Industry Eye: Alterations in tax system bring about range of opportunity for individuals and firms

With an election in the offing and a huge budget deficit to be corrected, further change in the UK tax system is inevitable. With change comes opportunity, and with opportunities come costs. There are also uncertainties.

Irrespective of which party forms the next government, one of the first anticipated changes is an increase in the rate of capital gains tax, currently set at 18 per cent.

When compared with a top rate of income tax of 50 per cent from April 6 2010, there is a huge incentive for high earners to restructure income as gains wherever possible.

This results in an equal and opposite incentive for Parliament to increase the capital gains tax rate. The current government has already announced plans to crack down on schemes that turn income into capital gains, for obvious reasons.

This impact will be felt across agriculture, following the removal of indexation allowances, the cost of land is rebased to actual cost or, if earlier, the 1982 value. Land having a 1982 value of 2,000 per acre with indexation allowance had a cost base for CGT of approx 4,000.

With rebasing to 2,000 per acre, any increase in the rate of CGT will have a significant impact. Although there is little time left to plan, those contemplating disposals may wish to accelerate the process where possible to go to contract before April 5.

Those partnerships or sole traders who are higher rate tax payers may contemplate forming a hybrid structure by which they introduce a corporate partner, for example a limited company, as a partner. The share of profit allocated to the corporate partner will generally be taxed at 21 per cent rather than the personal rates up to 50 per cent.

This particularly benefits those businesses which wish to retain or increase their investment in working capital, for example stock, or capital expenditure above the annual investment allowance level of 50,000.

The profits to fund that investment could be allocated to the company and taxed at the lower rate. Profits could be extracted from the company in a variety of ways to ensure that the tax bill is manageable.

There are opportunities for companies too. Tax is much like any other cost that has to be met by a business.

Simplifying group structures, maximising claims for research and development tax relief and making effective use of share-based payments are among the possibilities for reducing the burden. New rules aimed at encouraging companies to provide staff with more fuel-efficient vehicles may also help employers and employees alike.

Whatever measures are in force, or possibly in a further post-election Budget, as the Government seeks to raise revenue to trim the deficit, it generally opens up opportunities which with careful planning can mitigate the impact on yourselves and your business.

Now is the time to contemplate your potential exposure to an increase in taxation and, where it would have an impact on your future plans, a timely discussion with your advisers might identify mitigation opportunities.

Patrick McCreanor is agriculture director for accountancy firm Baker Tilly in Leeds and Saltaire. email: patrick.mccreanor@ bakertilly.co.uk, or tel: 0113 2855000.