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Budget 2009

small ovalOverview

The purpose of this review is to update you on the specific budget changes affecting the small business; landlords and for personal tax issues.

 

small ovalKey Points

bulletA small amount of help for SME's with an extension of loss relief claims and higher capital allowances.

bulletA new "even higher" higher rate of income tax of 50% for earners over £150,000, brought forward to 2010/11

bulletPension tax relief to be restricted on incomes over £150,000

bulletISA limits up substantially

bulletEU holiday let property losses rule change - get in quick

As already announced:

bullet Cost of employment (employers NI) rises by 0.5%

bullet Taxes on earned income (employees NI) up by 0.5%

 

small ovalCommentary and Issues

Our Chancellor has made us wait for this one, being already nearly three weeks into the new tax year. Anyone would think he was trying to put it off, but as widely expected the pre-budget forecasts were hopelessly optimistic and there is a very large black hole in public spending which he hopes to fill by...well...erm...the economy all going back to normal, taxing people a bit more, spending a bit less. But not now, after the election.

It would appear he is going to keep the unemployment figures down by forcing anyone unemployed and under 25 into training or jobs created out of thin air. I have to give our man some considerable credit for keeping a straight face while announcing new funding for job centres as if this was anything other than a necessary expenditure given the rises in the numbers of unemployed!

 

small ovalSmall Business

New Issues

bulletCapital allowances are to be temporarily increased from 20% to 40% for 2009/10

  1. Comment: A bit more messing about with capital allowances that most small businesses no longer receive in any case due to the "Annual Investment Allowance" which covers the first £50,000 of investments. Long-term readers of this commentary will know the continued changes in this area are a recurring theme - I can't recall two consecutive years with the same rules being in place. Does this really promote investment on the ground?

As Already/Partly Announced

bulletLoss Relief

In the pre-budget report Darling announced that for limited companies with a year end between 24th November 2008 and 23rd November 2009 up to £50,000 of losses would be able to be carried back and matched against profits (giving a tax refund) for up to three years.

Today this has been extended to periods ending 23rd November 2010, and for unincorporated businesses for the tax years 2008/9 and 2009/10.

  1. Comment: That is somewhat fairer; as I pointed out in November the dates are rather arbitrary given the biggest losses are likely to be in 2009 and many companies have a December year end.

bulletRate of Corporation Tax to 22% from 1st April 2010

As already announced the rates of small Company Corporation tax are still on the increase. The current rate of 21% will increase to 22% for profits earned from the 1st April 2010.

VAT

bulletThe main registration threshold is up to £68,000 from £67,000 and the de-registration threshold going up to £66,000.

bulletNo announced changes to the return to the 17.5% rate on the 1st of January.

  1. Comment: Phew! I still however think he will have to push it up to make the books balance unless spending is cut in the medium term.

bulletSimplification of overseas VAT rules

Where a small business incurs European VAT it can be difficult to reclaim it. Under a new system from January 2010 it should be possible to reclaim some of this using an on-line system.

  1. Comment: This is a welcome boost for those trading in the EU who are unable to reclaim overseas VAT other than by using an agency with the expertise to fill in all the paper forms for each country. We will see in time how valuable this is as the rules vary from location to location and may not be suited to a "DIY" reclaim approach.

bulletComplications on EC sales lists

Exporters of services will have the dubious pleasure of the EC sales lists which was previously the preserve of those dealing in stocks. What is more this will be due within 14 days not 6 weeks as it is now.

  1. Comment: You don't have to do this until you are asked - but if you are its really not much fun!

Other Business Measures

bulletEmployers NI up by 0.5% to 13.3% from 2010/11

  1. Comment: This tax on employing people is an easy "invisible" target and raises about £2.6 billion according to the tables tucked away in the back of the budget. It doesn't do much at all for jobs however, and increases the incentives to employ contractors - which then leads to big nasty issues such as IR35. I really don't like distortions in the market place and this is a very big one which leads to behavior changing purely due to tax - and then a whole raft of other legislation is then required to try and stop it.

  2. I must admit I found it cheeky that Darling didn't bother to mention this very real cost to businesses whilst gushing about all this non-existent help small businesses were supposed to be getting - which seems to mostly involve pushing the jobless into training courses.

bullet"Time to Pay" extended

The "Time to Pay" measures for those struggling to pay their taxes were highlighted again.

  1. Comment: I am very pleased to say I got it wrong in my pre-budget review in November and there is genuine additional help available to businesses struggling to pay their taxes. The rate of interest payable tends to be far less than your overdraft, so if you are struggling then do take advantage. There is a genuine "light touch" to the agreements in contrast with the previous system which took a much more aggressive stance. This is by far the best thing the Chancellor has done for small businesses that I can recall, so if you have a big overdraft and taxes to pay then I would strongly suggest you take a look at this.

small ovalPersonal Tax

Taxes on Income

bulletIncome tax up to 50% for incomes exceeding £150,000 from 2010/11

bulletNI up by 0.5% for all employees from 2010/11

As already announced there will be an "even higher" higher rate of tax for those earning over £150,000. However; it just got a whole lot worse. Instead of 45% from April 2011 it will be 50% from April 2010.

There is also a rather nasty claw-back of your personal allowances for those earning over £100,000 which again is worse than announced in November as it now covers your full personal allowance and not just half of it.

NI is also up from 2010/11 - employees NI for everyone rises across the board. This is effectively 0.5p on earned income for all salaried persons. This means 11.5% NI for Basic Rate and 1.5% for Higher Rate (and Even Higher, Higher Rate) from 2010/11.

  1. Comment: All this is a bit hard to take in so in terms of how all this looks for real "taxes on income" (ignoring the now almost entirely arbitrary split between income tax and NI) I have prepared the following table which shows the marginal rate of tax (that is to say the pence in the pound you suffer for each £1 earned at this point) for most people of working age:

 

2009/10

2010/11

 

 

 

Lower NI Threshold

£5,720 to £6,475

£6,000* to £6,475*

Marginal Rate

11%

11.5%

Basic Rate from

£6,475 to £43,875

£6,475* to £44,000*

Marginal Rate

31%

31.5%

Higher Rate from

£43,875 +

£44,000* to £100,000

Marginal Rate

41%

41.5%

Personal Allowances

n/a

£100,000 to £113,000

Marginal Rate

41%

61.5%

Higher Rate Again

n/a

£113,000 to £149,999

Marginal Rate

41%

41.5%

Even Higher Rate

n/a

£150,000+

Marginal Rate

41%

51.5%

*Estimated

  1. As you can see there is a really nasty spot just over £100,000 where the marginal rate of tax will be 61.5% as your personal allowances are unceremoniously removed by 50p in the £1. This is a real cost of just over £2,500 in hard cash terms for someone earning between £113,000 and £150,000.

  2. With the normal 'fiscal drag' - that is to say not putting rates up in line with increases in earnings - expect to see more and more people caught in the "Even Higher" Higher Rate of tax just as the Higher Rate of tax currently catches a lot of middle managers although when it was introduced it was supposed to hit top earners only.

  3. Those of you who earn via dividends should note the rate of tax on dividends has gone up in line with the increased rate for income taxes.

Pensions Changes

bulletTax relief on pensions for salaries over £150,000 reduced to 20%

  1. Comment: For someone with a guaranteed two thirds final salary pension scheme our politicians don't seem to keen on anyone else having a decent one. As expected (I wrote this bit before he stood up) the 'leaks' this week about removing the tax break for higher rate tax payers on pension contributions were far worse than the reality - the standard tactics of course for bad news is to leak really bad news so that the actual announcement becomes 'good news'.

  2. What he has done is not unexpected - he has plugged the blindingly obvious option for earners in the prohibitive 50% tax zone of paying more into their pensions by simply removing that option. I don't have the details to hand but it sounded nasty.

  3. What our Chancellor doesn't seem to understand is that most people, well certainly outside the civil service anyhow, who earn over £150,000 tend to be quite switched on and will therefore tend to find ways to avoid paying 51.5% of their income over in taxes. It's going to be very good business for my profession when saving that sort of sum in the pound.

  4. Forestalling provisions have also been introduced to prevent the "loading" of your pension scheme before this comes into operation. Looking at the notes it looks very unworkable. How on earth administrators of pension schemes are supposed to spot when your payments are "outside your normal pattern of contribution" I have no idea given the propensity for many higher earners to drop in large lump sums sporadically rather than a steady monthly figure. Hmm. Don't fancy trying to regulate that.

ISA's

bulletISA limits are up to £10,200 (£5,100 cash) from the current £7,200 (£3,600 cash) from 6th April 2010

For those of you over 50 you get in early on 6th October 2009

  1. Comment: This is all very welcome, but why on earth do the over 50's get special treatment by 6 months? What happened to fairness for all?

 

small ovalLandlords

bulletHoliday let property losses

Following an EU ruling, holiday property landlords with a property in the EU can now claim losses (back to April 2007; that is to say your 2007/8 tax return) incurred against tax paid on their normal income.

Time limit for this is 31st July 2009

Background: Previously overseas holiday property landlords could not deduct losses against UK incomes.

However with the classic sting in the tail, NO holiday property landlord (UK, EU or elsewhere) will be able to deduct losses against earned income for 2010/11.

  1. Comment: This represents a reversal of the long-term policy of taxing holiday let property as a business rather than as an investment, which is the case for residential let property. It's messy, but a one-off tax grab may well be available to you. If you are a client of mine and this applies - let me know and we will get a claim in.

  2. From HMRC's point of view I imagine they didn't have a lot of choice given the EU rules effectively allowing loss relief to peoples holiday home in the sun might well have gotten rather expensive.

small ovalOther Points

bulletExcise duties (booze, fags and petrol to me and you) up another 2%

  1. Comment: Excise duties including fuel were raised substantially in December 2008 by 8% so that with the reduction in VAT no real change in prices would occur when VAT fell. However as predicted back in November there is no corresponding adjustment to put excise duties back down when VAT increases in January 2010. Quite the reverse - he is having another hike - presumably so they can be frozen just before the election. Cynical? Moi? Yes probably!

  2. Looks like the fuel price escalator is back too - fuel duties to rise by 1% over inflation for the next four years.

bullet Stamp Duty exemption extended

The exemption from Stamp Duty under £175,000 has been extended marginally to December 2009 as widely reported.

bullet'Place of supply' rules for VAT to be changed as from January 2010

  1. Comment: This could have a major impact for those supplying services outside of the UK. A detailed review is needed once the full rules are known to see if this applies to you.

bulletAir Passenger Duty up

As reported last time, short haul flights are up by around 20%, from £10 in 2009/10 to £11 in 2009/10 and £12 by 2010/11 however new banding take long haul rates up from £40 in 2009/10 (economy) to between £60 and £85 in 2010/11 and business class is up from £80 to a whopping £120 - £170 by 2010/11 depending on the distance flown.

  1. Comment: Another "green tinged" revenue raiser that is rather arbitrary. Still not seen this one covered in the mainstream press - maybe they haven't been on holiday lately.

bulletMinor tinkering to EIS and VC schemes

bulletEBIT (employee benefit trusts) finally outlawed

Comment: About a year late on this one, with the higher rates of tax there is going to be lot more of this sort of thing going on. HMRC need to be smarter about spotting and closing the loopholes before they become common place or they might as well not bother putting the 50% band in place at all.

 

small ovalAnd Almost Finally

A Few Oddities

bulletNamed and shamed if you have a £25,000 or more tax penalty

  1. Comment: Put 'em in the stocks! This is an odd one buried deep in the notes; if you get caught with your hand in the till and owe more than £25,000, our friends at HMRC will be naming and shaming you. Not a whisper of this in Darling's speech. No doubt the tabloids and local papers will love this. I must admit I quite like it although I dread to think what will happen when they get it wrong and make false accusations .

bulletCarbon Budget. We had our first Carbon Budget today!

  1. Comment: The chancellor was very keen to announce a carbon budget, and how far ahead we where on our Kyoto Treaty commitment compared to our peers. Must say I took this opportunity to use the little boys room so I have no idea what was involved, however I hope they count the carbon generated in all the hot air spoken through the speach.

bulletElection bribe for a new car

This hasn't been fully announced yet but we really are going to be able to trade in that old banger for £2,000 off a new shiny car, all in the name of an election bribe. Sorry I mean saving the overseas motoring manufacturers. Sorry, I mean to make the world a greener place. Silly me!

  1. Comment: Quite how it's "green" to throw away something that is still usable and buy a new one no-one in the press seems to have asked. But the slight decrease in emissions of a new car must more than offset the waste of scrapping a car that is still running and building a new one. It's not as if the new cars will be built out of steel, plastic, glass, rubber or any high carbon components being shipped around the globe. Well probably. I'm an accountant not a scientist so if the government says its green it must be. Right? Anyway this rather odd subsidy to the car industry efficiently distorts the second-hand car market with my £100 old banger now worth £2,000 if I wanted to trade it in for a shiny new one.

  2. What they don't tell you of course is that only half of this comes from the treasury (the other half from the car maker - which are discounting by more than £1,000 in any case) and given there is already 15% VAT on new cars Darling might even make a profit out of this one to bail out the big black hole of public debt. Now that's what I call a policy!

Allowances That Don't Move

Just a few of my favourite things that rarely move, i.e. some good old-fashioned stealth taxes that rarely get a mention, what is more I didn't even have to edit this from last year! Does this make it green as I recycled it?

bulletChildcare vouchers, £55 per week (2003, might be longer)

bulletRent a Room limit £4,250 (2000 or earlier, at least 9 years)

bulletSmall company profits limit £300,000 (1994, 15th year)

bulletLarge company profits limit £1,500,000 (1994, 15th year)

bulletLetting's relief £40,000 (predates all my reference material)

 

small ovalKey Allowance Summary

Some Key Allowances have moved as follows for 2009/10.

bulletPersonal allowance increase from £6,035 to £6,475

bulletNI threshold increase from £5435 to £5,720*

*relevant to company directors wanting to pay minimal director's salary

bullet Higher rate tax goes up from £34,800 to £37,400

bullet The VAT threshold rises from £67,000 to £68,000

bullet Personal CGT allowance up from £9,600 to £10,100

bullet Corporation tax stays at 21% for profits under £300,000

 

small ovalNotes

This review is based on the Chancellor's speech and the available information on the 22nd April 2009. 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.

If you wish to link to this article, please feel free to do so. Any quotations should be less than one paragraph and fully credited unless otherwise agreed.

James Smith, ACA

22nd April 2009

5.30pm

Final comment - there is not really a lot in this budget, but it could certainly have been a lot worse than this for small businesses. VAT is sticking at 17.5% (for now) and no direct attacks on small incorporated businesses, so personally for my own small business it has been a sigh of relief more than anything.

The opposition is naturally jumping all over the growth forecasts, and I must admit I don't really give them any more credence than the ones in November which are already shown to be wholly inaccurate. If the growth doesn't happen then we really are going to struggle as a country, not least simply raising the finance on the markets to pay for current expenditures. This can mean really only two things - higher taxes and lower spending in the medium term. There are probably some easy wins with some of the more grandiose projects that could be culled, but the outlook doesn't look very good to me. I don't doubt that all tax payers - not just those earning over £100,000 - are going to have to pay more. The only plus I can think of is the state-owned banks will be sold back into the private sector at some point which should generate some profits, but apart from that I cant see much to be cheery about.

 

 

 

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