At this point, it is worth recapping some of the main changes we already knew about and which were confirmed in the Budget:
The basic rate of Income Tax reduces from 22% to 20% from 6 th April 2008
The 10% starting rate of Income Tax is abolished except in respect of savings income
Age-related personal allowances for the over 65s increase substantially
The upper earnings limit for National Insurance is increased significantly as part of a process to bring it into line with the point at which higher rate Income Tax applies from 6 th April 2009
The rate of Tax Credit withdrawal (except for the family element of £545) increases from 37% to 39% from 6 th April 2008
The first income threshold at which Working Tax Credit begins to be withdrawn is to be increased from £5,220 to £6,420 from 6 th April 2008
A new single flat rate of Capital Gains Tax at 18% is to apply from 6 th April 2008
Taper relief and indexation relief for Capital Gains Tax are abolished from 6 th April 2008
Widows, widowers and surviving civil partners alive on 9 th October 2007 are entitled to any unused proportion of their deceased spouse’s Inheritance Tax nil rate band
Corporation Tax for large companies falls to 28% from 1 st April 2008
Corporation Tax for small companies increases to 21% from 1 st April 2008 and again to 22% from 1 st April 2009
The capital allowances regime is to undergo major reform from April 2008
Non-domiciled individuals resident in the UK for over seven years will be hit with a £30,000 annual charge if they continue to claim exemption from UK tax on unremitted foreign income and gains
Persons claiming the remittance basis of taxation will lose entitlement to personal allowances and the annual Capital Gains Tax exemption
(Full details of the new tax rates and allowances applying from 6 th April 2008 are set out in the Appendix.)
So, if we already knew about all of these major changes, what was left in the Budget?
In essence, whilst there are a few new items worthy of note, the vast majority of this year’s Budget proposals simply amount to the confirmation and refinement of the changes we already knew about.
Employment Income
Last year, (following a rather more exciting Budget), I produced a forecast of the likely rates of combined Income Tax and National Insurance on employment income received by individuals under retirement age over the next few years.
Given the anticipated alignment of the higher rate Income Tax threshold with the upper earnings limit for National Insurance from 6 th April 2009, it’s worth revisiting that forecast in the light of the latest proposals:
2008/9
2009/10
2010/11
%
Band
Cum
%
Band
Cum
%
Band
Cum
Personal Allowance
0%
£5,435
£5,435
0%
£5,635
£5,635
0%
£5,835
£5,835
Basic rate band
31%
£34,605
£40,040
31%
£38,100
£43,735
31%
£39,500
£45,335
Basic rate band
21%
£1,395
£41,435
n/a
n/a
Higher rate
41%
thereafter
41%
thereafter
41%
thereafter
Notes to the table
‘Cum’ = cumulative income for allowances and bands up to that point.
The first part of the basic rate band in 2008/9 is subject to both Income Tax and National Insurance at 11%.
The second part of the basic rate band in 2008/9 is subject to Income Tax plus National Insurance at just 1%.
Higher rate income suffers Income Tax at 40% plus National Insurance at 1%.
The allowances and tax bands quoted above for 2008/9 are accurate. Those quoted for 2009/10 and 2010/11 are projections based on the changes we are aware of combined with an estimated inflation rate.
What Will These Changes Do To Your Tax Bill?
Based on the previous table, the combined annual Income Tax and National Insurance burden on employment income is as follows:
Annual Earnings
Tax & NI 2007/8
Tax & NI 2008/9
Tax & NI 2009/10
Tax & NI 2010/11
£10,000
£1,308
£1,415
£1,353
£1,291
£20,000
£4,608
£4,515
£4,453
£4,391
£30,000
£7,908
£7,615
£7,553
£7,491
£40,000
£10,724
£10,715
£10,653
£10,591
£50,000
£14,824
£14,618
£14,442
£14,204
£50,000+
+ 41% of excess in each year
(The first two years’ figures are actual. Those for the second two years are forecasts. This also applies to the next three tables below.)
Comparing 2008/9 with 2007/8, we can see that the loss of the starting rate band leaves those with lower incomes considerably worse off. Many employed earners on low incomes will, however, receive more Tax Credits in 2008/9. A single person earning £10,000, for example, will receive an additional £372 in Tax Credits leaving them £265 better off overall.
Where the employee is earning the second wage in the household, however, the tax increases may not be offset by Tax Credit increases and, in the worst case, someone with a salary of £7,455 could be as much as £158 worse off in 2008/9 (a lot of money to them).
Those with moderate income are a little better off (but perhaps not in real terms when you take inflation into account).
Those with a salary of £40,000 make a saving of just £9. This is due to the large increase in the upper earnings limit for National Insurance meaning that these people have to pay National Insurance at 11% on over £5,000 more of their salary than in 2007/8.
In fact, there is a small band of salary level from £39,721 to £39,906 for which employed earners will be slightly worse off in 2008/9, with the worst affected on a salary of £39,825 losing £9.
Self-Employed Earners
The self-employed pay National Insurance at the main rate at 8% instead of 11%, so we get slightly different figures, as follows:
Annual Earnings
Tax & NI 2007/8
Tax & NI 2008/9
Tax & NI 2009/10
Tax & NI 2010/11
£10,000
£1,165
£1,278
£1,222
£1,166
£20,000
£4,165
£4,078
£4,022
£3,966
£30,000
£7,165
£6,878
£6,822
£6,766
£40,000
£9,835
£9,678
£9,622
£9,566
£50,000
£13,935
£13,580
£13,299
£13,019
£50,000+
+ 41% of excess in each year
In addition to the above taxes, most self-employed earners also have to pay Class 2 National Insurance, which is increasing from £2.20 to £2.30 per week from 6 th April 2008.
Landlords
For those whose income is derived solely from rental income, the tax burden over the next few years will be as follows:
Rental Profits
Tax 2007/8
Tax 2008/9
Tax 2009/10
Tax 2010/11
£10,000
£783
£913
£873
£833
£20,000
£2,983
£2,913
£2,873
£2,833
£30,000
£5,183
£4,913
£4,873
£4,833
£40,000
£7,414
£6,913
£6,873
£6,833
£50,000
£11,414
£10,626
£10,126
£9,766
£50,000+
+ 40% of excess in each year
The burden here is lower due to the fact that National Insurance is not due on rental income.
Pension Income
Pension income received by a person aged under 65 at the end of the tax year will suffer the same rates of tax as rental income in the previous table.
As explained above, persons aged over 65 are benefitting from significant increases in personal allowances for 2008/9.
The tax burden on a person aged between 65 and 74, but born on or after 6 th April 1935 (and not married to, or in a civil partnership with, a person born before that date) for the next few years is as follows:
Pension Income
Tax 2007/8
Tax 2008/9
Tax 2009/10
Tax 2010/11
£10,000
£271
£194
£130
£64
£20,000
£2,471
£2,194
£2,130
£2,064
£30,000
£5,183
£4,913
£4,870
£4,724
£40,000
£7,414
£6,913
£6,873
£6,833
£50,000
£11,414
£10,626
£10,126
£9,766
£50,000+
+ 40% of excess in each year
Capital Allowances
A large number of reforms to the system of capital allowances claimed by businesses are to take place from April 2008. Most of the changes apply to capital expenditure by companies on or after 1 st April 2008 or to capital expenditure by sole traders or partnerships on or after 6 th April 2008.
The main changes are as follows:
The 50% first year allowance for qualifying expenditure by small businesses (or 40% for medium-sized businesses) will cease to apply.
From April 2008, businesses of all sizes will be eligible for a 100% first year allowance on the first £50,000 of eligible expenditure each year. The new allowance is known as the ‘annual investment allowance’.
The annual investment allowance will be available in full to each company or unincorporated business except for companies in a group or any business entity which is ‘related’ to other business entities under the control of the same person or persons.
A ‘related’ business entity is broadly one which shares the same business premises or which carries out similar activities. Companies and unincorporated businesses cannot be related to each other for this purpose.
Groups of companies and related business entities will have to share a single annual investment allowance. They may allocate the allowance amongst them as they wish.
Businesses may also allocate the annual investment allowance to whatever qualifying expenditure they wish. Some exclusions will apply, however. In particular, cars are not eligible for the allowance.
For unrelieved balances on previous expenditure on plant and machinery and qualifying expenditure not covered by the annual investment allowance, the rate of writing down allowance will reduce from 25% to 20%.
A new category called the ‘special rate pool’ will be introduced.
Writing down allowances will be given on assets in the ‘special rate pool’ at the reduced rate of 10% instead of 20%.
Long-life assets, integral features in commercial buildings and thermal insulation expenditure on commercial buildings will all fall into the ‘special rate pool’.
The annual investment allowance will, however, be available in respect of expenditure which would otherwise fall into the ‘special rate pool’.
Transitional rates apply to writing down allowances and annual investment allowances where a business entity’s accounting period straddles 1 st or 6 th April 2008 (as applicable).
A 100% writing down allowance may be claimed on balances of under £1,000 in the main pool or the ‘special rate pool’. This facility is not available for assets in unincorporated businesses where there is an element of private use.
Industrial and Agricultural Buildings Allowances are being phased out progressively between 2008/9 and 2010/11.
Enterprise Zone Allowances are to be abolished in April 2011. Balancing charges will continue to apply where buildings in Enterprise Zones are sold within seven years of the end of the period in which the allowance is first claimed.
From 1 st April 2008, loss-making companies may claim a 19% payable tax credit (i.e. money back) by surrendering enhanced capital allowances on energy efficient or environmentally beneficial plant and equipment (these allowances are given at 100% in the year of expenditure).
Cars and Fuel
Many changes are being made to the taxation of cars used for business purposes, representing the usual combination of stealth tax and tax which is deemed to be socially acceptable because it is ‘green’.
The Government’s strategy seems to be to try to make business use of cars uneconomical. Having recently arrived at King’s Cross station over an hour and a half late, following a dreadful journey involving two unscheduled changes, I have to wonder what they think the alternative is?
From April 2009, the rate of writing down allowances on all cars owned by companies and/or used for business will be based on CO2 emissions rather than price.
Cars with emissions of over 160g/km will fall into the ‘special rate pool’ and attract writing down allowances at just 10%.
Lease payments on cars falling into this category will be subject to a 15% disallowance.
Most other cars will fall into the main pool and attract writing down allowances at 20%. Cars already within the main pool will remain there.
A 100% first year allowance will apply to cars with emissions no greater than 110g/km purchased between 1 st April 2008 and 31 st March 2013.
Company car tax charges are to increase by 1% for all cars with emissions over 140g/km from 6 th April 2008.
The charges will increase by a further 1% for all cars with emissions over 135g/km from 6 th April 2010.
The charge on cars with emissions no greater than 120g/km will be levied at 10% from 6 th April 2008 (or 13% for diesel cars).
The fuel benefit charge will also increase in line with inflation from April 2009.
Mileage allowances for business use of privately owned cars are to remain at current rates.
The VAT scale charges for private use are to be increased from 1 st May 2008.
Fuel duty will go up by 2p per litre in October 2008, 1.84p per litre in April 2009 and by 0.5p more than inflation in April 2010.
Property Taxation
Property authorised investment funds are to be introduced from 6 th April 2008 as an open-ended investment alternative to real estate investment trusts (REITs).
Land remediation relief is to be available for expenditure on derelict land.
Stamp Duty Land Tax relief for new zero-carbon homes is extended to new flats. The flats must be new builds and not conversions, however.
Stamp Duty Land Tax on lease premiums for residential property is effectively reduced as the additional charges applying where there is also annual rent in excess of £600 are to be abolished with effect from 12 th March 2008.
The additional charges continue for lease premiums on non-residential property but only where annual rent exceeds £1,000.
Sales of qualifying furnished holiday letting properties should generally qualify for the new Entrepreneur’s Relief (see below).
Many of the changes announced on Budget Day will take some time to come through, as they are due for consultation over the summer of 2011 and for legislation in 2012. This is in line with Government’s new approach to tax policy to consult with interested parties, and particularly tax professionals, on the detail of changes to ensure that the legislation, when finalised is effective and achieves the intended aims. Many of the changes due to commence very shortly, therefore, have been in the public domain for some time, and most were consulted on between December 2010 and March 2011. The Chancellor did announce some changes to draft legislation as a result of the outcome of consultations.
1.1 Corporation tax rates
The main rate of corporation tax will now reduce to 26% in April 2011, and not 27% as previously intended (the current rate is 28%). The reduction in the rate of corporation tax only applies to tax on profits in excess of £1.5 million in a year. The main rate of corporation tax will continue to reduce by 1% per annum after that date until the rate reaches 23% in April 2014. The small profits rate of tax commonly paid by small companies will reduce from 21% to 20% in April 2011 as previously announced. This rate applies to companies with profits of no more than £300,000, and therefore could in reality be relevant to companies of any size; it was previously called the “small company rate”. In consequence of these reductions, the marginal rate on profits between £300,000 and £1.5 million will also reduce, with a marginal rate of 27.5% applying to profits in that range from April 2011, rather than the current rate of 29.75%. Once the full rate of corporation tax reaches 23%, the marginal rate on profits between £300,000 and £1.5 million will be 23.75%, assuming that the small profits rate remains 20%.
The main impact for smaller businesses will be a change in the tax incentive to incorporate. At present a small business which trades as self employed (including a partnership) has a marginal rate of 28% in the basic rate band (20% income tax and 8% national insurance contributions). After April this will rise to 29% due to the increase in NIC rates. In contrast, basic rate band for the small company owner is the current 21% corporation tax which reduces to 20% in April. We can draw up a table of the relative tax burdens, using some basic assumptions, and compare self employed status with limited company status. The following key assumptions apply to Table 1:
• In the case of self employment, the tax and NIC burden includes income tax, and Classes 2 and 4 National Insurance Contributions. March 2011 Page 3
• In the case of the limited company, we have assumed that the profits are constant (which may not be true as additional costs may be borne by the company to meet regulatory requirements) and that profits are extracted by the sole director and shareholder by way of director’s fees of £7,072 (incurring no national insurance contributions) and the balance by way of dividend. There are no retained profits.
Table 1: Tax & NIC burden self employed to limited company 2011/12 Profit Sole trader Company Saving £10,000 £885 £586 £ 299 £15,000 £2,335 £1,586 £ 749 £20,000 £3,785 £2,586 £1,199 £30,000 £6,685 £4,586 £2,099 £40,000 £9,585 £6,586 £2,999 £50,000 £13,463 £9,206 £4,257 £75,000 £23,963 £19,206 £4,757
So the additional tax differential of 2% on the basic rate band proves beneficial. Even when the 40% rate band is reached, the savings continue to rise, as the marginal rate for unincorporated businesses will be 42% (40% tax and 2% NIC) on profits over the basic rate limit. Where the taxpayer withdraws company profits as a higher rate taxpayer the effective rate is now only 40% (20% corporation tax and 25% of the net in dividend taxation – total 40% of the pre-tax profit). So while the tax savings used to tail off after £50,000 (witness the savings at £50,000 and £75,000 in 2010/11 above) the savings now continue to increase. Advisers who still have clients operating as self employed and partnerships may wish to discuss the relative tax burdens with their clients to establish whether 2011 is the time to review this decision. March 2011 Page 4 Larger businesses will see the benefit of the reduced rates of corporation tax, and So the additional tax differential of 2% on the basic rate band proves beneficial. Even when the 40% rate band is reached, the savings continue to rise, as the marginal rate for unincorporated businesses will be 42% (40% tax and 2% NIC) on profits over the basic rate limit. Where the taxpayer withdraws company profits as a higher rate taxpayer the effective rate is now only 40% (20% corporation tax and 25% of the net in dividend taxation – total 40% of the pre-tax profit). So while the tax savings used to tail off after £50,000 (witness the savings at £50,000 and £75,000 in 2010/11 above) the savings now continue to increase. Advisers who still have clients operating as self employed and partnerships may wish to discuss the relative tax burdens with their clients to establish whether 2011 is the time to review this decision. March 2011 Page 4
Short life asset election
The legislation allowing de-pooling of short life assets has been amended to make it more widely applicable. Currently businesses can elect to keep assets in a separate pool if the asset is not expected to last for more than four years. This allows the business to claim the balance of the cost of the asset for tax purposes when it is sold. This would not otherwise be available if the asset was pooled with other assets. However, in the fifth year if the asset has not been disposed of, it is transferred back into the main pool. Businesses will now be able to retain an asset in an individual pool for eight years rather than four years, allowing the business to claim the net cost as a tax allowance on disposal. This could add somewhat to record keeping requirements for some businesses with a need for multiple “pools” of individual assets, but will in return generate earlier claims to capital allowances, and thus cash flow benefits for the business. Clearly businesses able to claim the Annual Investment Allowance would not seek to de-pool those items on which it has been claimed. There has been no change to the categories of assets for which the election is not available – this includes long life assets and cars.
1.3 Research and development expenditure (R&D)
The current rate of R&D tax credit for SME businesses is 75% of the amount spent, so that a business can obtain tax relief for 175% of the amount of qualifying expenditure. The definition of SME business for these purposes is specific to the R&D regime. The rate of relief for SMEs is to be increased from 1 April 2011 to 100%, so that a business will benefit from 200% tax relief on qualifying expenditure incurred from that date. This means that the tax system will contribute a maximum of £55 for each £100 of qualifying expenditure for businesses in the marginal corporation tax band of 27.5%. Relief at the small profits rate will be worth £40 per £100 spent. The more generous rate available under the less widely used vaccine research relief scheme will be reduced to 20% - this relief is available in addition to R&D relief and is currently 40% of the qualifying expenditure. There have been no changes to the rate available to large companies which is currently 30%.
In 2012 there will also be changes to the detail of the R&D scheme, by removing a limit on the payable R&D tax credit applicable to SMEs. At present, refunds are limited to the amount of PAYE and NIC paid in the period, and this limit will be abolished. This will both simplify the operation of the scheme and remove an unwelcome restriction. The requirement for claimant companies to spend at least £10,000 on R&D in a period in which they make a claim will also be removed in 2012 – it is unlikely that this presents a barrier to companies actively engaged in research and development, but is, once again, a simplifying measure.
1.4 Business Premises renovation allowance
This allowance provides 100% tax relief for expenditure bringing redundant business premises back into commercial use. The premises must have been empty for at least 12 months and be located in an assisted area (Assisted Areas Order 2007). Although this generous relief is designed to terminate in 2012, it will be renewed for a further five years. The capital allowance is available for expenditure on bringing redundant commercial property in disadvantaged areas back into use. The allowance is 100% of the renovation expenditure (but not the purchase price) and if the claimant does not take all of the allowance in the first year an allowance of 25% on cost will be available in subsequent years. The premises must be situated in a disadvantaged area, which is currently given by the Assisted Areas Order 2007 (plus the whole of Northern Ireland), but which may of course change as the new Enterprise zones are established. The scheme is not available for premises refurbished by or used by the following businesses due to State Aid restrictions:
Fisheries and aquaculture
Shipbuilding
The coal industry
The steel industry
Synthetic fibres
The primary production of certain agricultural products, and
The manufacture of products which imitate or substitute for milk or milk products.
The investor may rent out the premises or occupy them for the purpose of his trade, but any disposal within 7 years will produce a balancing adjustment, likely to claw back the allowances given.
The allowance is available on qualifying expenditure which is capital expenditure incurred in connection with:
• The conversion of a qualifying building into qualifying business premises, or
• The renovation of a qualifying building if it is or will be qualifying business premises, or
• Repairs (being capital expenditure) to a qualifying building (or where the qualifying building is part of a building, then to that building) to the extent that the repairs are incidental to the renovation or conversion of a qualifying building.
The allowance of 100% is available when the expenditure is incurred, but will be clawed back if the premises do not qualify on first use. To qualify, they must be used or let for use in a trade, profession or vocation, or as offices. The building must not be used (or have been used) as a residence. Part buildings can also qualify for the allowance. Where part of the Initial allowance is disclaimed, a writing down allowance of up to 25% of the qualifying expenditure is available to claim. No allowances are available on new construction in conjunction with the renovation, unless it merely provides access to the premises. No allowance is available for expenditure on land, or which is met by a grant. 1.4.1 Example Minted Limited owns a redundant office building in a designated disadvantaged area, which has been unoccupied since Minted vacated the premises some 5 years ago. It is in a poor state of repair and is so old that it is difficult to let. Minted has decided to refurbish the premises in the hope that they can be let. The company spends £420,000 converting it into smaller units for letting to businesses, all spent in the accounting period ending 31 March 2010. As of 31 March 2010 the company has secured one tenant in a finished unit, with rental income of £3,000 being received in the year. Other revenue expenses relating to the rental activity in that year are £14,000, and the company has trading profits of £350,000. It is anticipated that the net rentals for 2011 will be £130,000, and for subsequent years of the order of £200,000. Trading profits are expected to be £250,000 before tax for the foreseeable future.
Year ended 31 March 2010 £ Trading profits 350,000 Rental income 3,000 Costs (14,000) Capital allowance claimed (39,000 ) Rental losses (50,000 ) Profits chargeable to CT 300,000 March 2011 Page 8
Year ended 31 March 2011
Trading profits 250,000 Net rental income 130,000 Capital allowance claimed (80,000 ) Rental income (net) 50,000 Profits chargeable to CT 300,000 Year ended 31 March 2012
Trading profits 250,000 Net rental income 200,000 Capital allowance claimed (105,000 ) Rental income (net) 95,000 Profits chargeable to CT 345,000 Allowances of £196,000 remain available after 2012, all of which can be sheltered at marginal rates, with a claim of £105,000 in 2013, and £91,000 in 2014.
Planning point:
Businesses looking for premises in disadvantaged areas would do well to consider this relief which will give up front tax relief at very generous rates for the cost of renovating redundant commercial premises. It is also available to businesses which let the premises once refurbished, provided the premises are in qualifying business use.
1.5 Business Rates
The small business rate relief scheme was due to end on 30 September 2011, but has now been extended for an additional year. The scheme provides eligible small business ratepayers with small business rate relief at 100 per cent on properties up to £6,000 rateable value in 2010, (rather than the previous rate of 50 per cent), and a tapering relief from 100 per cent to 0 per cent for properties up to £12,000 in rateable value. More information is available from the Business Link website.
1.6 HMRC Time to pay scheme
HMRC has confirmed through the Budget announcements that the time to pay scheme will remain available and that the Business Payment Support Service will remain in place to advise viable businesses experiencing temporary financial difficulty. However, the message is clear for those businesses wishing to return time and again to the arrangements.
This help is not an arrangement to delay the payment of tax on an ongoing basis – it is targeted at those in temporary difficulty, so advisers with clients revisiting the time to pay arrangements may find that HMRC is less than sympathetic. Businesses will need to consider refinancing options, looking at a wider menu of funding options in which to provide ongoing working capital if they are unable to meet tax liabilities as they fall due.
1.7 VAT thresholds
The VAT thresholds for both registration and de-registration will increase on 1 April 2011. The new registration threshold will be £73,000, and the deregistration threshold will rise to £71,000. (These were previously £70,000 and £68,000 respectively.) The three line account provision for self assessment returns will continue to be aligned to the VAT registration threshold and will therefore increase to £70,000 for the 2011/12 fiscal year.
1.8 IR35
The Chancellor’s announcements indicated that the potential loss of revenue is too large to contemplate doing away with the measure. Instead a package of reforms is promised to make the tax easier to administer.
The Review of Small Business Taxation by the OTS looked specifically at IR 35. The report indicated that many businesses which were potentially affected by the provisions had “managed round” the tax charge that might arise, albeit at some expense. The report’s key conclusion was probably the following statement: “The reality of the situation is that there is probably no clear cut legislative alternative that addresses the concerns of all parties. In some places, the existing legislation is an effective deterrent to the use of intermediaries for the purpose of reducing tax liability on employment income. However, it is clear that in many other instances IR35 as it stands is not effective, either for the individuals affected or for the Exchequer.”
Alongside that conclusion, the OTS recommended two alternative policy approaches for Government, but indicated that abolition (or temporary suspension) posed a significant threat to revenue as there could be significant migration from employee status to limited company status as a result. As an alternative the OTS offered the following: To retain the legislation but to support it with specific comments from HMRC as to the enforcement of the legislation. The principle behind this approach would be to enable those working in businesses potentially affected by IR35 to be more certain about whether the legislation affects them or not – allowing them to “self certify” their status for IR35 purposes. The OTS summarised this option as follows: “If the Government commits to integration of income tax and NICs the OTS view is that this option is a viable short term measure to moderate the problem of IR35.”
1.9 Investment incentives
There are a number of changes to EIS and VCT which are intended to stimulate the flow of funds into venture capital schemes providing funds to SME start-ups and growing businesses. Most of the changes will have effect from April 2012, and the most notable will allow an individual to invest up to £1 million in EIS in any year. The current limit is £500,000. The schemes will also be extended to allow larger business to qualify for funding of this type, and to increase the amount of funds a company can raise through these schemes. However, from April 2011, the tax relief on offer for EIS investments will increase from the current 20% to 30%, in the hope that this will stimulate a flow of capital into the high risk market.
1.10 Entrepreneurs’ Relief
The already generous lifetime limit on Entrepreneurs’ relief has been doubled with effect from 6 April 2011. The limit for disposals from 23 June 2010 to 5 April 2011 is £5 million, and the limit from 6 April 2011 onwards is £10 million. Those taxpayers who have made previous disposals up to or in excess of the limit can make further disposals after 6 April attracting the ER rate of 10% CGT, but previous disposals in excess of the old limit will not be revisited. It is debateable whether this increase is justified in terms of stimulating investment in growth – it is costed at £50 million in 2012-13 rising to £100 million in 2015 – 16.
1.11 Tax Administration – online services
Businesses will see increasing use of internet only requirements from Government through the promotion of a scheme launched in late 2010 called “Digital by Default”. In particular new businesses registering with the Government will be required to use an online registration process by 2012 – 2013. Registration for VAT will become a mandatory online process from 1 August 2012, as will notification of changes such as business address. The remaining businesses not presently required to submit VAT returns online (those registered before 1 April 2010 and with turnover of less than £100,000) will be required to file returns online and pay electronically from 1 April 2012. There is also confirmation that the Real Time Information system (RTI) for PAYE and NIC administration will press ahead from 2012 – raising concerns from many in the tax profession that this measure is being rushed through – largely because the Government’s reforms of the benefit system depend on it.
1.12 Other tax administration points
The OTS’s recommendations for reform, and in particular the abolition of some under used tax reliefs were appreciated by Government, with some taken forward. The OTS will now be asked to study the administration of the tax system for smaller businesses and make recommendations.
1.13 NIC Holiday for new businesses
Although announced in the Budget in June 2010, the NIC holiday for new businesses, intended to act as an employment incentive has been poorly taken up, so it is worth reminding advisers of the key points. The scheme is open to businesses which register and will provide a saving of up to £5,000 in NIC for each of the first 10 employees taken on.
Qualifying businesses
The scheme is open to all businesses provided they meet the definition of “new” which start on or after 22 June 2010 and by 5 September 2013. Sole traders, partnerships and limited companies all come within the scheme, except for managed service companies. If a business caught by the IR35 rules meets the conditions, the holiday will apply only to salaries and wages actually paid, but not to the deemed salary. Location
As the holiday is a regional incentive, it only applies to businesses whose principal place of business is in the following areas:
• Northern Ireland
• Scotland
• Wales
• East Midlands
• North East
• South West
• West Midlands
• Yorkshire and Humber
If the principal place of business is not clear, the business must carry out most of its activities within these areas, and for businesses with no obvious principal place of business the determining factor is where the administration of the business is carried on, and where any tools or equipment are stored. There is a region checker on the Government website to allow businesses to check whether they qualify. (http://www.gos.gov.uk/regionFinder)
New business?
The test of a new business is based on the activities of the business; in order to meet the test of “new” the activities now carried on in the new business must not have previously been carried on by the same persons in another business during the six months leading up to the start of this business. This test looks at “all or most” of the activities of the new business. If the new business consists of activities, or mostly of activities resulting from the transfer of most of the activities of another business then it will not be considered new for this purpose. This test looks at whether there are similarities that may exist between the products or services, the customers, suppliers and the employees of any previous or ongoing business and the new business. There are some examples and further guidance on the new business test on HMRC’s website at
The new relief is classed as state aid for EU purposes, so certain business sectors are barred from participating. The following are excluded completely from the new scheme:
• businesses in the coal sector
• businesses in the road freight transport sector - where the aid is to be used to acquire road freight transport vehicles, and
• businesses involved in export-related activities.
However, some sectors are also restricted in the amount of state aid they can receive, and this will restrict the value of the NIC holiday to those businesses. The affected sectors are: Business sector State Aid limit Road transport - those not excluded as detailed above €100,000 Agriculture €7,500 Fisheries and aquaculture €30,000
1.11 Tax Administration – online services
Businesses will see increasing use of internet only requirements from Government through the promotion of a scheme launched in late 2010 called “Digital by Default”. In particular new businesses registering with the Government will be required to use an online registration process by 2012 – 2013. Registration for VAT will become a mandatory online process from 1 August 2012, as will notification of changes such as business address. The remaining businesses not presently required to submit VAT returns online (those registered before 1 April 2010 and with turnover of less than £100,000) will be required to file returns online and pay electronically from 1 April 2012. There is also confirmation that the Real Time Information system (RTI) for PAYE and NIC administration will press ahead from 2012 – raising concerns from many in the tax profession that this measure is being rushed through – largely because the Government’s reforms of the benefit system depend on it.
1.12 Other tax administration points
The OTS’s recommendations for reform, and in particular the abolition of some under used tax reliefs were appreciated by Government, with some taken forward. The OTS will now be asked to study the administration of the tax system for smaller businesses and make recommendations.
1.13 NIC Holiday for new businesses
Although announced in the Budget in June 2010, the NIC holiday for new businesses, intended to act as an employment incentive has been poorly taken up, so it is worth reminding advisers of the key points. The scheme is open to businesses which register and will provide a saving of up to £5,000 in NIC for each of the first 10 employees taken on.
Qualifying businesses
The scheme is open to all businesses provided they meet the definition of “new” which start on or after 22 June 2010 and by 5 September 2013. Sole traders, partnerships and limited companies all come within the scheme, except for managed service companies. If a business caught by the IR35 rules meets the conditions, the holiday will apply only to salaries and wages actually paid, but not to the deemed salary.
Location As the holiday is a regional incentive, it only applies to businesses whose principal place of business is in the following areas:
• Northern Ireland • Scotland • Wales • East Midlands
• North West
• South West
• West Midlands
• Yorkshire and Humber
If the principal place of business is not clear, the business must carry out most of its activities within these areas, and for businesses with no obvious principal place of business the determining factor is where the administration of the business is carried on, and where any tools or equipment are stored. There is a region checker on the Government website to allow businesses to check whether they qualify. (http://www.gos.gov.uk/regionFinder)
New business?
The test of a new business is based on the activities of the business; in order to meet the test of “new” the activities now carried on in the new business must not have previously been carried on by the same persons in another business during the six months leading up to the start of this business. This test looks at “all or most” of the activities of the new business. If the new business consists of activities, or mostly of activities resulting from the transfer of most of the activities of another business then it will not be considered new for this purpose. This test looks at whether there are similarities that may exist between the products or services, the customers, suppliers and the employees of any previous or ongoing business and the new business. There are some examples and further guidance on the new business test on HMRC’s website at http://www.hmrc.gov.uk/thelibrary/tax-paye/nics-holiday/examples-new-business.htm
Excluded sectors
The new relief is classed as state aid for EU purposes, so certain business sectors are barred from participating. The following are excluded completely from the new scheme:
• businesses in the coal sector
• businesses in the road freight transport sector - where the aid is to be used to acquire road freight transport vehicles, and
• businesses involved in export-related activities.
However, some sectors are also restricted in the amount of state aid they can receive, and this will restrict the value of the NIC holiday to those businesses. The affected sectors are: Business sector State Aid limit Road transport - those not excluded as detailed above €100,000 Agriculture €7,500 Fisheries and aquaculture €30,000
Qualifying employees
The holiday applies only for the first year that the business is in operation and to the first 10 staff engaged during that period. So if a business fails to engage 10 staff during its first year of operation, the benefit of the holiday will be limited to the staff engaged during that year – this is reckoned to be the main limitation of the scheme as many start up businesses will not engage any staff in their first year of operation. The start date of the business is taken to be the date the first employee was engaged, or the date trade started if earlier. The first 10 employees rule must be applied in strict order, so if some of these staff members are not paid sufficient to require employer NIC’s to be paid in respect of their earnings, they still count towards the limit of 10 staff, as do employees over pension age.
Administration
Qualifying businesses must register for the scheme by completing an application form and having eligibility confirmed. However, they must first register with HMRC as an employer, as they will need to quote PAYE references in the application. Registration for the scheme is done online by using the interactive form (although there is a paper form which can be downloaded and completed, which is necessary for businesses which have a restricted state aid entitlement – see above). Registration is available from this page on the Business Link website: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1085811757
Once this has been confirmed, (employers should retain the confirmation email for three years – they will need it if they apply for further state aid) the employer operates an NIC holiday in respect of employer NIC contributions for the first 12 months of the employee’s employment. Where staff are engaged at different dates, each will have a separate NIC holiday period, ending on different dates; each employee is subject to a £5,000 total limit, so the employer will need to keep a running total if high paid employees are included in the holiday scheme. (As a guide, employer contributions of £5,000 would be due on annual earnings of around £45,000 at current rates of NIC). The holiday does not apply to employer’s NIC on benefits in kind – Class 1A NIC. To help employers calculate the NIC to be withheld, HMRC has provided an interactive form to allow calculation and recording of the amount of NIC holiday. You can download it here http://www.hmrc.gov.uk/forms/e89.pdf (PDF document).
Employers must be sure that they record the NIC’s which would otherwise have been due in the normal way, and that they pay over any tax and employee NIC due at the correct time.
2.2 Taxation of company cars
Employees and directors provided with a car for business travel, for whom the car is also available for private use pay tax based on the list price of the car and the CO2 emissions of the vehicle. Various changes are due to commence in April 2011 and April 2012 which have been previously announced, but these are included here for completeness, and so that businesses and employees can consider their plans for business motoring. The changes are best illustrated by example, so an illustration follows. Changes already announced: April 2011
• The upper list price limit of £80,000 will be abolished. Clearly this will represent a significant tax increase for some drivers, but the average company car driver will be unaffected by the change.
• The “Table” rates will all increase by 1% for those drivers in the range 15% to 35%, but retaining the maximum rate of 35%. So a driver presently taxed at 18% of list price will be taxed on 19% of list price from 2011/12
Example – Bill’s car
Bill replaced his company car in 2009. He gave up his Ford Mondeo, and in view of the increasing cost of company car taxation, he decided to opt for a Ford Focus. The emissions are 159 g/km and the list price was £15,967. The rate of tax in 2009 was 19% bringing the benefit in kind to £3,034. In 2010/11 this has increased to 20% and therefore £3,193 and from April 2011 this will increase to £3,353. From April 2012 his benefit will rise to 22%, making the benefit £3,513, and from April 2013 (the latest announcement) £3,672. Overall, if Bill retains the car until it is 5 years old, his tax charge will have increased by 21%.
Julie’s car
Julie was keen to invest in a fuel efficient car through her business (a limited company), and she therefore bought a car with list price of £9,600 and an emissions rating of 118g/km. She is currently taxed at 10% of list price – a benefit of £960.
In April 2012 her benefit in kind will become 14% of list price - £1,344, and in April 2013 it will rise to 15% - £1,440. Her rise in tax charge is 50%, even though she followed the policy that she thought the Government was supporting. March 2011 Page 16 2.3 Free fuel for private motoring
Where an employee is provided with free fuel for private motoring by his employer, he is taxed at the relevant percentage (determined by CO2 emissions) of the fixed fuel benefit. This is currently £18,000, having been increased from £16,900 in April 2010 (an increase of 6.5%) which was the first increase for two years. It has been announced that the new base figure will be £18,800, a 4.4% increase. Company car drivers, and particularly directors of OMB’s should bear in mind that this brings the total increase since April 2008 to 11.2%, during which time fuel prices have increased by substantially more.
2.4 VAT fuel scale changes
Businesses which recover VAT on fuel must pay a scale charge to compensate for private fuel use. The scale charges have been revised from 1 May 2011 and show an increase of around 11%, although drivers at the top of the scale will see a 14% increase in their scale charge. Once again, this change is somewhat less than the increase in the price of road fuel, and businesses may wish to revisit their calculations on VAT recovery again. It is possible to change policy on VAT recovery from year to year, although HMRC does not expect to see this changed on a quarterly basis. Businesses will have to manage any change carefully to ensure the cut off is correct.
2.5 Use of a privately owned car for business
Where an employee or company director uses a privately owned car for business journeys, the employer can reimburse tax free up to a fixed amount per mile for the journey. If the employer reimburses at a lower rate (or does not reimburse at all) the employee can make a claim for Mileage allowance relief using the same rate – as a result the allowance is deducted from his taxable income for the year. The rates for travel by car have been unchanged for a decade now, but the Budget announcements include a welcome increase in the main rate as follows:
Rates per mile Rate to 5 April 2011 Rate from 6 April 2011 Cars and Vans: first 10,000 miles per annum 40p 45p Subsequent miles 25p 25p Motorcycles 24p
2.3 Free fuel for private motoring
Where an employee is provided with free fuel for private motoring by his employer, he is taxed at the relevant percentage (determined by CO2 emissions) of the fixed fuel benefit. This is currently £18,000, having been increased from £16,900 in April 2010 (an increase of 6.5%) which was the first increase for two years.
It has been announced that the new base figure will be £18,800, a 4.4% increase. Company car drivers, and particularly directors of OMB’s should bear in mind that this brings the total increase since April 2008 to 11.2%, during which time fuel prices have increased by substantially more.
2.4 VAT fuel scale changes
Businesses which recover VAT on fuel must pay a scale charge to compensate for private fuel use. The scale charges have been revised from 1 May 2011 and show an increase of around 11%, although drivers at the top of the scale will see a 14% increase in their scale charge. Once again, this change is somewhat less than the increase in the price of road fuel, and businesses may wish to revisit their calculations on VAT recovery again. It is possible to change policy on VAT recovery from year to year, although HMRC does not expect to see this changed on a quarterly basis. Businesses will have to manage any change carefully to ensure the cut off is correct.
2.5 Use of a privately owned car for business
Where an employee or company director uses a privately owned car for business journeys, the employer can reimburse tax free up to a fixed amount per mile for the journey. If the employer reimburses at a lower rate (or does not reimburse at all) the employee can make a claim for Mileage allowance relief using the same rate – as a result the allowance is deducted from his taxable income for the year. The rates for travel by car have been unchanged for a decade now, but the Budget announcements include a welcome increase in the main rate as follows: Rates per mile Rate to 5 April 2011 Rate from 6 April 2011 Cars and Vans: first 10,000 miles per annum 40p 45p Subsequent miles 25p 25p Motorcycles 24p 24p Bicycles 20p 20p Passenger rate 5p 5p
2.7 Increase in NIC rates
The National Insurance contribution rate rises proposed by Mr Darling take effect now, but the Government has taken steps to mitigate the impact on employers. To mitigate the effect of the changes, there is a significantly above inflation rise in the employer threshold for NIC from April 2011, the entry point for contributions rising by £21 above indexation. Note that the corresponding threshold for employee contributions will not increase as the above inflation rise in income tax personal allowances will produce a similar shelter for employees. This adds a small amount of complexity, as there will in future be two thresholds for NIC – the lower one applying to employee contributions and a higher amount for employer contributions. Note also that the “final” employee rate (also applying to the self employed) will increase from 1% to 2% next year; this rate currently applies on earnings and profits in excess of £844 per week.
Although announced some time ago, the changes to pension annual and lifetime allowance rules were confirmed in the Budget. Once again, this topic is too broad for a general budget summary, but the key points are summarised below:
• The special annual allowance charge rules will cease after the current tax year (2010/11)
• The revised annual allowance for Pension Input Periods (PIPs) ending in 2011/12 will be £50,000
• The revised lifetime allowance will be £1.5 million from April 2012. Members will have to decide whether they wish to opt for a personal lifetime allowance of £1.8 million by then.
• Pension input periods which end in tax year 2011/12 but which started before 14 October 2010 are subject to transitional rules for that period only.
• Members of schemes will be permitted to carry forward unused annual allowance for up to three years, using the oldest first after extinguishing available relief in the current year. For this purpose the annual allowance will be deemed to have been £50,000 for the three years preceding the change, so members may have to re-work their calculations.
2.9 Childcare tax scheme changes from 6 April 2011
The changes were proposed by the last Government and will commence from April 2011. Those employees who join a childcare scheme after 5 April; 2011 and who are paid (including benefits in kind) in excess of £42,475 in that employment will see a reduced benefit form childcare vouchers in the future. The change does not affect employers operating workplace nurseries. These continue to be a tax free benefit without limit provided conditions are met. Affected employees The changes only affect employees joining schemes on or after 6 April 2011. Existing employees within a scheme can continue to benefit from marginal rate relief on their childcare support, but the change withdraws relief in excess of basic rate for new joiners. To meet the definition of existing employees, the individuals must have submitted an application to the employer on or before 5 April 2011, and be eligible to receive tax and NIC exemption in relation to a qualifying child on that date. This means that the child must be born or placed for adoption at 5 April 2011 otherwise no tax and NIC exemption would be due. How it works When an employee joins a scheme on or after 6 April 2011 the employer must carry out a “Basic Earnings Assessment”. This is to establish their marginal tax rate for these purposes, and is carried out when the employee joins the scheme and annually at the start of the tax year thereafter. This is based on the information available at the time it is carried out and remains unchanged for the balance of the tax year. The assessment is used to determine how much the tax free allowance is for the year. Records of the calculation must be made and retained for inspection, but there is no requirement to submit them to HMRC. The information used in the assessment is derived only from the current employment (irrespective of other employments held). Compare earnings from the basic earnings assessment with the higher and additional rate thresholds, after adjusting for a personal allowance. The employer must then decide whether to continue to provide the maximum £55 per week tax free March 2011 Page 20 for employees who are higher rate taxpayers, or whether to restrict the benefit to the reduced tax free amount. Table: tax free amounts 2011/12 Basic rate and existing members Higher rate Additional rate Weekly £55 £28 £22 Monthly £243 £124 £97 Annual £2,915 £1,484 £1,166
If the employer provides excess childcare to the employee then the employer will need to report the amount on P11D at the end of the tax year, but if the provision is by vouchers the employer will have to account for NIC through the payroll.
INCREASE ENQUIRIES BY HMRC - 15 / 01 / 2009 POWER TO REQUEST FILES AT A SHORT NOTICE
As we all know H M Revenue and Customs are becoming far more sophisticated in their selection of Enquiry cases. We are aware of several initiatives that target trades associated with the Construction Industry.
One such project looks at accounts where all or most of the sales are received under CIS. HMRC have details of all payments and can see if purchases have been paid for by the main contractor. In most cases the answer is negative as these are provided by the main contractor. Assuming a claim has not been made in the accounts there will not be a problem.
However we have seen a number of cases that fall into two distinct categories:-
Estimated Purchases
Some accountants think they are doing their client a favour by estimating a figure for purchases. This is fine if there are some non-CIS sales and the purchase figure is consistent with those sales. If not and the case is taken up for enquiry it will be difficult to justify the claim. We all have to prepare accounts from incomplete (or non- existent) records so it is imperative that any estimated expenses can be reasonably justified.
Actual Purchases
If purchases are all provided by the main contractor then it follows that none will be need to be supplied by the subcontractor. No matter what we do some tradesmen will work for cash, claim the expenses in their accounts but omit the income. However, it sticks out like a sore thumb when comparing the CIS vouchers with the accounts. So be vigilant when letting staff loose on preparing accounts for those in the building trade. Make sure that if there are purchases these are consistent with the income.
