The Budget 2008
Wednesday 12 march 2008
Alistair Darling presented his first Budget on Wednesday 12 March 2008.
After the Northern Rock saga and the changes of mind on the ‘simplification’ of
capital gains tax, will it be his last?
On the economy, the Chancellor stated that there will be no recession although he
conceded that growth up to 2010 will be less than previously forecast. Borrowing will
go up as a result.
Our summary focuses on the direct and indirect tax measures which are buried in the
Treasury and HMRC press releases.
We concentrate on the issues likely to affect you, your family and your business. To
help you decipher what was said we have included our own comments.
If you have any questions please do not hesitate to contact us for advice.
Main Budget proposals
? Plans to stop the tax savings available to businesses by ‘income shifting’ are
delayed for one year
? Further details on the changes to the capital allowances regime including the
taxation of company cars
? Improvements to the Enterprise Management Incentive scheme
? Annual charge on non-domiciles still to be introduced but some relaxations
made to the original proposals
? Income tax relief extended for the Enterprise Investment Scheme
Previous announcements
Many of the changes detailed in this summary have been the subject of earlier
announcements. Here is a reminder of some of the more important ones:
? Reduction in the basic rate of income tax and significant increases in national
insurance
? Increase in the investment limits for ISAs
? The abolition of taper relief and indexation allowance for capital gains tax
(CGT)
? The introduction of a flat rate of CGT for individuals of 18% and a new
Entrepreneurs’ Relief
? A significant change in inheritance tax relief for married couples and civil
partners
The Budget proposals may be subject to amendment in the Finance Act. You should contact us before taking any action as a result of the contents of this summary.
Personal Tax
Tax rates
As previously announced the government proposes to radically change the tax rates
for 2008/09 onwards when the 22% basic rate of tax will be reduced to 20%. The
higher rate of tax will continue at 40%.
The current starting rate will be abolished and replaced with a new 10% starting rate
for savings income. Where an individual’s non savings income (broadly earnings,
pensions, trading profits and property income) exceeds the new starting rate limit,
then the starting rate will be unavailable. There are no changes to the tax rates
applicable to dividends.
However the rate of tax applicable to capital gains will change significantly to a flat
rate of 18% for 2008/09 (see Capital Taxes section).
Comment
Gordon Brown had previously announced the reduction of the basic rate of tax
by 2% in the Budget last year.
Some basic rate taxpayers may now lose out due to the withdrawal of the
starting rate for non savings income. There may also be a significant sting in the
tail for some higher rate taxpayers with earned income, as the changes in the
upper earnings limit for national insurance (see Employment Issues section) will
largely negate the income tax savings.
Allowances
The 2008/09 personal allowances were announced in October 2007. The personal
allowance for the under 65s is increased in line with inflation to ?5,435. Age related
allowances have been raised significantly to ?9,030 for people aged between 65 and
74 and to ?9,180 for those aged 75 and over.
Tax Credits
There are two types of Tax Credits; Working Tax Credit and Child Tax Credit (CTC).
The CTC is potentially available to families who have responsibility for one or more
child. There are several elements to the credit but broadly the maximum is an annual
amount for 2008/09 of ?2,085 per child together with a family element (generally one
per family) of ?545 per annum. The amount per child has been increased but the
family element has been frozen since the introduction of the credit.
Other changes from April 2008 are:
? the income threshold for Working Tax Credit will increase to ?6,420 (currently
?5,220)
? a higher rate of taper will apply for those in the fast taper band (up from 37%
to 39%).
Comment
The increase in the income threshold will give more to the family with very low
income but the higher rate of taper will eat away at that advantage for those with
higher income.
Individual Savings Accounts (ISAs)
Over the last year the government has finalised the changes to ISAs which will be
introduced from 6 April 2008.
? The annual ISA investment allowance will be raised to ?7,200. Up to ?3,600
of that allowance can be saved in cash with one provider. The remainder of
the ?7,200 can be invested in stocks and shares with either the same or a
different provider.
? ISA savers will be able to invest in two separate ISAs in each tax year; a cash
ISA and a stocks and shares ISA. Mini and maxi ISAs will no longer exist.
? Mini cash ISAs, TESSA-only ISAs and the cash component of a maxi ISA will
automatically become cash ISAs.
? Mini stocks and shares ISAs and the stocks and shares component of a maxi
ISA will automatically become stocks and shares ISAs.
? All Personal Equity Plans (PEPs) will automatically become stocks and
shares ISAs.
? ISA savers will be able to transfer money saved in their cash ISA to their
stocks and shares ISA.
Comment
Existing ISAs and PEPs will automatically convert into cash or stocks and shares ISAs. This will mean a change in the treatment of interest received on any un-
invested cash in a PEP. The ISA manager must deduct a flat rate 20% charge
and pay it to HMRC. This rule has always applied to stocks and shares ISAs and
will now apply to interest earned on un-invested cash formerly held in PEPs.
Foreign dividends
The government proposes to introduce amendments to the system of taxation for
individuals who own foreign shares. From 6 April 2008 individuals in receipt of foreign
dividends will be entitled to a non-repayable tax credit of one ninth of the distribution.
The legislation will apply to individuals who own less than a 10% shareholding in the
company.
From 2009, individuals with shareholdings in excess of a 10% shareholding will also
be eligible for the non-repayable tax credit. The tax credit will not be available where
the source country does not levy a tax on corporate profits and anti-avoidance
measures will be introduced to ensure these new rules are not subject to abuse.
Residence and domicile
The government will implement a package of reforms announced in the 2007 Pre-
Budget Report subject to certain changes. The measures will take effect from 6 April
2008.
The main proposal is that UK residents who are non-domiciled or not ordinarily
resident, who wish to continue to be taxed on a ‘remittance basis’ rather than on their
worldwide income and gains, will have to pay an annual tax charge of ?30,000 on
unremitted income and gains. Those with unremitted foreign income and gains of
less than ?2,000 will however be exempt from this charge.
The charge will apply if an individual has been resident in the UK for at least seven
out of the previous ten tax years. Individuals will be able to decide each tax year
whether to pay the charge and be taxed on the remittance basis or be assessed on
their worldwide income and gains.
Key changes include:
? users of the remittance basis will lose their automatic entitlement to certain
allowances, such as the personal allowance and the capital gains annual
exemption (unless the ?2,000 de minimis applies)
? children will not pay the ?30,000 charge
? the ?30,000 charge should be creditable against foreign tax
? art works brought into the UK for public display or for repair and restoration
will face no new tax charges
? income and gains in offshore trusts will only be taxed when they are remitted
to the UK, even if these come from UK assets
? changes will be made to the current rules on remittances to restrict the ability
of individuals to sidestep UK tax on income and gains where HMRC believe it
is due.
In addition, from 6 April 2008, when determining if an individual is resident in the UK,
any day where the individual is present in the UK at midnight will be counted as a day
of presence in the UK for residence test purposes. There will be an exemption for
passengers who are temporarily in the UK whilst in transit between two places
outside the UK.
Comment
The government has made some amendments to its initial proposals after
consultation with interested parties. It considers that the key question is whether
further changes can be made without putting the UK’s competitiveness at risk by
undermining the UK’s attractiveness to the internationally mobile.
Enterprise Investment Scheme (EIS)
Individuals can claim income tax relief of 20% on qualifying EIS investments. The current annual limit on investment is ?400,000 and this limit will be increased to ?500,000 subject to State Aid approval.
The EIS, Corporate Venturing Scheme and Venture Capital Trust schemes are intended to support investment in smaller higher risk trading companies. Most trades qualify under the schemes but not those that consist to a substantial extent of excluded activities. The activities of shipbuilding, coal and steel production will be added to these exclusions from 6 April 2008.
Offshore Funds
The government will simplify the rules for offshore funds. In order to retain the favourable tax treatment for investors disposing of an interest in the fund, an offshore fund will no longer have to make a distribution of at least 85% of its income. It will instead be able to ‘report’ income to investors who will then be subject to tax on that reportable income.
Corporate and Business Tax
Corporation tax rates
The main rate of corporation tax which applies to companies with profits of more than
?1.5 million falls to 28% from 30% from 1 April 2008 and that rate will be maintained
in 2009. The small companies corporation tax rate which applies to companies with
up to ?300,000 of profits will increase from 20% to 21% from 1 April 2008. The
intention is to increase this rate to 22% in 2009.
The effective marginal corporation tax rate for profits between ?300,000 and ?1.5
million is 29.75% from 1 April 2008.
Simplification of the associated company rules
The profits limits referred to above may need to be shared between companies if the
companies are ‘associated’. Companies are associated if they are under common
shareholder control, for example where the same individual has more than 50% of
the ordinary share capital of each of the companies. However an individual may be
regarded as having control of two companies because shares owned by other
persons are deemed to be owned by the individual. This is known as the ‘attribution
concept’.
From 1 April 2008, shares held by business partners will not be attributed to a person
unless a tax planning arrangement has been put in place in order to pay less
corporation tax than would otherwise be due.
Capital allowances
Major changes will be implemented to the capital allowances system from 2008/09.
The details for plant and machinery are:
? a new Annual Investment Allowance (AIA) for the first ?50,000 spent on plant
and machinery. This gives a 100% write-off against profits. The AIA
complements and does not replace any of the existing 100% first year
allowance schemes
? writing down allowances for plant and machinery in the main ‘pool’ will be cut
from 25% to 20%
? a new writing down allowance for ‘integral features’ in a building will be 10%
? writing down allowances for long life assets will be increased from 6% to 10%
? the 10% allowances will be given by combining integral features and long life
assets into a ‘special rate pool’
? the special rate of 10% for integral features will include certain replacement
expenditure where this might otherwise have qualified as a revenue deduction
? where companies have a loss after claiming 100% first year allowances on
green technologies they will be able to reclaim a tax credit from HMRC.
Comment
The new category of expenditure, integral features, includes some items that
currently would qualify for normal plant allowances such as space or water
heating systems but also includes items that do not generally currently qualify
for plant allowances such as general lighting systems and cold water systems.
Although integral features only qualify for 10% rather than 20% writing down
allowances, the AIA can be allocated first to integral features rather than other
plant.
Small plant and machinery pools
Writing down allowances at the rates summarised above are computed on the ‘pool’
of unrelieved expenditure. When calculating writing down allowances there is no de
minimis rule so, for example, businesses with ?1,000 of unrelieved expenditure and
no new expenditure or disposal receipts would have to carry on calculating the
annual writing down allowance for many years. Businesses will be able to claim a
writing down allowance of up to ?1,000 in the case of each pool, once the unrelieved
expenditure in either the main rate pool or the special rate pool is ?1,000 or less.
This measure has effect for chargeable periods beginning on or after 1 April 2008 for
businesses within the charge to corporation tax and on or after 6 April 2008 for
businesses within the charge to income tax.
100% capital allowances on green technologies
Two schemes exist that give 100% first year allowances for expenditure on certain
energy-saving and water technologies. Following the annual review of the qualifying
technologies, the schemes will be revised to include one new technology: waste
water recovery and reuse systems. The Energy Technology Criteria List will be
revised to include four additional sub-technologies: compressed air master
controllers; compressed air flow controllers; heat pump dehumidifiers and white LED
lighting.
The 100% first year allowance for expenditure incurred on natural gas and hydrogen
refuelling equipment due to end on 31 March 2008 will be extended for an additional
five years to 31 March 2013.
Taxation of business travel
With effect from 1 April 2009 for corporation tax purposes (6 April 2009 for income
tax) the capital allowance treatment of all cars will be reformed.
? Expenditure on cars with CO2 emissions above 160gm/km will attract 10%
writing down allowances.
? Expenditure on cars with CO2 emissions of 160gm/km or below will attract
20% writing down allowances.
? Subject to State Aid approval, cars leased to those in receipt of certain
disability allowances will be placed in the 20% main pool, regardless of their
CO2 performance.
The rules which disallow a proportion of car lease rental payments will be reformed in
line with the new capital allowances rules. The new disallowance will be 15% of the
relevant payments, applied to cars dealt with in the 10% special rate pool.
The 100% first year allowances for the cleanest cars will be extended from 31 March
2 emissions threshold will be reduced 2008 to 31 March 2013 and the qualifying CO
to 110gm/km.
‘Income shifting’
The government intended that legislation would take effect from 6 April 2008 to
address ‘income shifting’. The government has reconsidered its position following a
period of consultation with business and now believes that a further period of
consultation will ensure that legislation in this area provides clarity and certainty for
businesses and their advisers.
The government now intends to introduce legislation through Finance Bill 2009 and
will not enact legislation effective from 6 April 2008.
Comment
‘Income shifting’ refers to a situation where one spouse or civil partner
generates most of the profits of a business but the other receives a proportion
of the profit and the couple save tax as a result. The delay in the starting date
for any legislation is to be welcomed and hopefully the further consultation will
produce a more reasonable result.
Example
This is an HMRC example of a situation in which the original proposed
legislation would have applied. Individual 1 and Individual 2 form a company,
each owning 50 ?1 ordinary shares. The business of the company is to provide
the personal services of Individual 1. Individual 2 spends around five hours a
week on back office duties for the business. In the first year they each receive a
salary of ?5,000 and dividends of ?30,000. The salary received by Individual 2
is considered to be the market rate given the nature of the work done and time
spent doing it. The company has no significant assets or liabilities.
If Individual 2 has no capital in the business and bears no risk the whole of the ?30,000 would be treated as shifted income because Individual 2 is already
receiving a market rate for the work done, has no capital in the business and
bears no risk.
Of course, if Individual 2 does contribute more to the business than in the above example, then some or all of the income will not be treated as shifted
income.
We await with interest the conclusion of the further consultation on these
proposals.
Research and development tax relief
Research and development (R&D) tax relief gives enhanced tax relief to companies
who undertake qualifying R&D projects. The company must spend at least ?10,000
on qualifying expenditure in one year. The proposed changes, subject to State Aid
approval, are:
? large companies will be able to claim 130% relief, increased from 125%
? small and medium sized companies will be able to claim 175% relief,
increased from 150%.
Tax simplification
The government has introduced a rolling programme of tax simplification. Following
discussions with business and tax professionals, the government announced the
initial outcomes on the three tax simplification reviews launched in the 2007 Pre-
Budget Report:
? VAT rules and administration: consulting on ideas to simplify the operation of
the partial exemption regime and capital goods scheme
? anti-avoidance legislation: repealing outdated anti-avoidance provisions on
bond washing and employment securities
? corporation tax rules for related companies: simplifying the associated
companies rules (see above) and announcing a review looking at how to
simplify corporation tax calculations and returns for smaller companies.
Employment Issues
National Insurance Contributions (NIC)
There is no change in the rates of NIC. For 2008/09 the upper earnings limit, above
which employees continue to pay contributions of 1% on earnings, will be increased
by ?100 per week. This gives an annual figure of ?40,040.
The upper profits limit for Class 4 national insurance for the self-employed will also
be increased in 2008/09 to ?40,040.
In 2009/10 the upper earnings and profits limits will be aligned with the point at which
the higher rate of income tax becomes payable.
Comment
For many this increase in the contributions for employees and the self-employed
removes the tax savings given by the reduction in basic rate of income tax.
Company cars and the fuel scale charge
Where a company car is provided for an employee’s private use, a taxable benefit
arises which is based on the list price of the car and its CO2 emissions. The
percentages range from 15% to 35% for most cars. There are discounts currently
available for environmentally friendly cars and from 6 April 2008 there will be:
? a 2% discount for cars that have been manufactured to run on E85 fuel
? a new 10% company car tax band for non-electric cars emitting no more than
120gm/km of carbon dioxide. Environmentally friendly discounts do not apply
to such cars but the diesel supplement does.
If free fuel is provided with a company car for private motoring then a fuel benefit tax
charge arises based on the percentage used for the car benefit and a ‘multiplier’,
which is currently ?14,400. For 2008/09 the figure will increase to ?16,900.
Comment
The fuel scale charge multiplier has not changed since it was introduced in 2003.
This 17% rise, combined with an increase in the car benefit percentages for
2008/09, means that many employees will see a substantial increase in their tax
bills from next April.
Longer term the government is proposing:
? the starting point for the company car benefit will be reduced by 5gm/km to
130gm/km in 2010/11
? the incentive to drive fewer miles will be strengthened by increasing the fuel
benefit charge at least in line with the Retail Prices Index from April 2009.