Pre-Budget Report – Tuesday 9 October 2007
Following a politically turbulent week, Chancellor
Alistair Darling has presented his first Pre-Budget Report to the House of
Commons.
While acknowledging recent
uncertainty in the global markets, Mr Darling emphasised that the
Key measures of interest
to business owners included a series of reviews of the business taxation
regime, aimed at simplifying the tax system for businesses and the
self-employed, and proposals to allow local authorities in
The capital gains tax
system will also be subject to reforms, with the introduction of a single rate
of 18%, with the stated aim of ensuring that private equity bosses pay a 'fair
share'; while a number of 'loopholes' for non-domiciled taxpayers will also be
examined.
The Chancellor made a
much-anticipated announcement on inheritance tax, revealing that the potential threshold
for married couples, civil partners, widows and widowers, will increase to
£600,000, rising to £700,000 by 2010.
Other significant announcements include the introduction of a new aviation tax in 2009, which will tax individual flights rather than passengers, and increased investment in health and education, transport, and science and technology.
Do please contact us for specific advice about how
these announcements might affect you or your business.
Contents:
Green
taxes and the environment
Changes to the remittance
basis
Spreading of tax relief for pension contributions
National insurance contributions
exemption for holiday pay
Pensions: Technical improvements
Modernising tax relief for
business expenditure on cars
Aligning income tax and national insurance
Moving to a global low carbon economy
Offshore funds: a discussion paper
This
guide is for general information only. No responsibility is taken for any action
taken or refrained from in consequence of its contents. Always seek professional
advice before acting.
The Chancellor announced a number of measures aimed at tax simplification, including:
- Beginning this year, doubling the three line account threshold to £30,000 and introducing shorter self-employment pages for businesses with turnovers below the VAT registration threshold
- For those self assessment payments on account due in January 2010 and July 2010 (ie for 2009/10), the threshold below which taxpayers do not need to make payments on account will be doubled from £500 to £1,000
- Consulting this Autumn on how best to collect tax on benefits in kind and expenses through the payroll, removing the need for a separate end of year process for many employers
- Consulting on removing the £8,500 a year threshold at which most benefits in kind become taxable, making it simpler for employers when reporting benefits
- Consulting on how to improve the present separate systems for collecting Class 2 and Class 4 national insurance contributions (NICs)
- Repealing ‘outdated’ legislation relating to expenditure on fire safety equipment from April 2008, making the tax code easier to understand.
Corporation tax
The Chancellor confirmed that the main rate of
corporation tax will be cut by 2% to 28% from next year.
Personal
tax
The 2008/09 rates and allowances for income tax,
national insurance contributions, the Working and Child Tax Credits and Child
Benefit/Guardian’s Allowance will be published after the September Retail Prices
Index becomes available.
Capital
gains tax reform
For the tax year 2008/09 there will be a single rate of capital gains tax (CGT) set at 18%. The rate will apply to individuals, trustees and personal representatives. The 18% rate of CGT does not affect the income tax rates.
A number of changes to simplify the capital gains tax regime will be made, effective for disposals on or after 6 April 2008, including:
- The withdrawal of taper relief (even if assets were held before 6 April 2008)
- The withdrawal of indexation allowance (this change will only affect assets that were acquired before 6 April 1998)
- The abolition of the ‘kink test’ (this means that all assets held on 31 March 1982 will be deemed to have had a cost equivalent to their market value on that date)
- Simplification of the share identification rules. From 6 April 2008 all shares of the same class in the same company will be treated as forming a single asset (a ‘share pool’), regardless of when they were originally acquired. However, the same day rules and bed and breakfasting rules remain unchanged, and shares will be identified under those rules before they are identified with shares in the share pool.
The Annual Exempt Amount (AEA) will remain. The current level for 2007/08 is £9,200 for individuals and £4,600 for some trustees. The AEA for 2008/09 will be announced at Budget 2008. Other CGT reliefs, as explained below, continue to have effect.
These measures will have effect for disposals made on or after 6 April 2008 and for held over gains coming into charge on or after 6 April 2008. The current CGT rules continue to apply for disposals made up to 5 April 2008.
Examples
As a result of these changes, individuals disposing of assets on or after 6 April 2008 will work out the tax due as follows (please note that these examples use the 2007/08 AEA for illustrative purposes; the AEA for 2008/09 will be announced at Budget 2008):
In 1995 Andrew
purchased a holiday home in
In 1960 Sam purchased
some shares costing £500. In March 1982 they were worth £450. In August 2008
she sells the shares for £25,000. To calculate her CGT liability Sam will need
to deduct from the disposal proceeds of £25,000 the March 1982 valuation of
£450, giving £24,550. (She cannot deduct the cost of the
shares of £500 as abolition of the kink test means she has to use the March
1982 valuation.) Assuming she has the full AEA for 2008/09 available she
then deducts the £9,200 giving a chargeable gain of £15,350. That gain is taxed
at 18% giving tax payable of £2,763.
Other CGT reliefs will continue to be available. For example:
- Private Residence Relief will continue to be available for principal private residences
- Business asset roll-over relief continues to be available. Roll-over relief enables the CGT payable on the gain on a chargeable asset to be deferred until a point in the future. Taper relief is not given on the rolled-over gain under the current rules
- The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) attract a number of CGT reliefs. These include: CGT exemption where income tax relief has been claimed; loss relief on unquoted shares; deferral relief; and extended taper relief (all subject to certain conditions). For disposals on or after 6 April 2008 there will be no taper relief available. All other CGT EIS and VCT reliefs continue to apply
- Business asset gift hold-over relief also continues to apply. This relief allows CGT on business assets that are given away to be held over until the assets are disposed of by the donee
- Unused allowable losses from past years will continue to be allowed to be brought forward in order to reduce any gains.
Note: companies that
are liable to corporation tax in respect of their chargeable gains are not affected
by any of these changes.
The IHT nil-rate band – effectively the ‘exemption’ – on the death of one spouse or civil partner was specific to that individual death estate and could not be carried forward. In many cases, this resulted in a large IHT liability on the death of the surviving spouse or civil partner.
With effect from second deaths on or after 9 October 2007 the unused percentage of the nil-rate band from the first death estate can be carried forward and added to the nil-rate band available to the second.
For example:
- On the first death none of the original
nil-rate band was used because the entire estate was left to a surviving
spouse. Then if the nil-rate band when the surviving spouse dies is
£350,000 that would be increased by 100% to £700,000
- If on the first death the chargeable
estate is £150,000 and the nil-rate band is £300,000, then 50% of the
original nil-rate band would be unused. If the nil-rate band when the
surviving spouse dies is £350,000, then that would be increased by 50% to
£525,000.
A similar provision will apply to alternatively secured pensions (ASPs). This will make the same proportion of the original owner’s nil-rate band that was not used by their death estate available against the ASP charge on the cessation of the relevant dependant’s pension benefits.
Rules which will take effect from surrenders made after 9 October 2007 and deaths after 5 April 2008 will introduce taxing provisions affecting:
· Surrender of rights to payments under a lifetime or dependant’s annuity
· A connected person becoming entitled to an increase in their scheme pension rights following, and in consequence of, the death of a member
· A scheme member whose scheme rights are increased by virtue of the death of another scheme member at age 75 or more, or who becomes entitled to an unauthorised lump sum in consequence of that death.
Full details will be included in Finance Bill 2008.
Green taxes and the environment
Since its introduction in 2003, the ‘fuel benefit multiplier’ has remained at £14,400. The multiplier is the amount by which the car’s emissions based benefit rate is multiplied to arrive at the amount liable to tax and (employer) national insurance contributions.
From 6 April 2008 the multiplier will be increased to £16,900, taking the maximum income tax payable when an employer pays for the fuel an employee or director uses for private travel, from £168 to just over £197 per month.
Two intended measures have been announced which affect Air Passenger Duty (APD):
· From 1 November 2008 duty will be payable at the standard rate on all ‘business class only’ flights (thus rising from £40 to £80 for non-EEA flights)
· From 1 November 2009 duty will be payable per flight, not per passenger, under a new aviation tax.
APD rates will remain frozen at their current rates for 2008/09. For EEA flights these are £20 (standard) and £10 (reduced). For non-EEA flights these are £80 (standard) and £40 (reduced).
Other environmental measures announced included:
· Confirmation of a rise in line with inflation for the climate change levy from April 2008, with agreements extended to 2017
· Exemption for investment in microgeneration from reassessment between rates valuations
· A draft Order on the measures to support biofuels from April 2008 has been laid in Parliament.
The Government also hopes to be able to include policy recommendations based on the King Review of low-carbon cars in Budget 2008.
The amount of child maintenance a family can receive without an impact on their family benefits will rise from £10 to £20 per week in 2008, and to £40 per week in 2010.
In Budget 2007 an increase in child tax credit of £150 a year in addition to the indexation increase was announced, effective April 2008. The Chancellor announced that the increase in 2008 will in fact be £175 a year over indexation, with a further increase in 2010.
The pension credit will be increased by £5 per week from April 2008, for single pensioners, and by £7.65 per week for couples.
Compliance
and anti-avoidance
Changes
to the remittance basis
Individuals not domiciled or not ordinarily resident in the
From April 2008:
- After
being resident in the
- Days of arrival in and departure from the UK will be included as days ‘in’ the UK in establishing whether or not an individual is resident in the UK for tax purposes
- Unless
unremitted foreign income is less than £1,000 a
year, those claiming the remittance basis will lose their entitlement to
Further technical measures will reduce opportunities for those taxable on the remittance basis to, for example, alienate income or gains, or convert income and gains into non-taxable funds.
Remittance basis for
income from Irish investments and employers
Historically the income arising to
From 6 April 2008 the general remittance basis (as outlined above) will apply to such income.
Spreading of tax relief for pension
contributions
Legislation will be introduced in the Finance Bill 2008 to ensure that the rules that spread tax relief for large employer pension contributions relative to their contribution in the previous year cannot be circumvented by routing them through a new company. The measure will have effect for payments made on or after 10 October 2007 under binding obligations entered into on or after 9 October 2007.
Following the widely publicised decision in the Arctic Systems husband-and-wife business tax case, the Government has confirmed that it believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage (income shifting). The vast majority of individuals cannot shift their income and income shifting is considered to run counter to the principle of independent taxation.
The Government will be consulting, shortly after the Pre-Budget Report, on draft legislation to take effect from 2008/09 to address income shifting. The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits. Income from employment, interest on savings and any other source will not be affected.
HM Revenue and Customs will draw on the wide range of commercial experience available across the advisory community in framing practical guidance that minimises burdens, and makes it as easy as possible for individuals to understand their position. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business.
National insurance
contributions exemption for holiday pay
The exemption
from national insurance contributions (NICs) of
holiday pay paid via a third party is to be removed for all sectors outside the
construction industry. The exemption was aimed at addressing problems of high
mobility and turnover of the labour force in the
construction industry, but working time regulations now ensure holiday
entitlement is preserved in all sectors and therefore an ongoing exemption for
construction is no longer appropriate. However, given the longstanding nature
and wide range of benefits typically provided by schemes, the exemption will be
maintained for the construction industry for five years to give it sufficient
time to adjust.
Employers outside
this sector are increasingly using the exemption solely to reduce their and
their employees’ NICs liability, and therefore
secondary legislation now laid before Parliament will
remove the exemption for these employers from 30 October 2007.
Disclosure
Regime
Budget 2004
introduced a disclosure regime that has enabled the Government to respond to tax
avoidance more swiftly and in a more targeted fashion.
In order to
better identify and tackle those who make use of marketed avoidance schemes,
the Government will consult on options to improve the operation of Scheme
Reference Numbers.
Following on from
action in 2006/07 on stamp duty land tax avoidance, the Government will consult
with interested parties later this year on how to extend the disclosure regime
to high value residential property transactions.
The Government
will also consult with interested parties later this year on the practicalities
of addressing the use of special purpose vehicles to reduce stamp duty land tax
liability on high value residential property.
Financial
Products - disguised interest
Action is being
taken, effective immediately, to counter attempts by some companies to get
around the shares as debt rules, which apply to interest income disguised as a
capital gain or ‘tax nothing’.
Interest
relief exploitation
Action is being
taken, effective immediately, to tackle avoidance schemes seen as abusing the
availability of interest relief through the payment of interest in advance.
Leasing
avoidance
Action is being
taken, with immediate effect, to prevent two types of arrangement that seek to
avoid tax through the leasing of plant and machinery. The measures will counter
avoidance involving the sale and finance leaseback of plant or machinery and
attempts to exploit long funding leases to create a tax loss where there is
little or no commercial loss.
Life Insurance
Companies
Legislation will
be introduced to prevent life insurance companies from benefiting from tax
relief for expenses in respect of reinsured business which have been met by the
reinsurer of that business.
This will apply
to transactions entered into on or after 9 October 2007 (and from 2008 to
amounts spread forward in respect of earlier transactions).
Tackling
Vehicle Excise Duty (VED) Evasion
To assist in the
fight against VED evasion, the Government has now strengthened VED enforcement
powers to include motorists driving unlicensed vehicles and parking in areas
where enforcement is not currently permitted.
Therefore in
addition to public roads, from 1 September 2008 VED enforcement will also cover
vehicles parked in public places that are not intrinsically part of a private
dwelling, where a Statutory Off Road Notification has
not been made.
The Housing Finance Review, launched in July, has already held
discussions with a variety of mortgage lenders, investment banks, regulators,
consumer groups and academics with a view to ‘improving the efficiency’ of
mortgage finance markets.
A key aim is to make it possible for lenders to offer affordable
long-term fixed rate mortgages of ten years or more. One proposal is for the Debt
Management Office (DMO) to issue specific derivatives which may help mortgage
lenders to hedge longer-term fixed rate mortgages more cost effectively, and in
turn pass on the benefit to households.
The Housing Finance Review is due to report at Budget 2008.
Pensions: Technical improvements
Several changes will be made to introduce easements to the pension scheme rules. These relate to the lifetime allowance test, protection of lump sums exceeding 25% of pension rights, taxable property provisions and inheritance tax protection on overseas pension schemes. All the changes will be backdated and take effect on and after 6 April 2006 (‘A’ Day).
Consultations and proposals
A significant number of consultations and studies of interest to businesses were commissioned to coincide with the Pre-Budget Report.
Alongside the Pre-Budget Report and Comprehensive Spending
Review, the Government has published a White Paper relating to business rate
supplements. The document announces the introduction of a new power for local authorities in
The proposal, which builds on the review of
sub-national economic development and regeneration, is being promoted as a
substantial devolution of power to local communities, allowing them to make
investment decisions that more closely reflect local economic need.
The announcement follows extensive public
debate on reform to business rates in
The
Government's proposed model for business rate supplements involves four levels
of protection for business:
·
Revenue
from supplements will only be available for spending on economic development in
addition to existing plans. Proposals will be subject to detailed statutory
consultation
·
A
national upper limit of 2p in the pound will be set on the level on supplements
that can be levied
·
To
protect smaller businesses from disproportionate burdens, properties liable for
business rates with a rateable value of £50,000 or
less will be exempted from paying supplements
·
Where the supplement will support more than
a third of the total cost of the project there will be a full 'double-lock'
vote of businesses affected.
By April 2010, the Government will
legislate to enable local authorities to levy the first supplements.
The PDF document is available here:
http://www.hm-treasury.gov.uk/media/B/9/pbr_csr07_businessrate266.pdf
Modernising tax relief for business
expenditure on cars
In the 2006 Budget, the Government launched a
consultation on modernising tax relief for business
expenditure on cars. This proposed replacing the existing capital allowance
rules that apply to cars costing over £12,000, with a range of first-year
capital allowances based on CO2 emissions, with the balance of
unrelieved expenditure being taken to a new car pool with lower writing down
allowances than the general pool.
An update was published in March 2007 in which views were
sought on a refined proposal that utilised two pools,
the general plant and machinery pool and a lower rate pool, and introduced a
threshold for emissions. The pool to which expenditure would be allocated would
depend on whether or not the CO2 emission levels were above or below
the threshold.
The update document also sought views on proposals to
reform the lease rental restriction utilising the
same emissions threshold and applying a uniform fixed percentage disallowance
on relevant payments on cars with emissions above the threshold.
The summary of responses is
available here:
http://www.hm-treasury.gov.uk/media/5/2/pbr_csr07_cars248.pdf
Aligning income tax and
national insurance
In the 2006 Budget, the Government announced that it
would review the case for aligning income tax and national insurance contributions
(NICs), with the aim of reducing administrative
burdens on employers and improving outcomes for those on lower incomes. The
report published today sets out the conclusions of the review, and includes
detailed analysis of the costs and benefits of moving to an annual and
cumulative NIC system. It also sets out action that HM Revenue & Customs
will take to further reduce administrative burdens.
The PDF document
can be accessed here:
http://www.hm-treasury.gov.uk/media/B/B/pbr_csr07_incometax713.pdf 
Moving to a global low
carbon economy
One year after the publication of the Stern
Review of the economics of climate change, the Government has published a
document which draws together the key aspects of its response and its future
priorities, both in the context of international negotiations and of the UK's
efforts at home and abroad to reduce greenhouse gas emissions.
The PDF document is available
here:
http://www.hm-treasury.gov.uk/media/A/B/pbr_csr07_stern770.pdf
Offshore funds: a
discussion paper
The Government has published a discussion paper setting
out how it intends to modernise the offshore funds
tax regime, and is seeking comments on these proposals.
The discussion paper covers changes to the definition of
offshore funds for
A consultation stage impact assessment is included in the
Annex, on which the Government is inviting comments from interest parties, by a
deadline of Wednesday 9 January 2008.
The PDF document can be viewed here:
http://www.hm-treasury.gov.uk/media/2/E/pbr_csr07_offshore402.pdf