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Nick Scull, Head of Tax

Budget Update 23 March 2011

Against a background of rising inflation, considerable public debt and borrowing requirements, George Osborne has restated his intention to tackle the deficit within this parliamentary term. Having downgraded the growth forecast for 2011 to 1.7%, there was nothing in his red box to give away. The tax changes we saw yesterday are therefore designed neither to raise additional revenue nor to give any away. Instead he focused on trying to boost business and ease the burden for motorists. There was also talk of simplifying the tax system, in particular a possible merger of National Insurance and Income Tax.

This update summarises the main changes.

Personal taxes

Income Tax Personal Allowances:

• Personal allowance under 65, £7,475
• Personal allowance aged 65 to 74, £9,940
• Personal allowance aged 75 or over, £10,090

Income limit for aged related allowances is £24,000.

Income Tax Rates – unchanged at 20%, 40% and 50%. Basic rate limit £35,000. The Chancellor tried to reassure us that the 50% rate is only temporary. The historians amongst us will recall that national income tax is only a temporary measure until we manage to defeat Napolean (which is why it still needs to be re-enacted every year).

Income tax and NICs Reform — The Government has announced that it will consult on the options, stages and timing of reforms to integrate the operation of income tax and National Insurance contributions (NICs), whilst still protecting dividends and unearned income from the NIC charge. If this progresses to legislation, it will be a major reform of the UK tax system, although it will take some years to finalise the details.

Capital Gains Tax Annual Exempt Amount — This will increase to £10,600 with effect from 6 April 2011.

Class 2 national insurance contributions – these are currently payable by the self employed at a flat rate of £2.40 per week in 2010/11, rising to £2.50 per week in 2011/12. Currently, these contributions are paid by quarterly account billing or by monthly direct debit. For April 2011 onwards, due dates for payment are to be aligned with the self assessment payment dates as for income tax and Class 4 NICs. This will mean that the payment will change for 2011/12. There will be no collections of monthly Class 2 NICs payments from April 2011 until August 2011. Monthly direct debits will then recommence from August onwards. This means that by January 2012 six instalments will have been paid, equal to half the liability for the year. By July 2012, the liability for the year will have been paid in full. Unlike income tax and Class 4 NICs there will be no balancing payment on 31 January 2013, as Class 2 is a set amount and does not need to be estimated. There will be an alternative option to pay Class 2 by two six monthly direct debits, one on 31 January in the tax year and one on 31 July following the end of the tax year, instead of paying monthly direct debits.

Inheritance Tax Changes:

• The inheritance tax nil rate band is frozen until April 2015.
• The Government has announced that a reduced rate of inheritance tax (IHT) will apply where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the current 40% rate will be reduced to 36%. The new rate will apply where death occurs on or after 6 April 2012.

Residence – a statutory definition of residence is to be created to provide greater certainty for taxpayers.

Restricting Pensions Tax Relief — Changes announced are:

• the special rules affecting those earning over £130,000 (effectively restricting their contributions to £20,000 in most cases) will be abolished
• the annual allowance for tax relief on pension savings for individuals will be reduced from £255,000 to £50,000 from 2011-12, and
• the lifetime allowance will be reduced from £1.8m to £1.5m from 2012-13.

Pensions Annuitisation — The requirement to annuitise by the age of 75 is to be removed from April 2011.

Gift Aid Donor Benefit Limits — The maximum value of benefits that individuals and companies may receive as a result of making a donation to a charity of more than £10,000 under Gift Aid is to be increased from £500 to £2,500. The new limit will be subject to the existing rule that the benefit must not exceed 5% of the gift.

Furnished Holiday Lettings (FHL) – The following changes are confirmed from April 2011:

• Loss relief may only be offset against income from the same FHL business.
• UK losses can relieve UK FHL income only and similarly with the EEA losses.

From April 2012, to qualify as a furnished holiday lettings business, a property must:

• Be available to let for at least 210 days and actually let for 105 days in a year.

Businesses meeting the actually let threshold in one year may elect to be treated as having met it in the two following years (“period of grace”), providing certain criteria are met.

Review of Non-Domicile Taxation — At the June Budget 2010, the Government confirmed that it would review the taxation of non-domiciled individuals. The Government will introduce the following reforms:

• remove the tax charge when non-domiciles remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses
• simplify some aspects of the current tax rules for non-domiciles to remove undue administrative burdens
• increase the existing £30,000 annual charge to £50,000 for non-domiciles who have been UK resident for 12 or more years and who wish to retain access to the beneficial tax regime (the remittance basis). The £30,000 charge will be retained for those who have been resident for at least seven of the past nine years and fewer than 12 years

Business taxes

Corporation Tax Rates:

• The main rate of corporation tax is being reduced by 2% to 26% for the financial year commencing 1 April 2011.
• The main rate of corporation tax will be further reduced by 1% for each of the following three financial years until it reaches 23% in 2014.
• The small profits rate of corporation tax will decrease from 21% to 20% from 1 April 2011.

Capital Allowances – at present, most businesses can claim 100% of the cost of new equipment against tax in the year it is purchased – the Annual Investment Allowance – up to a maximum of £100,000 of cost. This limit will be slashed to £25,000 from April 2012. So a small business spending £100,000 on equipment could easily lose £11,250 in tax relief if the kit is not purchased before next April, and potentially over £28,000 of tax in some cases.

Capital Allowances: Short Life Assets — Businesses incurring expenditure on an item of plant or machinery from April 2011 onwards will be able to make a short life asset election in respect of that item if they expect to sell or scrap it within an eight-year cut-off period. This is an extension from the current four year period. This is a minor technical change which in many cases will cost more to administer than the tax benefit arising, and so we would not expect to see any great increase in the number of businesses choosing to make the election.

Research and Development Tax Credits for SMEs — The rate of the additional deduction for expenditure on R&D for companies that are small or medium sized enterprises (SMEs) is to increase from 75% to 100% from 1 April 2011, giving a total deduction of 200%. So qualifying spend of £100,000 would generate additional tax savings of up to £26,000 if a suitable claim is made. Please contact us if you think that your company might be involved in any R&D activities.

Business Rate Discounts in Enterprise Zones — The Government announced the creation of 21 new Enterprise Zones. 100% business rate discount for five years will be offered to businesses located in Enterprise Zones. The precise locations have not been announced, but we do know that there will be two in Yorkshire – one in Leeds and one in Sheffield.

Extend Small Business Rate Relief (SBRR) Holiday — The SBRR holiday will be extended by one year from 1 October 2011.

Time To Pay —HMRC will continue its Business Payment Support Service to provide advice and time to pay to viable businesses experiencing temporary financial difficulty.

Car tax and other employment tax issues

Review of HMRC powers, deterrents and safeguards security for PAYE and National Insurance contributions — Legislation will be introduced in Finance Bill 2011 to give HMRC the power to require a security from employers for PAYE and NICs that are seriously at risk of non-payment. It will be treated as a criminal offence if security is not provided when required.

Employer-Supported Childcare — Relief is to be restricted for higher earners who join employer-supported childcare schemes from 6 April 2011.

Approved Mileage Allowance Payments Rates from 2011-12 — Where employees use their own cars for business mileage, they can claim reimbursement from their employers through the approved mileage allowance payments rates (AMAPs). These payments are not treated as taxable benefits. The current higher rate of 40p per mile for the first 10,000 business miles is to be increased to 45p. The rate for mileage over 10,000 miles remains at 25p.

Advisory fuel rates – These rates are used for company cars where no fuel is provided for private motoring and business mileage is claimed; and for private cars where the employee purchases fuel using a company fuel or credit card in the first instance and later makes good the cost of his or her private mileage. The new rates are detailed here www.hmrc.gov.uk/cars/advisory_fuel_current.htm and came into force on 1 March.

Fuel Benefit Charge 2011-12 — Employees and partners who are provided with a company car and who also receive free fuel from their employers are subject to the fuel benefit charge. The cash equivalent of the taxable benefit is determined by multiplying a set figure (currently £18,000) by the appropriate percentage for the car, based on its CO2 emissions (grams per kilometre). This set figure will increase to £18,800 with effect from 6 April 2011.

Company Car Tax Rate 2013-14 — Legislation will be introduced in Finance Bill 2011 to reduce the appropriate percentages by 1% for all vehicles with carbon emissions between 95g and 220g from April 2013. Zero emissions cars will remain at 0% and ultra-low emissions cars with emissions up to 75g will remain at 5%.

Business owners and investors

Capital Gains Tax Entrepreneurs Relief — The lifetime limit on gains qualifying for entrepreneurs' relief is to be increased from £5m to £10m with effect from 6 April 2011. This offers a 10% rate of tax, rather than the default 28%, on qualifying gains, meaning that Entrepreneurs Relief can be worth up to £1.8m.

Enterprise Investment Scheme and Venture Capital Trusts — the rate of income tax relief given under the Enterprise Investment Scheme (EIS) will be increased from 20% to 30% with effect from 6 April 2011, subject to State aid approval.

Legislation will be introduced making the following changes to EIS and Venture Capital Trusts (VCTs) which will have effect on and after 6 April 2012:

• an increase in the thresholds for the size of qualifying company for both EIS and VCTs to fewer than 250 employees and to the company having no more than £15million of gross assets before the investment;
• an increase in the annual amount that can be invested through both EIS and VCTs in an individual company to £10million; and
• an increase in the annual amount that an individual can invest through EIS to £1million.

These measures will give a greater incentive for wealthier individuals to act as business angels by putting equity into smaller private companies in return for income tax relief, tax-free growth in the value of the shares and the option to defer capital gains tax on sales of other assets. It is also possible to invest in managed funds and other “passive” investments which qualify for these reliefs.

Business Premises Renovation Allowance — This scheme gives 100% capital allowances on the refurbishment costs when a qualifying building is brought back into use as business premises. The Government has confirmed it will extend the allowance for a further five years from its previous intended end date in 2012.

VAT

Registration and Deregistration Thresholds — The following changes will be made to the VAT registration and deregistration thresholds from 1 April 2011:

• the taxable turnover threshold, which determines whether a person must be registered for VAT, will be increased from £70,000 to £73,000;
• the taxable turnover threshold which determines whether a person may apply for deregistration will be increased from £68,000 to £71,000; and
• the registration and deregistration threshold for relevant acquisitions from other EU Member States will also be increased from £70,000 to £73,000.

Online filing – VAT registered traders at April 2010, that are presently not legally required to file returns online (those with turnover under £100,000), will be brought into the online filing net for returns beginning on or after 1 April 2012.

Online administration – registration, deregistration and changes in registration details will have to be completed online from 1 August 2012.

Capital Goods Scheme – A reminder that from 1st January 2011 a number of changes have been made to the Capital Goods Scheme. This will affect businesses which buy higher-value items and then use them for anything other than full taxable business use within 5-10 years. Click here to view our factsheet for full details of the changes.

Changes to Royal Mail's VAT policy – A reminder that with effect from 1st January some postal services are now subject to VAT. The majority of businesses will not be adversely affected by this as they will be able to recover any VAT charged to them by Royal Mail however, those that have Exempt activities or Non Business income may lose out. Click here for full details of the new charges.

Anti-Avoidance

Anti Avoidance Measures – A number of complex anti avoidance measures are to be introduced. In summary the schemes affected include:

• Sale of lessor companies
• SDLT anti-avoidance
• Corporate gains: degrouping charges
• Disguised remuneration schemes

Other changes

Fuel Duty Rates — The following changes in fuel duty were announced today:

• the main fuel duty rate has been reduced by 1p per litre (ppl) from 6pm on 23 March 2011;
• the 1 April 2011 increase will be deferred and implemented on 1 January 2012 when the main fuel duty rate will increase by 3.02p per litre.

Vehicle Excise Duty — From 1 April 2011, VED rates will increase by indexation only apart from VED rates for heavy goods vehicles which will be frozen in 2011-12.

Alcohol Duty Rates — Changes announced today will add:

• 4p to the price of a pint of beer,
• 15p to the price of a bottle of wine, and
• 54p to the price of a bottle of spirits.

The changes will take effect on 28 March 2011.

Tobacco — Tobacco duty rates will increase by 2% above the rate of inflation. Duty on hand rolling tobacco will increase by an additional 10%. The Government is also restructuring cigarette duty. Ad valorem duty on cigarettes has been reduced to 16.5% and specific duty has been increased by 25% above inflation. These changes came into effect at 6pm on 23 March 2011.

Tax reliefs to be Abolished – As part of the Governments Tax Simplification process the following tax reliefs are withdrawn from April 2011:

• Charities - transitional relief on distributions
• Millennium Gift Aid
• National Savings Bank ordinary account interest
• Payroll giving 10% supplement
• Exemption for certain assignments by seamen

* Instruments relating to National Savings, and

Transfers in relation to ships and vessels

Supplementary Charge — To help fund fuel duty decreases, the rate of the supplementary charge levied on profits from UK oil and gas production will increase from 20% to 32%.

Bank Levy — The Bank Levy rates will be increased from 1 January 2012 to offset the benefit to banks of the further decreases in corporation tax rates.