Blevins Franks

With everything that’s been going on in the financial markets and the media taking every opportunity to sensationalise each bit of news, it’s worth taking a step back and try to see the wood for the trees again.

The starting point of this exercise is to ask why people should consider investing in stock and shares in the first place?

Companies wanting to raise new capital to expand typically have three main options available to them. Firstly, they can borrow it from the bank for which they will, over time, repay the capital plus interest. Secondly, they can offer investors fixed interest bonds for which, over time, they will repay the capital and higher interest. Lastly and alternatively they can issue shares thus effectively selling some of the company to external shareholders.

In respect of borrowing from the bank or by fixed interest bonds, companies will do this if they believe that they can re-invest the loan to make more money than the costs of borrowing.

When companies issue shares to provide new capital for expansion, they do this because the company owners believe that they can re-invest the funds to make greater net gains, even though they will own less of the business as a result.

So, the first fundamental is that equities will be expected to outperform both cash and fixed interest bonds. The second fundamental is that in order to reduce the risk to individual companies, investors should spread their risk by investing in funds run by professional managers who spread the fund assets over many companies in different sectors.

Once a company has issued shares and they are available on a stockmarket to investors, the next question is: what drives the price of the shares on any given day? The simple answer is demand and supply - i.e. how many people want to buy the shares and how many want to sell them.

It’s similar, for example, to selling a porcelain collection at an auction. A seller is hoping that all of the potential buyers at the auction want to buy porcelain and that they are the only one selling. Buyers are hoping that they are the only ones buying porcelain and that there are many sellers. If there is competition between buyers this should drive the price up. If the reverse happens and everyone is selling porcelain to very few buyers, this will drive the price down.

This example translates through to the price of shares: if there are more people wanting to buy shares than the number who want to sell them then the price will go up; if there are more sellers than buyers, the price will go down.

That’s not to say that company profit forecasts and economic results are not important. Every investor, whether they are buying shares or property or antique collections, wants to believe that they are buying something that will make them a profit over time. They are typically happy to pay over the odds for something that they feel will still make them a profit. In the case of company shares however, if either the company profit announcements are lower than expected or new economic data indicates factors such as unemployment which will translate into people spending less on companies’ products or services, this inevitably results in investors re-considering whether they should keep the shares or sell and re-invest in something that will give them a better return.

This means that rather than company or economic news directly impacting the price of shares, it’s the emotions of investors who use this news to evaluate whether they should buy sell or hold depending on their own circumstances.

The herding mentality of the human race is never more evident than in the stockmarkets where we are all sellers or all buyers. Unfortunately market data shows that by the time the equity buying band wagon has reached the maximum, that’s the time when markets start falling. Equally, when the market has reached the bottom, that’s when no one is buying when they should be.

Looking again at the porcelain auction example, if you owned a collection you wanted to sell but learned that every other porcelain collector would be at the next auction trying to sell their collection, you would probably say away. Alternatively, if you were a buyer, then surely that’s the auction you would want to be at.

It’s strange and unfortunate that when it comes to stockmarkets, investors forget this logic and buy when shares look expensive and sell them when they are cheap because everyone else is also trying to sell theirs.

So, the third fundamental is that investors should not follow the herd as those that do will generally lose out. This is because they will have bought shares at a time when competition for them is high and they will end up selling at a loss at a time when everyone is trying to sell theirs as well.

The fourth fundamental is that as a result of the human herding mentality, share market movements tend to be over exaggerated, both on the way up and way down, and are driven partly by emotion rather than logic.

So where does this leave us?

This is an uncomfortable time with poor economic news continuing to filter through, but let’s take a step backwards in order to look forward.

Longevity is increasing so we are generally living longer and across the globe there is a population boom. In essence, there are an increasing number of consumers to which companies can sell their goods and services to. The industrialisation and economic growth and freedom of China, India and the other emerging markets with far lower cost bases than the West will allow companies to continue to move their manufacturing to cheaper markets, thus protecting and helping them to improve their profits. Irrespective of the short term, these trends continue to support the view that equities remain a vital component to protecting investors’ wealth (after taking account of inflation) in the longer term. In addition, interest rates are falling which enables companies to borrow for growth at lower costs and with the current lower oil prices companies are able to distribute their goods to consumers at lower costs, thus helping profits.

We may or may not have seen the bottom of the stockmarkets yet - however, as a result of the herding mentality resulting in wholesale selling of shares, it appears to have created a false doomsday scenario. This gives investors the opportunity to purchase equities within a wide spread and diversified portfolio at what may prove in the future to be bargain prices.

Investors holding cash should now consider investing part of their wealth in equities. Existing investors should not sell and in fact could consider increasing their exposure to equities at this time.

It is essential that you seek professional advice before making any investment decisions.

Written by Bill Blevins

There may be times when your company cash flow just isn’t there to meet your payment requirements.

One option you may consider is taking out a loan to assist you in the short term.

There are two options available, a company loan or a personal loan.

To apply for a company loan, in almost all cases you will need to have company reports; cash flows and accounts to show to the bank before they will consider your application. The interest rates applied to a business loan is generally higher than those applied to personal loans.

To apply for a personal loan the bank will need proof of your income, usually by way of pay slips and self assessment tax returns. Generally, personal loans as opposed business loans are a speedier way to get your hands on the cash.

The Benefits

You can take out a personal loan then lend that money to your company. The company has to repay you the whole of the amount. The accounting entries would be to debit the amount to the director’s loan account (DLA), then preferably set up a monthly standing order to your personal account for the repayments which will be credited to the DLA. Make the bank loan payments from your personal account as to not compromise the loan terms with the bank.

The total interest on the loan is deductible against the profits of the company; but you will need to declare the loan on a P11d which you can report as a business transaction, therefore not incurring any tax or class 1a NICs.

The Downside

Remember that the loan is a personal loan not a business loan. Any default on repayments will mean that the bank comes back to you personally for redress.

If you are a client and would need advice, please contact your Personal Accountant. If you are not, please feel welcome to book a free initial consultation.

By Phil Richards

Many building firms are now holding completed residential property which is proving difficult to sell in the current property market. One solution is to let out this property for a short period in the expectation that property prices will recover.

Ordinarily most of the VAT paid on construction costs is recoverable. Unfortunately rents received from the letting of residential property are an exempt supply for VAT purposes. Accordingly a builder who both constructs and lets residential property is considered to be a “Partially Exempt” trader. Potentially a proportion of the VAT recovered on the construction work may have to be paid back!

The builder may have to:

* adjust the VAT recovered on his submitted VAT returns

* restrict the VAT to be recovered on current and future VAT returns

* or do both

Fortunately there is an escape route! If the amount of input tax which can be attributed to the exempt rental income is below a defined “de minimis” amount, no adjustment to past or future returns is required - VAT input tax can be recovered in full.

Provided the exempt input tax is below:

* £625 per month, on average, up to £7,500 per year; and

* is not more than half of total input tax ,

then the exempt input tax is de minimis and recoverable in full.

If you are a client and house builder, and considering the rental of residential building stock, please contact your Personal Accountant at an early stage so we can help you through the partial exemption calculations which are tedious and complex. If you are not, please feel welcome to book a free initial consultation.

By Phil Richards

Many UK share investors will have picked up shareholdings in Spanish companies in recent years. The most common example is Banco Santander who have acquired a number of UK building societies. (Abbey National 2004, the Alliance & Leicester, and more recently they have bid to acquire parts of Bradford & Bingley.)

If you hold Santander shares, dividends you receive after 5 April 2008 now benefit from the same 10% notional tax credit as UK shares. For basic rate tax payers there is no real change.

But what happens if you sell your Spanish shares?

Capital Gains Tax

Many UK holders of Santander shares will have paid nothing for the shares as they were acquired when the underlying UK building societies were demutualised many years ago. Subject to the usual rules your disposal may or may not create a capital gains tax liability in the UK.

What many shareholders may not realise is that they also have a legal obligation to file a tax form in Spain.

The completed Form 210 and certificate of UK tax residence must be delivered in person to the Spanish tax authorities, generally in Madrid. This means that shareholders will normally have to engage the services of a Spanish tax representative in order to have the documents filed.
Form 210 must be filed within 30 calendar days of the date of the sale or gift. The failure to file the form will give rise to a penalty of approximately (Euro) €100, even if there is no tax to pay. This penalty may increase to approximately €200 if the form is not filed before the Spanish tax authorities have raised a demand.

If you are a client and would like some advice please contact your Personal Accountant. If you are not, please feel welcome to book a free initial consultation.

By Phil Richards

The Government are always pushing for us to become ‘greener’ and have put some incentives in place to entice us to conform.

There are a number of formal “tax-free bike schemes” which have been developed in response to the Government’s “Green Transport Plan”.

So if you fancy becoming ‘greener’ and fitter consider ditching the car and pedalling to work.

Basically your employer buys a bike and any equipment relating to it and hires it to you until you have paid back its full cost, usually over a year.

The tax break is facilitated because you pay for the bike by agreeing to reduce your monthly/weekly salary, before tax and NIC is deducted under the ’salary sacrifice scheme’. Paying in this way you can meet your repayments out of your pre-tax rather than post taxed income.

This can translate to almost a 50% cash discount on the price of a new bike. Higher rate tax payers will benefit more from the scheme.

The scheme applies to employees only, with a contract of employment and earnings that are at or above the national minumum wage level once the salary sacrifice has been applied.  Please see further details on the ’salary sacrifice scheme’ on the HMRC website.

If you are a client and would like advice please contact your Personal Accountant.  If you are not, please feel welcome to book a free initial consultation.

By Phil Richards

HMRC have published their new Advisory Fuel Rates for company car users with effect from 1st January 2009.

The changes have been made in consideration of the economic climate changes.

The new rates are as follows:

Engine size               Petrol            Diesel           LPG

1400cc or less                  10p                      11p                7p

1401cc-2000cc                12p                      11p                9p

Over 2000cc                     17p                      14p              12p

The Fixed Profit Mileage Scheme (FPMS) remains unchanged with the first 10,000 miles payable at 40p then 25p thereafter for cars, 24p for all mileage for motorcycles and 20p for all miles by bicycle.

If you are a client and require any advice please contact your Personal Accountant. If you are not, please feel welcome to book a free initial consultation.

By Phil Richards

HM Revenue & Customs (HMRC) have informed advisers and professional bodies in the UK about their next steps in preventing/catching tax evasion through the use of offshore bank accounts.

Following comments made by the Financial Secretary to the Treasury to the Fight Against International Tax Evasion Conference in Paris on 21st October, HMRC issued a briefing to the Compliance Reform Forum (CRF).
The CRF is a forum in which HM Revenue & Customs (HMRC) consults and communicates with representative organisations about changes to HMRC compliance checking activities. The standing membership of the CRF comprises representatives from relevant HMRC directorates and the professional associations and institutes for accountants and tax practitioners, the Federation of Small Business and the Low Incomes Tax Reform Group.

The first part of the briefing was a summary of its 2007 initiatives and next moves to be taken against those failing to declare their offshore earnings:
“Following rulings against a number of major financial institutions, HMRC obtained details of approximately 400,000 offshore bank accounts belonging to people with UK addresses. We believe the 400,000 accounts relate to 260,000 individuals and estimate that up to 25% of these individuals had not included income and/or interest from these accounts on their returns.

“In April 2007, HMRC launched the ODF [Offshore Disclosure Facility], enabling investors with offshore accounts to disclose tax due on income and gains not previously included in their returns. 62,000 investors came forward in the initial registration stage, which closed on 22 June 2007. Around 45,000 of these came forward to disclose and pay by the 26 November 2007 deadline. Those who notified, made a full disclosure by 26 November 2007, and paid the amounts due were able to take advantage of the fixed 10% penalty.

“HMRC is pursuing those with offshore accounts who did not come forward under the arrangements where there is a risk that the full amount has not been declared. In the most serious cases, criminal investigation may follow. The scheme has so far recovered around £400 million in unpaid revenue. The cost to the Exchequer of running the scheme has been approximately £6.5 million.”
The briefing went on to confirm press reports that HMRC was considering offering a second ODF next year:
“During the evasion conference in Paris, the Financial Secretary informed members of the press that HMRC would be giving offshore account holders a new disclosure opportunity in 2009. At this stage details are to how it will work are not available; it will first consult with the CRF.
“We are currently unable to provide any further details. However we feel it is important to be transparent on this important initiative, and ensure the Compliance Reform Forum is kept fully aware on current progress.
“While we are unable to discuss specifics, the objective will be to obtain information from a new tranche of financial institutions, using the same legal powers as applied to the first five banks.
“The intention of the new exercise will be to provide an opportunity for account holders to inform us of their own accord, if they have unpaid tax or duties and to settle their debts in a similar way to the original offshore disclosure facility.
“In anticipation of the new opportunity, HMRC will be extending an invitation to professional bodies to contribute through the Compliance Reform Forum to the design of this new disclosure opportunity.”

According to a report in the Financial Times, HMRC will target customers of 25 building societies and banks with British operations. They will shortly receive legal notices ordering them to disclose details of British residents with foreign accounts.
It is thought that these banks have been selected because they are likely to reveal the largest number of possible tax evaders, though Stephen Camm of PricewaterhouseCoopers told the FT that he expects the Revenue will eventually use the same approach every bank with a UK presence - around 500 of them.

The FT report also claims that the penalties imposed under a 2009 ODF will be 15% or 20%, significantly higher than the 10% imposed in the 2007 facility, though still much less than the 100% maximum. While last year’s ODF has so far yielded less than expected, it proved “highly cost-effective for the Revenue”.
The article concludes:
“Officials have told advisers that they believe they will be able to get round the strict Swiss secrecy laws”.
Isle of Man “tax haven” debate.

Earlier in November, UK Chancellor Alistair Darling caused some controversy in the Isle of Man by labeling the financial centre a “tax haven” and promising to review the its status. Speaking in the wake of the Icelandic bank crisis, Darling told the Treasury Select Committee:
“I actually think when we look at what has happened over the last few months we really do need to have a long hard look at the relationship between this country and the Isle of Man tax haven sitting in the Irish Sea… We can’t have a situation where all sorts of tax advantages accruing to the Isle of Man but when things go wrong people say what about the British compensation scheme?”.

Isle of Man Chief Minister, Tony Brown MHK wrote a letter to Darling asking for clarification of his remarks. This was followed by a meeting between Brown and Lord Chancellor Jack Straw, after which Brown said: “I am pleased to have received assurances that the United Kingdom has no plans to examine the constitutional relationship between us… “The United Kingdom Government recognises that the Isle of Man has been a leading proponent in efforts to bring greater transparency and fairness to cross-border financial transactions by signing Tax Information Exchange Agreements, TIEAs.”
Treasury Minister Allan Bell has also defended the Isle of Man’s “tough, transparent financial system”. In a statement he said:
“We are categorically not a tax haven.
“I expect that this will be confirmed as the OECD starts on a new round of assessing countries against its standards…. Our Government is determined that the Isle of Man will not be found wanting if these assessments go ahead, and that we will not be on any new list of tax havens that the OECD or any other country or organisation draws up.”
Earlier in the month Bell had expressed concerns about the intentions of the US President-Elect Barack Obama towards offshore banking centres.

Speaking on 5th November, he said about the election result, “I am sure this is a major improvement on what we have lived with for the past eight years, but - and it’s a big but - he has been very focused on closing down what he sees as offshore financial centres or tax havens.
“He has not differentiated between well-regulated jurisdictions like the Isle of Man and rogue ones that should be closed down.”
“The storm clouds are gathering. Huge economies love a scapegoat and smaller jurisdictions and so-called tax havens are targets.”

By Bill Blevins

With the British economy in its current turmoil, some may be considering expanding their business options and selling their services or products overseas.

International trade is not something that any business should contemplate without adequate and detailed planning. As in the UK, there is a myriad of rules and regulations when exporting to foreign lands, it is in your interest to fully inform yourself before you start.

SellOverseas was formed to offer a unique reference point on how to sell your products and services overseas.

Their site offers extensive information and advice, all free of charge. You’ll find information on export rules, finding an agent overseas, finance and taxes abroad and more.

So, if you are considering broadening your horizons SellOverseas have all the information you need to know.

By Sally Richards

As recession starts to bite and taking into account the difficult property market, we may consider letting either part or all of our homes. This article sets out a number of the tax considerations you will need to consider.

It has been some time since we were given tax breaks for owning our own homes - remember MIRAS? (Mortgage interest relief at source - tax relief at basic rate, up to certain limits, was deducted from the mortgage interest we paid).

As a consequence we have to fund both interest and capital repayments out of our taxed income.

For instance you would need to earn over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

Rent-a-room relief

At present you can elect to claim this relief if you let out a room in your home. The following rules should be considered.

*  If you don’t make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).
*  If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250 that you may earn free of tax.  Expenses are ignored.
(If your property is owned jointly the £4,250 will be shared between the partners, as will the rents.)

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

If the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home

If you decide to move from your home and let the whole property the following points should be considered.

*  You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.
*  As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.
*  If part of the gain becomes taxable because of the property being let as residential accommodation, then you can also make a claim for lettings relief of up to £40,000. The relief is available to both owners if property is jointly owned including married couples or civil partners.

We would recommend that you check with your mortgage lender that letting or part letting of the property is allowable under the terms and conditions of your mortgage.

You can find full information from the HMRC website.

If you are a client and require advice please contact your Personal Accountant.  If you are not, please feel welcome to book a free initial consultation.

By Phil Richards

On the 1st October 2008 a significant change occurred in the pension’s arena, namely the fact that “protected rights funds” could now be held within a self invested personal pension (SIPP for short).

By way of general background, protected rights benefits are built up as a result of an individual making a decision to “contract out” of the second tier of state pensions. For those old enough to remember, the opportunity to contract out on an individual basis, first became available in April 1987 and therefore there are people who have now been contracted out of the state second tier pension for more than 20 years.

During this period, those who were contracted out have had credited to their pension plans what are called National Insurance Rebates and Incentive Payments.

Many people have simply forgotten that they have a contracted out pension plan. For those who have been contracted out since the early days, it is not impossible for the protected rights fund to be approaching £100,000 (or even higher).

We can therefore be talking about significant sums of money, and the ability that now exists as from 1st October 2008 to hold these monies within a SIPP, and to take advantage of the wider investment powers of a SIPP, will obviously be extremely exciting to many people.

However, care does need to be taken, particularly when looking at the costs and charges associated with a SIPP.

It is this part of the exercise that requires particularly careful planning, and specialist expert advice and guidance. Please feel welcome to contact Steve Carruthers for advice.

By Steve Carruthers