Corporate matters

Business taxation

Employment related securities

Anti-tax avoidance legislation will be introduced in relation to share incentive plans (SIPs) and company share option plans (CSOPs), effective immediately. In relation to SIPs, corporation tax deductions will not be allowed where companies pay money into a SIP as part of a tax avoidance scheme. In relation to CSOPs, new grants of CSOP options over unlisted shares in a company which is under the control of a listed company will not be permitted.
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Crackdown on offshore account holders

Further penalties on those keeping untaxed wealth

The Chancellor, Alistair Darling set out his measures in Budget 2010 for a crackdown on offshore account holders. In the pre-election Budget, Alistair Darling had already laid out a number of anti-avoidance measures, namely signing tax sharing agreements with Dominica, Grenada and Belize, and imposing a 200 per cent tax penalty for those with irregularities relating to offshore accounts.
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VAT

The changes announced

Although the rate of VAT remains at 17.5 per cent, a number of changes were announced:

Supplies of postal services by the Royal Mail which are not made under a licence duty (e.g. Parcelforce) and services provided on terms and conditions that have been freely negotiated, will, from 1 January 2011 be subject to VAT at 17.5 per cent rather than being VAT exempt.
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Tax administration

Further refinements and streamlining of the rules

Late filing and payment of returns – Measures will be introduced to encourage filing and payment by the correct dates by introducing an escalating series of penalties depending upon the number of failures within a set penalty period. Further penalties will arise if there is a prolonged delay in filing returns or paying the tax due.

Financial security for late payment of PAYE and NIC – Legislation is to be introduced to allow HMRC to require a financial security from employers where amounts due under PAYE or NICs obligations are seriously at risk. This would be in line with the current practice for VAT.

Penalties for offshore tax avoidance – Finance Bill 2010 will introduce larger penalties for taxpayers who fail to provide a full account of their income tax or capital gains tax liabilities, where the failure is linked to an offshore matter.

The green bank

Funding for businesses in the renewables sector

The Chancellor during his Budget 2010 speech referred to the “green bank”. While the measures proposed under this scheme will be welcome in making available funding to businesses in the renewables sector, the mechanisms for doing so are limited.

In addition to this headline scheme, more detailed measures included in the Budget to increase rates of green indirect taxes and the introduction of a new green tax were;

the introduction of a landline tax (physical electronic communication networks) from 1 October 2010 at a rate of 50p per line per month;

increases to landfill taxes and a review of material subject to the lower rate;

increases to rates in relation to climate change levy;

an increase in the aggregates levy rates;

amendments to hydrocarbon oil duty rates; and

an increase of air passenger duty rates for travel on or after 1 November 2010 – including for those who have already booked tickets.

Relief for entrepreneurs

What were the unexpected initiatives?

The 2010 Budget delivered some unexpected initiatives for entrepreneurs. The doubling of the Annual Investment Allowance will allow businesses to claim immediate tax relief of up to £100,000 each year for capital assets (excluding cars) purchased from April 2010. This will mean an additional saving of £10,500 for companies and up to £25,000 for unincorporated businesses. In a further concession, businesses that purchase new zero-emission goods vehicles from between April 2010 and April 2015 will benefit from a 100 per cent first year allowance.

The Chancellor highlighted the need to support the industries of the future. This regime should introduce a new 10 per cent corporate tax rate from April 2013 on income from patents registered in the UK. The video games industry will also receive a special tax relief following recommendations of the Digital Britain report.
A new Small Business Credit Adjudicator with statutory powers will review applications for finance that have been declined.

The government also introduced the housing of its £4bn suite of finance products for small and medium-sized businesses under one roof, which is now known as UK Finance for Growth. This aims to streamline the various initiatives previously announced. The fund will support businesses that need £2m- £10m in financing and are struggling to access capital through traditional routes.

A new Small Business Credit Adjudicator with statutory powers will review applications for finance that have been declined. Finally, there was a commitment to allow early stage businesses to get a larger slice of government expenditure by mandating a 15 per cent increase in the central government spending allocated to small and medium-sized enterprises – an estimated increase of £3bn.

The Business Payments Support Scheme which has been utilised by 200,000 businesses to date is now extended for a further five years.

On the investment side, the lifetime limit on Entrepreneur’s Relief – the rate at which capital gains tax is limited to 10 per cent – was doubled to £2m, providing a further £80,000 of relief (total £160,000) for entrepreneurs who meet the conditions. Despite speculation, the main rate of capital gains tax will not increase from its current level of 18 per cent.

The territorial rules contained within the Enterprise Investment Scheme, the Venture Capital Trust regime and the Enterprise Management Investment scheme has been relaxed. Previously, qualifying activities were to be ‘wholly or principally’ in the UK. Now a ‘permanent establishment’ in the UK will suffice.

Finally, there were a number of measures announced to combat tax avoidance and evasion, including higher penalties and even more disclosures. This follows the announcements made in the 2009 Budget Report about the new 50 per cent top rate of income tax and the 1 per cent increase (for employees and employers) in national insurance and the new pension restrictions.

Budget 2010 questions answered

You and your finances

Some major tax changes come into affect from 6 April 2010 that had been announced in previous Budgets. From April 6, there is a new higher rate of income tax set at 50 per cent on earnings above £150,000. In addition income tax allowances and bands will be frozen – meaning that everyone will pay more tax on their earnings if they receive a pay rise.

Following Budget 2010 we have provided answers to some of the most asked questions we’ve received from clients.

Q: I’m a first time buyer – what help was announced to help me get on to the property ladder?
A:
For two years commencing from 25 March 2010 stamp duty has been scrapped on home purchases made by first-time buyers on properties worth up to £250,000. Couples buying homes jointly where one partner has previously bought a property will not be eligible even if the other partner is a first-time buyer.

Q: We’re currently looking to sell our house valued at £1.4m – how will Budget 2010 impact on the sale?
A:
If you are able to sell your house before 5 April 2011, you will not be subject to the stamp duty increase announced, however after this date the stamp duty rate payable on a property purchase of more than £1 million will increase from 4 per cent to 5 per cent.

Q: Following Budget 2010 – will we need to review our current inheritance tax planning provisions?
A:
The pledge to increase the inheritance tax threshold (IHT) to £350,000 will now not take place – the Chancellor announced he was freezing the current threshold of £325,000 for the next four years. The freezing of the IHT band for a further four years could cost a couple an additional £37,000 in IHT in real terms. If the value of your estate increases further and falls outside of your current IHT provisions, it makes sense to seek professional advice and review your particular situation, especially if the value of your estate increases considerably over the next four years. Freezing the IHT threshold for another four years will mean more families may need to consider estate planning opportunities by maximising reliefs and exemptions.

Q: I’m an entrepreneur and plan to sell my business within the next year – how will Budget 2010 affect me?
A:
The Chancellor confirmed that the rate of capital gains tax (CGT) will remain at 18 per cent. However, the annual amount of gains exempt from the tax is to be frozen at £10,100. The good news is that for entrepreneurs from April 2010, your will only have to pay 10 per cent on the first £2 million of capital gains. Depending on the value of your business, this could save you up to £80,000 when you sell.

Q: I’m a small business owner – were there any good news announcements in Budget 2010 for me?
A:
At the centre of this Budget was a £2.5bn package for small and medium – sized businesses. Business rates will be cut for a year from October and the investment allowance for small firms will be doubled to £100,000. Measures announced for small businesses aimed at assisting cash flow, included the extension of HMRC’s ‘Time to pay’ scheme. This scheme supports companies in distress struggling to pay their tax bills. The Chancellor has also ordered state-funded banks RBS and Lloyds TSB to provide £94 billion in small business loans, and he has created a new credit adjudication service for business owners who feel they have been unfairly rejected for credit.

Q: I earn £50,000 – how will my income be affected by Budget 2010?
A:
As previously announced, the Chancellor has decided to freeze all income tax bands, which will lead people to pay more tax on their earnings. There will be a 0.5 per cent increase in National Insurance contributions from 6 April 2011. The threshold at which you start paying tax at 40 per cent will remain at £43,875 for the 2010/11 tax year. This could mean you end up paying an extra £1,248 a year based on a £50,000 annual salary. The top rate of tax for people earning more than £150,000 is 50 per cent, up from 40 per cent, commencing 6 April 2010.

Q: I’m aged 42 and want to take out an Individual savings Account (ISA) – is it correct that I will be able to save a higher amount?
A:
The Chancellor had already announced that the total ISA limit for everyone would increase to £10,200 from 6 April 2010. Depending on your attitude towards risk for return, on or after this date you could put all of your money into a stocks and shares ISA, or alternatively put up to £5,100 (previously £3,600) into a cash ISA, with the remainder available for stocks and shares. The Chancellor also announced that from 6 April 2011, the ISA limits would increase in line with inflation for every year of the next parliament. The level of the increase will be set by the level of the Retail Price Index (RPI) the preceding September.

Q: I currently receive pension tax relief – following Budget 2010 will it be limited?
A:
It really depends on your level of income. If you earn over £130,000, the Chancellor confirmed that tax relief on pension contributions will be restricted from 6 April 2011. If your pre-tax income (including your own pension contributions) is less than £130,000 you will not be affected. Previously, up to 100 per cent of an employees’ salary could be paid into a pension tax-free. In an extensive report on the proposed changes, the government said: ‘It is neither fair nor sustainable in the current fiscal context to offer the greatest incentive to save in a pension to those who need it least. ‘For these reasons, the government has acted to address the disproportionate levels of relief going to individuals on the highest incomes’. The rate of relief will be tapered down so that those on incomes of £180,000 and over will receive relief at 20 per cent, the same rate as a basic-rate taxpayer.

Q: We are over 80 – what did Budget 2010 mean for us?
A:
Last year’s temporary increase to the winter fuel allowance was renewed for another year. This means each household with someone over the female state pension age will receive £250, and each household with someone over the age of 80 will receive £400. The Chancellor is also making it easier for over 60s to claim working tax credit by cutting the number of working hours needed to qualify.

Budget 2010

In brief

The savings industry has given a mixed reaction to news announced in Budget 2010 that from April next year Individual Savings Account (ISA) limits will automatically increase in line with inflation.

Since October last year savers aged over 50 have been able to put up to £10,200 a year in the tax-free savings wrapper, £5,100 of which can be held in cash, and, as announced in last year’s Budget, this will come into effect for everybody from 5 April this year.

From 6 April 2010 the annual ISA is £10,200. Investors can put all of this money into a stocks and shares ISA. Alternatively they can put up to £5,100 (previously £3,600) into a cash ISA, with the remainder available for stocks and shares.

The main rate of capital gains tax (CGT) remained unchanged at 18 per cent. However, the CGT exemption allowance is being frozen at £10,100 for 2010/11. In addition, the Chancellor said that he was doubling the level of Entrepreneurs’ Relief from £1 to £2 million.

Entrepreneurs’ Relief allows those selling businesses they started up to have up to £1 million of gains over a lifetime taxed at a lower rate of 10 per cent.

The Chancellor announced he was freezing the threshold for inheritance tax (IHT) at £325,000 for another four years.

Close companies

New measures announced

The widely utilised area of loans written off by close companies for the purpose of obtaining a corporation tax deduction for a dividend is being closed following new measures announced in Budget 2010.

Prior to the Budget announcement, where a close company (under the control of five or fewer individuals) makes a loan to a ‘participator’ (very broadly a shareholder) or to an associate of a participator, and subsequently releases or writes off that loan, under the loan relationship provisions the company may be entitled to a corporation tax deduction on the amount released or written off. In the hands of the participator the release is taxed in the same way as a dividend.

These rules broadly provide that the taxable and relievable credits and debits brought into account arising to a company under its loan relationships are those arising under generally accepted accounting practice (GAAP). A loan released or written off will normally give rise to an expense recognised in the company’s accounts under GAAP.

The new rules, which will be introduced in the Finance Bill 2010, will prohibit any deduction being brought in by the company for loan relationship purposes if the loan is wholly or partly released or written off. The income tax treatment of the person to whom the loan was made is unaffected by the measure.