Some first thoughts looking through todays budget summary, 22 June 2010.
We won’t comment on the economic background to the budget, or on the deficit, economy in general, etc – this has been done to death in the media already.
We will focus on primarily on tax changes, but other changes as well, as relevant to our clients.
It seems most changes are from April 2011, with the notable exception of the immediate CGT rate rise from midnight tonight, and VAT from 4 January 2011.
VAT: this is the biggest element in the budget – rising to 20% from 4 January 2011. The long lead in is welcome, as it will almost certainly allow for a “pre Christmas bonanza” at the end of 2010, with a strong blip in consumer expenditure in advance of the new year end new rate – politically, the timing is quite savvy. Anti forestalling measures apply to prevent, say, advance invoicing for goods / services to beat the increase. The rate takes the UK more into line with the EU a a whole.
Personal Tax: no rate changes, 50p rate to remain. Personal Allowance to increase by £1,000 from April 2011, but with a commensurate fall in Higher Rate threshold so that only Basic Rate tax payers benefit. Long term goal to get PA to £10,000. Rate bands likely to rise by inflation next year, to be announced later this year.
National Insurance: 1% rises for employers and employees to go ahead from April 2011 – the 1% employers increase (“tax on jobs”) was a hot topic in the election and its surprising to see it go ahead, but to offset its effect the starting limit for employers NI is increasing by £21 p/w above inflation – a quick calculation suggests that for 2010/11 (old rates) compared to 2011/12 (new rates) – employers are better off for employees under £20,800 and its only for employees earning over this that the 1% employers increase bites. Alas no relief at all for the employees element of this.
Capital Gains Tax: changes from tonight – its unusual to have a immediate change in a direct tax rate. Currently CGs are charged at 18% for all tax payers, after a annual exemption which is currently £10,100. From midnight, the CG rate will depend on total income, so that to the extent the chargeable gain falls into a taxpayers Basic Rate band the CG rate is 18%, but to the extent it falls into the Higher Rate or Additional Rate bands, the rate will be 28%. This is a lot lower than had been speculated pre budget.
CGT Entrepreneurs Relief: remains at 10% regardless of income, and lifetime allowance increases to £5m from £2m, again from tonight.
Corporation Tax: main and small companies rates to each reduce by 1% from April 2011, from 28% to 27% and 21% to 20% respectively. No change to small companies threshold, remaining at profit of £300,000.
Capital Allowances: from April 2012, main and special rate capital allowance rates to reduce from 20% and to% to 18% and 8% per annum. Annual Investment Allowance to reduce from £100,000 to £25,000. This is quite harsh – until recently the main Capital Allowance rate was 25%, and on a reducing balance basis even 25% takes a long time to relieve an asset, 10% for certain assets took even longer, and now we are seeing further reductions: of course AIA, initially £50,000, rising to £100,000 from April 2010, took the sting out of this by giving 100% allowances on that figure, but now thats been scaled back significantly. AIA never applies to cars, so the tax regime for relieving expense on cars is now looking very austere.
Zero Emission Goods vehicles: 100% capital allowances for these – useful if your spend is over and above the AIA level (see above) – below AIA level AIA is a 100% allowance anyway.
R&D relief: relaxing of rules about IP ownership.
Insurance Premium Tax: increases from January 2011, from 5% and 17.5% to 6% and 20%. NB IPT is not the same as vat and can’t be claimed back on your vat return, some businesses do try! However intentionally the higher rate of IPT is the same as vat, and this is to deter the shifting of value from standard rated goods on to exempt supplies like warranties or breakdown insurance.
Small business tax review: The Government remains committed to a review of IR35 and small business tax and will release details shortly”.
Landline Tax: confirmed scrapped.
Regional Development Agencies: to be abolished, but seemingly only after a White Paper later this summer on their replacement arrangements.
Bank Balance Sheet Levey & Commission on reforming banking, including bankers remuneration.
Benefit cut backs: including (i) lone parents with youngest child over 5 being moved to Jobseekeers allowance rather than Income Support – this has the effect of forcing them back into work (ii) Housing Benefit reform (iii) Disability Living Allowance reform (iv) reduction in Tax Credit eligibility for households with income over £40,000 (v) benefits and tax credits (other than state pension) to be indexed by CPI rather than RPI (vi) State Pension to have a guaranteed annual increase of either (a) prices (b) earnings or (c) 2.5% which ever is the highest (vii) review in the dates for rising of state pension age (viii) Child benefit frozen for thre years to fund above inflation increases in Child Tax credit. Taking all these measures together, other than the guarantee for state pensions, which is generous and politically savvy, the other changes are all likely to be cuts in one way or another, although there will be winners and losers.
ISA subscription thresholds: to be indexed linked.
Pensions tax relief: restrictions to remain, but simplification of the restrictions being consulted on.
Fair fuel stabiliser: Office of Budget Responsibility to be asked to undertake an assessment of the effect of oil price fluctuations on public finances, from which the Government will examine options for the design of a fair fuel stabiliser.
Tax collection: Government to use debt collection agencies to collect £140m of additional tax revenues this year.
General Anti Avoidance Rule: to be considered again
Deferral of implementation of Managed Payment Plans: these were to be a spreading scheme for tax bills – to be deferred.
Furnished Holiday lettings: the privileged tax rules for FHLs (where they are treated as a quasi business for most purposes, unlike other lettings) was to have been abolished from April 2010 but the clause was removed from the 1st 2010 Finance Act just before the general election, leaving the status quo. Its been confirmed this status quo continues, but there is to be a further review on eligibility and loss relief rules.
PAYE / NI security: a scheme was due to be introduced whereby HMRC could require security from businesses deemed at high risk of default – this already exists for VAT. This is now to be consulted on further rather than introduced as planned.
Pension Auto Enrollment: Government is ‘supportive’ of this, but its to be reviewed.
Employers supported childcare: to be restricted for Higher Rate & Additional Rate tax payers.
Company Car Tax: emissions thresholds being lowered as expected – this will increase tax costs unless more fuel efficient vehicles are purchased.
Associated Company Rules simplification: this has been coming for a little while, and its confirmed its still happening from next April – it applies to Companies under common control, and its operation, especially within extended families, is currently rather indiscriminate.
Business Rates (NNDR): the pre announced one year reduction from October 2010 for small premises will continue as planned, and there are some other specific changes to smooth effects of new valuations.