Dodd & Co - Budget 2009

Few could have envied Alistair Darling as he rose to give his 2009 budget speech with the task of trying to convince the country that he can lead us out of the current economic chaos.

With promises to tackle unemployment and housing, this speech was mostly about the economy and there was not much new to be announced in respect of taxation changes. The chancellor predicts that by the end of this year the British economy will start to grow and in his opinion we are in a better position than any other EU country, a point which David Cameron was keen to dispute.

If you would like to review the changes already announced in the pre-budget report last year please Click Here. Be aware however that some tax changes that were announced then have been amended, such as the new 50% higher rate of income tax.

As always it is as well to check the small print for issues not mentioned in the budget speech. Changes to the loss relief available for furnished holiday lets may affect many holiday home owners and our budget news update will put you in the know about the changes the chancellor did not tell you about.

David Cameron’s response to the budget speech was sceptical and at times vitriolic. He referred to Labour’s “decade of debt” and said that a new chapter had been written in the record books in red ink. As he gave his own views on the best way to tackle our economic problems the gauntlet was thrown down for the next election in no uncertain terms.

There are no changes to the rates of NIC in 2009-10.
From 2011-12
All rates of NIC will be increased by 0.5%.

There will be a higher rate of 50% for taxable income above £150,000.
Dividends are taxed as the “top slice” of income. Where total income is above £150,000, the tax rate on dividends falling into the new higher rate will be 42.5%.
The personal allowance will be restricted for individuals with “net income” of over £100,000. For every £2 of “net income” above £100,000 the allowance will be restricted by £1 until it is reduced to nil.

The tax rate applicable to trusts will be increased to 50%, and the dividend trust rate will be increased to 42.5%.

The child element of the award is increasing above indexation to £2,235 per child from April 2009, an increase of £150 from £2,085 in 2008/09.

Other elements of the tax credits award for both child tax credits and working tax credits are increasing in line with inflation, except for the family and new baby elements of child tax credit which remain unchanged. The limits on eligible childcare costs remain at £175 for one child and £300 for two or more children. The disregard for changes in income compared to the previous tax year remains at £25,000.

Child benefits rates increased from 5 January 2009. The new amounts payable are £20.00 per week for the first or only child and £13.20 per week for subsequent children.

The existing Individual Savings Account (ISA) regulations stipulate that the current overall annual subscription limit for an ISA is £7,200, of which up to a maximum of £3,600 can be saved in a cash ISA with the balance being in stocks and shares.

In an effort to assist savers who are currently faced with much lower interest rates than those earned in previous years the ISA subscription limit will increase to £10,200, of which a maximum of £5,100 can be saved in a cash ISA.

For investors aged 50 or over in the current 2009/2010 tax year this increased subscription limit will be available from 6 October 2009. For all other investors the new subscription limit will be available from 6 April 2010.

Please contact our sister company Dodd Murray Ltd on 01228 522258 If you have not already used your 2009/2010 ISA allowance and would like to discuss your investments.

From 22 April 2009 dividends received by UK individuals from overseas companies, or from offshore funds, will be treated as if they had a non repayable tax credit of 10% attached to them. The net income will then be grossed up by the 10% and the total taxed at the dividend rate, that is a lower rate of 10% or a higher rate of 32.5%, the same as for UK dividends.

Last year’s budget introduced this treatment where the holding in the overseas company was less than 10%. This year the 10% restriction has been removed and offshore funds brought in to the same taxation regime.

The chancellor was at great pains to stress that new measures to restrict tax relief on pension premiums would not affect most people, but nevertheless the changes announced in the 2009 budget will not be welcomed by higher earners who already face the prospect of increased higher rates of tax!

Taxpayers with income exceeding £150,000 will find that the higher rate relief available on their pension contributions made after 5 April 2011 will be reduced. Earners with over £180,000 income will receive only 20% (basic rate) tax relief and those with earnings between £150,000 and £180,000 will have their relief tapered from 40% to 20% depending on the level of their earnings.

In case this makes higher earners eager to make big contributions now to take advantage of the higher tax relief available, provisions have been put in place to stop additional tax relief on pension premiums that are beyond the normal pattern of contributions. Additional contributions made on or after 22 April 2009 will be caught by these rules if the total contributions made exceed £20,000.

In looking at the £150,000 income limit, deductions can be made for losses and Gift Aid payments, so in some cases it may be possible to avoid the loss of tax relief by careful planning.

Child trust funds are available to all children born after 31 August 2002 for whom child benefit is payable. The aim of the fund is that the money invested will grow tax free and then be available as a lump sum when the child reaches the age of 18.

The government makes an initial contribution into the fund of either £250 or £500, depending on the circumstances of the family, and then a further payment of the same amount when the child reaches the age of 7.

In addition to the payments made by the government, up to £1,200 per annum can be added to a child’s trust fund by their family and friends.

In his budget the chancellor announced that from April 2010 onwards the government will contribute £100 every year to the trust fund of all disabled children who have been in receipt of disability living allowance (DLA) at any point during the tax year ended 5 April 2010. A higher payment of £200 per year will be contributed for severely disabled children who have received the higher care element of DLA.

Special tax treatment has always been available for lettings that qualify as furnished holiday lettings (FHL). One of the qualifying criteria was that the property had to be in the UK.

This may not have been compliant with European law so the special rules will now apply to all FHL accommodation anywhere in the European Economic Area (EEA). The bad news is that this has triggered HMRC to repeal the whole of the beneficial tax rules for all Furnished Holiday Lettings, whether in the UK or the EEA, with effect from 2010-11. Until then the beneficial treatment will apply to properties in both the UK and the EEA.

Countries in EEA are: Austria; Belgium; Cyprus; Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hungary; Iceland; Ireland; Italy; Liechtenstein; Latvia; Lithuania; Luxemburg; Malta; Netherlands; Norway; Poland; Portugal; Romania; Slovakia; Slovenia; Spain; Sweden and United Kingdom.

Tax returns may be amended under the normal time limits for example to claim losses that were previously carried forward. If the time limit for amending the return has passed it is possible to claim under the normal time limit for making a claim (5 years after 31 January following the end of the relevant tax year for individuals and 6 years after the end of the accounting period for companies).

Late tax return amendments will be accepted by the Revenue for 2006/07 tax returns for individuals and company tax returns for the period ended 31 December 2006 or later as long as the amendments are made by 31 July 2009.

It will be possible to make a claim for an individual relating to the tax year ended 5 April 2004 until 31 January 2010.

For companies claims may be made for the period ended 30 April 2003 by 30 April 2009.

Care needs to be taken when claiming relief for old years for properties situated in countries which were only recently included within the EEA as they will only qualify as FHL properties after the country became part of the EEA.

Names, addresses and other details will be published where tax of any sort exceeding £25,000, is lost to HMRC by the deliberate actions of the taxpayer, and a penalty is charged.

In addition to the name and address, the trade, profession or sector, amount of tax, interest and penalties and the period to which it relates will also be published, to ensure that the defaulter is recognisable.

The details will not be published until all avenues of appeal have been exhausted. The details will then be published on quarterly lists within 12 months of the penalty becoming final. The details will remain public for twelve months and will then be removed.

If the tax is due as a result of an unprompted disclosure by the taxpayer, or in full response within the time limits to a prompted disclosure, then the names and details will not be published.

A Treasury Order will bring these proposals into effect and they will then apply to defaults from that date.

There has always been a concern that pensioners who could claim back tax deducted from savings but do not, are missing out. Pension Credit recipients will be contacted by HMRC as part of a taxback campaign to encourage people who could receive savings income gross to register to receive it gross and therefore avoid overpaying their tax.

People who are not domiciled in the UK or not ordinarily resident in the UK are currently entitled to claim the remittance basis on foreign income. Put simply, if you live in the UK and always have done or if you do not have any foreign income you need read no further.

The remittance basis allows these individuals to pay tax on their foreign income only when it is brought into the UK. Some minor changes have been made to the way this works.

Individuals with income from overseas employment who are also employed in the UK in the same tax year were previously required to complete a tax return even if no further tax is due in the UK on the foreign income because it has already been taxed in the other country. This obligation has been removed with effect from 6 April 2008 as long as the employment income is less than £10,000 and overseas bank interest is less than £100 per tax year and foreign tax has been paid on the income.

Normally a formal claim is required before the remittance basis can be used. The requirement for this claim has been removed from 6 April 2008 in the following cases:

There is confirmation that the £30,000 remittance basis charge will be considered to be tax paid for the purposes of “franking” gift aid payments. This is because to make a gift aid payment you must declare that you have paid the tax that the charity will be able to claim back. This has effect from 6 April 2008.

The government’s intention to try and induce investment by businesses in capital assets has been supported by a temporary introduction of a first-year allowance (FYA) for expenditure that qualifies for the general plant and machinery pool or main capital allowance pool. The temporary rate is effectively doubled from 20% to 40% for the next 12 months.

The new rate will apply for expenditure that is incurred during the 12 month period from 1 April 2009 (for companies) and 6 April 2009 (for sole traders, partnerships and other business forms).

On a further positive note, the temporary FYA has not replaced the £50,000 Annual Investment Allowance (AIA) that has been in place since April 2008, but has been added to the already existing relief. This means that businesses will receive more capital allowances in periods where their expenditure exceeds the current £50,000 limit with the excess expenditure above £50,000 receiving a writing down allowance of 40%.

This means that a business, whose capital acquisitions for a year were £100,000 and qualified for the main capital allowance pool, would receive relief on £70,000 of the expenditure in the year of acquisition.

Unfortunately, the relief has not been extended to the newly introduced “special rate” pool which includes long-life assets, integral features, cars and assets acquired for leasing out.

Motorists will be given £2,000 towards the cost of a new car if they scrap a 10-year old model or an older car, under plans announced in the budget to revive the motoring sector.

The reduction will start in May 2009 and will be in place until March 2010. Full details of the scheme, which will also apply to vans, will be announced by Lord Mandelson’s Department Of Business within the next few weeks.

The government will put in £1,000 towards the cost of a new car, with the amount being matched by the car maker.

If you want to take advantage of this scheme, you would need to begin negotiations for a new car at the dealership by providing proof of the old car’s age and the fact that you have owned the car for at least a year. The old car will also need to be inspected and once the formalities have been completed, a certificate will be produced which will enable you to buy the new car with the discount.

Manufacturers which participate in the scheme will need to make their entire range of cars available, including their very cheapest models.

In the November 2008 pre budget report, the chancellor confirmed that from April 2009 capital allowances available on cars would be reformed to follow suit with the CO2 emissions concept that the chancellor has adopted on other taxes for cars.
These new rules have now been confirmed and will apply for expenditure incurred on or after 1 April 2009 for companies and 6 April 2009 for sole traders and partnerships.

The new rules state that cars with CO2 emissions equal to or less than 160 g/km will be added to the main rate pool, and attract writing down allowance (WDA) at 20%. Cars with CO2 emissions greater than 160g/km will be added to the special rate pool and attract a 10% writing down allowance.

Expenditure incurred prior to 1 or 6 April 2009 on “expensive” cars (costing £12,000 or more) will continue to be subject to the old expensive car rules for a transitional period of around 5 years.

Cars that have an element of non-business use (in sole trader and partnership businesses) will continue to be dealt with in single asset pools, but the rate of WDA will still be determined by the CO2 emissions.

The current rules for lease cars will also cease for new leases taken out on or after 1 April / 6 April 2009 and will be replaced with rules that increase tax relief for leased cars if they have lower CO2 emissions. The new rules will provide for a flat disallowance of 15% of the lease costs where a car’s CO2 emissions exceed 160 g/km, and no disallowance where the CO2 emissions are equal to or below this level.

It was announced prior to the budget that 100% first year allowances have been extended for clean cars to 31 March 2013, however the threshold has been reduced to 110 g/km, which has reduced the number of cars that are available for the relief and moved the bar for the vehicle manufacturer in terms of engine development.

The government announced today the new car base rate for company cars for the 2011/2012 year and onwards. With the CO2 base rate already being set at 130g/km for the 2010/2011 year, the government have reduced the rate further to 125g/km from April 2011.

This will mean that employers’ and employees’ costs of providing / receiving the car will increase. The increase on an existing vehicle being provided will be attributable to 1% of the list price of the vehicle each year from April 2010 and April 2011.

Basically, for a vehicle with a list price of £20,000 and taxable benefit of £5,000 the benefit will increase to £5,200 in April 2010 and £5,400 in April 2011. The additional cost to an employee who pays tax at the basic rate in this example would be £40 in each year. This means that the tax due would increase from £1,000 in 2009/10 to £1,040 in 2010/2011 and £1,080 in 2011/2012.

In addition, from April 2011 the current cap (of £80,000) applied to the list price of cars will be removed so that no restriction is applied when calculating a taxable benefit. It appears from the government’s initial guidance that this cap will be scrapped completely and will therefore apply to vehicles that are already being provided to employees prior to April 2011 where the car’s list price is greater than £80,000.

The rates of corporation tax remain unchanged, with 21% for companies with profits up to £300,000 per annum and 28% for companies with annual profits above £1,500,000. (The current marginal rate of 29.75% will continue to apply for profits that fall between these two thresholds).

There were no major surprises announced in the chancellor’s budget from a corporation tax viewpoint, so we expect current tax planning ideas involving companies to continue as before.

With the top rate of income tax for individuals being increased to 50% next year (where income is above £150,000), we anticipate that corporate structures will become even more popular for businesses, given the large differential between company tax rates and personal income tax rates.

The government has extended the relatively new 3 year loss carry back relief for a further 12 months until 23 November 2010, which is a welcome move, albeit a relatively modest one given that the relief is again capped at £50,000 for the additional year. (When this relief was last introduced during the recession of the early 1990s it was much more generous, as there was no cap on the amount of losses that could be carried back).

The doubling of the capital allowances rate from 20% to 40% is good news for large companies that incur significant capital expenditure, because the £50,000 Annual Investment Allowance is proving to be of very limited value.

There was the usual raft of anti-avoidance measures that mainstream businesses do not have to worry about and there were also one or two measures introduced to “tidy up” areas, such as the allocation of capital gains and losses within groups.

The “devil in the detail” includes a proposed change on the tax treatment of intangible assets (such as goodwill, single farm payment, milk quota etc). It appears as though the change will not have any major impact on tax planning that is currently undertaken in this area, but we will have to await the draft legislation for further clarification.

As expected, and following a long period of consultation, the new rules on the taxation of foreign profits are to be introduced with effect from 1 July 2009, although some of the rules will be deferred until as late as July 2011.

80 % of the money invested previously had to be employed in the business within 12 months and the remainder after a further 12 months. This has been relaxed to allow a period of 24 months for the employment of all funds. This applies for investments made on or after 22 April 2009.

Previously if a company issued non EIS shares of the same class of shares on the same day as they issued EIS shares, the funds generated by this other issue had to be employed in the business under the same time limits. This requirement has been removed. This applies for share issues made on or after 22 April 2009.

Under the old rules an investor used to be able to treat half of his investment, if made before 6 October in a tax year, as if it had been made in the previous tax year subject to a limit of £50,000. The whole amount may now be claimed in the previous tax year regardless of the date of the investment and up to limit of £500,000. This applies for the tax year 2009-10 and subsequent years.

Normal share for share exchange rules are to apply for EIS shares. Any deferral relief will be recovered as before but no gain or loss will be brought into charge. This applies for share issues made on or after 22 April 2009.

80 % of the money invested previously had to be employed in the business within 12 months and the remainder after a further 12 months. This has been relaxed to allow a period of 24 months for the employment of all funds. This applies for investments made out of funds raised by VCTs on or after 22 April 2009.

Prior to the 2009 budget, the European Commission issued a formal request to the UK to amend its agricultural and woodlands reliefs with regard to inheritance tax (IHT) so that they extend to property Europe wide.

Agricultural property relief (APR) reduces the value of agricultural property chargeable to IHT on death and when certain lifetime gifts are made. Historically, agricultural property and woodlands reliefs from UK inheritance tax have only ever applied to property in the UK, the Channel Islands and the Isle Of Man. There was no such restriction to business property relief from IHT, which is available whether the business is carried on inside or outside of the UK.

The changes announced today will mean that the relief will be extended so that property located in the European Economic Area (EEA) will now also qualify. Some people had feared that the current 100% and 50% rates of APR could be reduced or even abolished in the budget so this is welcome news for many farmers and landowners.

Similarly, woodlands relief has also been extended so that this relief will now also apply to property in the EEA. Where certain conditions are met, this means that IHT is deferred on the value of timber or underwood until it is sold.

The changes mean that IHT refunds could be achieved where IHT was paid after 23 April 2003 on agricultural property located in an EEA state at the time of the disposal.
One further step taken is that the government will now allow hold over relief for capital gains tax (CGT) purposes on a gift or sale of such property in the EEA. It is also possible to make a retrospective hold over relief claim in respect of the 2003-04 tax year and later.

David Cameron may have accused the chancellor of backtracking on some of the contents of his pre-budget statement, but Alistair Darling has stuck to his plans to restore the standard rate of VAT to 17.5% from 1 January 2010.

The advance notice of the increase should give businesses the chance to plan ahead to implement the changes. However, costs will still be incurred in printing new price lists, updating till systems and so on.

The chancellor announced anti avoidance measures to prevent some businesses taking advantage of the increase in the rate of VAT. The measures will largely affect sales between connected parties and sales where an invoice is due for payment more than six months after it is raised. The effect of the anti avoidance measures will be that VAT will have to be charged at 17.5% even if the VAT rate in force when the invoice is raised is 15%. The anti avoidance measures only apply where the customer cannot reclaim all of their VAT.

Despite the anti avoidance measures, businesses may still be able to ask unconnected customers for payments for goods or services before 31 December 2009 and charge VAT at 15%, even if the good or service is not provided until 2010.

It remains to be seen whether an increase in prices of 2.5% from midnight on 31 December 2009 will cause a rush at the bar this new year’s eve, or just a headache for the bar owners trying to work out how much VAT to pay over on the night’s takings!

All fuel scale charges have been reduced, with the quarterly VAT saving ranging from £1.57 per quarter for the lowest emission cars to £5.48 per quarter for those with the highest emissions.

The new scale charges for quarterly returns are given below. They should be used for VAT periods starting on or after 1 May 2009. The amount of VAT which should be paid over depends on the standard rate of VAT, and so scale charges will increase from 1 January 2010 when the standard rate of VAT goes back up to 17.5%.

HMRC are continuing to roll out changes to the procedures for opting to tax land and buildings. The chancellor announced a simplification of the way that the option to tax is made on land and buildings that have been used for exempt purposes in the past.

The new rules are expected to help those who decide to opt to tax a property which they have let out in the past without charging VAT. This might be done to reclaim the VAT on the costs of a refurbishment. The new rules are expected to help property owners in this situation by extending the range of circumstances under which they can rely on automatic permission to opt to tax, rather than having to ask for permission from HMRC.

The details of the plans are yet to be published, but are expected to be implemented from 1 May 2009.

Rumours of large increases in the VAT registration threshold have proved to be unfounded. The chancellor announced only modest increases in the registration and deregistration threshold, with each increasing by £1,000.
From 1 May 2009 the new thresholds will be:

The budget set in place the pre-announced changes to the way that services supplied to a customer in another EC country are treated for VAT.

The rules will come into force from 1 January 2010, and will affect certain types of services supplied to other businesses. Under the new rules, it is more likely that supplies will be subject to VAT in the country in which the customer is based. The types of businesses most likely to be affected are those which provide or receive services in the following areas:

The changes will affect businesses which receive as well as supply these services. The recipient of the service may have a requirement to account for the VAT on the service, whilst the provider may have to fill in an EC sales list which summarises the supplies made under the new rules.

Any businesses which provide services to other EC countries, or which receive services from other EC countries should familiarise themselves with the rules in advance of their implementation on 1 January 2010. To discuss the implications for your business, contact Faye Armstrong or Claire Hebdige.

Simplification of the way that businesses can claim VAT incurred in other EC countries was announced in the budget.

In the past, claims for VAT incurred in other EC countries had to be completed in the local language and sent to the VAT office of the country concerned. This meant that many businesses decided the claim was not worth the effort and the VAT went unclaimed.

From 1 January 2010, a new electronic VAT refund procedure will be introduced, whereby businesses will submit claims for VAT incurred in other EC countries to the UK VAT office. Claimants will have up to nine months from the end of the calendar year in which the VAT was incurred to make the claim, and the claim should be paid within four months of being submitted.

The stamp duty land tax holiday will be extended by 3 months. Residential properties costing under £175,000 which are purchased between now and 31 December 2009 will continue to be exempt from SDLT.

In addition the chancellor announced measures to provide a favourable SDLT treatment for individuals buying properties under certain share ownership schemes. A new scheme was announced which will allow individuals to purchase the property after initial occupation under an Assured Shorthold Tenancy. The new scheme is designed to allow the individual to save the deposit needed to purchase the property whilst still occupying it. The measures introduced will simplify the SDLT treatment which has previously made such schemes unattractive and it is hoped this will allow greater access onto the housing market.

The chancellor announced a raft of duty increases that will leave most out of pocket. 1 April 2009 saw the increase in fuel duty of 1p per litre that was announced in the pre-budget report come into force and today further increases were announced that will see the addition of a further 2p per litre from 1 September 2009 onwards and a further 1p per litre on 1 April 2010.

There will be an immediate increase in tobacco duty of 2%, which equates to roughly 7p on a pack of 20 cigarettes and from tomorrow the rate of alcohol duty will also increase by 2%, putting 1p on a pint of beer and 13p on a litre of spirits.

Currently AIFs are taxed on their income at a special rate of corporation tax of 20%.

From 1 September 2009 AIFs will be able to elect to be taxed instead as if the dividend income that they receive and distribute to their investors is tax free and the other income that they receive is interest income, but they will have a tax deduction for any interest income that they distribute to their investors. The effect will be that the tax system “looks through” the AIF and taxes the investor in the AIF as if they directly receive the dividend and they directly receive the interest. The investor will pay tax at dividend rate on the dividend element and income tax rates on the interest.

This measure is seen as increasing the competitiveness of the UK as a base for financial services.

Currently investments in non qualifying offshore funds are taxed on a transparent basis – the UK taxpayer has to look through the fund at the various sources of income and gains, and pay tax on his share of each individual source.

From 1 December 2009 investments in such funds will be treated as “non transparent” for the purposes of income and capital gains tax. CGT will only be payable from that date when a holding is sold, regardless of any sale of the underlying assets by the fund.

There will be transitional arrangements. As part of this investors may elect to have this treatment apply to them for the purposes of CGT for any period from 2003/04 onwards, if they think that it would be of benefit to them.

Anti avoidance legislation is to be introduced with effect from 1 April 2009 to prevent a claim for income tax loss relief on losses arising on an offshore life assurance policy.

The weekly limit for the calculation of statutory redundancy awards was increased to £350 on 1 February 2009. The budget has announced an increase to £380 per week, but it does not make clear the effective date. This has now been confirmed as October 2009.

This will mean that the maximum payable under the statutory redundancy scheme is now £11,400, up form the previous maximum of £10,500.

The government announced that in June 2009 the Insolvency Service will launch a consultation on measures to help companies in financial difficulties. From the summer the Insolvency Service will produce a series of regular reports on the monitoring of pre-pack sales, to prevent creditors being treated unfairly through abuse of pre-pack sales.

The chancellor announced that a second tax amnesty would be run for disclosure of offshore accounts and unpaid tax / duties. This follows recent requests made by HMRC to offshore banks for details of their account holders. The amnesty will run until March 2010.

The measures announced in the pre-budget report to help businesses and individuals spread their tax liabilities will be extended to a more formal structure of managed payment plans although this is unlikely to be in place until April 2011 as a result of the changes needed to HMRC’s accounting systems. Powers will also be available to allow the collection of small debts through the pay as you earn system, but similarly this is unlikely to be in place until at least April 2012.

Following recent consultations, the penalties will be aligned across the taxes and are being introduced to target taxpayers who do not submit returns or pay liabilities on time. These will be introduced in stages from April 2010.

There will be separate penalties charged for the late payment of taxes where the liability is due annually (e.g. corporation tax) at a rate of 5% of amounts outstanding 30 days after the due date and at 6 and 12 months after the due date. These penalties will however be suspended where a payment arrangement has been entered into with HMRC.

Where more frequent returns are required e.g. CIS, the following penalties will apply:

The penalties for payments collected through PAYE will depend upon the number of defaults within any 12 month period. Whilst there will be no penalty for the first default, subsequent late payments will incur penalties of 2% with further penalties being charged at 5% on amounts outstanding after 6 and 12 months. These will also be suspended where a payment arrangement has been entered into.