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Newsletter issue - December 08.
Q. I see that the Chancellor has postponed bringing in a new law to tax family companies who share business profits between spouses, the so-called income shifting rules. I'm an IT contractor starting a new company through which I will provide my services. In light of this would you advise me to issue shares to my wife on the formation of the company to help avoid higher rate tax in the future?
A. The proposed income shifting rules were to supplement the existing settlement rules that tax the artificial transfer of income between spouses. If your spouse holds shares and receives dividends from your new company you may avoid higher rate tax, but you must also avoid being caught by the settlement rules. To do this give your spouse ordinary shares which have full voting rights, which you have subscribed for yourself. It is good practice for your spouse to also be a director of the company and take part in all major decisions, such as who to bank with, and when dividends should be issued. Whilst the Chancellor has said income shifting rules will not be introduced in the Finance Act 2009, there is no guarantee that the law will not be changed the following year as the Chancellor has said it will be kept under review in the most tax efficient manner. However, for now it does work. Please note this advice is on the assumption you are not caught by the IR35 service company rules.
Q. My son built and maintained a few websites on behalf of local businesses. Before he started his university course in October he transferred the code and customer details to an established website creation company for £18,000. How should this money be taxed?
A. It seems your son has a bright future as an entrepreneur. The sum he received is a capital payment for selling his first business and it is taxed as a capital gain. The full gain of £18,000 (assuming no costs) should qualify for entrepreneurs' relief, which will reduce it by 4/9ths, leaving £10,000. From this sum he can deduct his annual capital gains exemption of £9,600 leaving just £400 taxable at 18%, producing a tax liability of just £72. He should declare the gain on the capital gains tax pages of his 2008/09 tax return.
Q. We raised some sales invoices in November 2008 with VAT charged at 17.5%, for services to be delivered in December 2008. The invoices have already been paid. Do we have to take any action now because of the decrease in the standard VAT rate to 15% from 1 December 2008?
A. You don't have to make any adjustment to your invoices if you don't want to, as the VAT was correctly accounted for in November. However, you may issue a credit note if you wish to amend the original invoices to show services supplied in December at 15% VAT. This will only be worthwhile where your customers are unable to reclaim the full amount of the VAT charged.
