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The Pre Budget Report 2009

Old Mill Overview

Although it provided a chance for the wolves from other parties to howl that the government has no answer to the budget deficit issue facing the country, his supporters will suggest that the Chancellor has played a reasonably clever hand. He is faced with the twin needs of satisfying financial markets that Labour Britain would be firm enough to deal with the debt, but at the same time being seen to offer support and stimulus to the economy in a way which will encourage enterprise and business – economic growth, after all, being the most likely route to get the country out of debt.

Therefore this is a pre budget report that business may look kindly on – delays to a rise in Corporation tax and elements of continued business support will be welcomed.

However the raising of NI from 2011 will not be popular. He is relying on recovery already being well under way before this comes in. This could lead to smaller businesses giving consideration to the possible advantages from incorporation.

There was also only limited pain for a public bracing itself for a massive tax rise. This included an element of surprise that VAT was only increased back up to 17.5% - still well below the European average.

The chancellor feels that there is no immediate rush to repay the debt and this offers a more attractive option for the next few years. The question is whether he has managed to convince the public and the press in particular. Given that the majority of the press seem to have already made up their mind that there needs to be a change of government he would seem to be on thin ice.

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National Insurance, Tax Thresholds and Pensions

Andrew Wholey, Old Mill Tax Consultant talks about national insurance, tax thresholds and pensions:

National Insurance Contributions

A 0.5% increase has been announced which will impact upon all employers, employees and the self employed.

Changes had already been announced in the 2008 Pre-budget Report (broadly, for 2011/12 the main rate of Class 1 and 4 NICs was increased by 0.5% to 11.5% and 8.5% and the Class 1 employer rate was increased by 0.5% to 13.3%. The additional rate of Class 1 and 4 NICs was also increased by 0.5% to 1.05%).

Today’s announcement effectively adds a further 0.5% to the increases previously announced (resulting in an overall 1% increase to NICs for 2011/12).

Tax rates and thresholds

For 2010/11 all tax allowances and thresholds will be the same as for the current year.

Bank Payroll Tax

With immediate effect and until 5 April 2010, this new tax is to be levied at a rate of 50% on discretionary and contractual bonuses (on the excess over £25,000) payable to any “banking employee”, by Banks and other Financial Institutions.

The tax is payable by the Bank and does not directly impact upon the tax or NI liabilities of the employee, and the additional cost will not be deductible for corporation tax purposes.

The tax will be payable on 31 August 2010, and detailed provisions (to include anti avoidance provisions) will be published later.

Pensions – restricting tax relief for high income individuals

In the 2009 Budget announcements were made concerning the Government’s intent to restrict tax relief on pension contributions for high earners (broadly, where income exceeds £150,000). On the same day, “anti-forestalling provisions” were introduced, in order to prevent those affected from taking actions to forestall the impact of these changes.

With effect from 9 December 2009, further changes were announced to these forestalling provisions. The income definition for the £150,000 will now include the value of employer pension contributions (except where income, excluding employer pension contributions, is £130,000 or less).

Pensions – changes to tax rates for special charges and the special annual allowance charge.

These changes impact upon:

  1. Registered Pension Schemes who are liable to pay a charge on the payment of short service refund lump sums.- After 5 April 2010, the rate of 20% will be applied on the first £20,000 of payments (up from £10,800), and 50% will be payable on any excess over this threshold (up from 40%).
  2. Beneficiaries of an Employer-Financed Retirement Benefit Scheme (EFRBS), where the scheme makes a payment other than to an individual. - The current charge of 40% is increased to 50% for benefits to be received on or after 6 April 2010.
  3. Pension scheme members who are liable to the special annual allowance charge (currently 20%).- From 6 April 2010 the charge will be set at the “appropriate rate” (determined by reference to the rate of tax relief given on the amount of their pension savings in excess of the special annual allowance). This will effectively restrict tax relief on the excess to the basic rate of income tax (20%).

Salary Sacrifice – restricting tax exemptions for workplace canteens

From 6 April 2011, changes will be introduced to restrict the broad exemption given in relation to benefits provided in the form of free or subsidised meals. This will only impact upon “salary sacrifice” of “flexible benefit” arrangements which allow some employees to effectively purchase their meals out of gross pay, whilst others cannot.

“Equitable liabilities” – excessive determinations of income, in the absence of timely filed income tax returns

Current law does not permit HMRC to forgo tax that is legally due although in practice and as a consequence of a concession published in August 1995, they have not pursued liabilities if the taxpayer can prove they would not have otherwise been due. This concessionary measure is now to be put on a statutory basis.

For more information please contact Andrew on 01749 335034 or email andrew.wholey@oldmillgroup.co.uk

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VAT

Mark Peters, Old Mill VAT Director looks at VAT changes in the pre budget:

The standard rate of VAT has reverted to 17.5% as previously indicated. Some commentators had predicted a higher rate, but this has not proved to be the case - yet.

The Flat Rate Scheme rates have changed to coincide with the reversion of the standard rate to 17.5% AND to reflect an HMRC review of their general accuracy. Don't assume your new rate is the same as the one you applied before 1 December 2008 - check it! If the rate has changed check it is still financially appropriate to remain on the Flat Rate Scheme.

For more information please call Mark on 01392 214653 or email mark.peters@oldmillgroup.co.uk

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Companies and Businesses

Isobel Savage, Old Mill Tax Manager looks at Companies and Businesses:

The planned rise of 1% up to 22% in small companies rate of corporation tax has been deferred for yet another year - a move we welcome though sadly there has been no drop in the mainstream corporation tax rate as some pundits had predicted.

The Business Payment Support service which has helped many businesses and individuals over the last year has been extended for as long as is needed. Any businesses seeking time to pay arrangements of £1m or more will however have to provide an Independent Business Review (IBR) in support of their request.

Science and R&D

There are two planned changes in this field: firstly, companies receiving patent income will put these funds into a “patent box” which will enjoy a lower rate of corporation tax of 10%, and secondly a restriction on R&D tax relief for SMES who do not own the IP to the research they undertake will be lifted helping any companies who share IP or undertake research on behalf of another company.

International Tax

Changes to the worldwide debt cap were announced following on from its introduction in last year’s Budget.

Details on the proposed new CFC scheme are to be published in January when preliminary discussions will also commence regarding the possibility of exempting from UK tax foreign branch profits.

There will also be some tightening up on the availability of losses arising from over- and under-hedging structures (known as risk transfer schemes) to ensure that tax relief is only available on the real economic loss at group level and that other losses are ring-fenced and only available for offset against profits from the same arrangements.

Venture capital schemes

Various changes are planned to the VCT and EIS schemes to ensure compliance with the European Commissions rules on state aid and a new definition of a “small” enterprise is to be proposed which is likely to restrict the size of companies to be invested in and what constitutes a qualifying trade as the aim is to focus on smaller high risk businesses.

For more information call Isobel on 01392 214641 or email isobel.savage@oldmillgroup.co.uk

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Inheritance Tax and Furnished Holiday Lets

Catherine Vickery, Old Mill Tax Manger talks about inheritance tax and furnished holiday lets:

Inheritance Tax Avoidance

Two Inheritance Tax schemes used in recent years to pass assets into Trusts whilst avoiding the normal 20% Inheritance Tax charge that would usually arise have now been blocked with immediate effect. These two schemes either rely on retaining a future interest in the Trust, or by purchasing an interest in a Trust rather than transferring money into a Trust. Where these strategies have been set up before 9 December 2009 they are likely to remain effective.

Inheritance Tax Nil Rate Band Frozen at £325,000

The Nil Rate Band had been due to be increased to £350,000 from 6 April 2010, but this has been removed on the basis that house prices and hence inflation have not risen in the year.

Furnished Holiday Lets

The favourable Furnished Holiday Letting rules are to be abolished from 6 April 2010 as announced in the 2009 budget, but we have now been given further details on how this will operate. Not all reliefs will be suddenly lost overnight, as any Capital Allowances from expenditure incurred before 6 April 2010 can still be claimed after 6 April 2010, but subsequent capital expenditure on furnishings and fittings will be covered under the renewals basis or 10% Wear and Tear Allowance.

From a Capital Gains Tax point of view, the “trading” business will be treated as ceasing on 5 April 2010. However Entrepreneurs’ Relief which gives a 10% effective rate of tax may still be claimed if the property is sold at any point up to three years after cessation. You will therefore still have up to 6 April 2013 to claim Entrepreneurs’ Relief.

The position for Rollover Relief has also been considered, and whilst they have clarified that any disposals before 6 April 2010 will qualify for rollover into new qualifying assets, Rollover Relief after 6 April will be severely limited.

It is important to consider whether any action needs to be taken before 6 April 2010, as gift relief that allows you to gift a property without triggering the Capital Gain will be lost immediately from 6 April 2010, and the Treasury have been keen to point out that they anticipate that the majority of Holiday Letting businesses will not qualify for any Inheritance Tax Reliefs. The key here is to consider whether you want to pass properties down to the next generation now, and make the transfer before the 6 April 2010 to avoid triggering the Capital Gain, as this opportunity will be lost on 6 April 2010.

For more information please contact Catherine on 01935 709381 or email catherine.vickery@oldmillgroup.co.uk

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The Green Edge

Kim Davis, Old Mill Tax Consultant talks about green issues:

Following the reoccurring theme of recent Budgets, policies aimed at promoting ‘low carbon growth’ made up a significant part of the PBR:

Changes to cars and vans benefits

Unsurprisingly the tax on fuel benefits continues upwards with the amount to which the relevant percentage is applied increasing from £16,900 to £18,000 on company cars from April next year. The fuel benefit on vans has increased to £550 (from £500).

The emissions level for the lowest rate of car benefit has been severely reduced from below 120g/km to 99g/km and all the other bands will consequently drop by 5g.

No benefit charge will arise on the provision of electric vans 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.

No benefit charge will arise on the provision of electric cars for employees and directors, so the current rate of 9% will be reduced to nil with effect from 6 April 2010 and will apply for 5 years.

Changes to capital allowances

New electric vans purchased on or after 1 April 2010 (corporation tax) or 6 April (income tax) will qualify for 100% first year allowances. This will be in addition to the annual investment allowance and writing down allowances already available.

Domestic supplies of energy

Income received by domestic producers of renewable electricity selling to the National Grid through Fee-in tariffs, FITs (for example electricity generated from wind turbines or solar panels) will receive on average £900 in 2010 tax free.

Climate change levy

The reduced rate of climate change levy, applicable to suppliers of solid fuels and gas, will be increased from 20% to 35% from 1 April 2011.

Duty on fuel

Duty differentials for biofuels will cease in 2010-11, so biodiesel and biothanol will be charged at the same rate as petrol and diesel. A relief will continue for producers of biodiesel produced only from waste cooking oil, allowing businesses to offset an allowance of 20 pence per litre against duty payable.

As already announced, the duty on petrol and diesel will increase from 1 April 2010 to 2013, by 1 pence per litre above indexation in each year.

For more information please contact Kim on 01935 709338 or email kim.davis@oldmillgroup.co.uk

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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.