Please click here to download this article as a PDF.
Chancellor George Osborne has delivered his second Budget, and emphasised that his main focus is on generating future growth in the economy, whilst trying to avoid further pain for families as a result of the spending cuts and recession. Headline announcements include a 2% cut in the main rate of Corporation Tax, an immediate cut in the rate of fuel duties, the creation of 21 Enterprise Zones, various tax incentives to encourage charitable donations and a consultation process to look into the merger of Income Tax and National Insurance.
The Chancellor will fund his announced cuts with further attacks on tax avoidance and tax evasion, an increase in the rate of bank levy and various targeted tax measures.
Business & Corporation Tax
On the whole, it is a reasonably positive budget for businesses, with reduced corporation tax rates, simplification of the tax system and extra tax incentives for entrepreneurs and also Research & Development expenditure.
The small companies rate of corporation tax is to be reduced from 21% to 20% with effect from 1 April 2011. The main rate of corporation tax is to be reduced from 28% to 26%, with further reductions of 1% in future years such that it will be 23% by 2014. This reduction from 28% to 23% will result in the UK having one of the lowest corporation tax rates in the G20.
Individuals investing in companies will now be able to claim 30% income tax relief where their investment qualifies for EIS (Enterprise Investment Scheme) tax relief, as opposed to the current rate of 20%. If the individual has incurred capital gains within the previous 3 years, then capital gains tax relief of up to 28% can also be claimed. This means that individuals will now be able to claim up to 58% tax relief when investing in qualifying businesses, which means that for every £100 that they invest, it may only cost them £42 in cash terms. We anticipate that this tax change will encourage “business angels” to invest more equity into the SME sector, which is a welcome development given the current difficulties in obtaining new loan finance from traditional sources.
The favourable Research and Development tax reliefs are to be further enhanced with the current 175% tax relief being increased to 200% in April 2011 (and to 225% in April 2012).
21 new Enterprise Zones are to be created which will provide various tax reliefs and exemptions. 10 regions have been named with the remaining 11 to be confirmed in the summer.
The small business rates relief holiday is to be extended by one year and will now run until October 2012. Likewise, the business premises renovation allowance is to be extended for a further 5 years.
Other welcome developments are the announcements to streamline the system for planning applications and a moratorium exempting micro-businesses (less than 10 employees) and new start-ups from new domestic regulation for 3 years.
Today’s budget was trailed as being a “budget for growth” and whilst there are a number of positive measures, we feel that it hasn’t gone far enough in terms of providing any major impetus and consequently 2011 will remain a very challenging year for most businesses. It will be important therefore that businesses continue to ensure that they take full advantage of the existing tax reliefs that are available, as well as the new ones, with a view to minimising their overall costs.
Capital Gains Tax
There were no major changes to capital gains tax relief although many people expected that principal private residence relief would be looked at in this budget. This relief has however been left unchanged.
The annual exemption will increase from £10,100 to £10,600 per person from 6 April 2011. Gains below this level will not be subject to tax.
Entrepreneurs’ relief is given for gains on qualifying business asset disposals with the result that the gain is taxed at 10% rather than the 18% and 28% tax rates applying to non qualifying gains. The limit which covers the total gains that can qualify for entrepreneurs’ relief in a person’s lifetime will increase from £5,000,000 to £10,000,000 with effect from 6 April 2011.
Cars, Fuel & Mileage
With the Government’s “Green Policy” continuing to gather steam, they have announced that they will be continuing to reduce the starting Carbon Dioxide emissions (CO2) rate for company cars. Rules that will be introduced in April 2012 will result in a new starting rate of 11% being imposed on cars with emissions of 100 g/km and above (increasing by 1% per 5 g/km).
With effect from April 2013, the starting rate of 11% will be enforced on vehicles with emissions of 95 g/km, and increase by 1% by 5 g/km of emissions.
The Government has again increased the fuel benefit charge, which is used to calculate the value of the fuel benefit that an employee is assessable on. This gives a second increase in as many years from £18,000 to £18,800.
In what seems to be a somewhat reluctant move, (as the Government were only stating last year that the mileage allowance rates were an allowance and not a reimbursement of costs), the Government have increased the business mileage allowance rate used for the first 10,000 business miles travelled in a tax year. The rate has been increased by 5p per mile to 45p per mile for the first 10,000 business miles travelled per year. The rate used for each business mile in excess of the 10,000 mile level is unchanged at 25p per mile.
A further popular announcement made by the Chancellor is an immediate 1 penny per litre cut will be made to the rate of Fuel Duty, and a Fair Fuel Price Stabiliser will be introduced, helping to moderate overall fuel prices if the price of oil continues to rise.
Charities and Gift Aid
HMRC announced generous reliefs for charities and community amateur sports clubs (CASC's) as part of its Big Society policy.
The maximum value of benefits which a donor can receive in return for a gift-aided donation will increase from £500 to £2,500 from April 2011. However, this will only affect donations exceeding £10,000 as the benefits must still be valued at less than 5% of the donation.
Other changes are planned which will have a wider benefit, but will take a little longer to come into effect. From April 2013 charities and CASC's will be able to reclaim a gift aid style repayment on donations of less than £10 without having to obtain gift aid declarations. Up to £5,000 of donations per charity per annum can qualify for this tax repayment, but only charities with a good gift aid track record will be able to benefit, as they will have to be registered for gift aid with HMRC for at least three years and have a good gift aid compliance record in order to enrol.
HMRC is to introduce a new online system for claiming gift aid in 2012/13, which will include automatic validation checks and which it is hoped will streamline the current cumbersome paper based system.
However HMRC plans to withdraw the scheme whereby taxpayers can sign a tax repayment over to charity with effect from the 2011/12 tax year.
Inheritance Tax
A new potential reduced rate of Inheritance Tax
The Chancellor has announced today that a new reduced rate of Inheritance Tax (IHT) will apply where 10% or more of a deceased person’s net estate is left to charity.
10% of the net estate means the remaining chargeable estate after deducting all IHT exemptions, available reliefs and the nil rate band available to the estate.
In such qualifying cases the current 40% rate of IHT will be reduced to 36%. The new rate will apply where the death of the individual occurs on or after 6 April 2012.
The effect of the change will be to reduce the overall cost of giving to charity through bequests. The relief is designed so that the benefit of the tax saving is reflected in the bequests received by the charity and not in payments to other beneficiaries of the estate.
The government will be consulting on the detailed implementation of this measure and will issue a consultation document before the summer.
The aim behind the proposals is to encourage individuals to give to charity when writing their wills. It will be interesting to see how this change will affect the way wills are drafted in the future.
As was announced previously, the IHT nil rate band is currently frozen until April 2015 at the current exemption of £325,000 per person.
Income Tax Personal Allowance Increase
The new personal allowance level from 6 April 2011 for those aged under 65 will be £7,475.
For those aged between 65 and 74 the limit will be £9,940 with anybody 75 and over at the end of the tax year being entitled to £10,090.
From 6 April 2012 the Finance Bill 2012 will increase the personal allowance for those aged under 65 to £8,105.
The personal allowance will increase from 2013-14 by at least the equivalent of the RPI, until the Government’s goal of increasing the personal allowance to £10,000 is achieved.
With reference to the Governments aim to simplify our tax system they will consult in the current year on the options, stages and timing of reforms to integrate the operation of the income and National Insurance tax systems.
ISA – Increased limits and new accounts for Juniors
From 6 April 2011, and in accordance with the increase in the RPI, savers will be able to save up to £10,680 in an ISA, of which up to £5,340 can be saved in cash.
If you have not already used your 2010/2011 ISA allowance and would like to discuss your investment strategy please contact our sister company Dodd Murray Ltd on 01228 522258 who will be pleased to help. A married couple taking action now could invest almost £42,000 in a tax free environment over the course of the next two weeks, which could lead to significant tax savings.
Following the end of the Child Trust Funds (CTF) in January 2011 the Government intends to introduce in Autumn 2011 Junior ISA’s for UK resident children who do not have a CTF. Further details will be announced in due course but it is expected that these new accounts will have many features in common with the existing ISA products.
Enterprise Investment Schemes & Venture Capital Trusts
To increase the incentive for people to invest in smaller companies, which face barriers in raising external finance, with effect from 6 April 2011, and subject to State aid approval, legislation will be introduced in the Finance Bill 2011 to increase the rate of income tax relief given under the Enterprise Investment Scheme from 20% up to 30%. This will apply to shares listed on or after 6 April 2011.
Again subject to State aid approval legislation will be introduced in the Finance Bill 2012 to increase the following:-
the thresholds for the maximum size of qualifying company for both EIS and VCTs;
the maximum annual amount that can be invested in an individual company; and
the annual amount that an individual can invest under the EIS.
These changes will apply from 6 April 2012.
National Insurance Rates
The planned increase of 1% on NIC rates will still be applied from April 2011 (12% and 2% employees NI, 13.8% employer’s NI, 9% and 2% Class 4 NI).
The Government also announced that from 2012-13 the basis for indexation of a majority of national insurance contribution rates, limits and thresholds will be in line with the Consumer Price Index (CPI) instead of the Retail Price Index (RPI).
State Pension Reform
As mentioned recently in the press the Government intends to reform the state pension system for future pensioners so that it provides simple, contributory, flat-rate support above the level of the means-tested Guarantee Credit. The Government will however honour contributions made to the current system. The Department for Work and Pensions (DWP) will shortly publish a Green Paper to consult on options for reform, which will include a proposal for moving towards a single tier pension. The Chancellor indicated that this may be at a level of roughly £140 per week.
Furnished Holiday Lettings (FHL)
With effect from 6 April 2011 it will no longer be possible to set FHL losses against other income. Losses will only be set against other FHL profits. This will affect property owners who are currently able to offset losses and obtain 40% or even 50% tax relief against other income. If they do not own other profitable FHL properties the losses can only be carried forward.
With effect from April 2012, the qualifying rules will also change. At the moment the property has to be available to let for 140 days in the year and actually let for at least 70. Total periods of “longer term” occupation, that is, let to the same person continuously for more than 31 days, must not exceed 155 days in the year. From 6 April 2012, the requirement will be for 210 days availability and 105 days actual lettings.
It will be possible for owners to elect for their properties to continue to qualify for up to 2 years provided that there was a genuine intention to meet the new criteria.
If you are thinking of investing in some furnishings, fixtures and fittings for your FHL property it could benefit you to do this before 6 April 2011. If you make a loss in 2010-11 the loss can be enhanced by the capital allowances claimed and you can, if appropriate, claim the additional costs against your other income. If you delay the expenditure until on or after 6 April 2011, you will only be able to claim the allowances against other FHL profits or carry them forward.
Stamp Duty Land Tax (SDLT)
There are no major changes or reforms to the SDLT system.
One small development is that a new relief is being introduced that will apply where a purchaser is buying more than one property as a single transaction. Under the current rules, the value of each property has to be “linked” or added together, in determining which rate of SDLT applies. In future, it will be possible to adopt an averaging approach, whereby the total sale consideration is divided by the number of properties to determine the rate of SDLT.
For example, if two properties are being purchased at the same time, with one costing £300,000 and the other £150,000 the rate of SDLT will only be 1% in the future as the average cost is £225,000 which falls in the 1% band (whereas under the current rules the rate of SDLT is 3% because the combined total of £450,000 exceeds the £250,000 SDLT threshold). In the above example this change results in a saving of £9,000.
A number of anti-avoidance measures have been introduced which are aimed at “schemes” that seek to avoid SDLT.
Tax Credits
The main changes affecting tax credits claimants were announced in the emergency budget last summer and there were no significant changes announced today. We are still awaiting clarification as to how the proposed new “universal credit” from 2013 will affect current tax credits claimants, particularly the self-employed, but what we do know is that individuals will see a significant reduction to their payments compared to the amount of tax credits they currently receive.
A reminder of the most important changes announced last summer are listed below:
Reduction in tax credits for higher earners
The government will reduce tax credit eligibility for families with household income above £40,000 by reducing the family element threshold from £50,000 to £40,000 from April 2011. The Government will increase both withdrawal rates to calculate the reduction to payments above the income thresholds to 41% (previously 39%).
Families will receive lower tax credits awards as a result of these changes.
Reduction to the income disregard for increases in income
Tax credits awards are based on the household income of the previous tax year. Currently a claimant only has their award recalculated if the income of the current year turns out to be more than £25,000 higher than the previous year. When finalising the previous year’s award any income increase below £25,000 is ignored. This £25,000 income disregard is going to reduce on 6 April 2011 from £25,000 to £10,000 and on 6 April 2013 from £10,000 to £5,000.
This will result in large overpayments of tax credits potentially occurring over the next few years so it is important tax credits claimants are aware of these changes. Tax credits claimants should be encouraged to save as much of their tax credits award as possible until their final income is known and their award has been recalculated.
Introduction of a new income disregard for falls in income
From 6 April 2012 a new income disregard of £2,500 for falls in income will be introduced. This means that from 2012/13 any reduction in income in a tax year of less than £2,500 will have no impact on a tax credits award so no additional lump sum payments will be made where this is the case.
Reducing the backdating provision for new claims
The backdating provisions for new tax credits claims will be shortened to one month with effect from 6 April 2012. A claim can currently be backdated for 3 months. This means that there will be lower lump sum backdated payments available to new claimants so it will be even more important to claim straight away if you think you are eligible.
Under the new proposals for universal credit from 2013 there are now even more reasons to get your tax credits claim submitted as soon as possible so that you continue to see the benefit of the old system for longer.
The Plan For Growth
“Britain has to earn its way in the modern world”
In a paper “The Plan for Growth”, released with the Budget today, Vince Cable and George Osborne have announced their plan to put the UK on a path to sustainable, long-term economic growth, recognising that vigorous competition is at the heart of a dynamic economy.
A lot of the measures are aimed at removing obstacles to growth (eg reducing red-tape), but there are also some positive steps to help businesses grow too, and hopefully many of these will have a positive impact for businesses in our area.
For those businesses that export goods or services there are a number of positive proposals to make the whole process both easier and offer more security of payment. The aim of these proposals being to help stimulate the country’s export performance and thereby make inroads into the large deficit on foreign trade that the country suffers due to imports outpacing exports in recent years.
All businesses should benefit from the proposals to improve businesses access to much needed finance. The paper recognises that there has been a breakdown in relationships between businesses and the banks, and that the level of competition in the banking system has led to a lack of choice and transparency over lending decisions, and the government proposes to work with the large banks to improve the situation.
A number of actions to encourage greater investment in SME’s have been announced – in particular reforms to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT’s), as well as the doubling of the limit on capital gains qualifying for Entrepreneurs Relief.
Funding for Growth Stage and Mature businesses should be available through the Enterprise Capital Funds and the Business Growth Fund together with a Business Angel Co-investment Fund. Meanwhile the Enterprise Finance Guarantee scheme is being extended for Start-up / Early Stage business funding.
Tourism is recognised in the paper as being the UK’s sixth biggest industry with 200,000 businesses providing £52bn of UK GDP and employing 4.4% of the workforce. Accordingly the government is introducing a number of schemes aimed at helping the tourism sector, and as tourism is a large part of the Cumbrian economy we look forward to seeing much of that assistance and growth in our region.
VAT
The VAT registration threshold will increase from £70,000 to £73,000 from 1 April 2011, and the VAT deregistration threshold will increase from £68,000 to £71,000 on the same date.
Fuel scale charges are to increase by a typical 10% for VAT return periods starting on or after 1 May 2011.
The value above which VAT must be declared on goods imported into the UK from outside the EC will fall from £18 to £15 from 1 November 2011.
