Financial Monitor (March 2007)

Budget Special

We set out below various proposals outlined in the Chancellor’s Budget Speech on  21 March 2007 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 2007/08 are as follows:-

Future changes to income tax rates and allowances

The basic rate of income tax will be reduced to 20% from 6 April 2008.

The starting rate of 10% will no longer apply to earned income and pensions but will still be available for savings income and capital gains.  The rates of tax on dividends are unchanged.

Those aged over 65 will see their personal allowances increased by inflation plus £1,180 for 2008/09 and in 2011/12 the personal allowance for those over 75 is expected to be £10,000.

The basic rate band will be increased by inflation in 2008/09 and by £800 plus the  rate of inflation in 2009/10 and will be aligned with the upper earnings limit for Class 1 national insurance contributions.

Tax relief on personal term life assurance policies

The new pension rules introduced last year unintentionally provided tax relief on life assurance contributions paid within a pension scheme.  This relief has been withdrawn with effect from 1 August 2007 for occupational schemes and 14 December 2006 for personal pension schemes.

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.

The current distinction between mini and maxi ISAs is removed from 6 April 2008.

Taxation of foreign dividends

Individuals in receipt of dividends from foreign companies will be entitled to a tax credit identical to that on UK company dividends from 6 April 2008.  Consequently, those paying tax below the higher rate will have no further tax liability on foreign dividends and higher rate tax payers will pay a quarter of the dividend received in tax.

The individual must own less than 10% in the non-UK resident company and total dividends from non-UK companies must be less than £5,000.

Gifts to charities

Currently individuals making charitable donations above £1,000 can qualify for Gift Aid tax relief providing the value of any benefit they receive in consequence of making the donations is less than 2.5% of the value of the donation.  This figure is increased to 5% from 6 April 2007.  This restriction has an overriding limit of £500 (previously £250).

Homes abroad owned through a company

Directors who have use of an overseas property owned by a company whose sole activity is to hold that property will no longer face a benefit in kind charge if they use that property personally.

COMPANY TAX

Rates of Corporation Tax

From 1 April 2007 the effective rates of corporation tax are as follows:

Future changes to corporation tax rates

The main rate of corporation tax will be reduced to 28% (currently 30%) from 1 April 2008.

The corporation tax rates for companies with profits below £300,000 will increase to 21% on 1 April 2008, and 22% on 1 April 2009.

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 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 2007/08.

From 6 April 2008 there will be a 2% discount to the appropriate percentage rate for cars that have been manufactured to run on E 85 fuel.

Capital allowances - rate of first year allowance

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 continues until 31 March 2008 for companies and 5 April 2008 for unincorporated businesses.

Capital allowances – annual investment allowance

A new annual investment allowance for the first £50,000 of expenditure on plant and machinery will be introduced from 1 April 2008.  The detailed design and scope of this allowance will be the subject of consultation.

Capital allowances – writing down allowances

The rate of writing down allowances for plant and machinery will be reduced to 20% (currently 25%) from 2008/09 but the rate for long life assets will increase from 6% to 10%.  Writing down allowances on industrial and agricultural buildings will be gradually phased out by 5 April 2011 but balancing adjustments and recalculations of writing down allowances on sale will cease with immediate effect.  There are two exceptions: where there is a current contract for sale, or it relates to qualifying enterprise zone expenditure.

The rate of writing down allowance on fixtures integral to a building will be set at 10% (rather than the 25% which can be applied currently) effectively treating them as long life assets.  Detailed rules will follow but the change will apply from 2008/09.

The Government proposes to remove the expensive car rules and replace them with a simpler system of writing down allowances based on CO2 emissions.

Capital allowances – business premises renovation allowance

The legislation introduced in the Finance Act 2005 comes into effect on 11 April 2007 and will relate to qualifying expenditure incurred after 10 April 2007.

A 100% initial allowance will be available for capital expenditure incurred on the renovation or conversion of business premises that have been vacant for a year or longer in designated disadvantaged areas in the UK.

Managed services companies

These are service companies which can provide benefits equivalent to that of a limited company to individuals who would otherwise be employees.  In particular they have been used to avoid tax and national insurance contributions by making payments by way of dividend to these individuals.

With effect from 6 April 2007 all payments made by such service companies will be subject to PAYE whether or not they are deemed to be salary or dividends and in addition travel expenses to the ultimate client will not be a tax allowable expense.

Where PAYE is not deducted in these situations then the regulations will allow the sums not deducted to be collected from the director, the provider of the managed service company or persons actively involved in the provision of the individual services through the managed service company.

Research and development (R & D) tax credit

From 2008/09 and subject to state aid approval the enhanced deduction available to small and medium enterprises (less than 500 employees and turnover under 100 million euros) in respect of qualifying R & D expenditure will increase from 150% to 175%.  The value of the payable credit will remain at the current level (24% of qualifying expenditure).  The enhanced deduction available to large companies will increase from 125% to 130%.

Landfill tax

The rate of landfill tax will increase to £24 per tonne (previously £21 per tonne) from 1 April 2007 and £32 per tonne from 1 April 2008.

The lower rate of landfill tax for inactive waste will increase to £2.50 per tonne (currently £2.00 per tonne) from 1 April 2008.

Aggregates levy

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

Those improving, maintaining or constructing railways, tramways or monorails will be exempt from the levy from a date to be announced.

VALUE ADDED TAX

Registration limit

From 1 April 2007 the turnover limit for registration increases to £64,000 (currently £61,000) and the limit for deregistration increases to £62,000 (currently £59,000).

Cash accounting scheme

The annual turnover limit below which businesses can use the scheme is increased from £660,000 to £1,350,000 from 1 April 2007.  Business can remain in the scheme until their turnover reaches £1.6 million.

Fuel scale charge

New scale charges apply where businesses recover input tax on fuel used for private motoring.  The new system is based on CO2 bands and the quarterly charge ranges from £27.11 for cars with emissions below 140 g to £63.45 for those 240g 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 2007.

Smoking cessation products

From 1 July 2007 the reduced VAT rate of 5% will be applied to ‘over the counter’ sales of smoking cessation products.  The reduced rate will apply for one year.

Transfer of a going concern

It will no longer be necessary for the seller to transfer his business VAT records to the buyer when there been a transfer of a going concern.  This was a provision which was very rarely complied with but is still required in the cases where the buyer retains the same VAT registration number as the seller.

CAPITAL GAINS TAX (INDIVIDUALS)

Annual allowance

The annual allowance is increased to £9,200 from 6 April 2007 (previously £8,800).

INHERITANCE TAX (IHT)

The nil rate band is increased to £300,000 (previously £285,000) from 6 April 2007 but there have been no changes in the rate of tax nor the various annual exemptions.  The nil rate band will be £312,000 in 2008/09, £325,000 in 2009/10 and £350,000 in 2010/11.

Pre owned assets – late elections

Finance Act  2004 introduced an income tax charge whenever individuals have free or low cost enjoyment of properties which they had previously given away in a manner which avoided a charge to inheritance tax.  As an alternative to the income tax charge the individual can elect, by the 31 January following the year for which they became liable to the charge, to have inheritance tax treatment reintroduced for the property.  The legislation now allows for H M Revenue and Customs to accept elections made after the deadline.

NATIONAL INSURANCE CONTRIBUTIONS

Rates - employed

From 6 April 2007 employees will pay 11% on earnings between £100 and £670 per week and 1% on earnings over £670 per week.  Employers will pay 12.8% on earnings over £100 per week.

Rates – self-employed

From 6 April 2006 Class 2 National Insurance Contributions will increase to £2.20 per week.  Class 4 Contributions will be 8% on profits between £5,225 and £34,840 and 1% on profits over £34,840.

Future increase in national insurance thresholds

In 2008/09 the upper earnings limit which attracts the higher rate of employees’ and self employed national insurance contributions will be increased by £3,900 per annum above indexation.

STAMP DUTY LAND TAX

Exchange of property

A measure will be introduced from Royal Assent to prevent the “linked transaction” provisions applying to properties exchanged between connected persons.  This avoids a higher rate of stamp duty land tax applying than would be applied to exchanges between unconnected parties.

Payment of tax

From Royal Assent it will no longer be necessary to send payment of the stamp duty land tax with the return although payment will still need to be made by the filing date for the return.

Relief for buyers of new zero carbon homes

From 1 October 2007 to September 2012 new homes costing less than £500,000 which are certified to have zero carbon emissions on average over a year from all energy use in the home will be exempt from stamp duty land tax.  Where the home costs more than £500,000 the stamp duty will be reduced by £15,000.

The relief will not be available on second or subsequent sales nor on existing homes.

MISCELLANEOUS

Penalties for incorrect returns

A single new penalty regime will be introduced for incorrect returns for Income Tax, Corporation Tax, PAYE, NIC and VAT.  The penalty will be based on the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer.

There will be no penalty where a taxpayer makes a mistake, moderate penalties for failure to take reasonable care, higher penalties for deliberate action and still higher penalties for deliberate action with concealment.  Penalties will be substantially reduced where the taxpayer takes active steps to put right the problem.

The new regime will not be introduced before March 2009 at the earliest.

Changes to the income tax and corporation tax enquiry window

For income tax self assessment returns from 2007/08 and corporation tax returns for accounting periods ending after 31 March 2008 the one year time limit for H M Revenue and Customs to enquire into a return will begin on the date a return is filed.

This will in most cases give a shorter enquiry window than at present.

Payment of tax by cheque

Currently payments of corporation tax and VAT made by cheque are deemed to be made as soon as H M Revenue and Customs receive the cheque.  From a date to be announced the date of payment will be the date the funds clear H M Revenue and Customs’ bank account.

Filing dates for self assessment tax returns

From 2007/08 onwards paper self assessment tax returns must be filed by 31 October following the tax year but returns filed online will continue to have a filing date of  31 January following the tax year.

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
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