2009 Pre-Budget Report comment

10 December 2009

Yesterday afternoon The Chancellor of the Exchequer presented the Pre Budget Report 2009. His announcements were against the backdrop of a forthcoming election, a stated intention to halve the Budget deficit within four years and a desire to maintain the UK government’s credit rating on the world stage.

Although the headline measure was a punitive tax on bankers’ bonuses, the biggest revenue raiser will be the proposed National Insurance increases, which will hit both employers and employees.

From 6 April 2011 (i.e. after the next election) the National Insurance payable by employees will increase by 1% to 12%. The self-employed will also face a 1% increase in National Insurance rates. Employers will experience a rise in National Insurance from 12.8% to 13.8%. The Pre Budget Report 2008 had announced a 0.5% increase in National Insurance from those dates. Yesterday’s announcement therefore represented a further 0.5% increase.

Other changes to the tax system are as follows:-

Personal Tax

The rate at which individuals fall into the 40% tax band are frozen and this will push approximately 70,000 more people into the higher rates of tax.

In Budget 2009 the Government announced plans to restrict tax relief on pension contributions for individuals with incomes of over £150,000 with effect from 6 April 2011. The 2009 Budget also announced specific provisions to prevent individuals accelerating contributions prior to 2011. These transitional arrangements have been amended with immediate effect so that anyone with income in excess of £130,000 may be subject to the anti-forestalling rules. This change is a direct response to techniques designed to circumvent the anti-forestalling rules.

The inheritance tax threshold was due to increase to £350,000 on 6 April 2010. This was a commitment made by the current government. The Chancellor has now announced that the threshold will remain at its current level of £325,000.

The Government had announced that there would be a withdrawal of certain tax reliefs applying to furnished holiday lettings. This measure has been confirmed and leads to the conclusion that owners of such property may wish to consider a disposal before 6 April 2010 in order to take advantage of capital gains tax benefits which will otherwise be lost.

These announcements are disappointing as they increase the tax burden. The changes to the pension regime may lead to reduced contributions into pension schemes thereby damaging the pension industry and reducing future pension levels.


SME Business Matters

The proposed increase of the lowest rate of corporation tax from 21% to 22% has been postponed until 1 April 2011.

The Enterprise Finance Guarantee Scheme which provides support to businesses with less than £25m turnover has been extended for a further 12 months thereby guaranteeing £500m of bank lending to the SME sector.

There has been a relaxation of one of the main conditions attached to companies claiming research and development tax credits. This should open the availability of such credits to many more SMEs.

Presently companies pay a small Climate Change Levy on their energy bills. Those businesses which satisfy environmentally friendly conditions get an 80% discount to this levy. There is a proposal to cut the rebate from 80% down to 65% from 2011.

HMRC will open consultation with interested parties on the possibility of exempting from UK corporation tax certain profits generated overseas.

There will be a relaxation of certain conditions applying to the Enterprise Investment Scheme and the Enterprise Management Incentive Share Option Scheme. Both changes are designed to extend the numbers of businesses that can qualify for these tax-efficient schemes.

The changes for business are broadly welcome as, in the main, they are beneficial for the SME sector.


Company Cars

Company cars are to be subject to various changes.

The Finance Bill 2010 will include an amendment to change the taxable benefit associated with company cars by varying the tax bands into which company cars fall. This may lead to an increase in the tax liability for the employee (and a National Insurance liability for the employer) from 6 April 2012. Those most likely to be hit are employees who presently have company cars and retain the same cars after April 2012. Changing to a more environmentally-friendly model can avoid the possible tax increases.

From 6 April 2010 the taxable benefit employees suffer as a result of being provided free fuel for private motoring will increase. This will also lead to increased National Insurance costs for the employer.

There will be tax relief available for owners of electric cars and electric vans.

The main rates of fuel duty will increase in real terms by 1p per litre from April 2010 and every year thereafter until 2013.

The Labour Government have repeatedly tinkered with the company car regime and therefore these changes are not surprising. The thrust of the various changes is to reduce the attractiveness of company cars and promote greener technology.


Property Taxes

The stamp duty land tax holiday on residential property valued up to £175,000 will end on 31 December 2009. At that point the threshold will revert down to its original level of £125,000.

There is an existing exemption from business rates for empty properties with a rateable value up to £15,000. This relief will be extended by another year and apply to empty properties with a rateable value of up to £18,000.


VAT

The temporary reduction in VAT will end on 31 December 2009. On 1 January 2010 the VAT rate will revert to 17.5%. This will have a knock-on effect for businesses which apply the flat rate VAT scheme.


Anti Avoidance

The requirement for certain parties to disclose stamp duty land tax avoidance schemes will be extended to some residential properties.

The Budget 2009 announced a proposal to publicly disclose details about tax defaulters whose tax understatements cumulatively exceed £25,000. It is anticipated that this provision will apply to tax failures after 1 April 2010.

There will be anti-avoidance legislation to prevent companies being sold so that the purchaser can acquire the benefit of capital allowances which had not been previously claimed.

Taxpayers who open offshore bank accounts in certain jurisdictions will be required to disclose to HMRC the existence of the accounts within 60 days of them being opened. This requirement will only apply to accounts with more than £25,000 deposited within them and there will be a penalty for non-disclosure.

At present there is an opportunity for taxpayers to disclose the existence of offshore income that they had not previously taxed. This opportunity closes on 4 January 2010. Taxpayers who make disclosure will be subject to a penalty fixed at 10% of the tax under-declared. Legislation will be enacted which could result in future penalties for undisclosed offshore income being at rates of up to 200% of the tax avoided.

The tax anti-avoidance industry has proliferated in recent years. Numerous anti-avoidance measures which are targeted at that industry and users of their products are not unexpected.

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