Pamela Sayers reviews key tax considerations affecting professional practices.

With the top rate of income tax at 50% (at least for the time being), increased national insurance rates from 6 April 2011 and a decrease in the main and small companies' tax rates from 1 April 2011, there are undoubtedly tax arbitrage opportunities from using different corporate structures with a tax differential of 26% or more.

Service companies

Professional practices will continue to make use of service companies, together with the transfer pricing opportunities introduced in April 2004. The results of our 2010 Annual Survey of Law Firms showed that a third of respondents were considering the introduction of a service company, while for a third this was already complete or in progress. The Government announced on 9 December 2010 that it would incorporate the latest definition of 'transfer pricing guidelines' into legislation based on recent Organisation for Economic Co-operation and Development guidance. Legislation has now been introduced by the Finance Bill 2011 to bring this into effect for accounting periods commencing on or after 1 April 2011 for corporation tax, and for the 2011/12 tax year and onwards for income tax purposes.

High earners

Those earning over £42,475 a year will be paying more income tax and national insurance from 6 April 2011, so they will certainly be feeling the pinch. However, changes to the pension rules from 6 April 2011 will enable high earners to obtain tax relief at their highest marginal rate (and therefore reduce the average tax rate) on pension contributions of up to £50,000. In addition, it will be possible to bring forward unused annual allowance from the previous three fiscal years if there was a registered pension scheme in those prior years.

Taxes had already been increased for those on higher incomes with effect from 6 April 2010, with those on £100,000 a year and upwards losing the benefit of the personal allowance, and those on taxable incomes over £150,000 a year paying tax at 50% on income above this level. However, the Chancellor indicated in the Budget that there are too few top-rate taxpayers to fill the empty coffers, hence the need to widen the net – and share the pain. It was interesting to hear the Chancellor say that the 50% income tax rate was "temporary", but that was what Robert Peel said about income tax in 1842!

Capital expenditure

For professional practices wishing to undertake capital expenditure, it would be advisable to consider whether it is possible to accelerate the expenditure and bring the asset into use, to take advantage of the annual investment allowance of £100,000, prior to its reduction to £25,000 from April 2012. Furthermore, firms will need to review their short-life assets in more detail. Prior to the Budget, short-life assets had to be disposed of within four years of purchase to be pooled separately, and for the benefit of the pool to be written off if the assets were scrapped within that time. The time limit permitted before disposal has now been increased to eight years.

Tax simplification?

Finally, the establishment of the Office of Tax Simplification will result in many outdated reliefs being removed. Unfortunately, the relief for late-night taxis is also on the list for abolition, which will undoubtedly cause frustration for professional practices, since this has been the subject of much discussion over the last three years.

There will also be a period of consultation on merging the operation of income tax and national insurance contributions, which could simplify the tax system dramatically if it ultimately leads to a full merger. This is clearly a major issue which will take time to resolve.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.