07 March 2011
editorial - times are a'changing
This edition of our briefing focuses on the number of accountancy changes that are facing the hospitality industry over the next year or so. They include changes to tax rates and allowances, the potential introduction of International Reporting Standards for small and medium sized companies, thoughts on the VAT increase to 20% and a whole host of changes as a result of pension reform.
But are times really changing for the hospitality sector and are we doggedly pulling ourselves out of the recession? The news from the Treasury that the Consumer Price Index is up to 4% is unlikely to be well received by the industry. Those of you who have managed to pass the VAT increase to 20% onto your customers may well find it hard to increase prices again so quickly as a result of this news. It is clear that hard fought margins are going to be squeezed further and that pressure needs to be applied to suppliers to keep their price increases to a margin.
There is also a general thought in the economy that interest rates will certainly rise during 2011, with the last estimates suggesting rises in May, September and January, taking the rate to 1.25% followed by further rises making it 2.25%-2.50% by the end of 2012 and 3.0% by December 2013.
These macroeconomic factors both mean that cash flows are going to be stretched and my advice is to produce detailed forecasts to budget for when times are going to be toughest. This is not a time for “burying your head in the sand”, talk to your bank, forewarn them of the cash flow problems that you may have and the covenant dates that you are most worried about.
However it is not all bad news, the official dates for the 2012 Olympics were released in mid February and with tickets going on sale in mid March, now is the time to get the plans in place for how to take advantage of this unique event.
I would like to take this opportunity to thank Barry Newberry at Epoch wealth management for his guest article guiding us through the numerous changes in the pensions world. I hope you find this issue insightful and please do not hesitate to contact me or anyone else in the hospitality team if you have any queries about the articles or any other aspect of the sector.
Andrew Ball
partner | 020 7969 5530
aball@haysmacintyre.com
corporation tax update
Substantial Shareholding Exemption (“SSE”) and degrouping charges
There are proposed changes to the substantial shareholding legislation which affects the way degrouping charges arise and the length of time group assets are held by new group companies.
degrouping charge
Under current law degrouping charges arise when a company leaves a capital gains group with an asset which has been transferred to it from another group company on a ‘no-gain no loss’ basis, within a six year window.
Under the proposed change degrouping gains will instead be computed by way of an adjustment to the consideration for the disposal of the investee company’s shares (as opposed to arising in the company itself). This means if the SSE applies to the share disposal it will also apply to the degrouping gain.
group assets
There is a further change proposed to SSE which would apply when trading activities and assets are transferred to a newly incorporated group company which is subsequently disposed out of the trading group. Under current law SSE would not have applied as the new company’s shares were not held for 12 months (or more). Under the proposed change the share holding period is extended by the period the asset was used in the trade of the transferor company. If this period is at least 12 months the share disposal of the new subsidiary would qualify for SSE.
Both these changes benefit the tax payer and will simplify the tax implications of corporate disposals especially where a company carries on a trade from more than one site. If one site is sold this can now be structured to ensure no corporation tax arises.
EIS
There have been recent amendments to the Enterprise Investment Scheme (“EIS”) and Venture Capital Trusts (“VCT”). These changes remove the requirement that a company must operate “wholly or mainly” in the UK and replace it with a simple requirement that the issuing company must have a Permanent Establishment (“PE”) in the UK.
This amendment could generate significant tax advantages for small, fast growing companies with predominantly overseas activities and to international companies looking to the UK for investment.
Here a PE means either:
(a) a fixed place of business through which the business of a company is wholly or partly carried on; or
(b) an agent acting on behalf of the company who has and exercises there authority to enter into contract on behalf of the company.
This includes branches, offices and places of management. This will mainly be beneficial where previously less than 50% of a company’s trading activity was conducted outside of the UK and therefore investment in these companies did not qualify for EIS relief. The removal of the “wholly or mainly” test would seem to allow for a greater percentage of the activity to be conducted abroad provided some part of the trade remains in the UK.
In addition a non resident company carrying on part of its trade in the UK through a PE should also qualify.
corporation tax rates
For accounting periods beginning on or after 1 April 2011 the main rate of corporation tax has been reduced from 28% to 27% and the small profits rate (for taxable profits of under £300,000) has also been reduced from 21% to 20%.
There is also a planned phased reduction in the main rate of corporation tax of 1% per annum bringing the rate down to 24% from April 2014.
capital allowances
To balance the reduced rates of corporation tax there are changes to reduce the tax benefits under the capital allowances regime. The below changes take effect from 1 April 2012:
plant and machinery pool rate: The main rate writing-down allowance on plant and machinery expenditure will be reduced from 20% to 18%.
special rate pool: The special rate writing-down allowance on plant and machinery expenditure will be reduced from 10% to 8%.
Hybrid rates will be used for accounting periods spanning 1 April 2012.
annual investment allowance (“AIA”): The maximum amount of AIA (which gives businesses a 100% first year writing down allowance for qualifying expenditure on plant and machinery up to a certain amount) will be reduced from £100,000 to £25,000.
Mark Shewring
tax manager | 020 7969 5583
mshewring@haysmacintyre.com
international reporting standards
“My company’s not listed so I don’t need to worry about IFRS for my accounts.” This might be true for now but could be changing if recent proposals come into force.
background
In October 2010 the Accounting Standards Board (“ASB”) released two exposure drafts under the title “The Future of Financial Reporting in the UK and Republic of Ireland” which set out significant proposed reforms to financial reporting in the UK.
In essence, Financial Reporting Exposure Draft (“FRED”) 43 “Application of Financial Reporting Standards” and FRED 44 “Financial Reporting Standard for Medium Sized Entities” (“FRSME”) will, if implemented, bring in a watered down version of IFRS to a much wider audience and create a three tier approach to financial reporting in the UK.
scope and proposals
The top tier for financial reporting will be those with “public accountability” where full IFRS will apply. The bottom tier will be for small companies which can continue to report under the Financial Reporting Standard for Smaller Entities (“FRSSE”), and will therefore not be affected by the FREDs.
It is entities between these two extremes, i.e. those that are neither small nor publicly accountable, that are the focus for the FREDs and which would see a slightly toned down version of IFRS being introduced or, in other words, “IFRS lite”.
impact
what differences will you see if your entity is subject to the FRSME?
Perhaps the most obvious will be a change in the format of the accounts together with some changes in terminology. For instance, the profit and loss account will be replaced by a statement of comprehensive income, which may be in one or two parts, and the balance sheet will become the statement of financial position. The impact will obviously depend on individual circumstances but perhaps the most likely impacts will be as follows:
• no revaluations of property, plant and equipment will be permitted under the FRSME;
• the revaluation of investment properties will go through the income statement;
• no capitalisation of finance/borrowing costs will be permitted;
• restatements to prior years will occur if material errors are found. At present prior year adjustments are restricted to when errors are fundamental and therefore more prior year adjustments can be expected under the FRSME;
• providing for liabilities arising under employee benefits such as accrued holiday not taken at the reporting date; and
• non basic financial instruments, such as foreign exchange contracts and interest swaps, will be carried at fair value as assets or liabilities in the statement of financial position.
actions
what should I do?
The proposed effective date of the FRSME is for accounting periods beginning on or after 1 July 2013. Therefore, in reality, the first accounts to be affected will be those for the year ending 30 June 2014, although it is proposed to allow early adoption. This may seem a long way off but, for those with June year ends, the date of transition will be 1 July 2012 – not quite so far away.
If you are, say, currently negotiating a five year term loan with financial covenants you may find the financial statements on which the covenants will be calculated changing substantially towards the end of the period. It would therefore be good practice to ensure it is clear on what basis the covenants will be calculated and to avoid unintended covenant breaches.
My experience from helping listed enterprises convert to IFRS is that planning the transition is crucial to ensure the necessary information is available and to minimise the costs involved. An impact assessment needs to be undertaken to firstly confirm which tier of reporting will be mandatory and then to consider whether there would be any benefit in adopting, if available, a higher tier of reporting.
Once the tier to be adopted is decided a review of the accounting policies currently in place should be undertaken to identify those that are not consistent with the FRSME and where balances need to be recalculated under the FRSME. It is much more convenient to calculate these differences at the time of the transition date when information should be readily available and has not been archived.
Andrew Ball
partner | 020 7969 5530
aball@haysmacintyre.com
up and away with VAT
Of course, it is obvious that VAT has increased and that the hospitality industry is watching nervously to see if and to what extent this chokes off customer demand or their profits. But it is not as simple as watching to see whether higher prices will have that effect, since the question also is whether to delay any increase in prices, and risk making short term losses, in order to remain keenly competitive during a period in which consumer sentiment may have been battered by poor trade statistics and the knowledge that the VAT induced price rises are upon us. And, if that were not bad enough, the increased cost of fuel hits restaurants, pubs and hotels that rely on car delivered custom, and at least part of this increased price can be laid at the door of VAT.
There appears to have been a mixture of responses on the high street. Many catering establishments appear to have held their prices at least for the time being. On the last weekend of January my wife, two children, and I enjoyed a Sunday roast at a nearby restaurant at exactly the same price as it had been for about a year previously. Perhaps this is in the hope that, if they increase them at a later stage, no one will associate that with the VAT increase, particularly given the relatively high consumer inflation rates that appear to apply across the board. Others have decided to bite the bullet, so to speak, and to use VAT as the reason for the prices going up. Which of these two strategies better judges human nature?
It is easy to say that “only time would tell”. However, it seems reasonable to speculate that the practice of holding prices down for a little while may well prove to be the winning strategy.
If there is an overriding benefit to the government in increasing VAT as compared to other sorts of taxation, it is that, after a short flurry of indignation, the public forgets that it is paying it, since it does not see the VAT component in the pricing structure. Accordingly, price increases can then be blamed on inflation, or promises can be made that quality is increased, and people need not necessarily think that they are simply paying more money to the government.
By emphasising that a price rise is linked with higher taxation, there is a risk of associating an unpleasant thought of higher tax with the product whose price has been increased. By waiting until the VAT story is out of the Press, and then inching the prices upwards, the customer does not make that unhappy association.
We cannot deny that the customer may then simply think that the prices have increased for no reason and that is just as unpleasant, but experience suggests people have an almost irrational desire to pay as little tax as possible, whereas they are less apt to notice the general tramp of inflation. People may choose to love you if you say “we are holding the VAT” (a strange turn of phrase which has become prevalent recently), and this may play better than “sorry, but we can’t help charging you more for the VAT”.
Perhaps you can try looking in the mirror and repeating both of these lines in turn to yourself and ask yourself which you prefer to hear.
Graham Elliott
VAT partner | 020 7969 5610
gelliott@haysmacintyre.com
guest article - all change on the pension front
Pensions is a subject that bring tears of boredom to most people’s eyes. However, when people start to consider retirement, pensions are brought acutely into the centre of their consciousness.
Keeping abreast of your pensions can be difficult enough but the ever changing legislative and regulatory environment adds to the hospitality sector’s woes. April 6th 2006, ‘A’ day, was a watershed for pensions, with the sweeping aside of eight pension regimes to leave one, “simplified” regime. Since then though, we have had changes to the annual allowance rules, anti-forestalling, the freezing and then proposed reduction of the lifetime allowance not to mention further changes to the State pension age and the introduction of auto-enrolment!
So what is changing?
companies
• auto-enrolment – compulsory employer contributions. Employers in the hospitality sector will, for the first time, be compelled to make minimum contributions to pension plans for eligible employees. These will be phased in, with the largest companies required to act from October 2012.
While this may seem like a while away, it is imperative that plans are put in place to cover the extra expense and administrative burden. With fines of up to £10,000 a day (possibly per employee!), burying your head in the sand is not an option. There are exemptions from auto-enrolment and employers with existing pension schemes should start to review them to see whether they conform.
• National Employment Savings Trust (NEST) – NEST will provide a cheap solution to the auto-enrolment requirements, likely to appeal to many smaller companies. Employers will still need to take charge of the administration process and ensure that they know what they can and cannot do.
individuals
• State pension age increasing faster than expected. The latest announcements from the coalition government brought forward the increase to age 66 and further increases are in the pipeline.
• life time allowance reducing to £1.5M in April 2012. More people will be caught by the reduced limit. Transitional
protection is available but action is needed before April 2012.
• Pension Input Periods (PIP). Contributions paid now may actually be assessed against next year’s reduced annual
allowance. Do you know when your PIP ends?
• annual pension contributions “capped” at £50,000 but you may be able to carry forward unused relief for up to three tax years. Combined with PIP rules, means that it could be possible to contribute £250k in one year if you have sufficient earnings.
• capped and flexible drawdown to replace Unsecured Pension (USP) and alternatively secured pension (ASP). The ability to cash in your entire pension, subject to a minimum income requirement. Anyone considering this option should seek independent financial advice.
• changes to the death benefits for crystalised benefits from 35% tax pre-75 and 82% tax post-75 to a uniform 55% tax. Good news for those currently in ASP but bad for those in USP, although it is possible to improve the situation. Ask your IFA for details.
• removal of compulsion to take benefits at age 75. While this sounds like a triumph for the anti-annuity brigade, the tax treatment of benefits means that most will continue to crystalise their pensions at or before age 75.
• early access to pension funds. The Coalition Agreement pledged to explore the potential to give people greater flexibility in accessing part of their pension funds early. The Treasury has recently published a consultation paper.
The list goes on...
In summary, the general sentiment is that these are positive changes for the individual, but costly for the employer! At least we finally seem to have more simplicity to the regime and more importantly some genuine benefits which aren’t available at present. However, as with every change in legislation we also have a few anomalies and transitional rules which will provide plenty of chances to slip up but also create a number of opportunities as illustrated in the diagram below. We would strongly recommend taking advice from a pensions specialist immediately if you feel that any of these changes may affect you.
Barry Newbury
partner | 07972 178905
E: barry@epochwm.co.uk
late night taxis
If you go home in a cab tonight you’re sure of a big surprise...
Beware, late night taxis home are very much on the HMRC radar at compliance visits and they are all too well aware of the kinds of organisations who take them.
Travel from home to work, or work to home is ordinary commuting and this is a taxable benefit if provided by an employer unless the journey meets the terms of the exemption available under Section 248 ITEPA (previously ESC A66). To qualify for exemption:
• the failure of car sharing arrangements conditions are satisfied or
• all four late night working conditions are satisfied; and
• the number of such journeys for which a taxi has been provided for that employee in the tax year is no more than 60; if there are more than 60 only those in excess will be taxable.
The four late working conditions must all be satisfied:
• the employee is required to work later than usual and until at least 9pm
• this occurs irregularly; and
• by the time the employee ceases work
– either public transport has ceased, or
– it would not be reasonable to expect the employee to use public transport; and
• the transport is by taxi or similar road transport.
Many employers have interpreted the rules as meaning that so long as an employee did not have more than 60 journeys a year there was no problem; that is not the case.
Please note that HMRC has not expanded on what “it would not be reasonable to expect the employee to use public transport” so being tired or having to carry heavy bags are not qualifying reasons.
journeys which will not qualify
To illustrate the position I shall give some examples of when taxi journeys are unlikely to meet the tests of the exemption.
• Joe works as head waiter in a bar and must close up the premises and cash up the tills every evening. He generally leaves between 1-2am to go home and the bar owner pays for him to take a taxi home. This journey will not qualify because Joe’s usual end of shift time is between 1-2am. Therefore he is not working later than usual.
• Hamid is a finance director of a large hotel. His contractual hours are 9am-5pm. He deals with many overseas customers and is regularly at his desk until 9-10pm each evening. He takes a taxi home one night at 10pm as he is tired. First, he usually works late so he cannot be said to be working later than usual. Second, even if he usually left at 5pm, taking a taxi because he is tired does not meet the terms of the exemption.
• Melissa is head of IT for a large chain of restaurants. Her normal working hours are 9am-5pm. One afternoon the entire chain’s computer billing system crashes and she has to stay late to supervise the IT team while they fix the problem. At 10pm the problem is fixed and Melissa offers to buy the IT team a drink to congratulate them on fixing the system. She then takes a taxi home. Melissa’s journey is not from the office home so will not qualify. If she had taken a taxi from the office her journey would have qualified.
• Alison works for a theatre as head of events. She is expected to be at the theatre for all first nights. This occurs about four or five times a year. She always gets a taxi home afterwards. Even though this is more irregular than say once a week, there is still a predictable pattern to it and so, technically does not meet the terms of the exemption.
• Despina is the general manager of a hotel. On her Christmas skiing holiday she broke her leg and cannot travel on public transport. Her manager is keen to ensure that Despina is at work despite the broken leg and so offers to pay for taxis home every day. There is nothing in the Section 248 exemption which legislates for temporary disability. She may meet the term about it being unreasonable to travel on public transport but she fails the other tests and of course they all have to be met.
There is an exemption under Section 246 ITEPA for reimbursement of home to work travel expenses to disabled employees but a broken leg does not count for these purposes.
public transport strike action
You may provide, or reimburse the costs of, home to work travel and hotel accommodation including subsistence if required to employees affected by strike action on public transport.
early morning taxis to work
Not a hope.
record keeping
It is important to keep good records. Accounts with taxi firms, employee expense claims and petty cash are all likely places to find the expense. Does the person responsible for preparing P11Ds in your organisation look at accounts payable? Don’t forget to make sure taxi accounts are subject to the same scrutiny as ordinary expenses.
What records do you need? You will need evidence that the employee’s journey met the terms of Section 248. At least give the time of the journey, why this was an unusual journey and why public transport was unreasonable. Three years after the event, when assisting your HMRC inspector in their enquiries, you probably won’t even recall what job the individual had let alone why they had to work late.
expenses policy
Your policy should be clear about what is required from your employees and those signing off the expense claim.
Lorraine Owens
employment tax manager | 020 7969 5578
in brief
iXBRL
Following on from our iXBRL article in the Spring 2010 hospitality briefing, a reminder that this comes into force for
tax returns filed with HMRC after 1 April 2011. For more details please see the following link
update on CAMRA super complaint
In our last briefing we looked at the Campaign for Real Ale (“CAMRA”) legal challenge to the Office of Fair Trading (“OFT”) for anti-competitive practices in the UK pub market caused by the beer tie. The result was that the OFT said that the level of competition in the sector means the beer tie couldn’t inflate prices and canned the CAMRA compliant.
CAMRA says that they will continue to fight and at least the issue is now in the spotlight with Business Secretary, Vince Cable, accepting that landlords have legitimate complaints about their treatment and warning that big pub companies face legislative action if they don’t raise their game before June 2011.
push for lower VAT rates
The CEO of Travelodge, Guy Parsons, with the backing of the British Hospitality Association and the British Beer and Pub Association, is leading a campaign to reduce VAT for the hospitality sector to 5% ahead of the 2012 London Olympics.
Current EU legislation enables member states to set a separate VAT level for hotels and restaurants, with 21 European countries having a lower VAT rate for hotels and 13 countries having a lower rate for restaurants.
Parsons said “a VAT cut will allow the industry to leave a legacy after the Olympics by generating 220,000 more jobs and ultimately pumping more income into the Exchequer”.
Jeremy Beard
partner | 020 7969 5503
jbeard@haysmacintyre.com
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