Budget Review 2011
 Overview
The purpose of this review is to update you on the specific budget changes that affect my clients, being those with a small business; landlords and those having general personal tax issues.
We also include a round up of various announcements made in the past few months, and major changes in effect from April whether announced today or some time ago.
Key Points
New issues:
 Help to small business through reduced regulation and various incentives to help investors and investment.
IR35 unchanged
As already announced, but active from April:
Taxes on companies fall - Corporation Tax for small businesses down to 20% from 1st April from 21%. Additional fall of 2% for larger businesses
Taxes on self employed rise - NI up 1% across the board to 9%. This gives a combined rate of tax (NI + income tax) of 29% for basic rate and 42% for higher rate for 2011/12
Taxes on employment rise - employees NI up 1% across the board. This gives a combined rate of tax (NI + income tax) of 32% and higher rate of 42% for 2011/12
Employers NI also rises by 0.5% to 13.8% from April 2011
Political Sketch
This is the first "budget proper" of the new government, following the emergency budget in June. Osborne seems to have dispensed with the theatre of a pre-budget report in the autumn, instead issuing various notes towards the end of the year which are summarised here.
On tie watch, he went for purple, and the budget did certainly seem to be more of a Tory hue, not much in the way of Lib Dem compromise here. The main theme was to support business to provide jobs and growth rather than government spending money to provide jobs. George claimed he wanted to make the UK the "best place to start, finance and grow a business". Which all sounds very nice, but it's the actions that count. In terms of those, well some smallish measures on promoting investment, but nothing that will touch the majority of small businesses. The most general indicator is that the pendulum seems to have swung back towards making life for small businesses easier and not harder, with promises of cuts regulations, and for all business with less than 10 employees to be exempt from new rules for 3 years.
What was also interesting in what he didn't say, not a whisper on IR35 which was one of the main planks of the office of tax simplification's (OTS) proposals. As far as tax overall goes the big news of the day was that the other main proposal of the OTS, the combination of taxes on income (i.e. Income tax and NI) into a single tax was been taken seriously and would be consulted on. This would be a huge change to the system, and make it all far less confusing for most people. Again however, no action yet just hopes for the future.
Small Business
New Issues - General
Approved mileage rate up to 45p from 40p
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Comment: This is the rate applicable to those who use their own cars for work purposes. It is the first raise for a number of years. The rate over 10,000 miles remains at 25p. This will push the balance on company vs private ownership of new cars further towards private ownership.
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It also benefits landlords, employees and sole traders claiming a mileage rate.
Corporation Tax down 2% to 26% for larger businesses (£1.5million profit)
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Comment: Whilst not directly affecting many small businesses, for those over the £300,000 profit mark, it is good news as it lowers the marginal rate of tax. The 1% fall for small businesses to 20% was not amended.
New Issues - Investment
R&D Tax Credits enhanced
R&D tax credit goes up to 200% from April 2011 and 225% from 2012, and the £10,000 minimum spend removed.
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Comment: A surprise bit of help here although not that many firms qualify for these credits. There is also help for micro businesses as the £10,000 floor has been removed, so the relief is available for any amount of qualifying R&D.
Enterprise Zones created
21 enterprise zones are to be set up offering favourable trading conditions
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Comment: Might be nice if you happen to be in one, other than that it's unlikely to provide anything other than very localised help.
EIS and VCT Scheme
The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) are being given a make over, with tax relief raised to 30%.
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Comment: This may help those looking for funding or indeed looking to invest, but generally there is low take up of these schemes due to the restrictive conditions. Relief is still below likely investor's marginal rate of tax of 40% or 50%.
Entrepreneurs' relief up to £10 million
The 10% band of ER is extended from £5million to £10million
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Comment: Not many small businesses sell for more than £5 million, so limited real help here again, although a big boost if it affects you.
As Already Announced or Extended
The following measures have largely already been announced, but are coming in shortly or are extended:
Rate of Corporation Tax down to to 20% from 1st April 2011
Corporation tax is to fall to 20% for businesses with profits under £300,000.
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Comment: With the rises in NI this increases the incentives for tax geared incorporations for small businesses.
Capital allowances
The annual investment allowance is £100,000 for 2010/11 and 2011/12 but falls to £25,000 from 1st April 2012
Writing down allowance falls from 20% to 18% from 1st April 2012
-
Comment: there are lots of minor changes to capital allowances going through the system so be careful if planning large expenditures. If your year end straddles April, then the annual investment allowance is pro-rated. So a business with a year end of June 2012 would get 9/12ths of £100,000 plus 3/12ths of £25,000, a total of £81,250.
Employers NI up by 0.5% to 13.8% for 2011/12
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Comment: Not great for jobs and growth this one
Loss Relief
If you have a loss in your limited company of up to £50,000 and your year end is between the 24th November 2008 and 23rd November 2010 you can carry back these losses to be matched against previous profits as far as three years. This can then generate a refund of tax paid in those earlier years.
Company car costs up
Private fuel costs are up from April 2011, with the basis figure going up from £18,000 to 18,800.
The company car tariffs go up 2% from April 2011 and another 1% from April 2012.
And to top it off, the continued "ratchet" on emissions banding means drivers will often go up one or more emission bands during a typical 3 year ownership.
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Comment: These are policies left over from Darling, left unchanged. Not good news at all if you have a company car.
Compulsory e-filing of Corporation Tax Returns
This wont directly affect our clients as will be invisible to you, but if you file your own Corporation Tax returns you will now have to get your accounts into a special format rather than submitted as a PDF or paper copy for submissions from 1st April 2011. The deadline for Companies House is 2013.
Things he was very quiet on
IR35
Osborne
would appear to have taken the cowards way out and politely ignored the ONS comments about potentially suspending the legislation. Not a whisper about this in the speech. Within the notes there are a couple of para's of fairly wishy washy measures to "make improvements to the way in which it is administered". Or do nothing much at all I am afraid on this important issue.
I include some notes in the OTS section below about this.
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Personal Tax
New Measures
Charitable Donations and IHT
A reduced rate of Inheritance tax of 36% is proposed for estates leaving 10% or more to charity.
There are also various small improvements allowing charities to claim more gift aid on things such as bucket collections.
The IHT band is however frozen until 2015.
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Comment: Presumably the IHT band is frozen now so it can go up in a big step just before the election. Cynical? Me?
50% rate of tax a "temporary" measure
Whilst nothing concrete,
Osborne
signaled the 50% rate is not going to stay in the longer term.
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Comment: However popular this may be amongst class warriors the 50% rate is unlikely to actually raise much revenue given the general disincentive effect to earn over £150,000 and the added incentive to get around it if you do. Talking of which of you are hitting these sorts of levels and trading through a limited company, it would seem wise to draw dividends such as you stay under until the rate is relaxed in the future before taking the larger sums.
Indexation of allowances
All allowances are to be indexed by the CPI (rather than RPI) rate of inflation from 2012/13 unless otherwise announced.
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Comment: This brings to an end the current 'fiscal drag' caused by personal allowances being frozen for the past couple of years, and puts in place an expectation of allowances keeping up with inflation.
As Already Announced
The following measures have largely already been announced, but are coming in shortly:
Tax relief on pensions - a flat £50,000 from April 2011
The system is now very simple - full income tax relief up to a maximum contribution of £50,000. This includes proper tax relief for those paying the 50% rate of income tax.
There are carry forward provisions allowing use of unused allowances from earlier periods up to 3 years later. This means you could actually (by 2015) pay a maximum of £200,000 in a single tax year so long as you had paid nothing for the previous three.
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Comment: After the mess of the last couple of years on pensions to the extent that even the normally excellent Pensions Advisory Service couldn't explain how it works, this is a very welcome change. Simple, effective and reasonably fair.
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You don't however get any tax relief for National Insurance which as above is now a big part of taxes on income.
Higher Rate Tax Threshold cut
To accommodate the rise in personal allowances from £6,475 to £7,475 the higher rate tax threshold is actually cut from £37,400 to £35,000.
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Comment: Overall this means that anyone under 65 will become a higher rate tax payer with total earnings of £42,475 rather than £43,875 as previously. It was announced for 2012/13 a similar cut won't occur when personal allowances increase.
Taxes on Income Up 1%
National Insurance on all earnings go up by 1% for 2011/12
I have enclosed again a table to show how the new rates of taxes on income (Income tax plus National Insurance) will look for employees. For the self employed you broadly save 3% on the rates below.
|
2010/11 |
2011/120 |
|
|
|
Lower NI Threshold |
£5,720 to £6,475 |
£7,225 to £7,475 |
Marginal Rate |
11% |
12% |
Basic Rate from |
£6,475 to £43,875 |
£7,475 to £42,475 |
Marginal Rate |
31% |
32% |
Higher Rate from |
£43,875 to £100,000 |
£42,475 to £100,000 |
Marginal Rate |
41% |
42% |
Loss of Allowances |
£100,000 to £113,000 |
£100,000 to £114,900 |
Marginal Rate |
61% |
62% |
Higher Rate Again |
£113,000 to £149,999 |
£114,900 to £149,999 |
Marginal Rate |
41% |
42% |
Additional Rate |
£150,000+ |
£150,000+ |
Marginal Rate |
51% |
52% |
Tax planning notes:
There are two bear traps in the system (and a third from 2013 with child benefit losses for HR tax payers)
1. Gradual loss of personal allowance at the £100,000 income threshold
2. Payment of the additional (50%) rate of tax.
The main weapon at your disposal to avoid the above are pension contributions as outlined above which have the effect of raising the tax thresholds to keep you out of the above traps.
Landlords
New Items
Stamp Duty
Some minor points on stamp duty, in particular changing the rules on bulk purchases so in essence each property is taxed at the band it would be if purchased individually, rather than the stamp duty being based on the overall deal price of multiple properties.
As Already Announced
Stamp Duty up to 5% for purchases over £1million.
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Comment: This is a Darling/Labour policy that has been left unchanged. Few people actually pay this of course due to the existence of tax mitigation schemes which avoid it.....which was actually acknowledged by the chancellor in his speech whilst making some generic clamp-down-on-tax-loophole type comments. You cant help wondering however if he would raise more revenue if the rate was much lower and people didnt have the incentive to get around it.
Furnished Holiday Lettings
After much dithering there are some new rules in this area which are finally in effect from the 1st April 2011, the previous changes having been suspended.
The key points are:
Loss relief is restricted to being carried forward against future profits on the letting, and not available against other incomes
Tighter definition of a holiday let. The nights available for letting go up to 210 from 140, and actually let to 105 from 70. There are some provisions to stop properties "yo-yoing" in and out if you have a single bad year.
Capital allowances still available, so long as the letting still qualifies.
Warning on VAT. VAT rules do not follow the same definitions. The VAT threshold may therefore remain important for holiday lettings businesses with low occupancy that are taxed as a lettings business for income tax, but remain a holiday let for VAT. It is one of those weird ones that isn't obvious. Be careful if you have several properties - the threshold is £73,000 per annum.
Other Points
Fuel Duty
The pro-tory headlines might scream "Fuel Price Escalator Scrapped". Except it hasn't quite yet, only delayed for a bit, and then replaced in a while. The net effect is no immediate pump rises.
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Comment: Very sneakily the fuel rate will be pegged to RPI and not the (normally lower) CPI. This is also a missed opportunity for proper reform of this tax to take out the current 'amplifier' effect of changing prices of crude. The ideal system in terms of certainty for business and individual budgeting would work to stabilise pump prices insulating the economy a little from changes in world oil prices rather than magnifying them.
Office of Tax Simplification
There is a group set up tasked with simplifying the tax system made up largely of tax experts working for private clients and not for HMRC. Their report was issued on 3 March 2011. Most of their work is rather low key fiddling about in the background with the sorts of things accountants need to know about but no-one else, but they did make two bold if somewhat obvious proposals, the first was the scrapping of IR35, and the second the merger of taxes on income into a single tax, rather than having National Insurance and Income Tax as now with what is in effect two different sets of rules working in two slightly different ways.
For now the IR35 issues have been ignored, but the taxes on income policy seems to have struck home. I would no doubt make great political theatre at some point to combine them (I don't know when, to pick a time at random, just before the next election?). Sensibly however they are looking at extensive consultation before doing this. There would need to be probably several rates of income tax for different things, PAYE earnings, savings, dividend and pensions for example.
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Background Notes on IR35: This legislation applies to small contractors operating through a limited company. It seeks to tax "disguised employment" as if the contractor was directly employed by the buyer of the service. Contractors and employers dislike it. HMRC dislike it, and there have been many calls for it to be changed or scrapped. It is one of the main points of interest in the Office of Tax Simplification's recent report. This is a perennial problem for legislators as the rules are widely accepted as complex, costly and largely ineffective. The underling pressure arises from the very significant gap between the overall amount you need to pay to provide an employee with the same take home pay as a contractor operating through their own limited company. The only way to make this pressure go away is to narrow the tax gap significantly. Instead the rises in NI, and the fall in Corporation tax increase the pressure. Quite frankly its nigh on impossible to legislate well in this area, but George isn't even trying.
Key Allowance Summary
Some Key Allowances for 2011/12:
Personal allowance up to £7,475 from £6,475
NI threshold up to £7,072* from £5,715
*relevant to company directors wanting to pay minimal director's salary
Higher rate tax down to £35,000 from £37,400*
*Directors paying dividends to keep under the higher rate should pay no more than £31,863, down from £34,000
VAT threshold up to £73,000 from £70,000
Personal CGT allowance up to £10,600 from £10,100
Corporation tax down to 20%from 21% for profits under £300,000
ISA threshold £10,680. Maximum of £5,430 cash.
Notes
This review is based on the Chancellor's speech and the available information on the 23rd March 2011. 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
23rd March 2011
4.30pm
Final comment
This budget seemed to be as 'pro business' as I can remember during the speech, although having looked back through the proposals there isn't really a huge amount of substance to it. Given the budget deficit there isn't to be frank a lot of room to do very much.
What
Osborne
has done is to really use the budget speech as a bit of a confidence booster in talking up the economy, having dumped all the bad news into the pre-budget review last year, and give some glimmers of hope for the future in terms of things like lower the top band of income tax. I am sure he will enjoy combining NI and income tax in due course which should bring some better transparency to the tax system. The main disappointment is the failure to deal with IR35, properly. Limping on with the current system is a suprising choice.
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