March 2007 Archives

It turns out that Uncle Gordon was warned by the Treasury, way back in 1997, that abolishing the dividend tax credit would create a black hole in pensions funds, leading to shortfalls in pensions.

But as we all know, he went ahead and did it anyway. Result? About £5bn a year lost from pension funds since 1997.

And who is suffering now? Pensioners all over the land. Companies are closing down their final salary pensions schemes, so that for many people, their pension will be determined, not by reference to how much their final salary was, but rather by how much their pension fund can buy on the (unpredictable) stock market when they retire.

And still he marches on towards 10 Downing Street.

Click here to read the Treasury documents Uncle Gordon ignored.

The taxman has failed in his attempts to extract VAT from a lapdancing club.

Spearmint Rhino Ventures (UK) Ltd operated six gentlemen clubs, offering lapdancing entertainment by partially clad women.

The women paid a licence fee to the club for allowing them to conduct their business on their premises for an eight hour period. The lapdancers' 'portfolio' consisted of private dances for the customers, for which the customers paid upfront. Also, if a customer so requested, a lapdancer could arrange a 'sit-down', which basically meant that she would sit and chat with him for an hour. The customer paid extra for this service.

In addition to the licence fee, the lapdancer also paid £40 to the club for each sit-down she arranged.

The rest of the money was retained by the lapdancer.

The taxman tried to claim VAT on the fees paid by the customers to the lapdancers. However, instead of going after the lapdancers for the money, the taxman decided to get it from the club. There would have been no point chasing the women for the money as, generally speaking, there is no requirement to register for VAT unless your sales exceed £64,000 in a year. As it was unlikely that each lapdancer would be earning that amount of money in a year, there was no point chasing them for VAT. On the other hand, as a result of their high sales turnover, the clubs were already liable for VAT, so it was in the taxman's interest to see if they could be stung for some extra.

The clubs naturally refused to pay. They argued that the lapdancers were self-employed, independent entities, and therefore nothing to do with them. The taxman's argument was that because there were strict rules in the club as to what the lapdancers could and could not do, they were actually agents of the club, and not independent, self-employed dancers, and therefore the club was liable for VAT on any payments they received.

The judge wasn't having any of this. He didn't see how the lapdancers could be described as agents of the club. The way he saw it, when a lapdancer arranged with a customer for either a private dance or a 'sit-down', the customer was contracting, not with the club, but with the lapdancer herself. He therefore concluded that the club did not have to pay the VAT.

The Telegraph contains a brief summary of the case, but the original case report is far more entertaining.

When you buy certain capital assets to use in your business, you are allowed to write off part of the cost each tax year, to take into account any depreciation to the asset. Whatever you write off this way can be deducted from your taxable profits, or added to your allowable losses.

You are not allowed to use whatever depreciation rules you like, rather the taxman has set particular rates that you must use.

You can currently deduct as follows:

• deduction for plant and machinery: 25% of cost on a 'reducing balance' basis.
• 'long life' assets: 6% of cost on a 'reducing balance' basis.

There is also a 40% deduction in the first year for plant and machinery, but small companies may claim 50%.

'Reducing balance' basis means that every tax year, you deduct the relevant percentage from whatever the balance is at the end of the previous tax year. So if, for example, you have a qualifying asset that cost £1,000, you can deduct 25% ie £250. For the next tax year, you deduct 25% of the reduced balance, ie not the original cost of £1,000, but the reduced balance of £1,000 - £250 = £750. So the next year's allowance will be £750 x 25% = £187.50. And so on and so forth.

Anyway, hurrah! Uncle Gordon has decided to increase the rate for deduction of long-life assets to 10% (a 4% increase).

Don't rejoice so much, though. This is Uncle Gordon, after all. Whatever he gives, he always takes back. And more.

He has decided to decrease the rate of deduction for plant and machinery to 20% (a 5% reduction).

These changes take effect from April 2008.

Small consolation though, the 50% deduction in the first year is still available for small companies. Until next April, at least.

The taxman is making vague promises about an allowance for the first £50,000 of expenditure on plant and machinery, but no concrete details yet. We will wait and see how it works in real life.

Uncle Gordon cuts 2p off income tax.

BUT:

1. The tax cut only takes effect from April 2008.
2. The small companies tax rate increases by 1p next month, rising to a 3p increase in a few years time.
3. The 10% income tax rate is abolished.

Not such a good deal after all, then.

The Fisherman has been occupied with the Budget, and will soon bring you this blog's views of Uncle Gordon's latest tax grab.

In the meantime, check out some highlights over at Bel's.

The Telegraph is talking of some respite for pensioners in the forthcoming review by Sir Michael Lyons of the council tax system.

Believe it when you see it.

Film makers in the United Kingdom have been spitting feathers all weekend.

Uncle Gordon has decided to remove most of the tax incentives for investing in films.

First, some background. Some new tax rules for the film industry were made some time ago, and these apply to films which started principal photography on or after 1 January 2007. However, the old rules are still in place for films which were in production on 1 January 2007, and it is these old rules that are affected by the latest changes from Uncle Gordon.

Generally, under the old rules, an investor could become a 'non-active partner' in a film partnership. His main role would be to contribute money to the partnership, which was in turn used to finance the film. As films tended to make losses in the early years, the investor was entitled to loss relief which was worked out on the basis of how much capital he had contributed to the film.

As such investors tended to have high income or gains elsewhere, they typically offset the losses against these, achieving a lower tax bill as a result. This is called 'sideways loss relief' because it operates to reduce taxable profits or gains from other sources arising in that tax year (and sometimes in an earlier year). If sideways loss relief were not given, the losses would have to be pushed forward and offset against profits from only the partnership in future years. It is thus clear why sideways loss relief is so attractive.

Not for much longer. Uncle Gordon has waded in and decided that, with effect from 2 March 2007, any such capital contributed to a partnership by a 'non-active partner' would be disregarded if it was shown that the capital was contributed with the aim of securing loss relief. In addition, any sideways loss relief given on or after that date to a 'non-active partner' would only be restricted to £25,000, or if the amount of losses incurred was lower, then that lower amount. Any losses that do not qualify for sideways loss relief would be carried forward to future years.

Understandably, there is an outcry. The film industry is not happy, because with the tax relief severely restricted, investors would no longer wish to invest.

Environmental projects may also suffer. Partnerships trading in carbon credits are also attractive to investors for the same reason as the film partnerships. The environmental groups are also not happy.

So who is going to say something to Uncle Gordon? Will the film industry collapse first before he realises the folly of his actions?

UPDATE (9 March 2007). Uncle Gordon has performed a U-turn. The rules are not going to apply to certain film partnerships where the producer sells the film to the investor and has it leased back to him. This is a common arrangement by which the producer raises the money he needs for the film. It is normally used for films certified as 'British' films because they get more generous tax treatment.  It was this type of arrangement that the film industry was most concerned about when they heard of Uncle Gordon's plan to restrict relief. They're happy now.

Unfortunately for the environmental partnerships, no such U-turn for them. Uncle Gordon is digging his heels in. So much for all that 'environment is king' rhetoric he has been mouthing of late.

The Liberal Democrats are up to their silly ways again. Their Treasury spokesman is proposing an annual 'wealth tax' for people whose houses are valued at above £1m. The tax would be levied at 1 per cent of the value of the house.

Leave to one side the fact that such homes will attract capital gains tax on sale, or, possibly inheritance tax on death of the owner. Even leave aside that the householders are probably already paying punitive rates of council tax, with more to come when the dreaded valuation exercise is completed.

Leave all those aside for now.

What Vince Cable, their Treasury Spokesman, has failed to realise, is that the increase in the value of house prices is mainly for reasons outside the control of the the homeowner. House prices rise for a many reasons, inflation, market action, and oftentimes, even Government action. The homeowner is not responsible for any of these, but he is being called upon to pay an annual 'wealth' tax, thereby penalising him for actions outside his control. Such idiocy. In fact, probably the only way a homeowner can contribute to the value of his house is by carrying out improvements, for which he would have laid out money from his own pocket. This, apparently, is not enough for the greedy, clueless Liberal Democrats, who regard private wealth as something to be stolen from its owners, and then wasted on their latest harebrained schemes.

The Fisherman is now convinced that, at the very least, a rudimentary course in economics must be compulsory for any aspiring politician. This course must come complete with an examination at the end, and a pass mark of not lower than 70 per cent.

The Fisherman will volunteer to be a tutor.