Financial Monitor (March 2006)

We have set out below various proposals outlined in the Chancellor’s Budget Speech on 22 March 2006 and subsequent Press Releases. This is not an exhaustive list of every item covered but includes those points we consider of importance to our clients. If you need any further information on any particular issue please contact our tax partner, Peter Newsam.

PERSONAL TAX

Tax rates and allowances
The rates and allowances for the tax year 2006/07 are as follows:-

*Limited to relief at 10% rate of tax only.

Individual Savings Accounts
The current ISA limit of £7,000 maximum and £3,000 for cash will be retained until 5 April 2010.

Changes to Venture Capital Scheme Investment
The rate of income tax relief for investments in a Venture Capital Trust was increased from 20% to 40% for two years from 5 April 2004. It was originally intended that the rate of relief should revert to 20% but it has now been decided that relief of 30% will be given from 6 April 2006. However, the minimum period that the investment must be held to qualify for the income tax relief is increased from three years to five years.

Changes to the taxation of Trusts
With effect from 6 April 2006 the standard rate band (tax payable at 22%) for trustees who pay tax at the special rate applicable to trusts (40%) is increased from £500 to £1,000. In addition, there are a number of technical amendments to align the rules relating to the taxation of trusts for income tax and capital gains tax purposes.

In addition, most interest in possession and accumulation and maintenance trusts are to be made subject to the same inheritance tax charges as discretionary settlements. The new rules will apply to all new trusts created after 22 March 2006 and to additions to existing trusts.
Existing accumulation and maintenance trusts will become liable to the new rules from 6 April 2008 whilst interest in possession trusts will become subject to the new rules when the current life interest ceases.

Pension contributions – the new scheme
Pension savings are currently governed by various different tax regimes limiting the amount that an individual can contribute to a tax-advantaged pension scheme and the consequent benefits that a scheme can pay out. Pensions simplification will replace the existing tax regimes with a single universal regime for tax-privileged pension savings. The numerous controls in the current regimes will be replaced by two key controls in the new regime:

• the lifetime allowance of £1.5m on tax privileged savings, rising to £1.8m by 2010; and
• the annual allowance of £215,000 or 100% of earned income whichever is lower, for savings in a tax privileged pension scheme, rising to £255,000 by 2010.

The new allowances are effective from 6 April 2006.

In addition, it will continue to be possible to pay a gross contribution of up to £3,600 per annum without the level of earnings being relevant.

COMPANY TAX

Rates of corporation tax
From 1 April 2006 the effective rates of corporation tax are as follows:-

Extension of Group Relief
It will now be possible in limited circumstances for UK Groups with foreign subsidiaries resident within the European Economic Area that have incurred foreign trading losses to offset these losses against UK taxable profits.

It will be necessary to take all possible steps to have tax losses relieved elsewhere before relief is claimed in the UK. In addition, the foreign loss will have to be computed in accordance with UK tax principles.

BUSINESS TAX

Company car tax
The current regime continues with the base level of CO2 emissions, at which 15% of the list price of a car is charged as a benefit, remaining at 140 grams per kilometre for 2006/07 and 2007/08. This base level will be reduced to 135 grams per kilometre in 2008/09. The maximum percentage to be applied remains at 35%. From 2008/09 there will be an additional percentage rate of 10% for company cars with CO2 emissions of 120 grams per kilometre or below.

The figure to which the car benefit percentage is applied to calculate the private fuel benefit charge remains at £14,400 for 2006/07.

Rate of first year allowances
The rate of first year allowance that can be claimed on investment in plant and machinery remains at 40% for medium sized businesses. An increased rate of 50% for small businesses is introduced for one year from 1 April 2006 for companies and from 6 April 2006 for unincorporated businesses.

Computers loaned to employees
It has been possible to loan computers to employees for private use without them incurring a benefit in kind charge providing the cost of providing the computers was less than £2,500 and all employees were eligible for the benefit. This exemption is removed from 6 April 2006 and consequently employees will be liable to an annual benefit in kind charge, calculated at 20% of the cost of providing the computers, apportioned for business and private use.

Mobile phones provided to employees
There is no benefit in kind charge where an employee uses an employment provided mobile phone for private calls. The legislation is being amended to confirm that the exemption only applies to one mobile phone per employee for their own private use.

Taxation of leased plant and machinery
The current rule where lessors of plant and machinery are entitled to claim capital allowances on its cost and are taxed on their rentals whilst the lessees are simply entitled to a deduction for rentals are to be changed for most leases in excess of five years. Effectively lessors will not claim capital allowances and will be taxed only on the element of rental which relates to finance charges, thus allowing the lessor to claim capital allowances on the amount that they would have been able to claim had they bought the asset and a tax deduction for that part of the rental charge on which capital allowances cannot be claimed.

Employer supported childcare
The tax and national insurance contributions exemption for employer supported childcare will rise from £50 to £55 per week (£217 to £243 per month) from 6 April 2006.

VALUE ADDED TAX

Registration limit
From 1 April 2006 the turnover limit for registration increases to £61,000 (currently £60,000) and the limit for deregistration increases to £59,000 (currently £58,000).

Fuel scale charges
There has been an increase in the VAT scale charge where private fuel is provided.

The VAT due per quarter will be:-

The new scale charge must be applied to the first VAT period commencing on or after 1 May 2006.

CAPITAL GAINS TAX (INDIVIDUALS)

Annual allowance
The annual allowance is increased to £8,800 from 6 April 2006 (previously £8,500).

INHERITANCE TAX (IHT)

Tax rates and allowances
The nil rate band is increased to £285,000 (previously £275,000) from 6 April 2006 but there have been no changes in the rate of tax nor the various annual exemptions. The nil rate band will be £300,000 in 2007/08, £312,000 in 2008/09 and £325,000 in 2009/10.

Pension scheme investment
Currently an IHT charge can arise if a scheme member does not exercise their right to take pension benefit, for example if they did not take their pension when their life expectancy was seriously impaired and this resulted in an enhanced death benefit payable to their beneficiaries. By Revenue concession such a charge is not made where the beneficiary is a spouse, civil partner or person who is financially dependent on the scheme member. This concession is now to be included in the legislation.

The new pensions tax regime introduces an option called Alternatively Secured Pension which overcomes the need for an annuity to be acquired when a scheme member reaches 75. To prevent the relief allowing scheme members to pass funds to their heirs tax free rather than providing a pension in retirement then any surplus in the scheme at death will be liable to inheritance tax unless the beneficiary is a spouse, civil partner, financial dependent or a charity.

NATIONAL INSURANCE CONTRIBUTIONS

Rates – employed
From 6 April 2006 employees will pay 11% on earnings between £97 and £645 per week and 1% on earnings over £645 per week. Employers will pay 12.8% on earnings over £97 per week.

Rates – self-employed
From 6 April 2006 Class 2 National Insurance Contributions will remain at £2.10 per week. Class 4 Contributions will be 8% on profits between £5,035 and £33,540 and 1% on profits over £33,540.

STAMP DUTY

Stamp duty – residential property
When residential property sales are completed after 22 March 2006 the threshold below which stamp duty is not payable is increased from £120,000 to £125,000. The higher threshold of £150,000 for properties in designated disadvantaged areas remains.

MISCELLANEOUS

Landfill Tax
The standard rate of landfill tax will be increased from £18 per tonne to £21 per tonne with effect from 1 April 2006.

Review of on-line services
The latest review of H M Revenue and Customs (HMRC) on-line filing services has produced the following recommendations which are accepted by HMRC.

• require businesses to file their VAT returns on-line;
• large and medium sized businesses (turnover over £5.6 million) plus all new registrations from 1 April 2008;
• companies and unincorporated businesses with annual turnover of more than £100,000 from 1 April 2010;
• all other VAT traders from 1 April 2012;
• employers with more than 50 employees will need to notify starters and leavers (P46 and P45 procedures) on-line from 6 April 2008. Other employers will need to comply from 6 April 2010;
• corporation tax self assessment returns will need to be filed on-line from 31 March 2010;
• from 2008 filing deadlines for income tax self assessment returns will be brought forward to 30 September for paper returns provided by HMRC and 30 November for returns filed on-line. It will no longer be possible for agents to use ‘substitute’ returns generated by their tax return preparation software.

To ‘compensate’ for the enhanced filing deadlines the time allowed for HMRC to enquire into the return will be twelve months from the filing date rather than twelve months from 31 January following the tax year as at present.

The above dates are provisional and are dependent on HMRC having fully tested IT systems in place.

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