D J Macaulay

UK tax alerts

July 2009

Business cars and tax post April 2009
Possible HM Revenue & Customs targets
VAT Partial exemption update

Business cars and tax post April 2009

From the 6 April 2009 (1 April 2009 Companies) the full impact of a complete overhaul of tax allowances granted to purchasers of company cars comes into effect.

The aim of the changes is to encourage the use of CO2 effective cars.

The rates of tax allowance available, based on CO2 emissions, are:

• New cars emitting no more than 110g/km will attract a 100% first year tax allowance.
• Cars emitting no more than 160g/km (including second hand low emission cars) are to be included in the main plant and machinery pool, attracting writing down allowance of 20%.
• Cars emitting more than 160g/km will be added to the special rate pool, and thus will attract writing down allowance at a rate of 10%.

The overall effect of these changes is to slow down the rate of write off for tax purposes, and the bigger less CO2 efficient cars will be the worst affected.

Company Car purchasers

Companies who buy cars should be aware that when a vehicle is sold any balancing allowance, the difference between the tax written down value and the proceeds of sale, will no longer be available in the year in which the vehicle is sold. The proceeds are deducted from the relevant pool of expenditure and written off at the 20% or 10% rate.

This issue does not affect sole traders and partnerships as each vehicle with private use is kept in a separate pool.

Motorcycles

Until 31 March 2009 motorcycles were classified as cars for capital allowance purposes and thus did not qualify for the Annual Investment Allowance. That has now been reversed and from 1 April (6 April for income tax businesses) motorcycles are ordinary plant and machinery and will qualify for the 100% Annual Investment Allowance. (Up to the £50,000 combined expenditure limit.)

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Possible HM Revenue & Customs targets

We have listed below three areas of business tax which continue to interest H M Revenue & Customs. Please note that the comments below are based on comments made by HMRC and are not presently the subject of legislation.

Managed Service Companies (MSC) legislation

If a company is an MSC, IR35 is suspended: instead, workers within MSCs are deemed to be within PAYE and NICs for all of their receipts, including dividends. In addition, the current reliefs for travel expenses are limited, so that any travel to and from the client are normally not deductible for tax purposes.

The rules that apply to MSCs are particularly harsh from a tax perspective. However HMRC still believe that further legislation may be necessary to stop certain avoidance activities.

Arctic Systems – income shifting

You may remember the Arctic Systems case concerned with the husband and wife team of Mr and Mrs Jones who formed a limited company each owning one share. Mr Jones provided computer services to external end-users and his wife supplied accounting and secretarial services, which took her 4-5 hours a week. In most years they were both paid a small salary and the remainder of the profit was distributed equally to the two of them by way of dividend, which reflected their equal shareholdings in the company. HMRC took issue with this asserting that the dividends should be split in accordance with the underlying contribution by each party to the business. HMRC lost the case and have no current plans to introduce legislation in this area – they are however keeping the matter under review!

Subcontractor status in the construction industry

The following comment was published recently by HMRC:

‘The Government is concerned about false self-employment within the construction industry. This can result in an unfair commercial advantage and possible exploitation of vulnerable workers. The Government will continue to work with the construction industry and others to find a way to address this problem, taking account of challenges facing the industry and its need for a flexible labour supply.’

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VAT Partial exemption update

A business that is partly exempt is restricted on the amount of input tax it can claim (it can only claim input tax on costs relevant to taxable sales). The key challenge is to identify how much input tax can be claimed on general overhead items, ie those expenses that are relevant to both the taxable and exempt activities of the business.

Input tax on expenditure that relates to both taxable and exempt activities is known as ‘residual input tax.’ The amount of residual input tax claimed is usually based on the standard method of calculation (an apportionment based on income) unless a special method is in place.

If you are affected by the Partial Exemption rules we suggest you give us a call. The goal posts have been moved!

The actual changes are beyond the scope of this alert but most of the changes simplify the process – it’s worth taking a fresh look at the method of calculation.

If your business fits one of the criteria below one of the changes is compulsory. It relates to businesses that make:

• supplies of services to customers outside the UK; or
• certain financial supplies such as shares and bonds; or
• supplies from establishments located outside the UK

Don’t forget that many partly exempt businesses will be able to reclaim all of their input tax, including input tax relevant to exempt supplies, if they are classed as deminimis as far as partial exemption is concerned.

The deminimis limits are as follows:

• total exempt input tax is less than £7,500 in a partial exemption tax year (£1,875 in a VAT quarter); and
• exempt input tax is less than 50% of total input tax