Topics covered in this newsletter include a warning to construction clients that the new penalty rules will apply from this month, a discussion of the proposed Annual Investment Allowance, changes in the rules applying to VAT on home computers and finally a note of the increased tax-free limits for employees attending full time education.
Construction Industry Scheme – Penalties kick in this month
When the new CIS scheme was implemented in April 2007, HMRC agreed to waive the penalties for late returns for the first 6 months. This penalty free period, April 2007 to September 2007, is now over!
Automatic Penalties for late returns – form CIS300.
These will now be applied to all late returns received by HMRC after 19 October 2007. Please note the definitions that follow:
To summarise, if contractors fail to submit ANY of the monthly returns issued by HMRC for the period 6 April 2007 to 5 October 2007, by 19 October 2007 (22nd October if you file electronically), penalty notices will be issued, automatically!
Three further points that may be of assistance:
New Annual Investment Allowance (AIA)
HMRC are proposing a change to the way in which you can write off purchases of plant and equipment for tax purposes.
The change is likely to be introduced for companies on 1 April 2008, and for sole traders and partnerships 6 April 2008.
Presently small companies and enterprises can write off 50% of qualifying expenditure on plant and equipment against their taxable profits in the year in which the expenditure is made – any balance of expenditure brought forward or carried forward will then qualify for a writing down allowance. Medium sized businesses are restricted to a 40% initial or first year allowance.
From April next year the 50% and 40% first year allowances will be replaced with a 100% annual investment allowance for capital purchases in any one year of up to £50,000.
Obviously this will benefit certain firms and disadvantage others. If you have the ability to claim a 50% first year allowance on all your plant and equipment expenditure and this is changed to a 100% allowance on expenditure up to £50,000, you will be worse off if your expenditure exceeds the break even figure.
The breakeven figure for “Small” firms is £100,000 – if you spend more than this you will qualify for less tax relief post April 2008. The equivalent breakeven figure for “Medium sized” firms is £125,000.
Please note the following factors which also need to be taken into account:
A note of caution – businesses may be encouraged by this annual investment allowance to make investment decisions purely on a tax basis. Even if you are a sole trader or partner paying tax at 40%, a £50,000 payment for equipment to save £20,000 in higher rate tax should only be made if there are compelling commercial reasons for the investment, as well as compelling tax reasons. Otherwise you may be draining £30,000 of working capital (and cash flow) from your business to buy an asset that may make very little contribution to future increases in profitability.
At present this change is based on the issue of a HMRC consultative document. It is likely that the legal framework will be included in next year’s Budget. We will need to monitor progress and will advise clients accordingly.
VAT on computers provided for home use – revised treatment
On 6 April 2006 the Government withdrew the Home Computer Initiative – from that date the provision of a computer for home use to an employee may become a taxable benefit.
On 13 August 2007 the VAT rules caught up!
Up to 13 August 2007 employers could still reclaim all the VAT they paid when they purchased a computer for an employee’s home use, as long as there was an element of business use.
From 13 August 2007 the VAT position is as follows: