The Budget 2007 – our take on it

The Chancellor presented his eleventh Budget on 21st March 2007 which included some headline grabbing reductions to tax rates. However, as is always the case, the real truth is in the small print and the good news is outweighed by the bad news for many. So we have gone behind the headlines and summarised below the main points in the Budget and how these will really affect you.Good news for some companies and bad news for others!

The good news is that the main rate of corporation tax will fall to 28% from 1st April 2008. Unfortunately this reduction will only apply to certain large companies and some investment companies.

The bad news is that from 1st April 2007 the Corporation Tax rate for smaller companies will increase to 20%, rather than the current 19%. Further staged increases will then follow; from 1st April 2008 this will increase to 21% and 22% from 1st April 2009. This means that from 2009 a company making £100,000 in profits could be paying an extra £3,000 in Corporation Tax each year. The budget reduces the tax incentive for many small businesses to become companies.

More changes for businesses with assets!

Plant and Machinery changes

The 50% rate of first year capital allowances has been extended for a further 12 months from April 2007 on expenditure incurred by small businesses on most plant and machinery, thereby helping save tax on assets acquired for the business.

From 2008/09, it is proposed that first year allowances for small and medium sized businesses will be replaced by an annual investment allowance of £50,000 per year, following consultations. What this means for businesses is unclear at this time.

Ordinary writing down allowances for plant and machinery in the general pool will be reduced to 20% from 2008, increasing the tax burden on businesses. Those businesses that invest in long life assets will benefit from an increase in capital allowances from 6% to 10% per annum in April 2008.

Industrial Buildings (IBA) and Agricultural Buildings Allowances (ABA) to be withdrawn

Included in the major business reform package announced by the Chancellor is the gradual withdrawal of IBA’s and ABA’s over the next four years, which could increase the tax burden for many businesses, including those with industrial property or hotels.

As a first step, balancing adjustments and the re-calculation of written down allowances are withdrawn in respect of balancing events occurring on or after 21 March 2007 with a few exceptions.

Allowances on plant integral to a building

From April 2008 it is proposed to set writing down allowances at 10% for certain fixtures integral to a building, which can include radiators, heating systems and emergency signs. The details will be subject to consultation. This may well increase the tax burden for many businesses currently able to claim 25% writing down allowances on certain assets integral to a building.

Business Premises Renovation Allowances (BPRA)

BPRA will provide 100% initial allowances on capital expenditure incurred, on or after 11 April 2007, on the renovation or conversion of qualifying business properties, which will ensure full tax relief will be enjoyed at the time the property is renovated rather than when later sold.

Research and Development (R&D) Tax Relief to be extended

Proposals were included in the budget to benefit those businesses undertaking research and development. From 2008 it is proposed to increase the rate of tax relief available for large companies to 130% of qualifying R&D expenditure and 175% for smaller businesses.

Managed Service Companies to pay more in tax

From 6th April 2007, PAYE will be applied to all payments made to individuals by Managed Service Companies. NIC will be applied after the Finance Bill becomes law. The Government believe that these companies have been used to get around “IR35″ and avoid PAYE/NIC on employment income, by those who would have been classed as employees had there been no company in place.

New legislation will specifically target Managed Service Companies, and prevent employees from claiming the costs of travelling to and from each engagement as an allowable expense.

It is proposed that any unpaid tax and NIC may be recovered from other parties, whether involved directly or indirectly, where the Managed Service Company does not pay.

Buy your Foreign Property in a company

The budget proposes to remove the possibility of a tax charge for individuals using a company solely to buy property abroad. Subject to certain conditions the budget proposes to bring in a retrospective relief to allow individuals to set up a company to purchase property abroad for their own use without them suffering a benefit in kind. Although the legislation will not be introduced until 2008, the budget states that they will not seek to charge a benefit-in-kind in the interim where certain conditions are met.

Benefits provided by former employers now tax free

Legislation is to be introduced to exclude from taxation minor benefits provided by former employers to retired former employees. Once the regulations come into force, the exclusions will be backdated to 6 April 2006.

National Minimum Wage increases

From October 2007 the adult rate for the national minimum wage will increase to £5.52 per hour (£4.60 per hour if between 18 and 21, and £3.40 per hour if 16 or 17).

Company Cars

The company car tax and fuel rates remain the same for the 2007/2008 tax year. From 6th April 2008 cars that have been manufactured to run on E85 fuel will enjoy a 2% discount from the appropriate percentage used for the car benefit. E85 is the term used for motor fuel blends of 85 percent ethanol, and is an alternative fuel being promoted as completely renewable.

VAT

Registration and Deregistration Limits Increase

From 1st April 2007 the threshold for registering for VAT has increased to £64,000 and the deregistration limit to £62,000.

VAT Fuel scale charges overhauled

From 1st May 2007 new Fuel Scale charges will apply where input VAT is recovered on any fuel used for private motoring. Instead of the normal 5 categories based upon engine size, there will be 21 bands based upon CO2 emissions, replicating the systems used for benefits in kind. The level of emissions will need to be established for each car where input VAT is reclaimed on private fuel, which will undoubtedly increase the administrative burden.

Businesses may be caught in the fight against fraud

Businesses trading in electronic goods, satellite navigation systems, mobile phones, computers, and accessories could be liable for another’s VAT if they had reasonable grounds to suspect that VAT would go unpaid elsewhere in the supply chain. HM Revenue and Customs presume a business would have reasonable grounds if they purchase the goods at below market value, unless there is evidence to the contrary. Businesses dealing in these products will need to ensure that they take steps to minimise their risks.

Stamp Duty Land Tax Changes

On the whole most of the changes to Stamp Duty Land Tax were to ease the administrative burden, tidy up the legislation or formalise the provisions announced in December 2006 to counteract schemes aimed at avoiding the tax.

From 1st October 2007 newly built zero-carbon homes will benefit by relief from Stamp Duty Land Tax. Properties costing up to £500,000 will be exempt from the tax on first sale, and those costing over £500,000 will enjoy a £15,000 reduction in the Stamp Duty Land Tax payable. Whilst this sounds very generous, it remains to be seen how many properties qualify.

Individuals

Income Tax

The basic rate of Income Tax will be reduced from 22% to 20% from April 2008. However, the starting rate of 10% will be removed for earned income and pensions from the same date but will continue for savings income and capital gains. The higher earners will be marginally better off (up to £424 per annum); however this will be at the expense of those who earn less then £18,600, as they will be worse off.

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

From 6th April 2008 the amounts that can be invested into ISA’s will increase up to:

£3,600 per tax year for a cash ISA
and up to £7,200 per tax year into a stocks and shares ISA subject to an overall limit of £7,200 to both ISA’s in a tax year. This will increase the amount an individual can save without suffering income tax or capital gains tax on their investment.
Tax incentives withdrawn for Pension Term Assurance

Subject to certain conditions, pension contributions used to fund a personal term assurance policy have qualified for tax relief. This relief has now been withdrawn for individuals taking out new policies, thereby increasing the cost of such policies.

For contributions under occupational pension schemes, the relief is withdrawn for all new policies paid on or after 1 August 2007 subject to certain applications made before 29 March 2007. For contributions under other registered pension schemes, the relief is withdrawn for all policies paid on or after 6 April 2007 except particular applications made before 14 December 2006.

Where relief remains available, the policyholder will cease to be entitled to the relief if the policy is varied to increase the sum assured or extend the term of the policy, unless there is an option under the policy which is then exercised.

Inheritance Tax

Previous announcements stated that from 6th April 2007 the Inheritance Tax ‘Nil Rate Band’ will increase to £300,000 , increasing again to £312,000 from April 2008 and £325,000 from April 2009. The 2007 Budget announces a further increase to £350,000 from April 2010.

Trusts

The budget introduces corrections to last years Trust changes. These include from 6th April 2006 Trustees only paying tax on the increase in share price when a company purchases it’s shares back from the Trust, rather than suffering tax on the whole proceeds.

Beneficiaries will no longer receive a benefit for notional tax credits on chargeable event gains on certain life assurance policies previously given in error as an oversight in the legislation.

Anti-avoidance measures

In the Government’s continued clamp down on tax avoidance, further measures where included in and just before the Budget. These included stopping the practice of buying and selling companies to secure a tax advantage through getting access to their capital losses and gains. The provisions previously introduced to stop the sale of lessor companies to avoid tax have been extended to include partnerships and consortia. Rules regarding the use of Employee Benefit Trusts have been tightened. Regulations previously introduced to stop Companies creating artificial losses to save tax were extended to individuals from 6th December 2006.

Measures may catch loss making partnerships

Prior to the budget a further measure was announced to stop tax schemes that used partnerships, especially Limited Liability Partnerships (LLP) in which losses were created and set against other income to reclaim tax. However the provisions may also affect unsuspecting partnerships not involved in the schemes, where losses are incurred and there is a non-active partner.

Compliance

Criminal Investigation powers to be extended

The Budget includes proposals to allow some of the powers already used by Customs and Excise in criminal investigations to also be available to Revenue officers, which is a concern. The powers may include the use of search warrants, being able to obtain evidence from people other than the suspect, and arrest, search and question suspects. The proposals are currently being consulted upon.

New penalties to be brought in

The Budget included proposals to standardise the penalty regime for income tax, corporation tax, PAYE and NIC as well as VAT. The penalty will be determined by the amount of tax understated, the reasons for the understatement and the extent of disclosure by the taxpayer. The new rules are expected to come into force for returns filed after 31st March 2009.

The proposals suggest that there will be:

no penalty where a taxpayer makes a mistake;
moderate penalties for failures to take reasonable care;
higher penalties for deliberate action; and
still higher penalties for deliberate action with concealment.
How this will work in practice is anyone’s guess at the moment, especially the factors that decide whether the error arose because of a genuine mistake or a taxpayer not taking reasonable care.

Online filing and relevant changes for tax returns

The enquiry windows for HM Revenue and Customs (HMRC) to seek to review Tax Returns for both Income Tax and Corporation Tax are to be linked to the date the returns are submitted from 2008, rather than the deadline by which they should be submitted.

From 2008, paper self assessment tax returns will need to be submitted to HMRC by 31st October 2008, and those filed online will need to be submitted by 31st January 2009.

The requirement to file all PAYE forms online during the tax year may well be introduced in phases from 2009. The requirements to file and pay online for VAT are expected to be phased in from 2010 and from 2011 Corporation Tax will follow. Many businesses and individuals may need to invest in technology merely to deal with HM Revenue and Customs in the future.

We can help

Despite statements about simplifying the UK tax system, the truth is that it gets increasingly complex each year. But we can help.

We can guide you through the complexities of the legislation and help you to pay much less tax.

So if you would like to discuss ways in which we can help you to make tax savings, or if you would like to discuss any of the issues identified please do not hesitate to contact us.