To all Clients - Budget 2008 and other matters

Mr Darling presented his first Budget on 12 March 2008.  Speaking for approximately 50 minutes, he reeled off many ‘facts’ and statistics, mainly comparing the U.K. today with the period immediately prior to Labour coming to power.  There was very little of interest in the speech (one commentator rather cruelly branding it “the most boring Budget of all time”).  Mr Darling hardly mentioned tax, at all, referring occasionally to things which had already been announced. 
As usual, I will comment on the more relevant points in the Budget a little later but before that, I take the opportunity to deliver some bullet point reminders from previous years letters, together with a few new ones.  Please take a few minutes to read through them.

• Self Assessment Tax Returns to us please.

• Please let us have copies of any Notices of Coding you receive if you have a PAYE tax code, and we also complete your Self Assessment Tax Return.

• Please keep/obtain tax vouchers for all interest and dividends received, and also for interest paid gross.  Please do this as soon as possible after 5th April, and chase up any that do not arrive during the normal course of things.  In all cases the certificates should be for the Tax Year ended 5 April 2008 (2007/08).

• Please keep records of business/private mileage if making a claim for business use of vehicles.  If you require a pro forma mileage log, then please let me know.

• Please keep all business records for a minimum of six years.

• If your spouse works within your business, he/she must be treated like any other employee.  Any salary paid should be taxed and NIC’d if appropriate, and the net pay must actually be paid and entered in your books.  It is not acceptable simply to make a transfer at the end of the year, when we are preparing the accounts.

• The 50% first year capital allowance for small business expenditure on plant and equipment etc ceases on 31 March 2008 for companies, and 5 April 2008 for individuals/partnerships.  A new system of Capital Allowances is introduced from April as outlined later.  If planning expenditure in the next couple of months it may be beneficial to consider the impact of the new rules. 

• Forms P14, P9D and P11D etc. need to be ordered from the Tax Office Order line.  Please ensure that you have all the appropriate year end PAYE return forms well in advance of the filing deadlines.  The on-line filing incentive is reduced to £100.  Please read all HM Revenue & Customs (HMRC) correspondence that you receive as, normally, you will not have been sent anything, unless it applies to you. 

• Please let us have copies of any Self Assessment Tax Calculations or Statements of Account that you receive.

• We offer, through two independent financial advisers, a full range of investment, pension and financial services.  If you would like a free consultation and appraisal of your current arrangements, then please telephone to arrange an appointment.  In particular, we recommend that you review your pension arrangements, and life and accident insurance cover once a year, as well as ensuring that you have an up to date and valid Will in place. 

• Please remember that we, like all accountants, solicitors, banks and building societies etc., are now required, by law, to comply with the Proceeds of Crime Act and the Money Laundering Regulations.  Amongst other things, we are obliged to report any evidence (or suspicion) of criminal activity, to the Serious Organised Crime Agency (SOCA) who pass the information on to HM Revenue & Customs (HMRC) and/or (if appropriate) the Police. 

The Budget

As mentioned above, the Budget Speech contained very little of substance that had not been announced before.  There were no surprises in what he said and, as was the way with his predecessor, the detail was left to be discovered in the 100+ press notices that were issued, once the speech was over.
It is for this reason that I will limit my comments to the changes that are coming in from this April.  Firstly though, a ‘non-change’ -

Income Shifting

Following its defeat in the Arctic Systems case, the government threatened to introduce new rules to tackle what it regards as tax avoidance, where the income of the main earner is ‘shifted’ to someone else purely to achieve a tax saving.  Often, this is the case in a family limited company, where one spouse is the main earner, but the profits are shared equally with the other spouse, either through the payment of dividends or non-commercial remuneration packages.  Similarly arranged partnerships and employment situations were also to be targeted by the new rules.
The government has been consulting on the detail of the changes, but the principle was always clear; from 6 April 2008 the owners of family businesses would be prevented from dividing income purely to minimise the tax payable.  In effect, from 6 April 2008 owners of family (and similarly arranged) businesses would have to show that the division of profits was commensurate with the contribution that each of them had made to the business.
However, it was generally believed that the proposals, in their current form at least, were unworkable, and the government has now decided to continue with the consultations and not implement any changes until April 2009.

Capital Gains Tax

The Autumn Statement announced the most radical changes to the taxation of capital gains since the system was first introduced.
With effect from 6 April 2008, Taper Relief and Indexation Allowance on both ‘business’ and ‘non business’ assets will be abolished in respect of disposals after 5 April 2008.  Instead, all gains for individuals, trustees, and personal representatives will be taxed at a flat rate of 18%.
Initially there was no distinction made between ‘business’ and ‘non business’ assets and, therefore, business owners who had previously expected to pay a maximum of 10% capital gains tax on business asset disposals were suddenly looking at a tax cost of 18% (an 80% increase).
However, after much lobbying by business groups and a couple of ‘false starts’ Mr Darling has now confirmed that there will be a special allowance available to business owners known as Entrepreneur’s Relief.  Put simply, from 6 April 2008, those disposing of all or part of a business, or assets which were used in a business that has ceased, or shares in a qualifying company where the holder was an officer or employee holding at least 5% of the shares, will benefit from relief on the gains arising.  The gain will be scaled down to 5/9 to bring the effective rate of tax to 10%.  Every qualifying person will have a lifetime allowance of £1,000,000 of gains.  There are some conditions that need to be met but, overall, it is a very welcome concession that should benefit small business owners.
It should be noted that a business which consists of the holding and letting of property does not qualify unless it is comprised of furnished holiday lettings, within the U.K.
If you are contemplating disposing of any chargeable assets in the near future, and it is still possible to influence the disposal date, then you should consider the respective tax positions of a sale before the tax year end, and a sale after the tax year end.
If an asset is held solely by an individual spouse, it may be possible to ‘bank’ the accrued indexation allowance by transferring the asset to the other spouse, before 5 April.  The cost to the second spouse becomes the original cost (to the first spouse) plus the indexation allowance.  Remember that to qualify for indexation allowance the asset must have been acquired prior to March 1998.
These changes do not apply to capital gains made by limited companies, which will continue to be taxed as at present.
As with all changes of this type there will be ‘winners’ and ‘losers’, so if you are contemplating a disposal then please let us know as soon as possible so that the tax effect can be determined.

Capital Allowances

Gordon Brown announced (in last years Budget) proposed changes to the Capital Allowances system from 1 April 2008 for companies, and 6 April 2008 for individuals. 
Briefly, the rate of Writing Down Allowance (WDA) given on plant and machinery in the general pool is to reduce from 25% to 20%. 
Businesses that do not have an accounting year that coincides with the tax year will have an average hybrid rate, depending on their ‘year end’.   The rate for ‘long life’ assets will increase from 6% to 10%, with the same scope for hybrid rates.
There are major changes to the treatment of fixtures and fittings which are integral to a building (lifts, central heating/air conditioning systems etc.), and fixtures which are currently classified as part of the building may now qualify for capital allowances at a new rate of 10%.
Agricultural and Industrial Buildings allowances are to be phased out altogether by April 2011.
The current system of granting first year allowances (of 40/50%) will cease and be replaced by an Annual Investment Allowance (AIA) of 100% on the first £50,000 of expenditure.  Again, this will be time apportioned if the accounting year does not coincide with the tax year.  Most general plant, with the notable exception of motor cars, will qualify for the new allowance.  Consequently for most small businesses spending less than £50,000 per annum on capital equipment, there will be a 100% allowance.  Any expenditure in excess of £50,000 will enter the general pool, and qualify for WDA of 20%.  From a purely tax point of view, therefore, it would seem beneficial for small businesses to delay buying capital equipment until early April 2008, unless there is some other reason for buying earlier (commercial necessity or special prices).  Conversely, businesses who spend in excess of £50,000 per annum might want to consider bringing expenditure forward (to March 2008) to take advantage of the current first year allowance of 40/50%.  Please remember that for purchased assets the date of purchase is generally the date that the contract becomes unconditional, and for assets bought on hire purchase, the full allowance is only given once the asset is brought into use.
The current system of giving balancing allowances (deducting balancing charges) when a non-pooled asset is disposed of, will be abolished.  In the year of sale, the written down value will be reduced by the sales proceeds, and the WDA calculated on the reduced amount.  This will carry on indefinitely so that allowances will be given for a number of years after the asset has been disposed of.
There is a separate system for motor cars where allowances are determined by the CO2 emissions of the car.  Cars emitting no more than 120g/km will continue to benefit from the 100% first year allowance.  Cars emitting 121g/km to 165g/km (bands C and D for VED purposes) will be included in the main plant pool, and vehicles with higher emissions will be included in a separate pool qualifying for a lower WDA (possibly only 10%),
The situation with expensive cars is not clear; it was intended to reform the ‘expensive cars’ rules but, as yet, no detail has been published. 

Tax Rates (from April 2008)

Changes in income tax and corporation tax rates were announced last year, but to summarise, the basic rate of income tax is to come down from 22% to 20%, but the 10% rate (for non-savings income) is to be abolished.  The main rate of corporation tax (for profits over £1.5m) will come down from 30% to 28%, but the small companies’ rate will increase from 20% to 21% this year, going up to 22% in April 2009.
Full details of the current tax rates, allowances and national insurance rates can be found in our Budget Summary.

Fun Taxes

With regard to what have become known as ‘fun taxes’, Mr Darling announced an increase in tax of 11 pence on a packet of 20 cigarettes, and on wine and beer increases of 14 pence per bottle, and 4 pence per pint, respectively.  After a number of years without any increase, the duty on spirits was increased by 55 pence per bottle. 

And Finally

As you know, we are not authorised to give specific investment advice but you may wish to discuss some or all of the following with your Financial Adviser.
Inheritance Tax rules allow you to give away £3,000 per year and this exemption can effectively be backdated one year.  Therefore in the first year £6,000 can be given away, and £3,000 each year thereafter.
Try to maximise your ISA investment before 5 April, which is £7,000 this year.
Consider making pension contributions to obtain tax relief at your maximum income tax rate which might be 40%.
Consider paying into pensions for your family.  Stakeholder pensions allow contributions to be made for all U.K. residents, even children, as there is now no requirement to have any earnings.
Everyone has an annual Capital Gains Tax exemption of £9,200, meaning that capital gains up to this amount will escape tax.  You may want to consider taking advantage of this exemption by realising gains from investments, up to this level, before the end of the Tax Year.  
If a spousepays tax at a different rate, you might consider transferring income producing assets to give income to the person paying at the lower rate.  It is not believed that the government would consider this to be ‘income shifting’ as outlined above, because ownership of the asset, itself, is transferred and the income is not ‘earned’ by the transferring spouse.

If you have any queries concerning anything in this letter then please let me know but, in the meantime, the main tax and business changes can be found in our Budget Summary, which I hope you will find interesting and informative. 

Very finally, please remember that the Self Assessment filing deadline has been advanced to 31 October by 2008 for the 2007/08 Tax Return, if filing a paper Return.  The existing 31 January deadline remains for those filing on-line, as do the current tax payment dates of 31 January and 31 July.

Regards

P J DALTON

N.B.    This letter was produced shortly after the Budget Speech, so please contact us before making any decisions based on information outlined above.