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14/12/2009
The Pre-Budget Report
Chancellor of the Exchequer Alistair Darling delivered this year’s Pre-Budget Report at a time of great uncertainty for the UK economy. While the recession appears to be levelling out, and there are even some tentative signs of recovery, most economists agree that the road ahead will be a rocky one, with rising unemployment and high levels of personal and government debt likely to have a negative impact. The need to reduce the current record levels of government borrowing has hampered the government’s ability to offer standard pre-election giveaways, with several tax rises already on the horizon and increased measures to clamp down on avoidance.
Summary of Key Proposals
VAT – rate will return to 17.5% from 1 January 2010. No further increases announced.
Stamp duty holiday on properties worth up to £175,000 will end on 1 January, with 0% rate continuing to apply only to homes worth under £125,000.
Employers’ and employees’ national insurance to increase by a further 0.5% in 2011 for those earning over £20,000, to raise an extra £3billion.
Restrictions on tax relief on higher earners’ pension contributions from April 2011 will also apply to employer contributions.
Inheritance tax threshold to remain at £325,000.
Bankers to face one-off 50% tax on any bonus paid out over £25,000.
Maximum penalty for offshore tax dodging doubles to 200% of the tax owed.
Corporation tax rise of 1% for small businesses deferred for a further year.
The ‘Time to Pay’ scheme, which gives businesses more time to pay their tax bills, to be extended for ‘as long as it is needed’.
Enterprise Finance Guarantee scheme extended for a further 12 months.
Mortgage Interest Scheme to help homeowners facing repossession extended for another six months.
10% tax on patent income to fund new research in science and technology.
Education or training guarantee for 16 and 17-year-olds, and for under-24s who have been out of work for more than six months, to run for another year.
Pensions up by 2.5%; other benefits to rise by 1.5%.
£160million investment in low-carbon projects and a doubling of investment in ‘carbon capture’ technology.
£200million to improve energy efficiency in homes and completion of ‘smart meter’ programme by 2020.
‘Scrappage’ scheme for inefficient boilers.
50p a month levy on landlines to fund expansion of high-speed broadband.
Setting the Scene
Mr Darling began by stating that there were growing signs that confidence was returning to the global economy, and said he believed the UK economy would resume growth by the end of the year.
However, he said volatile oil prices and the recent problems in Dubai illustrated the fragile nature of the recovery, and said the government would continue to support the economy until the recovery was ‘established’.
He stated that the UK economy will have contracted by 4.75% during 2009 – a far worse figure than the 3.5% anticipated in the last Budget. However, he predicted growth of between 1 and 1.5% next year, and 3.5% in 2011 and 2012 – broadly in line with his previous predictions.
The government borrowing forecast for the 2009/10 financial year was revised slightly, from £175.4billion to £177.6billion, with a similarly high figure of £176billion next year, before beginning to fall back, reducing to £96billion by 2013/14.
The Chancellor gave himself a little more room for manoeuvre by predicting the total cost of taxpayer support to the country’s struggling banks would be around £10billion – less than the £50billion that had previously been earmarked.
Inflation would rise to around 3% early next year, the chancellor said, largely as a result of the reversal of the VAT cut, before falling back to between 1 and 1.5% later in the year.
Public spending would rise by 2.2% in 2010-11, but after that spending will have to be cut, with a fall of 0.8% between 2011-12 and 2014-15.
Mr Darling announced a £12billion programme of savings, including a cap on public sector pension contributions, reducing civil servants’ pay, cutting IT projects and selling off assets.
VAT and Duty
It was confirmed that VAT would revert to 17.5% from 1 January 2010, after just over a year at the reduced rate of 15%.
Contrary to some predictions, there was no indication of further increases in the future.
The duty on bingo will be cut from 22% to 20% at the next Budget, partially reversing a previous rise from 15% to 22%.
Fuel duty will increase by 1p per litre in real terms on 1 April each year from 2010 to 2013. The 20p per litre differential for biofuels will end in 2010-11.
Income Tax
Income tax rates remained unchanged at 20%, 40% and the new rate of 50% from next April.
The threshold for paying tax at 40% will be frozen in 2012-13, potentially drawing more people into paying tax at that rate in the future.
The government’s crackdown on offshore tax dodging is set to continue, with the maximum penalty rising to 200% of the tax due.
In an effort to discourage banks from paying big bonuses, a one-off 50% tax will be charged on any bonuses over £25,000, paid by the banks not the recipients. The proceeds will be invested in job-creation programmes.
National Insurance
National Insurance will rise by a further 0.5% in April 2011, in addition to the 0.5% increase already announced in last year’s PBR.
The threshold at which people begin to pay NI will be raised, so that those earning under £20,000 will not end up worse off.
Business and Enterprise
The government’s ‘time to pay’ scheme, where struggling firms can ask for more time to meet their tax bills will continue for ‘as long as it is needed’, Mr Darling said.
The temporary increase in the threshold for empty property relief will also be extended, so that for 2010-11 empty commercial properties with a rateable value below £18,000 will be exempt from business rates.
In a further piece of good news for hard-pressed firms, the proposed 1% rise in Corporation Tax for small businesses has been deferred, as it was in the previous budget.
A £500million ‘growth fund’ will be created to invest in small businesses, with further details due to be announced at a later date.
The Enterprise Finance Guarantee Scheme, which guarantees bank loans to small businesses, will be extended for a further 12 months, guaranteeing an additional £500million of loans.
A new 10% tax will be introduced on income from patents to fund new research in science and technology, while the previously-announced 50p-per-month levy on landline phone bills to pay for the rollout of high-speed broadband, was confirmed.
Housing and Mortgages
The stamp duty holiday on properties worth up to £175,000, announced in 2008, will end on 1 January, with the 0% rate continuing to app
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George Osborne presented his first Budget on Tuesday 22 June 2010.
For the first time, forecasts were published in advance of the Budget. The Office for Budget Responsibility was formed in May 2010 to make an independent assessment of the public finances and the economy in advance of each Budget and Pre-Budget Report. Within the framework of these forecasts George Osborne stated that a tough but fair Budget was needed.
Many fundamental announcements have been made which affect the taxation of most individuals and these include:
- An increase in the personal allowance of £1,000 from 6 April 2011 for those aged under 65 but higher rate taxpayers will not benefit due to a reduction in the basic rate band upper limit.
- An increase in the rate of VAT to 20% from 4 January 2011.
- A new 28% rate of capital gains tax for higher and additional rate taxpayers.
- An increase in the maximum Entrepreneurs' Relief to £5 million from £2 million.
- A scheme to reduce NI contributions for new businesses in particular areas.
- Corporation tax rates to be reduced and the system to be reformed.
- The Annual Investment Allowance for capital allowances is to be reduced from £100,000 to £25,000 and the annual writing down allowances are to be reduced from April 2012.
Link: Treasury Website
A new rate of Capital Gains Tax (CGT) of 28% will be introduced. For individuals, the rate of CGT remains at 18% where total taxable gains and income, after taking into account all allowable deductions including losses, personal allowances and the CGT annual exemption, are less than the basic rate limit. The new 28% rate will apply to gains or any parts of gains above this limit.
The new rate of CGT will apply to gains arising on or after 23 June 2010.
Subject to a number of conditions, gains on qualifying business disposals by individuals and certain trustees are eligible for Entrepreneurs' Relief. This provides an effective CGT rate of 10% and works by applying a 4/9 reduction to the chargeable gain and then charging the balance at 18%. The change to the CGT rate would mean that the normal 4/9 reduction would no longer achieve 10%. The rules will be changed so that the rate of tax for gains on qualifying disposals on or after 23 June 2010 will be 10% and the previous 4/9 reduction will cease to apply from this date.
The amount of gains that can qualify for Entrepreneurs' Relief will also be raised from £2 million to £5 million for gains arising on or after 23 June 2010.
Link: HMRC Budget note
It is proposed to increase the standard rate of VAT from 17.5% to 20% with effect for any supply made on or after 4 January 2011. The rate change does not affect either zero-rated supplies nor those supplies subject to VAT at the 5% reduced rate.
Detailed guidance has been issued by HMRC for businesses on implementing the change.
Links: HMRC Budget note HMRC guidance
At the start of the tax year new late payment penalties were introduced for PAYE and other payments due from employers. The new rules apply to almost all employers and contractors, whether they employ one or a hundred employees. The rules apply to monthly, quarterly and annual periods of PAYE starting on or after 6 April 2010.
HMRC can impose late payment penalties on PAYE amounts due that are not paid in full on time, including:
- monthly, quarterly or annual PAYE;
- student loan deductions;
- Construction Industry Scheme deductions;
- Class 1 NIC; and
- annual payments of employers' Class 1A and Class 1B NIC.
HMRC have now amended their guidance to include comments on so-called 'warning letters'. HMRC state:
'The letter is only to let you know that HMRC think you have made a PAYE payment late and that a penalty could be charged. It is not a penalty notice and you can't appeal against it.
Importantly, it does not mean a penalty will definitely be charged, and you may get a penalty even if you do not get a letter.
If you agree that you have made a late payment, you should make sure you pay on time and in full in future. The next time you pay late you may become liable to a penalty. HMRC will contact you before a penalty is charged. If they charge a penalty they will send you a penalty notice.
If you believe you have received a letter in error, perhaps because you have already paid, have a time to pay agreement or have a 'reasonable excuse' you don't need to contact HMRC yet. But you may find it helpful to make a note of why you don't think a penalty is chargeable in case HMRC contact you about penalty action in future.'
If you receive a letter but have paid on time, it may worth telling HMRC that their records are currently wrong to avoid problems later on. If you are experiencing problems with paying PAYE or any other tax on time, HMRC may be prepared to defer payment and this, in turn, may avoid penalties.
Please get in touch if you would like to discuss this further.
Link: HMRC guidance
HMRC have recently issued a reminder about the various 'toolkits' that they have developed to assist agents when preparing returns. Although the toolkits are aimed at tax professionals, they highlight common errors and the steps that can be taken to reduce those errors. The first series of toolkits cover:
- marginal small companies' relief;
- capital allowances for plant and machinery;
- personal and private expenditure;
- capital gains tax for land and buildings; and
- capital gains tax for trusts and estates.
The intriguing thing about all of the toolkits is that the main area of risk for all the above areas is record keeping or the lack of it!
In addition, for capital allowances for plant and machinery the main areas of risk include:
- record keeping e.g. different proportions of non-business use during the period of ownership and detailed records of all acquisitions and disposals;
- acquisitions and disposals e.g. whether the asset qualifies for capital allowances; and
- non-business use of assets, particularly cars.
For private and personal expenditure, the main areas of risk are:
- record keeping e.g. non-business expenses being incorrectly recorded or misposted in the business records and claimed in error as allowable expenses;
- personal bills being paid by the business;
- travel and subsistence;
- entertaining, gifts, subscriptions and sponsorship; and
- drawings and capital account.
So the moral is clear - good records today keep the taxman at bay. If you would like to discuss this area in more detail, please do get in touch.
Link: HMRC website
Every year, tax credit claimants must renew their tax credit awards by 31 July or their payments may stop. Claimants on 'nil awards', and those receiving only the full family element of Child Tax Credit, will receive a statement of their 2009/10 award. If these details are correct no further action is needed and the claims are automatically renewed. However, if the details on the award statement are wrong, claimants must tell HMRC.
HMRC have launched a series of online videos to help claimants through the annual renewal process. The interactive videos take claimants through the renewal process step-by-step, offering the chance to tailor the help to their own circumstances. The videos cover key areas such as:
- providing details of the previous year's income;
- notifying HMRC of any changes in circumstances that haven't already been reported during the year; and
- checking the accuracy of the information in the renewals pack.
HMRC's Director of Benefits and Credits, Steve Lamey, said:
'These new videos are a great way of getting help and advice on renewing your tax credits, and should be able to answer any questions you may have about the renewals process.
Once you've received your pack, please don't put it off - renew straight away. The sooner you renew, the sooner we can make sure you're receiving the right money.'
Links: News release Video