Reflections on the budget

The sun shone while Darling announced tax and borrowing increases!

It may have been sunny outside on 22 April 2009, but Alistair Darling brought the world’s doom and gloom into his Budget speech. The message was clear: this is bigger than just the UK; it’s an international, planet-wide problem and therefore, technically, not anyone’s fault. He referred to the deep crisis of the 1930’s and said that too little had been done too late. “We will not repeat those mistakes again”. He used the past to justify the headline grabbing public borrowing figures, peaking at £175 billion this year, before falling slowly over the following years.

The speech was crammed with World doom and gloom, before Darling announced his rescue plan of investing to grow the UK out of recession. Darling used the gravity of the situation to increase the previously announced 45% top rate of tax from April 2011 within the blink of an eye to 50% from 2010. 

As usual there were masses of detail to wade through, 222 pages of budget notes, 42 pages of press notices, not to mention hundreds of pages of supplementary documents, before you even consider the budget report itself.

Company tax rates remain unchanged

The rates of corporation tax remain unchanged. The main rate of corporation tax will continue at 28%, and as previously announced in the 2008 Pre-Budget report the corporation tax rate for smaller companies is to stay at 21%. However it is still the highest it has been in recent years despite the recession.  Despite this there are still significant tax savings to be enjoyed by transferring a business into a company.

The scope for enhanced capital allowances widened

The 100% enhanced capital allowances available for investment in energy saving or water efficient plant and machinery, is to be extended. Capital expenditure by businesses on plant and machinery would normally qualify for 20% writing down allowance. If the plant and machinery qualifies under the appropriate lists for approved energy saving equipment or water efficient technology then a 100% first year allowance can be claimed.

This enhanced 100% allowance is to include investment in uninterruptible power supplies from a date to be announced shortly. 

Tip: As investing in plant and equipment entitled to the enhanced allowances could result in the full cost being allowed for tax in the year that you bought it, then it is worth considering. It is surprising what qualifies, as it could be basic light fittings, heat pumps or mere toilets that could save tax. Further details of what qualifies can be found at www.eca.gov.uk. 

Top rate of personal tax 61%!

The Chancellor announced an increase in the top rate of personal tax from 2010 to 50%. This will be the highest personal tax rate in Europe, which could have a serious impact for those businesses that meet tax on behalf of employees on certain benefits. Those employers could face an effective tax rate of up to 126%.

What the Chancellor omitted to mention was that for those with incomes between £100,000 and £112,950 they will effectively be paying 60% tax on that income. This arises because of the gradual withdrawal of the personal allowance for those with incomes over £100,000 from 2010. This may even increase to 61% if all of your income is earned income as a result of the extra 1% National Insurance. Or 61.5% from 2011 when the extra 0.5% increase in National Insurance kicks in.

With the increase in the personal tax rate to 50% for incomes over £150,000, comes an increase in the tax payable on dividends. Prior to 6 April 2010 the top rate of tax payable on dividends is 32.5%. This will increase to 42.5% on dividends where the individual’s income exceeds £150,000.  

Tip: For limited company owners we offer a remuneration review to identify the most tax efficient combination of options to extract funds from the company to minimise your overall tax burden.

Extra tax for trusts

From 2010 there will be an increase in the tax rate for Trusts to 50%. Many Trustees may wish to consider the impact of the tax increases and what options are available.

Losses carry back extended

A measure announced in the 2008 Pre-Budget Report to help cash flow for struggling businesses has been extended for a further year.

Companies and unincorporated businesses can normally carry back losses against profits of the previous year although there are special rules allowing a carry back for three years for unincorporated start-ups and also for businesses that cease to trade.

For company accounting periods ending between 24 November 2008 and 23 November 2010, and unincorporated businesses ending in tax years 2008-09 and 2009-10 the three year carry back will apply to all losses. The claims will be subject to a maximum loss carry back of £50,000 for each accounting year to the earlier two years of the three year carry back period. This will result in businesses being able to claim refunds of tax paid in the earlier years, albeit limited.

Temporary u-turn on first year capital allowances

From April 2009 first year allowances on plant and machinery are being reinstated temporarily. In April 2008, after lengthy consultations, first year allowances were replaced by a 100% Annual Investment Allowance (AIA) on £50,000 of capital expenditure on most plant and machinery. The Chancellor has decided that investment in businesses needs more help and is to reinstate the first year allowance.

The 100% AIA was welcomed last year as businesses are free to allocate the AIA in any way they wish, leaving them free to maximise their tax savings by ensuring that the allowance is allocated against assets that would normally qualify for the lowest reliefs.

Where businesses spend more than £50,000 on plant and machinery then it may be possible to claim the new 40% first year allowance on the excess, in addition to the 100% AIA on the first £50,000. There will be certain conditions and exceptions, such as cars and assets to be leased will not qualify. 

Company car tax to change in 2011

New benefit in kind rates will apply for company cars provided after 5 April 2011. Where an employee is provided with a company car for their private use they will be taxed on a benefit in kind, which is reported each year on HM Revenue & Customs form P11D. The calculation of the benefit in kind is based upon the list price of the vehicle and accessories provided and the CO₂ emissions.

The rates used in the calculations will change in 2011 and subsequent years. The current £80,000 cap to the list price used will be removed increasing the taxable benefit for those employees with cars costing more than £80,000.

Tip: We would be happy to review the taxable benefit on your company cars and advise on ways to reduce the tax burden.

Name and shame deliberate tax defaulters

HM Revenue & Customs will be able to publish the names and details of individuals and companies who are penalised for deliberate defaults with lead to tax owed of more than £25,000. Those that make full unprompted disclosure to HM Revenue and Customs may well avoid this. 

Capital allowances on cars bought by the business change

From April 2009 the annual capital allowances for cars will be dependent on the level of CO₂ emissions for the car rather than just the cost.  Cars below 110 gm/km will continue to be entitled to a full 100% first year allowance, between 110-160 gm/km will get an annual allowance of 20% whereas cars in excess of 160 gm/km will only qualify for 10% in a special rate pool.

The changes add further complexities to already complex rules, making it more difficult for business owners to make informed decisions. For example, businesses purchasing cars costing more than £30,000 and over 110 g/km CO₂ may well be better off under the new rules. However if the car is likely to fall drastically in value and perhaps not be owned for too long, then the changes are going to be costly. Motorcycles are excluded from the definition of cars and will not be subject of the new rules, but will qualify for the 100% Annual Investment Allowance.

Tip: As the issues may not be straightforward and there could be significant amounts at stake then please contact us prior to making the purchase.

Tip: Cars with low emissions may be a very cheap way of providing family members with cars whilst saving tax.  It is surprising what cars have low emissions. A list of cars can be found at www.comcar.co.uk.

No mention of income shifting, but disposing of income streams are taxable

Whilst there was no mention of the previous income shifting rules mentioned, the Budget notices included reference to the disposal of income streams. If companies, partnerships or individuals dispose of the right to future income streams without disposing of the underlying asset then the proceeds will be taxed as income. Although in some circumstances this is already the case, the proposed changes are to be more comprehensive.

Investment limits for Individual Savings Accounts (ISA’s) increase

The amounts that can be invested into ISA’s will increase to £10,200 per tax year, of which up to £5,100 can be saved as cash.

This will increase the amount an individual can save without suffering income tax or capital gains tax on their investment.  For those aged 50 or over before 6 April 2010, the new limits will apply from 6 October 2009.

For everyone else the new ISA investment limits will apply from 6 April 2010.

Tip: As anyone 16 or over can open an ISA and earn interest tax free it is well worth older children considering opening an account.

EIS carry back rules relaxed

From 6 April 2009 the rules regarding the carry back of income tax relief for investments into Enterprise Investment Schemes (EIS) have been relaxed. Previously only up to half of the investment made (with an overall maximum of £50,000) prior to 6 October in a tax year could be carried back. These restrictions have been removed and the full investment, up to the maximum in any one year of £500,000, can be carried back.

For investments made on or after 22 April 2009 into EIS, Corporate Venturing Scheme (CVS), or Venture Capital Trust (VCT) the funds need to employed for the purposes of a qualifying activity within two years of the issue of shares or if later within two years of trade commencing. The time limits were previously much tighter.

Financial advice should always be sought to ensure the right investments are made for your circumstances and the risks you wish to take.

Tip: If you are setting up a new business and introducing funds, consider whether it can be set up under the EIS rules and you enjoy the same tax breaks as for an EIS investment. Care would be needed but the tax savings could be substantial.

Stamp Duty on residential property extended to 31^st December 2009

The Chancellor announced a “holiday” from Stamp Duty Land Tax in September 2008 for homes costing £175,000 or less. This holiday was to be applied until 2 September 2009. In the Budget the Chancellor has extended the period of this Stamp Duty Land Tax holiday for residential properties up to £175,000 until 31 December 2009.

VAT Registration and Deregistration Limits Increase

From 1 May 2009 the threshold for registering for VAT will increase to £68,000 and the deregistration limit to £66,000.

 New VAT fuel scale rates for taxing private use on fuel provided will apply for returns beginning on or after 1 May 2009. The scale charge for a particular vehicle is determined by its CO₂ emissions figure.

Tax Relief restricted on Pension Contributions for high earners

From 6 April 2010 tax relief on pension contributions will be restricted for people with taxable income of £150,000 or more. These high earners will suffer restrictions on their pension contributions until they eventually only receive 20% tax relief in the same way basic rate taxpayers do.

An individual receives relief at their marginal income tax rate on their pension savings. Relief for these high earners could be at 20% from 2010 instead of their new marginal rate of 50%. Broadly for every £100 pension contribution from April 2010 it will cost the higher earner £80 rather than £60, as is currently the case.

Although there are no limits to how much can be saved in registered pension schemes, the maximum tax relief available in any one year for pension contributions is limited to 100% of a person’s earnings and by what is called the “annual allowance”. One option may be to make substantial pension contributions in the current tax year when 40% tax relief is possible.

Before you rush out and make such substantial payments into your pension, hold on. The Budget includes rules to catch any payments in excess of £20,000 in a year that are not the usual level of contributions that you pay. It is difficult to see how these rules are going to work this year, let alone avoid catching innocent individuals who had already planned to make substantial contributions this year that are not part of a normal pattern.