Financial Monitor (March 2008 Budget Special)

We set out below various proposals outlined in the Chancellor’s Budget Speech on  12 March 2008 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 2008/09 are as follows:-                       

There will be a new 10% starting rate in 2008/09 for savings income only with a limit of £2,320.  If an individual’s taxable non-savings income is above this limit then the 10% will not be applicable.

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

Gift Aid – transitional relief
The reduction in the basic income tax rate from 22% to 20% affects the amount that UK Charities and Community Amateur Sports Clubs can reclaim under the Gift Aid scheme.  For donations made between 6 April 2008 and 5 April 2011 HMRC will pay these bodies a transitional relief supplement of 2% of the gross gift aid payment.

Higher rate taxpayers will be able to claim higher rate tax relief of 20% being the difference between the higher rate 40% and the basic rate 20%.

Company car tax benefit
The base figure of CO2 emissions on which the benefit is claimed will be 135g per kilometre of CO2 for 2008/09 and 2009/10 but will reduce to 130g for 2010/11.  This will increase the annual taxable benefit for most company car users by 1% of the list price of the vehicle when new.

Individual savings accounts
The limits for investment have been increased with effect from 6 April 2008 when it will be possible to invest up to £3,600 per annum into a cash ISA (currently £3,000) and up to £7,200 in a stocks and shares ISA (currently £7,000) with an overall limit of £7,200 (currently £7,000) in both ISAs.

Residence – days of residence in the UK
Under the current rules when deciding if an individual is resident in the UK for tax purposes all days spent in the UK are normally counted except those on which the individual arrives in or departs from the UK.  From 6 April 2008, when the individual is present in the UK at midnight then that day will count as a day of presence.  Normally therefore days of arrival will be counted but not the day of departure.

Days spent in transit where an individual is present at midnight will not be counted providing activities unrelated to the individual’s passage through the UK are not engaged in, eg. attending business meetings.

Non-domiciles
Currently non-UK domiciled individuals do not need to pay tax on foreign income and gains unless that income or those gains are remitted to the UK.

From 6 April 2008 UK resident individuals who are not UK domiciled but have unremitted foreign income and gains exceeding £2,000 will not be eligible for any of the personal income tax allowances nor the annual exempt amount for capital gains tax purposes if they claim the remittance basis on that income.

Adult non-domiciles who have been UK resident for more than seven of the past ten years and have unremitted foreign income and gains exceeding £2,000 will be able to retain the remittance basis treatment on that foreign income on payment of an annual charge of £30,000.  Individuals will be able to choose each year whether they want to claim the remittance basis and pay the £30,000 charge or alternatively pay UK tax on their worldwide income.

COMPANY TAX

Rates of corporation tax

From 1 April 2008 the effective rates of corporation tax are as follows:

Future changes to corporation tax rates

The corporation tax rates for companies with profits below £300,000 will increase to 22% on 1 April 2009.

BUSINESS TAX

Income shifting
The Chancellor’s proposals which would have affected all businesses where shares in partnership profits or company dividends are allocated in a tax efficient way rather than according to merit have been deferred until April 2009.

Capital allowances – integral features and thermal insulation
Certain integral features within a building, other than one used in a residential property business, will be eligible to be included in a new capital allowances pool which will attract an allowance of 10% of the pool value each year.

These features are:

• electrical systems (including lighting systems)
• cold water systems
• space or water heating systems, powered systems of ventilation, air cooling or air purification systems and any floor or ceiling comprised in such systems
• lifts, escalators and moving walkways
• external solar shading and
• active facades.

When more than 50% of the above features are replaced then the replacement cost will also be added to the pool.

Some of the above expenditure is currently eligible for a 25% writing down allowance but other expenditure currently obtains no tax relief at all, although replacement electrical systems are currently often eligible for 100% relief as repairs albeit with no relief for initial installation.  For most businesses these apparent reductions in tax relief will be compensated for by the Annual Investment Allowance which is referred to below.

Taxpayers will also qualify for the 10% rate on thermal insulation expenditure for property (currently only industrial buildings get 25% relief) although again residential property businesses are not eligible.

The above changes will have effect for expenditure incurred after 31 March 2008 by companies or after 5 April 2008 by individuals and partnerships.

Industrial Buildings Allowance (IBA), Agricultural Buildings Allowance (ABA) and Enterprise Zone Allowances (EZA)
IBAs and ABAs were abolished for new expenditure from April 2007 and are being phased out for expenditure incurred before then.  The rate of allowance is reducing from 4% to 3% in April 2008, from 3% to 2% in April 2009 and from 2% to 1% in April 2010, ceasing completely in April 2011.  

EZAs give 100% relief for expenditure on commercial buildings in specifically designated Enterprise Zone areas.  This relief will be withdrawn in April 2011 but there is no phasing out of the relief in the meantime.

Capital allowances – writing down allowances for plant and machinery (including cars)
The rate of writing down allowance for 2008/09 will be reduced from 25% to 20% but the rate for long life assets will increase from 6% to 10%.  Such long life expenditure will be included in the same pool as the integral features and thermal insulation expenditure referred to above.  The rates are apportioned for periods spanning April 2008.

Cars costing over £12,000 will continue to be restricted to a maximum annual allowance of £3,000.

Capital allowances – annual investment allowance (AIA)
From April 2008 all businesses including trades, professions, vocations and “ordinary” property businesses (ie. not residential) will be able to claim 100% tax relief on capital expenditure on plant and machinery, integral features, thermal insulation and long life assets up to a maximum of £50,000 in a year.  Expenditure in excess of £50,000 will attract WDAs in the 20% and 10% pools referred to above.

Group companies are only entitled to a single £50,000 AIA for the group but companies or businesses under common control have an allowance of £50,000 each unless the business activities are carried on from shared premises or involve similar activities.  Where the allowance needs to be shared then businesses can do that in the way they wish.  Unincorporated businesses and companies are not considered together so it is only combinations of either one or the other that requires the allowance to be divided between them.

Expenditure on cars does not qualify for the AIA but expenditure on long life assets and assets for leasing which currently do not qualify for first year allowances will be eligible.

The AIA is reduced or increased accordingly if the accounting period is less or greater than 12 months.  The AIA will also be apportioned in the first year if the business accounting period does not coincide with 31 March.  Consequently a company with a December year end will be able to claim 100% tax relief on expenditure up to £37,500 in the period from 1 April 2008 to 31 December 2008.

Capital allowances - small plant and machinery pools
A writing down allowance of up to £1,000 will be able to be claimed when the unrelieved expenditure in a capital allowances pool is £1,000 or less.  This will remove the need to claim small amounts of writing down allowances annually when current expenditure on plant, machinery etc. is covered by the Annual Investment Allowance.

Cars with very low carbon dioxide emissions
100% first year tax allowances are currently available on new (not second hand) low carbon dioxide emission cars (less than 120g/km).  This relief will be extended until 31 March 2013 but for cars with emissions less than 110g/km.  The 100% relief is still available for cars with emissions between 110g/km and 120g/km until 31 March 2008.

Enhanced capital allowances for energy efficient and water saving technologies
The current regime which gives 100% tax allowances for capital expenditure on certain energy saving and water technologies continues.  The lists of qualifying items are included on the Energy Technology Criteria list and the Water Technology Criteria list.  These lists have been amended to include the following items: waste water recovery, compressed air master controllers, compressed air flow controllers, heat pump dehumidifiers and white LED lighting.

Tax incentives for development of brownfield land
Land remediation relief which gives 150% tax relief for expenditure involved in land remediation will be extended from 1 April 2009 to include expenditure on derelict land and to the removal of Japanese Knotweed by treatment.

Capital allowances for business cars
From April 2009 the capital allowances treatment of all cars will be reformed.  Expenditure on cars with CO2 emissions above 160g/km will attract 10% writing down allowance annually whilst expenditure on cars with emissions of 160g/km or lower will attract 20% writing down allowance annually.

The rules which disallow a proportion of car lease rental payments will be amended so that only cars with CO2 emissions above 160g/km will incur a disallowance which will be 15% of the relevant leasing payments.

Research and development tax credit
From April 2008, the rate of research and development tax credit will rise from 125% to 130% for large companies and from 150% to 175% for small and medium enterprises (SME) (less than 500 employees and turnover under 100 million euros).  The SME increase is subject to approval from the European Commission.

Landfill tax
The rate of landfill tax will increase to £32 per tonne (previously £24 per tonne) from 1 April 2008 and to £40 per tonne from 1 April 2009.

Aggregates levy
From 1 April 2009 those exploiting taxable aggregate in the UK will be subject to a levy of £2.00 per tonne (currently £1.60 per tonne but increasing to £1.95 per tonne on 1 April 2008).

VALUE ADDED TAX

Registration limit
From 1 April 2008 the turnover limit for registration increases to £67,000 (currently £64,000) and the limit for deregistration increases to £65,000 (currently £62,000).

Fuel scale charge
The VAT fuel scale charge band has been amended.  The quarterly charges range from £20.55 for cars with emissions below 120g to £71.94 for those 235g or above.

For older cars which do not have a CO2 emissions figure, H M Revenue and Customs have allocated an emissions level based on cylinder capacity.

The new charges need to be applied to the first VAT accounting period commencing on or after 1 May 2008.

Smoking cessation products
The reduced VAT rate of 5% will continue to be applied to ‘over the counter’ sales of smoking cessation products when the initial legislation comes to an end on 1 July 2008. 

VAT – transitional period for VAT claims
Businesses registered for VAT between 1 April 1973 and 1 May 1997 have until 31 March 2009 to make any claims for any VAT repayments which were initially denied by Customs and Excise following the introduction of the three year time limit for claims.  Any businesses who believe overpayments have been made in that period can now make a claim.

Correction of errors
Currently errors in VAT Returns of less than £2,000 may be corrected in a subsequent VAT Return.  Errors exceeding this limit need to be notified separately to HM Revenue and Customs.

For VAT periods commencing after 1 July 2008 errors of up to £10,000 or 1% of net VAT Turnover (Box 6 on the Return) whichever is greater can be corrected on the next VAT Return.  There is an upper limit of £50,000 for such amendments.

CAPITAL GAINS TAX (INDIVIDUALS)

Annual allowance
The annual allowance is increased to £9,600 from 6 April 2008 (previously £9,200).

Rate of capital gains tax
Taper relief and indexation allowance will be abolished on 5 April 2008.  A capital gain will simply be calculated on the difference between net sale price and the cost of an asset or its March 1982 value if the asset was held at this date plus any improvement expenditure since acquisition or March 1982.  The annual allowance above will be deducted and the resulting gain will then be taxed at 18%.

Enterpreneur’s relief
The 18% rate referred to above will be reduced to 10% for certain gains of up to £1 million (this is a lifetime limit, not an allowance for each disposal).  The relief works by reducing the gain before annual allowance by 4/9 and then applying the 18% rate of tax which gives an effective 10% rate.

Broadly the relief will be available where the asset has been held for a least one year and comprises:

• disposals of goodwill and assets used by a sole trader or partnership in a trading business (includes furnished holiday lettings but not other property letting businesses).  Assets sold without the disposal of the business or part of the business unless following the cessation of the business will not qualify for the relief, eg. a farmer selling a pice of land but continuing to farm would not appear to qualify for the relief.

• shares held by an individual in a trading company or the holding company of a trading group where the individual owns at least 5% of the voting ordinary share capital and is an officer or employee of the company or of a company in the same group
  
  
• assets owned by an individual and used in a company for which they fulfil the qualifying conditions above.

INHERITANCE TAX (IHT)

Nil rate band
The nil rate band is increased to £312,000 (previously £300,000) from 6 April 2008 but there have been no changes in the rate of tax nor the various annual exemptions.  The nil rate band will be £325,000 in 2009/10 and £350,000 in 2010/11. 

Any unused nil rate band on the death of a spouse or civil partner can be carried forward and the proportion unused is available on the death of the surviving spouse or civil partner, calculated using the nil rate band in the year of second death.  Consequently a widow or widower who dies in 2008/09 could have up to £624,000 to set against the estate irrespective of when their spouse or civil partner died.

NATIONAL INSURANCE CONTRIBUTIONS

Rates - employed
From 6 April 2008 employees will pay 11% on earnings between £105 and £770 per week and 1% on earnings over £770 per week.  Employers will pay 12.8% on earnings over £105 per week.

Rates – self-employed
From 6 April 2008 Class 2 National Insurance Contributions will increase to £2.30 per week.  Class 4 Contributions will be 8% on profits between £5,435 and £40,040 and 1% on profits over £40,040.

MISCELLANEOUS

Review of powers, deterrents and safeguards

In order to align the rules for HM Revenue and Customs and Excise there will be amended powers for HMRC’s access to records and information which will include:

• a power to inspect records required under the record keeping legislation – this restricts the existing VAT and PAYE inspection powers but introduces a new power of inspection for Income Tax, Capital Gains Tax and Corporation Tax
• a power to require supplementary information which is relevant to establishing the correct tax position
• a power to visit business premises and to inspect records, assets and premises
• removal of VAT and PAYE powers to undertake inspections of private homes without the taxpayer’s consent
• penalties for failure to allow an inspection and failing to comply with an information notice
• appeal rights against any penalty and against information notices which have not been pre-authorised by an appeal tribunal.

In addition the time limit for making assessments will be aligned so that VAT assessments can now be made within 4 years (currently 3 years) unless there is deliberate understatement or failure to notify liability when the time limit will be 20 years.  The time limit for IT, CGT and PAYE assessment will also be 4 years and 20 years except in the case of failure to take reasonable care when the time limit will be 6 years.

Credit card payments
It is intended that HMRC will be in a position to accept payment by credit card from Autumn 2008.

Whilst every care has been taken in the preparation of these notes we can accept no responsibility for errors or omissions contained in them or for any loss arising from their use unless we have been consulted professionally prior to any action being taken.

UHY Wingfield Slater
Wellington House, 39 Wellington Street, Sheffield S1 1XB
Tel: 0114 275 1544  Facsimile: 0114 275 1366  Email: info@uhy-wingfieldslater.com  Web Site: www.uhy-wingfieldslater.com
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