Warr on...

Alistair Darling presented his first budget on 12th March 2008.

Much of the content had been announced:-

• by Gordon Brown in the 2007 budget; or
• in the 2007 autumn statement.

The speech itself was not very long but the devil was in the detail. Budget notes running to 270 pages were released immediately after the speech.

A summary of the main provisions of relevance particularly to small businesses is set out below.

1. Personal Allowances

The personal allowance has been increased by £210 to £5,435 in line with inflation. Substantial increases have, however, been made to allowances for the over 65’s. For example, for those aged between 65 and 74 the allowance has been increased from £7,550 to £9,030. It should be noted, however, that these enhanced allowances are subject to tapering and are only of use to those with limited income.

2. Income Tax Rates

These are as follows:

A 10% band has been retained for savings income only and for a maximum of £2,320. However, this is only available in full where other income (except dividends) is no more than an individual’s personal allowance. As an example, if a person (under 65) has £5,435 income from employment and £3,000 gross bank interest, his tax liability will be calculated as follows:

The combined effect of the increase in tax bands and personal allowances means that an individual will be able to receive gross income of £41,435 (2007/08: £39,825) before paying higher rate tax.

3. Capital Gains Tax (CGT)

The annual exemption for 2008/09 is increased by £400 to £9,600. The regime itself has, however, been greatly simplified and from 6th April 2008 all gains will be taxed at 18%. This compares with the present system under which taper relief is applied to an asset at rates which depend on the nature of the asset and its length of ownership, with the resultant tapered gain being added to the person’s income and taxed accordingly. A relief known as “Entrepreneur Relief” applies to eliminate four ninths of the gain on certain business assets to result in effect with a 10% tax rate on such gains.

For further consideration, please refer to our recent article on the changes to capital gains tax.

4. Inheritance Tax (IHT)

The nil rate band is increased to £312,000. Furthermore, where a person dies on or after 9th October 2007 they may also use any unused nil rate band of an earlier deceased spouse or civil partner.

5. National Insurance (NIC)

The rates of Class I National Insurance applying from 6th April 2008 are as follows:

The rate of Class II and Class III National Insurance will increase to £2.30 and £8.10 per week respectively.

Class IV National Insurance will be at a rate of 8% on profits between £5,435 and £40,040 and 1% on profits above £40,040.

6. Foreign Dividends

In most cases, from 6th April 2008 a person receiving dividends from a non UK company will be taxed on that dividend in exactly the same way as if it was received from a UK company.

7. Non Domiciliaries

A non domiciled adult individual who has been resident in the UK for seven out of the last ten years and who wishes to use the remittance basis to pay tax on offshore income and gains will from 6th April 2008 lose his personal allowances and capital gains exemption and pay an annual £30,000 charge.

A number of “loopholes” frequently used by “non domiciled” and “not ordinarily resident” individuals are also being closed.

8. Investment

A number of changes are being made to ISAs, in particular the investment limit is being increased to £7,200, of which £3,600 may be held in cash.

The annual limit for tax efficient investment under the Enterprise Investment Scheme (EIS) is increasing from £400,000 to £500,000, but there were no changes to Venture Capital Trust (VCT) investment limits.

9. Corporation Tax

The small companies’ rate of corporation tax is increased from 1st April 2008 by 1% to 21%. At the same time, the large companies’ rate is reducing by 2% to 28%. The bands set out below apply to a company which has no associated companies.

10. Capital Allowances

Many changes have been made to the system of capital allowances. Some of the more important ones are highlighted below: -

First Year Allowances
These are being abolished from 1st April 2008 for companies and 6th April 2008 for sole traders and partnerships. Instead they are being replaced by an Initial Allowance of 100% of expenditure up to £50,000 per annum. Most plant will qualify for this allowance, but cars are specifically excluded. Where an accounting period is less than twelve months the allowance is scaled down. A similar scaling down takes place for the accounting period which includes 1st April 2008 (or 6th April 2008) so a company that makes its accounts up to 30th September 2008 will have an initial allowance of £25,000 which will apply to most purchases between 1st April 2008 and 30th September 2008.

Writing Down Allowances for Plant
The rate applying to most assets is reduced from 25% per annum to 20% per annum, again from 1st April 2008 for companies and 6th April 2008 for individuals and partnerships. Again there is an apportionment in the accounting period which includes 1st April 2008 (or 6th April 2008).

Writing Down Allowances for Cars
Again, the rate here is also reducing to 20%, but from 2009 higher polluting cars will only benefit from a 10% rate. Apportionments as outlined above will apply.

Small Pool Balances
Businesses with a written down pool value of no more than £1,000 will be able to write off the whole of that balance.

For further consideration, please refer to our recent article on the changes to capital allowances.

11. Value Added Tax (VAT)

The VAT registration and de-registration thresholds have been increased to £67,000 and £65,000 respectively.

There have been above inflation increases in the VAT fuel scale charge which applies when a business pays for private and business fuel for a car used by a business.

There has been an increase in the size of errors that can be corrected on the next VAT return following discovery. In most cases this will rise from £2,000 to £10,000. Separate disclosures will only need to be made for large errors.

12. Income Shifting

It was widely predicted that rules would be introduced to tackle situations where two people (typically husband and wife) own shares in a small company (or are partners in a partnership) and arrange the income they each receive to minimise their tax liabilities rather than to reflect their individual contributions to the business. There will now be no new legislation applying from 6th April 2008. The Government are still looking at this area and state that there will be further consultation with new legislation coming into effect on 6th April 2009.

13. Tax Avoidance

A number of new measures were introduced over many areas of taxation to tackle avoidance. One such measure (BN66) tackles an abuse that purports to use double taxation treaties by setting up a complex partnership of offshore trusts through which UK residents can receive tax free income. Unusually, this particular measure is to be retrospective and will go back more than 20 years! The Government intend to do this by “clarifying” legislation that was introduced in 1987.

14. Charities

The reduction in the basic rate of tax from 22% to 20% was not welcomed by charities. That was because when a donation is made to them under gift aid they are deemed to receive that donation net of basic rate tax, so if a person makes a gift of £780 they can claim £220 back from H M Revenue & Customs to gross the gift up to £1,000. Using the same principal with a 20% basic rate the gift would only be worth £975. To protect their revenues, the Chancellor decided that they could continue to claim tax back as if the rate was 22% for another three years.

15. Tax Planning – 6% Tax On £100,000 Income

Budgets bring changes to the tax system and changes often bring opportunities for tax planning, especially when advantage can be taken of a combination of measures (or a failure to introduce expected legislation). The fictitious example below uses:

(i) the retention of the 10% band for savings income;
(ii) the annual investment allowance for plant and machinery;
(iii) the delay in the introduction of income shifting rules; and
(iv) pension funding charges which took effect on 6th April 2006.

John is an architect who operates through a small limited company. His wife Jill is a housewife, but she spends 10 hours a week helping John with company administration. They are both directors and each hold 1 share in the company. John and Jill personally have £100,000 savings in a high interest bank account. In the year to 31st March 2009 the company makes a profit of £100,000 before directors’ remuneration, depreciation and tax. During March 2009 the company invests £50,000 in a new IT system and integral features and thermal insulation for the office. The cost is financed by a bank loan. John and Jill are each paid £5,000 as a salary, on which they pay no tax or National Insurance, and they each receive £30,000 in dividends. The company also pays £10,000 into John’s personal pension plan. Their joint savings give them £5,330 gross interest from which £1,066 tax is deducted.

The company’s corporation tax liability is £8,400 calculated as follows:

Personally they each receive a tax rebate of £310 calculated as follows: -

Deducting their overpayments from the company’s corporation tax liability the net tax payable is just £8,680, less than 6% of the £100,000 profit.

16. Disclaimer

This document has been produced for general guidance only and does not constitute tax advice. Whilst every care has been taken in its preparation, Warr & Co will not accept liability for any loss incurred as a result of any use made from this document or its contents.

We will be happy to offer specific advice to clients when requested.

Date of Article: 14th March 2008