Happy New Year…
This month’s articles cover: the value of tax planning prior to end of the tax year, the increase in the Annual Investment Allowance announced last month, the intended launch of Universal Credits later this year and further easing of the proposed Income Tax relief cap.
End of year tax planning
Although we are now at the beginning of a new calendar year we are in the last quarter of the current tax year.
Whether you are a business person, property landlord or pay significant amounts of tax as an employed or retired person there is now a short window of opportunity to examine your likely earnings for the 2012-13 tax year, and more importantly, see what can be done to minimise those liabilities.
It is impossible to outline all of the possible tax planning issues that could be of benefit. We have listed below a few and would request that you give us a call to discuss your individual circumstances.
As indicated above every person’s circumstances are different and the above list is by no means exhaustive. Please call if you would like to organise a review of your tax planning opportunities for 2012-13.
Ten-fold increase in Annual Investment Allowance
One of the surprise announcements in the Autumn Statement 2012 was the decision to increase the Annual Investment Allowance (AIA) from 1 January 2013 to £250,000. The increase will apply for two years.
Obviously, this is an attempt to focus the minds of entrepreneurs on investment. For profitable, self-employed traders this could be a useful tax planning tool providing a means to drastically reduce higher rate tax payments. Indeed all businesses should consider this change as an opportunity to bring forward the tax relief on qualifying equipment purchases.
There may be an opportunity to quite legitimately create tax losses if the AIA claimed exceeds taxable trading profits for the year. If the losses can be carried back, perhaps tax paid in earlier years can be reclaimed… However, beware if your accounting period falls in the tax year 2013/14 or later, as loss relief may then be restricted by the new cap (see below).
We would advise business owners to consider a rounded approach to investment decisions as it would be imprudent for the “tax tail” to unduly influence other commercial considerations. For example, how would the capital expenditure be funded without depleting working capital?
Universal Credit and the self-employed
A new Universal Credit (UC) benefits system will be introduced in the UK this year:
Universal Credit will be paid into a claimant’s designated bank account on a monthly basis. Claimants will manage their claims online and will be required to disclose any monthly earnings.
But what if you are self-employed?
It is common for new businesses to be run on a loss making basis in the early years and many businesses are badly affected by the current downturn in economic activity. The Department of Work and Pensions (DWP), who are responsible for managing UC, will apparently require claimants to declare their current earnings, online, each month. The self-employed will need to report the number of hours they work in their business and this will be valued at the National Minimum Wage (NMW) rate. If the actual profits of their business are higher, the higher amount will need to be declared.
Hopefully, the DWP will reconsider these monthly reporting obligations for the self-employed, for two reasons:
Cap on Income Tax relief
Draft clauses recently published for the Finance Bill 2013 outline the way in which the Government proposes to limit the amount of tax relief an individual can claim. Capped reliefs will be limited to the greater of £50,000 or 25% of net taxable income – this is income less pension payments and charitable donations. The cap will commence 6 April 2013 and will include claims to carry back losses from 2013-14 to 2012-13.
Readers may remember that it was originally intended to include charitable donations in the capped reliefs but after successful lobbying by charities this proposal was dropped. We are pleased to report that two further reliefs will be excluded from the cap. These are:
Tax Diary December 2012/January 2013