We now have an Emergency Budget which provides the framework for a five-year plan, based on the values of responsibility, freedom and fairness.
The Finance (No2) Act 2010 received Royal Assent on the 27 July and incorporated changes to corporation tax rates, capital gains tax rates, the VAT rate change, changes in rates for insurance premium tax, repeal of the excess relief charge, changes to the treatment of pensions at the age of 75 at Budget day, income tax changes for MPs, amendments to corporation tax loan relationships and changes to the insurance business transfer scheme.
We know that in the run up to the pre-Budget report on the 20 October we will have reports on future spending, business reviews and we will have the opportunity to recommend changes via consultations.
The Office for Budget Responsibility (OBR) issued its first report on the state of the UK economy, incorporating the Budget forecast. The OBR is responsible for producing the forecast at the budget which incorporates the government's policy measures.
It is also required to 'make a judgment' on whether the government's policy has a better than 50% chance of achieving its fiscal mandate. Its conclusion for this year's Budget report was that 'in 2014-15 and 2015-16 there is a greater than 50% chance of the cyclically adjusted current Budget being balanced or in surplus'.
To balance the Budget, or to create a surplus, the chancellor indicated that business will need to lead the recovery, but that savings are required. He indicated that his aim was an 80/20 ratio for the savings - 80% spending cuts and 20% increased taxes. He noted that in this, his first Budget, he had achieved a 77/23 split.
Capital gains tax
Capital gains tax was tweaked and amended. We have three rates for disposals made after 23 June, resulting in tax rates of 10%, 18% and 28% and an increase in the lifetime allowance for business disposals by entrepreneurs.
The new 10% rate for entrepreneurs' relief replaces the 4/9ths exemption previously available, which resulted in an effective rate of 10%. There is a small change here because of the use of the annual exemption. The real change to entrepreneurs' relief is the increase in the lifetime allowance from £2m to £5m.
It is important to remember that the lifetime allowance, which was £1m for disposals between 6 April 2008 to 5 April 2010 rose to £2m for disposals between 6 April 2010 and 22 June 2010, and from 23 June is £5m. The end result is a sensible change for entrepreneurs and helps make the UK a better place for doing business and, along with other measures, encourages investment.
Entrepreneurs' relief is still available on a material disposal of business assets. The main material disposals are as follows:
- The disposal of the whole or part of a business owned by an individual throughout a minimum one-year period ending with the date of disposal.
- The disposal of an asset in use for the purpose of a business at the time at which the business ceases to be carried on. The disposal must be made within a three-year period beginning with the date of cessation, provided that the asset has not been used for any purpose, other than that of the business, during the intervening three-year period.
- The disposal of, or disposal of an interest in, shares or securities of a company where the company is an individual's 'personal company' and is a trading or holding company of a trading group and the individual is an officer or employee of the company. A personal company is a company where the individual holds at least 5% of the ordinary share capital and where they can exercise at least 5% of the voting rights.
From 23 June the rates of tax charged for other disposals subject to capital gains tax are 18% and 28%. The rates are dependent upon an individual's total income and gains after deduction of allowances. Income and gains after allowances and up to £37,400 will be charged at 18%. Capital gains over this limit will be charged at 28%. For this tax year, gains made from 6 April to 22 June will be taxed at 18% and are not included in the total income and gains calculation.
The past option of using QCBs, EIS and VCT investments to defer gains, while still qualifying for entrepreneurs' relief no longer applies. The taxpayer will now need to claim entrepreneurs' relief or hold the gain over. As with any change and split tax period, care will need to be taken to ensure allowances are claimed in the most beneficial way.
The anticipated VAT increase to 20% was the headline news from the Budget. The timing of the increase on the 4 January gives business time to adjust as it carefully avoids the difficulties of a 31 December change and for many is the first day of work after the New Year break. The change should be easier as businesses have considerable experience in coping with VAT rate changes, having already coped with the quickly introduced temporary reduction to 15% in 2009.
Care needs to be taken and, as with the previous VAT changes, rules to counter schemes to change the tax point by prepayment have also been introduced. These anti-forestalling rules apply to standard-rated supplies of goods and services to exempt or partly exempt purchasers where:
- the supplier and the recipient are connected persons, or
- the payment or VAT invoice, together with any related supplies under the same scheme, exceeds £100,000, or
- the supplier or someone connected to the supplier funds the prepayment, or
- an invoice is issued in advance, payment of which is not due within six months.
In the Budget newsletter earlier this year, VAT consultant Paddy Behan suggested that businesses, especially partially exempt businesses, will need to carefully consider the change as both cost and cashflow are affected:
'Businesses will need to pay attention to invoices raised after 4 January 2011. The Value Added Tax Act, Section 88 allows the supplier to make an election to account for VAT on invoices that span a change in rate. When the standard rate is going up, it can benefit the recipient of the supply for an election to be made.
Thus, for instance, a partly exempt purchaser of construction services is very likely to want the supplier to make an election and to charge 17.5% on the appropriate proportion of the invoice in order to reduce the VAT charged and, hence, the irrecoverable amount.
'If, before the supplier makes an election, they raise an invoice for services partly performed before 4 January 2011, and partly after it, with VAT at 20% on the whole amount, they can raise a credit note and issue a split rate invoice, provided they do so within the time limit in Regulation 15 of the VAT Regulations.
The point to note is that the time limit runs from the date of the change, not the date of the invoice. The time limit is 45 days from the date of the change or such later time as HMRC may allow in general or special directions.'
The flat rate scheme will also change from 4 January. The turnover limit will increase to £230,000 from £225,000 to take account of the 2.5% VAT increase. The ability to continue to use the scheme if turnover exceeds £230,000 and also the tests for a business to join the scheme have been amended to say:
- that the value of taxable supplies excluding VAT doesn't exceed remains unchanged at £150,000;
- that the VAT-inclusive figure doesn't exceed £191,500. This has been increased from £187,500.
The registration threshold of £70,000 applies from 1 April 2010.
Corporation tax, capital allowances and business support measures were also changed. Businesses will need to look at cashflows and investment opportunities. First, the good news - the main corporation tax rate will reduce from next year by 1% per year and will be 24% by 2014.The main rate continues to apply where profits exceed £1.5m.
The small company rate, for profits below £300,000 will also be reduced by 1% from 1 April 2011. The bad news is the reduction in capital allowances from April 2012, for unincorporated businesses from 6 April, and incorporated businesses from 1 April. Cashflow and investment decisions will need to be reassessed by business. The main changes are:
- General writing down allowance is reduced from 20% to 18%.
- Special writing down allowance is reduced from 10% to 8%.
- Annual investment allowance is reduced from £100,000 to £25,000 per year.
- Hybrid rates apply for periods that span these dates.
NIC and tax credits
Help for new business was also given with the welcome introduction of a national insurance contribution holiday. This applies for all of those businesses which met the criteria from 22 June 2010. Further details of this can be found here.
The tax credit regime was also changed and many households will see a reduction in income. The main reduction is the revision of the amount of income a family can receive, while still being eligible to claim the relief.
The reduction applies for the period beginning 6 April 2011 and sees the income level drop from £50,000 to £40,000. This amount tapers at 41% until the minimum income level of £16,190 is reached. 2011 will also see the income disregard drop from £25,000 to £10,000 and from 2012 claims will only be backdated one month instead of the current three months.
Furnished holiday lets
The long saga of the tax treatment of furnished holiday lettings (FHLs) continues for yet another year. The existing rules will continue to apply for 2010/11, but the results of the government consultation will result in a clear tax treatment for the next tax year of 2011/12.
For the current year, the conditions for FHLs are:
- The property must be available to let for at least 140 days in the relevant period.
- The property must be let commercially for at least 70 days in the relevant period.
- The property must be in the UK or European Economic Area.
- The property is let out at a commercial rate with a view to profit.
- Periods of longer occupation exceeding 31 days ('periods of longer occupation') do not count towards the 70 days referred to above.
- If the period of longer occupation (ie more than 31 days) exceeds 155 days in total, the property will not qualify as holiday accommodation.
Glenn Collins is ACCA UK's head of advisory services