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Veterinary Matters - Tax oppportunities

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12 January 2012

There are a number of important changes on the horizon to the tax rules which should not be ignored. If you have any questions about any of the information here, please give me or your usual tax contact a call.

Corporation tax: the headline rate is reducing

As announced in the Autumn Statement, the headline rate of corporation tax continues to reduce at 01 April 2012.

The headline rate is currently 26%, and it will reduce to 25% next year. (This rate applies to stand alone companies – with no “associated” companies – with profits in excess of £1.5m.) By 01 April 2013 the headline rate is expected to be 24%.

If a company’s profits sit in the “marginal” band (between £300,000 and £1.5m) the effective rate of tax on profits above £300,000 is presently 27.5% and we anticipate that it will be 26.25% from next April.

For a stand alone company with profits less than £300,000, the current rate is 20%. There are presently no plans to reduce this rate any further.

Capital Allowances: the Annual Investment Allowance is being cut

Annual Investment Allowance (‘AIA’)
 
If you are thinking about undertaking capital expenditure in the near future, you should consider accelerating this and, in particular, consider whether you incur it this side of April 2012.

This is because the AIA – which provides 100% tax relief on up to £100,000 of expenditure on capital items such as plant and machinery (but not cars) – is to be reduced to £25,000 from 01 April next year.

You might expect that your entitlement to the AIA for your whole accounting period would be calculated by reference to the total AIA for the 12 months. However, your AIA entitlement for the period falling after April is in fact limited by reference to the number of months in the period from April.

This can produce some unexpected results, as illustrated below.

For a 31 July 2012 year end the AIA available is as follows:
 
Period from 01 August 2011 to 31 March 2012: 8/12 * £100,000 £66,667
Period from 01 April 2012 to 31 July 2012: 4/12 * £ 25,000 £  8,333
Total AIA for July 2012 year end £75,000

Note that in the above example the expenditure must be incurred by 31 March 2012 in order to benefit from £66,667 of allowances.

The difference is even starker where we look at, say, a 31 December year end.

The AIA available is as follows:
 
Period from 01 January 2012 to 31 March 2012: 3/12 * £100,000 £25,000
Period from 01 April 2012 to 31 December 2012: 9/12 * £ 25,000 £18,750
Total AIA for December 2012 year end £43,750

   Note that in the above example the expenditure must be incurred by 31 March 2012 in order to benefit from £25,000 of allowances.

The timing of the capex is therefore critical. Please call us to discuss this in more detail if you have any particular purchases in mind.

Remember that, in order for your acquisitions to qualify for capital allowances, they must be purchased outright (for example funded by cash, bank loan or via hire purchase).

Capital Allowances: writing down allowances are reducing

Any expenditure qualifying for capital allowances but not covered by the AIA is subject to writing down allowances.  These are also reducing from 01 April 2012:
• the rate for the general pool is reducing from 20% to 18% per annum; and
• the special rate pool (for example ‘integral features’ such as water and heating systems) from 10% to 8% per annum.

Pensions: a reminder of the rules

Annual allowance
It is worth reminding you that every individual is entitled to an annual allowance for pension contributions of £50,000 per tax year. An individual’s annual allowance for a tax year is increased by the amount of any unused annual allowance in the previous three tax years.

The maximum contribution to a pension fund that a taxpayer can obtain tax relief for in any one tax year is limited to 100% of his “relevant earnings” (essentially, sole trader or partnership profit, or salary), though anybody can pay up to £3,600 per year into a pension scheme regardless of the level of his or her earnings.

Company contributions
Note however that company contributions are not limited by reference to your earnings in the same way. The company's contributions should qualify for corporation tax relief (as long as they are of a 'reasonable' amount, that is, as long as they are not excessive) but they will count towards the £50,000 annual allowance.

In theory, therefore, if you had not made a contribution yourself in the current tax year, nor in the previous three tax years, the company could make a contribution of £200,000 on your behalf now – this may be unlikely in practical terms, especially if there are a number of directors, but it hopefully illustrates the point. Where only one director would prefer an increased contribution, we can advise as to how best to ensure that all directors are receiving equivalent remuneration.

Example
 
Let us assume that you have made the following personal and/or company contributions:
 
2008/09  2009/10 2010/11 Total c/f to 2011/12
Gross pension contributions made (£)  30,000 30,000 30,000
Carry forward relief (£) 20,000 20,000 20,000 60,000

You would then be able to make an aggregate contribution in 2011/12 of £110,000 ie the £50,000 allowance for 11/12, together with the brought forward £60,000.

Alternatively, you could for example pay £70,000 in each of 11/12, 12/13 and 13/14 ie the £50,000 allowance for 11/12, together with relief from each of 2008/09, 2009/10 and 2010/11 respectively brought forward.

Note that care is needed in respect of “pension input periods” which can affect the maximum contribution available. You should speak to your financial adviser before using your carry forward relief.

Pensions: auto-enrolment is deferred – but until when?

It is well established that the Government is seeking to introduce compulsory pension contributions for employees and employers, with auto-enrolment for most small businesses originally planned for the spring or summer of 2014.

It was announced in the Autumn Statement that for employers with less than 50 employees the date of auto-enrolment has now been pushed back from April 2014 to May 2015, and the exact dates for implementation across the board are not presently available.
Although auto-enrolment comes in from 01 October 2012, individual employers' own duties will be gradually introduced over the following four years and will be based on the size of the employer, typically by PAYE size.
We shall let you know once we have further information (we expect this to be around April next year).

Pensions: reduce costs using salary sacrifice and pensions

Once introduced, the compulsory pension contributions to be made by employers will represent a real cost to the business.

It would therefore be a good idea to consider salary sacrifice as a means of mitigating this cost.

Under this arrangement an employee sacrifices salary equivalent to their existing pension contribution and the employer agrees to make an equivalent pension contribution on their behalf. This generates NIC savings of 12% (of the pension contribution) for a basic-rate taxpayer and 2% for a higher-rate taxpayer. There will be employer NIC savings at 13.8% regardless of the employee’s income.

There are therefore savings for both employer and employee (note that employers can instead retain all the savings).

If implemented prior to the introduction of auto-enrolment, these arrangements could be used to provide pay rises without any increased employer cost.

Note that it is important that salary sacrifice arrangements are implemented correctly, and the greater the number of employees, the more important it is that the changes are communicated clearly to your employees. Worst case if not implemented correctly (for example, where the appropriate changes are not made to contracts of employment) is that employees sacrifice salary but HMRC continue to tax the old (higher) salary!

Research and development claims

Research and development (‘R&D’) tax relief can significantly reduce your practice’s tax bill (if you trade as a company), and even get you some cash back.

We have recently concluded an R&D claim for a company which undertakes R&D testing studies on farm livestock for large agricultural pharmaceutical companies, primarily pharmacological and parasitological work.  We claimed c£27,000 back for them!

If you carry out similar work, whether small animal, large animal or equine related please let us know.

What is R&D tax relief?
R&D tax relief is a means of helping companies (but unfortunately not partnerships or individuals) carrying out “qualifying activities” by giving a financial reward for technical development that seeks to deliver substantially improved products, processes, devices, materials and/or services.

The definition of “qualifying activities” is very broad. R&D for tax purposes effectively takes place when a project seeks to extend overall knowledge or capability in a field of science or technology, or where a project seeks to achieve an appreciable improvement to an existing process, material, device, product or service.

What costs qualify?
Revenue costs incurred whilst undertaking development work can qualify for the relief. These would for example include:

  • staff costs including NIC and pensions – for time directly spent on the R&D, but also indirectly, for example the staffing costs of individuals involved in ancillary/support activities relating to the qualifying R&D projects; and
  • consumable items – e.g. power and water costs, software used for R&D and consumable materials such as drugs.

How much is the tax relief?
For small and medium-sized companies (‘SME’) 200% of qualifying expenditure can currently be deducted from taxable profits.

From 01 April 2012 this will be increased to 225%.

(An SME is a company with fewer than 500 employees and either annual turnover not exceeding €100 million or a balance sheet not exceeding €86 million.)

Cash back
Small and medium-sized companies reporting tax losses can ‘cash in’ their R&D tax losses for a repayment of PAYE and NIC already paid.

How much must I spend on R&D to qualify?
At present, qualifying expenditure must be at least £10,000 (excluding VAT) a year in order to make a claim. With effect from 01 April 2012 there is no minimum spend meaning that all qualifying expenditure (regardless of the amount) should qualify.

Subcontracted R&D
It is important to note that if a company is undertaking R&D work as a subcontractor for a larger company it may still qualify for R&D relief. You may still therefore claim even if you are carrying out the work for other companies/organisations.
 

For more information, contact the Veterinary team on 01242 680000.