Lambert Chapman LLP’s Paul Short reviews the 2012 Budget

I have mentioned before about what I call “The Greaves Effect” in tax planning.

Bill Nicholson, the Spurs Manager, paid AC Milan £99,999 in 1961 to bring Jimmy back from the land of the Lira (as it was then with the Euro a pleasant dream).  Bill paid £1 out of his own pocket to avoid Jimmy having the burden of being the first £100,000 footballer.

In the financial world we miraculously see people earning just below the threshold at which a higher rate of tax or duty comes into play and the 2012 Spring Budget will only invigorate this phenomenon.  Child Benefit will start to be withdrawn when one member in the household reaches a total income of £50,000.  I am fairly confident that we will see a lot of our clients earning £49,999 in the 2012/2013 tax year.

There will be lots of people with taxable income just below £42,475 for the current year, if their target is to avoid higher rate exposure.  By higher rate exposure this would mean that the tax on the next £1 doubles from 20% to 40%.  Is that an incentive for someone to work harder?

At an income level of £100,000, the personal allowance starts to be withdrawn.  If income is between £100,000 and £116,000, the marginal rate of tax can be in excess of 60% on earned income.  Again we are likely to see a lot of owner managers and other parties who have some control over the level and timing of their income running with income between £90,000 and £99,000.

The reduction in the top rate of tax from 50% to 45% with effect from 6 April 2013 is particularly interesting. The Government have grasped this particular political hot potato but I think they have been rather cunning.  By delaying its imposition until 6 April 2013 but giving good advance notice, they know that there will be a lot of players in the City and in the owner manager community who will defer income which they might otherwise have taken in 2012/2013, but which would suffer tax at 50%, and take the income in 2013/2014 when the rate might be reduced to 45%.

If you are a banker with a £1million bonus due in March 2013, I suspect that you would be happy to delay it for a month and save £50,000 of Income Tax.  The tax take statistics for these two tax years will be out by 2015 just in time for the Election and the Government will be able to demonstrate that the reduction in the top rate of tax has actually led to an increase in the revenue due to the Exchequer.  It might just help to win the Election.

Lambert Chapman LLP’s John Smith-Daye reviews the 2012 Budget

I’m sure that my colleagues will be commenting on some of the more important topics covered  in the 2012 Budget, such as the changes to Corporation Tax main rate (only applicable for those companies with profits in excess of £1.5m), reduction in higher rate of income tax from 50% to 45%, child benefit amendments, personal allowance increase and so on. I thought I would bring to your attention a few points detailed in “OOTLAR” – a document dealing with the Overview Of Taxation Legislation And Rates.

All items in italics are direct quotes from that document, which can be found at http://www.hmrc.gov.uk/budget2012/ootlar-main.pdf or from the Budget Speech itself.

1.15 Resettlement payments paid to Members of Parliament (MPs) – From April 2012, the MPs’ Expenses Scheme administered by the Independent Parliamentary Standards Authority (IPSA) will include provision for the payment of a resettlement payment to any MP who involuntarily leaves Parliament after that date. As a consequence of this change, legislation will be included in Finance Bill 2012 to exempt from income tax the first £30,000 of resettlement payment paid by IPSA. The amendment will ensure that these payments are treated in the same way as similar grants previously paid under the House of Commons Members’ Allowances Scheme. The amendment will have effect in relation to any resettlement payment made by IPSA on or after 1 April 2012

(Hmmmm, interesting that this one didn’t actually get mentioned in the Speech.)

Then there was the bit about alcohol duty. As I was listening intently, I thought what I heard was that there was to be no change. But what he actually said was that there would be no change to what had already been announced…….. I quote from the Speech…….

“But today I have no further changes to make to the duty rates set out by my predecessor.”

Meaning that there would actually be increases – see below – but of course, he wouldn’t want to highlight that!

1.34 Alcohol duty rates – Legislation will be introduced in Finance Bill 2012 to increase the duty rates for all alcoholic drinks by 2 per cent above the rate of inflation (based on RPI) with effect from 26 March 2012. This will add 3 pence to the price of a pint of beer, 2 pence to the price of a litre of cider, 11 pence to the price of a bottle of wine, and 41 pence to the price of a bottle of spirits.

Another area of great interest to accountants and small businesses alike is that of Personal Service Companies, and the taxation thereof. OOTLAR states that they are to be looked at in greater detail again, and I wait with some trepidation as to how this is all going to end up.

2.61 Personal services companies and IR35 – The Government is bringing forward a package of measures to tighten up on avoidance through the use of personal service companies and to make the existing IR35 legislation easier to understand. This will include HMRC strengthening specialist compliance teams, simplifying the way IR35 is administered, and consulting on proposals which would require office holders/controlling persons who are integral to the running of an organisation, to have PAYE and NICs deducted at source.

As has become tradition in the recent past, most beneficial items have been well flagged up before the Speech, and most detrimental items will continue to be hidden or blamed on the previous Administration.

I really must get some treatment for my cynicism. Or is it realism?

Lambert Chapman LLP’s Paul Short considers the use of a Personal Service Company

The other night I listened to the debate in the House about the arrangement between the Government and Head of the Student Loans Company, one Ed Lester, to remunerate him through his personal service company.

It struck me that there was a lack of decisive thought and a grasp of the issue by the MP’s.  There were the usual hypocritical tirades about the shamefulness of tax avoidance, although one Conservative MP did try and correct the mob by pointing out that tax avoidance is legal and it is tax evasion which is illegal (what David Laws and other MP’s did by claiming mortgage interest relief when they were not entitled to it).

The reportage by the broadsheets was somewhat rabid in content as well.  

The Telegraph reported that Mr Lester’s reward was £182,000.  An accountant had advised the DT’s senior political correspondent that the use of a personal service company would have enabled Mr Lester to save up to £40,000 of tax, on the basis that a company would be paying corporation tax at 21% (actually 20% now) rather than personal tax of up to 50% (well possibly 52% with the National insurance).  

Emotive stuff.  But when one breaks it down the reward package would appear to be:

	£000’s
Basic	140
Bonus	14
Pension Contribution	28 £182

If we were to assume the whole of the £182,0000 was subject to tax and national insurance, then the emerging tax and national insurance liability would be £76,000. 

The corporation tax liability, at 21%, would be £38,000.  The difference is £38,000 so I think we can see where the accountant is getting £40,000 from.  

It does seem a bit harsh to include the pension contribution though.  Presumably, this might have been paid, even if he had been an ordinary employee of the Government.  If we therefore take off the tax and national insurance applied to this by our zealous accountant, we reduce the saving by £16,000.  We are now down to around £22,000.  

The calculation does, however, assume that Ed does not need to draw any of the income out of his company to live on.  If he had to draw out some of the income, this reduces the saving further.  For the big winner see below.

Anyone who has had the misfortune to have had dealings with the Student Loan Company might well regard them as the most dysfunctional and incompetent organisation they have ever had dealings with, given that there is some admittedly stiff competition amongst our quango’s.  Given this, apart from wondering whether Ed qualified for his bonus, the proposition that he did not need to draw any income out of the company because he was actively engaged elsewhere, might have some traction.  Nevertheless, we must suppose that he was throwing in substantial time to the task in hand, particularly as he was receiving motor expenses as well for travelling from Berkshire to Glasgow (I wonder who does the P11D).

There is also the small matter of the employers national insurance saved by the Government on the use of the personal service company, something in the region of £20,000 I suspect.  Is it legal?  It all depends on what the contract says when I asked Duncan Forsyth, who is our expert on personal service companies and their contracts.  No one in the House seemed to pick up on this particular point.

If Dave Hartnett and his mates at the Revenue are serious about clamping down on tax avoidance, then perhaps they can start fairly close to home with their fellow Government departments.