Alistair Darling presented his most important Pre-Budget Report to date yesterday afternoon. In what was perhaps the most leaked statement of recent times, he effectively gave today, while promising to take it all away again – and then some – tomorrow. For a full analysis of the Pre-Budget Report and how it will affect you and your business please read on
As the Credit Crunch continues to squeeze all our wallets now is a good time to check that you are re-investing your hard earned profits in a tax-efficient manner.
Thanks to the “green” credentials of our former Chancellor, Mr Brown, a tradition being continued by Mr Darling, there are several tax incentives out there to encourage investment in certain environmentally friendly items.
For those businesses investing less than £50,000 per year in new plant and machinery 100% First Year Allowances may no longer have much of an impact, but for those investing more than £50,000, it should be noted that these allowances continue to be available in respect of expenditure on the following:
- Certain energy-saving plant and machinery, i.e. plant and machinery included as a qualifying technology or products specified in a Technology List or Product List (see www.eca.gov.uk for full guidance). Examples of the designated technologies include lighting, pipe insulation, combined heat and power, thermal screens and refrigeration equipment.
- New electric cars and cars with low CO2 emissions (i.e. not more than 110g/km). Examples of qualifying cars include the VW Polo BlueMotion, Seat Ibiza Ecomotive, Mini Cooper D and Toyota Prius (check actual model details).
- New plant and machinery for refuelling stations used to refuel vehicles with natural gas or hydrogen fuel.
- Expenditure on specified environmentally beneficial plant and machinery. Broadly, the assets that qualify are plant and machinery for improving water quality and reducing water use. For a full list of qualifying technologies and products refer to the energy and water technology criteria lists available at www.eca.gov.uk.
From 1 April 2008 it is also possible for companies to surrender certain losses in return for payable tax credits in respect of certain expenditure on energy-saving or environmentally beneficial plant and machinery that qualifies for 100% First Year Allowances.
So, if your business is upgrading, for example, lighting, heating, refrigeration or water systems then consideration should be given to investing in those items that meet the qualifying criteria for 100% First Year Allowances. Not only may you reduce your taxable profits, you may also be able to ‘cash in’ on any losses suffered in the period of expenditure.
For accounting periods ending after 31 March 2008 the new enquiry window in respect of corporation tax returns will be twelve months from the date of filing.
Prior to this, the window was twelve months from the filing deadline. So, for example, the enquiry window for a return for the year ended 31 January 2008, submitted on 31 July 2008, would end on 31 January 2010, i.e. the twelve month anniversary of the filing deadline – some eighteen months after the date the return was submitted.
Under the new rules, the enquiry window for a return for the year ended 31 January 2009, submitted on 31 July 2009, would end on 31 July 2010, i.e. the twelve month anniversary of the actual filing date.
This means that companies who file early will benefit from earlier certainty about their tax liability. They shall also not suffer from what has historically been perceived as the disadvantage of giving HMRC longer to consider whether an enquiry should be opened.
Unfortunately, the new enquiry window deadline will not apply to any company which is a member of a group (unless it is a ‘small group’).
Prior to the announcement of the 2008 Budget, VAT errors under £2,000 could be amended on the subsequent VAT return. Anything over this amount had to be disclosed to HMRC by way of a voluntary disclosure.
Happily, the Budget has increased this limit effective from 1 July 2008.
From that date, any errors under £10,000 can now be corrected in the next VAT return due. For larger businesses, which have a turnover exceeding £1 million, the limit has been extended further, and errors up to 1% of the turnover (capped at £50,000) can now be corrected on the VAT return.
In the past, as long as a voluntary disclosure was made without HMRC investing first, misdeclaration penalties were not levied on such errors. From 1 April 2009 this rule will also change. HMRC will have the power to apply misdeclaration penalties on error corrections and, if an error is corrected on a VAT return rather than being disclosed, the taxpayer may be faced with even higher penalties.
Any voluntary disclosure made to HMRC should contain full details of each error, including the amount, date and how the error came about.
Enterprise Investment Schemes offer a simple and effective solution to individuals looking to defer (and potentially reduce) a capital gain whilst significantly reducing their income and inheritance tax liabilities.
They normally become available each year in the months leading to 5th April, the tax year end. Now therefore is a good time to consider what they may offer you.
What are Enterprise Investment Schemes (EIS)?
An EIS is a Government initiative designed to encourage private individuals to invest in Britain’s smaller companies. To achieve this, the Government offers EIS investors a range of compelling tax reliefs.
Tax Advantages
Provided the underlying investments made by the EIS are held for at least three years, there are five separate tax advantages:
- 100% capital gains tax deferral for the life of the investment.
- 20% upfront income tax relief.
- Up to 40% loss relief on any holdings that fall in value.
- 100% inheritance tax relief after two years (provided the investments are held at time of death).
- Unlimited tax-free capital gains deferral on amount invested within three years of the original gain.
Tax Advantage One – Capital Gains Tax Deferral
If you’ve made a capital gain that is taxable, it can be invested into an EIS and the capital gains tax that was payable will, under current legislation, be deferred for the life of the investment.
What’s more, the recent change to capital gains tax rates announced by the Chancellor has made EIS structures even better for investors. So investors who have realised a capital gain at 40% during the last three years can now invest in an EIS, knowing that when they come to sell their EIS investment, the tax rate on this gain will have fallen from 40% to 18%. Combined with the 20% income tax relief, this provides investors with the potential for tax relief equal to 42% of the amount they invest.
Tax Advantage Two – Income Tax Relief
Under current legislation, 20% income tax relief is granted on qualifying investments made, up to a maximum of £500,000 per tax year, in order to retain this relief, the investment must be held for three years. This tax relief is available as and when the money is invested into portfolio companies, unless the investment is through an approved fund, in which case it is generated on the fund closure date.
Tax Advantage Three – Loss Relief
Loss relief is one of the most compelling features of an EIS and significantly improves the overall post-tax risk/return profile of the investment. The reason that loss relief is so beneficial is that each individual holding within a portfolio is assessed separately for this relief.
Tax Advantage Four – Inheritance Tax Relief
On death, investments made by the EIS will qualify for 100% exemption from inheritance tax under current legislation, provided the investments have been held for at least two years. This two-year period applies from the date the money is invested into qualifying companies.
Tax Advantage Five – Tax Free Growth
Where gains arise from holdings within the portfolio, there is no capital gains tax (provided the investment has been held for at least three years).
How it Works
The combination of income tax relief and CGT deferral works as follows:
| EIS share investment | 10,000 | |
| Less income tax relief at 20% | (2,000) | |
| Less CGT deferral at 40% | (4,000) | |
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| Net cost | 4,000 |
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Important Information
An EIS should be regarded as a longer term investment. The above is a short summary and is not intended to be comprehensive. An investment in an EIS should only be made on the basis of information contained in the relevant product brochure. The information here should not be construed as investment advice on the merits of investing in any particular EIS.
Please also remember that taxation levels, losses and reliefs are subject to change. You should always seek professional advice before investing.
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Alternatively you can contact Donna Hand on 028 9043 9009 or email donna.hand@bdo.co.uk
please do not hesitate to contact us.
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Carol Malcolmson Wealth Management Director carol.malcolmson@bdo.co.uk |
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Aileen Paterson Personal Tax Director aileen.paterson@bdo.co.uk |
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| Sean Lavery Tax Partner sean.lavery@bdo.co.uk |
Marie Mallon Personal Tax Director marie.mallon@bdo.co.uk |
Peter Wood Senior VAT Manager peter.wood@bdo.co.uk |
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| Alex Ward Wealth Management Partner alex.ward@bdo.co.uk |
Catriona Loughran Corporate Tax Director catriona.loughran@bdo.co.uk |
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