Look Back In Anger - Emergency Budget 2011

This post is in two parts. The first represents my technical notes on Budget matters that I consider to be of interest to our clients. The second is my comments on the implications of the Budget proposals for future tax planning by businesses and individuals.

 

EMERGENCY BUDGET 2011: TECHNICAL NOTES

 

A. PERSONAL TAX

 

1. Income tax and national insurance rates, allowances and thresholds

 

1. From 2011-12 the income tax personal allowance will increase by £1,000 to £7,475. This is intended to be part of a process whereby the personal allowance increases to £10,000 by 2015-16.
2. The basic rate limit will be reduced by the appropriate amount to ensure that higher rate income tax payers do not benefit from this change. This limit will be set in October 2010 by reference to the September 2010 RPI figure.
3. Appropriate changes will be made to the upper earnings limit and upper profits limit for Class 1 and Class 4 national insurance respectively to ensure that these remain aligned with the income tax basic rate limit.
4. The employers’ national insurance threshold for 2011-12 will be increased by £21 in addition to the normal inflation increase.

 

 2. Capital gains tax

 

1. From 23 June 2010, where a taxpayer’s income and gains (net of annual exemption) exceed the upper limit of the income tax basic rate band, gains exceeding that limit (treated as the top slice of income) will be taxed at 28%.
2. Trusts and personal representatives will pay capital gains tax at 28%.
3. Entrepreneurs’ relief will be given by application of a capital gains tax rate of 10% (not a reduction of gain by 4/9) and will apply to a lifetime total of £5 million per taxpayer (previously £2 million).
4. The annual exemption remains unchanged at £10,100.
5. Gains made between 6.4.10 and 22.6.10 will be ignored in computing the applicable rate of capital gains tax.
6. A taxpayer can use 2010-11 losses and annual exemption to best advantage.

 

3. Pension scheme annuitisation

 

This has been deferred to age 77, pending legislation to end compulsory annuitisation.

 

4.  Settlor-interested trusts

 

Income tax repayments arising to settlors in respect of income from such trusts must be paid over to the trustees.

 

5.   Adult placement carers

 

Will be able to claim full capital gains tax main residence exemption where they use part of their home exclusively to house an adult placed in their care by social services.

 

B. BUSINESS TAX

 

1. Corporation tax main rate

 

Will fall from 28% to 27% with effect from 1 April 2011, and by a further 1% per year until April 2014, at which point it will be 24%.

 

2. Corporation tax small profits rate

 

Will fall from 21% to 20% with effect from 1 April 2011.

 

This means that the marginal corporation tax rate for the above years will be as follows:

 

Corporation tax year ending 31 March	Marginal rate of corporation tax
2011	29.75%
2012	28.75%
2013	27.5%
2014	26.25%
2015	25%

 

3. Capital allowances

 

The annual investment allowance will fall from £100,000 to £25,000 from April 2012.

 

The rate of writing down allowance on the main pool will fall from 20% to 18% for accounting periods ending after 31 Msrch 2012 (companies) and 5 April 2012 (sole traders, partnerships and LLPs). From the same dates the rate of writing down allowance on the special rate pool will fall from 10% to 8%.

 

A 100% first year allowance will be available on zero-emission goods vehicles acquired between April 2010 and March 2015 inclusive.

 

4. Research and development tax reliefs

 

For accounting periods ending after 8 December 2009, it is no longer a requirement for a company to own the intellectual property in the project for which it claims R & D tax reliefs.

 

5. New VAT penalty regime

 

This is to be introduced from a date to be confirmed.

 

Quarterly returns

 

Late filing

 

£100 penalty for the first late filed return.

 

This will start a 1-year penalty period.

 

There will be an addition of £100 to the penalty charge for each subsequent failure in the penalty period, which will be extended for a further year by each default, up o a maximum penalty charge of £400. Four consecutive returns will need to be submitted on time to escape from a penalty period.

 

There will be a 5% penalty where the failure continues for 6 and for 12 months.

 

Deliberate withholding of information by a taxpayer may result in a 100% maximum penalty.

 

Late payment

 

There will be no penalty on the first failure, which will start a 1-year period.

 

There will be a 2% penalty on the next failure in the penalty period, which will be extended for a further year. This will rise to 3% and then 4% for subsequent defaults in the penalty period. Four consecutive returns will need to be submitted on time to escape from a penalty period.

 

There will be a 5% penalty where the failure continues for 6 and for 12 months.

 

Monthly

 

Late filing

 

There will be a penalty of £100 for the first 6 returns filed late in the penalty period, then increasing to £200 per return.

 

Late payment

 

No penalty on first failure.

 

1% penalty on second, third and fourth.

 

2% penalty on fifth, sixth and seventh.

 

3% penalty on eighth, ninth and tenth

 

4% penalty thereafter

 

6. VAT standard rate change

 

The standard rate of VAT will increase to 20% from 4 January 2011.

 

There will be anti-forestalling rules to apply a 2.5% supplementary charge where an artificial prepayment scheme is applied. This will be deemed to happen where the customer cannot recover the VAT charged by the supplier and one of the following applies:

 

i.     The supplier and the customer are connected; or

ii.    The value of the supply exceeds £100,000; or

iii. The supplier funds the prepayment; or

iv. An advance VAT invoice is issued and payment in full is not required within 6 months (excluding hire purchase invoices).

 

7. New VAT flat rate scheme rates

 

These will apply from 4 January 2011 as follows:

 

 

Category of business	Appropriate percentage
Accountancy or book-keeping	14.5
Advertising	11
Agricultural services	11
Any other activity not listed elsewhere	12
Architect, civil and structural engineer or surveyor	14.5
Boarding or care of animals	12
Business services that are not listed elsewhere	12
Catering services including restaurants and takeaways	12.5
Computer and IT consultancy or data processing	14.5
Computer repair services	10.5
Dealing in waste or scrap	10.5
Entertainment or journalism	12.5
Estate agency or property management services	12
Farming or agriculture that is not listed elsewhere	6.5

 

Category of business	Appropriate percentage
Accountancy or book-keeping	14.5
Advertising	11
Agricultural services	11
Any other activity not listed elsewhere	12
Architect, civil and structural engineer or surveyor	14.5
Boarding or care of animals	12
Business services that are not listed elsewhere	12
Catering services including restaurants and takeaways	12.5
Computer and IT consultancy or data processing	14.5
Computer repair services	10.5
Dealing in waste or scrap	10.5
Entertainment or journalism	12.5
Estate agency or property management services	12
Farming or agriculture that is not listed elsewhere	6.5

 

Film, radio, television or video production	13
Financial services	13.5
Forestry or fishing	10.5
General building or construction services*	9.5
Hairdressing or other beauty treatment services	13
Hiring or renting goods	9.5
Hotel or accommodation	10.5
Investigation or security	12
Labour-only building or construction services*	14.5
Laundry or dry-cleaning services	12
Lawyer or legal services	14.5
Library, archive, museum or other cultural activity	9.5
Management consultancy	14
Manufacturing fabricated metal products	10.5
Manufacturing food	9
Manufacturing that is not listed elsewhere	9.5
Manufacturing yarn, textiles or clothing	9
Membership organisation	8
Mining or quarrying	10
Packaging	9
Photography	11
Post offices	5
Printing	8.5
Publishing	11
Pubs	6.5
Real estate activity not listed elsewhere	14
Repairing personal or household goods	10
Repairing vehicles	8.5
Retailing food, confectionary, tobacco, newspapers or children’s clothing	4
Retailing pharmaceuticals, medical goods, cosmetics or toiletries	8
Retailing that is not listed elsewhere	7.5
Retailing vehicles or fuel	6.5
Secretarial services	13
Social work	11
Sport or recreation	8.5
Transport or storage, including couriers, freight, removals and taxis	10
Travel agency	10.5
Veterinary medicine	11
Wholesaling agricultural products	8
Wholesaling food	7.5
Wholesaling that is not listed elsewhere	8.5

 

Comments

 

The title of this blog does not mean that I am confusing my Osbornes, but it seemed appropriate in view of the clear theme in the new Chancellor's speech that the previous government had been reckless in its spending. It was widely anticipated that pain would be on the tax agenda, and so it proved overall, although not exclusively. So here are my thoughts on the planning implications of George Osborne's first Budget:

 

Personal tax

 

Income tax and national insurance

 

Given the £1,000 personal allowance increase and the matching uplift in the lower threshold for employers' national insurance, the dilemma about what salary to pay a director/shareholder of an owner managed business appears to have been solved. Take a salary equal to the personal allowance from 2011-12, pay a modest amount of employee's national insurance (it appears that the thresholds for primary and secondary contributions are diverging from 2011-12) and claim corporation tax relief at 20% on the gross salary. I reckon that means the following:

 

Salary £7,475

 

Employee NICs @ 12%

on excess above £5,720 £211 

 

Net salary    £7,264

 

Corporation tax relief on £7,475

@ 20% £1,495

 

So it costs the company £5,980 to pay the director £7,264. Looks like good planning to me!

 

Capital gains tax

 

We are quite used to manipulating the income of owner managers operating through limited companies to avoid paying higher rate tax, and we will need to consider this even more carefully where they make gains in excess of the annual exemption in future.

 

The increase in the entrepreneurs' relief limit is unexpected but nonetheless welcome, as is the protection of the effective 10% rate against the increase for higher rate taxpayers.

 

Corporation tax

 

We are squarely back in a tax regime that is going to encourage businesses to operate as limited companies, given the planning opportunities available using that structure.

 

Capital allowances

 

A couple of years;' warning of this one, perhaps encouraging businesses to grasp the nettle of major capital investment now rather than delaying. Many smaller businesses will not find these changes a problem, as they will never spend more than £25,000 on plant and machinery in a year, and will thus always get full upfront relief for this expenditure.

 

Research and development

 

The relaxation of the intellectual property rule is hugely important, as it opens up the possibility of the 'dream' tax planning scenario of IP held by the owners of the business outside the company whilst the company claims enhanced tax relief on development of the IP. This can be a hugely efficient structure from a tax planning perspective.

 

VAT penalty regime

 

This is a big move away from the payment-focused regime we have been used to, placing equal importance on getting the paperwork in on time as well as the cheque. Businesses will need to adjust to the new regime in advance of its arrival.

 

VAT rate rise and forestalling regime 

 

The only surprise here is that the increase has been deferred until 4 January 2011 (my 49th birthday, as it happens), which is presumably again to encourage people to spend now to beat the VAT rise. Again we have forestalling rules, but given that they are only designed to restore the status quo one is tempted to say "why not have a go anyway?" And they do also appear to be relatively easy to get around. Given the relatively modest rise I doubt we will see a proliferation of the type of scheme we saw when VAT was introduced on domestic power, when my father in law bought his electricity and gas for about 3 years in advance - he is a stern and unbending Tory, but he has never forgiven Kenneth Clarke for this measure.

 

Overall impressions

 

I will confess, and have done so frequently in this blog, that I have not been a George Osborne fan. However, he came across pretty well this afternoon I thought, at least so far as I could tell given the appalling broadband reception I had to put up with whilst trying to watch the speech on my office computer! He really has been left with the mother and father of all economic messes to sort out, and I guess we should all wish him luck.

 

One thing I will say is that there are far fewer Budget notes this time around, and much less obscure anti-avoidance legislation than we have been used to. It is interesting to see this light touch applied at the same time as significant tax rises, given that we can expect to see significant avoidance activity in the light of direct and indirect tax increases, and this has actually been facilitated in the small company arena by the corporation tax, income tax and national insurance changes. Thus whether the tax revenue forecasts are met in practice will be interesting to see. The pain appears to be being spread fairly evenly, and thus arguably fairly, but will those with the best tax advisors be spared their share of the suffering? Watch this space!

 

 

Mark Simpson

 

22 June 2010