The Chancellor’s Autumn Statement 2012 – Tax planning strategies

We’ve been looking closely at the Chancellor’s statement and subsequent analysis to try and determine the things that our clients need to be mindful of now and strategies you should employ to ensure you continue to be tax efficient and plan for the overall impact on your personal budgets.

We haven’t listed all the changes here, you can find a great summary at: www.bbc.co.uk/news/uk-politics-20606382

And more in depth detail at: http://www.hm-treasury.gov.uk/as2012_index.htm

Instead, we focus on the things we think are most relevant to our clients and the actions you should consider:

Personal Finance

–          Personal allowances will increase by more than originally expected, this means that the average tax payer will pay £267 less tax than currently if they receive no wage increase.

–          Child benefit will be frozen into 2013-2014 and as previously announced from January 2013 in houses where there is an individual in receipt of income above £50k, it will be partially of fully withdrawn.

–          Some elements of tax credits are being incremented by just 1% and the remainder not at all – the income disregard, the amount your income can increase in a year without impacting on your tax credits that year is decreased to £5,000.

 

The impact to you:  in short the combined effect of these measures means that taking inflation into account, if you have children and earn less than about £25k combined or over £50k as an individual you will be worse off in the next tax year. Also if you are self-employed and claim tax credits and your income can vary significantly from year to year, you are more likely to receive an overpayment and have to pay this back once your income is known.

Our advice:  We advise calculating your income for the new tax year now and starting the process of budgeting based on your revised income so you can start to think about adjustments that you may need to make in order to live within a reduced budget. If you are self-employed and claiming tax credits or child benefit it is more important than ever to keep track of your likely income during the year so you don’t end up receiving overpayments which you will have to repay.

Business Finance

–          The 1% reduction in corporation tax announced from 2014, does not impact on the small companies rate so for the majority of our clients this won’t benefit them.

–          Increase in capital expenditure thresholds, this is the amount you can spend on fixed assets in the year and get a full tax deduction in the year of spend. This is increasing from £25k to £250k from Janaury 2013 for 2 years.

–          Fuel Benefit charge, continued increases.

–          3p rise in fuel duty scrapped.

–          Small business rate relief extension.

The impact to you:  Aside from the small business rate relief, these changes will only benefit larger business and those with high capital spend. For companies providing private fuel to individuals, this is a potential total tax increase to the company and the individual combined of up to £144 a year, to a total tax cost of up to £3,973. In reality, you would have to be consuming significant amount of private fuel to make that worthwhile. For business with high distribution costs the scrapping of the planned fuel duty increase should provide a little relief.

Our advice:  If you do have any capital spend planned then take some advice as to the timing of that spend to ensure that you benefit from tax relief as early as possible. The calculations are complex when thresholds change mid-year so there’s no substitute for doing the sums. If your business is still paying for private fuel, then please re-consider this, tracking mileage and making claims is every business owners least favourite job but it has the potential to save you thousands. Tools like electronic diaries and google maps means that more than ever this can be done quite quickly retrospectively and can even be delegated.


Cash Accounting

–          Some sole-traders and partnerships will be able to move to cash accounting from April 2013 and a form of flat rate deductions. This applies similar choices to the calculation of income tax as apply to the calculation of VAT.

The impact to you:  This is possibly the biggest change to business accounting we might see in our lifetimes but in reality for sole traders and partnerships there is very little change to how you keep your business records, as the majority of small businesses use cash accounting anyway and the year end-adjustments we make to adjust them to an accruals base are minor. For eligible businesses with a significant stock holding there will be a large tax timing advantage in the first year. It will be easier to complete your tax return yourself should you wish to also.  Just like with the flat rate VAT scheme there is potential for employing this to reduce your tax.

Our advice:  Although accruals based accounts are produced to enable you to fulfil your tax obligations, we believe that they also have a more important purpose in helping you understand the profitability of your business. This change means that some business could stop counting their stock but without doing so, you cannot accurately determine your margins and identify issues with your business model. We would advise that our smaller clients would still benefit from preparing the accounts in the traditional way, whilst taking advantage of the tax timing benefits of preparing their tax return under different rules. It is also important to be able to monitor your tax under both flat rate rules and standard rules so your business can choose the most preferable treatment. Please contact us if you want advice on the likely impact to your business.


Other key points

–          Additional resources are being put into debt recovery.

The impact to you:  If you pay your taxes on time then none! However, should you struggle to pay your taxes on time you may find that this may not pass unnoticed. Traditionally, there have been very few implications of late payment of taxes other than VAT except for relatively low interest charges. Recent years have seen a tightening up and increase of penalties with respect to PAYE and self-assessment based income tax, however, Corporation tax has up to now stayed fairly under the radar and we expect this to change.

Our advice:  If you have been relying on paying your corporation tax late in order to finance working capital within your business then consider that this may not be as favourable an option in the future. Factor this into your business planning approach and build in a contingency for moving away from this as a source of low-cost finance.