Pre-Budget 2008
 Overview
The purpose of this review is to update you in brief on the specific budget changes affecting the small business owner.
Key Points
 VAT down to 15% for 13 months to January 2010
Minor measures for small business
Corporation tax rise postponed for 12 months and more loss relief
Tax rates up for higher earners over £100,000 (not just £150k+)
The big sting in the tail, National Insurance increases 0.5% for employees and employers from 2011
Consulting on Husband/Wife companies not concluded
Other bits and bobs
Commentary and Issues
So fresh from saving the world economy, what does Gordon, sorry, I mean Darling have in store for us today? On a background of escalating public debt and poor economic performance . . . we have a quite substantial temporary tax cut, with some huge rises due in the future. Call me cynical (well everyone else does) but anyone would think an election was around the corner and the incumbents didn't think there was much chance of being in office when all this has to be paid for. We may have quite an amusing election if it becomes political suicide to actually win the vote.
Anyhow so politics aside, what does it mean for the cash in your pocket?
VAT Down To 15%
This move was widely signalled for the Sunday papers which at least gave me some time to think about this for you beforehand. The details are as follows
VAT to 15% from the 1st December 2008
This is a TEMPORARY measure ending on the 31st December 2009
Comment - I doubt there will be much of a rush by retailers to pass this on given many are deeply discounting their prices by 20-50% in any case. There is also the issue of psychological pricing. An item currently priced at £9.99 is unlikely to be marked down to £9.78. A temporary drop in that this will also tend to create a mini boom for services (such as mine) quoted +VAT in December 2009, and a corresponding mini slump just when the economy is trying to climb out of recession in January 2010. It will also pretty much kill off any sales this last week of November with shoppers no doubt waiting to see what will be cheaper next week. Can't say I am impressed with this sort of tinkering.
What this means for your small business
This will affect both VAT registered business and those that are not.
Non-VAT registered traders
You will lose a slight amount of competitive advantage if you currently benefit from being slightly cheaper than VAT registered competitors.
You should defer major purchases until December when a lower rate of VAT may be charged.
VAT registered traders
Those on the regular scheme will see little difference.
If selling to consumers by keeping your after VAT sales price the same you will make a small additional margin per sale.
If selling to businesses at price plus VAT then your prices will naturally fall slightly assuming you normally quote in this manner.
Do however ensure you check contracts to see if you have quoted an inclusive price, or price plus VAT and ensure you communicate the deal price to any customers who may be confused about the price that has been agreed.
Bookkeeping issues
You will need to still account for VAT based on the VAT value stated on your invoice. That is to say if you receive an invoice that states 17.5% VAT on the 5th December, you still process that invoice at 17.5% regardless or the fact it is now within the 15% regime. It may actually be the correct value due to the tax point as below.
Tax Points. The "tax point" is not normally a very interesting date. It is however suddenly of importance, so a VAT recap. The "tax point" is the date you issue your invoice if within 14 days or the date on which goods are shipped or a service is provided. Crucially however if the invoice is delayed by more than 14 days the tax point becomes the date you shipped the goods or provided the service.
This may therefore have some odd effects.
For services provided on for example on the 20th November a different rate of VAT may apply depending on the invoice date.
If you invoice these services between the 20th November and the 30th November, it clearly will be 17.5%
If you invoice from the 1st December you would think it would be 15% regardless however once we are over 14 days from the services being provided (i.e. from the 5th December) we are now back to the default tax point of the date of supply - i.e. the 20th November - i.e. 17.5%.
-For deposits billed some time ago for work to be completed after December, these invoices can be re-issued at 15% with a VAT only credit note.
-For continuously supplied services (e.g. consulting services) these can be billed at the prevailing rate on invoice (i.e. 15%) rather than 17.5%, even if the bulk of the service was provided in November.
-For those who normally 'cash account' the crucial rate will be the rate in force at the time of supplying the initial goods/service as opposed to the rate in force when the money is received.
Confused? You will be when all this kicks off! Please get some help, it is about to get very messy with lots of misunderstandings between different businesses as many people simply won't understand the rules about tax points as its not common knowledge. There is some anti avoidance legislation being drafted that will affect things from now until the 1st December. It's probably aimed at "gamesmanship" on the VAT front. Not had a chance to read the details yet.
Accounting software adjustment
I imagine most of the major providers will issue individual guidance on how this change can be carried out within your software. For Quickbooks users in particular (which is the most popular package used by my clients) you will need to be very careful. Don't simply change the rate from 17.5% to 15% or you will probably find all the history changes too! You will need to set a new rate. This can be found under "lists/VAT code list". I suggest you open a new rate called "T" for temporary, and set this to 15%.
Flat Rate VAT scheme implications
The rates for the Flat Rate VAT Scheme have been reissued. On inspection I think there will be some disappointment with this, more tax for some seems to be result as the rounding is very much in the chancellors favour. It might be time to check your flat rate computations vs the normal scheme.
The full list is available here, page 43.
As a quick reference the most popular ones amongst my client base are:
13% (IT consultancy) becomes 11.5%
12.5% (Management consultants) 11%
11% (my favourite "business services not listed elsewhere") 9.5%
Comment: Its not quite as bad as it looks at first glance with 1.5% off most rates vs the 2.5% drop in VAT as the percentage is applied to the gross value of the invoice - but its still going to hurt. A £100,000 turnover consultant will lose approximately £450 on this, albeit with some reduction input VAT.
Small Business Measures
£1 billion borrowing available for small business
More loans available in the range £1,000 to £1 million, however it looks like these will through normal banking channels, with 25% guaranteed by the government.
Comment: The key thing here is how the money will be made available - and it sounds like this is very much a last minute thing as nothing is yet available to confirm. I have read elsewhere that " The finance will be in the form of guarantees provided by the government underwriting funding to small businesses." but I cannot substantiate this statement.
If it is anything like most of these schemes you will have more chance of raising the funds by putting a hat out in the High Street than through the official channels. Smells like the small firms loan guarantee scheme - which is generally guaranteed only to disappoint.
Delays in tax payments
Darling announced some vague measures to delay the payment of VAT and Corporation taxes. There is a new helpline (not very helpful when I called them, nice chap although no-one had thought to tell him what was happening or issue any guidance - which is about par for calling HMRC at the best of times) 0845 302 1435 to arrange deferment.
Interest of 5.5% will still apply to most late payments, the rates of which are a lot higher than you will be getting in the bank so only worthwhile if you have an expensive overdaft facility.
Comment: There is already a system whereby you can beg on your knees to HMRC and ask for payments to be spread. It sounded to me like an extension of this existing scheme rather than anything new. This looked to me more like a political sop to Conservative party's tax plans than much genuine help.
Sole trader loss relief
For the tax year 2008/9 (only) losses incurred on a sole trade will be able to be carried back 3 years against earlier profits rather than a single year.
Company Tax Issues
There are several announcements made that affect limited companies:
Increase in Corporation Tax to 22% deferred for 12 months.
As background, the rates of Corporation Tax have been increasing for a while. The long run 19% rate went to 20% for periods after April 2007, to 21% in April 2008 however Darling has deferred the 22% rate due to start in April 2009 by 12 months to periods after April 2010.
Comment - the earliest this will effect any company will be those with a May 2009 year end - paying 5% less tax on the 1/12th of their profits falling into 2008/9, but not until February 2010. Not exactly what you might call an immediate relief Darling! Those with a March 2010 year end will benefit by December 2010 by which time I would hope the economy would be looking a little healthier in any case.
Still I will be more than happy to pay 5% less Corporation tax next year, and I am sure you will too.
Corporation tax loss relief increased
Normally you can offset a current years Corporation tax loss only against the prior year's profits. This introduces a TEMPORARY measure for 12 months allowing loss relief of up to £50,000 to be clawed back from earlier years, 2 and 3 years before the current year.
Comment: This measure may help secure tax repayments that companies wouldn't otherwise have been entitled to; however it is very tight and only applies to businesses with tax years ending between 24th November 2008 and 23rd November 2009. Lots of arbitrary winners/losers created here which always seems rather unfair, moreover the biggest losses in cash values are likely to be for businesses with the very popular December 2009 year end hitting the full brunt of the recession in 2009, but just missing out these dates.
Personal Tax Changes for Higher Rate
Some dramatic changes to those with higher incomes over £100,000. Apparently you lot don't pay enough tax, so the chancellor wants more - quite a lot more.
New rate of income tax of 45% over £150,000 (2011/12)
Abolished personal allowance for incomes over £140,000 (2010/11)
Halved personal allowance for £100,000-£140,000 2010/11
Comment: All this doesn't look very promising for attracting top talent to the UK. It also creates several problems. The 45% rate is going to be rather uncomfortable but the withdrawal of personal allowances is a far more insidious announcement and one which is going to no doubt cause all sorts of tax issues - a double strike if ever there was one. This represents an additional burden of £2,775 for those earning over £150,000, or a further 2% in income tax on top of the 45%.
There is a phasing in of the withdrawal of the personal allowance on a £1 reduction, £2 increase basis, but this will lead to a 60% rate of marginal taxation at certain points above £100,000 (61.5% including NI) and result in all sorts of messes with tax codes and other complexities.
This sort of measure also adds to the incentives to avoid tax. One of the most obvious being switching earnings so that they attract only 18% capital gains tax as opposed to 45% for earnings. Why capital gains are "good" and earnings are "bad" I really don't know. Watch this space however as they have just created a huge market for technical tax schemes as the incentive has just got a whole lot higher to keep your taxable incomes down.
Finally the really daft thing about this sort of change is that it won't really help raise that much in tax revenue, it just means more games for accountants and some tortuous tax computations. Studies have shown that the optimum rate for tax is about 40% - above this the disincentive to work and avoid tax tends to actually reduce the amount of tax received as the taxed base shrinks. With the increased NI rates the top rate of tax will some 46.5%.
The Sting in the Tail - Taxes on Incomes Up
There is always a big sting in the tail with these things - I even wrote that headline before Darling has said a word. This time around the main issue is one of National Insurance, or "taxes on income" as I like to call them.
Employers NI rises from 12.8% to 13.3%, i.e. increasing the cost of employment by half of one percent.
Employees NI rises by 0.5% across the board, effectively this is 0.5p on income tax for all salaried persons.
No doubt the press will be busy debating the very temporary VAT changes, but the reality is that this will be the longest felt and hardest felt change. To give Osbourne his due - he actually spotted this in his reply so I am somewhat encouraged that he is more on the ball with this than you might guess from his grasp of the party funding rules.
Comment: The effective date for this thankfully isn't until April 2011, so whether or not it will be put in place, or whether Darling was just trying desperately to make his sums look a little better I really couldn't say. If it sticks it will however make employment more expensive, and increase in incentives for other forms of working, such as contracting and self employment which HMRC has tried so hard in recent years to clamp down on. It also makes running a small limited company more attractive as the 0.5% is added to self employment NI. The top band of NI for higher rate tax payers also increases 50% from 1% to 1.5%.
Nice and Quiet Husband/Wife companies
The very thorny issue of moving income from husband to wife (or indeed the other way) to reduce the overall tax burden was knocked on the head in the last Budget and seems to be conspicuously absent today, a few comments about being a tad on the busy side where slotted in the background reports. Our friends at HMRC keep threatening to do something, but they just can't construct a sensible set of workable rules in this area. This to my mind is no surprise, some of the best minds this side of the tax fence can't work out a decent solution either apart from aligning the rates of tax from all types of income or abandoning independent taxation for married couples altogether and waving the white flag.
The implications for your business are that quite frankly you can still split your income between husband and wife until HMRC come up with a workable way of stopping you. Do however still be warned that this is a technical area and you could still end up in hot water under the current rules.
Other Points
Excise duties on alcohol are up 8%
This will mean higher prices for most drinks, even if the full effect of the VAT reduction is passed on. Similarly fuel duty is up to compensate for the VAT fall.
Comment: Both of these measures are classic stealth taxes, with a hidden increase when another tax falls, but which will no doubt fail to make the corresponding adjustment back down when VAT increases in January 2010.
Rates rebates on empty property
Business rates will now not be charged on empty business property, but this only applies to small premises with ratable values of less than £15,000 per annum, and only from 2009 on a temporary basis.
Air Passenger Duty up up up and up some more
Tucked away in the reports, APD is up massively. Short haul flights are up by around 20%, from £10 now to £11 2009/10 and £12 by 2010/11 however new banding take long haul rates up from £40 now [economy] to between £60 and £85 in 20010/11 and business class is up from £80 to a whopping £120 - £170 by 2010/11 depending on the distance flown.
Comment: So we aren't even allowed to go on holiday now? No doubt most people who fly business class will already be smarting over the higher taxes for those on £100k+, so some extra tax to pay on top too!
Notes
This review is based on the Chancellor's speech and the available information on the 24th November 2008. This is before the actual budget in March 2009 which tends to refine announcements in the pre-budget report, and of course the final Finance Act which makes much of this law won't be published until the Summer 2009. This document may be updated as further key details come to light, but please remember this commentary does not constitute advice, this is written quickly and we are not perfect!
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James Smith
ACA
6.25pm
24th November 2008
Final Comment. Although overall the cuts in VAT should reduce prices in the shops given how competitive retail is , I don't think consumers will really notice from item to item given the way most items are priced. Moreover the fact that this is only a temporary change until the end of December 2009 may lead many retailers to treat this as a bonus to their margins at a troubled time rather than as an opportunity to cut prices. There is also the very real issue that lower taxes now, mean more tax later . . . I imagine Darling also doesn't have to worry about the huge amount of administration he is about to unleash on the economy by fiddling about with temporary VAT rates.
One thing that got the biggest (if not hollowest laugh) was the claim that the last economic cycle ended in 2006 - which is a bit odd as even last year we were told it hadn't yet as it would break Gordon's "golden rule" about borrowing. For the future there is a new set of rules that seem to conveniently ignore borrowing in the next few years when it is at its maximum. 8% of GDP is a phenomenal amount of debt to be building up when this is just for current expenditure - even based on the no doubt fluffy figures announced today we would not be in balance to even break even until 2015 - about the point you would expect another recession with not a penny of debt repaid. I'm glad Darling doesn't run my household finances. |
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