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Vive la differentiation

Budget reforms which take eff^_ect from this month offer IFAs many

opp^_^_or^_tun^_ities to enhance exis^_t^_ing rel^_^_a^_tion^_ships and

create new ones with both clients and, where app^_^_ropriate, other


If IFAs have information that they can use to help cli^_ents better

achieve their financial objectives, then they can differentiate themselves

on the most important of grounds – providing a solution as opposed to

merely delivering a product.

Where the IFA is seeking to have a working relationship with another

professional, hav^_ing a demonstrable under^_stan^_^_ding of taxation can

be a bonus, especially if they can show how to apply that understanding in

a business context.

Trust is the foundation of any good relationship. Demonstrable

under^_stan^_ding of all
the key issues in a truly holistic sense and

with a true client focus will undoubtedly contribute towards this


This year&#39s key targets for a post-Budget audit or review must be

businesses. Sig^_ni^_fi^_cant opportunities can be genera^_ted by the

changes imple^_men^_ted on either April 1 or April 6, 2000, some of which

were proposed in this year&#39s Budget and others in the Nov^_ember 1999

pre-Budget report and March 1999 Budget.

The introduction of the 10 per cent rate of corporation tax for profits up

to 10,000 is analogous to the 10 per cent starting rate of income tax for

individuals. However, it is hard to see how this will be of trem^_endous

significance to the pot^_entially business-generating corporate clients of

most IFAs.

It would seem to be of grea^_test relevance to one-person companies but

these may be just the companies that are most likely to be hit by the

anti-avoidance provisions taking effect from April 6, 2000.

So, the key communication point in respect of this new 10 per cent rate

will be to clarify that this will not be relevant for the majority of

clients of IFAs.

Before leaving this area, it is worth mentioning that if
pro^_fits are

between 10,000 and 50,000, the marginal rate of 22.5 per cent will apply

effectively to profits fall^_ing bet^_ween these two figures, with the

lower 10 per cent rate app^_lying to profits up to 10,000.

Of course, this is not what actually happens. What happens is that the

entire profits (not exceeding 50,000) are subject to tax at the 20 per cent

rate but a formula is app^_lied to reduce the average rate of tax

applicable to all profits to a figure that exceeds 10 per cent but is less

than 20 per cent. The effect, if the first 10,000 of profits were always

subject to tax at 10 per cent, would be that the balance up to 50,000 would

be taxed at 22.5 per cent. This would operate as a way of dragging the

effective average rate of corporation tax up from
10 to 20 per cent.

Having an understanding
of how corporation tax works
at all levels

will help reinforce the client or professional&#39s view of the IFA as a


The increase in the Nat^_io^_nal Insurance threshold to 535 a week

represents an opportunity for many small busines^_ses, incorporated and

unincor^_porated, to review the oppor^_-
tunities for tax and NI savings

through the payment of justifiable rem^_uneration to wor^_k^_ing spouses –

which may itself generate pension contribution cap^_ability. It is

necessary to remember that the more one looks to pay the spouse, the

greater the justification needs to be.

No one advising in the bus^_iness market can afford not to be familiar

with the basics of the new personal service company provisions. We still

await the detailed tax law on this most contentious of subjects, which we

understand will not be enacted until the summer.

It seems the tax provisions will operate to recategorise cor^_porate and,

in some cases, partnership inc^_ome received by an “intermediary” as

Sche^_dule E income of the individual who is the provider of the services

to the extent that such income, if received dir^_ec^_tly by the wor^_ker,

would have been taxed as Schedule E inc^_ome based on the application of

the “emp^_loyed or self-employed?” test.

The impact of these provisions is expected to be wide and should cause

advisers to these businesses to review the likely tax position of the

individuals involved. Even if no tax/legal solutions are implemented, it

will be important to remain aware of the issues so as to communicate

effectively with the client.

It is worth noting that the Inl^_and Revenue&#39s website features many

frequently asked questions and answers on the subject of recategorisation.

IFAs should pay particular attention to the possibility for pension

business. Despite there being some as yet unanswered questions on pension

funding issues in this context, generally speaking, contributions made by a

personal service company to an approved pension arrangement can limit the

amount of recategorised inc^_ome as such contributions are deductible for

this purpose.

The other key pension iss^_ue is that the essence of the provi^_sions is

to recategorise inc^_ome as Schedule E inc^_ome. This will be so even if

the inc^_ome has been used to fund dividends.

Again, the detail of how this will be arranged is yet to be disclosed.

Regardless of the mech^_anics, though, if this is the outcome, then

pensionable inc^_-
ome will be immediately created, albeit perhaps not

with certainty until after the end of a relevant tax year.

Pension contributions made by the personal service company will, as stated

above, be deductible and will reduce the potentially attributable inc^_ome.

Despite the tax attraction of pensions, the parties inv^_ol^_ved will need

to be happy with the pension product. The inclination to be so may be

greater given that, because of these provisions, the dividend route of

removing funds from the company is not available so any funds removed for

personal use will bear an inc^_ome tax and NI cost, leaving substantially

less for personal investment.

Once the pension earnings cap is reached, the approved pension route will

cease to be open and attention will have to turn to unapproved pensions and

personal investment in tax-effective plans. Examples of these include Isa,

collectives and insurance products.


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