06.08.2010

Further emergency budget analysis: capital gains for some, losses for others. Tax boost for SMEs and workplace pension reforms in 2012.

Please click on the links below to read each article.

Budget brings capital gains for some and losses for others 
Following on from our Emergency Budget Alert last month we look at the issue of Entrepreneurial Relief vs Business Asset Taper Relief.

Encouraging news for smaller companies 
In contrast to most of the other tax rate changes announced in the emergency Budget in June, corporation tax rates are decreasing.   What advantage will this give medium and smaller companies?

NIC holiday for new businesses 
The Chancellor announced an employer’s NIC (National Insurance Contributions) holiday for new businesses setting up in certain parts of the UK. How will this effect your business?

Workplace Pension Reform 
October 2012 marks the beginning of the roll-out of the Government's workplace pension reforms which will change the face of employee pension provision in the UK. And it will very likely affect your company.

 

Budget brings capital gains for some and losses for others

The whole issue of Entrepreneurs’ Relief versus Business Asset Taper Relief (BATR) was raised again prior to the Emergency Budget, and indeed George Osborne even made reference to the old relief in his speech.  Since ER was introduced in April 2008, it has become apparent that it was not a direct substitute for BATR, and its drafting was much more akin to the old style retirement relief.  Apart from the level of gains on which ER is available, no other changes have been made.

Whilst there are some taxpayers for whom ER does give a substantial benefit, there are some classes of taxpayer for whom capital gains tax has most definitely gone up.  During the property boom of the 1980s and 90s, many individuals bought properties to let.  Taper relief was introduced in 1998 and non-business assets required to be held for ten years in order to gain the maximum benefit from this relief.  This meant that after ten years, a higher rate taxpayer would see the effective rate of tax on a capital gain fall from 40% to 24%.  On a disposal after 22 June, that same taxpayer has seen the rate of tax on their gain rise to 28%. 

There is also the whole question of furnished holiday letting (FHL).  The Labour government had fully intended removing all reliefs attached to FHL; however, the Finance Act passed earlier this year failed to make any mention of this.  The Coalition has left all the current reliefs intact, so that someone who meets the necessary conditions to make a let property qualify can enjoy a number of benefits; for example, the availability of losses arising from FHL to offset against other income and a gain arising on disposal which qualifies for ER, giving rise to a tax charge of 10%. 

And what about share disposals and capital gains tax reliefs?  Prior to the abolition of taper relief, many taxpayers invested in portfolios of shares listed on the Alternative Investment Market (AIM) as these shares qualified for business asset taper relief after a qualifying holding period of only two years.  There is no possibility of any such relief under the ER legislation, so again the gains on shares on AIM have increased for many taxpayers from 18% to 28%.  We are aware that those involved in the administration of AIM were, indeed, speaking to the Coalition regarding the possible return of reliefs, but to date this has not come about.

The other class of taxpayer which has received little coverage in all this is trusts.  Most trusts now fall into the discretionary trust regime, giving an income tax charge of 50% and, from 23 June, a capital gains tax rate of 28%.  Planning involving trusts can still be a useful tool in the right situation, but there is no doubt that with such punitive rates of tax in place, advisers and taxpayers will need to consider these very carefully indeed.
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Encouraging news for smaller companies 
In contrast to most of the other tax rate changes announced in the Budget, the corporation tax rates are decreasing: the mainstream rate will reduce from 28% to 27% with effect from 1 April 2011 and will reduce by a further 1% each year for the following three years, down to 24%.

Furthermore, the small companies rate that applies to companies with profits below £300,000 will reduce from 21% to 20% with effect from 1 April 2011.

These reductions in the corporation tax rates are essentially being funded by reductions in the rates of capital allowances: the annual writing down allowance for expenditure in the plant and machinery main rate pool will reduce from 20% to 18%; and from 10% to 8% for expenditure on the “special rate” pool (“special rate” expenditure relates to expenditure on fixtures on buildings, long life assets and cars with CO2 emissions in excess of 160g/km).

The current Annual Investment Allowance, which enables businesses to claim a 100% allowance on plant and machinery expenditure, will be reduced to £25,000 per annum, having only just been increased from £50,000 to £100,000 in the April 2010 Budget. In order that some benefit can be felt from the reduced corporation tax rates, the reductions in capital allowances will be delayed by a year, until April 2012.

Small and medium-sized businesses are being helped further in relation to their research and development (R&D) activities, in that in order to claim the enhanced relief for R&D expenditure, it will no longer be a requirement that they must own the intellectual property that derives from the R&D expenditure. This change will have effect for accounting periods ending on or after 8 December 2009, and it is expected that there will be further improvements made to the system of reliefs currently available, following a period of consultation with interested businesses.

As part of the Government’s commitment to reviewing all small business taxation, there is an indication that the much-criticised IR35 “taxation of intermediaries” legislation may be abolished. This legislation has been with us for ten years now, and although designed to attack “disguised employment”, it has often applied to small companies set-up for legitimate commercial reasons and not for tax avoidance.

The reductions in the rates of corporation tax are hoped to make the UK more attractive to international investors; however, one of the biggest deterrents to inward investment remains the Controlled Foreign Companies (CFC) provisions which cover the taxation of subsidiaries of UK companies that are based in low tax jurisdictions. These provisions are to be reformed, but in order to allow a sufficient consultation process, there is some disappointment that this is unlikely to happen before 2012.

Overall the Budget brought some encouragement for small and medium-sized companies, although those companies with high capital spend will be less happy about the reductions in the capital allowances rates, but at least there is a window for accelerating capital expenditure, before the reductions take place.
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NIC holiday for new businesses 
The Chancellor announced an Employer's NIC holiday for new businesses setting up in  certain parts of the UK. These new businesses will not have to pay the first £5,000 of Employer's NIC for each of the first ten employees hired in the first year of business.  However, as the  scheme is aimed at parts of the country that rely heavily on the public sector for employment, new businesses setting up in London,  south-east England and the east of England will not qualify for this scheme.

The proposed date for the introduction of the NIC holiday is 6 September 2010 although this date has still to be confirmed. Anti-avoidance provisions have already been hinted at in relation to the scheme in the question and an answer paper published on Budget Day stated "the Government will take steps to ensure that only businesses which undertake a sufficient degree of new economic activity will benefit."

Details of exactly how the scheme will work and who can participate are not yet available but an overview of the scheme, draft legislation and guidance for new businesses will be available on the HMRC website ahead of the launch of the scheme.  The scheme itself will last for three years and businesses which were in existence prior to 22 June 2010 will not benefit from the scheme.  The maximum saving per employee is £5,000 and, as this can apply to the first ten new employees, the maximum saving to the business is £50,000.

Details have yet to be announced in respect of business sectors that will be excluded from the scheme, but the initial views are that the coal sector will be excluded and that there will be restrictions for the agricultural and fisheries sectors. The NIC holiday will apply to most employees, but the saving will not apply to employees who operate under companies caught by the IR35 rules and employees engaged through managed service companies. 

This announcement is good news for new businesses in parts of the country but it is cold comfort for existing businesses who are struggling to stay afloat.
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Workplace Pension Reform 
2012 will bring us more memorable events that just the Olympics. October 2012 marks the beginning of the roll-out of the Government's workplace pension reforms.

It may not be as thrilling as the Olympics but it will change the face of employee pension provision in the UK. And it will very likely affect your company.

What's happening?
The Government wants to see everyone making some provision for their retirement. So, between 2012 and 2016 (starting with the largest employers), employers will have new duties to:

• automatically enrol most of their employees into either a 'qualifying' company pension plan or NEST (a new statutory, centralised pension scheme), and
• make payments to the plan.

Even employees who don't give consent will be automatically enrolled (although they can opt-out again).

What does it mean for you?
There is a high chance that the workplace pension reforms will impact on your existing company pension plan if you have one - and they will certainly create new pension costs if you're making employee pension provision for the first time.

Auto-enrolment is likely to increase employee take-up rates and, regardless of whether you use your own company pension plan or NEST, a total payment of 8% of employees' qualifying earnings will ultimately have to be made - with the employer putting in at least 3%.

The minimum payments are being introduced in 3 phases, starting at 2% and stepping up to 5% in October 2016 then the full 8% from October 2017.

One thing is for sure: all employers will have to review their employee pension arrangements to make sure they're in shape for the new regime. This review may also need to include contracts of employment – for instance there can no longer be probationary periods before entry into the scheme.

NEST is designed to be a simple, low cost centralised pension plan. But this drive for simplicity means that it will have little investment choice, low contribution limits, restrictions on transfers and few options on retirement. As a result it may not suit everyone.

A company pension plan gives more flexibility. Unlike NEST, there is scope to tailor the plan design to your specific needs, allowing you to make it more appealing to senior or more financially sophisticated employees.

Of course, you can use NEST and your own plan to meet the needs of different employees - albeit with the extra administration that running 2 pension plans brings.

Whichever option you choose, communicating with your employees is important so they understand the true value of their pension plan; a good pension advisor can help with this.

Act now
There's no doubt that a good pension plan is more than an 8% payment. With pensions higher on the agenda, getting the right pension arrangements in place for your employees and communicating them properly could make a big difference to staff retention and recruitment. And it makes sense to start planning ahead and budgeting early for any additional pension costs. So don't delay. Prepare well in advance and make sure you're ahead of the pack with your company pension.
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Contact:

David Boyd, Partner Corporate Tax
Morag Page, Director Personal Tax
Patricia Goldie, Manager, Employment Tax
Heather McGovern, Wealth Management