Whilst certain proposals contained in the 2009 Pre-Budget and 2010 Budget
reports were included, others were not introduced. Rather, the 2010 Budget note
often stated the following ‘the government intends to legislate this measure in a
Finance Bill to be introduced as soon as possible in the next Parliament’.

The General Election outcome could be compared to a colourful mixed hanging
basket as no one party obtained majority power. A second 2010 Budget is now
expected following the resulting Conservative-Liberal Democrat coalition. This
means that some of the earlier proposals of the previous government may wither
as other tax proposals and policies are put on display. The precise nature and
effective operational date of any new tax law  remains ‘hung’ until that second
Budget is not only presented but also proceeds through the parliamentary
process to become a second Finance Act 2010. 

This includes expenditure on commercial vehicles (not cars) and may also apply
to replacement expenditure on certain fixtures in buildings (integral features),
such as air conditioning and rewiring, where more than 50% in cost terms of the
asset is replaced.

The AIA has now been increased from £50,000 to £100,000 in the Finance Act
2010. This will be extremely valuable for larger businesses and some smaller
plant intensive operations.

The increase will have effect for expenditure incurred from 1 April 2010 for
companies and from 6 April 2010 for the self-employed in business.

It's all a question of timing
Many businesses will have a chargeable period that spans 1 or 6 April, so the
AIA will have to be calculated pro rata for the period before and after the increase.
For a company that prepares its accounts for the year ended 31 December 2010,
the maximum AIA available for the period overall would be £87,500. This is
computed as 3/12 x £50,000 (£12,500) + 9/12 x £100,000 (£75,000). To ensure
the full potential of this relief is achieved the company will need to get the timing
of the expenditure right. Only £50,000 can be allocated to expenditure before 1
April 2010 (6 April for individuals in business).

Keeping it under control
A good record keeping system saves time in the long run as up to date records
will help you:

• keep track of your expenses
• ask for a bank loan or credit if you need to
• see quickly what you are owed by others and how much you owe them
• save accountancy costs
• pay the correct amount of tax
• receive the correct amount of benefits or tax credits
• avoid paying any extra tax or penalties.

Why you need to keep records
The law says that you should keep all records and documents you need to
support the entries on your tax return. If HMRC need to check your return, they
may ask to see the records you used to complete it.

Record keeping penalties
If adequate records are not kept or you do not keep your records for the required
period of time, you may have to pay a penalty.

Penalties for an inaccurate return
If an inaccurate return is submitted a penalty may be due unless you can show
that the mistake was made even though reasonable care was taken.

Some of the ways in which you can show you've taken reasonable care include:

• keeping full and accurate records which are regularly updated and
  saved securely
• checking with HMRC or an agent or accountant if there is something that
  you don't understand.

The records you need to keep
The records you need to keep will depend on the size and complexity of your
business and the different taxes that you have to pay, collect or charge.

The HMRC website has a very useful help sheet with specific detailed guidance
on records to keep in different situations, for example:

• Self-employed - www.hmrc.gov.uk/sa/rec-keep-self-emp.htm
• VAT - www.hmrc.gov.uk/vat/managing/returns-accounts/accounts.htm

How to keep your records
The law does not say how you must keep your records. You must keep some
original paper documents which show that tax has been deducted. An example is
form P60 (end of year certificate for PAYE). Generally it is recommended that you
keep all original documents you receive.

Most other records can be kept electronically (on a computer or any storage
device such as disk, CD, memory stick or microfilm) as long as the method
you use:

• captures all the information on the document (front and back) and
• allows the information to be presented in a readable format if HMRC need
  to see it.

How long to keep records
As a general rule, you should keep your records for a minimum of six years.
However, if you are:

• an employer, you need to keep Pay As You Earn (PAYE) records for 3 year
  (in addition to your current year)
• a contractor in the Construction Industry Scheme (CIS), you need to keep
  your CIS records for 3 years (in addition to your current year)
• keeping records to complete a personal (non business) tax return, you
  only need to keep them for 22 months from the end of the tax year to which
  they relate.

During the final session of the previous government the Prime
Minister outlined plans for certain changes to childcare vouchers.

Meanwhile in the micro economy, borrowings frequently arise between a company
and its ‘director shareholders’. This article considers the overall taxation
perspective for both lender and borrower beginning with the common situation of
where loan advances are made from the company to the individual.

The company perspective
A tax charge arises where a loan advance (or an increase in a loan) made to a
director shareholder during the accounting period remains outstanding nine
months and one day after the accounting period end. The tax rate is 25% of the
amount of the loan which existed at the accounting period end and which is still
outstanding at the due date.

If the loan is repaid in full (or in part) in a later accounting period, this tax (or part
thereof) will then be repaid nine months and one day after the end of that
accounting period. For example, if a loan was repaid on the first day of a 12
month period ending 31 December 2010, the tax relating to that loan would not be
due for repayment until 1 October 2011 – nearly two years after the repayment of
the loan! If instead the repayment was made on the last day of that same
accounting period on 31 December 2010, the tax refund would still be due on 1
October 2011.

What happens if the loan is written off?
From the company’s point of view, the loan write off is essentially a bad debt for
accounts purposes and is initially treated as an expense in the profit and loss
account. But is it deductible for corporation tax? Such a bad debt has never been
allowed as a trade deduction for tax purposes, but in recent years some have
argued that a claim could be made for it to be relieved as a non trade debt under
company loan relationship rules. There has always been a risk of HMRC
challenge associated with this course of action but in any case this ‘loophole’
was closed by the Chancellor on 24 March 2010 in a Budget announcement now
reflected in the Finance Act 2010. Essentially there is no corporate tax deduction
for shareholder loan releases or write offs made on or after 24 March 2010.

What tax implications will there be for the director shareholder?
Firstly, if loans generally exceed £5,000 at any time in the tax year and interest is
either not charged or is charged at less than the official HMRC rate (currently 4%),
a taxable benefit will arise. This is generally calculated on an average basis,
using average capital outstanding during the tax year and the average interest rate
prevailing. Where there is significant fluctuation in loan balances and/or HMRC
interest rates then an actual basis (amounts and rates) may apply instead.
Whatever the resulting benefit, this is then charged to income tax at 20%, 40% or
50%, depending on the circumstances of the individual. The company as employer
(but not the employee) will have to pay 12.8% national insurance contributions
(NIC) on the employment benefit.

There is no taxable benefit if interest is charged at the official rate or for certain
qualifying loans. There is also an exemption where non qualifying loans do not
exceed £5,000 at any time in the tax year.

And a loan write off?
If a loan is written off, a director shareholder is assessed on the income as
dividend income, as opposed to earned income. The total taxable income includes
the amount written off grossed up for the 10% dividend tax credit available on all
dividends. This is then charged at either 10%, 32.5% or 42.5%, depending on the
individual’s circumstances. The associated 10% tax credit, (though non refundable)
is available to reduce any tax liability.

Although from a tax view point the income is not assessed as earned income,
it is generally considered to be subject to Class 1 employer and employee NIC.

Company as borrower
Of course, it may be that a loan account is not actually overdrawn, and the
company actually owes money to the director shareholder. Clients who find
themselves in this position can use it to extract money from the company in a tax
efficient way.

From the director shareholder’s point of view, there is no reason not to charge
interest on the amount lent to the company. If the company was borrowing the
money from any other source, it certainly would have to pay interest. Commercial
interest will generally be tax deductible for the company.

Have you installed new ‘plant’ in a building used for the purposes of
your trade recently? ‘Plant’ includes such items as lifts, central heating,
air conditioning and electrical systems. All these items qualify for plant
capital allowances.

But a tax allowance is not necessarily limited to the plant. It can include capital
expenditure on alterations to an existing building incidental to the installation of
plant in a building. For example, the installation of a lift to upgrade an office block
will require the construction of a lift shaft. The lift qualifies as plant but the lift shaft
does not. However, the shaft qualifies for plant allowances under the ‘incidental’
rule. In contrast, expenditure on installing a lift shaft when constructing a new
building does not qualify as it is not expenditure on alterations to an
existing building.

How much expenditure falls into the extended meaning of plant has been
considered in a recent tax case. Wetherspoon pubs had submitted significant
claims for expenditure incurred on the conversion of all sorts of premises into
pubs. Some of the claims were disputed by HMRC. Much of the disputed
expenditure related to whether non plant costs can be classed as incidental to
the plant and thus qualify as deemed plant.

One example of expenditure where the Tribunal agreed with Wetherspoon was
a cement floor. A cold store was created within one pub in order to chill and
maintain the temperature of draft beer. Because of anticipated spillages and
associated washing down, the floor had to be inclined to a new drainage channel
by means of which liquids would be pumped out by pumping equipment within
the cold store. Wetherspoon claimed the cost of the cement flooring as
expenditure on an alteration to the existing building which was incidental to the
installation of the drain and pumping equipment.

HMRC took the view that some of the expenditure was eligible for allowances,
being the proportion which related to the provision of the incline. But they
argued that:

• 94.4% of the cost should be disallowed because that represented the
  proportion which would have been incurred anyway if a level floor had
  been installed.
• there was a lack of proportion between the provision of the inclined floor
  and the drain which made it inappropriate to regard the former as incidental
  to the provision of the latter.

The Tribunal considered that full relief was due. There never was any intention to
provide a level floor which was then altered to an inclined floor - it was to be an
inclined floor from the start. The fact that the cost of altering the existing building
to provide the inclined floor was relatively higher than the cost of the plant to
whose installation the alteration was incidental is immaterial.

There have been a series of cases over the last few months regarding
decisions by HMRC to refuse to allow taxpayers to be paid gross within
the Construction Industry Scheme (CIS).

One particular case illustrates some of the issues. HMRC wrote to the taxpayer,
stating that the tax treatment for CIS purposes would change from a gross
payment position to payment under deduction of tax with effect from 90 days from
the date of the letter unless there was an appeal.

The reason for HMRC’s decision was stated as follows:

• the self assessment first payment on account due on 31 January 2007 was
  not paid in full until April 2007 and
• the contractor’s monthly return for 5 May 2007 was outstanding.

The individual stated that he was distracted by personal problems in the nature
of serious health problems affecting both himself and his immediate family and
then work commitments and that these were the causes of the payment being
made late. The taxpayer was 61 years old and argued that the withdrawal of gross
payment status was likely to result in his having to close down his business, with
no prospect of employment.

The Tribunal held that the taxpayer had both shown a reasonable excuse for his
failure and that he had made the payment on account without unreasonable delay
after the grounds for the excuse had ceased. The excuse consisted of the inability
to make the payment on account without prejudicing his business cash flow and
the stress suffered by reason of his health and other personal problems in the
nature of family illnesses. However, in many of the other cases taxpayers have
not been so lucky and have lost their gross payment certificates.

If you are experiencing any difficulties in meeting your tax obligations, it is far better
to talk to HMRC before they talk to you. Please do get in touch if you have concerns
about this issue.