PBR 2008
What you need to know from the Pre Budget Report 2008. Changes to VAT, Income Tax, Business tax and NIC.
25.11.2008
What you need to know from the Pre Budget Report 2008. Changes to VAT, Income Tax, Business tax and NIC.
Chancellor Alistair Darling cut VAT from 17.5% to 15% as part of a £20bn package aimed at kick starting the UK economy. But a new 45% income tax rate for earnings over £150,000, and across the board increases in national insurance rates, will help pay for it. Duties on alcohol, tobacco and petrol will rise so their price remains at their current level.
- VAT
- Income Tax
- Increase in NIC
- Business Tax Changes
- Small Companies
- Other Business Tax Changes
- Pensions
- Authorised Investment Funds
- Film Partnerships
- Air Passenger Duty
As widely forecast, the standard rate of VAT will be reduced by 2.5% to 15%. The change will take effect from 1 December 2008 and will last for 13 months. The standard rate of VAT will, therefore, revert to 17.5% on 1 January 2010.
Businesses should apply the 15% rate of VAT to all supplies of goods or services with a tax point falling on or after 1 December 2008. However, businesses may be able to use special provisions to apply the 15% VAT rate to certain supplies made before 1 December 2008. These special provisions will be available for 45 days after the rate change.
HM Revenue & Customs will introduce ‘anti-forestalling’ legislation to prevent businesses using artificial arrangements to obtain a lower VAT cost on supplies that will take place after the standard rate reverts to 17.5% on 1 January 2010.
Changes to the income tax regime were announced for the next three years.
The changes for 2009/10 comprise mainly inflation related increases to allowance and tax bands as follows:
- the personal allowance will increase from £6,035 to £6,475;
- the age allowance for ages over 65-74 will increase from £9,030 to £9,490*;
- the age allowance for ages over 75 will be increased from £9,180 to £9,640*;
- *the income limit will increase from £21,800 to £22,900;
- the married couple’s allowance will increase from £6,625 to £6,965+.
The changes announced for 2010/11 introduce changes to the personal allowance regime for high earners.
If an individual’s gross income (after deductions of any trading losses) falls between £100,000 and £140,000 inclusive, the personal allowance will reduce to a minimum of half the normal personal allowance. Therefore, if in 2010/11, the personal allowance was £6,800, gross income of £106,800 - £140,000 would reduce the personal allowance to £3,400.
Gross income above £140,000 reduces the personal allowance by a further £1 for every £2 of income in excess of £140,000. Therefore, if 2010/11 personal tax allowance were £6,800, a person with gross income in excess of £146,800 would receive no basic personal allowance.
In 2011/12, income over £150,000 will be taxed at 45% (except dividends). The trust rate, which applies to discretionary trusts, will also increase to 45% (except dividends).
For dividends:
- taxable dividend income otherwise taxable at basic rate will be taxed at 10%;
- taxable dividend income up to £150,000 otherwise taxable at higher rate will be taxed at 32.5%;
- taxable dividend income otherwise taxable at the new 45% rate will be taxed at 37.5%;
- the dividend trust rate will be 37.5%.
First increase in NIC percentages in five years
The Chancellor announced the first increase in the NIC percentages in five and a half years. The 0.5% increase will apply for employees, employers and the self employed from April 2011.
This increase will cost employees an extra £440 million and employers £2 billion.
The lower threshold at which NIC becomes payable will also be realigned with the income tax basic personal allowance from 2011/12, which will somewhat offset the above increases.
Overall, these are the biggest tax increases that working taxpayers will face in the next four years and the Government hopes that the pain will be offset by the forecasted growth in the economy.
Extension of trading loss carry back
An unexpected and welcome announcement was a temporary extension of the provisions which allow trading losses to be carried back.
Companies can currently carry back trading losses for one year. However, for accounting periods ending between 24 November 2008 and 23 November 2009 it will also be possible to carry back up to £50,000 of trading losses for a further two years. Relief for trading losses incurred by unincorporated businesses for the tax year 2008/2009 will also be extended in a similar manner.
Loss making businesses should ensure that they finalise their accounts and submit their tax computations as soon as possible after the year end to obtain repayments due on a timely basis. In addition, consideration should be given as to whether a change in accounting date might increase the relief available.
Small companies rate of corporate tax: Another heavily trailed measure was the postponement for one year of the increase in the small companies rate of corporation tax. This will remain at 21%, increasing to 22% from 1 April 2010.
Where possible, companies that enjoy the benefit of the small companies rate should consider accelerating revenue and deferring expenditure so as to benefit from the postponement.
It was confirmed that from April 2009, capital allowances on “expensive cars” costing over £12,000 will be based on the CO2 emissions of the car. The restriction on allowable lease payments for expensive cars will also be based on the CO2 emissions.
A defect in the loan relationship rules which apply to companies is to be corrected. Currently, where a creditor company releases a connected debtor company from a trade debt, the creditor is denied any relief even though the debtor may be taxed on its “profit”. For accounting period beginning after 31 March 2009, the debtor will not be taxable on the release. Such releases should therefore be deferred until the new rules apply.
The rules on the timing of relief for interest paid to overseas group companies are also to be changed after consideration of responses received to a recent consultation exercise.
Other changes were announced to:
- anti-avoidance provisions relating to plant and machinery leasing and the sale of companies leasing plant and machinery;
- the regulations that deal with the taxation consequences of a change of accounting practice with regard to financial instruments;
- claims for equalisation relief by corporate members of the Lloyd’s insurance market;
- and the taxation of gains, stamp duty and stamp duty reserve tax in connection with certain stock lending arrangements.
Taxation of foreign profits
Recent proposals to reform the taxation of foreign profits have been controversial and created considerable uncertainty, contributing to the decision by a number of FTSE companies to relocate their headquarters to countries such as the Republic of Ireland and Luxembourg.
Large and medium-sized groups will strongly welcome the announcement that foreign dividends received on ordinary shares and most non-ordinary shares will be exempt from UK tax. However, this exemption will be balanced by a targeted anti-avoidance rule and, more significantly, a cap on interest deductions by UK members of a multinational group by reference to the group’s consolidated net external finance costs. The rules which deny relief for interest incurred for unallowable purposes will also be extended and consequential changes will be made to the rules on Controlled Foreign Companies.
Draft legislation will be published later this year for consultation, with a view to including these reforms in the 2009 Finance Bill. Consideration should be given to:
• deferring the repatriation of profits from subsidiaries in lower-taxed jurisdictions; and
• reorganising group financing arrangements.
Representations should also be made on publication of the draft legislation including its extension to small groups.
The government has deferred a decision on the controversial aspects of further reforms to the controlled foreign companies’ rules and consultation will continue through 2009.
One further change is the abolition of the requirements to obtain consent from the Treasury in advance of the issue of shares by an overseas subsidiary or a change in control of such a subsidiary. This is one of the few provisions of the Taxes Acts breach of which is a criminal offence. These rules and the notification requirements will be repealed and replaced by a quarterly reporting requirement for high-risk transactions with a de minimis limit of £100 million.
Lifetime and annual allowances
Tax-relieved saving in a registered pension scheme is subject to an overall limit called the lifetime allowance (LTA). This was set at £1.5m when it was introduced in April 2006 and will rise to £1.8m in 2010/11. The annual contribution limit on which tax relief can be claimed is called the annual allowance (AA). This was set at £215,000 when introduced in April 2006 and will rise to £255,000 in 2010/11.
However, the Government has decided to freeze both of these limits from April 2011and will hold them constant for the next five years i.e. up to and including the tax year 2015/16. Given that, in the first five years, the annual increases averaged 3.75% for the LTA and 3.47% for the AA, this will not only reduce the contribution relievable against income tax in real terms, but will also increase the potential for an individual’s pension plan to become liable to the 55% surplus tax for those who do not have existing transitional protection in place. It will also make planning to maximise the available LTA more difficult since any investment that produced a positive return of any kind would be subject to a 55% tax charge when benefits were taken.
From a planning perspective, individuals who were at, or approaching, the LTA limit in 2010/11 may find it more tax-efficient to start taking pension benefits from their pension plans in the form of an income to reduce the fund value rather than defer benefits in the knowledge that any increase in value would be taxed at 55%.
Pension reforms and Class 3 voluntary NIC increase
From 2010, the pension reforms already announced will provide a simpler and more generous state pension. Contributions will only need to have been paid in 30 years to qualify for a basic state pension. However, the Government is changing the rules for those people reaching state pension age between April 2008 and 2015, with only 20 qualifying years so that an extra six years can be purchased. To keep the cost neutral, the Class 3 NIC rate will rise by 50% to £12.05 per week, an annual increase of £205.
Investment
Authorised Investment Funds (AIFs)
A number of measures have been introduced regarding Qualified Investor Schemes (QISs), which are a type of AIF, which may only be marketed to sophisticated investors.
The limit of 10% by an investor in a QIS has been replaced by a genuine diversity of ownership rule. This effectively brings the QISs in line with the standard AIFs and removes the tax charge on substantial investors.
After 1 January 2009, a measure will be brought in to exempt ‘feeder funds’ to Property AIFs from Stamp Duty Reserve Tax, and to clarify the general tax position of distributions from Property AIFs.
An anti-avoidance measure will be brought in to ensure that only certain investors, i.e. general insurance companies, are allowed not to treat AIF dividends as a trading receipt.
Legislation will be introduced in the 2009 Finance Bill legislation to counter film partnership schemes which attempt to reduce the tax payable within the partnership by replacing existing film leases with long funding leases of plant and machinery.
This is designed to effectively replace a taxable income stream with a largely non-taxable income stream within the partnership.
If you are a partner in a film partnership, attempting to restructure the agreed terms of the partnership for future tax benefits, then please act with care and seek independent professional advice.
Air passenger duty will be increased substantially from 1 November 2009 by reference to four geographical bands, based on the distance from London. The tax on short haul economy flights to Europe will go up by 10% in 2009/10 and 20% in 2010/11, increases of £1 and £2 respectively. Long haul flights to more exotic locations will increase by between 25% and 112% of current rates, for example the biggest economy class fare increase will be from the current level of £40 to £85 in 2010/11, while long haul business and first class fares will increase from £80 to £170. These changes will apply to any flight, which departs on or after 1 November 2009, irrespective of whether the flight was booked or paid for before that date.
Air passenger duty is paid by airlines on passengers travelling. While it is the airline’s choice to pass on this cost to its customers, these significant increases may be difficult for the airlines to absorb in the present financial climate.
back to top
