Newsletter March 2010

HMRC clampdown on barristers

Ashley Hayman, Senior Partner

You may have seen recent press coverage regarding a possible clampdown by HM Revenue & Customs (HMRC) on barristers.  We understand that a specialist unit has been set up by HMRC to conduct investigations into barristers’ tax affairs because it has identified barristers as having poor record keeping generally and inaccurate tax returns.

The areas that HMRC is likely to consider in the course of an investigation include: transition from cash to accruals basis after 7 years, valuation of incomplete work (UITF40), and inaccurate or unsubstantiated claims for expenses.

UITF40 is an area of weakness for many barristers. Even if you think it doesn’t apply to you, it is essential to document that you have considered the work that is not completed at the year-end and taken account of any unrealised profit.

For our existing clients, assuming you have given us full facts regarding all of your income, gains or other profits, there should not be a problem.

If you are not a Cassons client and you are not represented by a recognised bar specialist accountant, you might consider taking additional advice.  There are many complexities in barristers’ accounts and you need expert advice.

If you are currently experiencing a tax enquiry please get in touch with us as we may be able to help!  Please call us on 0845 337 9409.

A tax enquiry can take up a considerable amount of both your time and that of your adviser in dealing with HMRC and its queries, especially if your adviser is not a bar specialist. Your adviser will inevitably have to commit significant time, at your expense, to fighting a tax enquiry for you. So, even if there is nothing wrong and no extra tax to pay at the conclusion of the enquiry, you are likely to incur substantial professional costs.  These costs (but not the tax) may be covered by a tax fee protection scheme.  Please contact us for further information by email counsel@cassons.co.uk or phone 0845 337 9409.

You can read here an extended version of this story as published by Counsel magazine in April 2010 and reproduced with their kind permission.

Avoiding the 50% tax rate

Andrew Hood, Bar Department Manager

The 50% rate of income tax takes effect from 6 April 2010 and, whichever shade of government we have following the General Election, it is likely to be around for at least a few years.

This new rate applies to taxable income above £150,000. Personal allowances will also be withdrawn from those with adjusted net income above £100,000 (reducing by £1 for every £2 of income above £100,000).  This produces an effective income tax rate of 60% on income between £100,000 and £112,950. Add to this your national insurance contributions, and your marginal tax rate can be as high as 61%.

If you are a self-employed barrister, what can you do about this? Depending on your accounting year, you may already be earning the profits that will be taxed at 50% (or higher) and, unlike a company director or employee, you cannot just decide to take a smaller salary to avoid this higher tax: you are taxed on the full amount of your profits, regardless of how much you actually withdraw from your practice bank account.

Here is an option for you to consider.  It may be better to suffer tax on more profits in the tax year 2009/10 at the 40% top rate for that year, than pay a further 10% (or 20%) next year or in future years. There are perfectly legitimate routes to achieving this, and one is peculiar to barristers alone.

Uniquely, barristers still enjoy the ‘cash basis’ for determining the profits to be taxed in their first seven years of self-employment after which the ‘normal’ earnings basis is applied.  The transition from ‘cash’ to ‘earnings’ basis requires a ‘catch-up’ charge which may be spread over ten years. You may consider electing to have some or all of the unexpired balance of your catch-up charge assessed to tax in 2009/10.  The top rate of 40% will be applied to the ‘catch-up’ charge rather than 50% or 60% over the next few years. It may also be possible to change your accounting date so that more profits are taxed earlier – at 40%. Of course both these suggestions result in tax being paid earlier, but at 40% not 50% or 60%.

The most appropriate solution for you will be specific to you, and will depend on a number of factors, such as how long you have been called to the bar, current and forecast profits, levels of disposable income and pension contributions, to name but a few. It is important to take advice on this before undertaking any course of action so please get in touch by email counsel@cassons.co.uk or phone 0845 337 9409.

Reminder: VAT returns must be made electronically from April 2010

Claire Hardwick, Bar Department

HM Revenue & Customs (HMRC) plans to phase out paper VAT returns from April 2010. After that date, if your turnover is over £100,000 (or if you are newly VAT registered) your return will have to be submitted online and you must pay VAT electronically.

There are a number of benefits to submitting a return online:
• Faster – no postal delays
• Secure communication
• Immediate confirmation of submission
• Up to an additional seven days to file and pay (plus three more days if you pay by direct debit)

When you submit a VAT return online, you must pay electronically. There are several options for doing this.

• Direct debit
• Internet, telephone banking or BACS direct credit
• Debit or credit card over the Internet using BillPay

If you are an existing Cassons client taking our Silk package, we will have already notified you that we have started the registration process in order for your filing to be completed online. Otherwise you need to register online.

Cassons budget briefing for barristers

Colin Tice, Tax Partner

Was Alistair Darling’s Budget speech really a Budget speech or pre-electioneering politics? As always, the small print in the Budget press releases will contain the detail. But there are few new announcements to impact on barristers.

There were no new announcements in relation to income tax and personal allowances. The additional rate of income tax at 50% for income over £150,000 was confirmed and this will be effective from 6 April 2010. Tax allowances and thresholds will be the same in tax year 2010/11 as for 2009/10. Personal allowances will be withdrawn from those with adjusted net income above £100,000 (reducing by £1 for every £2 of income above £100,000).  This produces an effective income tax rate of 60% on income between £100,000 and £112,950.

From 6 April 2010, the Annual Investment Allowance for capital expenditure on items qualifying for capital allowances will be doubled to £100,000 meaning that purchases of “plant and machinery” (such as furniture and office equipment) up to this amount can be written off against profits in full. But the allowance does not apply to cars. A new anti-avoidance rule will deny tax relief for losses on property if they arise due to AIA and are as a result of certain tax avoidance arrangements.

Investment income in the form of dividends faces a tax increase of almost 45% if you become liable to the 50% rate of income tax. This is because a 40%-rate taxpayer currently pays an effective rate of tax of 25% on the amount of the dividend received. From 6 April 2010, the top rate of tax means that dividends are effectively taxed at a new rate of 36.11%.

Capital gains tax stays at 18% which is significantly lower than income tax rates so there is still potential to invest for capital growth. The overall annual Individual Savings Account (ISA) subscription limit goes up from £7,200 to £10,200. As the tax restrictions on pension contributions for higher earners start to bite, it is worth noting that other tax efficient investments such as Enterprise Investment Schemes and Venture Capital Trusts remain available.

The inheritance tax (IHT) threshold will be frozen for 4 years. Assuming your personal wealth and/or asset values increase this means an effective increase in your potential IHT burden over that period.

The Budget introduced a relief from stamp duty land tax (SDLT) for first-time buyers of residential property of up to £250,000 for two years from 25 March 2010. But a higher SDLT rate of 5% will be introduced from 6 April 2011 for residential property exceeding £1 million. If you are considering buying an “expensive” property we recommend that you take professional advice on the tax implications.

Barristers need to be aware of the consequences of late filing of their tax returns and late payment of tax. An escalating series of penalties is to be introduced depending upon the number of failures within a set penalty period. Further penalties will arise if there is a prolonged delay in filing returns or paying the tax due. Until now the initial £100 late tax return filing penalty could always be avoided by payment of tax on time. This will no longer be the case and a penalty can be charged even if no tax is due. It is essential that your accounts and tax returns are prepared in good time not only to avoid these penalties but to assist you in your financial planning generally.

Please email us at counsel@cassons.co.uk or call 0845 337 9409 to discuss how we can help with your accounting and taxation planning.

You should not rely on it without taking individual advice based on the full facts of your case.  Information given is correct at the time of publication.

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