Tax Partner Blog- October / November 2008

WHERE’S DONALD BEEN?

A number of people have been asking me why I’ve not written a “Blog” for a while.  I’m afraid there’s not been much tax news to tell you as it appears that we’re in a position where tax has been forgotten about in the midst of the financial mayhem over the last couple of months. 

I’ve also put our “Autumn update”  - the sensible stuff – as a pdf document over on the right hand side of this web page – see the “quarterly tax newsletter” section. http://www.milnecraig.co.uk/view_documents.asp?fld_document_section_ID=7

Although tax has been off the media radar, there’s always something worth saying about tax and finance even if the politicians and media seem to prefer to talk about Russell Brand and Jonafon Woss.  The Scottish Media, acutely aware that the “Manuel-Gate” saga is London-centric, have instead focused on the great social injustice of tax breaks for private schools….I just don’t “get this”…the tax breaks given to these schools is worth less than the equivalent cost of educating the children in the state sector.   So why are we threatening them with a loss of these tax reliefs?  We should encourage people to “pay twice” (once in tax and another time in fees) and all the more money in the public purse for other things!

THE ECONOMY

In any case, and back to tax… what impact will the financial crisis will have on our tax system?  My own view is things will turn quite ugly for Mr Darling.  Corporation tax receipts have, in recent times, been substantially propped up by the energy sector and banking sector.  It seems clear that these receipts will fall sharply over the coming year due to the banking crisis.  The new Government borrowing will have an interest cost.  This burden will hit as the income from tax slow.  As unemployment rises, PAYE drops and as sales drop, VAT falls.  Stamp Duty receipts will be decimated and capital gains tax…well… hmm… ”what capital gains”.  So Mr Darling has a minor disaster brewing.  I’ll bet the Labour party wished they’d had that snap election and lost – they’d have the best of  chances of being out of power for one term as the Tories would have been associated with presiding over a mess.

So, where will the money come from, if we can’t borrow it all!?.....

Firstly, VAT could be increased to 20%.  This might be an odd thing to say but it some other EU countries have higher rates than we do.  A tax on “luxury consumption” makes some sense.

Secondly, the next bold step could be a further overhaul of the “tax credits” system.  This system pays large sums and for many people is a huge success in that it gives those who need it more money.  However, it is discredited for paying excessive amounts to people who are not due payments (partly because they had to make large tolerances for changing circumstances to paper over the fact that, fundamentally, it’s a flawed system) and has also been creating irrecoverable overpayments of £2Bn a year.  Until recently such a “hole” was considered a big number but perhaps the way the media reel off multi-billion bail outs these days makes us immune.  Tax credits would be a fast way to raise some money but maybe Brown/Darling can’t change it much as it is a flagship policy for Mr Brown (just a shame it’s a flagship with a leak£!).

Tax hikes seem hard to achieve and the timing is all wrong in terms of the economic cycle.  The next election is not so far away and there appears no doubt that there is little appetite for a “cost cutting” fight with the public sector unions who fund our incumbent Government.  So it’s “Borrow borrow borrow”.  No wonder we’re lowering interest rates…Mr Brown needs the money to be cheap.

CARS

Turning to more mundane matters (cars), there’s been a fair bit in the press from Contract Hire companies suggesting there are new rules coming in next April that make renting company cars better than owning them.  There’s also the prospect that some private car owners should “opt back in” to a company position.

The story here is incomplete in that the changes to these rules have been mooted for some time and are not yet fully known.  The new rules from April for company car tax relief (that is the tax relief the company gets, not the driver!) are

CAPITAL ALLOWANCES FOR PURCHASED VEHICLES (OR HP)

100% up front tax write down for cars up to 110g/CO2.

Cars up to 160g/CO2 - 20% of cost annual write down against profits regardless of list price.

Cars above 160g/CO2 - 10% of cost annual write down pa.

This sounds okay for expensive cars the 10% cars are in a “pool” which means, in plain English it could take 43 years to get the same tax relief you might have got in three years under the current system – as it allows each car to be fully written down to it’s sale value when disposed of.

There’s apparently no legislation and as a result nobody knows what happens to sole trader and partners cars which have slightly different rules.

CONTRACT HIRE – LEASING DISALLOWANCE

Currently, the tax deduction for your rentals is restricted by reference to a £12,000 list price (“expensive car” limit!).  The proposals to replace this look good as they get rid of that price limit.

A company will get 100% relief for cars up to 160g/co2 and a simple 15% restriction otherwise – nice and easy. 

As far as I can see this means that it’s now FAR BETTER to lease a company car than to buy it for tax purposes – there’s loads of the leasing companies promoting this fact.  A word of caution – we haven’t seen any draft legislation and we still don’t know if partnership and sole trader adjustments will be the same.

BENEFIT IN KIND

Don’t get too excited, as the driver of a company car is taxed on that benefit in kind.  Needless to say the rules don’t match the above….

Cars up to 120g/CO2  - benefit (taxable) = 10% List Price (13% diesel)

Cars above 120g/CO2 – benefit from 15% of list price to 35% of list price based on CO2 (starts rising at 135g and goes up by one percent per 5g output point) – diesels start at 18% but stop at 35% - I can give you a table if needed.

SUMMARY ON CARS

There’s no draft legislation and this programme of change could be put back another year – or might be revised heavily in the PBR or Budget.

However, for a limited company it seems leasing will be more tax effective than buying going forward.  I presume somebody in the Treasury is to be groomed to join a major leasing company after the next election – I really am that cynical.

So, rush back to a company car?....it depends…the benefit in kind rules are still nasty for higher CO2 cars and higher list price models (for benefit in kind).  But, if you’re happy with a BMW 318d or Golf Bluemotion, far be it from me to stop you doing a nice little contract hire.

COMMUNITY and CHARITY

A couple of things to mention.  Our website now has a “community & charity” documents section.  In there you’ll find information Epilepsy Scotland’s “Wag of Wags” dinner – a great night out next April.  Have a look if you’ve time.  I’ve also put some information a clients sahara trek – why? – well, Ian Cunningham is well into retirement and totally blind.  Despite his age and lack of sight he has undertaken to cross the sahara next year to raise money for the British Retinitis Pigmentosa Society.  Have a look if you’ve time – there’s also more information on both these items on the left hand menu of our web page (documents about them on the right hand side).

Donate to Ian at http://www.justgiving.com/trekthesahara

I’m not intending to turn my blog into a begging bowl but both of these are great charities and worth a look if you are interested.