Budget 2010
Lower public sector borrowing, doubling of stamp duty land tax threshold for first time buyers and new anti-avoidance measures included in the Finance Bill 2010. New tax rates 2010-11
25.03.2010
Lower public sector borrowing, doubling of stamp duty land tax threshold for first time buyers and new anti-avoidance measures included in the Finance Bill 2010. New tax rates 2010-11
Budget at a glance. Click on the headlines to read more.
Budget 2010 opinion Updated UK Tax Rates 2010-11
Changes to personal tax and allowances
- Personal and age-related allowances as well as the basic rate tax band for 2010/11 will remain unchanged from 2009/10 >more
- Foreign income and gains of a UK resident but non-UK domiciled individual which are remitted to the UK by way of a “relevant person” may be taxable >more
- Measures will be introduced in the Finance Bill 2010 to relax conditions of the employer supported childcare scheme >more
- First time buyers with a date of completion between 25 March 2010 and 25 March 2012 will benefit from relief from stamp duty land tax >more
- Offshore tax evasion -Under current rules, tax-geared penalties can apply to the under declaration of income and capital gains tax >more
- Trusts - Asbestos victims’ compensation trusts and income tax adjustments between settlors and trustees >more
- The Chancellor confirmed the restriction on higher rate tax relief on pension contributions for individuals with an annual taxable income of £150,000 or more from 6 April 2011 >more
- ISAs - from April 2011, the £10,200 ISA limit will be increased annually in line with inflation.
- Venture capital schemes
- VCTs
- EISs & VCTs
- Corporation tax rates for 2010/11 are unchanged from 2009/10 >more
- Currently entrepreneurs’ relief applies to reduce the effective CGT rate from the standard rate of 18% to 10% on the first £1,000,000 of lifetime gains on the disposal of certain qualifying business assets by individuals or trustees. From 6 April 2010, the lifetime relief limit will be raised to £2,000,000, potentially saving a further £80,000 on the disposal of qualifying assets >more
- Under current legislation, a company must operate wholly or mainly in the UK to be able to grant qualifying EMI options >more
- The annual investment allowance (AIA) is to be doubled from £50,000 to £100,000 on qualifying expenditure on plant and machinery incurred on or after 1 April 2010>more
- As previously announced, for a five year period from 6 April 2010 company cars which have CO2 emissions of 75g per kilometre or less will be subject to a reduced benefit in kind charge based on 5% of the list price >more
- The Chancellor announced that the bank payroll tax is expected to raise £2 billion (double the original estimate) >more
- Draft legislation was published at the time of the 2009 Pre-Budget Report aimed at preventing a loss of tax when a lessor company is sold and giving companies the option to elect for an alternative treatment where future profits are ring-fenced >more
- With the recession having a serious effect on employers’ ability to settle their regular PAYE liabilities with HMRC, the Chancellor announced new legislation to address this risk to the Treasury >more
- Disclosure of tax avoidance schemes, risk transfer schemes and double tax relief avoidance >more
- Under the company share option plan (CSOP) rules, an individual may be awarded options over shares with a market value of up to £30,000 at the time of grant without crystallising a charge to income tax or national insurance contributions when the option is exercised >more
- HMRC will be able to withdraw approval of a share incentive plan (“SIP”) where they are being used for tax avoidance purposes >more
- The Chancellor confirmed that the Finance Bill 2010 will include legislation to amend and simplify the anti-avoidance rules for transactions in securities >more
- The Budget introduced a package of measures affecting charities, Community Amateur Sports Clubs (CASCs) and donors making charitable gifts >more
- The turnover threshold for compulsory VAT registration will rise from £68,000 to £70,000 on 1 April 2010 >more
- Following a legal challenge on the scope of the UK exemption in the case of TNT Post UK Ltd, the European Court of Justice has confirmed that Royal Mail is the only postal body in the UK eligible to exempt postal services from VAT >more
- UK customers who are registered for VAT are required to account for VAT on the supplies of natural gas they receive from suppliers established outside the UK as a reverse charge >more
- Change to zero-rating for qualifying aircraft >more
- Lennartz accounting - what is covered? >more
- A number of measures will be included in a Finance Bill to be introduced in the next Parliament to complete reforms started in the Finance Act 2009 >more
Alastair Darling’s last Budget before the impending General Election lasted an hour, a surprisingly long time given how little of substance there was to his speech.
As expected, there was good news on public sector borrowing which is expected to come in at £167 billion (£11 billion less than forecast at the time of the Pre-Budget report on 9 December 2009). Disappointingly, there were very few further details on the cuts in public expenditure which are essential to achieving the four-year Deficit Reduction Programme.
The measure which will be most widely welcomed is the doubling of the stamp duty land tax threshold for the purchase of residential property by first time buyers from £125,000 to £250,000. This increase will apply for the two years to 25 March 2012 and had been widely trailed in the press.
Increases in the rates of both VAT and capital gains tax were also the subject of pre-Budget speculation but this time did not materialise.
Anti-avoidance and the policy of preserving fairness in the tax system were at the core of the Chancellor’s speech with a raft of new measures to be included in the Finance Bill 2010. Indeed, the most amusing part of the Chancellor’s speech, at the expense of Lord Ashcroft (the deputy chairman of the Conservative Party), was the announcement that a Tax Information Exchange Agreement is to be entered into with Belize. A similar agreement with Liechtenstein concluded in August 2009 is expected to yield additional tax revenues of approximately £1 billion.
The Budget which is likely to take place after the General Election will probably be of much greater significance.
Changes to personal tax and allowances
Income tax rates and allowances
As previously announced, personal and age-related allowances as well as the basic rate tax band for 2010/11 will remain unchanged from 2009/10, with the implication that more taxpayers may find themselves dragged into the higher rate tax bands.
The well publicised 50% tax rate on taxable income over £150,000 (42.5% on dividend income) will be introduced from 6 April 2010. In addition, the personal allowance will be gradually withdrawn for those with taxable income in excess of £100,000, with the rate of reduction being £1 of allowance for every £2 of income. Therefore, for 2010/11, the personal allowance is lost in full for those with taxable income in excess of £112,950.
Remittance basis: Relevant persons
Foreign income and gains of a UK resident but non-UK domiciled individual which are remitted to the UK by way of a “relevant person” may be taxable in the UK. A relevant person includes the individual, their spouse or civil partner, minor children and grandchildren, as well as “close” companies and their subsidiaries in which such persons are participants.
There was some doubt whether a subsidiary of a non-resident close company would be a relevant person. From 6 April 2010 the rules will be amended to ensure this is the case.
Life insurance policies
Following the introduction of a top rate of income tax of 50%, changes are to be made to the taxation of gains realised by individuals on life insurance policies. In particular, provision will be made for relief to be given (where appropriate) at the new top rate of income tax of 50% (42.5% in the case of dividends) where a deficit arises on the maturity of a policy and taxable gains have arisen earlier in the life of the same policy. The relevant legislation will be included in a Finance Bill to be introduced in the next Parliament and will take effect from 6 April 2010.
Measures will be introduced in the Finance Bill 2010 to relax the conditions of the employer supported childcare scheme where salary sacrifice arrangements would otherwise reduce an employee’s earnings below the national minimum wage and prevent that individual participating in the childcare scheme. These measures will have retrospective effect for 2005/06 and subsequent tax years.
Special guardianship and residence orders
From 6 April 2010, certain payments to special guardians, and to carers looking after children under a residence order, will be exempt from income tax in a similar way to payments to adopters.
Inheritance tax
The inheritance tax nil rate band will remain at £325,000 for the tax years 2010/11 to 2014/15.
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Asbestos victims’ compensation trusts
The trustees of trusts set up before 23 March 2010 as part of an arrangement made by a company with its creditors to pay compensation to asbestos victims will be exempt from capital gains tax, income tax and inheritance tax from 6 April 2010.
Income tax adjustments between settlors and trustees
Settlors who retain an interest in a trust they set up are taxed on the income of the trust. An individual is treated as retaining an interest in a settlement if he or his spouse or civil partner is able to benefit from the trust. Form 6 April 2010, where the settlor is subject to income tax at a lower rate than the trustees would face, i.e. below 50% he will be required to pay any repayments of tax to the trustees. These repayments will be disregarded for inheritance tax purposes.
First time buyers of residential property with a date of completion between 25 March 2010 and 25 March 2012 will benefit from relief from stamp duty land tax on house purchases up to £250,000. The Finance Bill 2010 will introduce an SDLT rate of 5% on residential property with a sale value in excess of £1 million, when the date of completion is after 5 April 2011.
Arrangements seeking to exploit the special SDLT rules relating to partnerships will be subject to anti-avoidance provisions for transactions on or after 24 March 2010. Exploitation of existing rules allows vendors and purchasers to contrive a partnership relationship thus reducing the ‘chargeable consideration’ and hence the SDLT payable. The Finance Bill 2010 will include provisions to counter the intended avoidance.
Stamp duty and stamp duty reserve tax relief BN23
The Finance Bill 2010 will make it explicit that members of clearing houses and their nominees will be covered by regulations giving them relief from multiple charges to stamp duty or stamp duty reserve tax.
Under current rules, tax-geared penalties can apply to the under declaration of income and capital gains tax and can be levied at a rate of up to 100% of the undeclared tax. These penalties can be mitigated by the behaviour of the taxpayer and the quality of the disclosure made to HMRC.
The Budget included measures to increase these penalties where offshore tax evasion is involved as follows:
- 150% where the penalty for non-compliance arises in a jurisdiction which has agreed to exchange information with the UK but does not automatically do so;
- 200% where the jurisdiction involved has not agreed to exchange information with the UK.
It is expected that these increased penalty provisions will apply to tax periods beginning on or after 1 April 2011.
The Chancellor confirmed the restriction on higher rate tax relief on pension contributions for individuals with an annual taxable income of £150,000 or more from 6 April 2011. Relief will be tapered away from those with taxable income above £150,000 and for those with income over £180,000. Tax relief for pension contributions will be limited to 20%.
In December 2009, the Government announced anti-forestalling legislation to immediately restrict higher rate tax relief through a special annual allowance tax charge (currently 20%) payable on excess contributions made by individuals with income of £130,000 or more who changed their normal ongoing regular pension savings, and whose total pension contributions exceeded a special annual allowance of £20,000 per annum (or £30,000 in certain circumstances).
The Government confirmed the following additional changes originally announced in the 2009 Pre-Budget Report:
- from April 2011, employer contributions will be included when calculating whether an individual has total taxable income of £150,000 or more;
- from 9 December 2009, the special annual allowance will apply to individuals with total income of £130,000 or more during the current tax year or in either of the two preceding tax years; and
- individuals with total incomes below £130,000, including an individual’s own pension contributions and charitable donations, but before the inclusion of employer pension contributions, will not be subject to the restrictions.
Nevertheless, it is still possible to invest up to 100% of earnings into a pension subject to the annual allowance, and to benefit from basic rate tax relief on any amounts above the special annual allowance.
The pension lifetime allowance of £1.8 million and the annual allowance of £255,000 (for the tax year 2010/11) will be frozen at current levels until 2015/16. The limit for the commutation of small pension funds will similarly be held at its current level for five years.
For employers, the proposal for automatic enrolment of employees into a qualifying pension scheme is still planned for 2012. However no further details have been provided.
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From April 2011, the £10,200 ISA limit will be increased annually in line with inflation.
Currently, the enterprise investment scheme and venture capital trusts reliefs are restricted to UK investments in order to gain approval from the European Commission for State Aid. These restrictions will be broadened to apply to European Economic Area companies within the EU.
Under current rules, a VCT’s ordinary shares are required to be listed in the UK. Under the new rules, it will be sufficient if the shares are admitted for trading on any EU regulated market.
VCTs have also previously been required to hold 30% of their qualifying holdings as eligible shares. The new rules will require 70% of qualifying holdings to be eligible shares but will alter the definition of eligible shares to include some shares with preferential rights.
EIS and VCT reliefs will be denied where it is reasonable to assume the company would be an “enterprise in difficulty” under EC rules.
An EIS company will no longer be required to carry on a qualifying trade wholly or mainly in the UK. For shares issued after the legislation comes into force, the company will simply be required to have a permanent establishment in the UK.
These changes will apply from the date of Royal Assent to the Finance Act 2010.
Corporation tax rates
Corporation tax rates for 2010/11 are unchanged from 2009/10. The Finance Bill 2010 will also keep the main rate of corporation tax at 28% and the main rate on ring fence profits at 30% for the financial year commencing on 1 April 2011.
Currently entrepreneurs’ relief applies to reduce the effective CGT rate from the standard rate of 18% to 10% on the first £1,000,000 of lifetime gains on the disposal of certain qualifying business assets by individuals or trustees.
From 6 April 2010, the lifetime relief limit will be raised to £2,000,000, potentially saving a further £80,000 on the disposal of qualifying assets.
Transactions currently in progress should therefore be reviewed to see whether it would be more tax efficient to defer the disposal until after 5 April 2010.
Enterprise management incentives
Under current legislation, a company must operate wholly or mainly in the UK to be able to grant qualifying EMI options. Under new rules to be contained in the Finance Bill 2010 and to have effect from Royal Assent, a company will simply be required to have a permanent establishment in the UK.
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The annual investment allowance (AIA) is to be doubled from £50,000 to £100,000 on qualifying expenditure on plant and machinery incurred on or after 1 April 2010 (6 April 2010 for unincorporated businesses). The AIA is available to those carrying on a qualifying business through a company, as a sole trader or through a partnership where all the partners are individuals. Qualifying expenditure includes expenditure on general plant and machinery, including expenditure on integral features. There are exclusions for certain types of expenditure, such as cars.
Anti-avoidance legislation will be introduced to restrict property business losses arising as a result of the AIA being set against general income. This anti-avoidance measure applies to losses arising as a result of tax avoidance arrangements entered into on or after 24 March 2010.
Other changes to capital allowances include amendments to the list of energy efficient technologies qualifying for enhanced capital allowances at 100%, and the introduction of a five year temporary 100% first year allowance on business expenditure on unused zero-emission goods vehicles from 1 April 2010 (6 April 2010 for unincorporated businesses).
For those engaged in the oil and gas industries, from 1 April 2010 expenditure on cushion gas will qualify for a 10% per annum writing down allowance. Leases of cushion gas over five years will, from 1 April 2010, be treated as long funding leases for tax purposes, which means that the lessee will have the option of claiming capital allowances on the expenditure rather than the lessor.
Zero and low emission vehicles
As previously announced, for a five year period from 6 April 2010 company cars which have CO2 emissions of 75g per kilometre or less will be subject to a reduced benefit in kind charge based on 5% of the list price.
In addition, cars and vans which cannot produce CO2 emissions under any circumstances will be exempt from an employee benefit in kind charge.
The Chancellor announced that the bank payroll tax is expected to raise £2 billion (double the original estimate). The Budget confirmed announcements made previously on the draft legislation published on 9 December 2009. In particular, the provisions to be included in the Finance Bill 2010 will be much more focused so that an FSA regulated business which does not take deposits will be excluded unless it:
- is a BIPRU730k firm and a BIPRU full scope investment firm, and
- has a capital resources requirement of at least £100 million.
The list of excluded companies is also to be expanded.
The Chancellor also stated that he would like to introduce a systemic risk tax on banks provided that this can be done on an international basis. The Conservative Party is in favour of the proposal and the German Government announced that it will introduce legislation, but the US is known to be against the idea.
Consortium relief
Following a recent case before the First Tier Tribunal, the consortium relief rules are to be relaxed so that EU and EEA resident companies in a UK consortium can pass on losses to their UK resident subsidiaries. Under previous rules, consortia could only obtain relief if they could demonstrate a link in the UK between the loss-making party and the claimant company.
Close companies
Close companies will be denied tax relief where a loan to a participator (generally meaning a shareholder and certain loan creditors) is released or written off with effect from 24 March 2010. A company is close if, broadly, it is controlled by five or fewer participators. The legislation already provides that the participator is effectively taxed as though they had received a dividend on such a release.
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Worldwide debt cap
Technical changes will be made to the worldwide debt cap legislation. This applies to “large” groups for accounting periods beginning after 31 December 2009 and its purpose is to deny UK companies relief for interest where they bear a disproportionate part of the group’s worldwide interest expense. The changes will be included in a Finance Bill to be introduced in the next Parliament and will generally apply from 1 January 2010.
Dividend exemption regime
Changes are also to be made to the dividend exemption regime which came into effect on 1 July 2009. The legislation, which does not apply to dividends “of a capital nature”, is to be simplified so that only dividends specifically excluded from income treatment will be regarded as capital. The changes will be included in a Finance Bill to be introduced in the next Parliament and will have retrospective effect, unless the recipient of the dividend elects otherwise.
Loan relationships and derivative contracts
Legislation will be introduced in the Finance Bill 2010 to allow regulations to be made amending the corporation tax rules on loan relationships and derivative contracts, where it is necessary to change tax rules as a consequence of a change in accounting standards.
Real estate investment trusts and stock dividends
UK REITs are to be allowed to issue stock dividends in lieu of cash dividends in meeting the requirement to distribute 90% of the profits from the REIT’s property rental business. The change will be included in a Finance Bill to be introduced in the next Parliament and will apply to distributions made on or after the date it receives Royal Assent.
Sale of lessor companies: option to elect
Draft legislation was published at the time of the 2009 Pre-Budget Report aimed at preventing a loss of tax when a lessor company is sold and giving companies the option to elect for an alternative treatment where future profits are ring-fenced. Amendments are to be introduced where the lessor company is: a controlled foreign company; is owned by a consortium or when ships are leased into tonnage tax. Changes that benefit the taxpayer have effect from 9 December 2009 and other changes from 24 March 2010.
Furnished holiday lettings – abolition
The Chancellor announced in the 2009 Budget that the special rules relating to furnished holiday lettings would be repealed from 6 April 2010 (or 1 April 2010 for companies). After this date, the profits and losses of a furnished holiday lettings business will be treated for tax purposes in the same way as any other property rental business, unless the proprietor can demonstrate that the business should be regarded as a trade under general principles. In many cases, this will be difficult to establish unless the services provided as part of the holiday letting business go beyond the provision of accommodation and include a large element of other services, such as the provision of meals.
For 2009/10 and earlier years, furnished holiday lettings benefited from a range of tax advantages, such as the ability to offset current year losses against other income.
Transitional provisions will allow continuing businesses to claim capital allowances on expenditure incurred before 6 April 2010 (or 1 April 2010 for companies).
Unrelieved losses from a furnished holiday letting business at 6 April 2010 (1 April 2010) are treated as property business losses and can only be relieved against future profits of the property business.
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Time to pay
The Time to Pay provisions, under which taxpayers can agree with HMRC to spread their tax payments over a longer period without incurring penalties, are to be extended to the end of the next Parliament. Since its introduction in November 2008, more than 200,000 businesses have been given more time to pay over £5.2 billion of tax.
With the recession having a serious effect on employers’ ability to settle their regular PAYE liabilities with HMRC, the Chancellor announced new legislation to address this risk to the Treasury.
The provisions, which are aimed at those employers who are consistently late in paying their PAYE liabilities, will be the subject of a consultation period once draft regulations are published. It is proposed that the amount and type of security that an employer will be required to provide will be set by HMRC serving a security notice on an employer. Failure to comply with the notice will be considered a criminal offence, attracting a fine of up to £5,000. Although this legislation will not become law until April 2011, it could have a significant impact on an employer’s financial status in the event that a security notice is served. HMRC has indicated that these proposed powers will not be used against employers who have reached agreement on the payment of PAYE arrears with HMRC under the Time to Pay provisions.
Other changes
Changes are to be made to:
- reinvestment relief within the North Sea fiscal regime, and
- the apportionment of income and gains accruing to life assurance companies.
Disclosure of tax avoidance schemes
Promoters of certain tax avoidance schemes are required to disclose details of certain avoidance arrangements to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. Scheme users are also required to notify the use of the scheme to HMRC on their Tax Returns.
Proposals to be included in the Finance Bill 2010 extend the scope of the DOTAS regulations to introducers of clients to tax avoidance schemes, in addition to increasing the penalties for failing to disclose a notifiable scheme.
There will also be a new requirement for scheme promoters to provide additional periodic information about clients who enter into a scheme. Notifiable arrangements are identified through a series of “hallmarks”, and these will be extended in the Finance Bill 2010.
Risk transfer schemes
As announced in the Pre-Budget Report on 9 December 2009, anti-avoidance provisions are to be introduced to counter the use of “risk transfer schemes” by large multinational groups in the financial sector. The Finance Bill 2010 will include a regulation-making power in connection with the legislation, which will generally apply from 1 April 2010.
Double tax relief avoidance
In an anti-avoidance measure aimed at banks and financial institutions, the Finance Bill 2010 will introduce legislation confirming that a person may only claim relief for foreign tax if the foreign tax is included in his taxable income. The manufactured overseas dividend regulations will also be amended to stop financial traders obtaining relief twice. The scope of the targeted double tax relief anti-avoidance rule is to be amended.
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Under the company share option plan (CSOP) rules, an individual may be awarded options over shares with a market value of up to £30,000 at the time of grant without crystallising a charge to income tax or national insurance contributions when the option is exercised.
Measures will be introduced from 24 March 2010 to counter arrangements designed to fall below this limit on grant but deliver artificially enhanced growth through the use of shares in companies which are under the control of a listed company.
There is a transitional period of six months to allow companies to amend their scheme rules to comply with the new regime.
HMRC will be able to withdraw approval of a share incentive plan (“SIP”) where they are being used for tax avoidance purposes.
They will also block a company’s claims for a corporation tax deduction on payments to SIP trustees who then use these funds to purchase shares from existing shareholders, and the shares are then devalued before being awarded to employees by altering the company’s share capital.
Following the issue of a consultation document “Simplifying transactions in securities legislation” in July 2009, the Chancellor confirmed that the Finance Bill 2010 will include legislation to amend and simplify the anti-avoidance rules for transactions in securities.
Broadly, the existing legislation seeks to counter arrangements involving shares or securities where steps are taken to obtain a tax advantage in certain defined circumstances. There is an exception from the rules where the transaction is carried out for commercial reasons and not for the avoidance of tax.
The revised legislation will target only close companies (meaning those controlled by five or fewer participators, or any number of participators who are also directors), including overseas companies which would be close if they were UK resident. The legislation also seeks to define more clearly what is meant by “tax advantage” which has frequently been a matter of dispute over the years.
The new rules will exclude “fundamental changes” in the ownership of close companies from the scope of the legislation. The consultation document indicates that a fundamental change will be treated as taking place if, following the transaction, 75% or more of the ordinary share capital is held by one or more persons unconnected with the transferor. This condition must continue to be met for a period of two years following the transaction.
Insurance and annuity contracts
There can be unintended tax consequences where the Financial Services Compensation Scheme intervenes to protect policyholders. Legislation will be introduced in the Finance Bill 2010 to provide regulation-making powers to ensure that if the FSCS takes action to protect policyholders, there will be broadly the same tax treatment as if the FICS had not intervened. The measure will have effect from the date of Royal Assent.
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Extending UK charity tax reliefs to certain organisations in Europe
The Budget introduced a package of measures affecting charities, Community Amateur Sports Clubs (CASCs) and donors making charitable gifts. The changes include the following:
- Currently only UK registered charities and CASCs qualify for the various charity reliefs and exemptions (including gift aid relief). However, following a European Court of Justice decision in January 2009, the definition of an organisation eligible for UK charitable tax reliefs and exemptions will be extended to bodies located in a Member State of the EU as well as Iceland and Norway. To qualify for charity reliefs, the body must be established for charitable purposes only, be regulated in their home country by a body equivalent to the UK’s Charity Commission and supervised by “managers” who are “fit and proper”. CASCs must meet the “fit and proper” test. This measure will apply from a date to be announced;
- Codifying the definition of “charity” which until now has largely been determined by case law. The new definition is effective from 6 April 2010;
- Tightening the rules which require donations under payroll giving and payments by UK charities to bodies outside the UK to be applied for genuine charitable purposes. This change is effective from 24 March 2010;
- Aligning the treatment of UK residents and non-residents where an individual has not paid sufficient tax to cover a donation under gift aid. This measure takes effect from 6 April 2010;
- Codifying the concessionary practice of HMRC of making in-year gift aid repayments to charities;
- Restricting the number of in-year gift aid repayment claims that can be made by a charity. New forms will be available for making claims.
Other than the specific dates mentioned above, the changes will be introduced later in 2010/11. Specific claims to tax relief for donations to CASCs or charitable bodies in the EU, Norway or Iceland between 27 January 2009 and 1 April 2010 will be considered by HMRC on a case by case basis.
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VAT registration and deregistration limits
The turnover threshold for compulsory VAT registration will rise from £68,000 to £70,000 on 1 April 2010. The taxable turnover limit, which determines whether a person may apply for deregistration from VAT, will rise from the current limit of £66,000 to £68,000 from the same date.
There are no changes to the conditions for determining entitlement or liability to register or to deregister from VAT.
EU law provides a mandatory exemption from VAT for supplies of postal services made “by the public postal services”.
Since VAT was first introduced in the UK on 1 April 1973, the application of this exemption in UK law has been limited to supplies made by Royal Mail Holdings plc, formerly the Post Office Company. All other postal operators in the UK have been required to charge VAT at the standard rate on their services.
Following a legal challenge on the scope of the UK exemption in the case of TNT Post UK Ltd, the European Court of Justice has confirmed that Royal Mail, as the operator providing the public postal service, is the only postal body in the UK eligible to exempt postal services from VAT. However, the ECJ also ruled that that the exemption only applies to the public postal services (i.e. Royal Mail) acting as such. The exemption dos not apply to supplies made by Royal Mail where the terms have been individually negotiated, or which are not subject to any regulatory or price control.
In practice this will mean, for example, that stamped and metered mail and standard parcel delivery will remain exempt, but services such as business collection, special delivery and Parcelforce services will become standard rated. These changes will come into effect on 31 January 2011.
VAT fuel scale charges
The VAT fuel scale charge affects all VAT registered businesses that recover input tax on fuel used for private motoring. Changes will be made to the scale charge to reflect the changes in fuel prices. There will also be amendments to the table of CO2 bands to maintain alignment with those used for direct tax purposes. Businesses must use the new scale charges from the start of their next VAT accounting period starting on or after 1 May 2010.
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VAT: Place of supply of gas, heat and cooling
Under existing arrangements, gas supplied via the natural gas distribution system is treated as supplied where either a wholesale customer is established or the natural gas is consumed. UK customers who are registered for VAT are required to account for VAT on the supplies of natural gas they receive from suppliers established outside the UK as a reverse charge. There are currently no rules which specifically govern the application of VAT to supplies of heat and cooling.
The existing rules, which also include electricity, are to be amended so as to:
- extend their scope to cover supplies in all categories of natural gas pipelines;
- limit their scope to supplies involving natural gas pipelines located in the EU or linked to such pipelines; and
- extend the relief from VAT at importation to all natural gas imported via a network (including liquefied natural gas by tanker).
These amended rules will also be extended to heat and cooling supplied through networks.
Amendments will be made to the definition of “relevant goods” for the purposes of applying the reverse charge mechanism. The measure will affect supplies made on and after 1 January 2011.
VAT: Change to zero-rating of qualifying aircraft
The UK VAT legislation currently provides a VAT zero-rate for supplies of certain aircraft and to parts and certain services for them where the aircraft is of a weight of not less than 8,000kg and is not designed or adapted for recreation or pleasure. This definition is out of line with Article 148 of the Principal VAT Directive.
The proposed legislation will change the definition for zero-rating of aircraft from one based on weight, to one based on the status of the customer. Supplies of aircraft will only be zero-rated where used by airlines operating for reward chiefly on international routes.
The Government intends to legislate this measure in a Finance Bill to be introduced as soon as possible in the next Parliament. The change will have effect for all supplies made on or after 1 September 2010.
Under the Lennartz accounting mechanism, VAT incurred on the purchase of assets such as immovable property, boats and aircraft which are used for both business and private purposes can be recovered in full, but output tax must be accounted for on the private use of the asset, over the life of the asset. For immovable property, this period is 10 years; for other assets the limit is 5 years.
Until a recent change in HMRC policy arising from an ECJ decision, many taxpayers were incorrectly permitted to use Lennartz accounting for “non- business”, as opposed to private use of the asset.
HMRC intend to introduce legislation in a Finance Bill as soon in the next Parliament to ensure that taxpayers who chose not to unravel these arrangements continue to account for output tax.
Measures to be introduced with effect from 1 January 2011 will, among other things, ensure that in future, VAT recovery will be restricted to the business use of the asset, and will exclude any private use by the taxpayer or his staff.
As this is a complex subject and details published in the Budget are very sparse, we recommend that anyone who might be affected by these measures seeks detailed guidance on their specific circumstances.
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A number of measures will be included in a Finance Bill to be introduced in the next Parliament to complete reforms started in the Finance Act 2009. In particular:
- the stamp duty land tax and petroleum revenue tax rules relating to ‘error or mistake’ relief are to be aligned with those for income tax, capital gains tax and corporation tax;
- interest rates for late paid, and repayments of, corporation tax and petroleum revenue tax are to be aligned with other taxes; and
- penalties for the late filing of returns and the payment of tax in respect of indirect taxes are to be reformed.
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We believe the information in this commentary on Budget 2010 to be correct at the time of publication, but cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein. The provisions announced in the Budget may be subject to amendment during the passage of the Finance Bill 2010 through Parliament. This commentary on Budget 2010 is provided for information purposes only and does not constitute any form of financial or investment advice. Past performance is no guarantee of future investment returns and you should be aware that the value of your investments can go down as well as up.
© Scott-Moncrieff 25 March 2010.
