Corporate Finance Associates Blog

The Conservative Liberal coalition’s emergency Budget was described as “courageous” and “decisive” by international think tank, the OECD.

The Budget had promised to be tough, delivering cuts in public spending and tax rises intended to start what was expected to be a long journey to pull Britain out of an economically challenging position. George Osborne said in the speech that this was a Budget that would “pay for the past and plan for the future”.

The measures George Osborne delivered, focused primarily on cuts in the public sector, including a review of public sector pensions to be lead by John Hutton, together with tax rises which will hit every tax-payer in the country and the massive overhaul of welfare benefits.

Rather than make this an exceptionally long post the following is a summary of the key points from one of the partners we associate with.

Budget Summary

Thanks to Hayward Wright Ltd for their permission to reproduce it.

We always welcome your feedback and comments.

The following information was provided by one of our partners as their interpretation of the main points of the March 2010 Pre-Election budget.

The Chancellor has now set out his fiscal stall prior to the expected general election in May. As forecast there is a modicum of electioneering in the speech!

This report focuses on some of the tax changes we can now expect. We will also have further changes to deal with after the election.

PERSONAL TAX ANNOUNCEMENTS

Changes to Stamp Duty Land Tax (SDLT)

First time buyer’s concession

One of the more politically charged announcements today was the introduction of a new relief for first time home buyers which will exempt them from Stamp Duty on a property purchase up to £250,000 – this is effective for transactions taking place on or after 25 March 2010 and before 25 March 2012. This additional relief is partly funded next year by the increase in SDLT on more expensive property sales.

To qualify all of the following conditions will need to be met:

1. The individual or individuals jointly purchase a major interest in land which is wholly residential, and

2. The consideration is more than £125,000 but not more than £250,000, and

3. The individual(s) intends to occupy the property as his/her or their only or main residence and has or have not previously purchased such an interest or its equivalent anywhere in the world.

New rate of Stamp Duty for expensive properties

From 6 April 2011 a new 5% SDLT rate will be applied to residential property sales where consideration exceeds £1m.

Income tax rates and thresholds

The changes to tax rates and thresholds announced in the pre-budget report last year have been confirmed, including the advent of the 50% income tax rate for tax payers with taxable earnings in excess of £150,000 per annum.

A reminder of 2010-11 position is set out below:

• the basic rate will remain at 20%;
• and higher rate will remain at 40%;
• the additional rate will be set at 50%;
• the basic rate limit will remain at £37,400;
• the starting rate limit for savings will remain at £2,440;
• the personal allowances will remain at their 2009-10 amounts.

From 2010-11 the additional 50% rate will apply to taxable income above £150,000.

From 2010-11 the amount of the personal allowance will be gradually withdrawn for all individuals (regardless of age) with “adjusted net incomes” above £100,000. The rate of reduction is £1 for every £2 above the income limit.

NIC rates and thresholds

Apart from minor adjustments to the Lower Earnings Limit for 2010-11, NIC rates and thresholds remain as in 2009-10.

The previously announced combined increase of 1% in the main rates of NIC will be effective for 2011-12.

Pensions

The restriction of tax relief for tax payers earning in excess of £150,000 per annum is confirmed. This will take effect from 6 April 2011.

The Registered Pensions Scheme 2010-11 Lifetime Allowance of £1.8 million and Annual Allowance of £255,000 will continue to apply at these levels for a further five tax years, i.e. up to and including the tax year 2015-16.

Furnished Holiday Let Property

As previously announced the special tax concessions offered to owners of qualifying Holiday Let Property will cease from 6 April 2010. From this date, income from such property will be taxed in the same way as income from other property rental businesses.

Inheritance Tax

The current Nil Rate Band of £325,000 will be frozen at this level for all tax years up to 2014-15.

Company Car Tax changes

A new 10% car benefit rate will be introduced on 6 April 2012 for all company cars with emissions up to 99g/km.

Additionally, from 6 April 2010 to 5 April 2015 there are two further changes to the chargeable benefit in kind for company cars and vans with zero emissions or emissions up to 75g/km. These are:

• the first change is full relief from the chargeable benefit in kind on company cars and vans which cannot produce more than 0g/km CO2 engine emissions under any circumstances when driven.
• the second change reduces the chargeable benefit in kind on company cars which have an approved CO2 emissions figure of exactly 75g/km or less, to 5% of list price.

Tax Credits

A number of changes to tax credits were announced including:

1. From April 2012 an increase in the child element of £4 per week for 1 and 2 year olds.

2. From April 2010 awards for fixed period childcare costs (such as claims of a few weeks during the school holidays) will be averaged and paid over that fixed period rather than averaged over a year. This will enable families to receive all the financial support towards their childcare costs they are entitled to receive for these periods when they need it.

3. From 6 April 2011, people aged 60 and over will qualify for Working Tax Credits if they work at least 16 hours a week.

4. As announced at the 2009 Pre-Budget Report and confirmed at Budget on 24 March 2010, from 6 April 2010:

• the Child element in Child Tax Credit will increase by £20 above earnings indexation to £2300 per year. An increase of £65 per year overall;
• the disabled elements of Child Tax Credit will increase by 1.5%;
• the elements of the Working Tax Credit (except the childcare element) will increase by 1.5%;
• maximum amounts for child care, family and baby element for Child Tax Credit, the income disregard, the first and second tax credit threshold and the withdrawal rates remain unchanged; and
• the income threshold for those on child tax credit only rises to £16,190.

From 12 April 2010:

• Child Benefit rates and Guardians Allowance will increase by 1.5%.

BUSINESS TAX ANNOUNCEMENTS

Annual Investment Allowance

At present it is possible to write off the full cost of up to £50,000 of capital expenditure on qualifying assets. This limit is doubled from 1 April 2010 (for corporation tax) and 6 April 2010 (for income tax) to £100,000.

First Year Allowance

The temporary first year allowance of 40% ceases to apply on 1 April 2010 (corporation tax) and 5 April 2010 (income tax).

Tax incentive for British Video Games industry

The Government is to seek State Aid Approval to introduce a new tax relief for the UK video games industry. Consultations on the shape of the new relief will begin later this year.

Losses – carry back

Corporation tax

The temporary extension of trading loss carry-back from one to three years for losses up to £50,000 continues for company losses arising in accounting periods ending between 24/11/08 and 23/11/10.

Income Tax

The temporary extension of trading loss carry-back from one to three years for losses up to £50,000 continues for the 2008-09 and 2009-10 tax years for unincorporated businesses; consequently this relief for income tax purposes will cease 5th April 2010.

Corporation Tax Rates

For the Financial Year commencing 1 April 2011, the small profits rate of corporation tax remains at 21%.

For the Financial Year commencing 1 April 2011 the main rates of corporation tax are set at 28%.

VAT increased registration and deregistration limits

The taxable turnover threshold, that determines whether you should be registered for VAT, will increase from £68,000 to £70,000 from 1 April 2010. The taxable turnover threshold that determines whether you could apply for deregistration will be increased from £66,000 to £68,000 on the same date.

Business Payment Support Service

This service which allows you to negotiate extended payment of your tax dues, including VAT, Corporation Tax, Income Tax and NICs and PAYE, is to continue.

HMRC will require businesses seeking Time To Pay (TTP) arrangements for arrears of £1m or more, to provide an Independent Business Review (IBR) in support of their request. It is expected that the new requirement will be implemented from April 2010 and HMRC will informally consult on how this will work.

There will be no change for other businesses.

Capital Gains Tax

There was speculation prior to the Budget that the CGT rate would be increased to close the gap between the present 18% capital gains tax rate and the more punitive income tax rates which peak, from 6 April 2010, at 50%.

Surprisingly there is to be no increase and as an unexpected bonus the lifetime limit of gains that can be covered by Entrepreneurs’ Relief is to be doubled, from £1m to £2m.

The present annual exempt amount for individuals of £10,100 is unchanged for 2010-11.

Anti-avoidance legislation

There are the usual spate of complex issues which are coming under HMRC scrutiny – this includes closer exchange of information with certain off-shore tax havens that have benefited a particular high profile individual recently!

One of the more relevant areas of proposed legislation is with regard to Employee Benefit Trusts and similar arrangements. HMRC consider these as being used to disguise payments of remuneration with a consequent loss of tax and National Insurance. They have declared their intention to introduce anti-avoidance legislation to take effect from 6 April 2011.

Fuel Duty

The expected increase of 2.76p per litre in fuel duty that was due to be implemented on 1 April 2010 is now to be phased in as follows:

• 1 April 2010 increase of 1p per litre

• 1 October 2010 increase of 1p per litre

• 1 January 2011 increase of 0.76p per litre

This Budget sets out the action the Government is taking to promote long-term sustainable growth.

These changes will may well affect you and your business, if they do don’t hesitate to contact us for further clarification how this could affect you.

The following is a distillation from the various accountancy contacts we work with and hopefully summarises the main themes discussed by the Chancellor.

Pre-Budget Report December 2009

The Chancellor’s speech held few surprises and included the expected windfall tax on bank bonuses. Spending cuts and tax increases were announced to fund the recent bail out of the banking sector and reflate the economy. A summary of the expected changes to tax, National Insurance and VAT follows.

Tax changes announced

Bank Payroll Tax

This tax will only affect bonuses paid directly, or via an intermediary, that exceed £25,000. The report describes the various banking institutions that will be included. All of our High Street banks and Building Societies are going to be affected as are asset managers, hedge funds, private equity and other similar businesses. The various terms published in the PBR are set out below:

• Rate of tax to be applied 50%
• Legislation will include anti-avoidance provisions
• Will apply to all discretionary and contractual bonus awards from 9 December 2009 to 5 April 2010. There will be 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 the time of the Chancellor’s announcement.
• Bonus is defined as including cash, benefits or loans.
• The Bank Payroll Tax will be payable on 31 August 2010.

The PBR also states that Bank Payroll Tax will not be taken into account when calculating the bank’s profit or loss for corporation tax or income tax purposes.

Research and Development Relief

Presently, to qualify for R & D relief, intellectual property associated with an R & D claim has to be owned by the company making the claim. This restriction is to be abolished for accounting periods ending on or after 9 December 2009.

National Insurance

Increases from 6 April 2010

• The Lower Earnings Limit will increase by £2 a week to £97 per week
• The special Class 2 rate for Volunteer Development Workers will increase by 10p to £4.85 per week.
• All other NIC rates are unchanged.

Increases from 6 April 2011

The main rates of NIC will be increased by an additional 0.5% over and above the rate increases announced in the Pre Budget Report 2008. The increased rates will be:

• Class 1 and Class 4 main rate NICs, 12% and 9% respectively
• Class 1 employer rate 13.8%
• The additional rate of Class 1 and Class 4 NICs, 2%.

Capital Gains Tax adult placement carers

From 9 December 2009 any person who disposes of a residential property that has been partly set aside for use under a local authority adult placement scheme, will not have their private residence relief restricted for capital gains tax purposes.

Pensions – Restricting tax relief for high income earners

This will affect individuals with incomes of £130,000 or over who, on or after 9 December 2009, change:

• their normal pattern of regular pension contributions; or
• the normal way in which their pension benefits are accrued;

and whose total pension contributions/benefits accrued exceed the special annual allowance of £20,000 a year (or in some circumstances £30,000).

Please call if you would like us to quantify the effects of this change should you be affected.

Inheritance Tax nil rate band freeze

The promised increase in the nil rate band in 2010-11 to £350,000 has been withdrawn. It will remain at current levels, £325,000.

Legislation is also to be introduced to cover the avoidance of IHT using certain trust arrangements involving property. This will only affect transactions entered into after 9 December 2009.

Shared Lives Carers – new tax relief

From 6 April 2010 a new tax relief is to be introduced for Shared Lives Carers who:

• provide accommodation, care and support for up to three individuals who have been placed with them under a local authority Shared Lives placement scheme; and
• share their home and family life with the individuals placed with them under the Shared Lives scheme.

The new relief will be available per household and will consist of:

• £10,000 fixed amount per tax year;
• £200 per week (or part week), per placement aged under 11; and
• £250 per week (or part week), per placement aged 11 or over.

If income from the caring activity does not exceed the tax free allowance for the year, carers will be exempt from tax on their earnings from Shared Lives Care.

If income exceeds the tax free allowance carers can choose to pay tax on:

• Their total receipts less the tax free allowance, or
• Their actual profits applying the normal tax rules for businesses.

Furnished Holiday Let (FHL) property

From 6 April 2010 for individuals and 1 April 2010 for companies, the expected withdrawal of the special tax rules, as announced in Budget 2009, for FHL property is confirmed.

From these dates earnings from these properties will be treated the same as other property businesses.

If you own property presently benefiting from the favourable FHL rules there is a short window of opportunity to take advantage of the existing rules. Well worth a visit to discuss your options with us, if you have not already done so.

No car tax for electric vehicles

From 6 April 2010 the company car tax charge for company car users who drive a car propelled solely by electricity will be reduced to 0%.

A similar reduction to 0% will apply to drivers of electric vans.

The measure for cars and vans is introduced for 5 years and may well lead to an increase in interest in electric company cars as tax free perks.

Increase in fuel benefit charges

From 6 April 2010 the figure used as the basis for calculating the benefit of private fuel for the use of a company car is set at £16,900, this is to be increased to £18,000.

The equivalent figure used to set the basis for private fuel in vans increases from £500 to £550.

100% Allowance for electric vans

If you purchase a new electric van after 6 April 2010 (income tax payers), 1 April 2010 (corporation tax payers), you will be able to claim a 100% capital allowance.

The vehicle must be unused, not second hand.

The allowance is subject to the Government confirming that the facility is allowable State Aid.

VAT flat rate scheme changes

The flat rate scheme percentages are to be revised from 1 January 2010 to reflect the reinstatement of the 17.5% VAT rate on 1 January 2010.

Please note the rates will not return to those used prior to the December 2008 change to 15% VAT. A new table of rates should be available soon on HMRC’s web site which will take into account the rate change and other data about VAT liabilities in each sector.

We hear about green shoots of recovery and it is easy to get (or continue to be) complacent about the lifeblood of most businesses namely cashflow and in the fog of the Credit Crunch here are some financial faux pas to avoid

1. Tax Liabilities

it’s easy to get carried away and forget to build tax into your financial forecasts and budgeting. Use an accountant, they are less frightening than you imagine and can help you understand the need to budget for how much tax & NI you expect and will need to pay. A good one could save you the equivalent of their fees by their knowledge and actions too

2. Ignoring the Authorities

Even if you are setting up as a sole trader, you should notify the Revenue and Customs (HMRC) immediately. Penalties are payable if notice is not given within a certain timescale. The rules on financial penalties changed on 6 April 2009, so don’t be caught out by out of date advice. There will be more to consider if you are setting up a limited company, so make sure you get the right advice, again contact an accountant early in the life of your business.

3. Being too Cheap

Value yourself, your products and services. It can be hard for new businesses to compete on price as existing competitors may find it easier to undercut you, or have a larger client bank to work with. Try other ways of making your product or service attractive to new customers.  Why not offer a tiered service so that those expecting more from you are happy to pay more.  It has been said that an average business increasing their prices by 10% can afford to lose 25% of their customers (maybe those that give you the most grief) and still be as profitable as before.

4. Underestimating your Cash Needs
 
It’s often said that ‘Cash is King’, but it is so important it is worth re-iterating. Make sure you have sufficient levels of working capital. Many businesses fail, not because they are not profitable, but because they lack cash. The bank overdraft is not always the most effective way of achieving that especially if your business is growing.  Speak to us we may have a better alternative.

5. It will never happen to me

New businesses often rely entirely on one or two key people, and little thought is given to what would happen in the event of accident or illness. Plan for the unexpected and make use of insurance where appropriate. If you are a partner or a company director make sure you protect your business in the event of a partner or a co-director becoming ill or dying. Business protection can often be the first thing to go if things get tight, but the cost in the future will be massive by comparison.

6. Is Your Working Capital Working?

Even in the current low interest climate, there are reasonable returns to be had on your working capital. Keep the funds held in your current business account to a minimum and make sure you are maximising the interest payable on your deposit account. With many business deposit accounts paying very little interest and significantly better returns available elsewhere you could be missing out.

7. Get a Reality Check

When forecasting your sales levels, make sure you are realistic. Build in factors such as delays in payment – particularly where you are offering credit to customers, who themselves are experiencing their own challenges, and of course those inevitable bad debts.

8. Dismissing Contingency Planning

Every business should budget for a contingency fund. It could help get you out of a scrape, or more importantly provide valuable funds for a new business opportunity.  Think about Disaster Recovery too, what would happen if your IT systems fail, or your premises are burnt down or flood.  The right insurance will pay out but cannot compensate for your time and effort to get back to normal.

9. Being afraid of Financial Reports

It’s easy to be baffled by jargon, but reports such as your profit & loss account, sales forecast and cashflow analysis, should be an essential part of your day to day business, and are not difficult to understand.  Again talk to your accountant, who can get you past the jargon or alternatively take a part time course in Business Studies and Finance, they will all help.

10. Get Advice when you Need it

Never enter unknowingly into a contract – always get advice if you need it first. There’s a lot of general advice available free, and, like us many professionals offer a free initial consultation. If not, good advice often pays for itself. A good rule of thumb is that if you don’t pay for advice expect that advice to be flawed, and someone else’s opinion when they have no vested interest in your success is about as much value as a belly button.

Above just remember that doing nothing is a decision, and often represents a decision to fail as in business as in life in general we are either moving forward or falling backwards, never can we be certain to stay in one place, in other words as a mentor of mine once said, “You are either Green and Growing or Ripe and Ready to Rot”!