WILL IT FUEL GROWTH?
Let’s face it – this was not an easy budget for the Chancellor to pull off and indeed the press has been quite negative. However, in the spirit of sticking to a plan for the achievement of a longer term goal, simplifying what we have and introducing further measures to assist small businesses we are relatively positive about some of the changes announced.
Harsh measures to raise taxes from wealthy corporates (oil companies and bankers) to pay for cuts in fuel and support to homeowners headlined Mr Osborne's speech. However there was also an overarching theme of 'simplification', following the publication of the 'Office of Tax Simplification's (OTS)' Interim Report on 10 March 2011, which covered a number of interesting topics.
For us the principle of simplification is embedded in our core values. We believe that the effective management of the business regulatory environment is crucial to enable business owners to focus on their objectives.
We know you get inundated with 'Budget Commentaries'. However, in our commentary we have tried to 'simplify' the speech to only include items that we think may be of interest to our clients, contacts and associates. If you wish to discuss in further depth any of the announcements or indeed anything in connection with your business, we would welcome your call.
Simplification?
The main attention was focused on the planned consultation on the merger of National Insurance and Income tax. AT LAST - it has been officially recognised that NI is just another income tax. However, whilst the aim is a simplified system, there are many complex hurdles to overcome including pensioners and internationally mobile individuals.
One really interesting result of this merger may effectively be that IR 35 is rendered redundant. Until the 'merger' takes place the OTS recommended that it should be suspended with a view to abolishing it or making clear changes to its enforcement. Unfortunately, the Chancellor stopped short of abolishing it immediately and instead opted for moderating it’s administration, a the measure that will disappoint those lobbying to get rid of it altogether.
A further recommendation of the OTS is that Inheritance Tax should be simplified - no easy task. But a measure to encourage individuals to leave donations to charity has been introduced whereby if a legacy of 10% is left to a charity, HMRC will take 10% off the rate of Inheritance Tax (ie. the Inheritance Tax rate will be at 36% rather than the current level of 40%).
The 'late night taxi' tax relief has been abolished along with 42 other reliefs as a result of the simplification report.
The administrative burden of the gift aid system for charities will be simplified including introducing an electronic system and abolishing the requirement to obtain gift aid declarations for donations of less than £10.
Individuals - are they better or worse off?
Depends on who they are....
For everyone the personal allowance is increasing to £7,475 from April 11 and by a further £630 to £8,105 in April 2012, a small but welcome effective 'tax cut'. However, the basic rate band is also reducing from £37,400 to £35,000 from April 2011 and then £34,370 the following year.
For employee’s National Insurance is still going up by 1% to 12% as of April 2011. Similarly, National Insurance for self-employed individuals is rising from 8% to 9% from April 2011.
The Chancellor sees the 50% income tax rate as a temporary measure only, but has made not commitment as to when it will be removed.
For new pensioners there will be a new single tier pension scheme based on contributions and a flat rate. The new pension will currently be worth £140 a week and will not apply to current pensioners. The aim is to enable people to plan their retirement income better, giving them a better idea of what they need to invest now.
The annual allowance for tax relief on pension savings will be reduced from £255k to £50k from April 2011. The lifetime allowance will also be reduced from £1.8m to £1.5m from April 2012. There is no change to the commentary on these changes which were released earlier in the year.
Tax cuts for businesses
The announced 2% reduction in the main rate of corporation tax was more than originally expected and brings the rate down to 26%. The tax will continue to decrease by 1% each year until it reaches 23% in 3 years time.
The small companies' rate will be reduced by 1% as expected to 20% from April 2011. There are no expectations to reduce this any further after the current year. The reduction in the main rate of corporation tax will however reduce the marginal rate of corporation tax for those companies with tax adjusted profits of £300k to £1.5m (divided by the number of associated companies).
There have been a number of adjustments to the calculation of car and fuel benefits. But the increase that will probably affect most companies and individuals is the increase to 45p from 40p for reimbursement rate per mile for business mileage for the first 10,000 miles. This will also take effect from 6 April 2011, a rate that has remained unchanged for many years.
Time-to-pay (TTP) – the government will thankfully continue to offer business payment support to viable businesses experiencing temporary financial difficulties. However, our experience has shown that HMRC are getting much tougher on this. The TTP officers have been asking probing questions into the level of director remuneration, dividends paid out by the company, borrowing facilities of the business and the personal borrowing facilities available to directors.
Entrepreneurs 'Lifetime Limit' up to £10 million
This is great news for Entrepreneurs allowing business owners to take advantage of the 10% Entrepreneurs Relief Rate. It must not be forgotten though that there is no change from the requirement to own 5% and be an officer or employee of the company, thereby stopping short of boosting ‘outside’ new investment.
Also assisting small businesses is the increase to 30% from 20% in the income tax relief under the Enterprise Investment Scheme (EIS). Qualifying criteria has generally been relaxed allowing more companies to take advantage of the tax breaks. This is excellent news for investors.
A further measure to help small and growing businesses is the increase of the Research and Development tax credit rate to 200% from 175%. The minimum expenditure of £10k and also restrictions on PAYE and NIC paid by the company has also been abolished. Beware though – the increase will not flow back through the cash back claims.
The Small Business Rate Relief holiday, which was due to end in October 2011, will be extended to October 2012.
Foreign issues
The Chancellor is sticking with his ‘Remittance Basis’ tax on non domiciles but is increasing it to £50k from £30k. This is clearly a tax on wealthy individuals as those with small income streams will simply opt to be taxed on a ‘world wide’ income basis.
Statutory residence tests, (which currently incorporate a number of more subject matters including where your family and personal possessions are) may be firmed up. Those individuals counting the days of being in or out of the country will welcome clarity on this matter.
Green Issues
The Chancellor seems to be supporting green technology by introducing a number of new initiatives including the introduction of the Renewable Heat Incentive alongside the Feed-In-Tariff scheme already in place and the establishment of a Green Investment Bank with an initial funding of £3 billion to invest in low carbon investment and private sector projects.
Best wishes
Sally Gardner FCA |
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