Taxing Times…..

Nobody likes paying tax. There it is. A bald statement. Oh people will tell opinion pollsters that they would happily pay more tax to improve services that they value, but in reality anybody fighting an election based on a message that more tax is a good thing is not likely to be holding the keys to No.10 Downing Street any time soon.

Yet like it or not, and regardless of who wins the next election, we are all likely to end up paying a lot more tax. National Insurance is due to go up in April 2011. It is highly likely that VAT will increase. There is also talk that Capital Gains Tax (CGT) will have to go up as well due to the disparity between the new higher rates of tax and the current 18% level of CGT. This will no doubt fall disproportionately on entrepreneurs, and provoke an outcry similar to that which followed the curtailment of the 10% taper relief for business assets a couple of years ago.

The Tax Advice industry is currently in overdrive finding ways of mitigating the impact on their clients of the new 50% rate which is being introduced from April 2010. And yet the retrospective nature of a recent court case relating to the reclassification of a long time “non dom” has caused many advisors to wonder whether even giving solid advice based on how tax law is currently being applied will be of any use if the Revenue decides that its own interpretation at the time was wrong and seeks to go back and correct matters.

It would appear that even with frighteningly detailed tax legislation in place, court cases will turn on specific facts, and the current HMRC view of those facts, and there is no guarantee that this view will be consistent.

HMRC are effectively operating as if there is a general anti avoidance provision in place, having cleverly blurred the boundaries between legitimate and legal tax avoidance and illegal tax evasion. Not only are they challenging the more imaginative schemes that have been specifically devised to avoid tax, but they are also looking to attack what was hitherto regarded as sensible tax planning.

Added to all this is the argument that the Directors’ Duties under the Companies Act 2006 require them to minimise their tax liabilities where possible which will make taxation issues even more of a burden for company directors and owners to deal with.

The UK already has a horrendously complex tax code with pitfalls galore even for those who do their very best to comply. Throw in the impact of uncertainty generated by HMRC’s attacks on tax avoidance, which could then potentially be applied retrospectively, and you are setting the scene for an era in which the tax lawyers are likely to be the main winners.

Taxing times indeed……

It’s a VAT trap…….

I tend to count myself as one of life’s optimists (supporting Spurs tends to do that to you), and I have no doubt that sooner or later we will be out of recession, and enjoying a period of steady, if maybe not exciting, economic growth. The creativity, determination and energy that I have seen over the past twelve months, as business people old and new have faced up to the reality of the economic situation and looked at how to improve their way of doing business, and the goods and services that they provide, has left me convinced of that.

However the accountant in me can never stop looking at potential downsides, so that I can ensure that I have some contingency plans in place to cope. One big lurking downside, along with dealing with the government deficit and the requirement to slash (there is no other word for it) public expenditure, with its consequent impact on unemployment, is the end of the VAT rate cut stimulus that the government put in place at the end of last year.

I fear that this has been forgotten among the various sightings of green shoots and the FTSE index rocketing over the 5,000 mark, but come 1st January 2010 VAT will be back up to 17.5% (or even 20%). Once again systems will need to be changed, wasting valuable time and money, but what will be more interesting is how many businesses will increase their prices as a result. I am sure that most of you will have noticed that since the much trumpeted “point of sale” VAT reductions that major store groups put in place last Christmas, prices have more or less drifted back to their pre-reduction levels. Will there be an increase in prices over and above their pre-VAT cut level, or will firms have to swallow the increase putting even more pressure on profits and cash?

Savvy businesses will have used the VAT reduction to squirrel away some cash (something that I advised clients at the time, believing that this was a better use of the rate reduction rather than adding to the discounts that were already in place for bargain hunting consumers), which they can use to support their businesses in 2010. For other businesses the VAT jump is going to be yet another hurdle for them to overcome. Hopefully it won’t be one too many.

Antony Doggwiler
ajd@orchardgrowth.com

What the VAT reduction means for small businesses

This is a newsclip from the BBC website which shows very clearly what the VAT reduction currently means for small businesses.

http://news.bbc.co.uk/1/hi/business/7757966.stm

It should be required viewing for all Ministers, MPs and civil servants as to what happens in the real world!

Alastair has spoken

Tuesday

So Alastair has spoken. I am not going to go into the economic or political significance of his “mini budget” beyond noting that he appears to have taken a sizeable gamble, which if it fails could lead to considerable difficulties for the UK economy in the future. However there are a number of measures which will directly impact on our clients, both present and future, some of which are discussed below.

Firstly credit where credit is due. There are many things that will benefit small and medium sized business, as long as they actually do what they say on the tin. These include the small business finance scheme, the loan guarantee facility for small businesses who export, the possibility of negotiating flexible payment of tax liabilities in cases of hardship, empty property relief and the ability to carry back some business losses for up to three years. The delay in the increase in the rate of small business corporation tax and the deferring of proposals to tackle so called income shifting are also very welcome. We at Orchard will certainly be looking at how our clients can benefit from these measures.

Regarding the centrepiece of the Pre-Budget Report (PBR), the temporary reduction in the rate of VAT is particularly good news for those that cannot recover input tax such as charities, public sector bodies, health and education, and er banks and insurance companies. For other businesses there will be the administrative hassles of changing systems, prices and catalogues, especially in retail which is in the middle of its busiest period and where there is already selective discounting taking place. Indeed if I were a SMART retailer, rather than cutting prices across the board, I would the use the VAT cut both on targeted price reductions i.e. as part of the price element of my marketing mix and to squirrel some cash away.

However all businesses, particularly those working in the business to business sector will need to be mindful of the cash flow impact of the VAT reduction – firms that had budgeted VAT at 17.5% should now adjust their cash receipts downwards to reflect the new rate of 15%. This could be a useful argument to deploy if you are looking to agree a payment plan for taxes with HMRC.

The main sting in the tail going forward is the increase in NI rates for both employers and employees, which represent an extra cost and cash burden. However the impact of this could be mitigated by looking at flexible remuneration ideas such as share schemes and salary sacrifice options.

My view remains that it is confidence and job insecurity rather than cash that is the main break on people spending and it is not clear whether the measures outlined in the PBR will have an impact in this area. Clearly I hope for the sake of UK plc there is some positive benefit from all of this but I remain to be convinced. Meanwhile I would continue to urge businesses to follow the basic principles of financial management and look for the opportunities that are always going to be there for SMART businesses.

Antony on the road (6)

Sunday

It seems that a reduction in VAT has emerged as the favourite for the main weapon to be used by the Government to stimulate the economy. (http://news.bbc.co.uk/1/hi/uk_politics/7744273.stm) I am a little sceptical as to how effective this is going to be as retailers are already falling over themselves to cut prices and tempt people to spend. I still think that lack of confidence driven by fear of unemployment will be the main reason for people not spending and unless firms boost cash flow by keeping the benefit of this VAT cut to themselves (for which they will be castigated by all and sundry) I can’t see the cut doing much to address this. Let’s see what tomorrow will bring.