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A recent court case may have important implications for entrepreneurs working from home. This ruling has highlighted that entrepreneurs need to thoroughly and carefully research the rules in order to ensure compliance, or be able to present their case properly..
There are many opportunities these days to work from home, either as an outsourced employee or as a self-employed contractor/service provider. Whatever type of work you undertake (or are considering undertaking), it is essential to find out exactly where you stand as far as income tax and deductible expenses are concerned.
This recent case highlights the confusion that can result as the rules are open to misinterpretation. It involved a taxpayer who is a self-employed electrician who worked on various sites – he travelled to work by car and claimed motor expenses for the journeys. Citing a decision in the Horton v Young 47 TC 60 case, the electrician claimed that his home was his work base and all travel to work sites was exclusively for the purpose of his trade. He had no other office and all of his business records were kept at his home, which was the address used for business correspondence, and also the base where he kept his tools of the trade and equipment.
HMRC disallowed the electrician’s travels claim, saying that although he might do some of his administrative work at home; it was not the place where he carried out his trade. He was told that his travelling costs were not allowable as they were not wholly and exclusively for the purpose of his business.
The First-tier Tribunal ruled that a subcontractor (such as the electrician) needed a business base from where to arrange his work and that this administrative work forms part of his trading activity. As this administrative work, was carried out at his home, then this in fact was his business base. His appeal was allowed subject to figures being agreed.
Clearly, when claiming tax-deductible travel expenses it is essential to remember that each case will differ. However, because securing, arranging and planning work are integral to the process of contracting for work, if the claim is actually supported by the facts, a contractor’s home can also operate as a business base. This will mean that travel expenses incurred in getting to the site where the actual work is carried out may qualify as a deductible expense.
As more people are opting to work from home, it is essential to understand the rules for deductible expenses and how they should be applied. The “Wholly & Exclusively” rules are open to interpretation and it’s important to work out exactly where you stand as far as these rules apply to you.
Following a test case brought by Belgian consumer group Test-Achats on sex discriminations in insurance premiums, the European Court of Justice (EJC) recently ruled that from December 21st, 2012, insurers may no longer price their products based on gender. The existing European Union Gender Directive Opt-out Clause (Article 5[2] of Directive 2004/113/EC) that permits insurers to discriminate on grounds of gender will cease to have effect from that date.
This is the decision that was expected following the ECJ Advocate General’s opinion statement in September, 2010. Juliane Kokott emphasised the importance of the principle of equal treatment of men and women under EU law.
Pension experts have described the ruling as a “seismic event” that will have far-reaching repercussions on the insurance industry and its consumers. The move means that insurance providers will need to radically change the way in which annuities, life insurance and health insurance are priced.
The end date for gender-based annuity purchases is likely to lead to a male annuity “closing-down sale” in the run-up to Christmas 2012. Women are likely to wait until after that date to buy an annuity.
As for Life Cover, unisex life assurance rates should lower the cost of cover for men and increase it for women. This may lead to the insurance industry experiencing a re-brokering bonanza in 2013.
The Association of British Insurers (ABI) has issued a statement to say that this news is “disappointing” and that “Each company will have to respond to the ban in the way they feel is in their customers’ interests”.
It’s expected that the ruling will have a knock-on effect on the rates at which men can take income from drawdown because they are intended to reflect annuity rates. This may prompt another review of the newly issued HMRC/GAD drawdown tables.
Planning for Life will be following any developments and we will provide more details on this situation when we have had a chance to assess the judgement.
Major changes to pension regulations to be introduced on 6 April 2011
The recent publication of the draft legislation of the Finance Bill 2011 followed an announcement in June of significant changes to the way in which pension schemes are operated.
The most important changes are in the Annual Allowance (AA) and the Lifetime Allowance (LTA) and these have been trailed over the past few weeks.
However, changes involving the removal of the “requirement to annuitise by age 75” were subject to consultation and have just been announced for the first time.
The proposal accepted by the Government this week that tuition fees for students could be unlimited has set alarm bells ringing for many families.
Business Secretary Vince Cable endorsed radical funding reforms put forward by Lord Browne which could see students expected to pay tuition fees of around £7,000, more than double current levels, from 2012.
This will worry many families with children coming up towards university age and underlines the fact that financial planning should focus on the whole family and not just those with an established career or business.
If the proposal becomes law, young people will be expected to begin to pay off their debt, which could run into tens of thousands of pounds, as soon as their earnings hit £21,000 per annum. Student bodies have claimed that this could deter those looking at higher-priced courses at the more expensive universities.
Under the proposal, the student themselves will pay off the loan but, we all know, this sort of burden is likely to increase the calls on the “bank of mum and dad”. This is where putting a plan into place for the whole family comes in. Not only does it help to clarify where these extra funds will come from but it also helps to establish the concept of financial planning for the younger members of the family, ensuring that they understand the implications of their decisions and are able to make the right choice about which course to take, whatever the cost.
It is never too early to establish a life plan. The beauty of the process is that it takes the fear out of dealing with financial issues while remaining completely flexible. The student can look at all the “what ifs”, from how they will pay back the loan from the basic salary level of £21,000, to what the implications are if they earn double that sum in their first job.
Hot
on the heels of July's announcement
of the end of compulsory annuitisation at age 75 comes another major change to
pension regulation.
The Treasury announced yesterday it is to cut the annual allowance for pension saving from £255,000 to £50,000 from next April.
The change will affect 100,000 pension savers, 80 per cent of which have incomes above £100,000, according to the Treasury. Pension savings above this level will be subject to a 55 per cent tax charge. Individuals paying 50 per cent tax will be able to claim relief at the full marginal rate.
Individuals will be able to offset unused parts of the allowance over a three year period to allow for one-off spikes in contributions over the £50,000 limit.
The lifetime allowance will be cut from £1.8m to £1.5m in April 2012. The Treasury will consult later this year about measures to help those who are close to and may breach the new limit.
For defined benefit schemes, increases in benefits will be valued at a factor of 16 compared to the current factor of 10. The increase is less than many had expected.
The new structure was put to consultation in July following widespread criticism of the previous administration’s proposal, the High Income Tax Relief Charge, which involved an earnings test, an age-related method of valuing final salary and other defined benefit pensions, and a complex tapering of tax relief for earnings between £150,000 and £180,000.
The changes will not affect the vast majority of savers. A financial planning rule of thumb is to save 12% of income per annum to ensure lifetime financial security. With the ISA allowance of £10,200 per annum and a pension allowance of £50,000 per annum, an individual would have to be earning in excess of £500,000 pa before he or she would be unable to direct all savings into these two tax-privileged savings vehicles.
The reduction in the lifetime allowance is something that needs to be monitored closely, especially for those approaching this figure, or indeed already in excess of £1.5 million.
One moor esteem on the agenda for the next round of annual reviews!
The Government announced this week that it intends to scrap compulsory retirement at 65.
Predictably, the media is full of articles about the proposed scrapping of the default retirement age. Some reports are in favour, others look at the potential problems that might occur. All are worthy of a read. The proposals are important for everyone as they might potentially impact upon any current retirement planning in place.
However, it is important to note there is an element of doubt about the whether the proposals would actually be workable. The recently settled case of Seldon v Clarkson Wright and Jakes illustrates some of the reasons why. It centres on the principles of age discrimination and whether this can be overridden by employment and contract law. This case was decided in favour of the partners of the firm, implying anti-age discrimination rules can be overridden by employment contracts. See the article on the case in the Solicitor’s Journal, which is both topical and very relevant.
Among the announcements that followed the
recent
General Election, the Coalition Government confirmed that it intended to
end
compulsory annuitisation at age 75.
Interim measures were introduced at the Emergency Budget to ensure that anyone reaching age 75 from the 22 June 2010 was not forced to choose between Alternatively Secured Pension (ASP) and annuitisation. The Government has now confirmed its longer-term plans in a HM Treasury consultation. The intention is to introduce the changes from 6 April 2011. The key proposals are:
- There will not be a formal requirement to
take benefits
from a pension scheme at any age, although lump sum death benefits paid
from
any funds where benefits have not been taken by age 75 will be subject
to tax
charges.
- ASP will be abolished and individuals
currently in ASP
will fall into the new regime, but only from 6 April 2011. Unsecured
Pension
(USP) will be split into:
- “capped drawdown” – this will be broadly
similar to USP
as it stands but will not necessarily have the same maximum income
limit, and
- “flexible drawdown” – individuals will be able to draw unlimited amounts from their pension scheme subject to being able to demonstrate that they have satisfied the Minimum Income Requirement (MIR). Lump sums taken under flexible drawdown will be taxable at the individual’s marginal rate of income tax.
- A uniform tax charge of 55% will be applied
to lump sum
death benefits paid from pensions in drawdown, and also to benefits that
have
not been put into drawdown where an individual is over the age of 75.
This will replace the 35% tax charge currently applied to USP lump sum
death
benefits, and the (up to) 82% tax charge applied to ASP.
Both the capped and flexible drawdown options will be available before and after age 75 and clients will be able to take pension commencement lump sums after age 75.
There are no plans to make any further changes that will apply before 6 April 2011, for those currently in USP or ASP. This means lump sum death benefits will be taxed at 35% in respect of a client who dies in USP before 6 April 2011, but if they die after 5 April 2011 the tax charge will be 55%. In ASP the same principle applies, except that the tax charge can currently be up to 82%, whereas lump sum death benefits would only face a tax charge of 55% on death after 5 April 2011.
The MIR will involve an individual demonstrating a sufficient level of secure income which must:
- Be in payment – i.e. it is not an
entitlement to future
benefits,
- Be guaranteed for life,
- Take into consideration expectations of
future cost of
living.
It is anticipated that an individual’s state pension and state second pension will count towards the MIR. It has also been suggested that scheme pensions in payment from occupational schemes and lifetime annuities that are increasing by at least Limited Price Indexation will qualify as MIR. There is no suggestion that income from sources other than pension schemes will count towards the MIR. The exact level of MIR is not set out in the consultation although will be set at a level to protect the Government from the risk of an individual falling back on the state. This will no doubt be one of the main points of debate.
The new government has announced that there will be an emergency budget on June 22nd.
The previous budget, produced by Alaistair Darling, has been seen as a political budget that was aimed at winning the election. The new budget will be a very serious one primarily aimed at reducing the amount of debt in the UK, and will have a far reaching impact on individuals, families, and companies.
As we progress through 2010 we are seeing an increasing divergence in the performance of regional stock markets.
During the first four months of 2010 American and Far Eastern / Asian markets have shown reasonably steady growth. As at the May Day holiday, US markets were up 6% year to date, Japan was up 9% and although China / Hong Kong are both down on the year, many of the other Far Eastern markets such as Indonesia, Malaysia and the Philippines are all in positive territory.
European markets, however, have fared less well. Indeed it has been a switchback ride so far this year and after sharp falls today most European markets have moved back to break even or even negative territory for the year. The reason of course, is Greece, with Spain, Portugal in close support.
One debt crisis does not a crash create, but it seems our long standing asset allocation stance of favouring the Far East and the Americas at the expense of Europe and the UK continues to have merit.
The Patricia Arnold Case, which is still making its way through the courts, concerns pensions and terminal illness.
In most cases, pension plans are held in trust and the general rule is that on death prior to crystallising benefits the fund will pass to the nominated beneficiaries free of inheritance tax.