Alistair Darling today published his last Pre-Budget Report before the next general election, which must take place by 3 June 2010 at the latest.
The public sector borrowing figures announced were nothing short of awesome. Estimated borrowing for the current year was increased marginally by £3 billion to £178 billion with a further £176 billion forecast for 2010/11. Even with the Deficit Reduction Plan, public sector borrowing is still forecast to be £96 billion in 2013/14.
The introduction of a bank payroll tax, effective from 9 December 2009 to at least 5 April 2010, had been widely anticipated, but the measure is forecast to raise a relatively modest £½ billion and in reality is largely a political measure. The most significant tax changes were a further extension to the restriction of relief for pension contributions and an increase of 0.5% (on top of the 0.5% increase previously announced in 2008) in all national insurance contributions from 6 April 2011. Given that NIC is regarded as a “tax on jobs”, and that job creation is essential to a return to economic growth, this increase (which will raise additional revenue estimated at £3 billion) is potentially counter-productive.
The announcements about controls on spending were general, with the exception of a cap of 1% on the increase in the public sector payroll. Indeed, Mr Darling made it clear that public sector spending will continue to increase, albeit at a reduced rate of 0.8%. Whilst the announcement of curbs on future government contributions to certain public sector pension schemes are welcome, they are a drop in the ocean compared with the huge and ever-increasing contingent liability represented by public sector pension commitments.
The Chancellor acknowledged that there has to be a balance between controlling spending and encouraging a return to growth. Only time will tell whether he got the balance right, but there is concern that he has erred on the side of caution with one eye on the forthcoming general election.
Comment includes:
Tax and national insurance rates
Business tax
Personal tax
Savings and investments
Compliance
Tax and national insurance rates
Although no change was announced to the well publicised increase in the top rate of income tax to 50% from April 2010, the Chancellor introduced additional measures which will increase the tax burden, including:
- for the tax year 2010/11 all tax allowances and thresholds will be the same as for the current year. For the tax year 2012/13, the higher rate threshold (the point at which someone starts to pay higher rate tax) will be frozen at the 2011-12 amount;
- the Chancellor announced in 2008 an increase in national insurance rates of 0.5% from 6 April 2011. Today’s PBR announced a further increase of 0.5%. With effect from 6 April 2011 the main rate of class 1 and 4 will, therefore be 12% and 9% respectively with the additional rate increased to 2%. This therefore gives an effective highest rate of tax of 52% for employees;
- employers will also face an increased liability from April 2011, with the employer rate for non-contracted out contributions being increased from 13.3% to 13.8%. This increased rate will also apply to Class 1A and Class 1B contributions. Back to top
Business tax
Bank payroll tax
The Chancellor announced a new one-off payroll tax which will impose a 50% tax charge on banks and certain other financial institutions making bonus payments to certain employees.
The new tax applies from 9 December and will run initially to 5 April 2010, although the Chancellor has left the door open for further extensions. The 50% tax charge will apply to bonus payments to an individual over £25,000, and covers both discretionary and contractual bonus awards. There is an exception for contractual bonus entitlements where the payer has no discretion as to the amount of the bonus because of a contractual obligation existing at 9 December 2009.
The bank payroll tax will apply not only to cash bonuses but will also catch money’s worth benefits and loan arrangements. The tax will not apply to regular salary, wages or benefits.
Income tax and national insurance contributions will also be due from the employee in the normal way. The employer’s NIC position is also unchanged, and contributions will be due at the rate of 12.8%.
Tax due under the new levy will be payable on 31 August 2010. Legislation will be introduced setting out how the tax will be collected and managed.
When the charge becomes due, banks will be required to report details of all bonuses over £25,000 awarded to individuals during the relevant period, irrespective of whether or not they believe that the bank payroll tax applies to them. Furthermore the bank payroll tax will not be deductible when calculating the profit or loss arising for corporation tax or income tax purposes.
Careful consideration will therefore need to be given as to whether or not a company’s activities are within the scope of this new tax.
Back to top
Business payment support scheme
The Chancellor announced an indefinite extension of the business payment support scheme under which businesses can agree a payment plan for their tax liabilities with HMRC. Agreement of a plan avoids penalties and surcharges which would otherwise arise, but not interest on overdue tax. A new requirement is that businesses seeking time to pay debts over £1 million will have to provide an independent review of their needs, so that HMRC can make an informed decision.
Back to top
Patent income
A welcome announcement was the introduction of a reduced rate of corporation tax of 10% on income from patents. Legislation will be included in the Finance Bill 2011 and the reduced rate will apply from April 2013 to income from patents granted after the legislation is passed.
Back to top
Research and development tax relief
Measures are to be introduced in the Finance Bill 2010 to remove the requirement for a company incurring research and development expenditure to own the intellectual property derived from that expenditure in order to be able to claim R&D tax reliefs. This change applies to small and medium-sized enterprises for accounting periods ending on or after 9 December 2009.
Back to top
Controlled foreign companies
A consultative document is to be issued in the New Year on the controlled foreign companies legislation. Other consultative documents on CFCs which have been issued in the past few years have resulted in significant uncertainty and have contributed to a number of major UK companies, such as WPP, moving their headquarters overseas. It is to be hoped that HMRC will take this into account in drafting the new document.
Back to top
Electric vans
A 100% first year allowance is to be introduced for businesses purchasing electric vans from 1 April 2010 (6 April 2010 for those within the charge to income tax). The allowance, which is subject to state aid approval, will be available only on expenditure incurred on new, unused electric vans and extends the range of “green technology” assets eligible for a 100% first year allowance. These assets include electric cars, cars with CO2 emissions below 110g/km and energy-saving plant and machinery.
Back to top
Enterprise management incentives
The requirement for a company granting share options under the Enterprise Management Incentive scheme to operate wholly or mainly in the UK will be removed for options granted on or after 6 April 2010. The company will instead be required only to have a permanent establishment in the UK. This is to comply with EU state aid requirements. This change will enable certain foreign companies operating in the UK to participate in the tax-advantaged EMI share option arrangements.
Back to top
Staff canteens
Currently the provision of free or subsidised meals to directors and employees in a canteen or on the employer’s premises is exempt from tax but the costs are deductible for the employer. From 6 April 2011, any canteen provision which is funded by salary sacrifice arrangements will be denied tax relief to the extent of the cost, which is funded by foregone taxable employment income. Provision where no such funding arrangements are in place is unaffected by this change.
Back to top
Index-linked gilt-edged securities
Anti-avoidance measures are introduced to counter avoidance using index-linked gilt-edged securities. The increase in the carrying value of an index-linked gilt during an accounting period resulting from an increase in the retail price index is generally not chargeable to corporation tax. However, from 9 December 2009 where a company has entered into swap arrangements or other transactions which limit the company’s economic exposure to inflationary adjustments, the company will not be able to benefit from tax-free uplifts in the carrying value of its index-linked gilts.
Back to top
VAT
The VAT standard rate will rise to 17.5% on 1 January 2010 as planned. Set rates used under a special scheme for small businesses called the VAT Flat Rate Scheme will also change on the same date. There were no other VAT changes.
Back to top
IPT premium splitting
Insurance premium tax is an indirect tax paid by an insurer on the gross premium charged under a taxable insurance contract (generally, non-life) which includes any commissions or fees unless they are charged to the insured under a separate contract. Legislation will be introduced in the Finance Bill 2010 to close an avoidance scheme involving an “administration fee” charged under a separate contract. The legislation brings such fees charged under a separate contract in connection with personal lines insurance (i.e. with private individuals) into the scope of IPT.
The legislation affects payments made on or after 9 December 2009. Charges for services provided in connection with insurance contracts with businesses and other organisations are not affected.
Back to top
Disclosure of SDLT avoidance schemes
Promoters of what HMRC refer to as “avoidance schemes” in most tax areas are required to disclose them to HMRC. Some commercial property schemes are already included in the disclosure regime. Legislation is being introduced to bring stamp duty land tax schemes that concern non-residential property with an aggregate value of at least £5 million, and also residential property with a value of at least £1 million within the ambit of these rules. The rules will also affect mixed developments where either of the above limits for non-residential or residential property are breached. The regulations are expected to come into effect by no later than 1 April 2010.
Back to top
Other
The Chancellor announced that the increase in the small companies’ rate of corporation tax from 21% to 22% is to be delayed for a further 12 months to 1 April 2011.
Other announcements included:
- relaxation of aspects of the North Sea fiscal regime;
- changes to the tax provisions relating to financial instruments to take account of changes to their accounting treatment;
- changes to the worldwide debt cap legislation which will apply to “large” companies for accounting periods beginning on or after 1 January 2010;
- the issue of a consultative document containing proposals to simplify the capital gains regime for groups of companies;
- discussions concerning the possibility of exempting foreign branch profits;
- the introduction of an anti-avoidance measure to counter the use of hedging transactions within groups of companies to obtain UK tax benefits;
- changes to the anti-avoidance provisions relating to the leasing of plant or machinery and the sale of businesses which lease plant or machinery; and
- the extension of anti-avoidance measures announced in July 2009 concerning the transfer of latent capital allowances on plant and machinery used for a trade.
The following previously announced changes were confirmed:
- amendments to the legislation on debt buy backs;
- anti-avoidance provisions on double taxation relief; and
- the introduction of measures to counter attempts to avoid tax under the CFC rules using payments of UK manufactured interest and manufactured overseas dividends.
Back to top
Personal tax
Changes to company car tax
The Chancellor announced that in accordance with the Government’s policy on restricting carbon emissions, the lower threshold for calculating company car and fuel benefits would be increased by a further 5% from 6 April 2012.
Legislation will also be introduced to fully exempt electric cars and vans from the company car tax regime for five years, commencing 6 April 2010. The current percentage of 9% will therefore no longer apply. In contrast, the notional price used for calculating the value of the benefit of free fuel provided to company car drivers will be increased from April 2010. The current amount on which benefits are calculated of £16,950 will be increased to £18,800. The van fuel benefit is also increased by £50 to £550 per year.
Back to top
Seafarers’ earnings deduction
The seafarers’ earnings deduction (SED) can provide 100% tax relief on a seafarer’s earnings, where the duties on a ship are carried out wholly or partly outside the UK. At present, EU or EEA resident seafarers may pay UK tax on their earnings, when a UK resident would not. From 6 April 2011, UK legislation will be revised so that EU and EEA resident seafarers will be taxed on the same basis as their UK resident colleagues.
Back to top
Furnished holiday lettings
As announced in the 2009 Budget, the furnished holiday lettings rules will be abolished from 6 April 2010. The PBR provided more detail on the transitional arrangements.
Losses incurred before 6 April 2010 will be allowed only against future rental profits. However, capital allowances on qualifying expenditure incurred before 6 April 2010 can continue to be claimed and the 10% wear and tear allowance will be available.
The various other generous reliefs, such as capital gains tax rollover relief, from which FHLs have previously benefitted, will all cease to be available from 6 April 2010. It is therefore important to consider utilising the available reliefs before 6 April 2010 wherever possible.
Back to top
Principal private residence relief
In the normal course of events, the sale of an individual’s main residence is free from capital gains tax through PPRR. Currently, where a person cares for an adult under a local authority placement scheme, their contract with the local authority may require them to provide a room in their house for the use of the adult in care. Previously this could have the effect of restricting PPRR on the sale of the property. Finance Bill 2010 will remove the restriction so that in these circumstances PPRR will be available in full.
Back to top
Inheritance tax
The Finance Act 2007 had previously provided that the threshold below which IHT is not payable would be raised to £350,000 on 6 April 2010. Due to falling asset values and a perception that raising IHT thresholds is not a priority in the current economic climate, the PBR repeals that announcement and will freeze the threshold at the current rate of £325,000
In addition, certain IHT anti avoidance arrangements that sought to avoid the upfront 20% IHT charge on transfers into trusts have also been stopped from 9 December 2009.
Back to top
Savings and investments
Pensions tax relief
In the 2009 Budget, the Government announced its intention to restrict tax relief on pension contributions for individuals with annual taxable income of £150,000 or more from 6 April 2011. Relief will be tapered away from those earning £150,000 and above and for those earning over £180,000, tax relief for contributions will be limited to 20%. At the same time the Government introduced anti-forestalling legislation to restrict higher rate tax relief through a special annual tax charge, currently 20%, payable on excess contributions made by individuals earning £150,000 or more.
The Government announced the following additional changes in the PBR:
- employer contributions will be included when calculating whether an individual has taxable income of £150,000 or more;
- from 9 December 2009, the special annual allowance will also apply to individuals with income of £130,000 or more during the current tax year or in either of the two preceding tax years; and
- individuals with income below £130,000, including an individual’s own pension contributions and charitable donations, but before the inclusion of employer pension contributions, will not be subject to the restrictions.
The amended anti-forestalling provisions will affect contributions paid on or after 9 December 2009.
Furthermore, from 6 April 2010 the special annual allowance tax charge will be set at the ‘appropriate rate’. This will be determined by the rate of tax relief given on the amount of an individual’s pension contributions which exceed their special annual allowance and will restrict tax relief on that excess to the basic rate of income tax, currently 20%.
Therefore, for example, should pension savings made by an individual in the 2010/2011 tax year that exceed their special annual allowance attract relief at 50%, the appropriate rate that would apply would be 30%, reducing tax relief to 20%.
Changes to tax rates for special charges
The tax rate deducted by pension schemes where a refund of contributions is requested by a member who has completed less than two years service will change from 20% on the first £10,800 of refunded contributions and 40% thereafter, to 20% on the first £20,000 and 50% thereafter for refunds made on or after 6 April 2010.
A tax charge of 40% is currently payable by a recipient who is not an individual of certain lump sums, gratuities or other benefits from an employer-financed retirement benefit scheme. For benefits received on or after 6 April 2010 the tax rate will increase to 50%.
Back to top
EIS companies
HMRC has revised its interpretation of Enterprise Investment Scheme legislation and has confirmed that companies carrying out their qualifying activity in partnership with an external third party company will no longer qualify under the EIS rules. This change in interpretation will not affect EIS shares that have already been issued where the certificate of compliance has been authorised on or before 9 December 2009, and therefore an investor’s ability to claim relief on such investments is also unaffected. There may, however, be adverse implications for EIS companies where shares have not yet been issued, or shares have been issued but the certificate of compliance has not yet been authorised.
Back to top
Venture capital schemes
Draft legislation has been announced implementing a number of changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). The proposed changes are required to secure state aid approval for the schemes and to align the schemes more closely with the EU requirements.
Back to top
Film tax relief
The Finance Bill 2010 will introduce legislation to correct an anomaly affecting the amount of tax credit claimable by film production companies where films are produced over two or more accounting periods. The revision, which is effective for accounting periods ending on or after 9 December 2009, will adjust the way in which the amount surrenderable for tax credit is calculated. The calculation will become the lesser of the available qualifying expenditure and the loss for the period, plus any unsurrendered loss brought forward. Previously, any unsurrendered loss brought forward was not included in the loss for the period.
Back to top
Compliance
Countering avoidance and evasion
A number of specific anti-avoidance measures were announced. In addition, the documents issued with the PBR include an HMRC report, Protecting Tax Revenues 2009. This includes the announcement of the introduction of a Code of Practice for the banking sector to encourage responsible tax planning, governance and transparency, and the formation of a hidden economic advisory group to address undeclared economic activity. A consultative document is also to be issued on the legislation which counters tax advantages in connection with transactions in securities.
Back to top
Disclosure of tax avoidance schemes
Currently promoters of certain tax avoidance schemes must disclose those schemes to HMRC.
The Government has issued a consultation document on the DOTAS arrangements to consider greater penalties for failing to disclose a scheme; a requirement for the names of taxpayers who have participated in schemes to be disclosed to HMRC; and a tightened definition of the schemes that have to be disclosed, amongst other measures.
These proposals may catch far more arrangements than previously and may include planning utilising employee benefit trusts; arrangements where an income return is converted into capital; and transactions involving a country on the OECD list of uncooperative tax havens.
This is part of HMRC’s crackdown on what they view as unacceptable tax avoidance to maximise tax revenues.
Back to top
Offshore evasion
The PBR announced the Government’s intention to introduce “robust” measures to tackle offshore tax evasion.
Legislation will be introduced to enable HMRC to levy higher penalties (up to 200% in certain cases) and to introduce offshore bank account opening disclosure arrangements. Further details will be available when the draft legislation is published and at present there is no firm date for implementation.
Back to top
Equitable liability
Under self assessment there is a statutory requirement for certain taxpayers to file tax returns. Failure to submit returns where required will result in HMRC issuing estimates of liabilities (determinations).
Determinations can only be set aside by the filing of returns within five years from the filing deadline. After that date the determinations are deemed to be final. However, some taxpayers fail to meet these deadlines but by concession HMRC have collected only the amounts actually due even if the returns are out of time (equitable liability).
Legislation will be introduced to confirm these arrangements providing certain conditions are met and to ensure HMRC should not collect tax in excess of the actual amount due.
Back to top
This commentary is provided for information purposes only and does not constitute any form of financial or investment advice. Past performance is no guarantee of future investment returns and you should be aware that the value of your investments can go down as well as up.
We believe the information contained herein to be correct at going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of acting or refraining from acting in reliance on this publication or any item herein. This commentary is not a substitute for professional advice.
Published by © Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide association of independent firms. Moore Stephens LLP is registered to carry on audit work by the Institute of Chartered Accountants in England and Wales. Authorised and regulated by the Financial Services Authority for investment business.
9 December 2009