listening,

understanding,

advising

The Emergency Budget

Those pundits who felt that a coalition would lead to weak, indecisive government now have further evidence that this is not currently the case. This was a budget which was not afraid to take bold steps.

The government had previously talked of aiming at

Reducing the deficit
Tax simplification
Fairer Taxes
Green taxes

It would be fair to say that this budget focused almost exclusively on the first of those objectives. In fact it extended it to the intention of balancing the budget in space of this parliament. There will be those who wonder if this is an either achievable or indeed desirable objective when keeping the economy thriving is so important to success.

To raise revenue this budget has taken the easy option of increasing VAT, an indirect tax where the pain is not so obvious, however the opposition are claiming that this does not sit comfortably with the idea of 'fairer taxes'. Although they have raised the threshold at which income tax becomes payable, more could have been achieved in a different economic climate.

Green taxes hardly seem to have got a look in.

However businesses will not see the budget as the brake on the economy it could have been. The rise in Capital Gains Tax was not as steep as had been predicted and Corporation Tax is being slightly reduced. However the reductions in Capital Allowances seem a rather unnecessary disincentive to investment.

Overall the budget will be viewed as sufficiently even handed to suggest that economy could move forward.

Personal Taxes

Income Tax

The Personal Allowance is to increase by £1,000 to £7,475 from 6 April 2011.
The Higher Rate threshold will be reduced so that Higher Rate taxpayers do not benefit from the increased personal allowance, although exact figures to be confirmed.

National Insurance

The Upper Earnings Limit for Class 1 and Class 4 NIC will be reduced in line with the Higher Rate threshold for Income Tax from 6 April 2011
The secondary threshold for NICs (which is the point at which employers start to pay Class 1 NICs) is to be increased by an extra £21 per week above indexation.
A new three year scheme is to be announced to exempt new businesses in certain geographical regions from up to £5,000 of class 1 employer NICs for each of their first ten employees in their first year of trading. Any new business set up from today will qualify although the scheme will not be up and running until September 2010.

Capital Gains Tax

Capital Gains Tax rate to increase to 28% for Higher Rate taxpayers for gains made on or after 23 June 2010. Basic Rate taxpayers to pay 18% CGT up to the Higher Rate threshold, and 28% above that. Capital Gains made before 23 June 1010 will not be included when considering how much basic rate band is available to offset against gains made after 23 June 2010.
Trustees and Personal Representatives will pay CGT at 28% except where Entrepreneurs Relief is available.
Where an individual has made Capital Gains both before and after the 23 June 2010 they may choose where to allocate their annual exemption and any losses, and generally it will be better to allocate against gains made after that date.
Entrepreneurs' Relief to increase from £2million to £5million lifetime limit from 23 June 2010. Entrepreneurs' Relief will act to tax all qualifying gains at 10%, whether they are Basic or Higher Rate Taxpayers.
Where an individual has qualifying and non-qualifying Capital Gains for Entrepreneurs' Relief then the qualifying gains take preference over the non-qualifying in utilising the basic rate band even through it results in no tax reduction.

ISAs

ISA limits to increase annually in line with the Retail Price Index from 6 April 2011. Current limit is unchanged at £10,200 for stocks and shares or £5,100 for cash.

Pensions - Requirement to Buy an Annuity at 75 to Cease

The government are to be announcing major changes to the requirement to purchase an annuity at 75.
As an interim measure before then, those who have not reached 75 by 22 June 2010 will not be required to purchase an annuity until 77 to give them time to review the new rules.
This has impact for Inheritance Tax purposes, as an individual in drawdown over the age of 75 could have suffered tax charges of up to 82%, but these charges will no longer apply from 22 June 2010. Interim measures will also be introduced for the period until April 2011.

For more information please contact Catherine Vickery on 01935 709381 or

Business Taxes

Corporation Tax

The main rate of Corporation Tax will be reduced from 28 per cent to 24 per cent over the next four years, starting in April 2011.

The small companies' rate will be reduced from 21% to 20% from April 2011.

Some small tweaks are to be made to the rules introduced in the 2009 Finance Bill which consolidated the treatment of intercompany distributions - the change has ensured that the exemption from Corporation Tax enjoyed by most intercompany distributions does not exclude capital distributions. This is relevant for any group companies contemplating or who have already undertaken (as the legislation has retrospective effect) a reduction in share capital with an ensuing distribution made out of reserves.

Finance Act 2009 introduced the harmonised interest regime which was intended to ensure consistent treatment of late payments, repayments and duties. A measure has been introduced in this budget to bring Corporation Tax (with no impact on the quarterly payment regime) and Petroleum Revenue Tax within the provisions. Late payment interest will be charged from the date the tax or duty is due until the date it is paid and repayment interest will be calculated from the due date (or payment date if later) until the date the repayment is made.

Research & Development tax relief was mentioned in the chancellor's speech but only to the extent that it would be reviewed and Sir James Dyson's proposals to be taken on board however a small amendment was made to existing rules which had been announced in the 2009 pre-budget report removing the requirement for SMEs to own the intellectual property of the product / service / process which they were working on.

Pensions

It had been mooted that pension relief rules might be changing however it was evidently to big an issue to deal with this soon into the new government. Instead we have had a warning that whilst the pension rules already introduced are to be repealed, the details of what will replace them have yet to be decided. The overriding aim of any policy would be to maintain the tax-take the government were relying on from the original rules and it would appear that the favoured options would be either to lower the annual limit from the current £255k to somewhere between £30k and £45k or to reduce the lifetime limits.

Anti-avoidance

Conspicuous by their absence are the usual raft of anti-avoidance rules which have very much been part of the last few Finance Bills and the reason for this appears to be alluded to in a paper detailing a new approach to the making of tax policy. There are various comments criticising the tinkering of rules and the complexity of legislation around anti-avoidance. The new approach planned appears to be one where the intention of any measures will be communicated clearly and therefore one assumes broadens HMRC's powers to challenge planning which they feel might be not in the spirit of the legislation. There has also been mention of a General Anti-Avoidance rule (GAAR) which has been shied away from in the past. Watch this space.

Furnished Holiday Lets

Another hot topic for many in the South West is Furnished Holiday Lets. The original repeal of the rules announced by the labour government and dropped from the first Finance Act 2010 has not been introduced nor does it appear that it will be. However the government will publish a public consultation over the summer about plans to change the rules from April 2011. The proposal is to include all properties within the EEA, and will tighten up on the number of days the property needs to be available and actually let to qualify as well as looking at the way in which loss relief is given.

For more information please contact Isobel Savage on 01392 214641 or

UK Real Estate Investment Trusts (REITs)

Historically, UK REITs have been required to distribute 90% of profits deriving from the property rental business as a cash dividend to investors.

Measures are to be introduced in the Finance Bill that will enable REITS to issue stock dividends in lieu of cash dividends, to be included within the definition of the 90% property income distribution test.

This facility will have effect for property income distributions made on or after the date that the legislation receives Royal Assent.

For more information please contact Andrew Wholey on 01749 335034 or

Companies issuing EMI options must now have a permanent establishment in the UK, or at least one company in the group, rather than be wholly or mainly trading in the UK.

EIS and VCT companies will be excluded from qualifying for relief if it is reasonable to assume that the company would be treated as an 'enterprise in difficulty'.

The treatment of tobacco duty on long cigarettes, those over 8cm long, will change to state that each additional 3cm over 8cm is treated as an extra cigarette.

Stamp Duty Land Tax (SDLT) and Petroleum Revenue Tax (PRT) will be brought in line with Income Tax, Capital Gains Tax and Corporation Tax rules to limit repayment claims from six years to four year from 1 April 2011.

For more information please contact Victoria Studley on 01935 709334 or

Capital allowances

The annual investment allowance will be reduced from £100,000 to £25,000 from April 2012.

From April 2012 writing down allowances will be reduced from 20% to 18% in the main rate pool and from 10% to 8% in the special rate pool. Special rate expenditure includes expenditure on long life assets, integral features and cars with CO2 emissions of more than 160g/km. A hybrid rate will be applied for businesses whose period spans the change in rules.

A 100% first year allowance is to be introduced for new and unused zero-emission goods vehicles effective for 5 years from 1 April 2010 for companies and 6 April 2010 for sole traders and partnerships. This is for vehicles designed primarily for the conveyance of goods or burden and will be available in addition to the Annual Investment Allowance.

Consortium Relief

Loss relief for the consortium's unused losses is extended from UK resident companies to companies established within the EEA. A further test for calculating the maximum loss claim will be made by reference to the proportion of voting rights and extent of control.

A more detailed program of corporate tax reform is planned for the autumn.

For more information please contact Kim Davis on 01935 709338 or

VAT

Rate Increase

The headline change announced in the emergency budget is that the standard rate of VAT will increase to 20% with effect from 4 January 2011, the first working day of the New Year. One presumes this date has been selected to make it easier for businesses that are busy over the New Year to manage the change.

Supplies of goods and services that are not currently standard rated will remain unaffected.

As with the reversion of VAT to 17.5% earlier this year, carefully targeted 'anti-forestalling' rules will be introduced to restrict the extent to which taxpayers can enter into arrangements to mitigate the effect of the increase.

HMRC have issued detailed guidance notes on both the rate increase and the anti-forestalling rules which is available on their website.

Flat Rate Scheme

As a result of the VAT rate increase the percentages used to calculate VAT liabilities under the flat rate scheme have been adjusted. Budget Notice 45 contains full details of the revised rates. The threshold for entry to the scheme remains unchanged at £150k; however the threshold for exit has increased from £225k to £230k.

Where a business exceeds this threshold but can show turnover will not exceed £191,500 (up from £187,500) in a subsequent year it will be allowed to remain in the scheme.

Postal Services

Following a legal challenge the UK authorities have accepted that supplies of postal services made by the Royal Mail are only exempt if made under a licence duty. As previously announced, postal services that are not made in this way, or those that are made on freely negotiated terms, will become subject to the standard rate of VAT from 31 January 2011.

Social mail, including stamped mail remains VAT exempt so in the main private individuals will not be directly affected. But VAT averse organisations such as charities are likely to see an increase in their costs as VAT is added - at 20% - to certain postal services they incur.

An opportunity exists for businesses to make retrospective VAT claims where they have previously incurred postal services that are now accepted as standard rated, and can show that their contract with the Royal Mail was VAT inclusive.

Aircraft

Prior to the budget rumours abounded that VAT would be added to domestic airline travel. The Chancellor has not done this, although a change previously announced in Budget 2010 affecting sales of aircraft for domestic travel will still come into effect.

From 1 January 2011 the scope of zero-rating for sales of aircraft will be restricted to those intended for use primarily by airlines operating international routes. From this date aircraft intended for use on domestic routes will become standard rated.

These new rules are intended to align UK and EU law. Currently zero-rating is based on the weight of aircraft, in future it will be based on customer status.

Lennartz

'Lennartz' accounting affects the VAT treatment of purchases of assets intended for use for both business and private purposes.

From 1 January 2011 full upfront VAT recovery (with subsequent payments of VAT on private use) will no longer be available under the 'Lennartz' accounting mechanism. Instead VAT recovery will be restricted to business use of an asset, with adjustments being required for any change of use in subsequent years. The measure also introduces a number of related changes to the VAT rules affecting directors' accommodation and existing 'Lennartz' accounting users.

Gas, Heating and Cooling

Another previously announced change; changes will be made to the VAT treatment of supplies of natural gas, heat and cooling from 1 January 2011. The measures should only affect suppliers and importers of these supplies, plus providers and VAT registered recipients of services comprising access to and use of natural gas, heat and cooling distribution networks.

Insurance Premium Tax

The standard rate of insurance premium tax will rise to 6% (up from 5%) for premiums received or written by an insurer after 4 January 2011.

In addition the higher rate of insurance premium tax will rise from 17.5% to 20% with effect from 4 January 2011 in line with the increase in the standard rate of VAT.

HMRC's powers, deterrents and safeguards - penalties for late filing and payments of tax (quarterly and monthly returns for VAT and Insurance Premium Tax, Aggregates and Climate Change Levy and Landfill Tax, and other excise duties)

New measures have been announced that are claimed to "complete the reform of the penalty regimes for late filing of tax returns and late payment of tax".

The date of implementation will be announced at a future date by Treasury Order, to both allow HMRC to change their internal systems and processes, and to allow for the "substantial education and preparatory period" that will be necessary for both taxpayers and their agents.

In future, quarterly returns that are filed late will attract an automatic £100 penalty after the due date for filing (regardless of whether or not all the tax has been paid).

The failure also starts a "penalty period" that will last for a period of one year during which further failures will attract additional fixed and escalating penalties up to a maximum of £400 per failure. The "penalty period" is also to be automatically extended to the first anniversary of the latest failure.

If there are further and prolonged failures, additional penalties of 5% of the tax on the relevant return will be charged at six and then twelve months from the date of the failure (and up to 100% of the tax where information is deliberately withheld).

A very similar regime will apply to monthly filed returns.

Penalties for late payments will also be levied at rates rising from 2% to 4% of the unpaid tax.

We have direct experience of similar measures having been introduced previously in the context of late payments and underpayments of PAYE. They are very unpleasant indeed the message being that focus on timely compliance is even more important than ever.

HMRC powers, deterrents and safeguards - Excise duties (alcohol, tobacco, energy products, gambling duties and air passenger duties)

Changes are to be introduced to broadly align record-keeping requirements and time limits across all taxes and duties. They will also update the compliance checking framework for excise duties in relation to modernising information and inspection powers.

For more information please contact Mark Peters on 01392 214653 or mark.peters[at]oldmillgroup[dot]co[dot]uk

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.