No festive cheer in Pre-Budget Report

First impressions. Our initial view of the tax changes announced in Mr Darling’s recent PBR is in line with the general consensus. There isn’t really anything for directors to worry about on the business or personal tax front, but here are a few of the highlights (or lowlights!).

On the plus side. The already deferred increase in the rate of Corporation Tax for small companies has been put back another year. The current rate of 21% for those businesses with taxable profits of £300,000 or less will remain in place until March 31 2011. Thereafter it will increase to 22%. The delayed increase in CT offers a potential tax saving for your company for 2010/11, but it’s small and difficult to plan around, so our advice is don’t waste any of your, or your accountant’s, valuable time finding ways to make use of it.

On the down side. The planned 0.5% increase in NI contributions will now be doubled to a 1% rise. So, as a director you’ll potentially get hit with a 2% increase in NI. On a salary of £50,000 you can expect to pay about £360 more per year, while your company will have to stump up around an extra £400. The good news is that at least this measure doesn’t take effect until April 2011.

Tip. For those who expect to have taxable income of over £100,000 in 2010/11, stick with our previous advice of taking a bonus before April 6 2010 to reduce the effect of higher rates of income tax coming in after that date. And as it’s money that you wouldn’t have paid yourself until after April 6 2011, you’ll also be skipping the hike in NI rates.

Pensions. There’s yet another chapter in the saga of Mr Darling’s idea of capping higher rate tax relief on pensions. The goalposts have been moved again; from December 9 2009 the point at which anti-avoidance rules kick in has been reduced to £130,000 but only in some cases, particularly where a salary sacrifice is involved. The Taxman hasn’t yet given the details.

Tip. If you’re planning a salary sacrifice to fund a pension contribution, and your company earnings are £130,000 or more, hold fire for now or you could lose out on higher rate tax relief. We’ll bring you further advice once the Taxman has published the full rules.

Protecting directors from personal liability

Risky business?

The principle of “limited liability” assumes that when things go wrong in a company the company itself takes the rap. So, in theory at least, the directors should be protected by the “corporate veil”. But over recent years, this has not been the reality as more and more directors have found themselves on the end of legal proceedings.

Can that happen?

For example, you could come under attack from shareholders and regulators, e.g. the HSE and Information Commissioner. But even if you’re not subjected to formal legal action, the costs of defending your own position could be high. Fortunately, there are two options available that can provide you with a degree of protection.

Option 1 - indemnity

First, the company can offer an “indemnity”. This is an agreement whereby it agrees to foot the costs if the director faces any legal action. It doesn’t need to be complicated, e.g. the terms could be put into a letter, and other than the time involved in doing this, it shouldn’t cost anything to set up. The financial implications only come into play if it needs to be relied on, i.e. action is taken.

Note. The Companies Act 2006 prohibits companies giving indemnities against any: (1) negligence; (2) default; or (3) breach of duty or trust caused by the director.

Option 2 - insurance

Interestingly, the Act does not prevent a company from purchasing insurance for directors in connection with any negligence, default, breach of duty or trust by them. This is usually done in the form of Directors’ and Officers’ Liability insurance (D&O cover) and there are two types:

• Side A - this provides cover for those accused of a wrongful act in civil, regulatory or criminal proceedings, i.e. the directors; and

• Side B - this covers the company for the cost incurred in indemnifying a director who faces actual or potential litigation.

It’s all the same?

It’s important to remember that there’s no such thing as standard D&O cover. Each insurer will offer a different policy, terms and, of course, price. So always be clear about what you need covered, e.g. corporate manslaughter, shareholders’ claims etc.

Tip 1. The policy should be “composite”, not joint, i.e. each director needs individual cover which can’t be affected by the misconduct of another.

Tip 2. Make sure that the policy can’t be cancelled by the insurance company for non-payment of the premium without notice being given to the director. You don’t want someone’s forgetfulness affecting your cover.

Best way. Ideally, to protect a director as far as possible, both an indemnity and D&O cover should be made available. Whilst each is beneficial, together they cover as many angles as possible.

Companies can provide an indemnity and/or Directors’ and Officers’ Liability insurance, with the best position being that both are available. An indemnity shouldn’t cost anything to set up - it only comes into play if things do go wrong. The cost of insurance will depend on the provider and cover, so shop around.

VAT increase

The standard rate of VAT is due to rise from 15% to 17.5% on 1 January 2010. This small rise in VAT may encourage people to make large value purchases in December 2009 rather than in January 2010, but there are other ways to take advantage of the lower VAT rate.

Where services or goods are invoiced for in advance, the VAT rate applies according to the date of the invoice. Say an organisation normally raises invoices for its annual membership fees on 2 January each year. If the 2010 membership invoices are raised on 1 December 2009 the members don't have the VAT increase and the organisation would receive at least some of its membership income earlier.

The VAT rate to be applied to a sale normally depends on the tax point for that transaction. This tax point is usually when the customer receives the goods or services. However, that tax point is superseded by an earlier date if the money is received before the supply of goods or services, or by the invoice date if that invoice is raised within 14 days of the goods or services being supplied.

When the VAT rate changes in the middle of these dates, you can choose whether to apply VAT at the date when the goods were supplied, or the date the invoice is raised. If you supply goods on say 24 December 2009, but raise the invoice on 4 January 2010, you have the option of charging 17.5% VAT rate based on the invoice date of 4 January 2010, or 15% VAT based on the date the goods were physically supplied.

Where you are supplying a service over a period that straddles the VAT increase, the VAT man will, by concession, allow you to charge VAT at 15% for the portion of the work done before 1 January 2010 and 17.5% VAT for work done on or after that date. Alternatively you can apply the usual rules and charge VAT according to the date the invoice is raised, or the payment is received, which ever happens first.

There are tax-avoidance rules which will add an extra 2.5% supplementary VAT charge where the value of the sale (and connected sales) total more than £100,000, or the customer and supplier are connected, or the payment is due more than six months after the date of the invoice. Talk to us if your sales are likely to fall into any of these categories.

Who’s liable for a sub-contractor’s mistake?

If you bring in outside help to complete work for one of your customers and something goes wrong, who will be in the firing line? And what steps can you take to protect yourself?

A helping hand

If you’ve landed a contract but don’t have the resources or expertise to complete the work yourself, it’s common practice to use a sub-contractor to help out. But will you and your company be liable for their mistakes if things don’t go as planned?

Contractual problems

If you don’t supply the goods or services you’re being paid for in accordance with the terms and conditions of sale, you’ll be on the hook to sort out the problem, financial or otherwise, even if it was a sub-contractor which caused it.

Trap. Not having a sale contract doesn’t mean you escape. Even if there’s no written or oral agreement, there’s an implied obligation to ensure that the job is completed to a reasonable standard.

Passing the buck

If your customer makes a claim against you because of, say, faulty workmanship, but this was down to the sub-contractor you used, you can, in turn, make a claim against them.

Tip. Have a formal contract with your sub-contractor that mirrors the terms of the contract you have with your customer. This can make it easier for you to go after the sub-contractor responsible if your customer makes a claim against you.

Non-contractual problems

If the sub-contractor has caused a problem not directly linked to the contract, for example their van damages your customer’s property, the good news is that they are liable. But there are two exceptions to this rule, and if either apply your customer can make a claim against you as well as against the sub-contractor.

• Vicarious liability. If you’ve “borrowed” your sub-contractor’s workers to do the work.

• Extra-hazardous activities. If the work involved is unusually dangerous.

The second exception is self-explanatory, but the first was recently redefined following an appeal court case.

Exceptions

In the case of Biffa Waste Services (B) v Maschinenfabrik (M), M had been asked by B to construct some heavy machinery, and had in turn engaged specialist sub-contractors to help. However, one of the sub-contractors caused a fire at B’s premises. B sued both M and the sub-contractors. In the original judgment M was found liable because it was caught by the exceptions above. But M appealed and won. The judge decided that the sub-contractors should be solely liable, but why?

Supervision is not control

The judge said that “supervision” of sub-contractors was not “control”. M did not control them and so couldn’t be liable for their mistakes.

Tip. When hiring a sub-contractor state in the contract that you’ll only supervise work. Control over how the work is carried out is up to them.

Trap. Even though you may not control the sub-contractor’s work, you and your co-directors still have an obligation under the Health and Safety at Work etc. Act 1974 to provide a safe working environment for everyone working for you, whether or not they are employees.

A customer can expect compensation if you fail to live up to the terms of your contract, even if it’s a sub-contractor’s fault. But if the problem isn’t directly related to the contract, they will be solely liable, providing you weren’t in control of their workers. State in your contract you’ll only supervise them, not control how they do the job.

Beware Tax Email Scams

Many people are currently waiting for a tax rebate from the Tax Office, as they have claimed for losses to be set against an earlier year's income. If you are expecting such a tax refund, or even if you are not, take care not to be drawn in by emails that claim to have a tax rebate ready for you. These emails tend to ask for details of your bank account to pay the refund into, but they are scams.

The UK tax office HMRC does not send emails to taxpayers informing them of tax rebates. All such emails are fraudulent, and potentially very dangerous. You should not respond to the email. Do not click on any link embedded in the email as this may allow the scammers to get to your computer through a virus included in the link.

Fraudulent emails normally stand out as they are not correctly addressed to you personally. The email may have missing address details or say 'Dear Subscriber' or 'Dear Taxpayer'. Some scam emails include what looks like a tax refund form including a fax back number. You should never complete such a form sent to you by email supposedly from HMRC. To complete genuine HMRC forms yourself you need to log into the HMRC secure website using the login details which will have been sent to you in the post.

PAYE Due

This is an easy question - all PAYE and NIC deductions, including student loan repayments, and CIS deductions for the tax period ending on 5th of the month must be paid to HMRC by 19th of that same month. This means your cheque must reach the Taxman's accounts office by the last working day before the 19th. If you pay electronically the payment must reach the Taxman's account by 22nd of each month. In most cases you will need to set-up the payment to leave your bank account on or before 19th as the Taxman's bank does not accept 'faster payments', which arrive the same day as they leave.

If all your average monthly PAYE deductions for the tax year are less than £1,500 you can pay those deductions to the Taxman each quarter instead of monthly. In this case the deductions must reach the Taxman's accounts office by 19th July, 19th October, 19th January and 19th April. If you pay electronically the payment must arrive by 22nd of the relevant months.

These deadlines are particularly important for sub-contractors in the construction industry who currently have 'gross payment' status.

Gross payment status allows those firms to be paid without deduction of tax. But the Taxman will withdraw gross payment status if you are up to 14 days late with more than three PAYE payments. If you are more than 14 days late for just one payment gross payment status will be withdrawn. You can appeal against the withdrawal of gross payment status, but you need a good excuse for making the late payments!

From May 2010 all employers will be subject to late payment penalties if they are late with more than one PAYE payment in the tax year. If you regularly pay your PAYE late we should discuss how to improve your systems before the new penalties start.

Are you having problems to pay your tax bill? Vertice Services can help you. New Business Payment Support Service.

From 24 November 2008, HMRC has introduced a new, dedicated Business Support Service designed to meet the needs of businesses affected by the current economic conditions.

If you're worried about being able to meet tax, National Insurance, VAT or other payments owed to HM Revenue & Customs (HMRC), or you anticipate that payments coming due will cause you problems, you can contact Vertice Services and we will call the Business Payment Support Line on your behalf.

HMRC’s staff will review your circumstances and discuss temporary options tailored to your business needs, such as arranging for you to make payments over a longer period. They will not charge additional late payment surcharges on payments included in the arrangement, although interest will continue to be payable on those taxes where it applies.

Please note: The Business Payment Support Line is for new enquiries only. If HMRC has already contacted you about an overdue payment, or if you already have a payment arrangement with them, please let us know.

Erro PAYE Codes

The Taxman has started to issue the 2010/11 PAYE codes, for the tax year that starts on 6 April 2010. This code arrives in the form of a P2 notice, and a copy should go to your employer (on a form P9). If you have received your 2010/11 PAYE code already please study it carefully, as any corrections need to be made in the next few weeks.

Since the Taxman fired up a new PAYE computer last summer there have been a number of faults appearing in PAYE codes. In some cases the age allowance or married couples allowance disappeared, in other cases the state pension amount was understated. Now many of the 2010/11 codes have excluded some of the basic personal allowance, which should be £6,475 for those aged under 65.

This fault occurs if you have changed jobs in the last few years, or started to receive a pension.

The Taxman's computer thinks you are still receiving a wage from your old job, so has split your personal allowance over your current employment or pension and your old job. If you do not have your full personal allowance of £6,475 shown on your 2010/11 PAYE code, ring the Tax Office to ask why, or speak to us.