Pre-Budget Report Summary Thursday, 10th December 2009
Chancellor Alistair Darling presented his Pre-Budget Report on Wednesday 9 December 2009.
Mr Darling spoke of the Report taking place at ‘a critical time for our economy’ and that the task was ‘to secure the recovery and promote long-term growth’.
This summary concentrates on the main tax measures which are being introduced:
Business tax
Corporation tax rates
The small companies corporation tax rate which applies to companies with up to £300,000 of profits is currently 21%. An increase to 22% was originally planned to take effect from 1 April 2010 but was deferred. This has now been deferred for a further year until 1 April 2011.
Business Payment Support Service (BPSS)
The service launched by the 2008 Pre-Budget, which enables viable businesses to negotiate more flexible payment arrangements to meet business tax liabilities including PAYE, will continue to be available for the foreseeable future.
The service supplements the existing Time to Pay (TTP) arrangements which may be negotiated by all taxpayers. However from April 2010 a new requirement will apply where a business seeks a TTP arrangement and the liability is worth £1 million or more. Such a business will need to provide an ‘Independent Business Review’ in support of the request and this is expected to be implemented from April 2010.
Capital allowance boost for low-carbon transport
A 100% first year allowance will be available for capital expenditure on new electric vans from 1 April 2010 for companies and 6 April 2010 for an unincorporated business. This proposal is subject to European State Aid rules.
Reduced corporation tax for innovation companies
A reduced corporation tax rate of 10% is to apply from April 2013 to income arising from patents. It is intended that there will be a consultation with business in time for the Finance Bill 2011. It will apply to patents granted after the legislation is passed.
Comment
This proposal is to be known as the ‘Patent Box’ and is designed to ensure that the UK remains an attractive location for innovation, by offering stronger incentives.
Venture Capital Schemes
Certain changes to the qualifying conditions for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are being made to ensure that both schemes continue to meet European State Aid requirements.
In summary the proposed changes are:
to qualify a company must not be in difficulty
to qualify a company need only have a permanent establishment in the UK rather than carrying on a qualifying trade wholly or mainly in the UK
a VCT’s shares must now be traded on an EU regulated market rather than being restricted to an official UK list
rules governing the amount of a VCT’s investment which must be held as equity are changed.
In addition a new ‘small enterprise’ definition is to be incorporated into legislation to ensure that the schemes remain targeted on the small enterprises for which they are intended and do not benefit larger enterprises.
Controlled Foreign Company (CFC) reform
The government remains committed to the reform of these rules and has announced that proposals will be issued in the New Year.
Worldwide Debt Cap for large groups
Further amendments have been proposed to the debt cap legislation which comes into force for periods of account beginning on or after 1 January 2010 for large groups. The amendments eliminate various anomalies which have been identified in applying the rules and include additional provisions relating to the allocation of disallowed finance costs.
Bank payroll tax
A temporary bank payroll tax of 50% is to apply to certain bonuses (in whatever form). The tax will apply to the amount of the bonus which exceeds £25,000 for any individual employee. The tax will apply to banks, building societies and other related financial businesses.
It is to apply to all discretionary and contractual bonus awards made after the announcement of the measure on 9 December 2009, except for contractual bonus entitlements which existed at the time of the announcement, where the payer has no discretion as to the amount of the bonus. The initial charging period will run until 5 April 2010. However the government has indicated that this period of charge could be extended until other relevant provisions of the Financial Services Bill come into force.
This one-off tax is payable on 31 August 2010. It will not be deductible in calculating the institution’s profit or loss for corporation tax or income tax purposes.
Comment
This intervention is designed to tackle certain remuneration practices that are considered to have contributed to the excessive risk taking in the banking industry.
Employment
Workplace canteens
Legislation will be introduced to restrict the existing tax exemption for workplace canteens. However this will only affect employees and employers who use the exemption in conjunction with salary sacrifice or flexible benefit arrangements.
These arrangements allowed some employees to purchase canteen meals out of gross pay and hence obtain a significant tax advantage over the majority of employees who purchase meals using their net pay.
The legislation will not affect canteen subsidies that are available to all employees. This will take effect from 6 April 2011.
Company cars
From 6 April 2012 the CO2 emissions bands used to work out the taxable benefit for an employee who has the use of a company car will be shifted down by 5gm CO2 per km. In addition, the current graduated table of company car tax bands will be extended down to a 10% band. This will mean that a 10% band will apply to company cars with CO2 emissions up to 99gm CO2 per km.
As a result ‘qualifying low emissions cars’ will no longer exist as a separate category.
Comment
Whilst a welcome move there are very few cars that might appeal to company car drivers that fall into this new band.
Changes to fuel benefit tax
From 6 April 2010 employees who receive free private fuel from their employers for company cars or vans will pay more income tax on this benefit.
For company car drivers the existing figure used as the basis for calculating the benefit will be increased from £16,900 to £18,000. For company van drivers the benefit will be increased from £500 to £550.
Comment
As a result of these increases employers will suffer additional Class 1A National Insurance Contributions.
Electric cars and vans
Employees who are provided with a company car for their private use, which is propelled solely by electricity, currently pay tax on the benefit which is based on 9% of the list price of the car. From 6 April 2010 this percentage will be reduced to 0% therefore reducing the benefit calculation and tax liability to nil. This will apply for five years.
In a similar vein, employees who are provided with a company van for their private use, which is propelled solely by electricity, currently pay tax on a flat rate benefit of £3,000. From 6 April 2010 this benefit will be reduced to nil thereby eliminating the tax liability. This will also apply for five years.
Comment
As a result of these changes employers will eliminate their Class 1A National Insurance liabilities on cars and vans provided to employees this way.
Other business measures
The government has announced the following measures.
An extension to the temporary exemption from business rates for empty properties. For 2009/10 properties with a rateable value of up to £15,000 are exempt. The relief will be extended to 2010/11 for empty commercial properties with a rateable value of up to £18,000
An additional £500 million of lending available to small and medium-sized enterprises through a 12 month continuation of the Enterprise Finance Guarantee. This provides targeted support for viable businesses with less than £25 million turnover that have no or insufficient security.
Creating a new Growth Capital Fund to support growing companies seeking to borrow amounts between £2 million and £10 million. Further details will be announced in 2010.
Further investment in the Strategic Investment Fund and UK Innovation Investment Fund
Capital taxes
Inheritance tax (IHT) nil rate band
The nil rate band for 2010/11 will be frozen at the current level of £325,000.
Comment
The original intention of the government was to increase the nil rate band to £350,000.
IHT avoidance
Legislation, effective from 9 December 2009, will be introduced in Finance Bill 2010 to counter two tax avoidance schemes that have been designed to avoid IHT charges on property in trusts. The measures will have effect for:
transfers into a trust where the settlor retains a future interest, or where a future interest in a trust is purchased, on or after 9 December 2009
interests purchased in trusts on or after 9 December 2009
Capital gains tax (CGT) and principal private residence relief (PPR)
PPR is not available on any part of a house which is used exclusively for the purposes of a business or vocation. On disposing of the house the appropriate proportion of the gain relating to the part occupied as the only or main residence is eligible for PPR.
Where a person cares for an adult under a local authority placement scheme, their contract with the local authority may require them to set aside one or more rooms exclusively for the use of the adult in care. In such a case, PPR may not be available on that part of the property. Finance Bill 2010 will remove this possible restriction.
The measure will have effect for disposals on or after 9 December 2009.
VAT
Standard rate of VAT
As previously announced the temporary reduction in the standard rate of VAT to 15% will end on 31 December 2009.
The Pre-Budget Report confirms arrangements to smooth the transition for businesses back to the 17.5% standard rate.
There will be a 'period of grace' for businesses trading across the midnight deadline to charge the lower 15% rate until they close (or until 6am on 1 January 2010, whichever is earlier)
Shops will be able to add the extra VAT to prices at the tills for up to 28 days, giving them extra time to complete the re-pricing of their stock.
VAT Flat Rate Scheme changes
The Flat Rate Scheme provides an optional simplified VAT arrangement for businesses with a turnover up to £150,000. The percentages were re-calculated in December 2008 to reflect the temporary reduction in the standard rate of VAT. The flat rate percentages have now been re-calculated to reflect the reversion of the standard rate of VAT to 17.5%. The new rates will be implemented on 1 January 2010.
Changes also include technical adjustments to reflect more up to date business patterns. This means that, for some sectors, the rates will not simply return to the level set prior to December 2008. Virtually all sectors will face an increase because of the increase in the standard rate, although increases in some sectors will be larger than others.
Miscellaneous
Spotlights on avoidance
HMRC’s internet publication, ‘Spotlights’, which highlights avoidance schemes, will be expanded to include more general ‘buyer beware’ messages. These will provide taxpayers with an indication of the type of arrangements to avoid. It will continue to highlight specific avoidance schemes that in HMRC’s view are ineffective or have unintended adverse consequences in order to deter taxpayers from buying into high risk avoidance.
Equitable Liability Extra Statutory Concession
A concession has existed for taxpayers in receipt of a determination of income or corporation tax who are out of time to file their tax return and who can demonstrate that the sums charged are excessive.
By concession HMRC only collected the sum that would have been due for the period had the taxpayer filed the return on time. Legislation will be introduced to permit HMRC to continue to apply this treatment provided certain conditions are met.
Comment
HMRC’s original intention was to remove this concession but not introduce relieving legislation. After pressure from professional bodies, HMRC have changed their mind.
