The following is our overview of the budget focusing on the areas we consider to be of most interest to our clients. If you have any queries arising from any of the budget announcements or would like to discuss how any of the proposals affect you then please contact us.

 

 

Mr Osborne introduced the first coalition government budget by indicating that “the country has overspent, it has not been under taxed”.  The coalition stated policy has been to reduce the budget deficit by a combination of lower spending and increased taxes, applying a ratio of 4:1 in favour of lower spending.

 

The headlines in today’s papers are about the increase in VAT rate on 4^th January 2011 from 17.5% to 20% and the increase in Capital Gains Tax rate from 18% to 28%.

 

Further detail about those two key announcements and other changes which may not have made the newspaper headlines are as follows:-

 

VAT

 

The basic rate of VAT is to rise by 2.5% in early 2011 with consequential rises on amounts due under the flat rate scheme. There will be anti-forestalling legislation to prevent artificial arrangements which seek to apply the 17.5% rate to commercial transactions undertaken after 4^th January 2011.

 

How this affects you

 

The pre-announcement of an increase in VAT rates allows large spends to be incurred before the change at the current VAT rate.  The Chancellor made play of the intention to retain the current list of zero-rated and exempt supplies thereby ensuring that not all prices will rise in the New Year.  Petrol prices would be expected to rise with an increase in VAT.  However, elsewhere in the budget there was comment about reviewing petrol price volatility and this may help shield pump prices from further increases.  The existing petrol duty increases of 1p from 1^st October 2010 and 0.76p from 1^st January 2011 were not mentioned and hence we must assume they remain in place. 

 

Special VAT rules apply to businesses which seek to recover VAT on the purchase of an asset which is used for both business and non-business use.  Legislation will be introduced on 1^st January 2011 to block the recovery of VAT on any private use for certain assets.

 

How this affects you

 

Until we have sight of draft legislation the impact of this change cannot be determined.  Present indications are that it will apply to land, property, boats and aircraft.  We will also need to understand the impact on a business which is making VAT adjustments based on present legislation and continues to own the asset into the future.

 

Capital Gains Tax

 

A new rate of Capital Gains Tax of 28%  is introduced for gains made after 22^nd June 2010.  The 28% rate applies to individuals whose income and gains exceeds the basic rate of tax with no tapering based on length of asset ownership.  Basic rate taxpayers continue to pay at 18%.  For most trustees and estates, the rate of Capital Gains Tax will be 28% irrespective of the levels of income.  The 28% rate will also apply to non-domiciled individuals who pay the £30,000 remittance basis charge.  Gains arising before 23^rd June will not be taken into account in determining the rate at which gains arising after 22^nd June are subject to tax.

 

The annual exemption for tax free capital gains is to remain unchanged at £10,100. This can be set off first against gains at 28% before being set against gains charged at 18%. 

 

How this affects you

 

The increase in Capital Gains Tax has been well trailed and there was a general sigh of relief that there was only a 10% increase in rate.  The increase has reduced the differential between income tax rates and capital gains tax rates which the Chancellor hopes will reduce the likelihood of individuals seeking to convert income to capital.  Treasury forecasts are that the increase in Capital Gains Tax rate will not lead to much increase in Capital Gains Tax revenue but rather an increase in income tax revenue due to changes in tax planning behaviour.

 

The lifetime limit for Entrepreneurs Relief is to be increased from £2m to £5m for gains made from 23^rd June 2010.  Where disposals qualified for Entrepreneurs Relief prior to 23^rd June, no additional relief (above £2m) will be given on those disposals.  However the taxpayer will be able to claim relief on a further £3m of additional gains arising after 22^nd June, up to the new lifetime limit of £5m.

 

How this affects you

 

The increase in the lifetime limit to £5m is welcome and a valuable relief for the Entrepreneur.  It is therefore important that structures and balance sheets are regularly reviewed in order to ensure that the business qualifies for this relief.

 

Business and Corporate Taxes

 

The highest rate of Corporation Tax will fall from the present rate of 28% down to 24%.  This reduction will start on 1^st April 2011 and will be a staged approach of a 1% annual fall over 4 years.  The starting rate of Corporation Tax will be reduced from the present rate of 21% to 20% with effect from 1^st April 2011.

 

Although the rates of Corporation Tax are falling, the profit levels which apply to various rates of Corporation Tax will remain unchanged.

 

How this affects you

 

The reductions in Corporation Tax rates are felt to stimulate business opportunity and attract inward investment.  Accordingly they should result in an increase in job opportunities.  The differential between income tax rates and corporation tax rates is increasing and this may encourage many unincorporated businesses to look to operate using a company.

 

There will be an ongoing review of small business taxation with a view to making it simpler and increasing tax certainty.  This is welcomed.

 

Capital Expenditure

 

The rates at which business can claim tax relief on capital costs will be reduced for accounting periods ending after 31^st March 2012 (Corporation Tax) and after 5^th April 2012 (Income Tax).  The rate of annual writing down allowance on eligible expenditure will reduce by 2%.  In addition the annual investment allowance of capital costs which qualify for full tax relief in the year of acquisition will be cut from £100,000 to £25,000.

 

As an incentive to modernise business fleets, expenditure incurred on zero-emission goods vehicles purchased new between April 2010 and March 2015 will be eligible for 100% tax relief in the year of acquisition.

 

How this affects you

 

The reduction in capital allowances is not unexpected.  The delay of its introduction allows businesses a period of time to incur capital expenditure and obtain relief at higher rates.  With Corporation Tax rates falling in future periods, there is a double benefit in incurring capital expenditure early.

 

National Insurance

 

The previously announced increase of 1% in the rate of employers National Insurance will remain.  The impact of this rise will be softened by increasing the threshold at which point employers will pay National Insurance by £21 per week.  There will be National Insurance exemptions for new businesses located (broadly) outside the south east of England which recruit new staff.  The incentive will be a holiday from paying employers National Insurance on the first ten new employees hired during their first year of employment.  This will be subject to a cap of £5,000 NIC per employee and the scheme is planned to run for three years.

 

Employee Incentivisation

 

There are to be minor changes to the Enterprise Management Incentive (EMI) share option rules to make these options more available to UK employees of international groups.  In an attempt to clamp down on incentivisation arrangement which the Government feels are artificial, there will be legislation, affective from April 2011, to reduce the extent that employee trusts are used to incentivise staff.  In addition the Government intends to press ahead with its review of share incentivisation schemes which are subject to Capital Gains Tax rather than income tax and National Insurance.

 

How this affects you

 

Existing employee benefits trust arrangements and unapproved retirement benefit schemes may require review and revision prior to April 2011.  With the differential between income tax and Capital Gains Tax falling, the attractiveness of share option schemes which aim to tax all profits to Capital Gains Tax, will be reduced.

 

 

Income Tax

 

The personal allowance for those under 65 is to be increased by £1,000 to £7,475 from 6^th April 2011.  No other announcements were made in regard of the personal allowance for those aged 65 or over.  National Insurance thresholds will also be amended to maintain their alignment with the income tax basic rate.  The basic rate will be reduced so that higher rate tax payers do not benefit from the increase in personal allowance.  The exact figure will be known when September’s retail price index is determined.

 

How this affects you

 

The increase in personal allowance for basic rate tax payers are consistent with the Government’s commitment to support lower and middle income  earners. 

 

Domicile

 

The coalition government had previously announced that there would be a review on the current residence and non-domicile rules.  This was confirmed in the emergency budget.

 

How this affects you

 

It is disappointing that there is uncertainty over this areas of taxation especially as there was a significant change to legislation in 2008.

 

Furnished Holiday Lettings

 

The Government maintained its commitment to retaining the special tax rules related to furnished holiday lettings which is to be welcomed.

 

Pensions

 

The previous Government had introduced unpopular legislation restricting the tax relief available on pension contributions by higher earners.  This was anticipated to generate £3.5bn of additional Revenue.  HMRC are looking to consult with industry to “raise at least the same amount of revenue” through alternative methods of tax relief restrictions.  At present, industry is indicating that it is favouring a ceiling on the maximum annual contribution payable into a pension scheme.  Present estimates would set this figure in the £30,000 to £45,000 range.

 

The Government has announced it will end the requirement to use a pension fund buy an annuity by aged 75 with effect from 6^th April 2011 with transitional rules for those who reach 75 before that date.

 

How this affects you

 

Relaxation of pension restrictions and consultation with the pension industry to amend unpopular legislation have been widely welcomed.  It is also good news that there will be transitional arrangements for those having a 75th birthday before new rules are finalised in the next tax year.

 

Anti-Avoidance

 

The Government is keen to restrict the activities of the tax anti-avoidance industry and will extend the scope of the tax disclosure regime.  It is also considering bringing in general anti-avoidance legislation which denies the benefit of tax relief where relief is obtained in scenarios not anticipated by legislation. 

 

Conclusion

 

The above are the key issues which affect yourselves.  There are other, industry specific, matters which are not necessarily widely relevant and we will alert you to them on a case by case basis.  If you have any questions please do not hesitate to contact myself of any of your normal service team.