Complification

In recent times HMRC have promised a simplification of the tax laws in this country which should have led to many planning opportunities. Remember the so-called "tax simplification" of pensions in 2006. Not. The subsequent changes led to the coining of the expression "complification". And then there are the swings back and forth as chancellors rethink their predecessors' ideas. Boy oh boy.

Some of the key highlights in the small print from this week's Budget include some more complifications:

- The increase to £50,000 in the annual charge for UK non-domiciled individuals from April 2012 for those who have been UK resident for 12 or more years and who wish to benefit from the remittance basis. The definition of residence will be put on a statutorily defined basis. Then the likes of Green and Stelios should be left in peace for a bit.

- The reduction in the main rate of corporation tax to 26% from April 2011 and by 1% a year thereafter to 23% in 2014. That should help offset the impact of the proposed cuts in capital allowances.

- The increase in the personal allowance to £8,105 in 2012/13, with a corresponding reduction in the basic rate band to £34,370. That should add a big slew of higher rate taxpayers to those already paying 40% and 50% tax.

- The increase in the lifetime limit for CGT entrepreneurs' relief from £5 million to £10 million - which sounds good but won't actually affect too many people. Except maybe Green and Stelios.

- The possible integration of income tax and NICs. But how on earth will they do that without huge "complification?"

The Smart Frog makes no apologies for sounding cynical. Let's see if time proves him wrong.

Happy birthday, Son - have a brand new car!

Recently, The Smart Frog happened to jump across a rather neat and simple trick for family company businesses to fund their private car purchases for the family through the company in an extremely tax-efficient manner. So, he thought he'd share it with you, of course.

Try this for size.

Buy a car through the company for, say, £10,000 with CO2 emissions of, say, 100. Give said car to Son to use. Usual company car rules tax the car on the company director (i.e. Daddy). Taxable value (i.e. amount upon which tax is payable) is 10% of list price, therefore value is £1,000. Tax payable at, say, 40%, is £400 (or even lower if Daddy is a lower rate taxpayer). The car's running costs are claimable by the company in full in its accounts, and the purchase cost qualifies for 100% tax allowances because it is ozone-friendly.

All this, and the car doesn't have to be driven a single mile on company business. Little Johnny can happily drive around all day long wherever he wants. No need to keep a mileage log. No need even to work for the company. The company picks up the tab and gets full tax relief, Daddy pays the miserly company car tax bill, and Little Johnny can continue spending all day watching The Jeremy Kyle Show. Little Johnny is a very happy Little Johnny. Perfect.

Not sure the legislation was actually intended to produce this unlikely result. But it does. And so use it to your benefit, that's what we here at Smart Frog Towers recommend.

If The Smart Frog ever developed proper hands and feet then maybe he'd try out his own advice. Until then, it's jump, jump and away for him. See ya'...

PAYE - Precisely As You'd Expect?

So, the recent PAYE fiasco has brought The Smart Frog prematurely out of hibernation. How could such a debacle go by without comment?

To summarise:

Almost six million people are embroiled in the biggest tax blunder for years.

About 1.4 million will have to fork out an average of £1,500 after underpaying through absolutely no fault of their own. Some will face far higher bills, though the Treasury insists no immediate repayment will be required if the sum is more than £2,000. Let's wait and see, shall we?

For 4.3million, the news is better. They will be told they are owed money by the taxman after having too much deducted from their earnings. The total in overpayments is £1.8billion, meaning an average rebate of £418.

For those who owe tax, there is an option. It's a little-known (certainly not in the general public-domain) rule called "official error" which broadly works to write-off tax which is owed under certain circumstances. Have HMRC publicised this? Have they heck.

The irony behind all this is that almost all of those affected are employees and therefore unrepresented and will, in all probability, know nothing about the "official error" rules and their rights.

Whatever eventually happens, The Smart Frog thinks that one fact is now glaringly obvious - the management of HMRC is grossly incompetent. Isn't all this just precisely what we've come to expect? They stagger from one crisis to another. Tax bills are wrong. Confidential data is routinely lost. The tax credit system is a total farce.

Should their management really be getting bonuses and appearing in honours lists or should they be dispatched to the nearest job centre? In the real-world outside the comfy arms of the Civil Service they wouldn't survive a minute.

Rant over. Night night.

OK, so what d'ya reckon, Mr Small Business Man?

So, were there any presents in it for you? This was never going to be a tax cutting budget, but it wasn't really that bad, was it?

The Smart Frog quites like the Annual Investment Allowance, an allowance which enables 100% of certain capital expenditure to be set against business profits (hithereto only available at a maximum 55%). The increase in the AIA to £100,000 (previously £50,000) will affect a relatively small number of businesses (those with capital expenditure between £50-100k) but they may well be a crucial sector in the economy. It may actually enable genuine investment by that minority of small businesses who want to invest and grow.

When the Smart Frog was told that the Chancellor might double entrepreneurs’ relief from Capital Gains Tax he assumed that also meant CGT rates were going up, but no they didn't. A nice little surprise there, then.

This of course allows the Chancellor to hold himself out as a champion of small business, as the Tories are talking about cutting the main rate of Corporation Tax and abolishing the AIA – which of course helps big business. The Smart Frog suspects this is the big idea here, because nobody wants to go into an election tagged as a friend to the banks.

Very importantly (and despite rumours to the contrary), the business tax payment support service (designed to help small business pay their tax by installments through the current difficult economic climate) is to continue. An independent review is to be required, but only where debt exceeds £1m. Not a problem for small business, then.

Usefully, the extended trading loss carry back provisions (for both income tax and Corporation Tax) will be extended for another year. Hopefully that takes them close to the end of their useful lives – anyone still making large losses by then is likely to have gone out of business!

The abolition of the 'furnished holiday lettings' provisions will still be going ahead, despite protestations by The Smart Frog, as well as the various accountancy bodies. Expected clarifications have not yet surfaced. This will be a mess.

Overall, though, there was no harm done to small business, and even some improvements. What d'ya reckon?

It's a bit of a lottery, really...

Rarely can the portents for a Pre-Budget report be as ominous as this one. Chancellor Alistair Darling will stand up on Wednesday shortly after noon to make what many people predict might be his last Pre-Budget statement.

His advisers at The Treasury always makes sure he has something to say - for example, the massive public deficit resulting from this year’s bank bail-out - but will it really matter?

The change of the rate of VAT back to 17.5% was set out in March’s budget and a new 25% flat rate for capital gains tax is expected, but could the impending general election make this year’s PBR be the dampest of squibs?

Trying to predict the contents of the Pre-Budget statement is always a bit of a lottery but, with a little bit of insider knowledge, here’s what we at The Smart Frog offices are predicting.

· Confirmation of further staged VAT rises in the future.
· A raise in the basic rate of income tax by 1p across the board from April 2010.
· Further 1% rise in NICs across the board from April 2011.
· Duty rises in petrol/diesel.
· No alcohol duty rises for some pre-Holiday Season cheer.
· Extension of the new three year carry-back of £50,000 of losses beyond the scheduled expiry date of November 2009.
· Increase in relief for entrepreneur and employee shareholders/investors to encourage long-term investment.

Check back to see how many of these predictions were correct. And before you ask, The Smart Frog is keeping the numbers for next weekend’s National Lottery a closely guarded secret!

Super, Duper...

The Smart Frog remembers back to the day when he was but a tadpole squating around the monopoly board wishing he was aboard the battleship. But, alas, he always seemed to be bankrupt by the end of the game by continually landing on the space between Park Lane and Mayfair and collecting a whole lily-pad of Super-Tax debts.

This blot on his wonderful youthful days has come back to haunt him in the form of the aforementioned Super-Tax being introduced in real-life. In real-life in the UK, next April, to be precise.

With a bit of analysis, it is easy to compare the new tax rates with those from the early '80's where rates were at 60%, but thankfully we're not at the 98% rate from the 1970's just yet. In the current financial climate, the Government is naturally keen to fill its coffers, and by our reckoning the new tax and national insurance rates, coupled with the changes to pension tax relief, will empty almost £13.24 Billion from the pockets of the UK's top 2% of earners by 2013. That's a lot of dosh!

The new rules will start to bite from April 2010. But what are they? See how these float your boat...

- Earners will start paying tax at 50% on that part of their income which exceeds £150,000 per year

- Personal tax allowances will be restricted by £1 for every £2 of income which exceeds £100,000 per year. This means that once income reaches about £113,000 (using today's rates) then there will be no personal tax allowance available at all

- Higher rate tax relief on personal pension contributions will slide away where income exceeds £150,000 per year (this rule applies with effect from April 2011), such that no higher rate relief will apply where income exceeds £180,000 per year

- Because of the peculiar way the system will work, the effective tax rate will actually reach 60% for those unlucky enough to find themselves in the worst income bracket

So, how can those poor souls protect themselves from the ugly clutches of the 50% (or even 60%) tax man? Well, there's plenty of ideas, but the basic premise is to try to ensure that income falls below £100,000 per year. Here's a few thoughts...

- Try to structure 'income' as 'capital gains' - this will most likely apply to employees who participate in company share schemes. Capital gains will not attract the Super-Tax rate, and indeed can be as low as 10%

- Try to 'split' income between spouses - for instance, ensure that income (such as investment income - dividends, bank interest, etc.) is equalised between spouses such that neither sneaks into the Super-Tax league. This can also apply to family companies by, maybe, ensuring that shares are held equally between spouses (but, be warned, tax avoidance rules are prevalent here, so take advice!)

- Ensure that trading losses are claimed as beneficially as possible - this will most likely apply to business owners

- Try to 'trigger' income arising before the new rules hit, for instance employees participating in short-term share schemes might want to exercise their options before 6 April 2010. Ok, ok, it will bring forward any tax payable by a year, but it could significantly reduce the amount of tax to pay

- Try to make full use of tax reliefs whilst they still apply, for instance Gift Aid relief and Personal Pension relief

So, that's The Smart Frog's civil duty done for today. Ensure you message him for specific advice before you take action, otherwise Super-Duper could become Super-Pooper!

Flippin' eck!

The news has been saturated recently with the revelation of MP's expenses, and quite rightly so. They've been very naughty boys and girls.

But now there has been the sacking by Gordon Brown of Kitty Ussher for 'flipping' her private residences for tax purposes in order to maximise her capital gains tax exemptions. The Smart Frog thinks that this is a step too far and completely unnecessary.

There is an important difference here. MP's have blatantly abused their internal rules for their own financial benefit. The rule which allows an individual, any individual, to elect to treat one residence over another as his or her home for capital gains tax purposes is simply part of this great country's tax laws, and surely each and every one of us is entitled to arrange our tax affairs as efficiently as possible. For the head of our Government - the guys who approve these laws - to get rid of a member of his staff for legitimately benefitting from those rules is quite simply wrong.

It's like saying that Joe, the self-employed plumber, can't claim for the use of his van. Or like Sir Green can't claim to be not resident in the UK. All are simply arranging their tax affairs in as tax efficient manner as possible, within the letter of the law, and so why should one lose her job because of it?

Coincidentally, the Smart Frog is currently advising a client on the same issue. The advice will be taken or not taken, but nonetheless he would be remiss not to give it, because that's what he's paid for. To criticise an MP for taking very good, sound advice from her accountant is simply not on. Would Joe or Sir Green ignore the advice of their accountant if it was going to save them heaps of tax. One thinks not - yet one suspects that they were nodding their heads with approval upon hearing the unfortunate fate of Ms Ussher.

The practice of flipping one's properties in order to optimise one's tax position has been around for years and years. It's taking it a bit flippin' far when one can lose one's job over it.