Electrification U-turn and its impact on the rail sector

Electrification U-turn and its impact on the rail sector

Electrification and modernisation plans re-commenced

On, off, on…

Just weeks after the General Election, the rail sector was dealt a devastating blow when the government ‘paused’ promised upgrades to major rail lines in the Midlands and the North of England. There were serious concerns over the future of inward investment and business confidence following the pause.

Peter Kennan, a Partner at Hawsons, who also Chairs Sheffield Chamber of Commerce Transport Forum, appeared on BBC and ITV news programmes back in June to express the disappointment felt by Sheffield City Region businesses following the announcement.

Major delays as new completion dates announced

However, the good news is that Network Rail is set to restart electrification of train lines and move forward with their plans. Secretary of State for Transport, Patrick Mcloughlin, has reversed his June suspension and has now pressed for urgency on these two important electrification schemes. This could mean wires across the Pennines by 2020, and wires reaching Sheffield from London by 2023. This is somewhat behind the original proposed completion dates of 2019, but is good news nevertheless. There is also good news for the Midlands as electrification of the line north of Bedford to Kettering and Corby will now be completed by 2019.

Speaking to the Sheffield Star about the announcement of the recommencement Peter Kennan said “We are delighted to welcome the news that the electrification of the Midland Mainline will resume and we will hopefully have electric trains from Sheffield to London by 2023.”

“A modern, efficient and environmentally friendly rail service to London is a key objective for our city business region. While noting some of the comments made following the announcement, work has to progress in stages from the present limit of electrification in Bedford, and Sheffield is at the extremity of the line. It is actually a big relief that the whole line will be electrified in due course and we feel the delay, although regrettable, is understandable.”

Electrification and the impact on business

Paul Wormald, Transport & Logistics Partner, said: “Whilst this recommencement is welcome news, the lack of detailed costing and implementation plans remains a concern, particularly in the light of delays and cost overruns on current electrification projects. One hopes that the Department for Transport and National Rail follow-up and deliver these projects which are absolutely critical for business growth in the Midlands and North of England.”

“Further plans for electrification and investment in modernisation will bring both opportunities and challenges for businesses involved in the rail industry, and across the Sheffield City Region and Midlands as a whole. For now, the long-term impact of such considerable changes is unknown, but it is essential that firms involved in the rail sector understand, and plan for, the likely business implications.”

More from our transport and logistics experts

You can find all of our latest transport and logistics sector news and newsletters here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Paul Wormald is a partner at Hawsons, working in the Doncaster office. He worked previously with two national firms of Chartered Accountants prior to joining Hawsons in 2001. For more information or advice on anything covered in this article, please contact Paul on [email protected] or 01302 367 262.[/author_info]

What is the best vehicle for tax purposes?

What is the best vehicle for tax purposes?

Operating a business tax efficiently is a key concern to all businesses. What is the best vehicle for tax purposes?

The choice of a suitable business medium, for example, sole trader, partnership or limited company may have a substantial impact on the level of reliefs, allowances and tax levied on you and that business. It is therefore essential to review the key issues to enable you to minimise tax liabilities. The briefing also introduces the issues which impact on changing your business structure from a sole trade or partnership to a company.

Tax and National Insurance (NIC)

To help manage the tax issues which we discuss here it is assumed that the individual or company has no other income or profit chargeable to tax and that no other expenditure or relief is available to relieve tax charges.

Unincorporated business

The taxable trading profits of a business run by an individual as a sole trader are taxed directly on the owner, irrespective of whether the owner draws the money from the business for personal use. The same applies to the profit share of a general partner in a partnership (including a member of a Limited Liability Partnership). The principle applies for both income tax and NIC.

Currently this means that a sole trader or partner whose taxable profit does not exceed £100,000 will be charged to income tax as follows:

  • the first £10,600 is tax free due to the availability of the personal allowance
  • the next £31,785 is charged at 20%
  • any further profits are charged at 40%.

Where taxable profits exceed £100,000 the personal allowance is reduced by £1 for every £2 in excess of £100,000 so that there is no tax-free allowance once income reaches £121,200.

If profits reach £150,000 the excess profits are taxed at the additional rate of 45%.

The position for NIC is more straightforward. The main liability is Class 4 which is paid on taxable trading profits as follows:

  • the first £8,060 is NIC free
  • the next £34,325 is charged at 9% and
  • any excess is charged at 2%.

Tips

Running a business as a partnership, with a spouse sharing profits equally, rather than as a soletrader may result in tax savings depending on the precise circumstances.

The incorporated business

When the trade is carried out in a company, the company not the individual initially suffers the direct tax charge on the taxable profit. The rate is 20%, irrespective of the level of the company’s profit.

The owners, who are generally both shareholders and directors, only suffer tax and NIC on any profits extracted from the company, so any profits retained in the company are sheltered from personal tax rates.

There are a number of different methods for the individual to extract profits, and tax rates and NIC may need to be considered to minimise liabilities. Currently, lower tax liabilities can arise on capital gains compared to income extraction but capital treatment is generally only available in limited circumstances, such as when the individual sells their shares or the company is liquidated. In the meantime, director/shareholders will need to extract income for personal living and this has a tax and in some cases a NIC cost.

The two common methods used are remuneration and dividend. Tax relief is generally available for director/employee remuneration including NIC costs but not for dividends.

Remuneration

Any form of cash remuneration (salary, bonus) and taxable benefits (medical insurance, car, etc.) are taxed as employment income attracting the normal income tax rates as outlined earlier. In addition, employment income (excluding benefits) attracts Class 1 NIC for both the individual and the employing company. This is 12% for the individual on any income in excess of £8,060 up to a limit of £42,385, then 2% on any excess.

The employer is liable for 13.8% Class 1 NIC on all earnings in excess of £8,112 with no upper limit and, although employees are not liable to NIC on benefits, generally Class 1A NIC is due from the employer at the same 13.8% rate.

Dividend

When a dividend is paid to an individual it is subject to different tax rates compared to other income due to a 10% tax credit being imputed on to the dividend. The effective rates (as applied to the cash dividend are):

  • basic rate taxpayers 0%
  • higher rate taxpayers 25%
  • additional rate taxpayers 30.6%

In many cases the overall tax cost to the company and the individual of remuneration is higher compared to a dividend.

The Chancellor, George Osborne, announced in the Summer 2015 Budget a shake-up in the way dividend income is taxed from April 2016.

Tips

Dividends are often used in combination with remuneration to obtain the most tax effective extraction of profits when the business is carried on through a company. A small salary can preserve entitlement to the state pension and allows the tax efficient use of the personal allowance.

How does a company compare with the sole trader or partner generating taxable profits in an unincorporated business?

At many levels of profit, business owners will pay less tax trading as a company rather than a sole trade or partnership. The NIC savings available to business owners if most of the profit is returned to the business owners as dividends are a significant factor in the savings.

Example

Anthony and Cleopatra make annual profits of £100,000 as a partnership. The business year end is 31 March.

As partners their total tax and NIC liability for the 2015/16 tax year is £25,584.

If they incorporate, each taking a salary equivalent to the employee nil rate NIC threshold (£8,060) and the balance as dividend there is:

  • no NIC liability
  • a corporation tax liability of £16,776
  • an income tax liability of £1,330

So the total tax and NIC liability as a company is only £18,106.

Whilst this shows that tax savings can be achieved by carrying on a business through a company, tax should not be the only factor considered before incorporating a business.

Effective use of losses when a business starts

One of the reasons many businesses start off as unincorporated is that the reliefs available to relieve any trading losses are generally more flexible than the equivalent available to a new company. The idea is that losses are more likely in the early stages of business development, so early and effective use not only saves tax but is cashflow beneficial. There are some caps to the use of loss relief for larger losses.

A tax loss could be created even though the business is profitable in the early years. This can occur if the business incurs significant expenditure on plant and machinery.

CGT reliefs

The main relief available to business owners to reduce the tax on gains on certain disposals is Entrepreneur’s Relief (ER). This is available on gains of up to £10 million on a qualifying material business disposal and applies to both unincorporated business interests and company shares. The rate of capital gains tax is 10% rather than 18% or 28%. A property personally owned but used in a trading partnership or company may also qualify.

Detailed conditions apply and it is important to plan at least 12 months ahead to secure the relief effectively e.g. an individual with trading company shares must have held 5% and be an officer/employee of the company for the 12 months leading to the disposal.

Business Property Relief (BPR)

The key inheritance tax (IHT) relief for trading businesses is generally available at a rate of 100% for both unincorporated business interests and unquoted company shares on lifetime gifts and at death.

Where a trading property is not held on the balance sheet of a partnership or a company as it is personally held outside the business, this will only qualify for 50% BPR at most. In addition, in relation to a property used in your trading company there is a risk of no BPR being available unless you have and retain control of the company’s voting power.

Impact of incorporation

If circumstances induce you to incorporate your existing unincorporated business to obtain income tax and NIC savings, there will be a number of factors for you to consider.

Key non tax factors include being aware of the legal and accounting formalities of operating a company and ensuring that practical matters of the transfer are considered e.g. new business stationery and informing customers, suppliers and the authorities such as HMRC.

Incorporation means the trade ceases for income tax and a new trade starts in the company. This may lead to profit distortions in the final period if careful planning is not considered. It also often involves the disposal of assets to the company which can impact upon both capital allowances and capital gains.

Properties are often retained in personal ownership. This is generally done to minimise the overall tax charges on a future disposal of the property as corporation tax would arise on any gains and also personal tax on extracting the rest of the profit. It also avoids Stamp Duty Land Tax which may apply on the transfer. Gains can also arise on the transfer of goodwill.

A recent change potentially restricts the availability of ER on the incorporation of a business if there is a sale of goodwill involved.

Example

Jack decides to incorporate his 10 year old trading business. The goodwill is valued at £500,000. Under the previous rules, Jack could sell the goodwill to the company and leave the consideration outstanding. ER would have been due on the gain. Jack could then draw against this money in the future with no further tax liability. In addition, the company could have claimed tax relief on the purchase.

For disposals on or after 3 December 2014, no ER is available for Jack and no tax relief is given to the company.

However, there are still planning opportunities available and ways of transferring businesses to companies tax-neutrally. Planning is needed in particular to:

  • maximise the capital allowance position for your circumstances
  • minimise the impact of tax liabilities including income tax, NIC and CGT
  • consider the cash flow impact of the timing of any tax payments on changeover

Once in a company structure any decision to transfer back to being an unincorporated business is also a trade cessation with a disposal of chargeable assets. The critical difference is that there are fewer reliefs available to ensure the process is tax efficient. This emphasises the point that long-term considerations should be taken into account as well as short-term tax advantages in choosing and changing business structure.

Many of the issues contained in this briefing have detailed rules which must be properly considered to achieve the desired outcome, so please contact us to review the areas suitable for your specific aims.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Stephen Charles partner

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.[/author_info]

Chancellor gives Annual Investment Allowance certainty

Chancellor gives Annual Investment Allowance certainty

The Chancellor announced in the Summer 2015 Budget that the Annual Investment Allowance will be set permanently at £200,000 from 1 January 2016. He has previously said that this would be included in the Autumn Statement, but this earlier announcement provides welcome certainty for businesses.

What is Annual Investment Allowance?

The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business, up to an annual limit and is available to most businesses. This recent article explains the importance of this tax relief for the capital expenditure plans of a company or business.

The details

The AIA was increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. However it was due to reduce to £25,000 after this date. The level of the maximum AIA will now be set permanently at £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.

Where a business has a chargeable period which spans 1 January 2016 there are transitional rules for calculating the maximum AIA for that period which operate as on previous occasions when the AIA has dropped. There will be two important elements to the calculations:

  • a calculation which sets the maximum AIA available to a business in an accounting period which straddles 1 January 2016
  • a further calculation which limits the maximum AIA relief that will be available for expenditure incurred from 1 January 2016 to the end of that accounting period.

It is the second figure that can catch a business out as demonstrated by the following example:

If a company has a 31 March year end then the maximum AIA in the accounting periods to 31 March 2016 will be:

9 months to December 2015 three quarters of £500,000 £375,000
3 months from January 2016 one quarter of £200,000 £50,000
Total annual AIA using first calculation £425,000

This is still a generous figure. However if expenditure is incurred between 1 January and 31 March 2016 the maximum amount of relief for will only be £50,000. This is because of the restrictive nature of the second calculation. Alternatively, the business could defer its expenditure until after 31 March 2016. In the accounting period to 31 March 2017, AIA will be £200,000. However, tax relief will have been deferred for a full year.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Stephen Charles partner

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.[/author_info]

Summer 2015 Budget summary and key details

Summer 2015 Budget summary and key details

Summer 2015 Budget

George Osborne delivered his Summer 2015 Budget yesterday, Wednesday 8th July, less than four months after he delivered the last one. Since his last Budget, in March, a lot has happened – including, in particular, the Tories’ election victory.

Read our Summer 2015 Budget summary and key details.

Our summary focuses on the issues likely to affect you, your family and your business including the changes to tax on dividends and inheritance tax. To help you decipher what was announced we have included our own comments. If you have any questions please do not hesitate to contact us for advice.

 

Stephen Charles partner

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.[/author_info]

What does the Network Rail ‘pause’ mean for business?

What does the Network Rail ‘pause’ mean for business?

What does the Network Rail ‘pause’ mean for business?

In 2013 a five-year plan was announced to electrify the route from London to Sheffield through the East Midlands.

Just weeks after the General Election, where there was a strong focus on the proposal of a Northern Powerhouse to boost economic growth in the North of England, the government has ‘paused’ promised upgrades to major rail lines in the Midlands and the North of England.

The  Secretary of State for Transport, Patrick McLoughlin, announced yesterday that the plans for the electrification project would be ‘paused’,  with rising costs and missed targets making the £38.5bn plan untenable. The Transport Secretary also blamed Network Rail, saying it should have foreseen that the changes would cost more.

What does the Network Rail ‘pause’ mean for Sheffield?

Peter Kennan, tax partner at Hawsons, who also Chairs Sheffield Chamber of Commerce Transport Forum, appeared on BBC and ITV news programmes last night to express the disappointment felt by Sheffield City Region businesses at yesterday’s announcement.

Peter said: “A ‘pause’ was the announcement, but the issue is how long is that pause and could the whole electrification project be kicked into the long grass as too costly and difficult to achieve in a time where Network Rail has to rein in and get better control of its finances.  Worse still, could the electrification from London to Sheffield be extended but finish short of Sheffield, leaving the city region at a competitive disadvantage? Budget cuts could always ultimately lead to that conclusion.”

“Businesses in Sheffield City Region deserve better than this. Under-investment in the Northern cities has been endemic for decades and this latest setback is a major disappointment and points to a cooling of ambition to achieve a credible Northern Powerhouse.”

Peter Kennan ITV news

Source: ITV news

Watch Peter’s interview on ITV news

What does the Network Rail ‘pause’ mean for businesses across the North of England?

Paul Wormald, partner at Hawsons, and Transport & Logistics expert, said: “The announcement yesterday will undoubtedly have a damaging impact on the economy, and particularly on businesses throughout the rail sector. The impacts on the supply chain of many rail businesses are likely to be on budgets, cash flow forecasts, financing lines, capital expenditure plans and recruitment plans.”

“With growing pressures to maintain margins and mounting uncertainty surrounding paused infrastructure plans, businesses within the rail supply chain are going to find it increasingly difficult to budget and plan ahead. Any delay, or worse, a cancellation, of the proposed rail upgrades, is going to lead to increasing concerns in regards to inward investment and business confidence. The sector is being left in limbo.”

Commenting on what this pause may mean for the Northern Powerhouse, Paul said: “The rail network in areas of the North of England is out of date and in need of a major overhaul to boost the Northern economy. With concerns now growing over the integrity of the proposal of the Northern Powerhouse, following yesterday’s announcement, the next few months promises to be eventful for all involved in the sector.”

More from our transport and logistics experts

You can find all of our latest transport and logistics sector news and newsletters here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Paul Wormald is a partner at Hawsons, working in the Doncaster office. He worked previously with two national firms of Chartered Accountants prior to joining Hawsons in 2001. For more information or advice on anything covered in this article, please contact Paul on [email protected] or 01302 367 262.[/author_info]

Planning for capital expenditure in the next few months

Planning for capital expenditure in the next few months

Planning for capital expenditure in the next few months 

For many businesses the prospect of obtaining a 100% tax deduction for the cost of plant and machinery purchased by the business is attractive.

Announcement from the Summer 2015 Budget

The Chancellor announced in the Summer 2015 Budget that the Annual Investment Allowance will be set permanently at £200,000 from 1 January 2016. He has previously said that this would be included in the Autumn Statement, but this earlier announcement provides welcome certainty for businesses.

What is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) provides such deduction to many businesses for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.

The maximum annual amount of the AIA was increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. However it was due to return to £25,000 after this date. George Osborne announced in Budget 2015 that following conversations with business groups this would be addressed in the Autumn Statement and would be set at a much more generous rate.

So, does that mean there is little time pressure on bringing forward capital expenditure plans?

Not necessarily. There are two reasons why you may wish to press ahead with your plans. The first reason is the straightforward point that tax relief is available for the expenditure on an accounting period basis. For example if you have a 30 September year end, expenditure incurred between 1 October 2014 and 30 September 2015 reduces the same period’s tax liability.

The second reason is the effect of moving from a higher to a lower annual amount of AIA. The amount of the AIA from 1 January 2016 is not known but is likely to be considerably less than £500,000.

On the previous occasions where there has been a change in AIA, there have been transitional provisions to calculate the amount AIA in an accounting period which straddles the date of change. If the transitional provisions for the 1 January 2016 are similar to the previous changes, there will be two important elements to the calculations:

  1. A calculation which sets the maximum AIA available to a business in the whole accounting period which straddles 1 January 2016.
  1. A further calculation which limits the maximum AIA relief that will be available for expenditure incurred from 1 January 2016 to the end of that accounting period.

It is the second figure that can catch a business out.

Example

Let us assume the new AIA is £200,000.

A company has a 31 March year end.

The maximum AIA in the accounting period to 31 March 2016 will be:

9 months to 31 Dec 2015 (three quarters of £500,000)                        £375,000

3 months from 1 Jan 2016 (one quarter of £200,000)                           £50,000

Total annual AIA using first calculation                                                    £425.000

This is still a generous figure. However, if expenditure is incurred on or after 1 January to 31 March 2016 the maximum amount of relief for that expenditure will only be £50,000. This is because of the restrictive nature of the second calculation.

Alternatively, the business could defer its expenditure until after 31 March 2016. In the accounting period to 31 March 2017, Annual Investment Allowance will be £200,000. However tax relief will have been deferred for a full year. In tax terms the moral of the tale is for the business to ensure that significant expenditure is incurred before 1 January 2016.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Stephen Charles partner

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.[/author_info]