.

Although root crops are still the core of the business – carrots make up over 21 percent of turnover – exotics such as sweet potatoes, herbs and aubergines are becoming increasingly popular. That old school pudding staple, rhubarb, is also making a comeback. Baby vegetables are really ‘in’ at the moment. Eat a Chantenay carrot anywhere in the country and it will have been supplied by Nationwide. Patrick proudly explains: "This baby carrot just needs a quick rinse and it is ready to cook."

The company has bases in East Anglia, where Tim is based, as well as Essex, Sheffield, Foggia in Southern Italy, and Rotterdam in Holland. Patrick and his brother Anthony are group directors based in Southport. Patrick says: “the area has its own microclimate with mild weather and little frost, which makes it ideal for produce growing”.

Patrick explains that the family ethos, the personal touch of the 35 staff, and an intimate knowledge of world markets is integral to the firm’s success. He explains: "At the moment there is a shortage of carrots in Germany, which we are able to bridge with exports from Britain." Or, if the supply of sweet potatoes dries up in Israel, restaurant customers or wedding caterers with set menus can rely on Nationwide to obtain alternative supplies from America.

Cassons audit the group’s accounts, provide corporate finance, pension, as well as group and personal tax advice to the company and its directors.

Like any successful company, Nationwide is constantly looking to the future. More offices are planned in Belgium, Germany and Russia. And whatever Delia Smith or Jamie Oliver decides is the next trendiest food, Nationwide will be ready to meet demand!

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