Budget 2008
Analysis and comment on the key changes announced in The Chancellor's Budget.
13.03.2008
Analysis and comment on the key changes announced in The Chancellor's Budget.
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Budget 2008: At a glance Download: New Tax Rates 2008-09
Business news
Economic outlook
Personal taxes
Environment
Transport
Budget 2008 Comment & Opinion: Digital version of Budget Briefing 2008
Becoming greener - UK must do more
Residence & domicile - Government backtrack
R&D tax credits
Individual loss relief restriction
Landfill tax
Insurance premium tax
VAT update
Inheritance tax
Tax efficient investments
Capital allowances
Round-up: Business Tax Matters
Other business news:
PAYE online system open
Employees travelling abroad?
Beneficial loans
Payments due in March
From next month, the main corporation tax rate falls from 30pc to 28pc. Small company corporation tax rate rises from 20% to 21%. New capital gains tax rate, 18%, will come in April, including the entrepreneurs’ relief, 10% on £1m lifetime allowances, announced in January.
Tax crackdown on family businesses delayed until 2009. Annual investment allowance £50,000. £60 million more for Small Firms Loan Guarantee Scheme, which will be extended to all small companies.
New target of 30% of government contracts for small firms. £12.5 million capital fund to be made available to encourage more women entrepreneurs. VAT threshold rises from £64,000 to £67,000.
Plant and machinery allowance rate drops from 25% to 20%. New £30m Enterprise Capital Fund to provide mezzanine finance to growing firms. Increase in small firms R&D tax credit delayed and new EU state aid rules applied to restrict access.
North Sea fiscal regime to be reformed to help incentivise investment and support production. Hotels, industrial and agricultural buildings annual allowance falls from 4% to 3%.
UK growth will be between 1.75% and 2.25% in 2008. Growth expected to shift towards companies and exports with growth rising to 2.25% to 2.75% in 2009 and 2.5% to 3% by 2010. Inflation will rise before returning to target, 2%, in 2009 and remain on target thereafter. Debt forecast for 2007-08 lowered to 37.1% of GDP. Public sector investment forecast to rise to £37 billion in 2010. £60m to be spent on encouraging people to return to work.
Significant backtrack on the non-doms proposals set-out in January, particularly on offshore trusts. £30,000 charge for non-doms from April, but no further change in this parliament or the next. From April, ISA investment limits increased to £7,200 with the amount that can be held in cash rising to £3,600.
Target to reduce carbon emissions by at least 60% by 2050 may be extended to 80%. Legislation to be introduced in 2009 to impose a charge on single-use carrier bags if progress is not made on a voluntary basis. £26 million fund available next year to help homes cut their carbon footprint and energy consumption.
From 2009, new bands of road tax for most polluting vehicles. 2p rise in fuel duty delayed until October. Fuel duty to rise by 0.5p per litre in real terms from 2010. Funding set aside to develop the technology for road pricing.
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BECOMING GREENER – the UK has to make significant greener efforts
VEHICLES with excessive CO2 emissions will attract additional tax in a number of ways. Pressure is being applied to supermarkets to control the use of plastic carrier bags, with the threat of future legislation if necessary. There will be new incentives for businesses and households to reduce their overall carbon footprint and support for various energy saving and resource efficiency schemes.
In overall economic terms, the net effect of the various measures produces an increase in revenues for the Exchequer rising steadily over the next three years, raising almost an extra £2 billion by 2010/11, with alcohol duties and vehicle taxes leading the way. Some commentators have already suggested that the overall budget does not quite balance, but, with predicted inflationary pressures, the Exchequer’s income will increase automatically, particularly from VAT and payroll taxes.
Many of the measures that will come into effect this April were announced in the Pre-Budget Statement last year and in earlier Finance Acts. However, the Chancellor did not address some controversial areas that have been subject to previous consultation, particularly income splitting in small family companies and the treatment of controlled foreign companies and foreign dividends; announcements are likely in Budget 2009. It had been predicted that this Budget could not contain a great deal of excitement since economically the Chancellor had little room to manoeuvre.
Politically some other areas may have been deliberately delayed for reintroduction after the next election. Small business owners and others had been strongly represented following the proposed capital gains tax changes announced in the Pre-Budget Statement.
The original proposals have been watered down considerably with the introduction of Entrepreneurs’ Relief. As previously announced, there is a lifetime limit of £1 million, but there are to be transitional provisions to deal with certain circumstances, for example, gains ‘frozen’ before 5 April 2008 will also benefit from Entrepreneurs’ Relief.
This is a welcome clarification. However, some will still miss out, for example certain employee share option holders, who fail to meet the qualifying criteria. Also, where a shareholder exchanges private company shares for publicly-quoted shares they may not secure Entrepreneurs’ Relief when the public company shares are sold. To address this, it will be possible for individuals to claim Entrepreneurs’ Relief at the time they exchange their shares, but they may have to fund their tax liability from the sale proceeds of some of their public company shares.
Businesses will no doubt conclude from the various complex changes to capital allowances that these measures are revenue positive for the Exchequer and not designed to encourage capital investment. The £50,000 investment allowance is of course welcome, but will only really benefit SMEs.
The taxation of individuals is simplified with a reduction in the basic income tax rate from 22% to 20%. However, with the abolition of the 10% tax band, some individuals on lower incomes may suffer disproportionately higher income tax. But, despite the cut in basic rate tax to 20%, charities and community amateur sports clubs making gift aid repayment claims will be entitled to a transitional relief for qualifying donations, made in the tax years 2008/2009 to 2010/2011, at an effective rate of 22%.
RESIDENCE AND DOMICILE – Government backtracks
Remittance basis
It is confirmed that individuals claiming the remittance basis will lose their personal allowance and CGT annual exemption. Those who have been resident for more than 7 out of 9 tax years need to pay a £30,000 annual levy.
Changes now announced include:
- automatic remittance basis for an individual with unremitted income and gains for a year totalling less than £2,000 (originally £1,000);
- children under 18 do not have to pay the £30,000 levy;
- if the £30,000 is paid directly to HMRC from an offshore account it will not be a taxable remittance;
- there is an attempt to re-characterise the levy as tax to assist relief under double tax treaties;
- a non-domiciliary choosing to be taxed on the arising basis from 6 April 2008 will get relief for foreign capital losses. If opting in and out of the remittance basis they will be able to make an irrevocable election to get relief for foreign capital losses when taxed on the arising basis.
Remittances
There has been good news in certain areas:
Chattels: the draft legislation in January imposed a tax charge from 6 April 2008 on chattels purchased with offshore investment income and remitted to the UK. Budget statements clarify that:
- there is no tax charge on such assets in the UK on 6 April 2008, or those owned before Budget Day and subsequently brought to the UK;
- there is an exception for personal effects e.g. clothes, jewellery, assets costing less than £1,000 and art brought into the UK for public display.
Offshore mortgages: payments of interest on existing mortgages secured on UK residential property will not now be treated as remittances from 6 April 2008 (subject to certain conditions);
Alienation: there is a narrowing of the definition of ‘related’ to immediate family (basically spouse/civil partner/cohabitees and their children and grandchildren under 18), but no further details on this provision. On a less positive note, the Budget confirmed that source ceased income will be taxable if remitted after 5 April 2008.
Offshore structures
- UK resident, non-domiciled settlors are back to not being charged automatically in respect of trust gains.
- Capital payments made to beneficiaries (which may include the settlor) will match to trust gains made after 5 April 2008.
- Such capital payments will now only be charged to tax if remitted to the UK.
- Non-UK resident trustees can make an irrevocable election to rebase all trust assets, including those held in underlying companies, at 6 April 2008.
- There is an indication that the requirement for settlors to disclose existing offshore trusts may have been abandoned.
- There are no significant changes from the draft legislation for individual shareholders of offshore companies. In particular they do not seem to get rebasing of assets.
Residence
From 6 April 2008, if an individual is still in the UK at midnight that will be a day of residence. The exemption for transiting through the UK has been widened.
R&D AND VACCINE RESEARCH RELIEF TAX CREDITS
IT was announced in Budget 2007 that the rate of relief would increase. It has been confirmed in Budget 2008 that small and medium companies (SMEs) will see their rate of tax credit increased from 150% to 175%. For large companies there is a 5% increase to 130%. However, relief for SMEs’ R&D claims or the Vaccine Research Relief scheme is now limited to €7.5 million per project. The Government is also introducing legislation to prevent claims by companies which are not going concerns.
INDIVIDUAL LOSS RELIEF RESTRICTION
MEASURES will be introduced from 12 March 2008 to restrict individuals claiming loss relief arising from any trade where they are not actively involved for at least 10 hours per week. The 2007 Finance Act brought in a similar restriction for partnerships. The restricted annual limit is set at £25,000 and is expected to affect a variety of individuals, particularly farming businesses, although there is an exclusion for qualifying film expenditure and losses arising from Lloyd’s underwriting.
THE standard rate of landfill tax will increase from £24 to £32 per tonne from 1 April 2008. And again on 1 April 2009 to £40.
FOLLOWING a consultation exercise, the requirement for insurers established outside the UK to appoint a UK tax representative will be withdrawn. This will take effect from Royal Assent.
VAT registration
From 1 April 2008, the taxable turnover threshold for VAT registration will increase from £64,000 to £67,000, while the deregistration threshold will increase from £62,000 to £65,000.
Correction of VAT errors
From 1 July 2008 the limit for disclosing errors to HMRC on VAT return forms has increased from £2,000 to the greater of either £10,000 or 1% of turnover, with an upper limit of £50,000. Similar increases will apply to other indirect taxes.
Staff hire concession removed
HMRC currently allows a concession whereby, in certain circumstances, employment businesses need only charge VAT on their profit margin. The concession will be withdrawn from 1 April 2009. This will have a significant impact on the way employment businesses account for VAT. (It will also have a knock-on effect for businesses hiring staff such as welfare institutions and charitable organisations, who will incur increased VAT on these services following this charge).
Time limit for VAT claims
Following HMRC’s recent defeat in the cases of Fleming and Conde Nast concerning the ‘3 year cap’, claims for output VAT overpaid before 4 December 1996 and input VAT underclaimed before 1 May 1997 can now be submitted. Claims can be made for VAT periods going back to 1 April 1973. HMRC has announced that all VAT claims for the above periods must be received by 31 March 2009, after which time the entitlement to make a claim will be lost.
Fuel scale charges
From 1 May fuel scale charges for businesses that recover input tax on fuel used for private motoring have been amended to account for changes in fuel prices. For more details click here.
Property: option to tax
A COMPLETE re-write of the option to tax legislation will be introduced from 1 June 2008. A new guidance notice, which will have the force of law, will also be published by HMRC. The new legislation will introduce a number of important changes to the option to tax, including:
- rules concerning the revocation of options;
- options made by VAT groups; and
- a new type of option covering multiple properties.
The changes are intended to simplify the highly complex option to tax rules and to deal with a number of common problem areas. They will be of particular interest to businesses in the property sector, but will potentially have an impact for any business with property interests.
Fund management
Following HMRC’s defeat in the JP Morgan Fleming Claverhouse case last year, the exemption for fund management services is to be extended to include the management of:
- UK listed closed-ended investment entities which invest in securities; and
- non-UK established funds recognised under the Financial Services & Markets Act 2000.
This will extend the exemption to include management of investment trust companies, which was the subject of the JP Morgan case, and venture capital trusts. The new rules will apply to fund management services supplied on or after 1 October 2008.
Managers of these funds should note that, by making exempt supplies, a restriction on the recovery of input VAT will be suffered under the partial exemption rules. Although the changes will be introduced on 1 October 2008, HMRC has previously announced that the exemption for the management of investment trust companies can apply retrospectively. The same is likely to be true for the management of other funds covered by these changes. Managers should therefore consider submitting claims for VAT overpaid on these services.
Similarly, qualifying investment funds should also consider submitting claims to investment managers for overpaid VAT. Any claims should be submitted as soon as possible, due to the three year time limit for claims.
THE period for taking advantage of the transitional serial interest concession for pre-22 March 2006 interest in possession (IIP) trusts announced in Finance Act 2006 (FA 2006) is extended by six months from 5 April 2008 to 5 October 2008. The FA 2006 changed the IHT rules for IIP trusts, bringing their tax treatment into line with discretionary trusts under the relevant property regime with its ten yearly and exit charges. A transitional period allowed existing IIP trusts to substitute a transitional serial interest. The relevant date for taking action on Accumulation and Maintenance Trusts remains 5 April 2008.
ENTERPRISE management incentives: For EMI options granted after 5 April 2008, the employer company must have fewer than 250 employees, prorated for part-time employees on a just and reasonable basis, and the individual limit on grants of qualifying options will be increased to £120,000 from £100,000.
Venture capital schemes: For shares issued or money raised after 5 April 2008, shipbuilding and coal and steel production is excluded from the Enterprise Investment Scheme (EIS), the Corporate Venturing Scheme (CVS) and the Venture Capital Trust Scheme (VCT).
Subject to approval of this change by the European Commission, the maximum EIS investment qualifying for income tax relief is increased to £500,000 for 2008/2009 from £400,000.
THE main rate of writing down allowances is to go down from 25% to 20% per annum. First year allowances, currently available to small enterprises at the rate of 50% and medium sized enterprises at 40%, are to be replaced. All businesses will be able to claim a new annual investment allowance of 100% on the first £50,000 of expenditure.
There is a phased withdrawal of industrial and agricultural buildings allowances (formerly 4% per annum) although there will be no balancing adjustments on a sale of the asset.
There is an increase in the allowances available on long life assets from 6% to 10%. At the same time, there is a separate classification of fixtures integral to a building which will qualify for the 10% allowance. Some of these costs would have previously attracted plant and machinery allowances at 50%, 40% or 25%, but others would have been part of the building, only eligible for either no allowances or 4% industrial buildings allowance.
There will also be a new list of energy efficient and water saving expenditure which will qualify for 100% allowances, whereas capital allowances for fire safety alterations to buildings has been withdrawn.
100% allowances on very low emission new cars have been extended from 2008 to 2013, although emission levels have been tightened.
There is a special new proposal for companies with 100% allowances available on energy saving or environmentally friendly plant to surrender these for payment as a tax credit when they cannot immediately make use of them because they are making losses and not paying tax.
Taxpayers with small balances on their capital allowance pools of no more than £1,000 will be permitted to write these balances off in one year. New measures will be introduced to prevent certain companies who sell trades from claiming large balancing allowances when the market value of plant and machinery is less than the tax written down value.
Investment funds
Offshore investment funds which annually claim ‘distributor status’ with HMRC are required to distribute at least 85% of their income each year if they want to retain the favourable CGT status for unit holders. New rules will relax this requirement. Instead of distributing 85% of their income they can instead report the distributable income to unit holders, who will then be required to include it on their UK tax returns. The distribution test is also relaxed. This will leave additional funds in the offshore fund for reinvestment.
Investment manager exemption
Investment managers and non-residents trading in the UK through such managers benefit from exemption from UK tax on the profits of the underlying transaction in certain circumstances. The rules are to be simplified to add certainty to the investment managers’ tax status; it will be easier to identify the appropriate transactions and to remove and simplify some of the definitions associated with this legislation.
Associated companies
From Royal Assent, the rules for deciding how many associated companies you have for thepurposes of the small company corporation tax rate band limits are relaxed. If you are a company shareholder and also a member of a business partnership you will not be associated with any companies owned by your fellow business partners.
Trading stock
It has long been accepted practice that goods taken from trading stock by owners should be taken at market value for tax computation purposes. This is now confirmed in statute and also covers other similar circumstances.
OTHER BUSINESS NEWS:
Employers who have completed their last payroll run of the year can now file their year end return as soon as it is ready. In earlier years, employers have not been able to file year end returns until after the end of the tax year, although last year the system allowed employers to file in the last week of March. This year, the system went live on Friday 7 March, to allow those employers who are ready to file early. The PAYE online system has frequently come under severe capacity pressure near to the filing deadline of 19 May, so any employers who can file early will benefit from this early availability. The system is expected to be unavailable for around 8 hours on 5 April for HMRC’s year end process to be run.
REMINDER – PAYMENTS DUE FOR MARCH 2008
Normally, payments of PAYE and NIC and subcontractor tax which are made electronically are due on 22 of each month, giving employers a slightly longer period to pay in recognition of their effort to pay by electronic means. Some employers are required to pay electronically – those with 250 or more employees. The funds must, however be cleared by the due date, and if this falls on the weekend, funds must be cleared by the Friday evening before. This year, 22 March falls on Easter Saturday, so employers and contractors will need to ensure that their payment is initiated sufficiently early to allow the payment to clear before the Easter break. Employers paying by cheque just need to ensure that the cheque reaches the Accounts Office by 19th of March.
HMRC has published a helpful list of standard allowance payments for accommodation and subsistence which employers can use to reimburse employees who are travelling abroad. The list consists of standard rates for accommodation and meals separately so that employers can choose how they wish to reimburse their staff. Employers may instead choose to reimburse the actual expenses incurred, and in some cases there are no standard rates available, so actual amounts will have to be used. Employees who stay in the homes of local staff or colleagues are subject to amended rules, and full instructions on the use of the standard reimbursements rates are in the Employment Income Manual.
The rate applying to beneficial loans for the current tax year is 6.25%. HMRC has announced that it is likely that this rate will also apply for 2008-09.
