Raising Finance for your Business

Transcription

1 REPORTING NEWS F rom P earson M ay C hartered A ccountants & C hartered T ax A dvisers November 2013 In this Issue raising Finance for your Business Pages 1-2 Lasting Powers of Attorney Pages 3-4 are you still on track for Retirement? Page 5 allowable Expenses & new Fixed Rate Expenses Pages 6-7 Funding the purchase of Capital Expenditure Pages 8-9 research and Development Tax Relief Claims and the Patent Box Regime Pages vat how to survive the Enforcement Powers Page Buy-to-let Properties Page 14 a potentially nasty Inheritance Tax surprise Page 15 Pearson May Charity Golf Day Page 16 Raising Finance for your Business inding a method of finance that works for F you and your business is crucial to its success. However, raising funds remains a significant challenge for many businesses. Whether you are looking to start a new business or need capital to expand, there are various options to consider. Overdrafts At the risk of stating the obvious, overdrafts are credit facilities that have a set amount of money, agreed between you and your bank. They can provide a flexible means for covering short-term outgoings and unforeseen business expenses. Overdraft limits need to be agreed in advance and interest is ordinarily charged on any money you receive from an overdraft facility. Other charges may also be payable such as arrangement or renewal fees. Overdrafts should not be used as a long term source of finance, and continued use may lead your bank to question whether you are in financial difficulty. If you find yourself overdrawn for long periods of time, contact us for advice. Continued overleaf There are three types of accountant: Accountants who can count, Accountants who can t count and Accountants who do more than count. Adding value

2 Raising Finance for your Business (continued) Loans Principally, loans have been the conventional source of funding for most businesses. Bank loans are taken out for a fixed term, with interest rates agreed in advance, so they are straightforward when it comes to incorporating monthly repayments into your financial plan. Repayment terms and interest rates can sometimes be negotiable, although banks are increasingly asking for collateral as an additional form of security. Alternatively, borrowing money from friends or family may be an option if they are willing. If this is the case, it is important to draw up legally binding arrangements and to make sure every aspect is formally agreed in advance to avoid any potential upset. Every loan application will show up on your credit file and banks are more cautious about lending in today s economic climate, so make sure your business plan is solid and your reasons for borrowing are legitimate, before you apply. If you are a perceived high risk to the bank, you may be refused the loan. Interest payable on overdrafts and loans is usually fully deductible for tax purposes, as long as the overdraft or loan are utilised for the purposes of the trade. The same rule applies for any overdraft or loan arrangement/renewal fees. See our later article on page 15 regarding deductibility of loans for Inheritance Tax purposes on death. Grants and Government support A grant is usually supplied by the government, local councils or charities, and for those that qualify, it can be a good source of cheap financing. It is usually non-repayable but there is a large amount of competition for this type of funding and grants are usually only offered to specific sectors or for specific projects that are in their proposal stages. Sometimes you will be asked to cover part of the cost of your project or to match the funds awarded to you. Following the onset of the credit crunch, a number of Government lending schemes are now available to eligible businesses. Launched in 2009, the Enterprise Finance Guarantee is available to UKbased businesses looking for a loan of between 1,000 and 1m. Under the scheme, the Government underwrites 75% of all qualifying loans provided by commercial lenders to viable SMEs. Certain eligibility criteria and conditions apply further details are available at Alternatively, eligible businesses using private sector investment may be able to bid for a share of the 2.6bn Regional Growth Fund, which operates across England from 2011 to Meanwhile, young entrepreneurs can apply for the start-up loans scheme, which provides finance for year-olds who are living in England and looking for finance to start a business. To search for available schemes and grants in your sector visit The accounting and tax treatment of grants received varies depending on the terms under which the grant is provided but as a general rule, grants received are taxable as trading income. However, the accounting and tax treatment can vary if the grant is provided to fund the purchase of capital equipment as opposed to funding the on-going operating costs of a business. Investment This option involves selling part of your stake in the business to an interested investor. The investor could be a wealthy individual, a private equity company or a larger company operating in the same sector. As only limited companies can sell shares, sole traders and partnerships are not able to use investment finance as a source of funding. If you sell part of your business to an investor, any profit (or loss) the business makes will be shared with the investor. Advantages for this type of finance mean you are not charged interest and there are no monthly repayments. Often, new investors also bring varied skills to the table, which could potentially improve your business. However, this type of finance means relinquishing some control and investors often expect to be consulted before any management decisions are made. Debt factoring and invoice discounting Factoring involves selling any unpaid invoices to a third party and paying interest and/or a fee on them. The third party will then collect the debt themselves. Invoice discounting provides a means of borrowing money against any unpaid invoices owed to your company (again, for a fee). As your invoices are paid, the amount you owe the lender decreases. These forms of finance can often be a good way of releasing cash tied up in unpaid invoices back into your business, but the level of fees and charges can vary so this needs to be considered at the outset. Any fees payable are usually eligible for tax relief in full. Asset finance Leasing equipment by way of an operating lease means you can avoid spending a large amount of money in one lump sum. This is often beneficial from a cash flow perspective, although it should be noted that in some cases the monthly leasing instalments can be more expensive than buying the asset outright. Leasing can also give you access to a high standard of equipment, and assets can often be upgraded easily when contracts end. This type of operating lease usually means you never own the asset during or after the end of the lease period whereas the terms under a finance lease can be more akin to Hire Purchase Agreements. Hire Purchase Agreements are another option for those who want to acquire business assets without having to pay for the whole item up-front, and contracts usually include an option to purchase at the end of an initial period. With operating leases, the regular payments are often fully tax deductible (leases in respect of cars is one area where this is not always the case). With Hire Purchase Agreements, tax relief is usually obtained up-front via Capital Allowances on the total cost of the asset (since the asset is usually deemed to be owned by the business at the outset) and interest charges and fees are also normally fully tax deductible. Also see pages 8 and 9 for further details of funding the purchase of capital expenditure. We can advise on the most suitable type of finance to suit your needs please contact us for further information. Lasting Powers of Attorney ALasting Power of Attorney (LPA) is a legal document which someone (the Donor) makes, giving someone they trust (the Attorney) the power to make decisions on behalf of the Donor at sometime in the future if he/she lacks the mental capacity or no longer wishes to make those decisions him/herself. The Donor must be aged 18 or over with the capacity to make an LPA. Any named individual aged 18 or over with mental capacity can be an Attorney. There are two types of LPA: The Property and Financial Affairs LPA This type of LPA allows the Attorney to manage the Donor s finances and property whilst the Donor still has the capacity to make decisions for themselves. Donors may include a restriction that the LPA may only be used at some time in the future when they lack the capacity to make decisions for themselves, for example, as a result of a brain injury or the onset of dementia. The Attorney for this type of LPA must not be bankrupt when the LPA is signed. A subsequent bankruptcy could result in the LPA being automatically revoked if it has been registered with the Office of the Public Guardian (OPG). The Personal Welfare LPA This type of LPA authorises the Attorney to make decisions about the Donor s personal welfare and can be used only when the Donor lacks the capacity to make decisions. Other restrictions or conditions An LPA may have limits on the decisions the Attorney can make, for example with regard to where the Donor lives or the ability to sell the Donor s house. The LPA may include guidance about the Donor s wishes and feelings. The Attorney should take account of guidance. The Donor may appoint more than one Attorney, either to act together (all must agree), or together and independently (can act together or any one can decide). It is very important for Attorneys to discuss decisions, where relevant, before making them to avoid conflicts during the operation of the LPA How to make an LPA There is a special LPA form which is readily available from legal stationers or by downloading from the internet. An LPA can be made at any time, but cannot be used until it has been registered with the OPG. It is recommended that it is registered as soon as possible after being made, so that there will be no delay in being able to use it should the need arise. An LPA is a powerful document and we would always advise that you seek advice from a solicitor before taking out an LPA. Continued overleaf 2 3

3 The LPA Form The LPA form (instrument) is in three parts: Part A The Donor s Statement. This sets out the Donor s details, details of who is to be appointed Attorney and how he/she is to act. This part of the form can be used to place restrictions or conditions on the decisions the Attorney can make or give relevant guidance. The part can also be used to give the names of anyone to be notified (named persons) when the LPA is registered with the OPG. Part B The Certificate Provider s Statement. A certificate provider is a person the Donor must select to complete a Part B Certificate in the LPA form. The certificate provider must be someone who has known you for at least two years (and this could include ourselves) or has relevant professional skills to be able to form a professional judgement about your understanding (e.g. a doctor, solicitor or registered social worker). The certificate provider must speak with the Donor privately so as to be satisfied that the Donor understands the powers that are being given to the Attorney. The certificate provider must also be satisfied that there has been no fraud or undue pressure on the Donor to make the LPA. Part C The Attorney s Statement. This section provides the Attorney s personal details and confirms their understanding of the legal duties involved in the appointment. The Mental Capacity Act 2005 This Act provides a statutory framework to empower and protect people who may not be able to make some decisions for themselves. Such people include those with dementia, learning disabilities, mental health problems, stroke or head injuries. It makes clear who can take decisions in which situations and how they should go about this. It enables people to plan ahead for a time when they may lose capacity. The Act covers major decisions about someone s property and affairs, healthcare treatment or where the person lives, as well as everyday decisions about personal care or what someone eats, where the person lacks capacity to make those decisions. Tax can be taxing - so don t try to carry the burden yourself. Attorneys and other people who have a duty of care to someone lacking capacity must: act in accordance with the principle of the Act make decisions in the Donor s best interests have regard to the guidance in the Code of Practice act only within the scope of the Attorney s authority. The Code of Practice The Code of Practice supports the Act and provides guidance for people working with and/or caring for adults who lack capacity, including family members, professionals and carers. It describes their responsibilities when acting or making decisions with, or on behalf of, individuals who lack the capacity to do so themselves. Duties and obligations of an Attorney under an LPA include: a duty of due care when making decisions on behalf of the Donor; to carry out instructions as required by the LPA; a duty not to delegate the Attorney s powers under the LPA unless authorised to do so not to benefit themselves but to benefit the Donor this means avoiding conflicts of interest and in particular not to profit or acquire personal benefit from their position a duty of good faith, which means acting with honesty and integrity a duty of confidentiality; to keep the Donor s affairs confidential unless the Donor has consented otherwise and specifically in relation to property and affairs LPAs: to keep the Donor s money and property separate from their own to keep accurate accounts on all of their dealings as Attorney. We are happy to assist and indeed a number of clients have asked us to act as their Attorney. At Pearson May we specialise in a full range of accountancy services to help you maximise your profits and minimise the tax you have to pay. Trowbridge Bath Chippenham Are you still on track for Retirement? ost of us can remember the day we left school M or university to begin our working life. However, today you may be closer to retirement than to the day you began your first job. Throughout the 1980s and 90s we became accustomed to thinking of building savings through pension plans and individual pension policies as the key to providing an income in retirement. During those years you may have heard commentators warning that we weren t investing adequately for retirement. So what is the state of retirement planning today? In recent years, what some have termed the pensions crisis has resulted in something of a conundrum, with many people either not knowing the extent of their retirement income shortfall or not knowing how to address the problem. Your pension plan may not seem to merit your urgent attention. However, with warnings that people are still saving far too little towards retirement, the challenge is evident. Action is necessary if the state pension is not to be the major (and wholly inadequate) source of income. Consider these Key Drivers: Inadequate state pension The state pension is paid to all eligible pensioners, but in reality it represents only a small proportion of average earnings and will only provide for the very basics of everyday living. The impact of stock markets Payouts from pension policies have taken significant falls in recent years. Remember that pension forecasts have historically taken into account a compounding return and so markets need to do more than just recover lost ground if pension plans are ever to regain their status as the primary cornerstone in retirement planning. Living longer is now a habit Government figures suggest that life expectancy in the UK is continuing on an upward trend for both men and women. Reducing annuity rates Falling interest rates have been accompanied by inevitable reductions in annuity rates. In January 1997 a pension fund of 100,000 would have bought a man aged 65 an annuity of over 11,000. Today, that annuity could have fallen to as little as circa 5,000 (for a single-life level annuity), although the exact amount will be dependent upon state of health and type of annuity selected. When will you retire? Where previously there was a trend towards early retirement, fuelled by the momentum of the stock markets, in recent years that trend has been reversed and retirement at 60 or beyond is now almost inevitable for the majority. Whether just starting out in the workplace or close to retirement, all of us must face the need to plan for the future. Some business people are planning to be financially independent of their business by the time they are 55, thus leaving themselves free to retire or continue in business as they choose. You may be apprehensive about this aspect of your future and it is certainly easy to bury ones head in the sand. Set your objectives and regularly review the performance of your investments against your retirement plan. Never too late or too early More and more people are realising that while it is never too late to act, nor is it ever too early to begin putting pension and retirement planning in order. Whatever your situation, we would welcome the opportunity to discuss this essential aspect of your future with you, helping you to plan in such a way that you do not experience a pension crisis. We would always recommend that you seek advice from an Independent Financial Adviser as their input can be invaluable in planning for the future and seeking the best retirement plan for you. And don t forget payments in to personal pension schemes can have tax advantages too. Payments made into pension schemes from your personal funds can obtain higher rate tax relief (subject to maximum annual and lifetime limits) and, if you have your own limited company, employer pension contributions made by the company to your personal pension fund are (within reason) usually eligible for corporation tax relief. 4 5

4 Allowable Expenses & new Fixed Rate Expenses We are often asked What expenses can I claim now that I am self-employed? The rather glib answer is Anything that relates to your business. Whilst this is generally true, there are some expenses which, although genuine business expenses, are specifically excluded from tax relief, such as: Business entertaining including the VAT; however input VAT on business entertaining of overseas customers can be recoverable and staff entertaining is usually allowable; Charitable subscriptions and donations, except to small local charities (although tax relief may be available via Gift Aid); Political donations; Costs and Fines for breaking the law; Penalties and interest for late filing or inaccurate Tax Returns, VAT Returns or PAYE submissions; General provisions for bad debts (i.e. a percentage of all outstanding debts rather than specific provision against individual debts); Loan Capital Repayments (but the interest element is normally recoverable in full); Your own drawings from the business, including payments for tax and National Insurance contributions; Depreciation and profits/losses on the sale of capital equipment; capital expenditure is subject to the capital allowance regime instead The Capital Allowance regime broadly now gives tax relief on the entire cost of any qualifying plant and machinery up to 250,000 per annum (with effect from 1 January 2013). See our February 2013 edition of Reporting News for more detail. Also see page 8. Generally, to be deductible for tax purposes, an expense has to be wholly and exclusively for the purpose of the trade and the above list is by no means an exhaustive list of the expenses which HM Revenue & Customs (HMRC) consider do not fall within that definition. Fixed Rate Expenses Most businesses (other than perhaps start-up businesses) will be used to the rules detailing which expenses are deductible for tax purposes and which are not but what may not be as familiar are the new rules introduced in the Finance Act 2013 regarding some new fixed rate deductions available for income tax purposes. These are available from the tax year 2013/14 onwards and comprise three categories: Fixed allowances for business mileage Use of home for business purposes Adjustment for private use of business premises A business doesn t have to use these fixed rates and can instead calculate the expenses on the normal bases (see below for further information). Indeed it can use the rates for just one of the categories but not the others. Fixed allowances for business mileage These allowances will be familiar to many businesses as they are already available to any unincorporated business whose turnover is below the VAT registration threshold. To date, the use of these allowances has been by concession rather than statute and they were based on the rates applicable under employment income rules i.e. 45p per mile for first 10,000 business miles travelled and 25p per mile thereafter (for most cars). The Finance Act 2013 has provided a statutory basis for claiming similar allowances and extended the scope of the previous concession as the new rates will be available to any unincorporated business regardless of the level of their turnover. Broadly speaking, a business can choose to claim the following rates rather than claiming the business proportion of all the running expenses for a particular vehicle: Cars & goods vehicles - first 10,000 business miles Cars & goods vehicles - thereafter Motorcycles 45p per mile 25p per mile 24p per mile If these fixed rate deductions are claimed in respect of a particular vehicle then no other running expenses can be claimed and no capital allowances are available. Once it has been decided to claim these expenses for a particular vehicle, they must continue to be claimed for the rest of the time they are in use by the business. It should be noted that the fixed rate allowances will not be available for any vehicles on which capital allowances have previously been claimed. The scope of the use of these new rates will therefore mostly be limited to new vehicles being acquired or those for which the concessionary rates were already being claimed (for businesses with turnover below the VAT threshold). It is also worth noting that the 10,000 business miles limit applies to all vehicles used by the business, not to each vehicle separately. Use of home for business purposes These new fixed rates are also available to all unincorporated businesses (including partnerships) and are based on the number of hours worked at home per month. The rates are entirely optional and can be used instead of keeping a record of the actual expenditure incurred (such as heat & light, telephone, council tax, insurance etc.) and then calculating a business proportion. The rates are as follows: NUMBER OF HOURS WORKED PER MONTH FLAT RATE PER MONTH or more 26 Where less than 25 hours per month are worked, there is no statutory deduction available under the fixed rate rules and businesses will have to use the normal rules based on actual expenditure incurred. There is little guidance available as to how hours worked is defined other than HMRC stating that it is the number of hours spent wholly and exclusively on work done in the home of the person, by that person or one of their employees. Clearly therefore, taxpayers will be expected to keep records of the amount of time spent working from home if they want to claim this deduction. If the flat rate deductions are claimed in a particular accounting period then businesses are free to revert to actual costs for subsequent periods and vice versa, giving slightly more flexibility than the mileage rates mentioned above. Adjustment for private use of business premises These fixed rate deductions are aimed at businesses where the premises are mainly used for the purposes of the trade but also used for private purposes e.g. pubs, hotels, B&Bs and some shops etc. where living accommodation is also provided to the proprietor(s). Although they are a form of fixed rate deduction, the rules work by disallowing a fixed amount of the total expenses incurred on the premises. The fixed rate disallowance is based on the number of people (including children) who use the business premises each month or part of a month as a private home: NUMBER OF PEOPLE MONTHLY DISALLOWANCE or more 650 The flat rate includes all household goods and services, food and non-alcoholic drinks and utilities. It does not however include mortgage interest, rent, council tax or rates so a reasonable apportionment of these costs will need to be made to reflect the private use element, as before. As with the fixed rate deductions for the use of home for business purposes, businesses can opt in and out of using these fixed rates from year to year. Historically, HMRC have agreed the use of fixed rates for certain relevant businesses under so called board and lodging agreements. These were often calculated and agreed on a case-by-case basis or for specific types of business in a particular area. As part of the introduction of the simplified fixed rate deductions, HMRC are withdrawing all such agreements with effect from 2013/14 onwards. However, HMRC have conceded that some businesses will need time to prepare for the change (for example if they do not wish to use the fixed rates and instead opt to keep detailed records of the actual expenses) and so if a business had used a previous agreement such as this for 2012/13 then it can continue to do so for 2013/14. If you need assistance please do not hesitate to contact us. 6 7

5 Funding the purchase of Capital Expenditure The decision to buy, hire purchase or lease an asset will generally depend on the financing available to your business. There are different treatments for tax and accounting purposes, depending on the type of finance contract entered into, and these will need to be considered together with the VAT treatment. Buy This section covers outright purchase for cash or by bank loan, etc. The asset is capitalised in the balance sheet and an annual charge for depreciation is deducted as an expense in the profit and loss account, which in turn reduces the value of the asset in the balance sheet. The annual depreciation charge is calculated in accordance with accounting standards, based on the estimated useful economic life of the asset and the residual value. Tax treatment Depreciation is generally not allowed for tax purposes, but capital allowances may be available. The first 250,000 of investment in plant and equipment (not cars) each year attract an annual investment allowance (AIA) of 100%. This new, temporary increase in the AIA from 25,000 per annum has effect for a two year period for expenditure incurred on or after 1 January Any annual expenditure over these amounts enters either the 8% pool or the 18% pool, attracting a writing down allowance (WDA) at the appropriate rate. Any business that invests in energy-saving or environmentally beneficial equipment is entitled to claim a 100% first year allowance (FYA). Brand new cars with CO2 emissions of up to 95 g/km also qualify for a 100% FYA. Otherwise, cars with CO2 emissions of up to 130 g/km are allocated to the main pool and attract 18% WDA and cars with CO2 emissions exceeding 130 g/km enter the special rate pool and attract WDA at only 8%. VAT Unless the asset purchased is a car, the VAT shown on the supplier s invoice will generally be recoverable by the purchaser, if he or she is VAT registered. Buying at the beginning of a VAT period will entail a wait of three months or more to recover the tax (assuming quarterly Returns are prepared) and therefore where you have the option, planning the purchase date may assist your cashflow. VAT on cars is recoverable only in very rare circumstances. Hire purchase (also known as Lease purchase) An HP agreement usually includes an option to purchase at the end of an initial period. Payment of this nominal fee transfers title of the asset and brings the legal agreement to an end. The asset is treated as if it had been purchased. It is, therefore, capitalised in the balance sheet and depreciation is provided on an annual basis. The obligation to pay future instalments is recorded as a liability in the balance sheet. The payments are apportioned between a finance charge and a reduction of the outstanding liability. The total finance charge should be allocated to accounting periods during the HP term and is shown as an expense in the profit and loss account. Tax treatment Capital allowances are available for assets which are in use at the end of the accounting period. See Buy section above for details. The finance charge in the accounts is normally allowed against tax. VAT VAT charged by the finance company will be payable with the initial instalment. In the case of a car, most businesses will be unable to recover any of the VAT. Finance leases A finance lease typically has a primary period for a fixed period at full cost, followed by a secondary period, usually of an indefinite length, at a very low cost. There is no hard and fast rule for the accounting and tax treatment of finance leases since the treatment will depend on the exact terms of each lease. However a brief overview of the treatment of the more common types of finance lease follows. Short Leases For certain finance leases of up to seven years, the accounting treatment follows the strict legal position. The ownership remains with the lessor, and the rental payments are shown as expenses in the lessee s profit and loss account. Tax Treatment The lessor (as owner) is entitled to the capital allowances, and the rental payments are generally allowable in calculating the lessee s profit. Where the asset is a car with CO2 emissions exceeding 130g/km, there is a flat rate disallowance of 15% on the amount of rental payments allowed for tax purposes. Longer-term Leases For longer term leases, the asset is capitalised in the balance sheet and depreciation is provided on an annual basis. The obligation to pay future rentals is recorded as a liability in the balance sheet. The rents payable are apportioned between a finance charge and a reduction of the outstanding liability. The total finance charge is allocated to accounting periods during the primary lease term and is shown as an expense in the profit and loss account. Tax treatment The tax treatment is usually aligned with the accounting treatment, and the lessee may be able to claim tax relief on the amount of depreciation charged to the profit and loss account in each accounting period, rather than claiming capital allowances. Tax relief is normally available in full on the finance charges. VAT on finance leases VAT charged by the finance company will be payable with the initial instalment and each subsequent rental. In the case of a car, most businesses will be able to recover 50% of the VAT. Operating leases An operating lease is where an asset is rented for a period, not necessarily fixed, and returned to the owner at the end of the period. Contract hire is a typical form of operating lease. The asset is not capitalised; the rental payments are charged to the profit and loss account in the period to which they relate. Tax treatment The accounting treatment is an acceptable treatment for tax purposes, where the accounting standard has been applied. No adjustments to profits, therefore, need be made. Where the asset is a car with CO2 emissions exceeding 130 g/km, there is a flat rate disallowance of 15% on the amount of rental payments allowed for tax purposes. Capital allowances are not available. VAT Each rental or instalment will have VAT added so that the VAT cost is spread throughout the period of the agreement. 8 9

6 Research and Development Tax Relief Claims and the Patent Box Regime Research & Development (R&D) Tax Relief For those companies which carry out qualifying expenditure on research and development, this can be a very useful Corporation Tax relief indeed. The relief has been part of the Corporation Tax legislation for quite a few years now but in recent years it has become an even more valuable relief (and one that is often overlooked) so it is a good time to revisit the rules. Firstly, R&D tax relief is only available to companies and not sole traders, partnerships or LLPs. The rate of tax relief available on qualifying expenditure incurred was increased with effect from 1 April 2012 and is now generally 225% (for all but the very large companies). That means if, for example, 50,000 is spent on qualifying R&D, an additional 62,500 can be deducted from the company s profits chargeable to Corporation Tax, i.e. a total of 112,500. TIP: If you are trading as a sole trader or partnership and think you are incurring expenditure which may qualify for R&D tax relief under the Corporation Tax regime then you may want to consider incorporating your business to trade through a limited company. Obviously, various other considerations should be taken into account before making this decision. The main question you will need to ask is what expenditure may be qualifying research and development expenditure. The view of HMRC is that this takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science of technology through the resolution of scientific or technological uncertainty, are R&D. The first question is What was the scientific or technological advance? To answer this question it is necessary to demonstrate an advance in overall knowledge or capability in the field of science or technology. Guidelines issued by HMRC in 2004 (which HMRC still refer to on their website) give four examples of projects which are qualifying R&D because the necessary advance has occurred:- (a) Extension of overall knowledge or capability in a field of science or technology. (b) Creation of a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology. (c) Making an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes. (d) Using science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product that has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner). The second question is What were the scientific or technological uncertainties involved in the project? Such uncertainties exist when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. Scientific or technological uncertainty will often arise from turning something that has already been established to be scientifically feasible into a cost effective, reliable and reproducible process, product or service. The third question is How and when were the uncertainties actually overcome? It is important to be able to demonstrate to HMRC that the uncertainties were not straightforward to overcome. It may be that the uncertainties were not overcome and either the project was abandoned or that it was then channelled in a new direction. This should not prevent R&D relief being claimed. One other very difficult aspect of R&D tax relief is assessing exactly what is qualifying expenditure and this difficulty is compounded by a degree of subjectivity. What is vitally important is that those businesses which may be incurring qualifying expenditure give detailed consideration to what it is they have been doing and ensure that they liase with us to tell us if they think that claims may be available as we will not always know from the information available to us from the basic records, whether qualifying expenditure may have been incurred. A successful application for a patent is significant evidence that the product is an advance or an appreciable improvement on previous products. See also below re further information regarding the new Patent Box Regime. We have a number of clients whose business activities do give rise to claims for the R&D relief. Any client currently not making a claim of this type and who thinks that a claim may be possible should contact the partner in the firm responsible for their affairs. The Patent Box Regime With effect from 1 April 2013 a new lower rate of Corporation Tax can apply to profits attributable to qualifying patents and similar Intellectual Property rights. The full benefit is being phased in over the next 5 years. The headline rate of Corporation Tax which will be applied to profits derived from qualifying patents is 10% but strictly speaking, this rate will only apply from the financial year commencing 1 April 2017 with the intervening years obtaining slightly less favourable percentage rates (although still more favourable than the mainstream rate, currently 20% for small companies). To benefit from the Patent Box Regime it is important that a patent covers at least part of a product, service or a process. Furthermore, a company claiming under this section must hold a qualifying patent granted by the UK IPO, The European Patent Office or in an EEA State which has similar patent ability criteria to the UK. The company also has to show that it has carried out some development in relation to the invention. It is not just patent owners that can benefit from the patent box. If you are a patent licensee you may also be able to take advantage provided that the license is exclusive. There is some fairly detailed interpretation as to what that might mean about which we can advise you if it is relevant. There are a number of points which need to be considered to enable you to maximise this relief when the Accounts for your first Accounts year end after 1 April 2013 are being prepared and the Corporation Tax computations based thereon: 1. Review all of your current intellectual property rights, particularly the patents, to be able to analyse to what extent profits are being earned in respect of those patents. That can be profits from the manufacture of goods into which items protected by patent are incorporated or from the licensing of those patents to third parties. 2. Investigate whether there are other current or future products, services or processes that can be patented. For a new idea to benefit from the Patent Box Regime there is no need to have a broad patent protection, a company can apply for a fast track low cost narrow patent in order to comply with the requirements of this regime. 3. An election to adopt the Patent Box has to be made when the first Corporation Tax Return to which it can apply is being submitted. 4. Ensure that all intellectual property licensing arrangements are Patent Box compliant. For example, exclusive if you are paying royalties to a third party to use a patent held by them. 5. It will be necessary to be able to compute the profits earned from products to which the Patent Box Regime can apply. You will need to consider how that can be computed and you may need to discuss these issues with us. This new legislation is fairly complex and requires some detailed planning and eventually detailed calculations. The opportunity to benefit from potentially significant tax relief should not be overlooked, particularly when you consider the potential benefits from making claims both in respect of qualifying R&D expenditure and the reduced rate of tax available for profits derived from patents

7 VAT how to survive the Enforcement Powers Although some of the penalties for VAT infringements have been less severe in recent years, there is still an alarming array of enforcement powers to trap the unwary. By being aware of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system. Late registration You must notify HM Revenue & Customs (HMRC) if your turnover exceeds 79,000 in the previous twelve months (or less), or if you believe it will exceed 79,000 in the next thirty days alone. The penalty for failing to notify liability falls within the new single penalty system if the effective date of registration is after 31 March There is no penalty if the taxpayer has a reasonable excuse for not registering at the correct time. It is crucial that you keep a record of the rolling annual total of your business s turnover so that you can monitor whether your business breaches the VAT registration threshold mentioned above. For new start-up businesses the cumulative month-on-month turnover should be recorded and monitored from the outset. After registration Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time: Is there someone in your business who controls VAT accounting and ensures that new products etc. are properly dealt with for VAT purposes? Do your business systems ensure that all output tax and input tax are properly recorded? Are systems in force to ensure that proper evidence is obtained to support VAT input tax claims? Where VAT is not charged on supplies made, is this correct in law and is proper evidence retained? Are there systems in force to ensure that non-deductible input tax is not reclaimed, e.g. most VAT on motor cars, or business entertaining? Is VAT always considered before contracts are made? Default surcharge A default occurs if HMRC has not received your return and all the VAT due by the specified due date. The relevant date is the date that cleared funds reach HMRC s bank account. If the due date is not a working day, payment must be received on the last preceding working day. All VAT payments must now be made electronically but this can include making payment by cheque at your local bank or building society via Bank Giro Credit. Full details of how to make payment can be found on HMRC s website Consequence of default You receive a warning after the first default - the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date at any point within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%. Lower rate (2% and 5%) surcharge assessments will not be issued for less than 400. At rates of 10% and 15% the surcharge liability becomes subject to a minimum charge of 30. Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge. Special arrangements for small businesses Businesses with qualifying turnover up to 150,000 will be sent a letter offering help and support following the first default rather than a SLN. This arrangement is intended to allow extra time to sort out any short-term difficulties before formally entering the default surcharge system. Any further default within twelve months will result in the issue of a SLN. Errors on returns and claims Incorrect returns can incur a penalty under the penalty regime, the details of which we have included in previous publications but can also be found on our website under the VAT heading within e-knowledge. Retention of records The period for retaining records is six years. There is a fixed penalty of 500 for breaching this requirement. Default interest Interest on tax will arise in certain circumstances, including cases where: An assessment is made to recover extra tax for a period for which a return has already been made (this includes errors voluntarily disclosed); A person has failed to notify his or her liability to register (or made late notification), and an assessment covering a period longer than three months is made to recover the tax due; An invoice purporting to include VAT has been issued by a person not authorised to issue tax invoices. Where an assessment covers a period exceeding three months, HMRC is required to break it down into return periods. This is necessary to establish the period for which interest is to be charged. Normally, interest accrues from the due date for submission of the return for the period concerned. However, the maximum period is three years, although interest will continue to run on assessments remaining unpaid after thirty days from the date of issue. The rate of interest is set by the Treasury and is broadly in line with commercial rates of interest. Appeals Appeals against penalties may be made to the independent tribunal. The tribunal now has powers of mitigation in appropriate circumstances. Where the appeal is against the imposition of interest, penalties, or surcharge, the tax must be paid before an appeal can be heard. The tribunal is given the authority to increase assessments that are established as being for amounts less than they should have been. A formal procedure is now established for appeals to be settled by agreement. This agreement must be in writing, and there is a thirty-day cooling off period during which the taxpayer may cancel the agreement. Access to information HMRC has extensive powers to obtain information. It can enter premises and gain access to computerised systems and remove documents. A walking possession agreement can arise where distress is levied against a person s goods. The sting in the tail None of the above penalties or interest is allowable as a deduction when computing income for corporation or income tax purposes. Action points If you receive a VAT assessment (because you have not submitted a return), you must check it and notify HMRC within thirty days if it understates your liability Make sure your systems and records are adequate to enable you to establish the gross amount of tax relating to a VAT period. The preparation of annual accounts cannot be regarded as a safeguard against penalties Make sure you get your VAT return and payment in on time. Some of these penalties may not apply if there is a reasonable excuse, but the scope is limited and should not be relied upon If in doubt, contact us. It is important that you seek professional advice as early as possible. We can help you! 12 13

8 Buy-to-Let Properties The basic idea underpinning the Buy-to-Let sector is to invest in property in the expectation of capital growth, and in the meantime earning rent which can be applied to cover the costs of ownership. Many investors were encouraged by soaring house prices, but it is now clear that prices could not continue upwards at such a rate, nor can rent levels always be sustained, and it may not be possible to cover mortgage repayments out of rents. However, some commentators believe that Buy-to-Let investors can expect a reasonable rate of return on their capital if they take a long term view of at least seven years. Properties should be chosen with care, in areas where tenant demand is high. The cautious investor will build up a cash reserve to be able to cut rents or go without a tenant for a couple of months, if necessary. The Student Scene One special area where Buy-to-Let makes very good sense is in the provision of accommodation for student members of the family. Traditionally, this has involved paying out fairly high rents over a period of three or four years and seeing nothing in return (except perhaps a sizeable student loan). By buying a house in the university area, your children can be assured of somewhere decent to live and should be able to cover most of the costs by renting rooms to other students. The situation presents significant tax saving opportunities, but the correct formalities need to be observed. Lenders may be happy to offer a mortgage to a student if the parents act as guarantors, and good rates could be available to the student first time buyer. The property should then qualify as the student s principal private residence and so capital gains tax (CGT) exemption will be available on any profits from the eventual sale. The rental income earned from letting to other students is potentially subject to income tax but a proportion of the running costs (including mortgage interest) should be able to be claimed against the rent. Alternatively, the provisions of the Rent a Room scheme allow the first 4,250 of rent in each tax year to escape tax, with any excess rent over 4,250 being taxed in full. Furnished Holiday Lettings (FHLs) The purchase of a dwelling with a view to short term letting for at least part of each year can give rise to some quite striking tax concessions. The qualifying conditions are that the accommodation must be within the European Economic Area (EEA) and let on a commercial basis (ie not merely to offset the costs of ownership). It must be available as holiday accommodation for at least 210 days in the tax year and actually let for at least 105 of those days. It must not normally be in the same occupation for a continuous period of more than 31 days during at least seven months of the year, which need not be continuous but includes any months containing any of the 105 let days. If these conditions are met, then the income is broadly treated as trading income, even though it is strictly property business income. Interest paid on a loan to purchase or improve the property is allowed as a trading expense (restricted if necessary by any private use proportion). Capital allowances may be claimed on any furniture and fixtures etc. and the income qualifies as relevant earnings for personal pension purposes. Losses made in a qualifying UK or EEA FHL business may be set only against income from the same UK or EEA FHL business. Properties used for qualifying FHLs are eligible for CGT entrepreneur s relief, rollover relief and business gifts relief, though due to several recent cases which have gone to Tribunal, it would appear that the availability of business property relief for inheritance tax purposes is somewhat in doubt at the moment. Main residence If a property has, at any time, been your main residence for CGT purposes, it may also be possible to claim the residential lettings exemption as well as exemption for the period of occupation as your main residence and the final 36 months exemption. A significant CGT saving can result from occupying a property as your main residence for a relatively short time consult us about this, and any queries you have about residential letting. HMRC Let property campaign If you are already a property landlord but have not kept your tax affairs up to date then this recent campaign may be worth considering. As part of their recent campaigns to encourage people to come forward to bring their tax affairs up to date if they have not previously done so, HMRC recently launched their Let Property Campaign. This campaign is a disclosure opportunity aimed at property landlords who have failed to disclose rental income. HMRC have said that the campaign will stay open for at least 18 months. It gives taxpayers the opportunity to come forward and disclose details of rental income which have previously not been disclosed. HMRC then have the ability to offer the best possible terms to minimise any penalties etc. that may otherwise be levied. HMRC estimates that up to 1.5 million landlords in this sector may be underpaying up to 500 million in UK tax every year. The campaign is open to all residential property landlords whether they have one property or multiple properties and to specialist landlords such as student or workforce rentals and holiday lettings etc. A potentially nasty Inheritance Tax surprise As a result of changes in legislation earlier this year, some loans and similar liabilities outstanding at death will potentially no longer satisfy the criteria for reducing the value of a person s estate upon death for Inheritance Tax (IHT) purposes. Previously, if an individual took out a loan to invest in a qualifying business venture or other similar property which either qualified for Business Property Relief (BPR) or Agricultural Property Relief (APR), on death, that loan would be deducted from the value of the deceased s taxable estate thus reducing the amount potentially liable to IHT. If the relevant criteria were met, the value of the property in question i.e. the share of the business, could qualify for 100% (or 50% in some cases) BPR or APR first and then the qualifying loan would be deducted after that relief had been given. The changes to the rules mean that such loans are now deducted from the value of the property before BPR or APR is applied. This is probably best illustrated by way of example: Mr Smith Mr Smith, a bachelor, had taken out a loan, charged on his main residence, to inject capital into his veterinary practice run as a partnership with his brother. Mr Smith died in August 2013 when the loan had a balance outstanding of 150,000 and the business was valued at 350,000. It is assumed that Mr Smith s share of the business qualifies for 100% BPR. Mr Smith had other taxable assets for the purposes of IHT totalling 475,000 (including his home). Under old rules, Mr Smith would have had a total taxable estate of 325,000, being 475,000 less the qualifying loan of 150,000 (since the business value of 350,000 is fully exempt due to the availability of BPR). As this total is equal to the current Nil Rate Band for IHT purposes, no IHT liability would arise. Under the new rules, Mr Smith would have a total taxable estate of 475,000 (i.e. the total of the other assets) since the value of the loan is deducted from the value of the business first, to give 200,000, which is then eligible for full relief via BPR. Thus his estate is worth 150,000 (the value of the loan) more than it would have been under the previous rules which would give rise to an unexpected IHT bill of 60,000 (40% of 475,000 less the Nil Rate Band of 325,000). The new rules apply to deaths occurring on or after 17 July 2013 but will only apply to new loans taken out on or after 6 April It does not therefore act retrospectively. This is not the case however where the debt relates to the acquisition or the maintenance of excluded property. Excluded property for the purposes of UK IHT are non UK assets belonging to an individual domiciled outside the UK. An individual who is UK domiciled or deemed domiciled will be subject to inheritance tax on all of his/her worldwide assets whereas an individual who is not UK domiciled will be liable to UK IHT only on assets located in the UK and non UK assets are treated as excluded property. Where a debt relates to financing excluded property it must now be matched with that property. Again this may be explained by an example: Thierry Thierry is not domiciled in the UK and he owns a substantial property in Bath. In order to reduce his exposure to IHT in the UK he raises a loan on the property and invests the monies offshore. Before the new rules were introduced he would, on his death, be taxed on the net value of the property. Under the new rules the liability is disallowed as it has been incurred to finance the acquisition of excluded property and must in the first instance be matched against that. In the case of excluded property the rules aren t restricted to those loans taken out after 6 April 2013 and therefore are retroactive. The third change in the rules means that it is more difficult to satisfy the criteria for liabilities being eligible for deduction against the value of a person s estate. They can now only be deducted if they are repaid after death using the assets of the estate, except where an estate chooses not to repay a liability due to a genuine commercial reason