BUDGET REPORT 2009
This budget has been held after the start of the new tax year for 2009/10 and is the latest date since 1945.
Income tax
The 2009 Budget has announced the following income tax changes:
- from 2010/11, there will be an additional higher rate of 50% for taxable income above £150,000;
- from 2010/11 the basic personal allowance for income tax wil be gradually reduced to nil for individuals with "adjusted net incomes" above £100,000;
- from 2010/11 there will be increases to the trust rate and dividend trust rate to match those for income tax.
For 2009/10 there are two main rates of income tax. The 20% basic rate of income tax applies to taxable income up to £37,400. the 40% higher rate applies to taxable income above £37,400. From April 2010, a 50% additional rate of tax will apply to taxable income above £150,000.
From 2010/11, the basic personal allowance will be subject to a single income limit of £100,000. Where an individual's adjusted net income is below or equal to the £100,000 limit, they will continue to be entitled to the full amount of the basic personal allowance.
The personal allowances for 2009-10 are as follows:
- The basic personal allowance will be £6,475. For 2008-09 it was £6,035.
- For individuals aged 65-74 it will be £9,490. For 2008-09 it was £9,030.
- For individuals aged 75 and over it wil be £9,640. For 2008-09 it was £9,180.
Trading losses
Legislation will be introduced in Finance Bill 2009 to extend the ability of businesses to carry trading losses back against profits of earlier years to get a repayment of tax.
The measure will have effect on and after 22 April 2009 for company accounting periods ending in the period 24 November 2008 to 23 November 2010 and for tax years 2008-09 and 2009-10 for unincorporated businesses.
Trade loss carry back will be extended from the current one year entitlement to a period of three years, with losses being carried back against later years first.
The amount of trading losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximium of £50,000 of unused losses will be available for carry back to the earlier two years. This £50,000 limit applies separately to the unused losses of each 12 month period or tax year within the duration of the extension.
Corporation Tax
Legislation will be introduced in Finance Bill 2009 to keep the small companies' rate for all profits, apart from ring fence profits, at 21% form 1 April 2009 and keep the fraction of the marginal small companies' rate at 7/400.
The small companies' rate for ring fence profits remain at 19% from 1 April 2009 and the marginal small companies' relief fraction for ring fence profits will remain at 11/400.
The main rate of corporation tax after 1 April 2010 will remain at 28% and for companies' ring fence profits will remain at 30% on and after 1 April 2010.
Capital Allowances
Legislation in Finance Bill 2009 will introduce a new temporary 40% first-year allowance (FYA) for expenditure on general plant and machinery.
The temporary FYA will be available to:
- any individual carrying on a qualifying activity;
- any partnership; and
- any company.
The temporary FYA will apply to qualifying spending incurred in the 12 month period beginning on 1 April 2009 for the purpose of corporation tax, and on 6 April 2009 for the purpose of income tax.
As with previous and existing first-year allowances there are exceptions where the expenditure will not qualify for the temporary first-year allowance, the main exceptions include "special rate" expenditure (including long-life assets and integral features), expenditure on cars, and on assets for leasing.
The Energy Saving and Water Efficient Enhanced Capital Allowance (ECA) schemes allow businesses investing in designated technologies that reduce energy consumption, save water or improve water quality to write off 100% of the cost against the taxable profits of the period during which the investment was made.
BUDGET REPORT 2008
Income tax rates
2008/09
• There is no starting rate of 10% for earned income and pension income.
• A new starting rate of 10% will be introduced for savings income.
• The basic rate will be reduced from 22% to 20%. The 20 % savings rate will be merged with the basic rate.
• The higher rate will remain at 40%.
• The rates applicable to dividends will remain at 10% and 32.5% respectively for the dividend ordinary and higher rates.
Income Tax bands
2008/09
The taxable bands which apply to income after the deduction of personal allowances are:
Basic rate 20% £0 to £36,000
(10% for dividends)
Higher rate 40% Over £36,000
(32.5% for dividends)
Starting rate for savings income 10% £0 to £2,320
Personal allowances
• Personal allowances for 2008/09 have been increased in line with inflation. The basic personal allowance will be £5,435 (2007/08 – £5,225).• The 2008/09 age-related personal allowance for those aged 65 to 74 will be £9,030, and for those aged 75 or over, £9,180 (2007/08 – £7,550 and £7,690 respectively).
• The income limit for age-related allowances will increase in 2008/09 to £21,800 from £20,900 in 2007/08.
• For 2010/11 the personal allowance for those aged 75 and over will be increased to £10,000.
• The married couple’s allowance (MCA) for 2008/09 (which will also apply to registered civil partners) where one partner was born before 6 April 1935 will be £6,535 for those below 75 and £6,625 for those aged 75 or over. (2007/08 £6,285 and £6,365 respectively)
• The minimum amount of the MCA will be £2,540.
• The blind person’s allowance is increased to £1,800 (2007/8 £1,730)
Capital gains tax
• The CGT annual exemption for individuals for 2008/09 is £ 9,600 (2007/08 £9,200). This also applies to personal representatives and trustees of certain settlements for the disabled. For most other trustees it is £4,800 (2007/08 £4,600).
• For 2008/09 the rate of capital gains tax above the annual exemption is 18%.
• A new relief for entrepreneurs has been introduced and those who qualify will pay capital gains tax at a reduced rate of 10% on some of the gain. See BN48 for more detail.
Corporation tax Rates
• The main rate of corporation tax for companies with chargeable profits over £1,500,000 will reduce from 30% to 28% on or after 1 April 2008.
• The small companies’ rate of corporation tax, applying to companies with chargeable profits under £300,000, will increase from 20% to 21% from 1 April 2008 and to 22% from 1 April 2009.
• These increases do not apply to ring fence profits from oil extraction and oil rights in the UK and UK continental shelf, for which the main and small companies’ rates will remain at 30% and 19% respectively.
• The marginal small companies relief fraction for the financial year 2008/09 will remain at one/fortieth for non-ring fence profits and eleven/ four hundredths for ring fence profits between £300,000 and £1,500,000.
VAT
Turnover thresholds for registration and deregistration with effect from 1 April 2008:
• The annual taxable turnover threshold, which determines whether a person must be registered for VAT, will be raised from £64,000 to £67,000.
• The taxable turnover threshold which determines whether a person may apply for deregistration will be increased from £62,000 to £65,000. The existing conditions for determining entitlement or liability to cancellation remain unchanged.
• The registration and deregistration limits for relevant acquisitions from other European Union Member States will also be increased from £64,000 to £67,000.
The increase in the annual taxable turnover threshold means that a person will have to apply for registration if:
• at the end of any month, the value of the taxable supplies made in the past 12 months or less has exceeded £67,000; or
• at any time there are reasonable grounds for believing that the value of the taxable supplies to be made in the next 30 days alone will exceed £67,000.
If at the end of any month, a person's taxable turnover in the past 12 months or less exceeds £67,000 but HMRC are satisfied that it will not exceed £65,000 in the next 12 months, that person will not have to be registered.
HMRC POWERS AND ADMINISTRATION
Following the merger of the Inland Revenue and HM Customs & Excise, HMRC has been consulting for two years on establishing one set of powers that apply across the merged departments. This process has been taking place in quite a low key way but many of the proposals are controversial. It was entirely reasonable that the two departments had different powers, because those of HM Customs & Excise were much more geared towards preventing illegal activities such as smuggling and gun running. The current alignment seems designed to end up in a position whereby HMRC will be able to apply the more draconian powers that once belonged to HM Customs & Excise to the activities that were once undertaken by the Inland Revenue.
In the Budget, developments were announced in three areas that have been the subject of recent consultation exercises. We are disappointed that these measures were announced a mere six days after the closure of the consultation period. This was not sufficient time to consider all the responses received and make a series of suitable recommendations. The hasty issue of these decisions shortly after the expiry of the consultation period does little to encourage proper consultation and suggests that Government has already made its mind up and is merely going through the motions of consulting.
Penalties for incorrect returns and failure to notify
Schedule 24 FA 2007 set out a new system for penalties. These new rules will now be extended to create a single penalty regime for incorrect returns that will apply across all the taxes, levies and duties administered by HMRC. The penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer. The use of ‘suspended penalties’, a new concept set out in the FA 2007, will be extended.
In addition, Schedule 24 FA 2007 will be extended to cover penalties for failing to register or notify HMRC of a new taxable activity. This will apply across all the taxes, levies and duties administered by HMRC and will include late VAT registration.
The new provisions for incorrect returns will provide for penalties in line with Schedule 24 FA 2007. These are based on the amount of tax understated, the nature of the behaviour and the extent of disclosure by the taxpayer. There will be no penalty where a taxpayer makes a mistake but there will be a penalty of up to:
• 30% for failure to take reasonable care;
• 70% for a deliberate understatement; and
• 100% for a deliberate understatement with concealment.
The measure will provide for each penalty to be substantially reduced where the taxpayer makes a disclosure (takes active steps to put right the problem), more so if this is unprompted. For an unprompted disclosure of a failure to take reasonable care the penalty could be reduced to nil. Where a taxpayer discloses fully when prompted by a challenge from HMRC each penalty could be reduced by up to a half.
Where a return is incorrect because a third party has deliberately provided false information or deliberately withheld information from the taxpayer with the intention of causing an understatement of tax due, there will be a new provision allowing a penalty to be charged on the third party.
Compliance checks
Legislation will be introduced in Finance Bill 2008 to reform the rules for checking that businesses and individuals have paid the correct amount of income tax, capital gains tax, corporation tax, VAT and PAYE or claimed the correct reliefs and allowances.
The new package will align existing powers and safeguards and introduce:
• a power to inspect records required under the record-keeping legislation – this restricts the existing VAT and PAYE inspections to statutory records and introduces a new power of inspection for direct tax;
• a power to require supplementary information which is relevant to establishing the correct tax position;
• a power to require third parties to provide information which is relevant to establishing a taxpayer’s 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 at private homes without taxpayer consent;
• appeal rights against any penalty, and against information notices which have not been pre-authorised by an appeal tribunal;
• penalties for failure to allow an inspection and failing to comply with an information notice, including a tax-geared penalty which can be imposed by the new upper tier tribunals; and
• an updated criminal offence of destroying or concealing records requested under a notice authorised by a tribunal.
BUDGET 2007
The Chancellor announced a cut in the main rate of corporation tax from 30% to 28% and a cut in the basic rate of income tax from 22% to 20%. However, you need only to turn to the Budget ‘Red Book’ and the table setting out the effect of the Budget policy decisions (see page 13 in the Overview, and repeated again on page 208) to see that the overall effect of both of these tax cuts is illusory. If you look at the table, you will see that not only has the Chancellor balanced the overall Budget, he has gone one further and, broadly, balanced both his corporate tax budget and his income tax budgets, with the tax cuts in those areas offset by tax rises elsewhere in those same areas.
Away from the attention grabbing headlines, the Chancellor made further changes to the business tax rules. The small companies’ rate of corporation tax will increase in 1% steps from 19% to 22% over three years. This was justified as a measure to try and stop businesses incorporating to save tax by paying out dividends rather than salary, but will increase costs for all small businesses. The Chancellor may be losing patience with the scale of the perceived abuse of the small companies’ rate, but he has decided to be more innovative with providing tax relief for reinvestment. He has proposed a new £50,000 investment allowance for all businesses (including unincorporated businesses) that reinvest in the business. This sounds a much more carefully targeted measure and should help to narrow the rather large differences between incorporated and unincorporated businesses.