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You’ll save paper but not VAT after 1 April.

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I’ve just come back from a short trip to the States. Whilst in most European countries VAT is taken for granted, in the US there is considerable debate over whether a VAT system should be established.

Although there is no VAT in the US at the moment, there are in fact sales taxes present in a number of states. What is interesting is that in some shops the sales tax is shown on the price of the goods on display whilst in others the sales price is not shown on the display but instead is added at the checkout. Studies have shown that in the US people are less likely to purchase a product if the sales tax is shown on the displayed price rather than added at the checkout.

However, whilst this is interesting every good student of ACCA or CIMA knows that the price shown in the UK on business to business transactions is net of VAT (i.e. VAT exclusive – excluding VAT) whilst goods for sale to the public are generally shown gross of VAT (i.e. VAT inclusive – including VAT).

On the subject of VAT in the UK, there was a recent change announced to the VAT filing system. In an attempt to reduce the level of filing of paper VAT returns, from April 2010 all businesses with an annual turnover of £100,000 or more will have to file VAT returns electronically and also pay VAT online. In addition, any  business registering for VAT on or after 1 April 2010 will also have to file and pay online.

From an environmental point of view this is good news as the amount of paper that is used for paper return completion and submission is huge.

So, is the paperless office coming closer?

All publicity is good publicity but surely it should be avoided (evaded?) in this case?

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Previous blog entries have highlighted the distinction between tax avoidance (legally minimising the tax liabilities) and tax evasion (illegal methods of avoiding tax).

HM Revenue and Customs have recently announced a new weapon in their fight against people who illegally evade tax. The tax authorities have said that people who have committed tax evasion on or after 1 April 2010 will now not only have to settle the tax owed, pay interest on tax and suffer potential penalties but they will now also face the prospect of having their names and addresses put up on the Revenue’s website for everyone to see.

This will apply to people that have deliberately evaded tax of more than £25,000.

There’s a saying that “all publicity is good publicity” but I’m not sure that being publicly exposed as a tax cheat is something that a lot of people will be looking for in terms of good publicity!

Avoiding or Evading? Do the tax authorities care…

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Taxation and football have been in the news this week in the UK.

First of all we had winding up orders threatened on Southend, Cardiff City and the Premier League team Portsmouth on Wednesday. If a winding up order happens the clubs as corporate entities will be liquidated. In simple terms this means that the football clubs cease to exist.

The courts have allowed all of them a “stay of execution” but it’s not a great deal of time. Portsmouth, for example has to prepare a “statement of affairs” by 4pm next Wednesday.

The reason for the winding up order on Portsmouth is that HMRC (the UK tax authorities) took them to court over an unpaid tax bill of over £7 million. Whilst there are lots of emotional and community issues behind winding up a football club, HMRC take the view that it is simply another business that despite repeated requests has not settled its debt.

Another tax / football story in the press this week was yesterday when Harry Redknapp, the Tottenham Hotspur manager, was charged with tax evasion. He allegedly evaded tax on a payment made to him in Monaco. The case was adjourned to April.

This leads to a point which students often get confused about. Namely, the difference between “tax evasion” and “tax avoidance”.

“Tax evasion” involves methods of illegally reducing tax liabilities. “Tax avoidance” however is legitimately minimizing tax liabilities. It should be noted though that “tax avoidance” doesn’t sound particularly legitimate (even though it is) so a number of advisers are now referring to “tax avoidance” as “tax mitigation”!

All of this could be of little interest to the supporters of Portsmouth though if they are wound up next Wednesday. We shall wait and see.

31 January or (31 January minus 7 days) deadline?

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Well it only seems like yesterday that we posted about the 31 October deadline for submitting the hard copy paper income tax returns. Today is 29 January and perhaps more importantly if you’re a UK tax payer who has yet to submit your Income Tax Return, Sunday is 31 January.

The deadline for submitting your UK tax return electronically is 31 January following the tax year in question. So for example, the deadline for submitting your tax return electronically for tax year 2008/09 (6 April 2008 to 5 April 2009) is 31 January 2010 – i.e. this Sunday! If you haven’t submitted your tax return yet then you’ve probably got a busy weekend ahead of you.

If you’re in the UK then there really is no excuse for forgetting the deadline. Moira Stewart, who worked for the BBC for over 30 years, has been fronting a campaign by HMRC to remind tax payers about the deadline. TV, radio and press adverts have been bombarding us in the UK for the last month or so.

What surprises a lot of people though is that when a tax payer registers for the online service they are sent details of their user name and password through the post. HMRC take up to 7 working days to register site users so if you were planning on spending this weekend doing your electronic tax return but have yet to register on the HMRC site then unfortunately you will receive the £100 fine for late submission as you won’t be registered before the 31 January deadline and hence won’t be able to submit the return before the deadline.

What is also important to remember is that 31 January 2010 is also the deadline for paying any outstanding amounts of tax for 2008/09. Payment of any outstanding tax after this date will be liable to interest.

CIMA results and performance with a smile…

First of all congratulations to all CIMA students that received their exam results yesterday and were successful. Your hard work paid off so very well done! We’ve heard from a number of you that were successful and those are always the best type of emails to receive from students!

If your results weren’t as expected though and you didn’t pass then better luck next time.

Various papers have performance management within the syllabus. A rather unusual method of managing performance was recently reported by the press.

Japan’s Keihin Express Railway Co., in an effort to promote a friendlier customer service, has implemented something called “smile scanners” at its stations to assess the smiles of their employees!

Employees have to look into a camera every day and have their smiles scored by a computer that analyses their facial features and gives feedback. The quality of the smile is reportedly rated on a scale ranging from 100 to zero.

Is it effective? Can the scanner distinguish between an artificial and a genuine smile? The jury is still out.

While we at ExP love technology, we’re not sure we would submit to such assessment, at least not before our morning coffee!

We’ve just passed 31 December. So what?

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As we start the new year people who are not students of UK tax maybe mistakenly assume that we have just finished a fiscal year on 31 December and have started a new fiscal year on 1 January.

As good tax students we know however that this is not true! The fiscal year (tax year) for individuals in the UK ends on 5 April and starts on 6 April. For companies the financial year start on 1 April and end on 31 March although remember that companies are free to choose their accounting period end.

Other countries have an assortment of fiscal year ends. Individuals in Japan and UAE for example have a fiscal year ending on 31 December. In the US the fiscal year ends on 30 September and in Australia it’s 30 June. This is all very interesting but don’t worry it won’t be examined.

However, what is important with regard to the start of the year is that all of us here at ExP would like to wish you all a very Happy New Year and all the very best in your exams, professional and personal lives for 2010.

Is it a boat? Is it a plane? No, it’s the world’s biggest non-current asset?

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I just read that Royal Caribbean have recently entered the World’s largest passenger ship – the Oasis of the Seas – into service.  It is enormous, with elevators to carry passengers up and down the 18 passenger decks.  To my old fashioned tastes, it looks rather like a floating housing estate, but I think that’s just age.

Whilst watching an online tour of the ship, I found myself being rather accountant-like about it.  What’s it’s design life and is its useful life going to be shorter?  Do cruise ships go out of fashion before they become too unreliable to sail?  Will it generate more revenues in the early years than the later years?  So should sum of digits/reducing balance depreciation be used instead of straight line?  Of the cost of £800 million to build it, how much is down to the hull of the ship itself and how much to the decoration?  The decoration is no doubt ideal for its target customers just now, but it’s bound to look hopelessly dated in twenty years’ time.  So what’s their policy for “unbundling” the ship into separate components and depreciating each over a different life?

There is much criticism of ship owners sending their decommissioned ships to developing countries to be broken.  As a cruise company, this ship will no doubt not suffer that fate, as to do so would damage the company’s public relations.  So there might be a constructive obligation to decommission the ship in about 30 years’ time at a loss.  Have they recognised that as a liability and discounted to present value?  They should have done, because IAS 37 requires it.

Finally, the interview with the CEO of the company starts by admitting that 2009 has been “horrible” and 2010 doesn’t look much better.  Evidence of impairment right at launch perhaps?  IAS 36 only allows companies to project revenues five years into the future when valuing assets (unless an extension to this period can be justified). Will the global recession be over by then?

So whilst other people see a big ship, I see a floating cocktail of accounting and audit issues.  Is this normal?

When is a discontinued activity not a discontinued activity?

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General Motors has had a difficult time of late, but things appear to be getting better.  Dogged by poor sales in its core US market, it was forced to raise cash by drastic means.  This involved agreeing the sale of its European subsidiaries (Opel and Vauxhall).  The sale of both to a consortium including Russian banks and Canadian car spares manufacturers. There were legal formalities to complete, but the deal had been announced, largely supported by the German government and looked certain to go through.

At the start of November 2009, it was announced that the board of General Motors had met after a mammoth session and decided not to do the deal to sell its European businesses.  The environment for GM had improved more rapidly than expected and a sale no longer looked necessary.

A discontinued activity is defined in IFRS 5 paragraph 32 as a separate business unit that (a)represents a separate major line of business or geographical area of operations,(b)is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or(c)is a subsidiary acquired exclusively with a view to resale.  Vauxhall/Opel sounds like it would fit this definition.  It may have been presented as a discontinued activity after being reclassified as held for sale.

It’s unusual for a volte face this big to happen, but it occasionally does. It can produce odd effects in profit, as items are written down to expected sales value and then reclassified at their previous carrying value.

The Premier League and the UK income tax rate…

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Cristiano Ronaldo’s well publicized move from Manchester United to Real Madrid in the summer understandably received a lot of publicity. A world record football transfer fee of £80m is bound to catch the attention.

Ronaldo’s first year remuneration from Real Madrid is reported to be in the region of £11m. Students sitting the 2009 exams should be well aware that the 40% tax rate for the 2008/09 tax years applies to taxable income above £34,800. An individual in the UK with annual earnings of £11m would exceed the 40% threshold in just 2 days!

There were no doubt many factors that persuaded Ronaldo to move to Spain to play for Real Madrid. From a tax point of view though, Spain has favorable tax legislation that enables foreign players to pay tax in the region of 23%. When you compare this figure with the 40% top rate in the UK (and the upcoming 50% tax rate which is not examinable in the December exams) and apply the difference to the amounts of remuneration that Ronaldo is earning then the tax bill  would be significantly lower in Spain than in the UK. Approximate figures show a difference in tax next year when the 50% rate is in place of nearly £3m per year. This adds up to a significant amount when looked at over his contract period of 6 years.

Of course the football purists amongst us would argue that it’s the football team and supporters that are important rather than the tax bill but then again I can’t be sure about this until somebody offers me £11m a year to live in the sun in Spain!

Is 40% average?

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Students should be well aware that the maximum personal UK income tax rate is 40% but how does this compare to the rest of the EU?

The EU have released the 2009 edition of their report on the “Taxation Trends in the European Union”. There are some interesting findings.

The top personal income tax rates in the EU range from a high of 59% in Denmark to a low of 10% in Bulgaria. The 40% top rate of income tax is also present in Greece, Hungary and Poland.

The arithmetic average of the 27 member states is 37.8% so the UK rate is slightly higher than the average for the EU. What is interesting is that the newer member states such as the Czech Republic, Romania and Slovakia all have relatively low income tax rates (15%, 16% and 19% respectively). When compared with the older EU member states the UK rate is relatively low.

This is all very interesting but the key thing to remember for the exams is that the top rate of income tax in the UK is 40%. In fact, ask anyone that has qualified since 1988 what the highest income tax rate is and they should say 40%. The top rate has been 40% since 1988!