Budget 2008 James Smith Accountants

The purpose of this review is to update you in brief on the specific budget changes affecting my client base, i.e the small business; landlords and personal tax issues.

Key Points

The "income shifting" proposals where rather too hot to handle and have been put back out for consultation again.

Commentary and Issues

Well this has got to be one of the more bizarre budgets. A phenomenal number of changes are coming in this April, more than I can recall in any one year, but a speech devoid of actually mentioning very many of them. Darling just kept banging on about "stability" and "resilience", something he could do well with applying to the tax system. Darling ended up with not much to say as a result of the changes Gordon announced in the past 2 years coming into effect this year, and a quite staggering number of changes in Darling's pre-budget report last year (the pre-election budget that didn't happen) that take effect this April. By the time Cameron got to reply and stick the knife in, Darling was looking increasingly like no-one's Darling, and I must say is increasingly reminding me of a startled white rabbit (albeit with someone else's eyebrows) not knowing which way to jump next.

Small Business

As previously announced (although 1/3 of small businesses are apparantly unaware of this) the rates of small company corporation tax are on the increase:

The large company rate of Corporation Tax is falling to 28% from 30% from April 2008 for profits over £1,500,000. Those with profits between £300,000 and £1,500,000 will pay a slightly lower marginal rate as the small company rate of Corporation Tax rises.

Comment: Companies are still however taxed less than most sole traders, but if your net business income is over about £350,000 you might like to consider an LLP structure. It would be nice to see the point at which a company ceases to be small increased - it's been £300,000 since 1994!

There has been a radical overhaul of the capital allowance regime, the biggest impacts for the smaller business are:

Introduction of a £50,000 100% "Annual Investment Allowance", so that in effect all the spend in the year on capital equipment can be expensed immediately for tax purposes unless you have a lot of it. This seems very generous. Expect a reversal in about 2-3 years due to "abuse", ie business making the claims.

The "writing down" allowance for current equipment will be reduced from 25% to 20%. This will impact business with large capital assets acquired over several years in the past and slow down the rate at which you will receive tax relief.

A welcome bonus was the ability for companies with "small" residual writing down pools of less than £1,000 to write off the balance in one year. This is a really sensible move for once removing lots of fiddly capital allowance computations.

Comment: You should note that for limited companies with tax years straddling the 31st March these allowances are split. Ie if you have a December 2008 year end, your capital allowance limit will be 9/12*50,000 = £37,500 for purchases in the 9 months between 1st April 2008 to 31st December 2008, and the current rules will apply to January 2008 to March 2008.

The main registration threshold is up to £67,000 from £64,000, the deregistration threshold going up to £65,000.

Errors Threshold. The notification of errors threshold is up significantly. Currently for errors under £2,000 there is no requirement to notify HMRC separately for any adjustment. This is to be increased to the greater of £10,000 or 1% of your turnover (restricted to an upper limit of £50,000).

Comment: a very sensible small change exempting quite a lot of pointless paperwork.

Darling announced some vague measures to help "female entrepreneurs" to the tune of a whole £12.5million (that's about 36 hours of dropping bombs on the Afghans), some tinkering with EIS Limits (up to £500,000 from £400,000) and a tiny bit more funding for the Small Firms Loan Guarantee Scheme which doesn't have much use in the first place.

Of more interest the Associated Companies Rules are to be tinkered with. This could be a very sensible move as they are currently a bit of a mess and have lots of unintended consequences. The main detail at this point is that businesses controlled by partners will no longer be associated. There are also lots more "reviews" aimed at "simplification" of taxes to small business. Heard it all before however and not much seems to ever happen.

Comment: In the pre-budget review he scared most of my profession rigid with some half baked ideas about the taxation of small business run by two or more family members (income shifting legislation). Fortunately after much intense lobbying from accountants and other interested parties he has backed down and put this hot potato out for more "consultation". Presumably he expects to be fired by the time this one comes back into his remit. To give you some idea of how bad his legislation is, for the first time I and many other ordinary accountants have actively been making representation through official channels and lobbying their MP's against the change. I have never felt the need to do either before. The net result is that your husband and wife business can still share the income to reduce their tax bill and there is quite frankly not much HMRC can really do about it other than issue guidelines on how they would like to interpret the law, as opposed to how the law is actually written.

Capital Gains Tax

As announced in the pre-budget report our friendly Chancellor thought it a good idea to sweep away any thoughts of long term tax planning by making what is in effect a retrospective tax as it affects gains that have already occurred by the 5th April. What was that about "stability" again?

New 18% rate of tax for ALL tax payers irrespective of being a higher/lower rate tax payer.

After some fierce lobbying, a 10% tax rate for business assets (Entrepreneurs Relief). This applies to business assets held for only one year and is subject to the various conditions. It applies to a total of £1 million which is apparently a “lifetime” limit but given the propensity for changes in policy, this might be the lifetime of a frightened rabbit for all we know. Importantly the clock on the “lifetime” starts from April 2008 and so is not retrospective as initially feared. Business assets include holiday let property which is traditionally classed as a business, but excludes Buy to Let properties which are treated as an investment. The key difference to Business Asset Taper Relief is that in order to qualify, the whole business must be disposed of, as opposed to just a part of it, ie it is a lot more restrictive.

Indexation allowance is still allowable up to 1982 (ie those buying assets in the inflation ravaged 1970’s won't be hit as hard as first thought).

Personal allowances still remain.

Other reliefs such as PPR relief, lettings relief and other aspects of the tax system remain in place.

Comment: I won’t go into the maths, but on the surface this looks like not much change, underneath this is actually rather regressive on basic rate tax payers, especially those with relatively small gains where due to the way Taper Relief was computed they didn't pay much tax. Interestingly this was billed as a revenue raiser, but after the climb down on Entrepreneurs Relief it won’t raise more than a few hundred million and I do wonder if they will actually lose out as the main gainers, recent landlords, should be significantly better off.

Landlords

Nothing specific for you this time around apart from the capital gains tax changes and the self assessment changes as below.

Personal Tax

There has been some major messing about with taxes on income, the net result of which is that the 10% rate of income tax has been abolished for earned income (but not for savings income for reasons I can't quite fathom) and the basic rate of income tax falls from 22% to 20%. What this means is that if you earn less than about £18,000 per annum you will pay more tax. Higher rate tax payers are getting caught too, with the National Insurance band from £670 per week to £770 per week.

Comment - Overall this is a sensible move with tax now being an effective 28% for basic rate tax payers (up to £41,435 of income) and 41% for Higher Rate payers once National Insurance is added in. (They have still left a little odd band of 23% between £40,040 and £41,435 which should get closed in 2009). Fingers crossed the path is now set to combine NI and Income tax (as it is already interestingly enough when they collect it from employers) and just call these "taxes on income" rather than continue the current "Income tax" and "NI" charade.

Not that Darling thought to mention it, but the much publicised ability to use your deceased spouse's unused IHT band was in the supporting legislative pack. Although this has been in effect from October 2007 HMRC have refused to process any probates on this basis. If I was cynical I would suggest that it might be to do with the draft legislation which is "open to interpretation" to put it politely.

The accepted logic is that we should be able to claim the "proportion" remaining on the first death as applied to the current IHT banding.

Ie if the IHT band was £200,000 on the first death and you use £150,000 of it (ie 75%), you have 25% remaining for the second death. This would appear to be applied to the current rate of IHT (ie £300,000 for 2007/8), so you would in this example have £300,000 on the second death plus 25% of the first death's £300,000 = £375,000 in total.

The draft legislation itself says "unused portion" which could equally as well be taken to apply to the IHT in force at the date of death. Again expect arguments and changes of "interpretation".

Currently days arriving and leaving the country are excluded from the calculations of residence, so if you arrive on the Tuesday morning and leave on Thursday at 11pm you have only spent one day in the UK under current rules. Under the new rules they will simply count the number of days you were in the county at midnight , ie this will be two days.

Comment - This policy is principally aimed at stopping senior executives habitually coming to the UK for meetings and claiming residence elsewhere. The original proposal was drafted to count both the day of arrival and departure which seemed a little harsh. This revision would appear to be sensible and also excludes those "in transit" elsewhere and that happen to be in a UK airport on the stroke of midnight .

This is a really a very important change that will affect you if you currently are not UK domiciled (very broadly, born outside the UK and don't plan to settle here permanently but even some "second generation" Brits can be classed as non-dom). Under the current system you may pay taxes on the "remittance" basis, ie when you bring money earned overseas into the UK. Under the new system Darling has decreed that you must make a stark choice:

1. Declare ALL of your worldwide income in the UK, remitted or not , or:
2. Continue on the remittance basis, but lose your personal allowances and capital allowances. This would mean for a typical higher rate tax payer an extra £2,175 in taxes from the loss of your personal allowance alone.

The threshold at which this comes into effect is just £2,000 of gross income, so they are presumably expecting a huge amount of extra paper shuffling to ensure compliance. The only sop in the budget was to double this from the original plan of £1,000 (not that Darling dared mention this within his speech).

Please note that tax suffered overseas is generally available to offset before any UK taxes that are applied. It is however rather tiresome to fill in the tax return and make the relevant claim and if the overseas rates of tax are lower than in the UK you will pay more tax.

For non-doms in the UK for more than 7 years out of the last 10, you will have another stark choice - pay the widely publicised £30,000 bung to the government to leave you alone and keep paying tax on a remittance basis only, or pay tax on your worldwide income. Clearly most people will simply pay tax on their worldwide income or if they are rich enough for it to matter, probably leave the UK and create some wealth in another country.

Comment - The rules in this area are pretty complex and will almost certainly be subject to lots and lots of revisions in the coming few years, so if this impacts you, detailed ongoing advice will probably be required. In practice this is looking like a tax on the honest as cross border anti-avoidance work is rather hard work for HMRC.

Following the "Carter" review there are some major changes to the paper shuffling aspects of self assessment, the centre piece of which is a hugely re-jigged self assessment form. It is designed to be machine read which means filling it in by hand will be quite tricky in my opinion, but given if you are reading this you are probably already a client this shouldn't be of major concern as clients' returns will be produced using software in any case.

Paper filing dates are being bought forward to the 30th October.
On-line filing is still 31st January, HOWEVER we won't as now be able to submit a paper return if (say) in January the on-line system doesn't work for you as happens on occasion. In practice I think they will have to accept some forms simply can't be submitted on-line but it leaves me somewhat uncomfortable with the onus of proof on the tax payer. There is also a very odd bit of legislation that states they will no longer accept manual returns output from my tax software which means some emergency hand writing may be in order!

Comment - One very positive aspect of the reform is that the enquiry window, that is to say the date by which HMRC can open an enquiry into your return, will now be linked to the date of filing, and not the end of the tax year. So the earlier you file, the shorter the enquiry window and the quicker you will have certainty over your affairs.

ISA's are having an overhaul. The current £3,000 cash limit or £7,000 for shares is being changed so there will be a total limit of £7,200, of which £3,600 can be cash. This means you can "mix and match" cash and shares without choosing between cash or shares as you have to now.

Comment - Thumbs up to this, it seems a very sensible reform. The cash ISA limit is however well behind inflation -it was £3,000 way back in 1991. If indexed to inflation this limit would be almost £5,000 by now.

And Almost Finally

Simplification of Stamp Duty rules - shares transferred with a value of less than £1,000 will no longer need to be stamped.

Comment - apparently 68% of transactions are for the minimum £5, which costs more to process than they raise. About time too!

Trade Loss Relief - loss relief will no longer be available on small businesses where the owner spends less than 10 hours a week on the trade. This will mean small part time start-ups may not be able to claim loss relief for that failed side project against their salaries income.

Comment - I think the intention was to hit a tax avoidance scheme but with possible side effects on genuine small start-ups. Quite how they know how long you have spent on your business I am not quite sure however!

Comment: I know we now own a mortgage company but you would have thought Darling would know a little bit about this market by now and why a 15 year fixed rate mortgage would be (a) prohibitively expensive and (b) unwelcomed by most home owners as they tend to er, move house and pay them off early or sometimes increase them.

Comment: Now carrier bags, that is a big problem facing society I am sure Darling would love to go down in history as "The Chancellor Who Taxed Plastic Bags". He didn't even have the guts to do it, just threatened that if big retailers didn't stop dishing them out he would think about taxing them. Probably. If Gordon lets him.

Comment: ???How??? No builders' breathing or breaking wind whilst on site building these things from fairy dust (obviously we can't use glass, concrete, steel, or any other normal material) with their power tools powered by a waterwheel out the back? You couldn't make it up.

Just a few of my favourite things that rarely move, ie some good old fashioned stealth taxes that rarely get a mention:

Key Allowance Summary

Notes

This review is based on the chancellor's speech and the available information on the 12 March 2008. This is before the full Finance Act is published which inevitably contains further details. This document will be updated as further key details come to light, but please remember this commentary does not constitute advice.

Final Comment - this is as I said at the start a very odd budget. It includes some very welcome simplifications to minor matters such as Capital Allowances for small business (effectively removed), and removing the need for so much tax planning surrounding Inheritance. But at the same time the budget muddies the waters with matters such as Capital Gains Tax which is quite frankly raising very little in revenue and creates a set of rather arbitrary winners and losers together with a whole new set of rules to get to grips with. Small businesses have a little something to cheer with the "income shifting" issues being deferred yet again (the truth of the matter is that it is just too complex an area to legislate on) but they are being hit by some very real increases in their corporation tax bills on a year by year basis. The positives to take from this is are that the chancellor although seemingly making policy on the hoof has actually listened and made some sensible modifications to his (or perhaps his predecessor's) plans. Perhaps he will become more of a badger (will fight when pushed but prefers to keep away from humans) than just a frightened white rabbit in time.

Keeping It Simple

Budget 2008

Overview

Key Points

Commentary and Issues

Small Business

Capital Gains Tax

Landlords

Personal Tax

And Almost Finally

Key Allowance Summary

Notes