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OPEFAIN

28th March 1987, Page 34
28th March 1987
Page 34
Page 35
Page 34, 28th March 1987 — OPEFAIN
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THE BOX

Andrew Darnill of management consultants Andrew Young, analayses the pros and cons of the Budget.

MI Following our instant coverage of last week's Budget, we have been taking a more in-depth look at the main changes put forward by Chancellor Nigel Lawson.

There was little in the despatch box of direct concern to the commercial vehicle industry, or to transport in general, but there were a number of policy shifts which could have far reaching effects on the future financial and taxation health of your business.

Corporation Tax: The standard rate will remain 35% for the year to March 31, 1988, but the small company rate is reduced from 29% to 27%. It applies where profits of a company do not exceed 2100,000 and marginal relief will apply on profits up to 2500,000.

For disposals made after March 16 1987, capital gains made by companies will be taxed at normal Corporation Tax rates instead of at an effective rate of 30%. Where capital losses have been made before March 17 1987, they will be set against gains realised before that date, with only the excess available against gains after that date.

Advance Corporation Tax: In future ACT will be offset against Corporation Tax on chargeable (capital) gains, as well as against Corporation Tax on income. There will be special provisions to deal with accounting periods which straddle Budget Day.

The rate of ACT will go down to 27/73, in line with the Chancellor's proposal to cut the basic rate of Income Tax to 27%. ACT at 29/71 will continue to apply to dividends (and other qualifying distributions) up to April 5 1987.

Where a company is profitable it may be a good idea to pay dividends before March 311987, so that individual shareholders paying higher rate taxes receive a credit of 29% against their liability, instead of 27%. Clearly, cashflow and other considerations also need to be taken into account.

Deduction of Tax at Source: With the change in the Income Tax rate, the general rule will be that it will be deducted at source at 27% from such payments as annual interest, royalties and annuities made after April 5 1987.

Payment of Corporation Tax: Certain companies established before 1965 have paid Corporation Tax up to 21 months after the end of the accounting period to which it relates. It is proposed to have a standard payment date for all companies nine months after the end of the relevant accounting period. The change for companies with "late" accounting dates will be phased in over the next three years in equal annual steps.

Training Expenses: The cost of retraining employees who have left or are about to leave a company will be deductable against Corporation Tax when spent on "qualifying training schemes" after April 5 1987.

Profit Related Pay (PRP): As foreshadowed in his green paper last July, the Chancellor is encouraging industry to reward employees on the results of their efforts. if private sector employees enter into Inland Revenue-approved PRP

schemes, 50% of the first 20% of an employee's PRP to a maximum of 23,000 will be exempt from tax. A PRP scheme must be approved before the profit year begins, and even though the legislation in the Finance Bill is unpublished and unapproved, employers are encouraged to start drafting PRP schemes now with the help of an Inland Revenue guidance unit which has been set up for the purpose.

COMPANY-RELATED

A PRP scheme can be company-related or employment unit-related, but the figures must be audited. The position of non-UK companies is at present unclear.

In general PRP will continue to be subject to National Insurance Contributions but in those cases where it is exempt from such contributions — when paid through a trust, for example — it will not be eligible for Income Tax relief.

VAT: In terms of VAT, many of the Budget changes are aimed at small firms. Raising the quarterly and annual registration limits to 27,250 and 221,300 respectively is a marginal increase and the maximum permitted under European law. Deregistration limits have also been increased to 220,300 (tax inclusive) and there have been further relaxations, including the time limits of both registration and deregistration. The increased time limits are long overdue and are particularly welcome in view of the current penalty regime. Increasing the registration threshold is not always seen as a good thing, however. Many reputable smaller businesses will welcome VAT registration as a means of giving the outward appearance of substance and also of cutting costs by enabling the recovery of input VAT.

VAT registration does bring other problems too. What happens, for example, if a customer doesn't pay — do you still have to pay the VAT? What about the chore of filing VAT returns? For those with a taxable turnover below 2250,000 the Budget offers what smaller businesses have been after for years — cash accountancy for both output and input VAT. This will be an option from October this year, and will not only solve the cashflow problems and ease pressures on borrowing, but will also give automatic bad debt relief.

Annual accounting, to be introduced from the summer of 1988, will also be optional and will avoid the need to submit quarterly VAT returns. These will in future only be filed annually. Traders will, however, have to pay tax in nine equal monthly instalments, which will be extracted by direct debit and based on previous year's figures in the absence of an agreement with Customs.

The annual VAT return may well give rise to a large balancing payment and could thus require careful management if difficulties are not to arise. Without regular detailed accounting as at present, the accuracy of the records of such traders may also suffer, and differences between the annual return and the annual accounts — which may be prepared sometime after the event — could give rise to over or under payment and even penalties.

PARTIAL EXEMPTION

Apart from this, the rules on input VAT and partial exemption will in future have a greater effect on businesses. Prior to April 11987, VAT-registered businesses in the industry will have recovered most if not all of their input VAT. From now on however, the change in emphasis towards direct attribution — even for de minimis purposes — means that many more will be caught. More detailed records may need to be kept, and, unless your exempt-input VAT is less than 26,000 per annum, some loss is to be expected. The sale of subsidiaries or premises is particularly vulnerable. VAT will not be recovered when it relates to matters not resulting in taxable supplies, a typical example being where a business is being acquired or sold as a going concern.

by Andrew Darnill • The Government's financial assistance packages are not the charitable hand-outs some businessmen fear. Neither are they a long term, high-interest burden around your neck. The Government says it wants British industry to be as cost-effective as possible and to stand on its own feet, and the schemes exist to achieve just that.

The Department of Trade and Industry said in 1983 that its industrial support plans are designed to make this country as commercially efficient and enterprising as our major industrial competitors. Most of them, if not all, subsidise and support their business communities far more vigorously than we do.

The D'fl classes its support for industry under four major headings — investment, innovation, business and technical advisory services and exports. Many schemes are immensely popular and they have helped launch a high number of successful businesses.

LOAN GUARANTEE SCHEME

This is one of the Government's best sellers and though it covers firms at the bottom of the pile, a wide range of firms have taken advantage of the scheme since its introduction in May 1981. It has been popular since day one. Nearly 16,000 guarantees were issued during the scheme's first three "pilot" years.

Sole traders, partnerships, co-operatives or limited companies are all eligible for the guarantee whether they have been in business for a number of years or are just starting out. There is no formal definition of a small business but large concerns, their subsidiaries or other firms controlled by a larger and substantial group will not receive help.

Under the small firms' loan guarantee scheme a business can obtain a medium term loan of up to £75,000 repayable over two to seven years at 3.5% per annum over the basic bank rate. The Government guarantees 70% of the loan if the business fails. The banks remain liable for the remaining 30% and all the big five High Street banks participate in the scheme.

There are a number of excluded industries under the scheme such as agriculture and horticulture, nightclubs and forestry. Transport, haulage, distribution warehousing and storage, however, are not excluded.

If you do apply for a .275,000 loan, the Government stipulates that the money cannot be used to finance the purchase of shares or to buy out a partner. Guarantee finance can, however, be used as part of a larger financing package with no reduction in the overall limit you can borrow.

QUALITY ASSURANCE

Grant are now available to help small firms implement consultants' recommendations which will help them improve their quality assurance procedures. Quality assurance is a growing area of importance in the haulage business, and the British Standards Institute is working


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