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Budget 2010

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Keeping It Simple

This plain-English book tells you everything you need to know about small business, bookkeeping, cashflow, VAT, tax returns and more.....Click here

"The book really is an excellent guide for any startup or SME" - Alex Bellinger, Editor of the SmallBizPod Blog

"5 out of 5" Brilliant Business Books

Pre-Budget 2009

Overview

The purpose of this review is to update you in a plain English manner on the specific prebudget changes that apply to my clients, who are in the main small service businesses and property owning individuals.

I have also included a detailed section on how to account for changes in the rate of VAT.

Key Points

Corporation tax rates frozen

Company car taxes are up

Taxes on income (National insurance) up 0.5% from 2011

VAT back to 17.5% - for now

Commentary and Issues

Well that was another 50 minutes of blathering on. Taxes on income up a bit, but not before the election. Some sneaky stealth taxes and a quite frankly empty threat to bankers about their bonuses.

The budget deficit is still staggeringly large, and that is even with the Chancellor's extremely optimistic forecasting techniques that Osbourne was less than polite about.

What was conspicuously missing is how Darling plans to actually raise enough money to pay for current spending. I have a sneaking suspicion its not really his problem.

Company Tax Issues

Increase in Corporation Tax from 21% to 22% deferred.

The rate of Corporation Tax for small businesses was due to increase from 21% to 22% from April 2010, having previously been deferred. This increase has now been deferred again until April 2011.

Comment: This is actually quite a lot of tax. A 1% increase in corporation tax from 21% to 22% doesn't sound a lot, but is equivalent to almost 5% in the actual tax paid. There is still however no increase in the banding for what defines a "medium" size company, which is still at the £300,000 profit level, and has been for many years.

Company Car Taxes up

Private fuel costs are up from April 2010, with the basis figure going up from £16,900 to £18,000.

Comment: In other words your tax will go up by about 6.5% on private fuel.

The company car tariffs go up 1% from April 2012. This is on top of a 2% rise from April 2011.

Comment: This doesn't sound much, but a 155g/km vehicle currently paying a rate of 19% will see this go to 22%, a total increase in your car tax of 16% in just two years. This could be a lot of money for many people.

Fortunately not many SME's choose to have a company car, but this is one less reason to do so. This seems an easy place to take additional tax by hiding behind 'green' issues.

If you are an employee with a car or cash option, the cash will look more attractive after this measure, especially if you normally go for the fuel.

If you are a director of an SME it might well work out to be cheaper to take a dividend and make cash contributions to reduce the level of tax, in particular if the decision to take a car was a marginal one.

Aside: They also announced that electric cars would be exempt from company car tax. I find that more than a little bit odd on the basis that I wasn't aware there are any commercially available electric cars suitable for business use. I can't see many people arriving at a business meeting in their G-wiz. But if you do, I salute you and your tax saving ways. Just hope you find somewhere to plug it in so you get home...

R&D Tax Credits - Criteria Widened

To quote HMRC: "The condition requiring that any intellectual property deriving from the R&D to which the expenditure is attributable be owned by the company making the claim will be abolished. The change will have effect for any expenditure incurred by a SME company on R&D in an accounting period ending on or after 9 December 2009 "

Comment: This is a helpful measure

10% rate of Corporation Tax on Patents

This is an early stage proposal to reduce the rate of Capital Gains Tax on incomes deriving from patents. however this will only apply to patents granted after the legislation is passed which is supposed to be from April 2013.

Comment : This is very early days, but it is worth keeping an eye on as the timing of a patent application could suddenly become very important.

Husband and Wife Companies

This was absent yet again.

Comment: No news is good news on this one. I keep putting this in as we where promised "something" would be done. It would seem to still in the "too hard" pile. For now.

 

Small Business Measures

"Time to Pay" scheme extended

The current ability to defer tax payments is being extended "as far as it is needed".

Comment: This is excellent news for SME's. This scheme has helped many of my clients pay their creditors and stay in business.

Vague Measures on Business Loans

The Chancellor mentioned again about borrowing for SME's and how the last scheme was being extended.

Comment: As I mentioned last time around, this just doesn't seem to work very well in practice for SME's. Announcing such things seems to be rather an empty gesture. The Chancellor, to give him credit, did acknowledge that the money didn't seem to really get down to SME's in his speech. Small comfort to those who need it.

Employers NI up another 0.5%

As discussed in more detail below, National Insurance was due to go up for employers from 12.8% to 13.3% from April 2011. Instead its going up to 13.8%.

Comment: Classic stealth tax. Adding to employers NI (again) isn't going to help encourage employers to take on staff, and it widens the tax gap between the self-employed and employees. This is a major distortion in the tax system and one of the main reasons the dreaded IR35 legislation was introduced. This takes us further away from an easy solution on that issue.

Personal Tax

NI and Income Tax Thresholds Frozen

Stealth tax time. There will be no general increases in the thresholds for NI and income tax for 2010/11, 2011/12 or 2012/13.

Comment: Given inflation forecasts of around 6% over this time, this pretty much reverses all the recent increases in the thresholds. It is however all subject to change and flatters the revenue forecasts.

IHT Rates Frozen at £325,000

The threshold was due to go up to £350,000 from the 6th April 2010, and now it wont.

Taxes on Income Up Another 0.5%

And the big one. NI up another 0.5% from 2011/12, on top of the 0.5% already announced. That is to say a TOTAL increase of 2% on earnings as it applies to both employers and employees NI.

Comment This didn't meet with a murmur in the House. This underpins the odd status of NI being a direct tax on incomes, but not called "income tax" which seems to make it invisible. Had Darling announced income tax up to 1% (which is what this is in effect, including employer's contributions) there would have been uproar.

Taxes do need to go up across the board, so in general I think this is sensible, but I just wish for once we could all deal with this as adults and be honest about it.

I have enclosed again a table to show how the new rates of tax are shaping up for the future beyond, especially for those who earn over £100,000 and are caught by the extra tax rises announced previously.

Landlords

Furnished Holiday Letting's

The Chancellor confirmed that the special rules of holiday letting's will cease on 1st April 2010. Accounts will thereafter be drawn up on the same basis as for buy to let properties.

The main issues is that this ends the ability to obtain a lower rate of capital gains tax on the sale your property, or tax relief against your general income due to losses on your holiday let property.

Comment: This is not all bad news. Unused capital allowances can still be claimed and new spend will often meet the criteria for being expensed. You will also be able to claim the "wear and tear" allowance which is worth 10% of your letting's fee instead of claiming for sundry furnishings.

VAT Back To 17.5% - for now

VAT to 17.5% from 1st January 2009.

As announced this time last year the temporary rate of VAT has been put back to 17.5%.

Comment: The big unanswered question really is when will it go up again to 20%? Based on the levels of debt and future spending plans this seems a question of when, not if.

Dealing with the change for your small business

This will affect both VAT registered businesses and those that are not.

Non-VAT registered traders

You should bring forward major purchases to December when a lower rate of VAT may be charged.

VAT registered traders

Do 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 15% VAT on 5th January, you still process that invoice at 15% regardless of the fact the rate is now 17.5% regime.

HMRC have put some very detailed guidance on their website which should help.

Comment: I should point out that this guidance is slightly removed from the actual legislation. In particular it alludes to more than one VAT rate on a single invoice in some circumstances. This is not really a very good idea. Issue one invoice for each VAT rate or you will end up in a muddle.

In summary if you supplied something before the new rate, then you can account for it at the rate which applied when you supplied it, not necessarily when you invoiced it. This is a useful concession as under the normal "tax point" rules this doesn't always happen.

Accounting software adjustment

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 15% to 17.5% or you will probably find all the history changes too! You may well already have the old 17.5% rate in your system. If not you need to set a new rate (this can be found under "lists/VAT code list") of 17.5%.

Flat Rate VAT scheme implication

The rates for the Flat Rate VAT Scheme have been reissued but not at the same rates as they where this time last year. HMRC have take the "opportunity" to revise some of the rates.

Comment: And there you were thinking I was being overly cynical when I suggested they might do that last year. Wish I was proven wrong on that one!

It might be time to check your flat rate computations vs the normal scheme.

The full list is available here.

Tip: Be careful however with this if you do your own VAT return. The flat rate you use will be based on the original invoice. That is to say if it was a 15% invoice, use the applicable 15% flat rate. If the invoice was a 17.5% invoice, then use the applicable 17.5% flat rate. This caught out quite a number of people when going to the other way.

 

More VAT Paperwork

Do you sell services to EU businesses to a value of more than £11,000 per annum?

If so, as announced previously, there is a lot of extra paperwork to look forward to in the new year.

EC Sales lists, the bane of EU goods exporters, will soon also be the bane of those of you selling services in the EU.

This includes, for example, businesses that receive commissions from the EU. Google AdSense for example would be included as they are based in Ireland.

Very briefly you will need to complete once a quarter (and no, not your VAT quarters, that would be too convenient - the calendar ones of March, June, September and December) a list showing all the names, VAT numbers and values of services sold in the preceding quarter. Every one, even if there are thousands of them for a few pounds each.

Oh and you have to do so within 14 days of the quarter end, or 21 days if efiling.

If you sell more than £70,000 per month (£35,000 from Jan 2012) you will have the pleasure of these monthly.

More details here

Tips:

1. Change your VAT quarters to align with the reporting dates so you don't forget.

2. Build in automated reporting into your accounting software. Most packages allow this with the correct data entry.

3. Do it online.

 

Other Prebudget Points

Excise Duties Unchanged (i.e fags, booze and petrol)

Comment: This is more than a bit cheeky because when the rate of VAT fell from 17.5% to 15%, excise duties where put up to 'compensate'.

As I commented at the time: "Both of these measures are classic stealth taxes, with a hidden increase when another tax falls, but the Chancellor will no doubt fail to make the corresponding adjustment back down when VAT increases in January 2010".

Good to know my cynicism was not misplaced!

Banking Bonus Farce

As widely reported there is a new punitive tax on being employed by a bank and getting a bonus in excess of £25,000, as payable by your employer at a rate of 50%. And this is on top of the normal NI contribution of 12.8% they have alredy paid.

Comment: At first glance it would appear to be a very dangerous move to pull a short term electioneering stunt on a major part of the UK financial sector. Then you look at the detail and it really is just a hollow farce. It only applies to bonuses paid between 9th December 2009 and 5th April 2010. That is to say presumably the banks will simply wait until 6th April 2010 and pay the bonus at that point. The main sting in the tail is hitting the Chancellor's new Even Higher rate of income tax. That is to say the snowy one hasn't completely lost the plot, although quite how he expects this rather empty threat to fund lots of other spending plans I have little idea.

Tax Break on Bio-fuels Removed

Comment: Remember to pay your excise duty when putting that chip fat in the tank.

"Bingo" Duty

Bingo duty is to be cut from 22% to 20%, along with an increase in the state pension by 2.5%.

Comment: Not an election coming up then is there? These points were announced as a pair of measures to much hilarity in the House.

New Telephone Tax

Another stealth tax, this time 50p per month on your telephone bill. Obviously.

Comment: I think this is related to broadband roll outs but it all seems rather an arbitrary tax.

Boiler Scrappage Scheme

Some cash available if your boiler packs up.

Comment: I must admit I have not looked at the notes on this yet, but it tickled me to see a subsidy on boilers. Which ever interested party lobbyed for that one deserves a big bank style bonus.

Equitable Liability Reinstated

This is nothing to do with your pension.

HMRC had recently removed a long standing informal arrangement whereby HMRC could sometimes be persuaded to put away their rule books and deal with a tax payer in a "common sense" manner in certain situations. It is not often used, but it is a very valuable concession where perhaps a statutory deadline has passed producing an absurd result. What is more this is going to be enshrined in law, and not simply be a concession.

Comment: HMRC have listened to reason on this topic. I wish I could say that more often.

Tackling "Avoidance and Evasion"

The Chancellor talked again about people who both "avoid and evade" taxation, and how he was going to take a tough line on both.

Comment: Fair enough you may think, but this use of terminology worries many in my profession considerably.

"Tax Avoidance" is the legal arrangement of your affairs to pay less tax. Legally.

"Tax Evasion" is not declaring your income properly so you pay less tax. This is not legal.

Trying to merge the two terms is very peculiar as we get to a position of what tax someone 'ought' to pay, as opposed to what tax Parliament (whether in wisdom or ignorance) has laid down that HMRC can legally collect. This is a huge difference. Given today's newly trumpeted and well deserved "tax break" is tomorrow's "evil loophole" how is anyone supposed to know whether their perectly legal avoidance is acceptable or not? That is to say it is up to the Chancellor to set the rules. If the rules of the game are 'wrong', then the rules need to be changed. That is his job. Arranging your affairs so that you pay a lower amount of tax than you might otherwise if you arranged them in another manner is tax avoidance. That is my job.

I should point out this is not a one off comment - the waters are being continually muddied on this one by both the Chancellor and HMRC.

Notes

This review is based on the Chancellor's speech and the available information on the 9th December 2009. This is before the actual budget in March 2010 which tends to refine announcements in the pre-budget report and of course the final Finance Act which means much of this law won't be published until the summer of 2010 . This document may be updated as further key details come to light, but please remember this commentary does not constitute advice.

If you find a typo on this report, or something is hard to understand then please do let us know. We write this very quickly, and we do make mistakes and occasionally do lapse into accountant speak.

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