The main headline-grabbers of the Government’s 2009 Budget are explained below. References throughout relate to the Finance Bill 2009, unless otherwise stated.
New additional rate of tax
Clause 6 of the Bill introduces the new additional rate of income tax for 2010/11. The new 50% rate will apply to individuals’ taxable income in excess of £150,000. The Bill also introduces a new dividend rate of 42.5% for individuals with dividend income taxable above the £150,000 threshold.
The abatement of personal allowances is introduced by Clause 4 of the Finance Bill 2009, which inserts provisions into ITA 2007, s35.
Under the new provisions, which come into effect from 2010/11, the personal allowance will be reduced by £1 for every £2 of adjusted net income over £100,000. Net adjusted income for these purposes is as defined by ITA 2007, s58.
For those in the abatement zone – £100,000-£112,950 income – this means a marginal rate of tax of 60%.
There are changes to tax relief from 6 April 2011 and anti-forestalling provisions from 22 April 2009. A further measure aimed at high earners is the intention to restrict income tax relief on pension savings for
individuals with an annual income of £150,000 or more, with effect from 2011/12. Beyond this income level, tax relief is tapered away until income reaches £180,000, at which point the rate of relief is limited to the basic rate of 20%.
In anticipation of the new rules, the Finance Bill introduces anti-forestalling provisions to apply from 22 April 2009, to restrict tax relief on certain pension contributions made between 22 April 2009 and 5 April 2011.
The new rules from 2001/12 do not form part of the 2009 Finance Bill, but the anti-forestalling provisions are introduced by Clause 71 and Schedule 35 of the Bill, which introduce a Special Allowance Charge.
The anti-forestalling rules are quite complicated, but as a guide they apply where the following conditions are met:
- Relevant income is £150,000 per annum or higher (in the year of contribution or two previous tax years).
- Pension savings have been made in excess of existing contributions.
- Total pension savings exceed £20,000.
For these purposes, pension savings include contributions to personal and occupational pension schemes, whether made by an individual or employer. It is possible, therefore, that in certain situations a personal tax liability can arise in respect of contributions made by an employer into an
Contributions made over and above regular contributions in existence before 22 April 2009, which exceed the £20,000 special allowance, will be subject to a higher rate tax charge on the excess contributions. This will be claw back higher rate relief given on excess pension contributions. Pension contributions subject to the charge will be taxable at 20%.
Pension contributions made between 6 April 2009 and 21 April 2009 will reduce the special annual allowance but will not, themselves, be subject to the charge.
Relevant income for these purposes is defined by Paragraph 2 of Schedule 35.
Business – capital allowances
Clause 24 of the Finance Bill reintroduces first-year allowances (FYA) for 2009/10 and, as with past FYAs, the aim is to encourage businesses to invest in plant and machinery.
The FYA is set at 40% for expenditure incurred between 6 April 2009 and 5 April 2010 for unincorporated businesses, and between 1 April 2009 and 31 March 2010 for incorporated businesses.
The Bill contains restrictions regarding assets eligible for the first-year allowance; ie, cars, long-life assets, integral features and assets for leasing. The temporary first-year allowance is available in addition to the £50,000 annual investment allowance.
Loss relief carry-back
The Chancellor announced in the Budget an extension to the three-year loss carry-back announced in the 2008 pre-Budget report. The pre-Budget report announced that losses of up to £50,000 of the 2008/09 tax year for unincorporated businesses, and for accounting periods ending between 24 November 2008 and 23 November 2009, could be carried back three years.
Clause 23 and Schedule 6 of the Finance Bill introduces an extension to the three-year loss carry-back to cover losses incurred by unincorporated businesses for 2008/09 and 2009/10, and incorporated businesses whose accounting periods end between 24 November 2008 and 23 November 2010.
The £50,000 limit remains: Schedule 6 provides that this limit applies to each loss-making year. Losses must be utilised under ITA 2007, s64 first (against general income of the loss-making or immediately preceding year). Any unrelieved losses may then be carried back to the two earlier years, subject to the £50,000 limit per loss-making tax-year.
Losses and BPSS
Although not contained within the Finance Bill, the supplementary Budget documentation announced changes in the operation of the Business Payment Support Service (BPSS) www.hmrc.gov.uk/budget2009/bus-payment-support-582.pdf
Businesses making losses in the current year but owing tax on profits made in the previous year can now ask for the anticipated loss to be considered for offset against the current tax due. Usually, these businesses can carry back the losses to the earlier year, but not until the accounts have been finalised and the tax return for the later year filed.
Clause 92 and Schedule 46 introduce one of the more controversial measures of the Finance Bill – the new transparency requirements for large companies, large groups and their senior accounting officers, for accounting periods beginning on or after 22 April 2009.
Under the new requirements, the senior accounting officer (SAO) must take ‘reasonable steps’ to monitor the accounting arrangements of the company and its subsidiaries, and identify any aspects that are not ‘appropriate tax accounting arrangements’.
This is an area in which the detail will be found in the secondary legislation and interpretation. In Hansard, on 13 May 2009, The Rt Hon Stephen Timms MP stated: ‘Our current thinking is to limit the measure to those companies with a large business relationship with HMRC and a customer relationship manager reflecting that – fewer than 2,000 companies compared with about 15,000 under the definition set out in Schedule 46 as drafted’.
The original proposal was that the measures apply to all companies and groups that qualify as large under the normal Companies Act definitions.
The original measures also required the SAO to provide the company’s auditor with an explanation of inappropriate tax accounting arrangements, but this will be removed.
The SAO must provide HMRC with a certificate for each financial year of the company stating either that it had appropriate tax accounting arrangements throughout the financial year or giving explanations of areas not in accordance with appropriate tax accounting arrangements, by the normal filing date for corporation tax purposes, ie within 12 months from the end of the period of account.
The original measures proposed either a ‘Type A’ or ‘Type B’ certificate based on whether there were appropriate arrangements. This requirement has now been questioned and Timms has stated: ‘I am now satisfied that this would work better with a single certificate, on which the senior accounting officer sets out either one position or the other, rather than two different types of certificate as provided for in the draft schedule’.
The company must notify HMRC of each person who has acted as SAO at any point during the year.
The SAO and/or the company are liable to a penalty of £5,000 in the event of non-compliance.
VAT rate change
Clause 9 and Schedule 3 of the Finance Bill provide that the standard rate of VAT will revert back to 17.5% on 1 January 2010 and introduces anti-avoidance measures to apply on the change of rate back to 17.5%.
The anti-avoidance measures take the form of a supplementary charge to VAT in the following circumstances:
- The supply of goods or services spans the date on which the standard rate of VAT reverts back to 17.5%. Paragraph 2 of Schedule 3 provides that a supply of goods or services spans the date of the VAT rate change, where the supplier raises a VAT invoice or receives payment (or both) prior to the VAT rate change and the basic time of supply is on or after 1 January 2010.
The customer is not entitled to recover all of the VAT on the supply unless any one of the following is met:
- A Supplier and customer are connected;
- B Consideration for the supply is more than £100,000 (unless the supply is made in accordance with normal commercial practice);
- C Supplier/connected person finances a prepayment from the customer; or
- D Supplier raises a VAT invoice, where payment is not due until at least six months from the date of the invoice.
The additional charge will be 2.5% and paragraph 16 of Schedule 3 provides that this becomes due on the date of the VAT change (1 January 2010) rather than the date of supply.
Glenn Collins, head of Advisory Services, ACCA UK; Simon Wood, technical adviser