Emergency Budget Alert 2010
'Tough but fair' from the Chancellor. Analysis and commentary on what it means for you
23.06.2010
'Tough but fair' from the Chancellor. Analysis and commentary on what it means for you
Chancellor George Osborne delivered what he described as a "tough but fair" Budget on 22 June, announcing increases in both VAT and capital gains tax, a freeze on public sector pay for most workers and a major reform of welfare benefits as he seeks to raise an additional £40bn to help plug the country's eye-watering deficit by 2015/16. The Chancellor laid the blame for the tough measures firmly at the door of the previous Labour government, repeatedly referring to the changes as "unavoidable" in order to create "a new balanced economy". Spending cuts rather than tax rises are the government's favoured means of addressing the deficit, with around 77% of the deficit reduction anticipated to come from cuts in spending >more
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Full emergency Budget breakdown >more
Individuals - Personal allowance, basic rate limit and national insurance thresholds
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New penalty charges for late monthly and quarterly PAYE payments
Redundancy payments - issues to consider
There was some good news mixed in with the doom and gloom, notably the re-linking of pensions to earnings and the surprise increase in capital gains tax entrepreneurs' relief threshold from £2 million to £5 million. The Chancellor also announced plans to reform the corporation tax system with lower rates, simpler rules and greater certainty to enable companies to invest, attract foreign investment and boost growth. In the meantime, the standard rate of corporation tax will be reduced progressively over the next five years to 24% by 2014. For smaller business, there will be a reduction to 20% from April 2011.
The Chancellor stated that "the failures of the banks imposed a huge cost on society", adding that banks should make a more appropriate contribution reflecting the many risks they take and announcing the introduction of a bank levy from January 2011.
Individuals - Personal allowance, basic rate limit and national insurance thresholds
The Chancellor announced a £1,000 increase in the personal allowance for individuals aged under 65. From 2011, the allowance will rise from £6,475 to £7,475. There were no announcements on age-related personal allowances or other reliefs, such as the blind person's allowance.
Higher rate taxpayers will not benefit from the increase in the personal allowance and the threshold at which individuals start to pay the 40% rate will be reduced by £2,500 for 2011/12. The alignment of national insurance and income tax thresholds will be maintained by reducing the upper earnings/profits limit.
The Chancellor also announced a package of measures designed to assist employers. The secondary threshold, above which employer's NIC is payable, will be increased by £21 per week above indexation for 2011/12. However, the planned 1% increase in employers' NIC from April 2011 remains in place.
In addition, a regional employer's NIC holiday for new businesses is to be introduced for all new businesses set up from 22 June 2010. The scheme, which will apply for three years, is expected to start in September 2010. It will benefit new businesses outside London and the South East.
New businesses qualifying for the relief will not have to pay the first £5,000 of class 1 employer's NIC due in the first 12 months of employment. This exemption will apply to the first 10 employees hired in the first year of business.
These measures will benefit new companies, partnerships, LLPs and sole traders and will extend to investment and property businesses. To prevent business entering into artificial arrangements to access the NIC holiday, there will be restrictions where there is an insufficient degree of new economic activity in the new business. Restrictions will also apply to the coal, agriculture and fisheries sectors, and there will be other targeted exclusions, such as individuals caught by the IR35 rules and employees engaged through managed service companies.
Capital gains tax
A rise in the capital gains tax rate had been widely forecast with predictions that the rate would be increased close to income tax levels of 40% or even 50%. The rate increase announced by the Chancellor was not as severe as had been feared and there was an unexpectedly generous increase in the entrepreneurs' relief threshold.
The key changes are:
- individuals whose total income and gains do not exceed the basic rate threshold (£37,400 for 2010/11) will continue to pay CGT at 18%;
- where total income and gains exceed the basic rate threshold, an increased capital gains tax rate of 28% applies;
- the CGT rate for trusts will be 28%, unless entrepreneurs' relief applies; and
- the lifetime limit for entrepreneurs' relief, where gains are taxed at an effective rate of 10%, is increased form £2million to £5million.
These changes take effect for disposals on or after 23 June 2010. Disposals taking place between 6 April 2010 and 22 June 2010 remain chargeable at 18% and will not be counted when determining whether the 28% rate applies to gains from 23 June 2010. In most cases, the disposal date for capital gains tax purposes is the date contracts are exchanged although there are exceptions for conditional contracts. Tax payers making disposals around Budget day will need to check their transaction date to ensure the correct tax rate is applied.
Gains will be added to income to determine the rate of CGT, while losses and the capital gains tax annual exemption will be offset against those gains attracting the highest CGT rate.
There were fears that the capital gains tax annual exemption would be reduced, possibly to as low as £2,000. However, these worries proved groundless, with the Chancellor confirming that the annual exemption for 2010/11 would remain at £10,100 and it will continue to increase in line with inflation in future years.
UK resident non-domiciled taxpayers claiming the remittance basis who choose to pay the £30,000 charge will pay capital gains tax at 28% on their UK source gains and remitted non-UK gains. The 18% rate will not be available in these circumstances.
The surcharged CGT rate where gains are distributed from a non-UK resident trust to UK resident beneficiaries will remain at a maximum of 28.8% for basic rate taxpayers, and will rise to a maximum of 44.8% for higher rate taxpayers.
Non-UK domiciliaries
The Government has reaffirmed its commitment, set out in the coalition agreement, to review the taxation of non-UK domiciliaries, but no further details have been announced. This creates another period of uncertainty for non-UK domiciliaries which is particularly unwelcome following the wide-ranging changes to the rules introduced in April 2008.
Special guardianship and residence orders
The Chancellor confirmed that 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.
Adult placement carers
Principal private residence relief ("PPR") exempts an individual's main home from capital gains tax. This relief can be lost where part of a home is used for business purposes, including making part of a residence available under a local authority adult placement scheme. For disposals on or after 9 December 2009, the Chancellor confirmed that PPR will be preserved in these circumstances.
Shared lives carers
Fixed rate expenses and an exemption from tax are currently available to respite carers providing up to 182 days care a year under the shared lives care provisions. These rules will be replaced from 6 April 2010 with a tax-free allowance. For income above the allowance, the carer will have the option to choose between being taxed on total receipts less the tax-free allowance or actual profits calculated according to normal business rules.
The tax free allowance will be available per household at the rate of:
- £10,000 fixed amount per tax year;
- £200 per week per placement aged under 11;
- £250 per week per placement aged over 11.
The new regime will apply from 6 April 2011. For 2010/11 only, carers will be able to apply the rules under either the old or new rules.
Pensions
The Chancellor signalled that the new Government is intending to remove with immediate effect the penal taxation of death benefits from pensions in income drawdown for those aged 75 or over by aligning the treatment with that applying to death benefits before 75. In this way, death benefits at any age for pension funds in income drawdown will be subject to a flat charge of 35% on exit from the pension. The remaining 65% will form part of the estate of the beneficiary. This is in stark contrast to the 82% potential tax charge on any death benefits taken post aged 75 from the funds in drawdown under the existing regime.
The Budget also indicated more significant changes will be made for 2011/12, albeit the only amendment to the rules confirmed so far is the removal of the requirement of pension fund investors to buy an annuity or take income drawdown from their plans after age 75.
In anticipation of these unknown future changes, the Government has said that for those who turn 75 from 22 June 2010 onwards, there will be a two year transitional period so that investors will not have to take any income from their plans before the age of 77, i.e. the need to buy an annuity or take minimum income drawdown has been deferred from aged 75 to aged 77. Unfortunately, this only applies to those who turn 75 from 22 June 2010 onwards and is not retrospective.
A further likely change from 6 April 2011 is a reduction in the annual allowance for pension contributions, currently £255,000 (or 100% of earnings). Provisional analysis suggests a figure in the region of £30,000 to £45,000, which is higher than the current special allowance of £20,000 (or £30,000 in some cases). Any change will be subject to a consultation process, and there is no comment on whether this increased/decreased annual allowance will be tax relievable at basic or higher rate tax levels.
There are to be no immediate changes to the current anti-forestalling rules.
Individual savings accounts
From 6 April 2011, ISA limits will increase annually in line with the retail price index. The cash ISA limit will be half of the value of the stocks and shares ISA limit.
Trusts
Asbestos victims' compensation trusts
The Chancellor announced a change to provisions previously set out in the March 2010 Budget. 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 2006, rather than 6 April 2010 as previously announced in the March Budget.
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. The Chancellor confirmed that from 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. This provision was previously announced in the March 2010 Budget but not included in the Finance Act 2010 and will be included in the new Finance Bill.
Corporation tax rates
The Chancellor announced reductions in both the standard and small company rates of corporation tax. The main rate of corporation tax will be reduced to 27% from 1 April 2011, and by a further 1% for each of the next four years so that from 1 April 2014 the standard rate will be 24%. The main rate of corporation tax on ring fence profits remains at 30%.
The small companies rate of corporation tax will be reduced to 20% from 1 April 2011. The small companies rate for ring fence profits remains at 19%.
Capital allowances
The main rate of writing down allowances for qualifying capital expenditure on plant and machinery will be reduced from 20% to 18% for accounting periods ending on or after 1 April 2012 for corporation tax and 6 April 2012 for income tax.
The rate of writing down allowances for expenditure for assets allocated to the special rate pool will be reduced from 10% to 8% for accounting periods ending on or after 1 April 2012 for corporation tax and 6 April 2012 for income tax. The special rate pool includes expenditure on long life assets, integral features and certain cars with CO2 emissions exceeding 160g/km. Hybrid writing down rates will apply to chargeable periods spanning the relevant dates.
The annual investment allowance, which gives a 100% deduction for expenditure on certain plant and machinery, will be reduced from £100,000 to £25,000 from April 2012.
As announced in the March 2010 Budget, a 100% first year allowance is to be introduced for business expenditure on new and unused zero-emission goods vehicles. This will take effect for expenditure on or after 1 April 2010 (corporation tax) or 6 April 2010 (income tax).
A change will be made to the special capital allowances rules for foster carers to correct technical anomalies.
Banks
A bank levy will be introduced from 1 January 2011. It will apply to the balance sheets of UK banking groups and building societies, foreign banks operating in the UK and UK banks in non-banking groups. These institutions will only be liable for the levy when their total liabilities (as defined) amount to £20 billion or more. The levy will be set at 0.04% in 2011 and 0.07% thereafter. For longer-maturity wholesale funding (i.e. greater than one year remaining to majority), the levy will be set at 0.02% in 2011 and 0.035% thereafter. The levy will not be deductible for corporation tax.
The purpose of the levy is to encourage banks to move to less risky funding profiles, since the Government believes that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy. A joint statement from the UK, France and Germany has been released today committing those countries to introduce a bank balance sheet levy. Final details of the levy will be published later this year, following consultation.
The Government is also exploring the costs and benefits of a financial activities tax on profits and remuneration and will be working with international partners to secure agreement.
Capital distributions
Finance Act 2009 extended the scope of the exemption from corporation tax for distributions received by UK companies to foreign distributions in addition to UK ones. The changes only applied to distributions of an income nature. Distributions of a capital nature continued to be dealt with under the chargeable gains legislation. Following the introduction of the foreign distribution exemption regime, it became clear that the dividing line between capital and income distributions is not clear cut, and also that unintended consequences resulting from legislative changes made several years ago meant that the established practice of treating most UK distributions as income ones was no longer tenable
As confirmed in the March 2010 Budget, draft legislation is to be introduced in the next Finance Bill to ensure that distributions will not be prevented from falling within the exemption regime solely because they are of a capital nature. The new legislation also makes clear that distributions out of reserves arising from a reduction in capital are likewise exempt.
These changes apply to distributions made on or after 1 July 2009. Recipient companies will be able to opt for the retrospective effects of this legislation not to apply.
Research and development tax relief
Companies that are small or medium enterprises may claim enhanced tax relief for expenditure on R&D. The SME thresholds are 500 employees, annual turnover of €100 million and balance sheet total of €86 million. Previously any intellectual property deriving from R&D to which the expenditure is attributable had to be owned by the claimant company. It was confirmed that this requirement is abolished for expenditure incurred by an SME company on R&D in any accounting period ending after 8 December 2009, as previously announced in the 2009 Pre-Budget Report.
Enterprise management incentives
It has been confirmed that a company wishing to grant EMI options to its employees must have a "permanent establishment" in the UK. This is to ensure compliance with EU State aid guidance and amends the previous requirement that the company must operate "wholly or mainly" in the UK. This change will have effect for EMI options granted from the date that the legislation receives Royal Assent.
Worldwide debt cap
The worldwide debt cap was introduced last year from 1 January 2010 to counter excessive debt funding of UK companies. The legislation achieves this by restricting relief for UK financing costs where these exceed the financing costs of the worldwide group. Following consultation with businesses, numerous changes have been identified that ensure the rules work as originally intended or meet concerns expressed by business representatives. The Government will legislate accordingly.
Consortium relief
The Chancellor confirmed there will be an extension of the rules for the "link company" element of consortium relief to allow the "link company" to be any company established within the European Economic Area. This will apply from the date of the published legislation and follows a previous announcement in the March 2010 Budget.
The link company provisions allow a consortium member to transfer its share of the consortium's unused losses to another member of the group. The new measures will also add an additional test based on a proportion of voting rights and extent of control in determining the amount of losses which can be claimed.
Loan relationships: anti-avoidance
Anti-avoidance legislation is to be introduced to extend the rules dealing with "de-recognition" for accounting purposes of loan relationships and derivative contracts. It will have effect for credits and debits arising on or after 22 June 2010. A technical note is expected in July 2010.
UK REITs and stock dividends
As announced in the March 2010 Budget, legislation is to be introduced to allow UK Real Estate Investment Trusts to issue stock dividends instead of cash dividends in order to meet their requirement to distribute 90% of the profits from their property rental business as dividends. This will take effect from Royal Assent. Recipients of the stock dividends will be taxed in the same way as recipients of cash dividends.
Furnished holding lettings
The previous government announced the abolition of the beneficial furnished holiday lettings rules from 6 April 2010, although following Conservative pressure the measures were not included in the 2010 Finance Act. The Chancellor has now confirmed that furnished holiday lettings, including lettings situated in the European Economic Area, will continue to benefit from the existing tax treatment until 5 April 2011.
However, there is a sting in the tail. A consultation process has been announced with a view to tightening up the furnished holiday lettings rules from 6 April 2011. The proposed changes include:
- increasing the numbers of days for which a furnished holiday letting is both available, and actually let, on a commercial basis in order to qualify. At present, accommodation must be available for at least 140 days and actually let for at least 70 days in a tax year.
- restricting the method by which relief is given for losses of a furnished holiday letting business. Under the current rules, losses may be offset against the taxpayer's other income and gains of the tax year of loss and the previous year. The loss relief provisions are perceived as one of the main advantages of the furnished holiday lettings rules, and any proposed changes are likely to be unwelcome.
As announced in 2009, furnished holiday letting treatment can be claimed for qualifying EEA properties for previous years subject to the normal time limits, generally four years from the end of the tax year in question.
PAYE: Safeguarding tax revenues
As part of the review of HMRC's powers, the previous Government announced measures in March 2010 Budget enabling HMRC to safeguard tax revenues by requiring a financial security from employers with a history of non-payment of PAYE. Legislation giving effect to the proposals was not included in Finance Act 2010, but the Chancellor announced that the consultation process will go ahead and will also ask for comment on a new criminal offence, carrying a fine of up to £5,000.
As part of the same measures and following a successful exercise in 2009/10, the Chancellor announced that HMRC will use external debt collection agencies to provide additional resources to pursue and collect tax debts. This measure will target lower value debts and is expected to lead to the collection of an additional £140 million.
One of the biggest challenges faced by HMRC involving the present PAYE system is that the value of the overall annual liability payable by an employer is not known until the submission of the end of year return, P35 by 19 May following the tax year end. Although an automatic penalty regime now applies where monthly tax payments are made late, HMRC is unable to verify whether the payment made reflects the actual amount due. The Government has therefore announced a consultation process to take place this summer in which employers and payroll providers will be asked for suggestions on how HMRC can be supplied with 'real time PAYE data' during the course of the tax year. Coupled with the enhanced collection strategies, this process will enable HMRC to identify and collect PAYE earlier than is possible under the present system.
Deduction of income tax at source
In certain situations, individuals and other non-corporate bodies that make payments of interest, royalties or other annual payments are required to deduct income tax at source. At present, a person is required to notify HMRC of the requirement to deduct income tax, following which HMRC issue an assessment. There has been concern that these rules do not operate efficiently and create confusion for taxpayers, and following a consultation process, HMRC have been given powers to amend the basis on which income tax is reported and paid under these rules.
Standard rate increase
The standard rate of VAT is to increase from 17.5% to 20% from 4 January 2011. The UK currently enjoys one of the lowest standard rates of VAT in the EU. The rate change will bring the UK in line with the average EU standard rate.
The new 20% rate will apply to all standard-rated UK supplies of goods and services, importations and acquisitions of goods from other EU Member States taking place on or after 4 January 2011.
The 5% reduced rate of VAT that applies to supplies such as domestic fuel and power and certain residential property conversion works will remain unchanged. The scope of the existing zero rate of VAT on supplies such as food and children's clothing and exemptions for supplies such as education and healthcare has not been changed.
HMRC has also announced anti-avoidance (or "anti-forestalling") provisions in respect of the rate change. The provisions are effective from 22 June 2010 and are intended to prevent businesses from gaining what HMRC perceives to be an unfair VAT advantage through use of certain VAT planning arrangements.
Businesses using the VAT Flat Rate Scheme will need to use amended rates from 4 January 2011. A list of the new rates has been published by HMRC.
Aircraft
It was announced in the previous Budget in March 2010 that the scope of the UK's zero rate of VAT for "qualifying" aircraft and certain related goods and services was to be reduced from 1 September 2010. This change has been put back to 1 January 2011. Under the new rules, the zero rate will only apply to supplies used by airlines operating for reward primarily on international routes.
Insurance premium tax
The standard rate of IPT will increase from 5% to 6%. The higher rate of IPT will increase from 17.5% to 20%, in line with the change to the standard rate of VAT. The change will have effect for premiums received or written by an insurer on or after 4 January 2011.
Excise
A number of changes were announced concerning time limits, information powers and inspection powers in connection with excise duties.
New penalty charges for late monthly and quarterly PAYE payments
The HMRC have introduced a change in the form of new penalties in respect of the late payment of monthly and quarterly PAYE. These penalties were introduced 6 April 2010 and the main change is that they apply to ALL EMPLOYERS. The old regime only applied to employers with 250 or more employees.
The penalties will be charged on a percentage basis of the amount that is late in a tax year and will be calculated as follows:
| No. of times payments are late in a tax year | Penalty percentage Amount to which penalty percentages apply |
| 1 | No penalty (if payment is less than six months late) |
| 2 - 4 | 1% |
| 5 - 7 | 2% |
| 8 - 10 | 3% |
| 11 or more | 4% Total amount that is late in the tax year (ignoring the first late payment in that tax year) |
At a recent HMRC Employer Forum one of the speakers explained that a letter will be issued to an employer after the first late payment with a warning that a penalty will be charged if one more payment is late. However there will be no further communication with the employer until the end of the tax year when the penalty notice is issued.
Redundancy payments - issues to consider
If you are about to make an employee or employees redundant there are many issues to consider before, during and after the process. There are HR issues to consider, employment law issues, morale issues. One issue that should not be forgotten about, though, is the tax treatment of the redundancy payment itself.
The first question that should be asked is whether or not a genuine redundancy situation exists. Under the terms of the Employment Rights Act 1996 a true redundancy applies where an employee been continuously employed for a period of two years and they are being made redundant because the business is either ceasing; moving; or the requirements of the business have altered in such a way that the kind of work carried out by the employee is no longer needed.
Once you are satisfied that it is a genuine redundancy situation then you can calculate the amount of statutory redundancy pay that can be paid to an employee. The calculation is age dependant and is based on what the employee currently receives for a weeks pay subject to an upper limit of £380 per week. Statutory redundancy pay can be paid without deduction of tax or NIC. The employer may wish to enhance the statutory redundancy payment with a non-statutory payment, and this too can be paid without deduction of tax or NIC provided that the overall payment does not exceed £30,000. Any amount in excess of £30,000 has to be subjected to tax but NIC does not need to be deducted as redundancy payments do not attract an NIC charge regardless of the amount.
In many cases, the total payment that an employee receives will include other items in addition to statutory and non-statutory redundancy pay. Each constituent part of the total payment should be considered separately to determine its tax treatment as it cannot be assumed that it will all be free of tax up to the £30,000 limit. Where the employee has a contractual right to receive a payment then that payment must be subjected to tax and NIC through the payroll. Examples of this are holiday pay, bonus or contractual Pay In Lieu Of Notice. Even where Pay In Lieu Of Notice is not contractual, then depending on the circumstances, it may still be taxable.
Care must be taken where a redundancy payment is being made to an employee who is near retirement age as HMRC could take the view that the "redundancy" is artificial and that the payment is, in reality, a terminal bonus or a payment to an unapproved pension fund. If this is the case the £30,000 exemption would not apply and the whole amount would have to be subjected to tax and NIC.
Where a redundancy payment has not been treated correctly for tax purposes HMRC will expect the employer to pay any tax and NIC that should have been deducted. We would advise that employee contracts, staff handbooks and all documentation in relation to redundancy payments should be carefully reviewed when decisions are being made about the tax treatment of these payments.
Contact:
Paul Renz, Head of Tax
Scott Craig, VAT Partner
Patricia Goldie, Employment Tax Manager
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