The big headlines arising from this year’s Pre- Budget Report
The government want banks to strengthen their capital base and so have introduced this levy to encourage the retention of profits – despite anti-avoidance provisions, we are likely to see banks reviewing their remuneration strategies in light of these announcements.
Example:
A bonus of £200,000 made to an individual would incur the following deductions:
| Source of NIC/tax | Tax/NIC payable | |
| 50% special levy payable by the company (£200,000 - £25,000) |
£87,500 | |
| 12.8% Employer’s National Insurance | £25,600 | |
| Employee’s 40% income tax on £200,000 | £80,000 | |
| 1% Employee’s additional National Insurance | £2,000 | |
| Total tax burden | £195,100 |
The company will therefore have to make a £287,500 payment (£200,000 bonus and £87,500 special 50% levy) to provide the employee with a £200,000 payment. The overall effective tax rate would therefore amount to 67%. Taking this one stage further, this represents a 98% tax burden on the net payment of £200,000 to the employee.
National Insurance contributions
The increase in rates will have a real impact on both employers and employees and is likely to lead to increased interest from employers looking to minimise their exposure to NIC on salaries and benefits to their employees.
Tax allowances
Allowances are usually calculated with reference to the RPI in the September preceding the start of the new tax year. This year, RPI was negative in September and as such, all allowances remain unchanged. This could represent a real cost to employers and employees if we see inflation during the next tax year.
This is the first time that the Government has restricted and rescinded the IHT threshold, and could be seen as a sign of things to come as the government looks to find ways of raising additional tax revenues. This therefore represents an opportunity for clients to act now to secure the nil rate band exemption, through, for example, Kleinwort Bensons’ Family Inheritance Trust, and guarantee the relief before any additional future amendments arise.
Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) were left mainly unchanged in the PBR as far as investors are concerned with any changes at company level restricted to their approval from the European Commission in April 2009 as State Aids.
Specifically HMRC have now announced that EIS companies carrying on their qualifying activity in partnership do not qualify under the EIS rules with effect from 9 December 2009.
It was well mooted in the venture capital marketplace that the PBR would block EIS relief on the perceived ‘capital protected’ EIS structures and we are pleased to see that this has only been restricted to activities structured through partnerships – existing investors are unlikely to be affected by these changes.
This change will mean that more clients than previously thought will be affected by the changes to higher rate income tax relief on pension contributions, and further strengthens the opportunity for clients to seek specialist advice from Kleinwort Benson’s pension team to ensure that they do not fall foul of the anti-forestalling rules, and are aware of the planning opportunities available to them.
This PBR includes measures to tackle avoidance, which aims to raise an additional £165 million by 2011-12 and protects around £5 billion of tax receipts per year from erosion by tax evasion and avoidance. The difference between tax avoidance and tax evasion seems to be steadily reducing, with the Chancellor viewing them in the same light in yesterday’s report. It is more important than ever to review your tax affairs and report them correctly.
Legislation will be brought forward to ensure that those who evade or who fail to declare offshore tax liabilities will face tougher penalties by deliberate tax evasion. There will be a new requirement to notify HMRC when opening offshore bank accounts in certain jurisdictions. Evading tax offshore could result in combined penalties of up to 200% of the unpaid tax. This represents a 100% increase in the penalty rate that previously applied.
This is a timely reminder that those who have incorrectly failed to declare offshore income and gains to HMRC are able to take advantage of the New Disclosure Opportunity – the registration deadline of which has been extended to 4 January 2010. This will allow a disclosure to be made to HMRC and the taxpayer will be subject to a special reduced penalty.
Furnished Holiday Lettings (FHLs)
The preferential rules governing the taxation of FHLs is being withdrawn from April 2010 which means the tax treatment will be the same as for other property businesses. Until the new rules take effect the current rules will also apply to UK taxpayers with qualifying lettings in the European Economic Area. The benefits currently applying to letting FHLs include; CGT rollover relief, entrepreneurs’ relief, pensions relief, loss relief against other (non-property) income and capital allowances
The withdrawal of this relief will hamper the domestic vacation market which over the past couple of years has been booming mainly due to a weak pound. If you have a furnished holiday let, you should take advice prior to the end of the current tax year.
Changes to Company Car and Van Tax and Capital Allowances
The company car tax benefit is based on the CO2 emissions and list price of the car. The current graduated table of company car tax bands will be extended down to a new 10% band from 6 April 2012. From 6 April 2010 electric cars will attract zero company car tax charge. Employee provided electric vans will attract a zero benefit-in-kind tax charge for 5 years and business owners and companies purchasing new vans will get 100% first year capital allowances.
A welcome 0% tax charge to the employee benefits tax code to accompany the political shift towards non-polluting vehicles.
Introduction of Patent Box - a reduced rate of corporation tax (10%) applying to income from patents from April 2013, to strengthen the incentives to invest in innovative industries, and through additional funding of £200 million for the Strategic Investment Fund that will include £150 million to support low-carbon investment.
This could provide enhanced returns for investors and entrepreneurs.