George Osborne, the youngest Chancellor of the UK Exchequer in over a century, has had to produce a budget in some of the toughest times in recent years. Kinetic Partners outlines the key headlines from the budget, including an increase in the rate of capital gains tax to 28% for high rate taxpayers.
Income tax: The personal allowance which provides an amount of tax free income will be increased by £1,000 from £6,475 to £7,475 from 6 April 2011 to benefit lower rate tax payers. There will be a reduction in the basic rate limit above which the higher rate tax is payable so that higher rate tax payers do not benefit from this increase in personal allowance.
The threshold at which employers start to pay Class 1 NICs will be increased by £21 per week from 6 April 2011.
Capital Gains Tax: The headline rate of capital gains tax has increased from 18% to 28% for individuals whose income and gains (or part of a gain) after all applicable allowances and reliefs exceed the upper basic rate income tax band, which currently stands at £37,400 for the 2010/11 fiscal year. Gains of trustees, personal representatives of deceased persons or individuals who pay the £30,000 remittance basis charge will also be charged at 28%. The increase in rates comes into force for all gains arising from 23 June 2010.
Transitional rules will be in place whereby gains arising before 23 June 2010 will not be taken into account when considering if income and gains exceed the basic rate income tax band. Where an individual has had a gain deferred under a relief such as the Enterprise Investment Scheme, the rate at which the gain is chargeable is that in force at the time of disposal. As such, gains may be deferred into a period where the higher rate applies.
Entrepreneurs’ relief has been extended to cover the first £5m of qualifying lifetime gains. Gains qualifying for entrepreneurs’ relief are subject to tax at 10% whether they are disposed of before or after 23 June 2010.
VAT: The standard rate of VAT will be increased from 17.5% to 20% for transactions made on or after 4 January 2011. Zero rated supplies, exempt supplies and supplies subject to the reduced rate of 5% will remain unaffected.
It should be noted that anti forestalling legislation will be enacted that counteracts an invoice being issued by a supplier or payment received by a supplier before the rate increase where the supply is on or after the date that the rate increases to 20%.
Corporation tax: The main rate of corporation tax will be reduced from 28% to 27% from 1 April 2011 and further reduced by 1% per annum to 24% by 1 April 2014. The main rate is applicable to companies with profits above £1.5m.
The corporation tax rate for companies with profits below £300,000 will be reduced from 21% to 20% from 1 April 2011.
Capital allowances: The capital allowances available to businesses for investment in plant and machinery will be reduced. Writing down allowances will be reduced from 20% to 18% for expenditure allocated to the main pool and from 10% to 8% for expenditure allocated to the special rate pool from April 2012. The annual investment allowance will also be reduced from the current limit of £100,000 to £25,000 per annum from April 2012.
Worldwide debt cap: The original worldwide debt cap proposals were met with a number of concerns from businesses and their advisers. As a result of the consultation process, a number of changes have been made to the legislation. These will be deemed effective as of 1 January 2010. One of the key changes is that assets and liabilities that are taken into account for the purposes of meeting the ‘gateway test’ will include long term arrangements that have the same economic effect as loans.
Research and development (‘R&D’) tax relief: Small or medium enterprises (‘SMEs’) will be able to benefit from enhanced tax relief for expenditure on R&D by an organisation in an accounting period ending on or after 9 December 2009, regardless of whether the intellectual property created vests with the company or not. The removal of this restriction will allow SMEs who previously did not qualify for relief at 175% to now benefit from the scheme.
HMRC powers and deterrents
The new measures which are to be implemented over a number of years complete the reform of the penalties regime which commenced with the Finance Act 2009. The new regime has been designed to encourage the filing and payment of tax by the correct due date by introducing an escalating series of penalties dependent on the number of defaults. However, the late payment penalties may be avoided where the tax payer has agreed a time to pay arrangement with HMRC.
Authorised investment funds (‘AIF’): Measures have been introduced to ensure corporate investors do not get unintended tax advantages from investing in AIFs. Effective from 22 June 2010, the corporation tax deduction given for interest distributions to an investor will be restricted to the extent that the distribution is derived from dividends exempt from corporation tax.
The second proposed change ensures that where foreign tax is suffered by an AIF, the deemed tax credit in the hands of the corporate investor is treated as a foreign tax credit for all tax purposes.
UK Real estate investment trusts (‘REITs’) and stock dividends: A UK REIT is required to pay a dividend distribution of 90% of the profits from its rental business for each accounting period (‘the distribution requirement’). This property income distribution is taxed in the hands of investors as income from property. However, stock dividends do not count as property income distributions and so do not count towards the distribution requirement. The legislation will be amended to allow UK REITs to issue stock dividends in lieu of cash dividends for the purposes of this requirement.
Enterprise management incentive (‘EMI’) schemes: The new legislation will see the removal of the requirement for a company granting the qualifying EMI options to be UK resident. Instead the company will need to have a permanent establishment in the UK in order to qualify. This change will have effect from the date royal assent is received.
Venture capital trusts (‘VCTs’): The current legislation requires the shares making up a VCT’s ordinary share capital to be included in the official UK list throughout the relevant accounting period. This will be replaced with a requirement that the shares instead be admitted for trading on any EU regulated market.
Other announcements
Other key announcements made by the Government include:
- Bank levy – the Government has indicated that it will introduce a bank levy based on banks’ balance sheets from 1 January 2011, intended to encourage banks to move to less risky funding profile
- Controlled Foreign Companies (‘CFC’) – the Government has confirmed that it will be reforming the CFC regime, with interim measures being legislated in Spring 2011 and wider reform being legislated in Spring 2012
- Asset management – the Government has confirmed its commitment to a “workable and non discriminatory” outcome on the AIFM Directive
- Pensions – the Government is considering restricting pensions tax relief by replacing the income excess relief charge with a reduced annual allowance in the range of £30,000 to £45,000
- Non doms – the Government has confirmed that it will be reviewing the taxation of non domiciled individuals
- Anti avoidance – the Government has outlined its intention to take action against the avoidance of tax and NIC on earnings through the use of trusts and other vehicles, including those which seek to avoid the restrictions on tax relief for pension schemes
- Anti avoidance – Substantive changes to the descriptions of schemes required to be disclosed under the disclosure of tax avoidance schemes rules are to be proposed for the 2011/12 fiscal year
- Anti avoidance – the Government has announced that it is considering a general anti avoidance rule, but that it will be part of a wider consultation on the tax policy making process
