Depth – Investment properties

Investment properties

Section 16 of FRS 102 sets out the accounting treatment for investments in land or buildings provided that they meet the definition of investment property. The treatment extends to property interests held by a lessee under an operating lease that are treated like investment property.

What is an investment property?

Investment property is property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both.

The following are not to be regarded as investment properties:

Those held for use in the production or supply of goods or services or for administrative purposes;
Those that are for sale in the ordinary course of business;
Mixed use property where the fair value of the investment property element cannot be determined reliably;
Those held primarily for the provision of social benefits.

The definition of an investment property in FRS 102 is wider than that currently used in SSAP 19 as it does not exclude from the definition properties which are owner occupied or let to another group company. Note that International Accounting Standards explicitly exclude from the definition properties let out to another entity under a finance lease.

[[[The definition of an investment property in FRS 102 is wider than that currently used in SSAP 19 as it does not exclude from the definition properties which are owner occupied or let to another group company]]]

Where an entity has mixed use properties, these should be separated between investment property and property, plant and equipment. If the investment component of the mixed used property cannot be measured reliably without undue cost or effort, then the whole property should be accounted for as property, plant and equipment.

Where an entity has properties which are held primarily for the provision of social benefits, such as social housing these should be property, plant and equipment. There is no separate reference to such properties under current UK GAAP and under International Accounting Standards.

Where an entity has a property interest that is held by a lessee under an operating lease it may be classified and accounted for as investment property if the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an on-going basis. This classification alternative is available on a property-by-property basis.

How is investment property initially measured?

Investment property should initially be measured at cost. The cost of a purchased investment property consists of:

its purchase price;
any directly attributable expenditure such as legal fees;
property transfer taxes; and
other transaction costs.

Where payment is deferred beyond normal credit terms, the cost should be the present value of all future payments.

Where an entity constructs an investment property itself it should determine the cost by following the relevant paragraphs in Section 17 – Property, Plant and Equipment.

The initial cost of an interest in property which is held under a lease and classified as an investment property should be determined by following the relevant paragraphs in Section 20 – Leases. This applies even if the lease would otherwise be classified as an operating lease if it was within the scope of Section 20.

How is an investment property subsequently measured?

Where the fair value of investment properties can be “measured reliably without undue cost or effort” on an on-going basis then the property should be held at fair value as set out in Section 16. The movement on fair value is accounted through profit or loss. No depreciation is charged.

Where there is undue cost or effort and the fair value cannot be measured reliably, investment property should be accounted for using the cost model in Section 17 – Property, Plant and Equipment. Any such investment properties should remain within the scope of Section 17 unless a reliable measure of fair value becomes available and that it is envisaged that a fair value will be measurable on an on-going basis.

[[[Where there is undue cost or effort and the fair value cannot be measured reliably, investment property should be accounted for using the cost model]]]

If a leasehold interest in property is classified as investment property, it is the interest which should be accounted for at fair value and not the underlying property. Guidance on obtaining a fair value in this case is set out in Section 11 – Basic Financial Instruments.

How is this different to ‘old GAAP’?

Currently under SSAP 19 changes investment properties are re-valued each year at their open market value. It would appear that the use of fair value under FRS 102 provides the possibility of using the existing use value rather than market value.

Also under SSAP 19, any changes in open market value are recognised in the Statement of Recognised Gains and Losses (STRGL), unless a reduction in value, or its reversal, is expected to be permanent which leads to the movement being charged or credited to the profit and loss account.

There is no ‘undue cost or effort’ opt-out under SSAP 19. Therefore investment properties should always be subsequently measured at open market value. No depreciation is charged under SSAP 19 unless the property is held under a finance lease where it must be depreciated once the remaining lease term is below 20 years.

What if fair value becomes difficult to obtain?

For investment properties which have previously been measured at fair value, it is possible that an entity is subsequently unable to determine a reliable measure of fair value without undue cost or effort. Where this is the case, an investment property is reclassified as property, plant and equipment (PPE) in accordance with Section 17. This will continue to apply in subsequent years until a reliable measure of fair value does become available.

Where investment properties are accounted for under Section 17, the carrying amount of the investment property on the date when the fair value is not available becomes its cost for the purposes of Section 17.

Disclosure of this change is required. However it should be noted that this is a change of circumstances and not a change in accounting policy.

Reclassification is also required where the use of the property changes such that it no longer meets the definition of an investment property.

What about deferred tax?

Deferred tax is chargeable on timing differences that arise from fair value gains on investment properties. Deferred tax is measured using the tax rates and allowances that apply to sale of the asset, except for investment property that has a limited useful life and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the property over time.

[[[Deferred tax is chargeable on timing differences that arise from fair value gains on investment properties.]]]

Are there any exemptions on transition?

There are no exemptions in general for investment properties on transition. So the changes in FRS 102 will apply to most investment properties. Those which are treated in a similar way to PPE (see the previous question above) can benefit from a ‘deemed cost’ exemption which we’ll cover more fully in the section on PPE.

Facts – Who does new UK GAAP apply to

Who does new UK GAAP apply to?

FRS 100 sets out the financial reporting requirements under new UK GAAP (FRSs 100, 101 and 102) for UK and ROI entities.

Is anyone excluded from using new UK GAAP?

Yes. The consolidated accounts of groups that are listed on a regulated market must apply EU-adopted IFRS (EU-IFRS). This is currently the case, so there is no change for such entities.

[[[The consolidated accounts of groups that are listed on a regulated market must apply EU-adopted IFRS (EU-IFRS).]]]

EU-IFRS remains an option for everyone else, with few exceptions. Subsidiaries who adopt EU-IFRS accounting treatment can reduce their disclosure by adopting FRS 101 (see below).

Small and micro-entities

For companies which qualify as small under company law (and equivalent non-corporate entities) a revised Financial Reporting Standard for Smaller Entities (FRSSE 2015) is currently available and it was originally expected that this will be the standard of choice. However the FRSSE will be replaced by FRS 102 for periods starting on or after 1 January 2016, albeit with reduced disclosures. A new Accounting Directive will require small company disclosures to be further simplified, and this will be implemented in the UK for the same effective date.

[[[FRS 105 will not require any further disclosures above the minimal requirements of the micro-entity regulations.]]]

Micro-entities will have their own separate accounting standard, FRS 105. As micro-entities are prohibited under law from adopting fair value or revaluation accounting, FRS 105 will not contain these treatments. In other respects FRS 105 resembles FRS 102 but with additional simplifications in areas such as deferred tax and pensions. FRS 105 will not require any further disclosures above the minimal requirements of the micro-entity regulations.

Other entities

We expect most non-small entities to apply FRS 102, though EU-IFRS (and possibly FRS 101) remain an option.

Reduced disclosure for members of groups using EU-IFRS

FRS 101 is available to reduce disclosure in individual financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of EU-IFRSs.

Qualifying entities are those entities that are members of a group that prepares consolidated financial statements:

that are publicly available;
that are intended to give a true and fair view; and
in which that member is consolidated.

A charity cannot be a qualifying entity for the purposes of FRS 101.

The disclosure exemptions are available irrespective of whether those publicly available consolidated financial statements are prepared under EU-adopted IFRSs, UK GAAP or any other GAAP, provided that they are intended to give a true and fair view. These exemptions may apply not only in subsidiary financial statements but also in the individual financial statements of parent companies.

Facts – When does new UK GAAP start

When does new UK GAAP start?

FRSs 100-103 will apply to accounting periods beginning on or after 1 January 2015, although the standards can be early adopted.

Mandatory adoption – non-small entities

We anticipate that very few entities will choose to early adopt (see section below), therefore 2016 will be when most accounts preparers and auditors will begin to deal with accounts prepared under the new standard.

[[[There is no need to adopt aspects of FRS 102 or to make pre-emptive disclosures ahead of time.]]]

There is no need to adopt aspects of FRS 102 or to make pre-emptive disclosures ahead of time. However the actual date of transition will be two years earlier than the first FRS 102 balance sheet (for a December year-end, this date was 1 January 2014). On adoption of the standard (e.g. for a December 2015 year-end), preparers will need to:

Restate the comparative (2014) balance sheet in full to comply with the new standard; and
Recalculate the opening comparative (2013) balance sheet in order to provide transitional adjustments to opening reserves.

The effect will be to present the 2015 accounts as if FRS 102 had always been in use. However, section 35 of FRS 102 lists five accounting issues (including accounting estimates) which must not be restated and also presents a number of transitional options. The ‘In depth’ section explores these in more detail.

Mandatory adoption – small and micro-entities

Small entities will, for the most part, adopt FRSSE 2015 for periods commencing on or after 1 January 2015 – however this regime will only last for a single year. For periods commencing on or after 1 January 2016, small entities will use FRS 102 albeit with simplified presentation and disclosure (as set out in section 1A of the standard).

Companies qualifying as micro-entities will be able to apply FRS 105 in place of FRS 102 should they wish to opt into this regime. Note that currently, the micro-entity regime is only available for companies (not for charities, LLPs and unincorporated entities).

Early adoption

[[[FRS 102 can be adopted for periods ending on or after 31 December 2012]]]

FRS 102 can be adopted for periods ending on or after 31 December 2012 (which would mean a transition date of 1 January 2011!). Small entities can early adopt FRS 102 with the small company simplified presentation and disclosure, set out in section 1A of the standard, for periods commencing on or after 1 January 2015 (in conjunction with early adoption of the associated changes to company law, which will otherwise apply for periods commencing on or after 1 January 2016).

Most entities are unlikely to consider early adoption, but this option will be more feasible for:

New entities (who will gain little by adopting ‘old’ UK GAAP);
Entities who can reduce tax (or improve tax cash flow) by early adoption;
Entities that benefit from some of the changes to accounting treatment (which are explored in the ‘main issues’ section).

Note that entities which are required to comply with a Statement of Recommended Practice (SORP) could not early-adopt FRS 102 if this would have entailed conflicts between the requirements of the FRS and the SORP. However, the relevant SORPs have now been issued and are compatible with new UK GAAP.

Facts – What is new UK GAAP

What is new UK GAAP?

‘New UK GAAP’ is the term for the new suite of accounting standards (FRSs 100-103) that will shortly replace all existing UK accounting standards. It’s the biggest change in such standards in a generation, and will have far-reaching impacts for preparers and auditors of UK financial statements.

The historical context

Existing UK accounting standards (SSAPs, FRSs and UITF Abstracts) have developed over several decades. However around a decade ago, the UK planned to adopt international accounting standards (IASs and IFRSs) instead. For several years, new UK standards were based heavily on IFRSs (in some cases being identical).

The difficulty with this approach was the size and complexity of the IFRSs, which were aimed at listed companies and similar public interest entities. Since 2005, UK listed groups have been forced to use IFRSs in the group accounts, but a growing consensus suggested that these standards would be unsuitable for the vast majority of UK businesses which are owner-managed and relatively small. As an alternative, the UK regulator decided to consider adopting a new international standard drafted for such businesses, the IFRS for SMEs, with some amendments to ensure it was suitable for the UK and compliant with EU law.

[[[FRS 102 will replace all existing UK GAAP for the majority of UK businesses including small entities]]]

The result of these amendments is FRS 102, the central standard in new UK GAAP. FRS 102 will replace all existing UK GAAP for the majority of UK businesses including small entities.

The new standards

FRS 100

Sets the framework for new UK GAAP (in essence, who does what and when).

FRS 101

Provides reduced disclosure for entities using IFRSs (as adopted in the EU) and who are members of groups, on the basis that the group accounts will include equivalent group-wide disclosures.

FRS 102

The financial reporting standard for the UK and Ireland, FRS 102 is a single standard that will apply to entities who don’t need (or choose) to use IFRSs. The standard contains a section (1A) dealing with simplifications in presentation and disclosure for small entities.

FRS 103

This FRS deals specifically with insurance contracts and is thus broadly relevant to insurers only. Such entities will also follow FRS 102 for all other areas of UK GAAP (or can choose to adopt IFRSs instead of FRSs 102/103).

FRS 104

This FRS applies specifically to interim financial statements and as such will not be directly relevant to most UK entities.

FRS 105

This standard (currently in draft) provides the accounting framework for micro-entities. FRS 105 is based on FRS 102 but with substantial simplifications, resulting in a document less than half the length of the main standard.

New year, new look? Claiming tax relief on refurbishment

If you are considering refurbishing your business, you may be able to claim tax relief on the costs incurred in doing so. However, it is important to bear in mind that differentThis is shan comnenting tax rules apply to expenditure on fixtures, alterations and repairs to your business premises. Here we outline some of the effects and the hell0 this is sue potential implications for your business.

Claiming relief rubbish

You can claim a full tax deduction for all expenditure on repairs to your buildin

Alterations to a building will be treated as ‘capital expenditure’. This means that the expenditure does not qualify for a tax deduction against profits but may eventually get tax relief for capital gains tax as an ‘improvement’ to the property.

Some capital expenditure will qualify for relief. Expenditure on fixtures may qualify for relief under the capital allowances system. This may mean that your expenditure on fixtures gets immediate tax relief due to the Annual Investment Allowance (AIA) but this will depend on how much other expenditure qualifying for plant capital allowances you have incurred in the accounting period. The current limit for expenditure relieved by the AIA is £500,000 but this figure is scheduled to fall to only £25,000 on 1 January 2016. If your accounting period straddles 1 January 2016, the AIA limit will not be £500,000 – further calculations are required. Please contact us if you are planning significant expenditure on fixtures and other plant and machinery.

Not all fixtures qualify for capital allowances but many do. Expenditure on fixtures covers a wide variety of items, from lights and boilers, to toilets and other sanitary ware. Different types of business will require different fixtures and you should check whether your chosen items qualify for capital allowances. Contact us for more information and to find out how this can impact your business.

Potential pitfalls

It may seem that both repair expenditure and expenditure on fixtures are equally valid ways of receiving a 100% tax break on your investment.

However, note the tax treatment for fixtures if you should decide to sell your business premises. Someone acquiring a property may be able to claim capital allowances on the fixtures which were put in place by the previous owner. When the transaction takes place both parties should agree on a price for the fixtures. The price can be any amount between the original costs of the fixtures when they were installed in the building down to £1. If the price is the original cost of the fixtures the capital allowances claimed by the previous owner are effectively clawed back (but the purchaser can claim on this amount). If the price is £1 the capital allowances claimed by the previous owner are effectively retained (but the purchaser can only claim on £1).

The dividing line between what is a repair rather than an alteration, and what does or does not qualify for capital allowances, can be difficult to ascertain. In addition, the rules that apply on the sale of a building which has fixtures which have qualified for capital allowances can be complex.

Careful planning can help you to maximise the relief available, and help your new‑look business to succeed.

Please contact us for further advice for your business.

Depth – Property plant and equipment

Property, plant and equipment

Section 17 of FRS 102 sets out the accounting treatment and disclosure for property, plant and equipment. It also applies to those investment properties where a fair value cannot be measured reliably without undue cost or effort.

What is property, plant and equipment?

“Property, plant and equipment” (PPE) includes tangible assets that are expected to be used by the entity for more than one period and are held:

for use in the production or supply of goods or services;
for rental to others; or
for administrative purposes.

However, it should be noted that PPE does not include the following:

biological assets which relate to agricultural activity;
heritage assets; or
mineral rights and mineral reserves, such as oil, natural gas.

These assets are all dealt with in Section 34 of FRS 102.

How is PPE initially recognised and measured?

Entities are required to recognise an item of PPE if it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably.

PPE will initially be measured at cost (including all directly-attributable costs, and any initial estimate for dismantling). Borrowing costs can also be capitalised (as under old GAAP). NB land and buildings are regarded as separable assets and as such entities should account for them separately, even if they are acquired together.

[[[FRSE 102 requires that major spare parts and stand-by equipment should be recognised as PPE if an entity expects them to be used for more than one period.]]]

In general, spare parts and servicing equipment are carried as inventory and recognised in profit or loss as consumed. However, FRSE 102 requires that major spare parts and stand-by equipment should be recognised as PPE if an entity expects them to be used for more than one period. Also, where spare parts and servicing equipment can be used only in connection with an item of PPE, then they should also be regarded as PPE.

Parts of some items of PPE may require replacement at regular intervals, or major components may have significantly different patterns of consumption. An entity shall capitalise the cost of replacement parts as a separate item of PPE if they will give incremental future benefits. Depreciation should be charged accordingly. The carrying amount of those parts that are replaced should be derecognised.

The standard also allows major inspections of PPE to be capitalised, in a similar way to old GAAP.

What about any later expenditure?

Subsequent expenditure is capitalised if:

It enhances the economic benefits; or
A component of the asset that is being depreciated is replaced or restored; or
The expenditure relates to a major inspection or overhaul, restoring economic benefits consumed to date and reflected in the depreciation charge.

How is PPE subsequently measured?

A choice is available between the cost model and the revaluation model. Where the revaluation model is selected, this shall be applied to all items of PPE in the same class.

An entity shall recognise the costs of day-to-day servicing of an item of PPE in profit or loss in the period in which the costs are incurred.

Under the cost model, an entity shall measure an item of PPE at cost less any accumulated depreciation and any accumulated impairment losses.

[[[Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.]]]

Under the revaluation model, an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal.

If market-based evidence of fair value is not available (possibly because of the specialised nature of the item of PPE or similar items are rarely sold) entities should use an income or a depreciated replacement cost approach.

How is this different to ‘old GAAP’?

Under FRS 15, the revalued amount should reflect the asset’s current value at the balance sheet date. For properties this means a full valuation at least every five years, with an interim valuation in year 3, and in other years if it is likely that there has been a material change in value. For other assets, a full valuation is needed at least every five years.

Under FRS 15, the basis of property valuation is strictly set out:

Specialised properties are valued at depreciated replacement cost;
Properties surplus to requirements are valued at open market value;
Otherwise, non-specialised properties should be included based on the existing use value.

How are gains and losses on revaluation shown?

If the carrying amount of an asset is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity. The Companies Act 2006, which will apply alongside FRS 102, requires (for companies) that a separate revaluation reserve is maintained. This is similar to old GAAP.

If the increase reverses a revaluation decrease of the same asset previously recognised in profit or loss, the increase should be recognised in profit or loss to the extent that it reverses the revaluation deficit.

Revaluation losses caused by a clear consumption of economic benefits are recognised in the profit and loss account. Other losses are recognised first in the STRGL until the asset reaches depreciated historic cost at which point the loss is recognised in the profit and loss account.

What about deferred tax?

Deferred tax is chargeable on timing differences that arise between tax allowances for PPE and the depreciation charged. Deferred tax relating to a non-depreciable asset that is measured using the revaluation model shall be measured using the tax rates and allowances that apply to the sale of the asset.

Are there any exemptions on transition?

Yes – an important exemption (for PPE and for investment property whose fair value is not obtainable without undue cost and effort). Para 35.10(c) and (d) allow a first-time adopter to measure assets at fair value or at a previous GAAP revaluation and to use these as ‘deemed cost’. This allows entities which have previously revalued but wish to use a cost model to use the latest valuation rather than reverting to the depreciated historic cost. It also allows entities which have used the cost model to continue to do so but using a (usually much higher) deemed cost base. This can bring valuable strength to the entity’s balance sheet, although at a price of higher depreciation charges in future years.

Enews February 2015

eNews – February 2015

This month we report on changes to auto enrolment limits, the launch of Pension wise and the Fit for Work service. We also update you on the latest HMRC phishing scam emails and the success of Accelerated Payment Notices. Please contact us if you would like any further information on these or any other issues.

Government publishes guidance on new ‘Fit for Work’ service

Accelerated Payment notices

HMRC warn of phishing email scam

Auto enrolment letters and updated thresholds

Government wants suggestions for Budget 2015

Pension wise

Strong demand for National Savings ‘pensioner bonds’

Government publishes guidance on new ‘Fit for Work’ service

The Government has published guidance on its new Fit for Work service, which aims to help tackle the problem of long-term sickness absence.

The service is being introduced to facilitate the return to work of employees who have been off sick for a period of four weeks or more. The new service will enable employers to refer their employees, with the employee’s consent, for an occupational health assessment. Following the assessment, a return to work plan will be created, including recommendations for employers on how to assist the employee with getting back to work.

A benefit in kind tax exemption of up to £500 per year per employee will be available for employer spending on medical treatments recommended by the assessment which help employees to return to work.

The Department for Work and Pensions is advising employers to update their sickness policies to reflect the existence of the new service.

If you would like any help in this area please do get in touch.

Internet link: fit-for-work-employers-guide

Accelerated Payment notices

HMRC have announced that they have secured almost all of the disputed tax due from the first group of tax avoidance scheme users to receive Accelerated Payment notices (APNs). An APN forces the taxpayer to make payment to HMRC of tax currently under dispute within 90 days of being issued with a notice. APNs are being introduced to counteract the perceived cash flow advantage for the taxpayer of holding onto the disputed tax during an avoidance dispute.

Approximately 30 scheme users were advised in August 2014 that they had 90 days to pay a total of around £29 million of disputed tax upfront under the new Accelerated Payments regime.

HMRC have announced that over 99% of this money was paid within the deadline, with several payment arrangements also in place. HMRC have received £32 million in disputed tax to date.

Financial Secretary to the Treasury David Gauke said:

‘The high success rate for the first set of Accelerated Payments notices shows avoidance scheme users are having to face up to the reality that they should pay their tax upfront, like the vast majority of taxpayers.

As we move into 2015 and HMRC ramps up the number of notices it sends out, thousands more will get the message that Accelerated Payments has changed the economics of tax avoidance.’

Jennie Granger, Director General for Enforcement and Compliance, HMRC, said:

‘These results show HMRC is making good progress in tackling marketed tax avoidance. If anyone is concerned about being able to pay an Accelerated Payment notice, they should contact us as soon as possible to discuss their options.’

Internet link: Gov news

HMRC warn of phishing email scam

HMRC are warning taxpayers to be wary of the latest in a long line of email phishing scams that claims taxpayers have ‘made mistakes while completing their last tax form application’.

HMRC have updated their list of phishing email scams to include the latest bogus email being circulated. According to HMRC:

‘the email contains a link which should not be clicked as it may direct you to a phishing site or contain malware. Do not respond to this email. Forward it to phishing@hmrc.gsi.gov.uk then delete it.’

Internet link: HMRC examples

Auto enrolment letters and updated thresholds

The Pensions Regulator (TPR) is to write to all small and micro businesses in the coming months as part of a new campaign to give them key information on auto enrolment, including when the duties affect their businesses.

In addition the auto enrolment qualifying earnings bands and earning thresholds have been announced for 2015/16. These thresholds are relevant to employers complying with their automatic enrolment obligations to enrol and then make pension contributions for eligible employees. Employers must meet their obligations from their staging date which can be found by using TPR Website tool.

The revisions in the limits take effect from 6 April 2015 and follow the recommendations from consultation with interested parties.

TPR proposes to revise the limits to the following amounts:

£5,824 for the lower limit of the qualifying earnings band
£42,385 for the upper limit of the qualifying earnings band

These limits are used by employers to calculate how much pension contributions are due where band earnings are the basis of calculation.

The amount someone must earn to be automatically enrolled into a workplace pension (the earnings trigger) will remain at £10,000 per annum instead of being aligned with the personal allowance as it has been for previous years following concerns that low paid workers will miss out on pension contributions.

If you would like help with auto enrolment please do get in touch.

Internet links: Gov Press release

Government wants suggestions for Budget 2015

HM Treasury is encouraging groups, individuals and representative bodies to submit their ideas for consideration in advance of Budget 2015.

HM Treasury has also published guidance on the correct procedure for making a representation, which advises that ‘representations should contain policy suggestions for the upcoming fiscal event and explain the policy rationale, costs, benefits and deliverability of proposals’.

‘It should also be evidence based, providing clear arguments on how it contributes to the aims of the Budget.’

Written representations for the 2015 Budget can be submitted until Friday 13 February, via an online survey or by emailing budget.representations@hmtreasury.gsi.gov.uk.

Chancellor George Osborne will present Budget 2015 on Wednesday 18 March.

Internet link: News

Pension wise

The government has announced the launch of ‘Pension wise’ which will offer free and impartial guidance to people on the new pension freedoms which comes into effect in April.

Economic Secretary to the Treasury Andrea Leadsom has unveiled the name and logo of the new pensions guidance service.

Pension wise will offer free and impartial information and guidance to people with a defined contribution pension approaching retirement and will be available from April 2015 for individuals approaching retirement.

Economic Secretary to the Treasury Andrea Leadsom said:

‘People who have worked hard and saved all their lives will be free to choose what they do with their money from next April.

We want people to be empowered to make informed and confident choices and I’m delighted to announce Pension wise: Your money. Your choice as the brand name for the impartial guidance service we are building.

Pension wise will be a first port of call for people with a defined contribution pension who are approaching retirement. It is a distinctive brand, making it easy for consumers to know where to go for help and guidance.’

Internet link: News

Strong demand for National Savings ‘pensioner bonds’

The National Savings & Investments website and helpline are experiencing a high volume of enquiries following the launch of their 65+ Guaranteed Growth Bonds which are being referred to as ‘pensioner bonds’.

The bonds are available for a period of one or three years. The taxable bonds offer savers interest of 2.8% over one year and a fixed annual interest rate of 4% over three years with a minimum investment of £500. Investors are restricted to a maximum investment of £10,000 in each of the two products offered.

The new bonds cannot be held within a New Individual Savings Account (NISA) and only pay interest at the end of the savings term. Where investors cash in their investment early, a penalty equivalent to 90 days’ interest will be applied.

Internet link: NS&I bonds

Cars for Employees

The current regime for taxing employer provided cars (commonly referred to as company cars) is intended:

to encourage manufacturers to produce cars which are more environmentally friendly and
to give employee drivers and their employers a tax incentive to choose more fuel-efficient and environmentally friendly vehicles.

We set out below the main areas of importance. Please do not hesitate to contact us if you require further information.

The rules

Employer provided cars are taxed by reference to the list price of the car but graduated according to the level of its carbon dioxide (CO₂) emissions.

Percentage charges

The percentage charge for the majority of cars is between 11% and 35%. The emissions table for 2014/15 is set out below.

2014/15

CO₂ emissions in (gm/km) (round down to nearest 5gm/km for values above 95)	% of car’s price taxed
0	0
1 – 75	5
76 – 94	11
95	12
100	13
105	14
110	15
115	16
120	17
For every additional 5g thereafter add 1%	–
210 and above	35 (max)

2015/16

CO₂ emissions (gm/km)(round down to nearest 5gm/km for values above 95)	% of car’s price taxed
0 – 50	5
51 – 75	9
76 – 94	13
95	14
100	15
105	16
110	17
115	18
For every additional 5g thereafter add 1%	–
210 and above	37 (max)

Examples

Jane was provided with a new company car, a Mercedes CLK 430, on 6 April 2015. The list price is £50,000. The CO₂ emissions are 240 gm/km.

Jane’s benefit in 2014/15 will be £50,000 x 35% = £17,500. For 2015/16 the benefit will increase to 37%, being £18,500.

Phil has a company car, a BMW 318i, which had a list price of £21,000 when it was provided new on 6 April 2015. The CO₂ emissions are 117 grams per kilometre. Note: The CO₂ emissions are rounded down to the nearest 5 grams per kilometre – in this case 115.

Phil’s benefit for 2014/15 is: £21,000 x 16% = £3,360. For 2015/16 the benefit will increase to 18%, being £3,780.

Diesels

Diesel cars emit less CO₂ than petrol cars and so would be taxed on a lower percentage of the list price than an equivalent petrol car. However, diesel cars emit greater quantities of air pollutants than petrol cars and therefore a supplement of 3% of the list price generally applies to diesel cars. For example, a diesel car that would give rise to a 22% charge on the basis of its CO₂ emissions will instead be charged at 25%. The maximum charge for diesel is capped at 35%.

Obtaining emissions data

The Vehicle Certification Agency produces a free guide to the fuel consumption and emissions figures of all new cars. It is available on the internet at http://carfueldata.direct.gov.uk. These figures are not however necessarily the definitive figures for a particular car. The definitive CO₂ emissions figure for a particular vehicle is recorded on the Vehicle Registration Document (V5).

The list price

The list price of a car is the price when it was first registered including delivery, VAT and any accessories provided with the car. Accessories subsequently made available are also included (unless they have a list price of less than £100).
Employee capital contributions up to £5,000 reduce the list price.

Employer’s Class 1A national insurance contributions

The benefit chargeable to tax on the employee is also used to compute the employer’s liability to Class 1A (the rate is currently 13.8%).

The exceptions

Imports

Some cars registered after 1 January 1998 may have no approved CO₂ emissions figure, perhaps if they were imported from outside the EC. They too are taxed according to engine size.

Engine size (cc)	% of list price charged to tax
0 – 1400	15%
1401 – 2000	25%
Over 2000	35%

Private fuel

There is a further tax charge where a company car user is supplied with or allowed to claim reimbursement for fuel for private journeys.

The fuel scale charge is based on the same percentage used to calculate the car benefit. This is applied to a set figure which is £22,100 for 2015/16 (£21,700 for 2014/15). As with the car benefit, the fuel benefit chargeable to tax on the employee is used to compute the employer’s liability to Class 1A. The combined effect of the charges makes the provision of free fuel a tax inefficient means of remuneration unless there is high private mileage.

The benefit is proportionately reduced if private fuel is not provided for part of the year. So taking action now to stop providing free fuel will have an immediate impact on the fuel benefit chargeable to tax and NIC.

Please note that if free fuel is provided later in the same tax year there will be a full year’s charge.

Business fuel

No charge applies where the employee is solely reimbursed for fuel for business travel.

HMRC have published guidelines on fuel only mileage rates for employer provided cars. The advisory rates are not binding and an employer may be able to agree higher rates with HMRC via a dispensation, perhaps where employees need to use particular types of car such as 4x4s to cover rough terrain. Employers can adopt the rates in the following table but may pay lower rates if they choose.

Rates from 1 March 2015

Engine size	Petrol
1400cc or less	11p
1401cc – 2000cc	13p
Over 2000cc	20p

Engine size	Diesel
1600cc or less	9p
1601cc – 2000cc	11p
Over 2000cc	14p

Engine size	LPG
1400cc or less	8p
1401cc – 2000cc	10p
Over 2000cc	14p

These rates can be found at https://www.gov.uk/government/publications/advisory-fuel-rates/current-rates

Employees’ use of own car

There is also a statutory system of tax and NIC free mileage rates for business journeys in employees’ own vehicles.

The statutory rates are:

	Rate per mile
Up to 10,000 miles	45p
Over 10,000 miles	25p

Employers can pay up to the statutory amount without generating a tax or NIC charge. Payments made by employers are referred to as ‘mileage allowance payments’. Where employers pay less than the statutory rate (or make no payment at all) employees can claim tax relief on the difference between any payment received and the statutory rate.

How we can help

We can provide advice on such matters as:

whether a car should be provided to an employee or a private car used for business mileage
whether employee contributions are tax efficient
whether private fuel should be supplied with the car.

Please contact us for more detailed advice.

Payroll Real Time Information

We set out below details of how payroll information has to be submitted to HMRC under Real Time Information (RTI).

RTI – an introduction

Under RTI, employers or their agents, are required to make regular payroll submissions for each pay period during the year detailing payments and deductions made from employees each time they are paid. There are two main returns which and employer needs to make which are detailed below.

Full Payment Submission

The Full Payment Submission (FPS) must be sent to HMRC on or before the date employees are paid. This submission details pay and deductions made from an employee. The FPS must reach HMRC on or before the date of payment of the wages to employees.

Employer Payment Summary

Employers may also have to make a further return to HMRC each month (EPS) to cover the following situations:

where no employees were paid in the tax month
where the employer has received advance funding to cover statutory payments
where statutory payments are recoverable (such as SMP, OSPP and ShPP) together with the SMP NIC compensation payment or
where CIS deductions are suffered which could be offset (companies only).

HMRC will offset the amounts recoverable against the amount due from the FPS to calculate what should be payable. The EPS needs to be with HMRC by the 19th of the month to be offset against the payment due for the previous tax month.

Payments to HMRC

Please bear in mind that under RTI HMRC are aware of the amount due on a monthly/quarterly basis. This will be part of the information reported to HMRC through the FPS and EPS.

HMRC will expect to receive the PAYE and NIC deductions less the payments each month or quarter (small employers only).

Year end procedures

At the end of the tax year a final FPS or EPS return must be made to advise HMRC that all payments and deductions have been reported to HMRC. This final return includes details whether for example, forms P11D reporting employment benefits or expenses are due. This additional information is no longer mandatory however many software packages currently require these fields to be completed.

Some further complications

Wages

Under RTI it is and not possible to put through wages at the year end of the business and assume this has been paid throughout the year, for example to utilise a family member’s national insurance lower earnings limit which gives them a credit for state pension and statutory payment purposes.

Wages should be paid regularly and details provided to HMRC through the RTI system on a timely basis.

Payments which are impractical to report on or before

HMRC have issued guidance covering issues such as payments made on the day of work (which vary depending on the work done) where it is impractical to report in real time. The regulations allow up to an additional seven days for reporting the payment in specified circumstances.

HMRC have also made available some guidance on exceptions to reporting PAYE information ‘on or before’ paying an employee which can be found at https://www.gov.uk/running-payroll/fps-after-payday

A relaxation of the rules for micro employers

A relaxation applies to some micro employers to the RTI reporting requirement that payments to employees should be reported on or before the amount is paid to the employee. The relaxation applies to micro employers (those with fewer than 10 employees) who pay employees weekly, or more frequently, but only process their payroll monthly and who made use of the small employer relaxation in 2013/14.

The relaxation means that micro employers, who find it difficult to report every payment to employees at the time of payment, may send information to HMRC by the date of their regular payroll run but no later than the end of the tax month.

Please do contact us if you would like any further help or advice on payroll procedures.

Penalties

HMRC are introducing automatic in-year penalties for RTI to encourage compliance with the information and payment obligations.

In essence late filing penalties will apply to each PAYE scheme, with the size of the penalty based on the number of employees in the scheme. Monthly penalties of between £100 and £400 will apply to micro, small, medium and large employers as shown below:

1-9 employees – £100
10-49 employees – £200
50-249 employees – £300 and
250 or more employees – £400.

Each scheme will be subject to only one late filing penalty each month regardless of the number of returns submitted late in the month. There will be one unpenalised default each year with all subsequent defaults attracting a penalty. This regime commenced on 6 October 2014 for employers with 50 or more employees with smaller employers being liable for the penalty from 6 March 2015.

HMRC charge daily interest on all unpaid amounts from the due and payable date to the date of payment, and will raise the charge when payment in full has been made. They may also charge penalties to employers who fail to pay their PAYE liabilities on time. These penalties are ‘risk assessed’ and range between 1% and 4% of the amounts paid late. The first late payment will not attract a penalty.

How we can help

The operation of PAYE under RTI can be a difficult and time consuming procedure for those in business. We will be happy to show you how to operate PAYE correctly, offer ongoing advice on particular issues, or to carry out your payroll for you so please do contact us.

Starting Up In Business

It is the ambition of many people to run their own business. Some may have been made redundant and find themselves with free time and financial resources. Others make the decision to start up in business to be more independent and obtain the full financial reward for their efforts.

Whatever the reason, a number of dangers exist. Probably the greatest concern is the possibility of business failure.

Read on for guidance on some of the factors which need to be considered before trading begins.

This factsheet cannot cater for every possibility and any decisions should be supported by professional advice.

Initial considerations

In order to make your business a success there are a number of key factors which should be considered:

commitment – starting a business is demanding. Determination and enthusiasm are essential
skills – you will need managerial, financial, technical and marketing skills. If you do not have these skills personally, they can be found in a partner or employee, or acquired through training
your product or service should have a proven or tested market, but must not conflict with the patent or rights of an existing business.

In addition to these general considerations there are a number of more specific matters.

The business plan

The business plan is the key to success. If you need finance, no bank manager will lend money without a sensible plan.

Your plan should provide a thorough examination of the way in which the business will commence and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.

Business structure

There are three common types of business structure:

Sole trader
This is the simplest form of business since it can be established without legal formality. However, the business of a sole trader is not distinguished from the proprietor’s personal affairs.

Partnership
A partnership is similar in nature to a sole trader but because more people are involved it is advisable to draw up a written agreement and for all partners to be aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate. A further possibility is to use what is known as a Limited Liability Partnership (LLP).

Company
The business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with.

The appropriate structure will depend on a number of factors, including consideration of taxation implications, the legal entity, ownership and liability.

Business stationery

There are minimum requirements for the contents of business stationery, both paper and electronic, which will depend on the type of business structure.

Books and records

All businesses need to keep records. They can be maintained by hand or may be computerised but should contain details of payments, receipts, credit purchases and sales, assets and liabilities. If you are considering purchasing computer software to maintain your records, obtain professional advice.

Accounts

The books and records are used to produce the accounts. If the records are well kept it will be easier to put together the accounts. Accounts must be prepared for HMRC and if a company is formed there are strict legal requirements as to their layout. The accounts and company tax return must be submitted electronically to HMRC in a specific format (iXBRL). Presently Companies House do not require annual accounts to be submitted electronically in iXBRL format, however there is software available to cater for electronic filing if preferred.

A company and a LLP may need to have an audit and will need to make the accounts publicly available by filing them at Companies House within a strict time limit.

Taxation

When starting in business, taxation aspects must be considered.

Taxation on profits
The type and rate of taxation will depend on the form of business structure. However, the taxable profit will normally differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances. Payment of corporation tax must be made online.

National Insurance (NI)
The rates of NI contributions are generally lower for a sole trader or partnership than for a director of a company but the entitlements can also differ. In a company, it may be possible to avoid NI by paying dividends rather than salary.

Value Added Tax (VAT)
Correctly accounting for VAT is an essential part of any business and neglect may result in a significant loss.

When starting a business you should consider the need to register for VAT. If the value of your taxable sales or services exceeds the registration limit you will be obliged to register.

Employing others

For the business to get off the ground or to enable expansion, it may be necessary to employ staff.

It is the employer’s responsibility to advise HMRC of the wages due to employees and to deduct income tax and national insurance and to account for student loan deductions under PAYE. The deductions must then be paid over to HMRC. Payroll records should be carefully maintained.

Under Real Time Information an employer must advise HMRC of wages and deductions ‘on or before’ the time they are paid over to the employee.

You will also need to be familiar with employment law.

Premises

There are many pitfalls to be avoided in choosing a property. Consideration should be given to the following:

suitability for the purpose
compliance with legal regulations
local by-laws
physical restrictions such as access.

Insurance

Comprehensive insurance for business motor vehicles and employer’s liability insurance are a legal requirement. Other types of insurance such as public liability, consequential loss, business assets, Keyman and bad debts should be considered.

Pensions

Putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules.

The latest reforms, under Pensions Act 2008, have brought about a requirement on UK employers to automatically enrol all employees in a pension scheme and to make contributions to that scheme on their behalf. Enrolment may be either in to an occupational pension scheme or the National Employment Savings Trust (NEST).

Compliance with the new regulations started from 2012 for the largest employers. The deadline for being compliant (an employer’s ‘staging date’) is determined by the number of people in their PAYE scheme and for smaller employers is between 2012 and 2018.

How we can help

Whilst some generalisation can be made about starting up a business, it is always necessary to tailor the strategy to fit your situation. Any plan must take account of your circumstances and aspirations.

Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems which befall new businesses.

We would welcome the opportunity to assist you in formulating a strategy suitable for your own requirements. We can also provide key services such as bookkeeping, management accounts, VAT return and payroll preparation at an early stage. Please contact us to find out more.