The Budget 2009
A Brief Summary Prepared by The Old Mill Tax Team
Yesterday’s budget came surrounded with much political hype. The chancellor had the unenviable task of trying to help stimulate the economy to bring it out of recession whilst trying to convince the financial markets that the economy would be robust enough to be able to make payments on the increased levels of borrowing that are necessary.
Of course there was a huge amount of political posturing on both sides. The opposition, of course, is baying about the high levels of borrowing, whilst trying to keep quiet that had they been in power they would have had very little option but to follow a largely similar route. The government have tried to throw up some minor smokescreens to allow some of the borrowing issue to be deflected into ‘Labour soak the rich’ comments. As they have only made minor attacks on the very wealthy (largely seen by the public as ‘fat cats’) they have obviously calculated that this will not cause public disquiet whilst at the same time it does show the financial markets that they are at least paying lip service to future balancing the books.
Another way in which the Chancellor can increase his revenue is by clamping down on tax avoidance and although it has not made the headlines the feeling of the tax team is that there was some real teeth in some of the measures announced yesterday which will make constructive tax planning harder.
However under the political posturing the devil is as always in the detail that the Chancellor did not cover in his speech. The Old Mill tax team have been delving into the treasury papers and attached is a brief summary of the key points identified at this stage.
- Business Taxes
- Personal Tax Headlines
- Changes to the taxation of company cars (from 2011/12)
- Tax Avoidance
- Review of HMRC powers, deterrents, and safeguards
Business Taxes
Corporation tax
The main rate of corporation tax will remain at 28%. The small companies’ rate will remain at 21% and the marginal small companies’ rate at 7/400.
Capital allowances
There was important news for businesses who have large capital expenditure on equipment, such as hauliers who need to purchase new lorries. A temporary 40% first year allowance will be introduced between April 2009 and April 2010 for expenditure on general plant and machinery. Businesses incurring expenditure in excess of the Annual Investment Allowance (AIA) cap that would normally be allocated to the main pool and qualify for a 20% (Writing Down Allowance) will now be able to claim a 40% FYA instead. Expenditure in the ‘special rate’ pool (long life and integral features), on cars, and on assets for leasing will not qualify.
The existing scheme of Enhanced Capital Allowance providing 100% First Year Allowance will be extended later in 2009 to include uninterruptible powers supplies, air to water heat pumps and close control air conditioning systems.
Loss relief
Trading loss carry back has been extended for company accounting periods ending in the period 24 November 2008 to 23 November 2010 and tax years 2008/09 and 2009/10. After carry back to the preceding year, which remains unlimited, a maximum of £50,000 will be available to carry back to the earlier 2 years.
Groups
If a group company makes a gain or loss on the disposal of an asset, they can jointly elect to transfer a gain or loss from the company making the disposal, rather than the need to transfer ownership of that asset. The former restrictions on the type of asset and the circumstances under which the gain or loss arises no longer apply, for example an asset of negligible value.
Multinational groups
By and large much of the measures introduced here are as expected and amount to merely tinkering around the edges:
- Most distributions and dividends received post 1 July 2009 from foreign group companies will be exempted from corporation tax in the same way that distributions from other UK companies are.
- A retrospective measure was introduced to ensure the reduction in the rate of corporation tax to 28% does not affect the amount of double tax relief available as it is now calculated on amounts paid rather than the rate in force. However given the measure above, this will have limited application.
- A cap is to be introduced on the amount of interest expense treated as allowable in a UK company – the cap being equal to the consolidated interest expense of the group.
- CFC rules are being tightened to remove exemptions relating to holding companies and those companies which to date have been treated as having an acceptable distribution policy.
- To facilitate cross border transactions, the treasury consents required for certain transactions involving subsidiaries have been removed and for any such transactions with a value of £100m or more there will be a post –transaction reporting requirement.
- Measures have been introduced for companies that compute their profits or losses in any other currency than sterling dictating the rate at which said losses are to be translated when carried back or forward and what rate to use when a company changes its functional currency and has losses available for offset in another period.
Other group tax issues
In line with the move towards "fairness", various other, expected measures have been introduced:
- Currently where two companies are "connected" for tax purposes and a creditor formally releases a connected debtor from a trade debt, the P&L debit is denied for CT purposes and the debtor may be taxed on his credit. For any trade debts released post 21 April 2009, the position is being equalised and the debtor should no longer be taxed on the release.
- The late interest rules which allow a tax deduction for interest on a paid rather than accruals basis will only apply to connected companies which are resident in a tax haven.
- Changes are being brought in to ensure that for groups of companies where some subsidiaries are part funded by preference shares issued to external investors, there should be no inadvertent break of their group structure which could lead to them losing out on the ability to claim and surrender group relief.
Anti-avoidance (corporate)
- As part of a move towards "principles-based drafting" of legislation the existing disguised interest provisions are to be replaced with broader anti-avoidance measures. The legislation is intended to attack all arrangements deliberately constructed to produce returns effectively equivalent to interest but which if not for this legislation would not be taxed as interest for corporation tax purposes.
- HMRC are to tackle two financial arrangement schemes notified to them under the avoidance disclosure rules as part of their move to close "loopholes". The first scheme being closed down is where intra-group finance is arranged through a convertible instrument and there is a mismatch between the deduction claimed for finance costs in the debtors company and the finance return taxed in the creditor company. The second scheme is where a company "derecognises" a derivative contract with the result that any profits arising to the company fall out of account for tax purposes.
- Other avoidance schemes disclosed which take advantage of the foreign exchange matching rules are being closed down by HMRC. The first covers arrangements based on one-way bets ie. those where an allowable forex loss is created when the exchange rate moves one way but no taxable gain is created when the exchange moves the opposite direction. The other type of scheme targeted gives a company a tax deduction for a forward premium on a forward currency contract with the counterparty not taxed on a corresponding profit.
Leasing
Amendments have been made to the legislation introduced back in 2006 which levies a charge when a lessor company changes hands and has enjoyed a tax timing advantage as a result of capital allowances. The new changes ensure there is no charge on an intra-group transfer of a lessor company owned by a consortium nor on the dissolution of a partnership/ partnership ceasing to carry on a leasing business.
Anti-avoidance measures have been introduced as published in the PBR relating to sale and leaseback transactions which ensure businesses entering into such a transaction do not get more relief than they would have done if they had obtained loan finance. There are further measures relating to long funding leases and clarification of what is defined as a sale and leaseback.
Miscellaneous
Confirmation has been given that for the purposes of the corporate intangibles regime, goodwill specifically includes internally generated goodwill created or acquired from an unrelated third party post 1 April 2002.
Personal Tax Headlines
Income Tax
Announcements made in the November 2008 Pre Budget Statement have been revised so that with effect from 6th April 2010:
- For individuals with net income in excess of £100,000 the Personal Allowance is gradually reduced to nil (£1 for every £2 above limit)
- Taxable income in excess of £150,000 will be taxed at 50%.
- The rate of tax applicable to Trusts increases to 50%.
- The rates at which dividends are taxed are adjusted to reflect the 50% rate where appropriate.
Pension Contributions Tax Relief
Effective from 6th April 2011
Applies to individuals with incomes in excess of £150,000 and will limit the relief at higher rates to £20,000 of contributions. Any excess will incur a tax charge so as to restrict the relief to basic rate.
To prevent individuals compensating for this by making higher contributions prior to 6th April 2011. Where individual has income in excess of £150,000 and contribution exceeds their normal regular contributions the excess over £20,000 will be restricted.
Furnished Holiday Lettings
Current law which confers favourable treatment (loss relief, entrepreneurs relief, eligibility for hold over relief etc) is to be repealed with effect from April 2010. This change derives from the fact that the law currently discriminates against similar properties located outside the UK (in other EU countries).
Improvements to Venture Capital Schemes
Enterprise Investment Schemes (EIS)from 22nd April 2009
Rules regarding the employment of funds raised and tax relief are amended so that :
- The funds raised by the EIS company have to be employed within two years of the issue of the shares or if later the commencement of qualifying activity.
- The above requirement does not apply to shares in the EIS Company of the same class that are not EIS shares. Previously they were linked.
- There is no restriction on the amount of relief carried back from a previous tax year subject to the overall relief of £500,000 each year.
Also under current rules it is possible that Capital Gains can arise where EIS shares are subject of share for share exchange. These transactions will now be treated as "no gain/no loss".
Corporate Venture Schemes CVT/Venture Capital Trusts
The funds raised by the CVT or VCT company have to be employed within two years of the issue of the shares or if later the commencement of qualifying activity.
Dividends of Non UK Companies
The current rule taxes dividends in the same way as UK dividends with 10% (1/9) non repayable credit for shareholders with less than 10% of shares. This is extended for holdings in excess of 10% provided country has the appropriate Double Tax Agreement with the UK.
Distributions from Offshore Funds
Where distributions are dividends the rule above relating to Non UK dividends will apply. However where the Offshore Funds hold more than 60% of it’s assets in interest bearing funds the distribution will be treated payment of interest and taxed accordingly.
Offshore Funds
Legislation is to be introduced to change definition of Offshore Funds. For Capital Gains an interest in the Offshore Fund will be treated as an asset (similar to Unit Trust). This will apply from 1st December 2009 but it will be possible to apply for retrospective treatment back to tax year 2003/04.
Tax Elected Funds TEF
Measures to be introduced to allow an election to treat Authorised Investment Funds as TEFs. The investor will then be treated as if he/she had invested in the underlying assets and taxed on dividends and/or interest as appropriate.
Stamp duty
The stamp duty holiday has been extended to individuals purchasing residential property between 22 April 2009 and 31 December 2009 on property of not more than £175,000.
Inheritance Tax
With effect from 22nd April 2009 Agricultural Property Relief (APR), Woodlands Relief (WR) is extended to agricultural property and woodlands in the European Economic Area (EEA). This is retrospective to Inheritance Tax paid on or after 23rd April 2003. The deadline for reclaiming overpayments is 21st April 2010.
The Capital Gains Holdover rules will also be amended to provide for relief where land situated in EEA is subject to APR.
Individuals domiciled outside the UK
The Finance Act 2008 introduced very significant changes to the remittance basis of taxation for "non doms" and further minor changes have been announced as a consequence of extensive consultation with the expatriate community and related stakeholders. The broad intent is to make the new rules simpler to operate in practice and to provide more certainty about the way in which the new rules operate.
Non resident individuals; entitlement to UK personal allowances
Non resident individuals who qualify for UK personal allowances for offset against UK source income will no longer qualify for the allowance solely by virtue of being a Commonwealth Citizen (HMRC were advised that former practice may have contravened the Human Rights Act). In future, such individuals may still qualify by meeting other conditions and of course, entitlement may be conferred by virtue of a double taxation agreement.
Changes to the taxation of company cars (from 2011/12)
Company cars; the benefit in kind
The £80,000 price cap that currently applies when calculating the cash equivalent of the car benefit is to be abolished.
There are other "fiddly" changes to the way in which the benefit for electrically propelled cars, and electric/petrol hybrid cars and those propelled by bi-fuels, road fuel gas and bioethanol will be computed – the idea is to change the focus of the legislation away from the way in which a car generates CO2 emissions, to the CO2 emission itself.
This includes reducing the lower threshold for CO2 emissions from 130g/km to 125g/km (for 2010/11).
Company cars; capital allowances
Previously announced changes relating to capital allowances will take effect from April 2009; the restriction on allowances relating to cars costing more than £12,000 is replaced by new rules which hinge around the level of CO2 emissions.
Cars with CO2 emissions in excess of 160 g/km will be dealt with in the "special rate pool" and attract annual allowances of 10% only. Those with emissions of 160g/km or less will be added to the main pool attracting 20% allowances.
Also announced was a scheme to provide a £2,000 discount to motorists who scrap cars over ten years old, when they purchase a new car – the scheme will operate until March 2010.
Tax Avoidance
"it cannot be fair that those who should pay tax, are allowed to avoid it"
A raft of anti-avoidance measures were announced which build on previous legislative changes designed to counter tax avoidance. These are intended to plug loopholes and close certain schemes, actions which should generate extra revenue of £1bn over the next three years.
Targets for new anti-avoidance legislation include:
- Living accommodation provided for employees and directors, and the use of lease premiums;
- The use of offshore life insurance policies to generate artificial tax losses;
- Contrived arrangements relying on employment income legislation to artificially create liabilities and losses;
- The use of Manufactured Overseas Dividends (by Banks in particular) to secure credits where the recipient hasn’t borne the economic cost of the overseas tax, and other provisions aimed at restricting double taxation relief;
- New measures have also been announced to encourage good corporate (and individual) citizenship including:
- A requirement within large companies and groups of companies (not those defines as "small" and "medium sized" in the Companies Act 2006), to operate effective accounting systems to facilitate accurate tax reporting and compliance.
- Very interestingly, the "senior accounting officers" of such companies will be personally liable to penalties for failure to comply, as will the corporate entity.
- An intent to name and shame taxpayers (individuals, businesses and companies) who are penalised for deliberately understating tax due, or overstating claims or losses, of more than £25,000.
This aligns consistency of treatment for tax fraud, whether investigated through criminal or civil proceedings (as is the case for the the vast majority of investigations).
Other schemes previously notified to HMRC have already been targeted by proposed legislation which will block interest relief claimed by individuals on loans used to invest in partnerships or small close companies when this is done for tax avoidance purposes. These risk-free arrangements targeted usually rely on the tax relief available on the interest for the borrower to end up in a profitable position.
Review of HMRC powers, deterrents, and safeguards
A raft of new measures were announced, including the introduction of legislation to
- Allow for a "voluntary managed payments plan" (to spread income tax and corporation tax payments);
- Allow for the collection of small debts by HMRC, through PAYE;
- Allow for the gathering of information from third parties, in relation to individuals who owe tax and with whom HMRC has lost contact;
- Allow for much greater alignment of the new compliance checking framework introduced by the Finance Bill 2008, to be extended to cover individuals and businesses involved with environmental taxes, insurance premium tax, stamp duty land tax, stamp duty reserve tax, inheritance tax, and petroleum revenue tax.
- The Finance Bill 2009 will reform the penalty regime for late filing of returns and the late payment of tax. There will be greater alignment and consistency and whilst the devil is contained in a lot of detail the message is clear – in future, non compliance is going to hurt more (this includes a more "harmonised" regime for imposing interest charges).
HMRC Charter
To date, none of the previous charters had a statutory basis and this is set to change. Legislation will be introduced in the Finance Bill 2009 that will require HMRC to prepare and maintain a taxpayers Charter. This will set out service standards and values to which HMRC will aspire in dealing with taxpayers and others – it will require an annual report that will measure performance standards.
Reclaiming income tax, capital gains tax and corporation tax overpayments
Current non-statutory claims to refund will be codified and legislation introduced in the Finance Bill 2009, to provide a statutory basis for making future claims.
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.