The Budget 2007
A Brief Summary Prepared by The Old Mill Tax Team
Introduction
Another years budget been and gone and for another year it seems to be more of the same. Tinkering here and there, supposedly becoming fairer but in practice creating more work for accountants and tax advisers. Once again the Chancellor has failed to grasp the nettle and significantly reform an extremely complex tax system.
Apart from the headline sleight of hand with Income Tax rates this budget appears on first examination to be as dull, or duller, than recent years. Though as has been seen in the past there could still well be a sting in the tail hidden in the small print which will take a month or so to analyse.
If there is one feature of this budget it would appear to be an element of attack on small business owners including farmers. The increase in Corporation Tax for smaller companies is unwelcome and there are a number of tinkerings with allowances, with VAT and in the administration which appear to do little to make life easier.
If there is anything in the summary below about which you have any query please do not hesitate getting into contact with us.
Personal Tax
Usual annual increases in Personal Allowances and Rate thresholds. Under the heading of “Modernising the Personal Tax System” further changes:
From 6th April 2008 (2008/09):
- The basic rate reduced from 22% to 20%.
- Removal of the 10% band for earnings and pensions.
- Increase in the Upper Earnings Level and Upper Profits Limit for employees’ class 1 and self employed class 4 National Insurance Contributions.
For years 2009/10 onwards:
- Further increases in Upper Earnings Level and Upper Profits Limits National Insurance Contributions.
- By 2011/12 the Personal Allowance for those aged 75 years and over will increase to £10,000.
Company Car and Fuel Benefit:
- For 2007/08 the multiplier used to calculate the fuel benefit will remain the same at £14,400.
- From 6th April 2008 the appropriate percentage figure used to calculate the car benefit (15% to 35%) will be discounted by 2% for cars capable of running on E85 fuel (Biofuel).
Capital Gains Tax
- Annual Exemption Limit increased to £9,200.
- An Anti -Avoidance Rule is to be introduced to prevent relief for capital losses against gains where those losses have been artificially created solely for the purpose of a tax advantage.
Venture Capital Schemes and Enterprise Management Incentives
- New rules to be introduced to set limits on the number of employees allowed (50) and the amount of money raised (£2 Mill.)
- Some refinement of the rules for subsidiaries.
Individual Savings Accounts
From 6th April 2008:
- The distinction between mini and maxi ISAs will be removed.
- The limits for subscription in any tax year will be:
- £3,600 for a cash ISA
- £7,200 for a stocks and shares ISA
Inheritance Tax
The Nil band threshold will be £300,000 from 6th April as previously announced. It is also proposed that the threshold will increase to £350,000 by 2010/11.
Pension Schemes
- Amendment to the rules taxing non cash benefits received from a former employer to exclude benefits which would not be taxable if pensioner was an employee.
- Changes to Inheritance Tax Rules where, benefits in the event of pensioners death are assigned to trustees and become payable at their discretion. This will ensure that if the benefits are paid out within a certain time the trust “relevant property” regime will not apply.
- From 6th April 2007 the following will be introduced:
- Rules to deal with members of a scheme who reach age 75 yrs but cannot be traced.
- A requirement to draw a minimum income from “alternatively secured pensions”.
- Technical changes for Inheritance Tax to deal with calculation of tax and interaction with nil – rate band.
Stamp Duty Land Tax
The following will apply to transactions on or after the date the Finance Bill 2007 receives Royal Assent.
- Currently where there is an exchange of properties between “connected persons” the value of the properties is aggregated and the rate of duty is the rate applicable to the aggregate value. This is to be amended to apply the rate applicable to each properties value.
- Regulations to counter SDLT avoidance schemes are to be incorporated in the Finance Bill 2007.
- Reliefs that apply to shared ownership leases will also apply to shared ownership trusts.
- Payment of tax self assessed will no longer have to accompany the return. The tax will still have to be paid by the due date.
- From the 1st October 2007 buyers of new Zero Carbon Homes will be free of SDLT liabilities on homes with a purchase price up to £500,000. Where this is exceeded the liability will be reduced by £15,000. The criteria to be met will be set out in to be laid before Parliament.
Miscellaneous
Personal Dividends:
Non - UK dividends paid to individuals to be taxed in the same way as UK dividends provided holding is less than 10% and less than £5,000 of non – UK dividends received in total.
Donations to Charities:
New limits for benefits a donor to a charity can receive from the charity where donations are made under Gift Aid rules.
Pre Owned Assets:
Legislation to be introduced to allow late elections for assets to be treated as forming part of an individual’s estate in cases where Pre Owned Assets rules apply. Time limit is the 31st January following the end of the tax year in which the rule first applies.
Trust Modernisation:
Legislation to clarify tax treatment of certain capital receipts treated as income in the hands of trustees. These are proceeds of a company purchasing its own shares and chargeable event gains on certain life policies.
Corporation Tax Rates
From 1 April 2007
- Small Companies Rate Increases from 19% to 20%
From 1 April 2008
- Small Companies Rate Increases from 20% to 21%
- Large Companies Rate Decreases from 30% to 28%
From 2 April 2009
- Small Companies Rate Increases from 21% to 22%
Capital Allowances
- First Year Allowances for Small Enterprises of 50% will be extended for a further year, to include 2007/08.
- From 2008/09 writing down allowances will be reduced from 25% to 20%.
- From 2008/09 writing down allowances on long life assets will be increased from 6% to 10%.
- From 2008/09 to 2010/11 writing down allowances on Industrial Buildings and Agricultural Buildings are being phased out. This will begin with a change in the rules over how Balancing Charges and Allowances are given, and this will have effect from budget day (21 March 2007).
- From 2008/09 writing down allowances on certain fixtures in buildings will be reduced to 10%. Further consultation will decide what fixtures this will apply to.
- A new “Annual Investment” allowance of £50,000 for expenditure on assets will be introduced from 2008/09 – Further consultation will decide how this will apply.
Enhanced Allowances
- From 2008/09 Research & Development deductions will increase from 150% to 175% for Small and Medium size enterprises, and from 125% to 130% for large enterprises. They will also extend the 175% relief to large companies with fewer that 500 employees.
- A new tax credit will be available from 2008/09 for losses resulting from capital expenditure on “green technologies” – further consultation will clarify how this will work.
- The Landlords Energy Saving Allowance has now been extended to include not only loft insulation, cavity wall and solid wall insulation, hot water system insulation and draught proofing, but also floor insulation. An allowance of up to £1,500 at 100% is available for landlords of residential property.
Anti – Avoidance
- Provisions have been put in place to prevent tax relief being given on contributions to Employee Benefit Trusts where taxable benefits are not received by beneficiaries within 9 months of the end of the accounting period.
- Provisions have been put in place to restrict tax relief on companies being purchased or sold to benefit from utilising capital losses and gains.
- Individuals providing their services via Managed Service Companies will be deemed to be employees for tax purposes, which will require PAYE to be operated and Class 1 NIC to be deducted on any payments.
VAT & Landfill Tax Changes
The following changes were announced on 21 March 2007;
VAT Registration Thresholds
The taxable turnover threshold which determines whether a business must register for VAT will rise to £64,000 (from £61,000) with effect from 1 April 2007. The corresponding de-registration threshold will rise to £62,000 (from £59,000).
This represents a slightly larger increase than in previous years.
Fuel Scale Charges
Fuel scale charges are payable where a business recovers VAT on fuel used for private motoring.
As widely heralded, fuel scale charges will be calculated in accordance with CO2 emissions rather than engine size with effect from 1 May 2007. This aligns the basis on which such charges are calculated with those used for direct tax purposes.
It is important to note that the changes affect the first complete VAT period from this date.
Assets used for Business & Non Business Purposes
Businesses that use assets for both business and non business purposes may choose whether to apportion upfront the VAT paid on their purchase, or claim it all and subsequently account for VAT on non business use. The latter approach is often referred to as ‘Lennartz accounting’. A number of changes have been made to the ‘Lennartz accounting’ rules to reflect recent European Court of Justice Decisions.;
- Ineffective legislation introduced to prevent ‘Lennartz accounting’ applying to land and buildings has been repealed.
- The period for which VAT must be accounted for on non business use of land and buildings is reduced from 20 years to 10 years in line with the capital goods scheme. For assets currently subject to ‘Lennartz accounting’ the non business use charges will need to be recalculated.
- The closure of a loophole in the existing regulations.
The first two changes will have effect from 1 September 2007. The third change is effective immediately.
Nicotine Patches
The VAT rate applicable to smoking cessation products will be temporarily reduced for 1 year from 17.5% to 5%. The zero-rate relief applicable to such products when dispensed by a pharmacist remains unaffected.
The change is timed to coincide with the pub smoking ban effective from 1 July 2007.
Asset Transfers
From 1 September 2007 the requirement for the seller to pass business records to the purchaser is reversed. Except in cases where the purchaser takes over the VAT registration number, the seller will keep the business records. He must make them available to the purchaser in order that they may meet their VAT obligations.
These pragmatic changes should prove helpful, especially in cases where only part of a business is being transferred. Sellers will no longer have to apply to HMRC to retain business records. Standard warranties in sale and purchase agreements will need to be reviewed and amended.
Gambling
These changes, which are effective from 1 September 2007, update existing legislation and confirm the VAT treatments applicable to gambling related activities. It confirms that participation fees for bingo and gaming are subject to VAT. Existing exemptions will be maintained.
Joint & Several Liability
This change affects businesses trading in electronic goods, mobile phones and computers.
It strengthens HMRC’s powers to combat so called carousel fraud.
Landfill Tax
The standard rate of landfill tax will rise to £24 per tonne (previously £21) on 1 April 2007. It will subsequently rise to £32 per tonne from 1 April 2008. The lower rate will rise to £2.50 per tonne (previously £2) on 1 April 2008.
HMRC have also announced a number of changes affecting landfill tax registered businesses, and environmental bodies enrolled under the Landfill Communities Fund. These changes are effective from 1 April 2007.
Administration
Penalties for Incorrect Returns:
Legislation to be introduced to provide a single Penalty Regime to cover: Personal Taxes, Corporation Tax, Pay As You Earn, National Insurance Contributions, and VAT.
Income and Corporation Tax Enquiries:
The period when an enquiry can be opened is to be linked to the date the Return is received by HMRC. Changes will apply to:
- 2007/08 Personal and Trust Self – Assessment Returns.
- Corporation Tax Returns for accounting periods ending after 31st March 2008.
Legislation to be introduced to treat cheque payments of Corporation Tax and VAT as made when funds have cleared into HMRC’s bank account.
Tax Return Filing Dates:
For Returns issued after 5th April 2008 relating to 2007/08 and subsequent years there will be two separate filing dates:
- For paper Returns 31st October following end of tax year e.g. 2007/08 Return 31st October 2008. The deadline will remain 30th September where HMRC are to calculate the tax.
- For Returns filed on line the date remains 31st January following end of tax year e.g. 2007/08 Return 31st January 2009
- The window for amending Returns will continue to be linked to 31st January.
Compiled by
Paul Pace. Associate Director Personal Tax. 01935 709306
Catherine Vickery. Tax Manager. 01935 709381
Mark Peters. Associate Director VAT Consultancy 01392 214641