BUDGET NEWSLETTER

Only time will tell

Alistair Darling’s first Budget as Chancellor was hailed by him as a Budget to maintain stability in the UK economy. Whether that will turn out to be the case, only time will tell.

The Budget does not, however, give stability to the UK tax system. There are a substantial number of changes being made – some from April 2008 and others at a later time. The changes include the new Capital Gains Tax system and the new scheme for taxing “non-domiciled” individuals, also announced in the Pre-Budget Report (PBR). Some changes have been made following the responses to the Consultations but, in the main, these measures are unchanged. Another PBR announcement – to introduce measures to counter “income shifting” – has had the date of implementation deferred until 6 April 2009 to allow for further consultation. This delay to permit further discussion is to be welcomed in the hope that it will result in a more workable outcome with cost savings to business and HMRC.

Business Taxation

Corporation Tax

As previously announced the main rate of corporation tax is reduced from 30% to 28% from 1 April 2008. The small companies rate is increased from 20% to 21% from the same date, on annual taxable profits up to £300,000, divided by the number of companies under common control.

A marginal rate of 29.75% applies to taxable profits over £300,000 until the main rate of corporation tax is reached at taxable profits of £1.5m.

Definition of Associated Companies

For the small companies rate of corporation tax, the £300,000 limit of taxable profits is divided by the number of companies under common control.

Previously companies controlled by an individual’s business partners were treated as being under common control. This will no longer be the case unless there are “relevant tax planning arrangements”.

Capital Allowances

As previously announced from 1 April 2008 for companies and from 6 April 2008 for businesses subject to income tax, there will be major changes to capital allowances. There will be 100% investment allowance on expenditure up to £50,000 per year on certain plant and machinery.

The rate of writing down allowances for plant and machinery in the general pool will be reduced from 25% to 20% per year and the rate of writing-down allowances on long life asset expenditure will increase from 6% to 10%.

Writing-down allowances on industrial and agricultural buildings will be gradually phased out, with final withdrawal of both regimes by 2011. To prepare the way for the final abolition, most balancing adjustments, and the recalculation of writing-down allowances on sale were effectively withdrawn from 21 March 2007.

The rate of writing-down allowances on certain fixtures integral to a building will be set at 10%. This new classification will be effected by means of a short list of the “integral features” affected.

Hybrid Rate of Writing-Down Allowances

For businesses whose accounting period spans 1 April (Corporation tax) or 6 April 2008 (income tax) hybrid rates will have effect for unrelieved expenditure in any capital allowances pool, including single asset pools.

Small Plant and Machinery Pools

For accounting periods beginning on or after 1 April 2008 legislation will be introduced to allow businesses to claim a plant and machinery writing-down allowance of up to £1,000 where the unrelieved expenditure in the capital allowances pool is £1,000 or less.

From 6 April 2008, the CGT changes announced in the PBR will take effect. These include :

• the abolition of indexation allowance

• the abolition of taper relief

• subject to the Entrepreneurs’ Relief, a flat rate of 18% for individuals and trustees.

Entrepreneurs’ Relief

Entrepreneurs’ Relief may be available in respect of gains made by individuals on the disposal of :

• All or part of a trading business the individual carries on alone or in partnership

• Assets of the individual’s or partnership’s trading business following the cessation of the business

• Shares in (and securities of) the individual’s “personal” trading company (or holding company of a trading group)

• Assets owned by the individual and used by his/her “personal” trading company (or group) or trading partnership (but normally only where shares or a partnership interest are disposed of at the same time)

• Assets of a furnished holiday letting business. 

The first £1 million of lifetime gains which qualify for relief will be charged to CGT at an effective rate of 10%. Gains in excess of £1 million will be charged to CGT at the rate of 18% which is being introduced from 6 April 2008.

Trustees will be able to claim relief on certain disposals of business assets and company shares and securities where a “qualifying beneficiary” has a qualifying interest in the business in question. Trustees must make claims jointly with the “qualifying beneficiary”. Any relief given on the trustees’ gains will reduce a beneficiary’s £1 million lifetime limit on relief.

A “personal” company is one where the individual is a director or employee and has 5% of the ordinary shares and voting rights.

There will be no minimum age limit for Entrepreneurs’ Relief.  It will be available where the relevant conditions are met throughout a qualifying period of one year.

Personal Taxation

Income Tax Rates

From 6 April 2008 the basic rate of income tax will reduce to 20%. The 10% starting rate will be abolished.  A new 10% starting rate for savings will be introduced for the first £2,230 of savings. However, if an individual’s non-savings income exceeds this threshold the starting rate for savings will not be available for savings income.

There is no change to the 40% higher rate, the 10% dividend ordinary rate or the 32.5% dividend upper rate.

Enterprise Investment Scheme (EIS)

This scheme allows investors income tax relief at 20%. The limit is to be increased from £400,000 to £500,000 from 6 April 2008.

The activities of shipbuilding, coal production and steel production will be excluded from EIS as well as the Corporate Venturing Scheme and Venture Capital Trusts.

Company Car and Van Taxation

Company car tax is calculated by applying a percentage, ranging from 15% to 35% depending on CO2 emissions, to the list price of the car.

From 6 April 2008 a new lower rate of 10% (for petrol cars) will apply for cars with CO2 emissions of 120 grams per kilometre, or less.

The lower threshold of CO2 emissions for the 15% rate (petrol cars) is as follows :

2008-09 135 grams per kilometre

2009-10 135 grams per kilometre

2010-11 130 grams per kilometre

Where employees provided with a company van which is available for private use purchase fuel for business purposes reimbursement will not be taxable.

Restrictions on Trade Loss Relief for Individuals

Individuals who are carrying on a trade can, subject to certain restrictions, set off their trading losses against other income and gains. This is commonly known as sideways loss relief.

The Finance Act 2007 introduced legislation to counteract the use of partnership arrangements that generate trade losses for use as sideways loss relief by a nonactive or limited partner.

Legislation will be introduced to restrict the amount of sideways loss relief that can be claimed by an individual, other than a partner, carrying on a trade in a non-active capacity. Where a loss arises to an individual carrying on a trade in a non-active capacity as a result of tax avoidance arrangements made on or after 12 March 2008, no sideways loss relief will be available for that loss. Otherwise there will be an annual limit of £25,000 on the total amount of sideways loss relief that may be claimed against income. These restrictions will not apply to losses that derive from qualifying film expenditure, or to losses of a Lloyd’s underwriting business.

For these purposes an individual, other than a partner, carries on a trade in a non-active capacity where the individual spends an average of less than 10 hours a week, in a relevant period, personally engaged in activities of a trade carried on commercially and with a view to the realisation of profits from those activities.

Residence and Domicile

Residence Test

From 6 April 2008 any day where an individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes.

Remittance Basis

Individuals who claim the remittance basis of taxation, and whose unremitted foreign income and gains is in excess of £2,000 will not be entitled to personal income tax allowances or the annual exempt amount for Capital Gains Tax.

Annual Charge for Users of Remittance Basis

Adults (those aged 18 and over) who claim the remittance basis, who have been resident in the UK for more than seven of the last 10 years, will pay a £30,000 annual charge in respect offoreign income and gains they leave outside the UK. This charge is in addition to any UK tax on foreign income and gains remitted to the UK. If the £30,000 is paid from an offshore source, it will not itself be taxed as a remittance.

Individuals who meet the conditions for the remittance basis of taxation can choose each year whether they wish to claim the remittance basis, or pay UK tax on their worldwide income and gains. The £30,000 charge will be income tax or capital gains tax and the unremitted income or gains to which the charge is attributed will not be taxed again if eventually remitted to the UK.

There are a number of detailed changes proposed to what constitutes a “remittance”.

Double Tax Treaty Loophole Closed

Measures to tackle an avoidance scheme using overseas partnerships have been announced which are to have retrospective effect. The scheme relied on “artificially” diverting income of a UK resident individual to a foreign partnership controlled by foreign trustees. Arguably, the UK’s double tax treaty exempted the partnership’s profits from UK tax. The new measures disapply the double tax treaty deeming the UK resident beneficiaries of the trust to be liable on their share of the partnerships profits.

Inheritance Tax

Nil Rate Band

In the Pre-Budget Report it was announced that a transferable nil rate band (which will increase from 300,000 to £312,000 from 6 April 2008) would be introduced. This has been confirmed in the Budget.

Where a spouse or civil partner dies and the destination of the assets held on death (whether under a Will or on intestacy) is such that the available nil rate band is not fully used on that death then, on the death of the surviving spouse or civil partner on or after 9 October 2007, the nil rate band available on that second death will be increased by the unused proportion of the nil rate band on the first death. This will apply whatever was the date of the first death. This is an important measure which means that, for many couples, there is no need to adopt complex measures to utilise the nil rate band on the first death.

VAT

There are a number of changes relevant to business including :

• Registration threshold increased from 1 April 2008 from £64,000 to £67,000.  Similarly the deregistration threshold is increased from £62,000 to £65,000

• With effect for supplies of services made on or after 1 October 2008 the VAT exemption for fund management will be extended to cover UK-listed investment entities (including investment trust companies and venture capital trusts) and certain overseas funds.

• With effect for prescribed accounting periods commencing on or after 1 July 2008 the de minimis limit, below which errors on previous returns may be corrected on the return, will be increased from £2,000 to the greater of £10,000 or 1% of turnover. This is subject to an upper limit of £50,000.

• The VAT scale charges for taxing private use of road fuel will be amended to reflect changes in fuel prices. Businesses must use the new scale charges from the start of their next prescribed accounting period beginning on or after 1 May 2008.

• A transitional period will be introduced, running to 31 March 2009, during which eligible businesses can make VAT claims for rights that accrued before the introduction in 1996 and 1997 of the 3 year time limit for claims.

Stamp taxes

Property Investment Partnerships

Where there is a transfer of an interest in a property within an investment partnership there will be no charge to Stamp Duty Land Tax. This amendment to the legislation will affect property investment partnerships that purchase interests in property in the United Kingdom. The change will be retrospective and have effect for transactions that occurred on or after 19 July 2007.

Reducing the Stamp Duty Administrative Burden

Instruments transferring stocks and shares that were previously chargeable to £5 stamp duty will, from 13 March 2008, be exempt and will not need to be presented to HM Revenue & Customs (HMRC) for stamping. Such instruments may now be presented direct to the company registrar.

Charities

Transitional Relief

HMRC will help UK Charities and Community Amateur Sports Clubs (CASCs) that claim repayments of tax in respect of qualifying Gift Aid donations during the three years 2008-09 to 2010-11. After 6 April 2008, Gift Aid will be paid using the new 20% basic rate of income tax. HMRC will pay a transitional relief supplement to charities and CASCs of 2% for the three years. A claim must be made by the charity or CASC within 2 years of the tax year of donation using form R68.

partners

Linda Brannock BA CA    Lindsay Forbes MA CA*    Gavin Morton BA CA

123 Irish Street, Dumfries DG1 2PE

Tel 01387 269595  Fax 01387 250017

Email info@carsontrotter.co.uk

CastleDouglas DG7 1DS

Tel 01556 503755  Fax 01556 503757

Email carsontrotter@lineone.net