The Second Budget - June
VAT – Increase in the Standard Rate
With effect from Tuesday 4th January 2011, the standard rate of VAT will be increased from 17.5% to 20%. The delayed effective date responds to businesses calls for a long lead time to allow for implementation and systems changes but comes directly after the busy Christmas and New Year retail trade.
Clients should ensure that systems are able to cope with this change at an already busy time of year. The effect on consumers, assuming businesses add the additional VAT to prices is to raise the price of a £10 CD to £10.21 and a £2,000 suite to £2,042.
From the effective date, the ‘VAT Fraction’, used to calculate the VAT element from a VAT-inclusive price will be 1/6.
Anti-forestalling legislation targets taxpayers pre-paying or pre-invoicing in excess of £100,000 to customers who cannot fully recover VAT on the supply.
The measure is expected to raise around £13billion per year going forward.
The increase in VAT will create an additional cost not only to consumers but to organisations who can't recover all their VAT - notably charities.
VAT – Changes to the Flat Rate Scheme (FRS) and Scale Charges
With the increase in the standard rate of VAT from 4 January 2011, the thresholds and FRS percentages will be amended. The threshold to join the FRS remains unchanged at £150,000, excluding VAT. However, the VAT-inclusive threshold for compulsory exit from the scheme increases from £225,000 to £230,000.
All of the FRS percentages by business category will increase from 4 January 2011 and a full list of the amended rates, as well as the current and historic rates is available by contacting Alan Davis.
The VAT due on Fuel Scale Charges will be amended from 4 January 2011 to reflect the new standard rate.
Capital Gains Tax
The much anticipated increase in capital gains tax was announced but it was not as painful as originally feared. However, the changes do take effect from 23rd June 2010 leaving no opportunity for planning disposals.
If you are a basic rate taxpayer and you realize a capital gain on the sale of an asset you will continue to pay capital gains tax at a rate of 18%. If the gain takes the total of your income and gains above the basic rate tax threshold (currently £37,400) then the portion of the gain above the threshold will be taxed at 28%. If you are already a higher rate tax payer then all of the gain will be taxed at 28%.
If the asset sold is a business, shares in your personal trading company or an asset used in a business then it may qualify for entrepreneur’s relief. Gains qualifying for entrepreneur’s relief will continue to be taxed at a rate of 10%. Relief was restricted to lifetime gains of £2million and this limit has been increased to £5million.
The first £10,100 of gains each year remains exempt from capital gains tax.
Trustees and personal representatives will pay capital gains tax at 28% unless entrepreneur’s relief applies.
Corporation tax (CT) rates
The main rate of corporation tax for companies with taxable profits over £1,500,000 will reduce over a four year period from the current rate of 28% to a final rate of 24% with the final rate of 24% being applicable with effect from 1 April 2014. This will be implemented by four 1% rate reductions each year with the first reduction being effective from 1 April 2011.
In respect of companies with taxable profits below £300,000, the current rate of 21% will reduce to 20% with effect from 1 April 2011.
The exception to both these rate changes applies to the profits from oil extraction and oil rights in the UK which will continue to be taxed at the main rate of 30% and the small company tax rate of 19%.
Consortium relief (CR)
Amendments are being made to CR rules to alter the definition of the link company to extend this to companies established in the European Economic Area and add a further test to establish the proportion of voting rights and control each member holds in a consortium.
Research & development (R & D) tax relief
Small or medium sized companies that incur R & D expenditure will no longer have to own the intellectual property derived from the R&D to claim the relief. This was previously mentioned in the Pre Budget Report in December last year but not enacted and will relate to relevant expenditure incurred in an accounting period ended on or after 9 December 2009.
The Chancellor also announced in his speech that he will agree with business a long term approach to the proposals from the entrepreneur James Dyson on research and development. We shall advise you in due course of the approach taken.
National Insurance Contributions
The previously announced increases in employers’ and employees’ national insurance contributions by 1% from 6 April 2011 remain. However, the burden on employers is being reduced by increasing the threshold at which employers must start paying NIC by £21 above inflation per week per employee
National Insurance Contributions- employer’s payment holiday for new businesses
The Government will confirm shortly a three year scheme to exempt new businesses in certain regions from up to £5,000 of Class 1 employer NIC payments, for each of their first 10 employees hired in their first year of business. The scheme should be up and running by September, but any qualifying new business set up from today will also benefit.
We will keep you updated on the details as we hear them.
Enterprise Management Initiatives
As previously announced in the 2009 Pre Budget Report legislation will be introduced to extend the grant of EMI options to companies having a permanent establishment in the UK. This replaces the previous requirement that a company must operate wholly or mainly in the UK
For businesses investing in capital allowances, there will be reductions to the rates of written down allowances for new and unrelieved expenditure on plant and machinery. With effect from 1 April 2012 (CT) or 6 April 2012 (IT), the current 20% rate will be reduced to 18% for non special rate pools and for the special rate pool the current rate of 10% will be reduced to 8%.
The second change relates to the annual investment allowance which reduces the recent March 2010 budget current limit of £100,000 to a new limit of £25,000 with effect from 1 April 2012 or 6 April 2012.
A new 100% first year allowance is being introduced for a five year period for the purchase of zero emission goods vehicles with effect from 1 April 2010 or 6 April 2010.
Businesses therefore have a reasonable period of time by which to benefit from the current higher rates and allowances.
For the tax year 2011/2012, the personal allowance, for those under 65, will rise by £1,000 to £7,475. To ensure higher rate taxpayers do not benefit from this increase, based on current estimates of the retail prices index (RPI), the basic rate limit is to be reduced by approximately £2,500 and the upper earnings and profits limits for National Insurance contributions (NICs) is to increase by approximately £1,640. The exact figures for the basic rate band and earnings limits should be confirmed when the September RPI is known.
Child and Working Tax Credits
For individuals wishing to claim, or for those who currently claim Child and Working Tax Credits, there has been a major overhaul of the Tax Credits available with increases in the withdrawal rates, reduction in the income threshold rates and the withdrawal of a number of the Tax Credits elements.
Furnished holiday lettings
The Budget 2009 proposal to repeal the special tax rules for furnished holiday lettings will not be implemented. Instead, the Government will consult over the summer on an alternative proposal to ensure the tax treatment of holiday lettings meets EU legal requirements in a fiscally responsible way, which does not penalise UK businesses, by changing the eligibility thresholds and restricting the use of loss relief.
Insurance Premium Tax (IPT) – Increases to Standard and Higher Rates
With effect for premiums received or written on or after 4 January 2011, the standard rate of IPT will increase from 5% to 6%, and the higher rate will increase from 17.5% to 20%.
The standard rate applies to most general insurance including property, motor and medical insurance (life and long term insurance products are exempt from IPT. The increase will add around £2.85 to an annual premium of £300.
The higher rate applies to travel insurance and specific insurance sold with motor vehicles and some consumer goods. The increase will add £2.13 to a £100 premium.
In a blow, particularly to Dundee, the special relief for the video games industry announced in the March 2010 Budget will not now be introduced.
Changes are being made to the Enterprise Investment Scheme (EIS) and the Venture Capital Trust scheme (VCT) to enable these schemes to receive European Commission approval as approved state aids.
Changes will be made to the “worldwide debt cap” legislation which affects large groups of companies to ensure the rules work as originally intended.
New anti-avoidance measures announced include action to be taken to tackle arrangements which use trusts and other vehicles to avoid, defer or reduce tax and national insurance liabilities of employees and directors. This legislation will cover Employer Financed Retirement Benefit Schemes (EFRBs) and will take effect from April 2011.
The Government will again examine whether a General Anti-avoidance Rule (GAAR) should be introduced as part of the measures to tackle perceived tax avoidance.