Lakers
Institute of Chartered Accountants in England & Wales
Chartered Accountants & Tax Advisers 3 Galley House, Moon Lane Barnet, Herts, EN5 5YL Tel 020 8440 2722 Fax 020 8440 2559 e-mail: lakers@lakersca.co.uk www.lakersaccountants.co.uk
BUDGET PROPOSALS - 12 March 2008
These are some of the proposed proposals which will be debated in Parliament and enacted in due course.
BUSINESS TAX Change in corporate tax rate — deferred tax implications The fall in the rate of UK mainstream corporation tax in April 2008 from 30% to 28% was reaffirmed. The new 28% rate will continue to be effective from 1 April 2009. As this change was enacted in Finance Act 2007, companies should adjust the effective rate when calculating their deferred tax going forward. Changes to small companies’ corporate tax rate The small companies’ rate will become 21% (up from 20%) from 1 April 2008 and the fraction used in smoothing the difference between this and the main corporate rate (marginal small companies’ relief) will be 7/400. Profit limits will remain the same. Capital allowances Most of the following measures will take effect from April 2008: • Rate of writing down allowance (WDA) in the general plant & machinery (P&M) pool reduces to 20% per annum. Rate increases to 10% in the long-life asset pool. • 100% first year allowance extended for a further five years for expenditure on new cars (110g/km or lower test). • Small and micro businesses now able to write off existing pool balances of £1,000 or less. • 100% first year allowance for expenditure on refuelling equipment for natural gas and hydrogen powered vehicles extended for a further five years, and also available for biogas refuelling equipment. • Further extensions announced to the 100% Enhanced Capital Allowances (ECAs) regime. • First-year tax credits of up to l9% for loss-making companies who invest in energy efficient assets which are eligible for ECAs. • Phased withdrawal of Industrial Buildings Allowances (including hotel allowances) and Agricultural Buildings Allowances. Anti-avoidance legislation will be introduced to combat planning designed to secure additional writing down allowances. • New l00% Annual Investment Allowance (AIA) for the first £50,000 of a business’s expenditure each year. AIA available on long-life assets and assets for leasing but not on cars. • New classification of ‘integral features’ with a 10% special rate pool. • 10% WDA available on thermal insulation for all existing buildings, other than residential properties. • Prevention of the use of arrangements to generate balancing allowances. • Land remediation relief extended to expenditure on derelict land and to the removal of Japanese knotweed by treatment on site, from 2009. • Landfill tax exemption for waste from the clean up of contaminated land phased out from 2012.
Controlled Foreign Companies The foreign profits consultation document has been deferred and is now promised before summer. In the meantime a number of targeted anti-avoidance measures have been introduced. These are aimed at companies which have sought to retain income offshore by falling within CFC exemptions. The legislation is effective for income accruing post 12 March 2008. Research and Development • Research and Development (R&D) deductions for large companies will increase to l30% from April 2008; • R&D deductions for small and medium sized companies (SMEs) will increase to 175% from a date to be appointed, once EC approval is obtained. Two further changes to the R&D regime for SMEs are announced to ensure compliance with state aid rules: • companies whose accounts have not been produced on a going concern basis will be prevented from claiming relief; • a cap of €7.5 million will be introduced limiting the amount of relief available per project. No announcements were made increasing the limits for companies to be considered small or medium sized, as had been expected. Trading stock Broadly, where a company disposes of stock or transfers goods from stock (for example to fixed assets) under a non-trading transaction, the accounting practice is disregarded and the tax computation amended to substitute the proceeds (or cost for the acquirer) to market value. This treatment is currently based on case law; legislation will be introduced in Finance Bill 2008 to put this on a statutory basis and has effect for all such transactions on or after 12 March 2008. Where applicable transfer pricing rules will take precedence. Financial products avoidance HMRC have accepted that further consultation is required in respect of the ‘principles based’ approach to financial products avoidance, and this is now expected to be introduced iii Finance Bill 2009. In the meantime, HMRC have introduced a number of specific anti-avoidance provisions to tackle avoidance involving disguised interest and transfers of rights to lease rentals. The ‘shares-as-debt’ rules, which will be repealed on the introduction of the ‘principle based’ approach, have been tightened with effect from 12 March 2008 to take account of schemes which have been used to avoid or exploit these rules. As part of their simplification agenda, HMRC have also announced that they will commence an informal dialogue on the possibility of aligning the various unallowable purpose provisions within the Taxes Acts. Formal consultation may follow in the autumn. As part of the same agenda, the ‘bond washing’ and ‘dividend buying’ anti-avoidance rules will be repealed in Finance Bill 2008 as they are now redundant. PERSONAL AND EMPLOYMENT TAXES Residence and taxation of non-domiciles The Chancellor confirmed that changes to the taxation of non-domiciles from 6 April 2008 will go ahead. The test for residence 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. This is a change from the original proposals contained in the draft legislation under which days of arrival and departure were to be counted. Anyone spending more than 182 days in the UK in a tax year will automatically be treated as resident. Visitors who exceed 90 days on average over four tax years will also be UK resident. Non-domiciles: £30,000 charge Individuals over the age of 18 who have been resident in the UK for more than seven out of ten years and wish to claim the remittance basis after 6 April 2008 must pay an annual charge of £30,000, unless their unremitted foreign income and gains are less than £2,000 in the year. The charge will now be attributable to a specified sum of unremitted income and gains rather than being a standalone charge, and it is hoped that the charge will therefore be creditable against overseas taxes under Double Tax Agreements.
The charge can be paid from an offshore source and the £30,000 will not be charged as a remittance, meaning that unremitted foreign income or gains can be used to pay it. Personal allowances and the remittance basis From 6 April 2008 individuals who claim to be taxed on the remittance basis and have more than £2,000 of overseas income and gains will no longer be entitled to claim income tax allowances and capital gains annual exemptions. Remittances in kind Remittances in kind (assets, property and services), originating from foreign investment income, will be taxed from 6 April 2008. There will, however, be a number of significant exemptions including personal effects, assets brought into the UK for repair and restoration, assets already in the UK on 6 April 2008 or overseas assets already owned on 11 March 2008. Changes to the treatment of offshore trusts will not have general retrospective effect The new rules will not seek to tax non-domiciles on capital payments made by trustees prior to 6 April 2008, unless they are UK resident and domiciled at the time the gain is subsequently realised and matched to the earlier capital payment. Where the trust has unmatched trust gains as at 6 April 2008, these will not be taxed where they are later matched to payments received by a beneficiary unless the beneficiary is at that time UK resident and domiciled. Putting the taxation of capital payments onto the remittance basis Capital payments or benefits made available to UK resident non-domiciles are to be put onto the remittance basis. Gains realised in relation to UK sited assets will also only be assessed on the remittance basis. Stepping up the value of offshore trust assets held as at 5 April 2008 The trustees of any non-UK resident settlement have the right to elect that their assets will be re-based to current market value, including assets they own via a non-UK resident close company. The election cannot be made on an individual asset basis but will apply to all assets of the trust and any underlying companies. Capital loss on disposal of foreign assets The capital gains tax legislation will be amended so that non-domiciles who are taxed on the arising basis can automatically offset their foreign losses. Individuals who claim the remittance basis from the 2008/09 tax year will be able to elect into a regime that enables them to claim relief for foreign losses in the years they are taxed on the arising basis. Non-domiciles: other changes will be introduced relating to: • remitting income after the source has ceased • mixed funds • payment abroad for the provision of services in the UK • remittances while temporarily non-resident • transfer of assets abroad • remitted foreign dividends Capital gains tax The Chancellor confirmed that his proposals for tax reform would continue as announced, with the abolition of taper relief, indexation allowance and halving relief as from 5 April 2008. A new Entrepreneurs’ Relief will be introduced in Finance Act 2008. The relief will allow the first £1 million (a lifetime limit) of gains arising on certain disposals from 2008/09 to be charged to CGT at an effective rate of 10%. The new relief applies where: • an individual makes a material disposal of business assets • there is a disposal of qualifying business assets held by certain trustees
• a disposal is made by an individual of assets held personally but used in a business. Taxation of personal dividends Legislation is due to be introduced in Finance Bills 2008 and 2009 to make changes to the system of taxation for individuals who own foreign shares. The changes will bring the system more in line with the taxation of dividends from UK resident companies. From 6 April 2008, UK resident individuals and UK and EEA nationals with small shareholdings (less than 10%) in non-UK resident companies will be entitled to a non-repayable tax credit on the same basis as for UK dividends. Finance Act 2009 will further extend the eligibility for larger shareholdings, but the tax credit in these cases will not be available if the source country does not levy a corporate tax charge (similar to corporate tax in the UK) on the distributing company. Restrictions on trade loss relief for individuals 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. In all other cases the annual sideways loss relief from all trades carried on in a non-active capacity will be restricted to £25,000, subject to transitional rules. Income shifting consultation The Government has considered the responses received in respect of the recent consultation into proposals designed to deny a tax advantage where an individual shifts part of their income to another person who is subject to a lower rate of tax. Representations suggested that the legislation should be postponed and further consultation undertaken, and the Government has agreed to this course of action. Employment taxes
Residence and domicile: changes for employment related securities
From 6 April 2008 all share benefits awarded to UK resident employees will be taxed in a similar way usually on vesting. The different rules for resident but not ordinarily resident employees will disappear, but they will be entitled to claim the remittance basis. Enterprise Management Incentives (EMI) The individual limit on the value of share options granted under an EMI plan has been increased to £120,000. However, the Government is to exclude certain companies from qualifying for EMI in order to comply with EU state aid guidelines, in particular, companies with more than 250 employees and those involved in shipbuilding, coal and steel production.
INDIRECT TAXES VAT registration thresholds The VAT registration and deregistration turnover thresholds will be increased (with effect from 1 April 2008) as follows: • VAT registration threshold = £67,000 (up from £64,000) • VAT deregistration threshold = £65,000 (up from £62,000). Option to tax land & buildings New legislation will take effect on 1 June 2008. The rewritten legislation is primarily designed to be easier to understand but also introduces a number of minor changes to improve the practical administration of the option to tax and its revocation (after 20 years). VAT simplification reviews Further consultation has been announced on simplification of the partial exemption regime and the capital goods scheme as well as exploring the need for HMRC’s permission before opting to tax. Excise duty on alcohol
Excise duty on alcohol increases by 6% as of midnight 16 March 2008 (and will rise 2% above the rate of inflation for the next four years). Aggregates levy The rate of aggregates levy will be increased by 2.6°h from £1.95 to £2.00 with effect from 1 April 2009. STAMP DUTY LAND TAX (SDLT) Withdrawal of group relief The group relief anti-avoidance rules are further tightened. An existing exclusion from clawback of that relief, where the vendor company leaves the group prior to the purchaser, will no longer apply where there is a subsequent change in control of the purchaser. The measure will apply to changes of control occurring on or after 13 March 2008 unless in pursuance of a contract entered into before that date. Alternative property finance Legislation will be introduced in Finance Bill 2008 to stop schemes that exploited a relief which was originally enacted to ensure certain alternative finance structures were not discriminated against by the SDLT system. Transfers of partnership interests Finance Act 2007 materially extended the scope of the provision that charges SDLT on transfers of interests in partnerships. A distinction between transfers of interests in partnerships effected for consideration (socalled ‘Type A transfers’), which continue to attract SDLT by reference to a proportion of the market value of UK property equal to the interest transferred, and transfers (or deemed transfers) effected for no consideration (so-called ‘Type B transfers’), which are exempt from SDLT if they fall within a ‘safe-harbouring’ rule that disregards property held by the partnership where, (broadly) full SDLT or Stamp Duty is paid on the original transfer of that property to the partnership. The concept is introduced of an election under which a person can ensure full SDLT is paid on a transfer to a partnership so that all future type B transfers of interests in the partnership would be exempt from SDLT. Other changes Other minor measures are introduced in relation to Zero Carbon Flats, the abolition of £5 stamp duty, leases and notification requirements.
For a full version of the above proposals, please visit HM Revenue & Customs website.
TAX RATES IN SUMMARY: UK Tax Rates and Allowances: 2006/7 to 2008/9 Rates, Bands, allowances, etc. 2006/7 2007/8 2008/9 £ £ £ Income Tax Personal allowance 5,035 Starting rate band 10% 2,150 Basic rate band (2) 20% 31,150 Higher rate: 40% Normal higher rate threshold: 38,335 5,225 5,435 2,230 (1) 32,370 36,000 39,825 41,435
National Insurance Contributions Class 1 – Primary 11% - On earnings between earnings threshold and Class 4 8% - upper earnings limit. Earnings threshold 5,035 5,225 5,435 Upper earnings limit 33,540 34,840 40,040 Class 1 – Secondary 12.8% - On earnings above earnings threshold. Class 1 & Class 4 1% - On earnings above upper earnings limit. Class 2 – per week Small earnings exception Class 3 – per week Pension Contributions Annual allowance Lifetime allowance Capital Gains Tax Annual exemption: Individuals Trusts Inheritance Tax Nil Rate Band Annual Exemption Pensioners, etc. Age allowance: 65-74 Age allowance: 75 and over MCA: born before 6/4/1935 MCA: 75 and over MCA minimum (3) Income limit Blind Person’s Allowance 2.10 2.20 2.30 4,465 4,635 4,825 7.55 7.80 8.10
215,000 225,000 235,000 1.5M 1.6M 1.65M
8,800 9,200 9,600 4,400 4,600 4,800
285,000 300,000 312,000 3,000 3,000 3,000
7,280 7,420 6,065 6,135 2,350 20,100 1,660
7,550 9,030 7,690 9,180 6,285 6,535 6,365 6,625 2,440 2,540 20,900 21,800 1,730 1,800
Notes 1. For 2008/9, a 10% starting rate band of £2,320 applies to interest and other savings income only. 2. Basic rate on income other than interest, dividends and other savings income is 22% until 5 April 2008. The rate applying to dividends is 10%. 3. The Married Couples Allowance, ‘MCA’, is given at a rate of 10%.
This publication has been written in general terms. Lakers would be pleased to advise readers on how to apply the principles set out is this publication to their specific circumstances. Lakers accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.