The government’s argument was that charitable giving was being used to artificially reduce income tax liabilities of the wealthy and the public outcry has been answered by suggestions that some of these are paying tax at a lower rate than their cleaners.

Whatever the ultimate truth of the matter, donors of more moderate amounts should be aware that higher-rate tax relief can be claimed on donations made under the Gift Aid provisions. This is likely to have greater importance as more and more people become liable to tax at the 40% rate. Although the government are committed to increasing the personal allowance – the amount of income that can be received during the year before income tax is payable – this is largely being restricted to those who are liable to tax at the basic rate and the point at which the 40% tax applies to chargeable income reduced from £37,400 to £35,000 and then to £34,370 between 2010/11 and 2012/13.

So, if you are making gifts to charity under Gift Aid and are liable at the higher rate, keep a note of the amounts and dates and, when completing your tax return, remember that higher-rate relief can be claimed on the grossed-up amount.

Tax relief is also available for gifts of certain other assets and that’s when you may need some more specialist advice.

Perhaps one of the most common benefits provided by an employer is the company car, and if this is available for private use during the year then a tax charge arises. The taxable benefit is calculated by reference to the list price of the car, multiplied by a percentage that depends on the car’s carbon dioxide emissions rating.

The recent Budget saw changes and reminders of changes to the car benefit tax regime and those with company cars – and particularly those thinking of changing their company car in the near future – should bear the new rules in mind.

Perhaps the most wide-ranging change is that the CO2 emission bands for petrol cars will have their appropriate percentage charges increased by one percentage point for 2014/15 and by two points in 2015/16 and 2016/17, although the current 3% surcharge for diesel cars will disappear from 2016/17.

Those employees with zero or low emission (up to 75g/km) company cars will experience the highest increases in their tax charges. These will change from a zero or 5% benefit in kind charge currently to 13% in 2015/16 and 15% in the following year.

There is also a tax charge on fuel for private use calculated by applying the appropriate percentage to a fuel ‘multiplier’. This figure rises from £18,800 to £20,200 for 2012/13 and will increase by 2% above RPI in 2013/14.

And it is not only employees who are affected. Employers will see changes to the CO2 emission limits that determine whether the capital allowances that they can claim on the cost of cars remains at 20% or is reduced to 10%.

So being aware of forthcoming percentage changes and emission levels is important – whether you are an employee or an employer, you should check these out before you commit to that new company car.

According to Government reports, UK businesses stand to save around £4.17 million if it sticks to plans to reduce regulatory burdens between January and June 2012. It forms part of an ongoing strategy known as the Red Tape Challenge which has seen the implementation of a ‘one-in, one-out’ rule regarding new legislation – and it hopes to remove more legislation in the coming months. Despite the drive, businesses should still be aware of new regulations that may affect individuals and businesses.

Key April 6 2012 legislation changes include:

Income tax

The income tax personal allowance for those aged 65 and under will increase from £7,475 to £8,105. This £630 increase forms part of the Government’s longer-term commitment to eventually increase the personal allowance to £10,000. The basic rate band will decrease from £35,000 to £34,370.

Statutory maternity, paternity and adoption pay.

The standard rate for statutory maternity, paternity and adoption pay will increase from £128.73 to £135.45 per week, or 90 per cent of the employee’s average weekly earnings, whichever is lower.

Sick pay

The standard rate for sick pay will increase from £81.60 to £85.85 per week.

National Insurance Contributions (NICs)

The class 1 NICs lower earnings limit (LEL) will increase from £102 to £107 per week. This is the threshold at which an employee is regarded as having made a contribution towards their state pension. This £107 limit will also become the threshold for entitlement to benefits such as statutory sick pay and maternity pay.

The thresholds at which national insurance becomes payable will also increase. Employers will start paying national insurance from £144 a week (previously £136) whilst employees start from £146 (previously £139).

Once an individual reaches state retirement age then they cease to be liable for national insurance.

Unfair dismissal qualifying period and employment tribunals

The qualifying employment period for making a claim for unfair dismissal will increase from one to two years. A fee of £250 will also be charged for bringing a case to tribunal with an additional £1,000 if the claim is accepted and given a hearing date.

There will also be amendments to Employment Tribunal Compositions in relation to panels. Parties will be able to request cases which are to be heard ‘before a judge sitting alone’ to be changed to a tripartite panel which are to be accepted or rejected at the judge’s discretion.

The Employment Tribunal system will also be modernised by increasing the maximum limits for deposit orders to £1000 and cost awards to £20,000. Witness statements will also be ‘taken as read’ and witness expenses paid by the parties involved.

Health and safety

Amendments to the Reporting of Injuries, Diseases and Dangerous Occurrences legislation will increase the period of incapacity following a workplace injury – which the employer must report – from over three days’ to over seven days’ incapacitation. This means that any injury caused in the workplace, which leaves the employee incapacitated for over seven days must be reported to the relevant enforcing authority.

The deadline by which the seven day injury must be reported will also increase to 15 days from the day of the accident.

Contracted out pension schemes

The option to contract out of defined contribution schemes, such as money purchase, personal and stakeholder pensions, will be abolished. Previously, individuals could chose to opt out of building up an entitlement to the State Second Pension by transferring pension liability to a private arrangement. As from 6 April, anyone who is contracted out of a defined contribution scheme will automatically be contracted back into the State Second Pension. This means that both employer and employee will pay the full rates of national insurance and not a reduced rate.

It will still be possible to pay a rebated rate of national insurance for employees in a final salary or defined benefit scheme, although the rate of rebate will reduce from 3.7 per cent to 3.4 per cent for employers and from 1.6 per cent to 1.4 per cent for employees. Such employees and employers will therefore pay a slightly higher rate of national insurance.

Annual pension allowance

The lifetime allowance for pensions will reduce from £1.8 million to £1.5 million. HMRC has announced technical changes as to how unused allowances from previous years may be brought forward.

Luncheon vouchers to be withdrawn

The 15p a day tax and national insurance-free limit for luncheon vouchers will be finally repealed. The whole amount of vouchers used after this date will be subject to PAYE and national insurance. This marks the end of 64 years of luncheon vouchers which were originally introduced during war-time rationing.

Company cars

Three small regulation changes regarding taxing employees for company cars will come into effect:

1. There are new thresholds for cars with very low emissions of carbon dioxide. In some cases, the car will not be taxed as a benefit at all and it may be practical to provide staff with such cars.
2. If you provide a disabled employee with an automatic car because the disability makes using a manual gearbox car difficult, the employee is taxed as if the car had a manual gearbox. From 6 April 2013, this provision is restricted to employees who have a blue badge for disability.
3. If the nature of the employment is such that a car needs security features, those features will not be regarded as a taxable benefit in kind.

Retail

Shops will no longer be able to legally display tobacco products, although smaller businesses with fewer than ten employees will have until April 2015 to comply.

Curiously perhaps, while the top income tax rate for the top earners is due to reduce by 5%, the top marginal rate for those in the £50/60,000 bracket and who have children will actually increase.

For someone with one child and with an ‘adjusted net income’ of £50,100, the tax on the top £100 of their income will suffer tax at 40%. Furthermore, for every £100 of income over £50,000, 1% of their annual child benefit is lost.

In this case, 1% of £1,055.60 equals £10.55, which with the £40 of tax equates to a marginal tax rate of 50% on that top £100 of income.

The charge gets worse the more children there are in the family.

If there were eight children in the family, annual child benefit would be £5,933.20 so every additional £100 of income between £50,000 suffers tax of £40 and £59.33 of benefit is recouped; a marginal tax rate of 99%.

Those who receive child benefit and who have incomes of between £50,000 and £60,000 (at which point 100% of the child benefit will have been lost) may wish to seek advice on how to reduce their adjusted net income to mitigate the effect of the benefit clawback.

We know how important it is to stay one step ahead.  That’s why we are providing you with a free, detailed summary of the 2012 budget.

This professionally written report highlights the key areas affecting both individuals and businesses in an easy to read format.

Includes:

• Budget highlights
• Personal taxation
• Capital taxes
  
• Business tax
  
• Value added tax
  
• Main anti-avoidance measures
  
• National insurance contributions

CLICK HERE – to download the Mulbury Hamilton March 2012 Budget

Budget highlights

• Personal allowance to be increased to £9,205 in 2013/14, and the higher rate threshold reduced by £1,025 to £41,450.
• Age allowance to be frozen from 2013/14 and then phased out.
• Limit on maximum amount of income tax reliefs that can be claimed from 2013/14.
• Additional rate of income tax reduced to 45% from 2013/14.
• 7% SDLT rate for residential properties valued at over £2 million and new measures to counter ownership through corporate entities.
• No changes to main pensions tax reliefs.
• Restrictions on the tax relief available on benefits from regular premium life assurance policies.
• Child benefit to be phased out where income is over £50,000.
• Corporation tax main rate cut to 24% from April 2012 and to 22% by April 2014.
• Voluntary cash basis based on turnover for tax on profits of small unincorporated businesses.
• An increase from £120,000 to £250,000 in the individual grant limit for EMI schemes.
• A further tightening of the car benefit rules through to 2016/17.

The latest amnesty applies to ‘e-traders’ – those who are in business selling goods for profit via the internet.

To be subject to income tax, a trade must be being carried on and the Taxes Acts helpfully define a trade by stating that ‘“trade” includes any venture in the nature of trade’.

Space prohibits a more detailed explanation of how one determines whether a trade is being carried on, but someone selling their unwanted clothes or household items is unlikely to be trading. HMRC themselves say that ‘those who only sell a few items and who are not traders are unlikely to be liable to pay tax on what they sell and will not be targeted by this campaign’.

However, those who buy items for resale on the internet and who have not declared this and submitted accounts to the department are likely to be investigated.

Those in this position should seriously consider whether they should make a declaration to HMRC under the amnesty to take advantage of the reduced 10% penalty charge that may then be applied.

The amnesty has two main elements. First, by 14 June 2012, the person must notify HMRC that they plan to make a voluntary tax disclosure. Secondly, they have until 14 September 2012 to tell HMRC about the tax due and make arrangements to pay any tax interest and penalties owed.

Professional advice should be taken to assist in determining whether a disclosure should be made.

And with the end of the tax year fast approaching, employers might want to use the recently updated ‘Expenses and benefits from employment toolkit’ (http://www.hmrc.gov.uk/agents/toolkits/exp-ben-frm-emp.pdf) before they prepare and file their P9D, P11D and P11d(b) forms.

The ‘toolkit’ is a 26 page document that points out the circumstances in which the forms are required, areas of risk, and a checklist leading the employer or their agent through the preparation of the form and the main types of expenses and benefits that are likely to need to be reported.

The checklist is, in turn, supported by detailed notes explaining – with reference to specific areas – the risks, how they can be mitigated, and an explanation of the particular subject.

For employers wishing to cut down on form preparation, the toolkit document also gives brief details of dispensations and PAYE settlement agreements (PSAs). Under the former, expenses do not need to be declared if HMRC agree that the director or employee would receive an equivalent tax deduction – for example, because they relate to travelling or subsistence for business purposes.

PSAs can be used for minor or irregular items or situations where it would be impractical to value them for reporting purposes. In such cases, the employer will settle any tax and National Insurance liability, rather than this falling on the employee.

Finally, don’t forget that – where required – forms P9D, P11D and P11d(b) must be submitted to HMRC by 6 July following the end of the tax year.

The department say that they are issuing 850,000 penalties for late tax returns this year, which is 550,000 less than last year. Some have interpreted this as meaning that HMRC will be collecting less in penalties this year, but this is not necessarily the case because the penalty will not be reduced if the tax liability is less than £100.

However, despite the strict principle that a £100 penalty is chargeable for late returns, if there is a reasonable excuse then the penalty may be waived. HMRC give the examples of a family illness or bereavement, or a delay in an online activation code being sent by them, as reasonable excuses.

In addition to the above, HMRC have publicised a practice from previous years.

The department believes that some tax forms are not returned to them because the recipient believes that they are not necessary, perhaps because all tax is paid under PAYE. If that proves to be the case, HMRC can remove the individual from the self-assessment system and waive the penalty for non-submission of the form. If you believe that this may apply in your circumstances, HMRC can be contacted on 0845 900 0444.

Those who do not fall into the above categories and who have still not submitted their return should note that, in addition to the initial £100 fixed penalty, additional daily penalties of £10 per day will apply after a delay of three months, with further penalties of 5% of the tax due or £300, whichever is greater, becoming payable after six and twelve months.

Need for a strategic approach

Businesses need to keep their investment strategies under regular review, regardless of the economic conditions, and assess potential investments not in isolation but within the context of their overall business objectives.

When the current economic downturn began, many UK SMEs responded by cutting back on investment – putting off, for example, IT and other equipment upgrades. But a recent survey from GE Capital has revealed that as a result of this underinvestment UK SME’s lost in the region of £8.3 billion in potential new income or new business opportunities.

There are, of course, many reasons for investing in your business besides replacing and upgrading systems and equipment, but this example does serve to illustrate the importance of taking a strategic approach to investment and making decisions proactively based on long term considerations rather than reactively as a short term response to current economic conditions.

Clearly there is an even greater need for a planned, strategic approach if your proposed investment involves expansion or diversification such as:

• Developing a new product or service
• Entering a new market
• Expanding territorially
• Entering into a joint venture or strategic alliance
• Planning a merger or acquisition.

Getting the balance right

Besides avoiding potentially damaging underinvestment, it is equally important to avoid over investing and thereby placing undue stress on your financial resources, restricting your investment options further down the road, or limiting your flexibility to respond to future changes.

As with many business decisions, investment is a question of balance – and getting the balance right depends in large measure on applying appropriate appraisal techniques during the planning stage.

Appraising potential investments

Investments of any significance should be subjected to a thorough appraisal, which ideally would include consideration of the following:

Financial factors

Appraise the financial viability of the project by considering, for example:

• Availability and cost of funds
• Impact on cashflow
• Return on investment

Alternatives

Before locking onto a particular project, or a specific approach to that project, it can be worthwhile to consider alternatives, for example:

• Not investing capital in the project but using rental or leasing alternatives instead
• Investing in the project but taking a less expensive approach – or perhaps even a more expensive approach – if analysis suggests it might be beneficial
• Investing in a different project altogether

Timing

Consider, for example:

• Whether to invest now or at a later date
• How long the payback period should be
• To what extent the project can be implemented in phases

Risks

Where possible, conduct sensitivity and risk analyses to assess how the investment might respond to different scenarios such as:

• Possible delays in implementing or completing the project
• Changes in the marketplace, especially competitor activity
• Changes in economic/financial conditions
• Internal changes such as the loss or acquisition of key employees, customers, or suppliers
• Changes to the regulatory regime

Non-financial factors

Finally, relevant non-financial factors should also be included in the appraisal, and where possible quantified:

• The project might, for example result in your being quicker to market with a product or service, improving employee relations, or adding greater flexibility to your operation, or it might cause disruption that could impact on other aspects of your business
• External factors such as regulatory and compliance considerations or company reputation might also be relevant.

We have considerable experience advising on the raising of capital and investing in a business, so if you would like help or advice with any of these steps, please don’t hesitate to contact us.

Conducting a financial appraisal

The principal purpose of a financial appraisal is to assess the impact of an investment on your cashflow. It enables you in various ways to estimate the return on investment for a proposed project and to compare it with other possible courses of action.

The simplest way to assess an investment is to estimate how long it will take to repay it – a technique known as the Payback Period. Thus, for example, if a project requires an investment of £100,000 and is projected to return £20,000 a year, the payback period is 5 years. If the return is likely to be irregular the calculations might be a little more complex but the same principles apply.

Note that when appraising a potential investment project it is probably advisable to initially ignore any sunk costs – money that has already been spent and cannot be recovered – or any money that would be spent anyway.

For smaller businesses, especially those that prefer to avoid higher risk long-term investments, this is a simple method for identifying projects with relatively short payback periods. However, because it does not take account any returns likely to be made after the initial investment has been returned it is an appraisal that should not be looked at in isolation.

Impact on profits

Another quick method of financial appraisal is the Accounting Rate of Return (ARR), which focuses on potential profit rather than cashflow. Here, you compare the average annual profit you expect to make over the life of an investment project with the average amount you will need to invest. Thus, for example, if a project required an average investment of £100,000 and was predicted to generate an average annual profit of £12,000, the ARR for that project would be 12 per cent. The higher the ARR, the more attractive the investment.

Both these methods can also be used to compare projects to see which are the most attractive, but when doing so it is important to be consistent in the way you make the calculations so that you are comparing like with like.

More sophisticated financial appraisals

There are more sophisticated appraisal techniques such as Net Present Value and Internal Rate of Return that take the time value of money into account by discounting future cashflow. They allow you to account more realistically for factors such as the length of time it will take for a project begin to providing returns or how a longer investment might impact on your cashflow These calculations can be quite complex and we suggest you contact us if you would like help or advice with this.

It is also important to note that the accuracy and reliability of any investment appraisal depends upon the accuracy of the data you enter, such as the size and timing of future cashflows. Again, this is an area in which you might want to seek our help and advice.

Tax considerations

Any time you invest funds it is important to consider the timing from the point of view of both your financial position and your tax position. Your investment could qualify for the Annual Investment Allowance if you are planning to invest in certain plant or machinery.

There are also other tax mitigation options that might be relevant such as a short life asset election.

Contact us for help and advice

The current economic conditions provide opportunities for business investment and development but the risk element of investing should also be carefully factored in to the decision making process. 

We would be pleased to help you when considering these investments, providing solutions for raising capital and exercising efficient tax planning solutions to achieve optimum performance. Call us on 0871 789 998 for further information.

There is no denying we are living in tough economic times, and while there is only so much the Government can and will do, we are here to help you and make sure that you are doing everything you can to remain strong and succeed.

Whatever happens in the Budget, it serves as a timely reminder to review your business plans and ensure that you are making the most of the tax opportunities that are available.

We will be providing a free budget summary within just a few hours of the Chancellor’s announcements – simply pop back on 21st March to get your copy.