Component accounting
Housing associations are increasingly adopting component accounting, as recommended in SORP 2008, and need to be aware (unless they are charitable) of the impact this change in accounting policy will have on taxable profits.
Previously tax deductible replacement costs of components will be capitalised under the new policy and only the annual depreciation will then be tax deductible. This can have a significant effect on profits chargeable to corporation tax, or on the speed with which accumulated tax losses are used, and therefore needs to be factored in to an association's business plan where appropriate.
Changes in tax rates
Business plans will also have to take account of various tax rate changes announced this year. All associations will need to assess the impact of the increase in the standard rate of VAT from 17.5% to 20%. Associations will also need to factor in the gradual reduction in the main rate of corporation tax, currently 28%, which will reduce to 27% from 1 April 2011, and thereafter reduce by a further 1% each 1 April until, with effect from 1 April 2014, the main rate becomes 24%.
SORP update 2010 – negative goodwill
The 2010 SORP update includes consideration of the accounting for 'negative goodwill'. In effect, the proposal is to recognise in the income and expenditure account the 'gain' – in substance a gift – arising on a transfer of engagements from one association to another, or an amalgamation of two or more associations.
The National Housing Federation is, we understand, consulting with HMRC on the tax implications of this accounting treatment and clarification has yet to be received. Our initial view is that while the tax treatment of this credit is not straightforward, in all likelihood there is only a possibility of it being taxable where it relates to stock/WIP or loans, with no tax effect arising from any credit relating to transfers of fixed asset housing stock.
Worldwide debt cap rules
New tax rules were introduced in Finance Act 2009 for restrictions on loan interest deductions for accounting periods beginning on or after 1 January 2010. While aimed at multi-national groups, these rules, (the basic intention of which is to prevent a group from securing a UK tax benefit from lending a greater proportion of debt to the UK part of the group than the worldwide group borrows externally), can apply equally to a group with no overseas entities, such as a UK housing association group. The legislation only applies to large groups (those with 250 or more employees or both turnover exceeding €50m and balance sheet total exceeding €43m). For such housing association groups, there may be circumstances where a combination of the structure of the group and the profile of the inter-company and external loans around the group can trigger a potential charge under these debt cap rules, even though this may not have been the intention of the legislation. We therefore recommend that all such groups review their position regarding rules as soon as possible.
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.
