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The Government proposes the following measures under this heading:
personal allowance for those aged under 65 up by £1,000 to £7,475 in 2011–12;
capital gains tax rate increased to 28 per cent for higher rate and additional rate taxpayers;
10 per cent rate for entrepreneurial business activities extended from the first £2 million to the first £5 million of qualifying gains made over a lifetime;
working with local authorities in England to implement a council tax freeze in 2011–12;
bank levy to be introduced from January 2011;
basic state pension to be uprated by increase in earnings, prices or 2.5 per cent, whichever is highest, from April 2011;
tax credit eligibility reduced for families with household income above £40,000 from April 2011;
pensions tax relief annual allowance reduced from April 2011; and
benefits to be indexed by CPI instead of RPI from April 2011.
Rates & Allowances
This notice sets out the main changes to rates and allowances in the tax year 2010–11 and 2011–12.
With regard to indirect tax:
the standard rate of VAT will increase to 20 per cent with effect from 4 January 2011;
the reduced rate of 5 per cent remains unchanged;
the sectoral rates for the VAT flat rate scheme will be updated; and
the standard rate of insurance premium tax will increase to 6 per cent and the higher rate to 20 per cent from 4 January 2011.
With regard to income tax:
the personal allowance for the under-65s will remain at £6,475 in 2010–11 but will be increased to £7,475 in 2011–12;
the basic rate limit for income tax will be reduced in 2011–12, the exact amount of reduction to be confirmed in the autumn but based on current RPI estimates to be £2,500; and
the higher rate threshold for 2011–12 is to be confirmed in the autumn.
With regard to NICs:
the starting point at which employers start to pay NICs will increase by £21 per week above indexation from April 2011;
the upper earnings limit and the upper profits limit will maintain alignment with the income tax higher rate threshold;
the rate for employees' NICs below the Upper Earnings Limit will increase to 12 per cent for 2011–12 and to two per cent for earnings above it;
the rate for employers' NICs will increase to 13.8 per cent for 2011–12;
the reduced rate married women between primary threshold and upper earnings limit is 4.85 per cent for 2010–11 and 5.85 per cent for 2011–12;
the rate of Class 4 contributions for profits below the Upper Profits Limit will increase to 9 per cent for 2011–12 and to two per cent for profits above that limit;
the figure for Class 2 contributions for 2011–12 will be determined by data available in the autumn.
With regard to benefits, the state pension and tax credits:
benefits, tax credits and public service pensions will be price indexed by reference to the consumer price index from April 2011;
the state pension will be uprated by the highest of the increase in earnings, prices (using the CPI) and 2.5 per cent from April 2011, although it will be increased by at least the equivalent of the RPI in April 2011;
the standard minimum income guarantee in pension credit will increase in April 2011 by the cash rise in a full basic state pension;
the child element of the child tax credit will increase by £150 above CPI in April 2011 and the baby element will be removed;
income thresholds and withdrawal rates are reduced for 2011–12 to become: first withdrawal rate 41 per cent; second income threshold £40,000; second withdrawal rate 41 per cent; income disregard £10,000; and
child benefit will be frozen for three years from 2011–12.
With regard to business and financial services taxes:
the main rate of corporation tax will be 27 per cent in 2011–12, 26 per cent in 2012–13, 25 per cent in 2013–14 and 24 per cent in 2014–15;
the small profits rate will be 20 per cent from April 2011; and
a bank levy will be introduced effective from 1 January 2011 based on banks' balance sheets at a proposed rate of 0.07 per cent, with an initial lower rate of 0.04 per cent in 2011.
With regard to capital gains tax:
the rate will rise from 18 per cent to 28 per cent for higher and additional rate taxpayers from 23 June 2010; and
entrepreneurs’ relief lifetime limit of gains will rise to £5 million from 23 June 2010.
With regard to excise duties:
cider duty rates will be reduced from 30 June 2010; and
landline duty will not be implemented.
PN03 Tackling tax avoidance
The Government intends to take a more strategic approach to the risk of avoidance to prevent increasing complexity and reduce the need for frequent legislative change but will continue to shut down avoidance schemes as they emerge.
Anti-avoidance measures announced in the Budget include:
an extension with immediate effect to the rules dealing with the derecognition of loan relationships and derivative contracts;
a measure having immediate effect to prevent avoidance involving authorised investment funds;
examination of the possible introduction of a general anti-avoidance rule;
consultation on bringing inheritance tax on trusts within the disclosure of tax avoidance schemes regime;
examination of possible further changes to the stamp duty land tax rules on high value property transactions;
confirmation that employer financed retirement benefit schemes come within the March 2010 Budget measures announced to tackle the use of trusts to reward employees, the legislation to take effect from April 2011;
confirmation that, with immediate effect, the anti-avoidance measure to prevent life insurance companies from manipulating previously unrecognised profits will also have effect where life insurance business is transferred to another company; and
confirmation that anti-avoidance rules announced at the March 2010 Budget to counter the manipulation of the consortium relief rules will take effect from the date of the publication of draft legislation.
BN01 The personal allowance, basic rate limit and National Insurance thresholds for 2011–12
The following changes will apply for 2011-12:
the personal allowance for those aged under 65 will be £7,475;
the basic rate limit will be reduced by an amount to be confirmed once the Retail Prices Index (RPI) for September 2010 is known;
the NIC Upper Earnings/Profit Limit (UEL/UPL) will be reduced to maintain alignment with the income tax higher rate threshold; and
the NIC secondary threshold will be increased by an extra £21 per week above indexation, calculated once the RPI for September 2010 is known.
The reduction in the basic rate limit is intended to ensure that higher rate taxpayers do not benefit from the increase in the personal allowance.
BN02 Corporation tax main rates
The main rate of corporation tax for companies with profits other than ring fence profits will be as follows:
from 1 April 2011, 27 per cent;
from 1 April 2012, 26 per cent;
from 1 April 2013, 25 per cent; and
from 1 April 2014, 24 per cent.
The main rate for companies with ring fence profits will remain at 30 per cent.
BN03 Corporation tax small profits rates
The small profits rate of corporation tax for companies with profits other than ring fence profits will be 20 per cent from 1 April 2011.
The small profits rate for companies with ring fence profits will remain at 19 per cent.
BN04 Capital allowances: rate and annual investment allowance changes
With effect from April 2012, the rates of writing-down allowances (WDAs) on plant and machinery will be reduced from 20 per cent to 18 per cent per annum for expenditure allocated to the main rate pool, and from 10 per cent to 8 per cent per annum for expenditure allocated to the special rate pool. Where a chargeable period straddles the change date (1 April 2012 for corporation tax or 6 April 2012 for income tax), hybrid rates will apply, calculated by reference to the proportions of the period falling before and after the change date.
The existing capital allowances treatment for oil and gas ring fence activities will be retained.
In another measure to take effect from April 2012, subject to transitional provisions, the maximum amount of the annual investment allowance (AIA) will be reduced from £100,000 to £25,000. Draft legislation will be published in good time before April 2012.
BN05 Zero-emission goods vehicles: 100 per cent first-year allowances
As previously announced (March 2010 Budget BN42), a new 100 per cent first-year allowance is to be given to businesses that purchase brand new zero-emission vehicles. The intention now is to introduce the measure as soon as possible after the summer recess.
The new allowances will be available for expenditure incurred in the period of five years beginning on 1 April or 6 April 2010 (for corporation tax and income tax respectively). The amount of expenditure that will qualify will be limited to €85 million per undertaking over the five-year period.
A zero-emission goods vehicle will be one that cannot under any circumstances produce CO2 emissions when driven. It must be of a design primarily suited to the conveyance of goods or burden (broadly speaking, a van rather than a car). The normal exclusions for leased assets will apply, as well as the other general exclusions specified in the legislation for the purposes of the first-year allowance rules.
Various very specific exclusions will also apply to comply with State Aid rules.
BN06 Capital distributions
The distribution exemption rules at CTA 2009, Pt. 9A will be amended to remove the requirement that distributions must be of an income nature. As a result, distributions of a capital nature received by companies will not be prevented from falling within the exemption regime solely by virtue of being capital in nature. This measure will apply with effect for distributions made on or after 1 July 2009, and so retrospectively, unless the recipient company elects otherwise.
It will also be made clear that distributions made out of reserves arising from a reduction in capital are distributions for these purposes. This will have full retrospective effect except where the distribution is made by a non-UK resident company, in which case it will apply with effect for distributions made on or after 1 July 2009, or where the recipient company elects otherwise.
This measure was previously announced as BN05 of the first 2010 Budget.
BN07 Relief for interest: amendments to the worldwide debt cap legislation
Fourteen separate changes are to be made to the worldwide debt cap rules, including:
ensuring that where a UK figure is being compared with a worldwide figure, the same amount is included in both figures in respect of the same borrowing;
excluding certain securitisation companies; and
ensuring that long-term arrangements that have the economic effect of loans are taken into account for the gateway test.
The legislation will apply to periods of account of the worldwide group beginning on or after 1 January 2010 except in the case of (3) above, where groups may elect for the change to apply prospectively.
This measure was previously announced as BN06 of the March 2010 Budget.
BN08 Research and development tax relief
It is a condition of the research and development (R&D) tax relief rules applying to small or medium-sized enterprises that any intellectual property derived from the R&D must be owned by the company making the claim. As previously announced (2009 Pre-Budget Report PBRN06), this condition is to be abolished with effect for any expenditure incurred on R&D in an accounting period ending on or after 9 December 2009.
BN09 Oil and gas fiscal regime
As previously announced (2009 Pre-Budget Report PBRN03 and March 2010 Budget BN08), a number of changes are to be made to the package of measures introduced by the Finance Act 2009 to provide support through the UK Oil and Gas fiscal regime. The changes include:
widening the relief applying where disposal proceeds are reinvested in new oil trade assets (applying with effect for disposals made on or after 24 March 2010);
ensuring that reinvestment relief applies as intended in a group context (applying to disposals made on or after 22 April 2009);
extending the rules applying to prevent chargeable gains arising on the swap of UK/UKCS licences in some circumstances (applying with effect for disposals made on or after Budget Day 2011);
extending the field allowance to investment in fields that have previously been decommissioned (applying to fields whose development is authorised on or after 22 April 2009); and
reducing the field allowance thresholds to qualify as an ultra-high pressure/high-temperature field (applying by way of an Order to be introduced before 29 July 2010).
BN10 Enterprise management incentives
As previously announced (BN13 of the March 2010 Budget), new legislation will amend the requirement that a company granting enterprise management incentives (EMI) options to its employees must operate wholly or mainly in the UK. A company granting EMI options will be required instead to have a permanent establishment in the UK.
The intention is to include the legislation in a Finance Bill to be introduced as soon as possible after the summer recess. It will have effect in relation to EMI options granted on or after the date on which that Bill receives Royal Assent.
BN11 Venture capital schemes
As previously announced (March 2010 Budget BN11), new legislation will make changes to the enterprise investment scheme (EIS) and venture capital trust (VCT) scheme agreed with the European Commission as a condition for their approval by the Commission as approved State aids. The intention now is to include the legislation in a Finance Bill to be introduced as soon as possible after the summer recess. It will take effect from a date to be appointed.
For VCTs only:
the current requirement that the shares making up a VCT's ordinary share capital be included in the official UK list throughout the relevant accounting period will be replaced with a requirement that the shares be admitted for trading on any EU-regulated market;
the current requirement that at least 30 per cent of the VCT's qualifying holdings is represented throughout the relevant accounting period by holdings of eligible shares will be increased to 70 per cent, but the definition of eligible shares will change to allow VCTs to include shares which may carry certain preferential rights to dividends.
For EIS and VCTs:
the new legislation will exclude shares in a company from qualifying if it is reasonable to assume that the company would be treated as an enterprise in difficulty for the purposes of the European Commission's Rescue and Restructuring Guidelines;
the current requirement that there is a qualifying trade carried on wholly or mainly in the UK will be replaced for shares issued on or after the commencement date with a requirement that the company issuing the shares must simply have a permanent establishment in the UK.
Regulations will also be made at this time to update SI 2004/2199 to reflect the new conditions concerning eligible shares.
BN12 Film tax relief: multi year claims
As previously announced (2009 Pre-Budget Report PBRN07), an unintended anomaly in the film tax relief rules is to be corrected. The anomaly can affect a company's claimable tax credit where it produces films over one or more accounting periods and incurs some overseas expenditure. The proposed revision will be to adjust the way in which the amount surrenderable for tax credit is calculated.
This measure will have effect for accounting periods ending on or after 9 December 2009 and will be treated for those periods as always having had effect.
BN13 Changes to the rules on the deduction of income tax deducted at source
It is proposed to introduce a power for HMRC to make regulations to amend the existing legislation in the Income Tax Act 2007 which governs when and how income tax deducted at source from interest, patent royalties or other annual payments should be accounted for by individuals and non-corporate bodies.
The legislation granting this power is to be included in a third Finance Bill to be introduced after Parliament's summer recess.
BN14 Consortium relief
In certain circumstances, a member of a consortium (the link company) can transfer its share of the consortium's unused losses to another member of its group. The rules are to be extended to allow any company established within the European Economic Area to be a link company (currently, only UK-resident companies can be link companies). At the same time, a further restriction is to be placed on the maximum amount of losses which can be claimed.
This measure will have effect for accounting periods commencing on or after the date that the legislation is published (expected to be after Parliament's summer recess).
BN15 Life insurance companies: changes to tax rules
The tax rules applying to life insurance companies are to be amended:
to ensure that an unintended tax charge does not arise where a UK life insurance company transfers long-term insurance business to a non-EEA overseas company (applying for transfers of business taking place after 22 June 2010);
to ensure a consistent basis of taxation where life insurance business ceases to be carried on in the UK through a UK company and starts to be carried on by a UK branch of a company resident elsewhere in the EEA (applying with effect for periods of account beginning on or after 1 January 2011); and
to prevent manipulation to avoid tax on previously unrecognised profits where life insurance business is transferred to another company (applying to transfers of business on or after 24 March 2010).
BN16 Corporation tax avoidance: authorised investment funds
Where a corporate investor receives a dividend distribution from an authorised investment fund (an AIF), and part of that distribution is derived from taxable income in the hands of the AIF, the distribution carries with it a deemed tax credit. This ensures that the correct rate of corporation tax is paid taking into account tax paid by the AIF. Changes to be effective from 22 June 2010 will be made to ensure that a corporate investor cannot make use of an AIF to create a UK tax credit where UK tax has not been paid.
BN17 Loan relationships: anti-avoidance
In most cases, a company's taxable profits and losses from its loan relationships and derivative contracts are based on the amounts shown in the accounts. Where accounting practice allows a loan relationship, etc. to be derecognised, tax rules can override the accounting practice and require the profits and losses to be calculated as if the asset had been fully recognised. In order to target schemes whereby profits are said to fall out of account as a result of the derecognition of a loan, etc., the circumstances in which the tax rules apply are to be extended to include:
where derecognition arises as a result of the acquisition or variation of a capital interest in a company, partnership or trust; or
where derecognition is triggered by an event that occurs in a later accounting period.
The changes described above will have effect for credits and debits arising on or after 22 June 2010.
BN18 UK Real Estate Investment Trusts and stock dividends
A UK Real Estate Investment Trust (a REIT) must meet a distribution requirement, meaning that it must distribute, for each accounting period, 90 per cent of the profits from its property rental business by way of a dividend. As previously announced in the March 2010 Budget (BN22), the rules will be amended so that stock dividends can be taken into account for the purposes of this requirement. The recipients of stock dividends will be taxed in the same way as if they had received the distributions in cash.
Legislation will be included in a Finance Bill to be introduced after Parliament's summer recess. It is intended to have effect for distributions made on or after the date that the Bill receives Royal Assent.
BN19 Insurance premium tax: increase in the standard rate and higher rate
From 4 January 2011, the standard rate of IPT rises from five per cent to six per cent and the higher rate of IPT rises from 17.5 per cent to 20 per cent.
BN20 Capital gains tax: rates and entrepreneurs’ relief
With effect for disposals on or after 23 June 2010, an additional rate of capital gains tax of 28 per cent is introduced.
In the case of individuals, the current rate of 18 per cent will remain payable where the total of the individual's income and chargeable gains for the tax year do not exceed the upper limit for the income tax basic rate band. Where, however, that total exceeds the limit, the excess, to the extent that it comprises chargeable gains (taken as the top slice of that total) is charged at 28 per cent. In arriving at the total of income and chargeable gains, any gains realised on disposals in the period 6 April to 22 June 2010 are ignored; these remain taxable at 18 per cent.
Chargeable gains arising to trustees and personal representatives on disposals on or after 23 June 2010 will be charged at 28 per cent.
Entrepreneurs' relief remains available to reduce the effective rate of capital gains tax on disposals of business assets to 10 per cent. The maximum relief, which was raised to gains of up to £2m in the first Finance Act of 2010, is to be raised further, to £5m, in respect of disposals on or after 23 June 2010.
The annual exemption for 2010–11 remains unchanged at £10,100.
BN21 Indexing individual savings account limits from 2011
As previously announced in the March 2010 Budget (BN28), the annual limits of investments into ISAs for 2011–12 onwards are to be increased annually in line with the Retail Prices Index (RPI). The new limits will be calculated by reference to the RPI for the September prior to the tax year concerned and will be rounded to a convenient multiple of 120 to assist those making monthly investments. The limits for investments into cash ISAs will remain at one-half of the overall limit.
These changes will be introduced by Statutory Instrument under existing powers.
BN22 Transitional measure deferring the effective requirement to buy an annuity to age 77
Currently, a member of a registered pension scheme must use his fund to buy an annuity by the age of 75 or become subject to strict limits on their income withdrawals. Where the member dies after that age and any of the fund is not used to pay pensions to dependants or charitable donations, it is subject to tax charges of up to 70 per cent. In addition, inheritance tax charges may arise.
It is proposed to end the requirement to purchase an annuity with effect from 2011–12 and a consultation exercise will be undertaken shortly. However, the Finance (No. 2) Act 2010 will introduce an interim measure to assist those who attain the age of 75 on or after 22 June 2010 to defer any decision on what to do with any pension savings not yet used to provide a pension. The following changes are to be introduced:
the application of the limits on income withdrawals is deferred to age 77;
immediately before age 75, members will become entitled to income withdrawal and a tax-free lump sum in respect of their remaining fund;
the charge on lump sum death benefits paid on death over the age of 75 is reduced to 35 per cent; and
the specific IHT charge will not apply.
BN23 Pensions taxation: National Employment Savings Trust
As announced in the March 2010 Budget (BN35), it is proposed to introduce legislation in a Finance Bill to be introduced after Parliament's summer recess, to allow the National Employment Savings Trust (NEST) to register with HMRC for tax purposes and be subject to the same tax rules as other tax-registered pension schemes.
BN24 Tax changes for certain trusts compensating asbestos victims
As previously announced in the March 2010 Budget (BN29), it is proposed to exempt trustees of certain trusts from capital gains tax, inheritance tax and income tax. The trusts that will benefit are those set up on or before 23 March 2010 as part of an arrangement made by a company with its creditors and specifically to pay compensation to, or in respect of, individuals with asbestos-related conditions.
The necessary legislation will be contained in a Finance Bill to be introduced after Parliament's summer recess and its effect will be backdated to 6 April 2006.
BN25 Income tax adjustments between settlors and trustees
As previously announced in the March 2010 Budget (BN30), legislation will be introduced to require settlors to pay all repayments of tax on trust income they receive to the trustees. These payments to trustees will therefore be disregarded for inheritance tax purposes. This measure will have effect for repayments relating to income tax chargeable on or after 6 April 2010 and will be contained in a Finance Bill to be introduced after Parliament's summer recess.
BN26 Income tax: special guardianship orders and residence orders
As previously announced in the March 2010 Budget (BN37), an exemption from income tax is to be introduced in respect of amounts received by special guardians and kinship carers in their capacities as such. These are individuals who care for children under special guardianship orders or residence orders respectively and the payments they receive are paid either by the childrens' parents or a local authority.
The exemption will apply from 6 April 2010 and the necessary legislation will be contained in a Finance Bill to be introduced after Parliament's summer recess.
BN27 Income tax relief for shared lives carers
As previously announced in the 2009 Pre-Budget Report (PBRN22), a new income tax relief in the form of a tax-free allowance will be introduced for qualifying shared lives carers. These are carers who provide accommodation, care and support for up to three individuals who have been placed with them under a local authority shared lives placement scheme; and share their home and family life with those individuals. Shared lives carers include adult placement carers, staying put carers and those receiving a Scottish Kinship Care Allowance.
The allowance, to be set against their earnings as carers, will be a fixed amount of £10,000 plus a weekly allowance of £200 or £250 depending upon the age of the individual in care and is to have effect from 6 April 2010. For the year 2010–11 only, carers whose earnings are more than the tax-free allowance have the option to choose the existing simplified method for calculating their profits. Thereafter, the existing simplified method will be withdrawn.
The necessary legislation will be contained in a Finance Bill to be introduced after Parliament's summer recess.
BN28 Capital gains tax: private residence relief and adult placement carers
As previously announced in the 2009 Pre-Budget Report (PBRN16), legislation will be introduced to remove a possible restriction on private residence relief (PPR). An individual who sets aside part of their house for the use of an adult in care under a local authority adult placement scheme will be able to treat that part of the property as part of their only or main residence, eligible for PPR.
This measure will have effect for disposals on or after 9 December 2009 and will be contained in a Finance Act which will be introduced after Parliament's summer recess.
BN29 Capital allowances rules for qualifying carers
The legislation relating to foster carers will be amended to ensure that it operates as intended. The amended legislation will also apply to the new income tax relief for shared lives carers.
The changes will ensure that anomalies do not arise when individuals start or cease to claim or qualify for foster-care relief or qualifying-care relief (and accordingly cease or start to claim capital allowances).
This measure will be included in a Finance Bill to be introduced as soon as possible after the summer recess and will apply to chargeable periods ending on or after the date on which that Bill receives Royal Assent.
BN30 Expenses paid to MPs
The income tax and National Insurance contributions (NIC) rules relating to MPs' expenses are to be updated. The amended rules will take effect retrospectively from 7 May 2010 and will reflect the new regime for MPs introduced under the Independent Parliamentary Standards Authority (IPSA).
Measures to be introduced in the Finance Bill 2010 will:
update ITEPA 2003, s. 292, which exempts from income tax amounts paid to MPs in respect of additional expenses incurred in staying overnight away from their only or main home for the purposes of their Parliamentary duties;
update ITEPA 2003, s. 294, which exempts from income tax amounts paid to MPs in respect of travel to certain European institutions and Parliaments;
introduce a statutory exemption for certain travel expenses paid under the IPSA scheme, to replace the existing concessionary exemption for the reimbursement of MPs' expenses in respect of Parliamentary travel;
introduce a statutory exemption for certain spouses' travel expenses paid under the IPSA scheme, to replace the concessionary exemption for the reimbursement of expenses relating to specific travel by MPs' spouses; and
introduce a new provision to exempt from tax payments under the IPSA scheme for the costs of evening meals purchased by MPs when the House of Commons is sitting late.
Regulations will be made to ensure that the NIC treatment mirrors the income tax treatment.
BN31 Seafarers' earnings deduction: EU and EEA residents
The seafarers' earnings deduction can provide 100 per cent UK tax relief where the claimant is ordinarily resident in the UK. As previously announced in the 2009 Pre-Budget Report (PBRN23), this relief is to be extended so that seafarers resident in the EU or EEA can also claim the deduction on their earnings as a seafarer where those earnings are liable to UK income tax.
The measure will have effect on and after 6 April 2011 and the necessary legislation will be contained in a Finance Bill to be introduced after Parliament's summer recess.
BN32 Landfill tax: criteria for determining material to be subject to the lower rate
The criteria for determining the lower rate of landfill tax will be published and reviewed.
HM Treasury will have regard to these criteria when listing in an Order the materials that qualify for lower-rating after 31 March 2011.
BN33 Aggregates levy: Northern Ireland credit scheme
The Northern Ireland aggregates levy credit scheme grants an 80 per cent tax credit to aggregate producers in Northern Ireland who meet certain conditions. The scheme is to be extended for a further 10 years to 1 April 2021.
BN34 Tobacco products duty: long cigarettes
From 1 January 2011, in the case of cigarettes longer than 8 cm (excluding any filter), each additional 3 cm (or part thereof) is treated as an additional cigarette. For example, a cigarette of 12 cm would be treated as three cigarettes for the purposes of tobacco products duty.
BN35 Relief for overpayments of stamp duty land tax and petroleum revenue tax
The SDLT and PRT error or mistake rules are to be amended to provide a means of reclaiming overpayments where there is no other statutory route. This will mirror changes made by the Finance Act 2009 to the rules for income tax, capital gains tax and corporation tax.
This measure was previously announced in the March 2010 Budget (BN65). It will take effect from 1 April 2011 and be included in a Finance Bill to be introduced as soon as possible after the summer recess.
BN36 Interest harmonisation for corporation tax and petroleum revenue tax
As previously announced (March 2010 Budget BN66), corporation tax and petroleum revenue tax are to brought within the harmonised interest regime introduced by the Finance Act 2009. The harmonised interest regime provides a single legislative framework for interest chargeable on late payments and payable on repayments in respect of taxes and duties administered by HMRC.
It should be noted that this will not include the rules applying to quarterly instalment payments, which will remain in force.
BN37 Review of HMRC powers, deterrents and safeguards: penalties for late filing of returns and payment of tax
As previously announced in the March 2010 Budget (BN67), a revised penalty regime will apply to taxpayers who fail to file their tax returns on time or pay their tax liabilities in full and on time for:
VAT and insurance premium tax;
aggregates levy, climate change levy and landfill tax;
air passenger duty, alcoholic liquor duties, tobacco products duty, hydrocarbon oil duties, general betting duty, pool betting duty, bingo duty, lottery duty, gaming duty and remote gaming duty; and
other excise duties.
The revised penalties will:
be introduced over a number of years;
treat late payment of tax and late-filed returns separately;
reflect the more frequent filing and paying obligations for these taxes and duties compared to direct tax;
try to encourage filing and payment by the correct dates by imposing an escalating series of penalties, depending on the number of failures within a set penalty period. Further penalties will arise if there is a prolonged delay in filing returns or paying the tax due;
include a right of appeal if the taxpayer has a reasonable excuse for the lateness; and
be avoided where taxpayers have agreed a time to pay arrangement with HMRC (as regards the late payment penalties).
The key features of the revised penalty for late filing of quarterly returns are:
£100 penalty immediately after the due date for filing (whether or not the tax has been paid);
the failure also starts a penalty period, which is set for a year;
if there are further failures within the penalty period, then the fixed penalty escalates by £100 for each of those subsequent failures, up to a maximum of £400 per failure. The penalty period is also extended to the first anniversary of the latest failure;
if any of the failures are prolonged, then additional penalties of five per cent of the tax on the relevant return are charged at six and 12 months from the date of the failure; and
if, by failing to make the return, the taxpayer is deliberately withholding information to stop HMRC from correctly assessing the liability to tax, then penalties of up to 100 per cent of the tax on the return may be chargeable.
The revised penalty for late filing of monthly returns is similar to the quarterly model above, except that the fixed penalties are £100 for the first three failures in any penalty period, £200 for the second three failures, etc., up to a maximum of £400 per failure.
The key features of the revised penalty for late quarterly payments are:
if a taxpayer first pays late, although there is no penalty, it starts a penalty period, which is set for a period of a year;
any further failures within that period attract a penalty of two per cent of the unpaid tax, as well as extending the penalty period to the first anniversary of the latest failure;
a third failure within the period attracts a penalty of three per cent, with further failures attracting a maximum of four per cent; and
if any of the failures are prolonged, then additional penalties of five per cent of the unpaid tax are charged at six and 12 months from the date of the failure.
The revised penalty for late monthly payments is similar in structure to the quarterly model above, except that, after the first failure, the tax-geared penalties are:
one per cent for the next three failures in any penalty period; and
two per cent of the next three failures, etc., up to a maximum of four per cent per failure.
Special provisions deal with circumstances where taxpayers change from a monthly to a quarterly return, or where exceptional payment obligations arise.
The necessary legislation will be contained in a Finance Bill to be introduced after Parliament's summer recess.
BN38 Review of HMRC powers, deterrents and safeguards: excise modernisation and compliance checks
The requirements for record-keeping and the time limits for assessments and claims for the purposes of excise duties on alcohol, tobacco, energy products, gambling duties and air passenger duty will be aligned shortly with the changes made in recent year to other taxes and duties.
BN39 VAT: change to zero-rating of qualifying aircraft
For supplies made on or after 1 January 2011, the definition of aircraft that can be supplied at the zero rate changes from one based on weight and usage to one based on the status of the customer. Supplies of aircraft will be zero-rated only where used by airlines operating for reward primarily on international routes. There is no change to the treatment of supplies of aircraft to State institutions.
BN40 VAT: place of supply of gas, heat and cooling
From 1 January 2011, there is a change to the application of VAT to supplies of natural gas and of heat and cooling. Under existing arrangements, gas supplied via the natural gas distribution system is treated as supplied where either a wholesale customer is established or the natural gas is consumed. UK customers registered for VAT must account for VAT on the supplies of natural gas they receive from suppliers established abroad as a reverse charge. There are currently no rules which specifically govern the application of VAT to supplies of heat and cooling.
The existing rules, which also include electricity, are to be amended so as to:
extend their scope to cover supplies in all categories of natural gas pipeline;
limit their scope to supplies involving natural gas pipelines located in the EU or linked to such pipelines; and
extend the relief from VAT at importation to all natural gas imported via a network (including liquefied natural gas by tanker).
These amended rules, which will be legislated for in a Finance Bill to be introduced after Parliament's summer recess, will be extended to apply to heat and cooling supplied through networks.
BN41 VAT: postal services
For supplies made on and after 31 January 2011, standard-rating applies to services that Royal Mail Holdings plc, the universal service provider of public postal services in the UK, is not required to make under a licence duty (such as those made by Parcelforce), and services provided on terms and conditions that have been freely negotiated. Social mail, including stamped mail, remains exempt from VAT so private individuals should largely be unaffected.
Zero-rating for passenger transport services will be updated to reflect the status of the provider of a passenger transport service made in conjunction with its postal services. Zero-rating applies to the transport of passengers by the Post Office company (i.e. Royal Mail), including any wholly-owned subsidiary of the Post Office company. The provision has only been used for rural bus services, i.e. the Postbus, that Royal Mail provides in conjunction with its postal delivery services, although it also applies to other modes of transport, such as aircraft and ships. There is no change to the scope of the zero-rating.
This measure was previously announced as BN48 of the March 2010 Budget.
BN42 VAT: Lennartz accounting: restricting application and securing revenue
From 1 January 2011, for certain specified assets, VAT cannot be recovered in respect of private use or purposes other than those of a business.
The change should ensure that VAT recovery is restricted to the business use of the asset, excluding any private use by the taxpayer or the taxpayer's staff.
The capital goods scheme will be amended to take account of changes in private use over subsequent years.
Until Vereniging Noordelijke Land-en Tuinbouw Organisatie v Staatssecretaris van Financiën (Case C-515/07) (VNLTO), some taxpayers were incorrectly permitted to use Lennartz accounting (HMRC Brief 2/2010 (22 January 2010)).
Where such taxpayers choose not to unravel these arrangements, they must continue to account for the VAT due under the arrangements. Legislation will ensure that this position is treated as having always had effect.
These changes may affect taxpayers who buy land, property, boats and aircraft which are used for both business and private purposes.
When the law ensures that there is no entitlement to any VAT recovery on the private use of directors' accommodation, the law relating to recovering VAT on directors' accommodation will be repealed.
This measure was previously announced as BN50 of the March 2010 Budget.
BN43 VAT: change of standard rate
The standard rate of VAT rises to 20 per cent from 17.5 per cent for:
any supply made on or after 4 January 2011; and
any acquisition or importation taking place on or after that date.
Changes to the thresholds for the Payment on Account scheme will be made to maintain the status quo of the scheme.
BN 44 VAT: change of standard rate: anti-forestalling legislation
Legislation will stop certain arrangements that purport to apply the 17.5 per cent standard rate of VAT to goods or services to be delivered or performed on or after 4 January 2011.
In certain circumstances, a supplementary charge to VAT of 2.5 per cent will be due on supplies on which VAT of 17.5 per cent has been declared.
Forestalling occurs when arrangements are put in place for a VAT invoice to be issued by a supplier or payment received by a supplier before the rate increase, where goods are not due to be delivered or services to be performed, until on or after the date that the rate increases to 20 per cent. The grant of a right or similar option may also be used for forestalling.
The supplementary charge to VAT applies to a supply of standard-rated goods or services where the customer cannot recover all the VAT on the supply, and one or more of the following conditions are met:
the supplier and customer are connected parties;
the value of the supply (and any related supplies made under the same scheme) exceeds £100,000. But this does not apply if the prepayment or issuing an advance VAT invoice is normal commercial practice;
the supplier or someone connected to the supplier funds a prepayment for the goods or services; or
an advance VAT invoice is issued where payment is not due in full within six months (except hire purchase invoices issued in accordance with normal commercial practice).
The supplementary charge to VAT is due on 4 January 2011 and must be accounted for on the supplier’s VAT return covering that date.
Similar provisions stop the use of the grant of standard-rated rights or similar options as an avoidance mechanism. They apply where before the rate increase the customer is granted the right to receive goods and services after the rate increase, either free or at a discount, and the customer cannot recover all the VAT on the right or option. The supplementary charge to VAT on rights and options applies if one or more of the following conditions are met:
the grantor and the customer are connected parties;
the consideration for the right or option (and any related supplies made under the same scheme) exceeds £100,000. But this does not apply if the right or option is normal commercial practice; or
the supplier or someone connected to the supplier funds the payment for the right or option.
The charge is due on the date that the option is first exercised on or after 4 January 2011.
The charge does not apply to prepaid or invoiced rentals of land, buildings or other assets, if the period concerned is a year or less, and the prepayment or the issuing of an advance invoice is normal commercial practice.
Suppliers may adjust the amount payable under contracts with customers for any supplementary charges, unless the contracts say otherwise.
BN45 VAT flat rate scheme: changes to the flat rate thresholds and percentages
From 4 January 2011, revised flat rate percentages apply to reflect the increase in the standard rate of VAT to 20 per cent.
From the same date, a person must leave the flat rate scheme if either his VAT-inclusive annual flat rate turnover exceeds £230,000 or his VAT-inclusive turnover in the next 30 days can reasonably be expected to exceed £230,000. Before 4 January 2011, both exit thresholds are £225,000.