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The Budget 2010

The March 2010 budget will probably be quite quickly forgotten – except by cider drinkers! It was mainly a restating of the detail of the Pre Budget Report from December 2009.

There was a certain, though limited, amount of pre-election posturing on tax avoidance and there was the welcome news that the borrowing requirements have been revised downwards – we don’t have quite as much debt as we thought we were going to have.

However, the main thrust of the budget was to protect the fragile economic recovery which we are led to believe is underway. Of particular note is the doubling in Annual Investment Allowances to 100% write off of the first £100,000 of investment in the year. There was also a considerable extension of the 100% write off in the case of ‘green’ investment on energy and water saving equipment.

The continuing above inflation increases in the excise duties on alcohol and tobacco was to be expected however the harshest treatment was reserved for cider. Although the government try to claim they are merely correcting a previous imbalance which gave cider an advantage in fact the current increases mean that our smaller West Country Cider makers will now be operating at a disadvantage to small breweries who are granted a 50% reduction in the duties they have to pay.

Personal Taxes
If you have any questions please contact:
Paul Pace (01935 709306) or Andrew Wholey (01749 335034)

Business Taxes
If you have any questions please contact:
Isobel Savage (01392 214641) or Kim Davis (01935 709338)

Personal Taxes

Income Tax rates, rate limits and personal allowance

Many of the changes to take affect from 6 April 2010, for the 2010/11 tax year, were previously announced in the 9 December 2009 pre-budget report.

To summarise:

Basic rate 20% unchanged
on first £37,400 of taxable income
Higher rate 40% unchanged
on the next £112,600 of taxable income
Additional rate 50% introduced
payable on taxable income > £150k

The limit for the 10% starting rate for savings remains at £2,440.

Tax free personal allowances remain at their current rates, with no increase for 2010/11:

Personal allowance £6,475
Personal allowance £9,490 (age between 65 and 74)
Personal allowance £9,640 (for those aged 75 and over)

Note:

1) age related allowances are clawed back where income exceeds defined levels;
2) regardless of age, allowances will be clawed back where income exceeds £100k (a £1 reduction in the personal allowance for every £2 in excess of £100k).

There was no increase to the current 18% rate of Capital Gains Tax.

National Insurance

The main rate increases previously announced (employee, employer and self employed) will take affect from 6 April 2011 (for the 2011/12 tax year):

Class 1 employee contribution increases by 1% to 12%

Class 1, 1A & 1B secondary employer contribution increases by 1% to 13.8%

Class 4 self-employed increases by 1% to 9%

The additional rate for Class 1 and 4 Contributions increases from 1% to 2% (not the 1.5% previously announced)

Bank Payroll Tax

This new tax was announced in the 9 December 2009 pre-budget report (effective from 12.30pm on 9 December 2009), and charges a 50% payroll tax on bonuses in excess of £25,000 paid by a “taxable company” (Bank).

Refinements to legislation (to clarify scope) were announced, and there has been no extension of the tax (beyond 5 April 2010).

Entrepreneurs’ Relief and Capital Gains Tax – increases in the lifetime limit

Legislation will be introduced to increase the “lifetime limit” of £1 million, to £2 million (for gains on qualifying disposals after 6 April 2010).

The relief operates so as to reduce the effective rate of capital gains tax on qualifying disposals to 10% only.

Where qualifying gains above £1m are recognised prior to 6 April 2010, no additional relief will be due (the first £1m only will qualify for Entrepreneurs’ Relief).

If however, further qualifying gains are realised after 5 April 2010 then additional relief will be due on up to an additional £1m of qualifying gains.

Individual savings accounts – annual limits from 2011

Annual subscription limits for all savers have been increased for 2010/11 to a total of £10,200 (of which £5,100 can be saved in cash).

From 6 April 2011 and for the duration of the next Parliament, the annual ISA limits will increase annually in line with inflation (the Retail Prices Index).

Restriction of Tax relief on pensions contributions

Previously announced changes take affect from 6 April 2011 (these have been pre-empted somewhat by “anti forestalling” provisions already enacted, which operate for 2009/10 and 2010/11).

From 6 April 2011 excess tax relief will be recovered (effectively restricting relief to the 20% basic rate) via the Self Assessment tax return, and a new “high income excess relief charge” that will be payable by affected individuals.

This will affect individuals with income in excess of £150,000.

For those with income between £150,000 and £180,000 the restriction will be tapered gradually reducing the amount of relief available until it is restricted to the 20% basic rate.

Pension schemes – the Lifetime Allowance and Annual Allowance (from 6 April 2011)

Tax relieved saving in a registered pension scheme for an individual is subject to an overall limit called the lifetime allowance (LTA). The limit on annual contributions on which tax relief can be claimed is called the annual allowance (AA).

For 2010/11 the LTA is £1.8 million and the AA is £225,000, and these rates will be held constant for a further five tax years up to and including 2015/16.

Childcare vouchers

Employees at or near the national minimum wage cannot normally benefit from the salary sacrifice arrangements for childcare vouchers and directly contracted childcare measures, if it would reduce their income below national minimum wage. However, the conditions will be relaxed for tax years retrospectively from 2005-06 for relevant lower paid employees where the childcare voucher scheme is provided by employers.

Changes to cars and vans benefits

No benefit charge will arise from 6 April 2010 for 5 years, on the provision of company vehicles provided for employees or directors, where there is private use, where the vehicle cannot produce CO2 emissions. This extends proposed changes which applied wholly to electrically propelled cars.

A reduced benefit of 5% will apply for company vehicles provided for employees or directors, where there is private use, for emissions up to 75g/km.

No benefit charge will arise on the provision of vans that cannot produce CO2 emissions, for employees and directors, where there is private use, from 6 April 2010 for 5 years. The current flat rate of £3,000 will be reduced to nil. This extends original proposals which were just for electric vans.

Share Incentive plans: anti-avoidance

With immediate effect, changes are to be introduced to the taxation regime governing the treatment of approved Share Incentive Plans (SIPs).

Previously, the availability of corporation tax deductions for monies paid to SIP trustees has led to perceived abuses (where the trustees buy back shares from director-shareholders, but no real value is transferred to the employees participating in the SIP).

Corporation tax deductions will no longer be allowed where payments to a SIP trust are made as part of a tax avoidance scheme.

Company share options plans: anti-avoidance

Legislation is to be introduced to counter avoidance arrangements which are being used to circumvent the £30,000 financial limit applied to tax-advantaged Company Share Option Plans (CSOPs).

Providing scheme rules are met, an individual can be awarded qualifying stock options over shares with a market value of up to £30,000 at grant, and then not pay income tax or NICs on their subsequent exercise.

Perceived abuse hinges around the ability to grant options over shares in a company which is under the control of a listed company, and in which there is artificially “geared growth” (that delivers additional reward to the employee, beyond that originally intended by the legislation).

Avoidance provisions will restrict the type of shares which can be used in a qualifying CSOP to broadly exclude all shares in a company which is under the control of a listed company.

A transitional period of six months will be allowed to allow time for scheme rules to be amended, where appropriate.

Transactions in securities: anti-avoidance

Existing legislation provides for counteraction where an income tax advantage derives from an individual entering into certain transactions in securities that involve the receipt of an abnormal amount of dividend (to obtain a tax advantage).

This legislation applied to UK listed and non-listed companies.

The new legislation is targeted at non-listed companies and prescribes how the tax advantage is to be quantified (it will then be counteracted in the same way).

Disclosure of Tax avoidance schemes

There is to be further expansion of rules relating to the disclosure of tax avoidance schemes (by promoters, including accountancy and law firms, banks and other financial institutions and their clients).

Penalties for non-compliance are to be increased, and the description of schemes that are required to be registered is to be expanded (to include NIC regulations to the extent the concern income tax).

Anti Avoidance - Earnings paid through Trusts or other entities (Employee Benefit trusts)

The Government will be taking action to prevent attempts to avoid tax and National Insurance contributions through the use of Employee Benefit Trusts and other arrangements to disguise payments of remuneration and intends to introduce anti-avoidance legislation to take effect from 6 April 2011.

Income Tax Adjustments between Settlors and Trustees

In cases where the settlor (the creator of a trust) has an interest in the Trust they are treated as receiving the income of the Trust net of tax paid by the trustees from trust funds. This may result in a tax refund for the settlor which they, in turn, repay to the trustees.

Such payments to the trustees will not be treated as an addition to the Trust for Inheritance Tax purposes.

'Non Doms' and the remittance basis of taxation: relevant person

The Finance Act 2008 introduced profound and significant changes to the remittance basis of taxation, further amended by the Finance Act 2009.

Broadly, the Finance Bill 2010 will introduce further minor amendments to this complex law, to extend the definition of “relevant person” to include subsidiaries of non-resident companies which would be close companies if they were resident in the UK.

Life Insurance Policies

An individual who falls into the additional tax rate bracket (over £150,000) is able to claim tax relief for any deficiencies on the policy where they have paid tax previously, but this provision prevents them from reclaiming more tax than they have actually paid.

UK Real Estate Investment Trusts

A UK Real Estate Investment Trust is required to distribute 90% of its profits if it is to meet its qualifying status conditions. This provision allows stock dividends in lieu of cash dividends to meet the 90% limit, and this will come into effect from 1 April 2010.

Inheritance Tax

The nil rate band of £325,000 for 2009/10 has been frozen until 2014/15.

Landline Duty

A new landline duty is to be introduced from 1 October 2010 of 50 pence per line per month. It is thought that it will be the end user (ie the individual using the phone line) that will suffer this additional charge.

Stamp Duty Changes

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Business Taxes

Capital Allowances

The annual investment allowance will be doubled from £50,000 to £100,000 for expenditure incurred on or after 1 April 2010 for companies and 6 April 2010 for sole traders and partnerships.

This is combined with the introduction of anti-avoidance legislation, specifically aimed at losses for property businesses, so that loss relief against general income will be restricted to the extent that the loss is attributable to the AIA.

The existing relief of 100% given to Energy Saving and Water Efficient technologies will be extended to include ‘Permanent Magnet Synchronous Motors’ and ‘Biomass Warm Air Heaters’. Further details will be published later in 2010.

A 100% FYA is to be introduced for new and unused zero-emission goods vehicles effective for 5 years from 1 April 2010 for companies and 6 April 2010 for sole traders and partnerships. This is for vehicles designed primarily for the conveyance of goods or burden and will be available in addition to the Annual Investment Allowance.

Corporation Tax

Yesterday’s budget confirmed the main corporation tax rate would remain at 28% with the small companies rate staying at 21%.

HMRC have taken a tough stance on one area where there has been increasing interest of late and this is in relation to loans to participators from a close company. When any such loan is written off, the debtor is taxed as if they had received a dividend albeit that it is not by law a dividend and therefore the requirement for distributable reserves etc does not apply. The treatment of this write-off from the company perspective has been open to various arguments and in many cases a corporation tax deduction has been successfully claimed. The new legislation however denies any relief specifically under the loan relationship rules.

As expected there were few other major changes to corporation tax legislation, rather some tweaks to recent law to ensure it achieved the desired outcome. There were some minor changes to the debt cap rules and further measures to ensure that in the hands of a UK company, the only distributions which fall outside the standard exemption to corporation tax would be those which are specifically excluded elsewhere.

Measures were also introduced to pave the way for anticipated changes in accounting standards specifically with regards to accounting for financial instruments. Any companies accounting under FRSSE are unlikely to be affected by these changes but for larger companies there are likely to be some substantial differences in the way derivatives and loan relationships are treated.

Changes to State Aid

Various small changes were put through to ensure certain reliefs provided by the tax system can be approved by the European Commission as approved state aids. This impacted on the EMI scheme where options can now be granted in companies with a UK permanent establishment not just those trading wholly or mainly from the UK.

The Venture Capital Schemes were affected in a similar manner in that the requirement for ordinary shares in a VCT to be listed in the UK has been widened to include any admitted for trading in any EU regulated market.

Presumably as a result of the economic climate, a new measure has been introduced to exclude from EIS / VCT qualification investments in a company which would be deemed to be “an enterprise in difficulty”.

Few significant changes were announced in the budget from an indirect taxation perspective, and those that were announced tended not to have a wide impact on business.

VAT

The usual incremental changes were announced, with the VAT registration threshold increased by £2k to £70k, and similar increases in the deregistration threshold to £68k. VAT petrol scale charges were also altered to reflect changes in fuel prices.

An exemption applying to the Royal Mail for conveyance of postal packets will be restricted from 31 January 2011. From this date the scope of VAT exemption will be restricted and some Royal Mail customers will be charged VAT where they weren't before. The postal services affected will be those that are freely negotiated or not made under a licence duty.

Taxpayers purchasing land, property, boats and aircraft for business and private purposes will no longer be able to reclaim all the VAT initially incurred, and then pay VAT on private use over time. From 1 January 2011 upfront recovery will be restricted to business use only. This change follows European Court of Justice case law developments.

The definition of qualifying aircraft for the purposes of zero-rating will be changed from 1 September 2010. In future relief will be based on customer status rather than weight and usage. Only aircraft manufacturers and their customers should be affected. Other changes of perhaps narrow interest are also being made to natural gas, heat and cooling importers and distribution networks, and to emission allowance traders.

Excise Duty Rates

Alcohol duty rates have risen above inflation, particularly in relation to cider which will increase by 10% above inflation. Duty on hydrocarbon oils will generally rise by 1p, with further increases scheduled in future. The biggest change relates to biodiesel and bioenthanol, where duty rates will be increased significantly to the main road fuel rate following the ending of the duty differential for biofuels for road use. Tobacco products will rise in cost by only 1% in real terms. There will also be changes in rates to amusement machine licence duty, gaming duty and bingo duty.

Air passenger duty rates will increase, in some cases quite significantly, from 1 November 2010. Long haul flights in particular will see significant rises.

Charities and Community Amateur Sports Clubs (CASCs)

From 6th April 2010 there will be a new definition of organisations eligible for UK charity tax reliefs and exemptions. Briefly an eligible organisation must be:

Further changes proposed are:

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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.