Latest News for Chartered Accountants London

We are pleased to announce that Richard Turnbull was appointed an Audit manager on 1st May 2007. Richard has worked for Bowker Orford since January 2006, following qualifying with a regional office of a national firm.

Richard has wide experience of corporate clients, both large and small, as well as an increasing involvement with Charities, Pension Schemes and Trusts.

We are pleased to announce that Peter Davis has joined the Partnership. Peter was trained by a medium-sized firm in London, and following two further positions with London Accountants, set up his own practice in Bury St Edmunds in 1993. We have known Peter for over ten years and are confident his experience will be of great benefit to clients.

Peter’s experience covers a wide range of clients, both corporate and personal, and he has particular experience in the music and entertainment world, computer software companies, and other hi-tech clients.

Peter is married with one son, and lives in Bury St Edmunds.

After 38 years with Bowker Orford, Michael Orford has taken the decision to reduce his work involvement from 1st May 2007 and retires as a Partner on that day. He is continuing to act for the firm as a Consultant, and will be still heavily involved in client work for some 3 days a week.

Michael trained as an accountant with a medium sized international firm and joined his father's firm Bowker Orford in 1969 to set up and run their new computer bureau. He became a partner in 1971 and, whilst servicing a wide range of clients, was responsible for overseeing many of the administrative functions of the firm, including the firm's information technology systems.

During his time with the firm Michael developed considerable experience in dealing with clients in the music and entertainment industry, as well as acting for a number of computer and hi-tech clients. He is a founder member of the Institute of Chartered Accountants Entertainment and Media Group and serves on their Steering Committee.

Michael is married with four grown-up children and five grandchildren, and lives in Haslemere, Surrey. He and his wife maintain a strong interest in the performing arts and are both active members of a local amateur film production group. He is hoping to have more involvement in this hobby in his semi-retirement, as well as spending a little more time in their house in Southern Spain.

There has been extensive debate over the last couple of years regarding the time at which a service business should recognise income (sales). The uncertainty is over and in addition HM Revenue and Customs (HMRC) announced a concession on the matter in the Pre Budget Statement at the end of last year.

Unfortunately during the 1990’s and into this decade some businesses adopted what are known as ‘aggressive earnings policies’. This means that they included sales in their accounts before they had actually done the work or provided a service.

This was true for many companies in industries such as telecoms and construction and not just the high profile collapse of companies such as Enron and WorldCom. As a result the governing body for the Accountancy Profession issued a directive (know as ‘Application Note G’) which requires a business to recognise sales at the time it fulfils its contractual obligations to its customers through the supply of goods or services. This is set out below.

Accounting requirements

Although the requirements of Application Note G are clear when dealing with the sale of goods there was a great deal of discussion regarding its effect on service businesses. Further guidance was issued within the Accounting Profession (known as UITF 40) which looked at how service businesses should comply with Application Note G. The outcome is that where services are provided over time sales should be recognised in the accounts as the services are provided.

This means that where a service contract is partially complete at the year end the proportion of the work done will be included in sales and debtors at selling price rather than in work-in-progress (WIP) at cost, and consequently profit will be recognised earlier.

The only contracts not affected by this are where the work is speculative (ie not subject to a contract) or contingent (ie there is no certainty of income until the outcome of an uncertain future event).

These changes are complex and we will need to review carefully all contracts when we prepare your next accounts and determine what adjustments are necessary to comply with the new mandatory rules.

The new rules will apply to your first accounting period which ends on or after 22 June 2005.

Tax effects

As a result of including many partially complete contracts in sales and not WIP there will be a one off increase in profit in the first year. This could be significant and will be subject to tax. Our profession was aware that this could cause hardship to many small businesses and made strong representations to the Government to provide for some relief.

We at last know the tax treatment. The government announced, in the Pre-Budget Report on 5 December 2005, that it will introduce legislation in the Finance Bill 2006 to spread the tax impact (referred to in tax law as ‘adjustment income’) of UITF 40 over three years, with possible spreading of up to six years. This relief will be available to all businesses.

Businesses would normally have had to pay the extra tax at the end of January 2007, or January 2008, depending on their year-end. The final details may not be available until the Finance Bill is published, usually in April or May, but HMRC has written to the Accountancy and Legal Professions outlining the proposals.

Businesses will need to calculate the adjustment income and 1/3rd will be taxed in the first year; that is, for the first accounting period ending after 22 June 2005, and a further 1/3rd in each of the next two years. However, a further test may allow the spreading of the charge for up to six years.

UITF 40 – Revenue recognition for service businesses

The following example illustrates how the tax rules will work. Tax Treatment - Example

John’s business will be severely affected by UITF 40. The normal taxable profit is £100,000 and the adjustment income is £150,000.

1/3rd of the adjustment income is £50,000 but the additional taxable income each year is compared to 1/6th of the taxable profit of £100,000; that is, £16,667.

If the profits remain unchanged over the next five years, the addition to the taxable profits will be capped at £16,667 each year.

In the sixth and final year, that amount and the balance of the untaxed adjustment income will also be taxed.

This will create a balancing charge of £66,665 in year six, being £150,000 less 5 years at £16,667.

Other tax-related issues

There are other possible tax consequences that may affect the computation of the additional charge; for example,

• trading losses brought forward will be able to be set against it;
• it will be classed as income for computing tax credits;
• it will not be subject to Class 4 NICs; and
• it will be classed as earnings for pension purposes.

The Customs have changed the rules that govern how VAT can be claimed back on business mileage allowances paid to employees.

The change affects the situation where employees purchase fuel themselves and then make an expenses claim based on a mileage allowance or their actual fuel costs.

From 1 January 2006, this claim must be supported by a garage VAT receipt in order for the employer to be able to reclaim the VAT back on the fuel element of the expenses reimbursed. A proper VAT receipt will be required. A debit or credit card slip, which most people are routinely given at the garage, is not sufficient.

Which employees are affected by the new rules?

The change affects those employees driving company cars, as well as those employees who claim a mileage allowance for driving their own cars for business journeys.

The changes do not affect employees who buy their fuel using an employer-provided fuel card, credit or debit card or a garage fuel account, where garage VAT receipts are already required to support a claim.

What do the VAT receipts have to cover?

VAT may only be reclaimed on the cost of fuel for business use and the receipts only need to cover this amount.

Company car drivers who are paid a fuel-only rate will need VAT receipts to at least cover the full amount of the mileage expenses claimed.

Where employees are paid a rate per mile, for example 40p, for using their own car for work, the fuel element included in these expenses is between 9p and 16p per mile. VAT receipts will only be required to cover the fuel element of the expenses. Therefore, if 100 miles at 40p per mile are claimed (£40), the VAT receipts submitted need to be for say £12, where your business reclaims the VAT at an average rate of 12p per mile.

VAT receipts should be retained as proof of the purchase. These receipts will generally be less detailed garage VAT receipts employees obtain from garages.

The fuel prices per mile rates (the ‘fuel element’ above) used to determine the business fuel cost remain unaffected. Customs publish their own rates but also accept rates set by recognised motoring agencies, for example, the RAC, AA etc.

To summarise, the only practical change to the current system is that VAT receipts must be kept to support any VAT claim on business mileage. It is important that these receipts are kept in the same way as those for your other business expenses.

The changes come into effect from 1 January 2006, regardless of the VAT return period end date. Whilst Customs have acknowledged that you will need a little time to make the necessary changes to your systems, so as to hold VAT receipts in support of all of fuel claims, it is necessary to sort out internal procedures as soon as possible.

Are there any other practical considerations?

• Customs accept that the amount of the VAT receipts in many cases will not match the VAT reclaimed in respect of business fuel in any one claim period and that receipts may cover more than one period, particularly where fuel is purchased towards the end of a period. However, the receipts must always at least cover the amount of VAT reclaimed.



• A claim cannot be supported by a VAT receipt which is dated after the dates covered by the claim. This means, in practice, that it may be advisable to arrange for employees who use, or may use, their cars for business purposes to retain all their garage VAT receipts. This will ensure that, at the end of the claim period, the value of business fuel is covered by receipts.



• These VAT receipts will need to be kept in the same way as all other VAT receipts. Customs may well review these receipts in years to come and failure to keep them could result in your business mileage VAT claim being disallowed. Consequently, interest, penalties and a repayment to Customs could become due.

PENSIONS - THE NEW RULES

Pensions are set to become much simpler to understand, following some key changes to the tax rules that will be introduced on 6 April 2006 (known as A-Day). The aim of this report is to explain the main changes. It is important to obtain specialist advice about your pensions strategy whether you are an employer, an employee or you are self-employed.

The new rules do genuinely have the simplifying effects intended by HMRC (Her Majesty’s Revenue & Customs, formerly the Inland Revenue). But a few aspects have turned out to be very complex, and these changes are so crucial that you should be making a complete reappraisal of your financial planning strategy.

The changes mainly affect how much can be contributed to pensions, the limits on the benefits that can be withdrawn from them and how those benefits can be taken. The new rules will generally apply to all pension schemes regardless of when they were set up.

Unchanged features

Some key aspects of pensions have not changed:

• Contributions normally qualify for full tax relief.
• Employer contributions do not attract National Insurance.
• The contributions are invested in a fund that accumulates free of UK tax on investment income and capital gains, although pension funds cannot claim the tax credits on dividends from UK shares.
• Part of the pension fund can be taken as a tax-free lump sum (although the rules have changed) and the rest as a taxable income for life.
• Life assurance can be provided under pension plan rules and the premiums are allowable for tax, although the rules have changed.

Annual allowance for contributions

There will be a big increase in the maximum you will generally be allowed to invest into your pension each year and obtain tax relief. You will be able to contribute up to 100% of your earnings. Your employer may be able to contribute more and the overall annual allowance will be £215,000 in 2006/07 – this will rise in later years. Even if you have no earnings, you will still be able to invest £3,600 a year before tax relief.

Lifetime allowance

Everyone will have a maximum permitted tax-exempt fund (or its equivalent in retirement benefits). This will be called the lifetime allowance. In 2006/07, it will be £1.5 million and will rise in later years. Any benefits you have built up before 6 April 2006 can be protected, with the proper advice.

Tax-free lump sum

The maximum tax-free amount will be 25% of the fund. Many people could therefore end up with more tax-free cash when they retire, but a few will get less than they might have done under the current rules. There are also special provisions that can protect rights to excess tax-free cash built up before 6 April 2006.

When you can retire

The earliest age at which most people will be able to retire will rise from 50 to 55 on 6 April 2010. Flexible retirement will be encouraged by allowing people to carry on working for employers while receiving a pension from the same employer’s scheme.

Death benefits before retirement

The maximum lump sum death benefit under the new pension rules will be the lifetime allowance, ie £1.5 million in 2006/07 – normally free of all tax.

Income in retirement

When you come to draw your retirement benefits, there are some important changes, but the main options will be very similar to the current choices:

• If you are a member of certain types of group scheme (eg one linked to your final salary), you will probably receive a scheme pension paid out by the scheme itself.
• If you have an individual scheme such as a personal pension, you may receive a secured pension – normally in the form of a lifetime annuity.
• You might want to take an unsecured pension, such as withdrawals directly from your pension fund. These will operate very much as they do now; for example, they must stop at age 75. But you will be able to take a new option – an alternatively secured pension. This is a restricted form of pension fund withdrawal that could provide some limited death benefits. Death benefits under both unsecured pension and alternatively secured pension may be subject to inheritance tax.

Investment rules

The restrictions on pension investment by self-invested schemes will be altered. However, the government has changed its mind about pension scheme investment in residential property and certain other assets, such as fine wine, art, classic cars and antiques. They are now on the list of ‘prohibited assets’ for pension schemes.

There will be tax penalties for investment in these ‘prohibited assets’; which will include a 40% tax charge on the scheme member and sanctions on the scheme itself.

The rules on how much such pension schemes can borrow – eg to buy commercial property – will be tightened up. In some instances, the amount that schemes can lend to their sponsoring employers will also be more restricted, although loans in existence before 6 April 2006 will not be affected.

Penalties for exceeding limits

Penalties will be higher than at present, eg for exceeding the lifetime allowance. You could find that 55p is taken as tax for every extra £1 in your pension fund.

Action checklist

Here are just a few of the action points to consider:

• If you are thinking of retiring before 6 April 2006, consider deferring if it would mean getting higher tax-free cash or more flexibility.
• Take advice on protecting your pension benefits. If it looks as though they will be near or above the £1.5 million level on 6 April 2006 you should talk to us well before 6 April 2006.
• If your tax-free cash at 6 April 2006 might exceed £375,000, you should ask for advice about safeguarding it under the complex special rules.
• Review the investment strategy for your self-invested pension scheme.
• Explore the scope for borrowing by your pension scheme before the new restrictions start to apply.
• Consider now whether you want to make loans from the pension scheme to the sponsoring employer.
• Think about the ways you want to draw your retirement benefits.
• Ask for a review of any unapproved schemes of which you are a member. The rules for these schemes are also changing.
• Review your life assurance. You may well be able to qualify for full tax relief on premiums arranged under the new rules.
• If you are an employer, you should review all your pension arrangements and rules.

Timescales are relatively tight, so you should get advice as a priority.

This guide is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking action on the basis of the contents of this publication. The guide represents our understanding of the law and HM Revenue & Customs practice as at January 2006, which are subject to change.