The Budget 2008
A Brief Summary Prepared by The Old Mill Tax Team
This year’s budget has mostly been the reiteration of changes proposed by Gordon Brown last year, and by Alistair Darling in his pre-budget report. However there have been several announcements, and as usual, the ‘devil is in the detail’ – all 270 pages of budget notes summarising the changes. One of the key changes was not actually mentioned in the budget at all, and that was the delaying of the introduction of the income shifting proposals from April 2008 to April 2009 to “allow enough time for proper consultation and consideration”. This delay will be a relief for many of our clients, particularly our family run businesses and especially the farming businesses where amounts drawn from the business may not reflect efforts put in.
We have briefly reviewed and highlighted some of the key changes below, although this is not meant to be a comprehensive paper, but more a flavour of the areas that may impact on our clients.
Personal Tax
Rates & Allowances
Previously announced changes to tax rates and thresholds. Principally the abolition of 10% rate and reduction of basic rate to 20%. Allowances have increased in line with inflation except for age related allowances where the increase is greater than inflation. A table of rates and allowances is attached, but one area of particular note is the extension of the upper rate limits for National Insurance Contributions which was not mentioned specifically. For Employees the Class 1 upper limit increases £100 a week, resulting in additional NI of £504 per year, and the self employed Class 4 NIC upper limit increases £5,200 a year, resulting in additional NI of £364 a year.
Savings Income - Dividends from Non UK Companies
The one ninth tax credit available to reduce tax due on UK dividends will be extended to dividends from Non UK Companies. This is effective from 6th April 2008 for individuals owning less than 10% of the shares in the Non UK Company. This will be further extended to individuals owning more than 10% of the share from 6th April 2009 provided the country where the company is resident taxes corporate profits in a similar way to the UK. There will be anti avoidance measures to prevent abuse.
Inheritance Tax - Nil Rate Band
The Pre Budget Report detailed changes whereby a person dies on or after 9th October 2007 any unused Nil Band of their deceased spouse or civil partner can be used to calculate Inheritance Tax on their estate. One consequence of this relates to Capital Gains Tax. More estates will not pay Inheritance Tax and values for shares; land etc will not have to be agreed. The normal Capital Gains Tax rule is that where assets that have been inherited are sold the cost for Capital Gains is the value agreed for Inheritance Tax. This rule will not be applied in these cases.
Charities - Gift Aid
A consequence of the reduction in the basic rate is that gift aid payments received will be net of 20% rather than 22% thus reducing the amount they can reclaim from HMRC. A transitional relief will be introduced for the period from 6th April 2008 to 5th April 2011 whereby an additional 2% can be claimed.
Employee Taxation - Company Cars
The Finance Bill 2008 will set rates for the company car tax charge (and employer Class 1A NICs) that will be applicable for 2010/11 and subsequent years. These changes reflect the Government’s increasingly “green” agenda, and a broad desire to reduce CO2 emissions.
With effect from 6 April 2010, a new lower rate of 10% will apply for cars with CO2 emissions of exactly 120 g/km.
Also, the threshold for the current 15% charge is to be lowered from 140 g/km to :
2008/09 135 g/km
2009/10 135 g/km
2010/11 130 g/km
Most diesel cars attract a 3% supplement on the petrol percentages discussed above (capped at 35%). It is understood that this supplemental charge will continue to apply (i.e. from 2010/11 the lowest charge will be 13% where CO2 emissions are 120 g/km).
Overseas Pension Plans
This announced change will affect internationally mobile workers who are members of non-UK pension plans, their employers and the managers of the overseas pension plan.
In brief, measures are to be introduced to ensure that where UK tax relief has been granted, the related funds are identified for the purposes of determining limitations and charges on benefits equivalent to those for a registered UK pension plan.
UK tax “residence” for individuals
As a consequence of lobbying and the consultation process, changes previously announced have been “softened” a little.
From 6 April 2008 any day where an individual is present in the UK at midnight will be counted as a UK day (for the purposes of the 90 day rule).
Also, the exemption for passengers in transit have been extended.
Individuals “domiciled” outside the UK
Much publicised changes will be included in the Finance Bill 2008.
Individuals who have been UK residents for more than seven of the past ten years will be affected where they claim the “remittance basis” of taxation, and have unremitted income and gains in excess of £2,000 per year (increased from £1,000 in earlier announcements). In this case personal allowances will be withdrawn.
From 6 April 2008, such individuals will have to pay a £30,000 annual tax charge in respect of foreign unremitted income (in addition to the tax due on any overseas income and gain that is remitted to the UK).
The charge will apply to adults only (over the age of 18), and the character of the charge is to be refined (to try and ensure it is a “creditable tax” for the purposes of double tax relief in an individual’s home country).
Various and complex “loop holes” will be closed.
Venture Capital Schemes – EIS, VCT and CVS
- Income tax limit increased from £400,000 to £500,000 dependant on EEC approval.
- Additionally shipbuilding, coal and steel production have been listed as excluded activities.
Business Tax - Entrepreneur’s Relief
No changes to the draft legislation issued last month.
- Indexation and Taper will go from 5 April 2008
- Entrepreneurs Relief available up to a lifetime allowance of £1million with an effective rate of 10%, on qualifying disposals
- Single rate of 18% for all other gains
Capital Allowances
Main changes had already been announced and will come into force from 6 April 2008 (1 April 2008 for companies):
- First Year Allowances to be abolished and replaced with a £50,000 Annual Investment Allowance (AIA) available to all businesses.
- Writing Down Allowance on Plant and Machinery reduced from 25% to 20% on expenditure in excess of the AIA.
- Industrial Buildings and Agricultural Buildings Allowances to be phased out from April 2008 to be abolished entirely from April 2011, together with Enterprise Zone Allowances.
One new announcement that will be beneficial from an administrative point of view is that any pool balances of under £1,000 can be taken as one special allowance, to do away with the requirement of having ongoing small pools where the assets may have long since been scrapped. The 100% first year allowance for “green” cars was due to end on 5 April 2008, but it has now been extended until 2013, although the carbon emission limit reduces from 120g/km to 110g/km.
Vat Changes
The registration threshold has increased from £64k to £67k and for deregistration from £62k to £65k with effect from 1 April 2008.
The error limit below which errors may be corrected on the next VAT return without the need for a voluntary disclosure will be increased from 1 July 2008. This increases the net error limit from £2k to the greater of £10k or 1% of turnover up to maximum error limit of £50k. This should enable more errors to be corrected without incurring interest charges.
Fuel scale charges are being increased in line with fuel price increases from 1 May 2008.
The 3 year cap for error etc claims is being reintroduced with effect from 31 March 2009. This results from Custom’s losing a case in the House of Lords.
There are small changes to the Option to Tax rules designed to simplify the operation of the rules.
Amendments to Research & Development Relief Schemes
The maximum rates of relief are increasing from 150% to 175% for SME’s and from 125% to 130% for Large Companies (as announced in the 2007 budget!) There are also some further minor adjustments to the way the scheme is administered
Trading Stock
From 12 March 2008 any stock appropriated into or from stock otherwise than in the course of trade will continue to be at market value for tax purposes but this rule will be statutory rather than being based on case law and precedent. In practical terms there should be no change to the tax treatment.
EMI share options
- Individual employee limit increased from £100,000 to £120,000 from 6 April 2008
- Companies involved in shipbuilding, coal and steel production will no longer qualify for EMI, neither will companies with 250 employees or more
Associated Companies
From 1 April 2008 simplification measures will mean that companies whose directors or shareholders are also separately members of business partnerships will not be treated as associated, unless ‘relevant tax planning arrangements have been entered into with the company’. This is thought to remove the inclusion of the companies controlled by partners of film schemes for instance.
Anti Avoidance – Financial Products
There are new rules to block various avoidance schemes that have been registered around areas such as “disguised interest” and “receipt of interest in the form of non-taxable distributions” for companies. There are numerous other new anti- avoidance rules covering other areas including SDLT, Leased Plant and the abuse of Tax Treaties amongst others.
Anti Avoidance -Trading Loss Relief
Measures are to be introduced to restrict “sideways loss relief” where an individual carries on a trade in a non-active capacity. This is effects arrangements made after the 12th March 2008.
Manufactured Payments
Legislation is to be introduced to prevent individuals avoid tax by making “manufactured payments”. These are dividends or interest arising in the course of sale and repurchase of shares and securities,
Penalties and Admin
After bringing together Customs and Excise with the Inland Revenue a new a single penalty regime for incorrect returns across all the taxes, levies and duties administered by HMRC is expected from 1 April 2009. A similar regime for failing to notify a taxable activity will also be enacted. The regimes are expected to be based on the amount of tax understated, nature and disclosure.
The new HMRC ‘powers’ will align and modernise HMRC’s access to records and information. It is proposed that VAT, IT and CGT, CT and PAYE time limits for errors, mistakes and fraud limits are aligned. It appears from the budget note that you are no longer able to make a mistake for IT, CGT or CT! Time limits for taxpayers claims will be aligned at 4 years.
Secondary legislation regarding appeals against a HMRC decision is to be intended to be in effect from April 2009 making use of internal reviews before appeals are referred to tribunal.
Payment of taxes by credit card is expected to be available from Autumn 2008.
This is a preliminary analysis only and professional advice should be sought before relying on the above or undertaking any transactions. Please speak to your Old Mill contact or a member of the Tax Team.