Budget 2008 Analysis

What We Already Knew

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The first income threshold at which Working Tax Credit begins to be withdrawn is to be increased from £5,220 to £6,420 from 6 th April 2008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).

news

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.

Tax and Finance Deadline - 06 / 06 / 2008
June 1:

Due date for payment of corporation tax for accounting periods
ended 31 August 2007.
Changes to the VAT ‘option to tax’ rules for land and buildings
come into force. For full details, see VAT Information Sheet
03/08 VAT: Land and Buildings – New Schedule 10 of the VAT
Act 1994 accessible via http://www.hmrc.gov.uk

June 7:
End of the week of grace allowed by ESC B46 for the receipt of
CTSA returns for accounting periods ended 31 May 2007.

June 19:

PAYE: Remittances for the month ended 5 June 2008 due.
CIS: Return of payments to subcontractors for month ended 5
June 2008 due to reach HMRC.

June 30:

Accounts for private companies to 31 August 2007 and public
companies to 30 November 2007 due to be received at
Companies House.

July 1:

Due date for payment of corporation tax for accounting periods
ended 30 September 2007.
VAT: The £2,000 ceiling on corrections to errors in past returns
is revised to £10,000 or, if more, 1% of turnover within the
return period, subject to a maximum of £50,000.
EU Withholding Tax: The rate of tax withheld from interest on
offshore bank accounts increases from 15% to 20%.

July 6:

Forms P11D due to be received by HMRC. Copies should be
supplied to the employees concerned. Payment of Class 1A NIC
is due by 19 July.

July 7:

End of the week of grace allowed by ESC B46 for the receipt of
CTSA returns for accounting periods ended 30 June 2007.

£2.7 billion for 10p

The chancellor has, as we all know, announced his intention of
borrowing £2.7 billion to fund a £600 increase in the personal
allowance, in order to compensate low income taxpayers for the
increase they currently have to pay because of the abolition of
the 10p tax band. This appears to have silenced his critics in the
short term, but does in fact leave some people on relatively low
incomes (between £6845 and £10505) worse off by up to £61.
Meanwhile, most basic rate taxpayers have an unexpected £120
bonus.
The Basic Rate limit reduces from £36,000 to £34,800. This
effectively ensures that higher Rate taxpayers do not benefit from
this exercise.
The increased personal allowance will be reflected in PAYE codes
from the end of September and this will generate a refund. Note
however that anyone on a BR tax code will not benefit from the
refund unless and until they are allocated a weekly/monthly tax
code.

Tax credits

H M Treasury has published a consultation paper on the Tax
Credit system, inviting comments by 5 September. We have
already commented about the difficulty of providing final figures
of profit for those who started self-employment in the final
quarter by 31 January following, and members may wish to
express their own views on problems with the system.

Fixed deductions for expenses
Some fixed deductions for employees’ expenses are increased
with effect from this year. These deductions need to be claimed
in tax returns and are often incorrect in PAYE codes. The full
table is in HMRC’s Employment Income Manual
(http://www.hmrc.gov.uk/manuals/eimanual/EIM32712.htm).

One law for them …
It has become evident recently that Members of Parliament are
able to benefit from generous expense allowances for their
second homes, without apparently having to demonstrate that
their constituencies are outside reasonable daily travelling
distance from Westminster Bridge. For the ordinary taxpaying
employee who necessarily performs some of his or her duties at
home, HMRC has raised the amount allowable in the absence of
4
specific vouchers from £2 per week to £3 per week from 6 April
2008. The manual suggests that strictly speaking holiday weeks
should be disallowed.
http://www.hmrc.gov.uk/manuals/eimanual/EIM32815.htm

Penalties
As previously reported, a new penalty regime comes into force for
SA returns for 2008-09 and for CT returns for periods beginning
after 31 March 2008. HMRC has published guidance on the
application of the new penalty regime at
http://www.hmrc.gov.uk/about/new-penalties/index.htm

Backdated pensions

A pensioner who has lost part or all of an occupational pension
due to the winding up of an underfunded superannuation scheme
may be entitled to a payment under the Financial Assistance
Scheme. The payment may relate to pension losses arising over
a number of tax years. HMRC has confirmed that in such cases
the payment will be taxed by reference to the rates for the years
to which it relates and not treated as a single payment taxable in
the year of receipt.
http://www.hmrc.gov.uk/news/tax-treatment.htm.

Tax clearance for businesses

HMRC has a long-standing non-statutory clearance procedure for
large corporations, where it will give its view on the tax treatment
of a proposed or completed transaction where there is ‘material
uncertainty around the tax outcome of a real issue of commercial
significance to the business.’ This procedure is now extended on
an experimental basis to businesses of all sizes, and ‘commercial
significance’ is defined by reference to the size of the business
and the impact of the ‘real issue’ on it. Where IHT is involved,
the trial period is intended to run until 31 October 2008; for other
taxes no closing date is currently fixed.

Residence and non-residence

HMRC have published an interim revised version of booklet IR20,
incorporating developments since 1999. It can be downloaded
from http://www.hmrc.gov.uk/pdfs/ir20.pdf. There will be a
further revision to incorporate the Budget changes in due course.

Low income non-domiciles

The Chancellor appears to be unaware of the problems the new
proposals for non-domiciled taxation may cause. Attention has
concentrated on the wealthy, but the Low Income Tax Reform

Group points out that the proposals as drafted are likely to bring
overseas students’ vacation earnings into the charge to UK tax.
This may be somewhat theoretical, but the provisions could be
used to charge tax, interest and penalties on a foreign student
whose vacation earnings are already taxed in the country of
origin, especially if some overzealous HMRC officer had a grudge
against overseas students.

Changes to P46 procedure

From the start of this tax year it is no longer necessary for an
employer to obtain a completed P46 for new employees with no
P45 and earnings below the NIC threshold. Employers need to
obtain the appropriate information from such employees and
keep a copy of any documentation or a note of how the
information was provided.

TAX CASES

Tomlinson v HMRC
An appellant attempted to quash a Section 95 penalty. He had
submitted a form R40 to HMRC on 6 April, and on the same day
HMRC served notice to make a Self-Assessment return for the
same year. They lost the R40 and in due course charged a
penalty for failure to make the tax return. The High Court upheld
the penalty on the grounds that a form R40 is not a selfassessment.
The appellant was saddled with costs of £3,520 as a
result of taking his appeal to Court.

Walsh v HMRC

This appeal concerned an enquiry case in which no evidence was
offered and the agent who prepared the accounts and tax return
was uncooperative. The Commissioners simply held that the
appellant had failed to show to their satisfaction that the
amendment to the return was excessive, and that it must
therefore stand good.

McCall and Ors v HMRC

In this IHT appeal it was held that agistment (the letting of
agricultural land for grazing) constituted a business of investment
and not a business within the meaning of the provisions for
Business Property Relief. There is a useful discussion of the
meaning of the word ‘business’ and how it relates to Business
Property Relief in the judgement.

Smith v HMRC

This enquiry appeal concerns unexplained bank deposits and the
use of a company credit card for private expenditure. Its main
interest lies in the fact that one of the assessments under appeal
was described as a ‘jeopardy’ assessment; although the
conditions for such an assessment did not exist the assessment
was held to be valid.

Grace v HMRC

This case concerned the residence status of an airline pilot who
owned a house near Gatwick Airport but was domiciled in South
Africa and claimed to be resident and ordinarily resident there.
His appeal was successful on the grounds that he only came to
the UK for a temporary purpose (i.e. to carry out the duties if his
employment) and had no other connection with this country apart
from holding a British passport and having an estranged wife in
the country. There is a useful discussion of the concepts of
residence and ordinary residence, including a review of several
earlier cases, in the judgement.

MKM Computing Ltd v HMRC

The Special Commissioner reviewed a number of relevant factors
and concluded that on the balance of probabilities the legislation
applied in this IR35 case.

Nelson Dance Settlement Trustees v HMRC

In this IHT case, the Special Commissioner held that Business
Property Relief applies to the disposal of business assets where in
a lifetime transfer the value of the business was reduced.
http://www.bailii.org/uk/cases/UKSC/2008/000682.html

NATIONAL INSURANCE

Peter Arrowsmith’s Tip of the Month
Since the introduction of Capital Gains Tax taper relief it has been
good NIC planning to ensure that where land and buildings owned
outside a company are used by that company in its trade full
market rent is paid. Rent of course attracts no NIC liability unlike
salary, nor the opprobrium that dividends attract. In fact the
justification for paying rent is (apart from what follows)
unassailable. The reason that this was not the case before taper
relief was the restriction that applied for CGT retirement relief.
Now the position has again reversed as the same restriction once
again applies in the case of the new CGT entrepreneurs’ relief.
Where there is any possibility that entrepreneurs’ relief will be
required in the future the payment of rent should cease. If the
rent is being paid under a lease or other formal, binding
agreement that lease or agreement will need to be varied (with
all the consequences that may ensue) – it will not be sufficient to
merely stop the payment of rent.
The position is not quite so clear cut as with retirement relief. If
an individual has sold one business and used all their relief then
started another business the question of entrepreneurs’ relief on
the next disposal does not arise – unless the next chancellor
increases the lifetime limit or reintroduces retirement relief!
Similarly (as was the case with retirement relief also) if the
disposal of the company shares alone is expected to use up all
the available relief, there will be none available to use against the
associated disposal of the separately owned land and buildings in
any event – so rent could still be paid (subject to the usual
crystal ball re future changes).

As the Finance Bill is presently drafted, the payment of rent
before 6 April 2008 will also impact on the future entrepreneurs’
relief that will be available. Lobbying is taking place to remove
this retrospective effect. Only time will tell whether there is any
success on this point.

Budget 2008 Analysis - 17 / 03 / 2008
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%,
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 will also increas dramatically
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 .
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.

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