Victoria Bishop, Tax Partner at robinson+co, gives her opinion on the Budget together with a summary of the main headlines.
The opinions expressed are those of Victoria and do not necessarily reflect the views of robinson+co.
All care has been taken in preparing this material. However no responsibility can be accepted for any losses arising to any person acting or refraining from acting as a result of it.
Tough But Fair?
George Osborne started his first Budget by stating that it would be a tough one – but fair. Harriet Harman, responding for the Labour Party, stated that the Budget will affect those worst off in our society, directly contradicting Mr Osborne’s claim that the pain will be borne by all in proportion to their income.
Changes to save on benefits and welfare payments, pay freezes in the public sector (and for the Royal Family) were matched by a VAT increase and reductions in tax relief available to businesses.
It was expected to increase – and Mr Osborne did not disappoint.
The main rate of VAT will rise to 20% on 4 January 2011, although the zero rate for basic foodstuffs, children’s clothing and books remains, as do the exemptions for education, health and the like.
The 5% rate (for domestic fuel and power) remains the same. There are also no changes to the various VAT schemes to cut down on administration, although the flat rates will increase. Click here to see what the flat rates will be from 4 January 2011.
We will of course be contacting our clients prior to the increase to ensure that the change goes smoothly. In the meantime please contact Roger Troughton, our VAT Partner, on 01900 603623 if you have any particular queries.
The Conservatives had made it clear that they would seek to reduce the main rate of corporation tax and they are implementing this by a 1% reduction each year until a rate of 24% is reached on 1 April 2014.
This means that for the year starting on 1 April 2011 the main corporation tax rate will be 27%.
Surprisingly Mr Osborne chose to also reduce the small companies’ rate. This means that from 1 April 2011 companies with a profit under £300,000 will pay corporation tax at 20%.
Taking into account national insurance contributions paid by the self employed these rates once again make incorporation an attractive option, although much depends on personal circumstances.
Contact Victoria at robinson+co if you require further information on 01900 603623.
The reduction in the tax rate is, however, offset by changes to the way expenditure on plant and machinery is relieved.
From April 2012 capital allowances will be given at 18% or 8% (rather than the current rates of 20% or 10%).
The real sting in the tail however is the reduction in the Annual Investment Allowance. With effect from April 2012 this will be reduced to £25,000. This is 75% less than the current allowance of £100,000.
We at robinson+co will of course be discussing these changes with our clients to ensure that maximum tax relief can be obtained when investing in your business, but please do not hesitate to contact your Engagement Partner for further information on either 01900 603623 or 01946 692423.
Employer’s National Insurance Contributions
It had already been announced that some of Mr Darling’s NIC increases would be cancelled, and a leak had ensured that the plans for a NIC “holiday” for some employers was not a surprise.
Full details of this scheme are not yet available but new businesses in certain areas can save up to £5,000 in employer NICs per employee for the first 10 employees. The scheme will run for three years and only applies to businesses started after 22 June 2010.
This scheme will apply to new businesses in Cumbria so please contact us at robinson+co on 01900 603623 or 01946 692423 if you need any help whatsoever.
Capital Gains Tax
The rumour mill worked overtime on this topic and the announcement by Mr Osborne proved to be an amalgam of the various rumours.
The tax rate for capital gains within the basic rate will remain at 18%, only increasing to 28% for capital gains which take one’s total income and gains above the higher rate limit (currently £43,875). Although this change is introduced immediately, it is by no means as large an increase as expected. The Chancellor acknowledged that a larger increase would have been self defeating.
However, the rate of 28% is still less than the highest income tax rate of 50% so big earners are likely to continue to seek to convert income to capital gains and benefit from a lower tax rate.
The Annual Exemption is to remain at the relatively generous £10,100.
Please contact Victoria on 01900 603623 or firstname.lastname@example.org for further advice in this area.
Mr Osborne has increased the lifetime limit for capital gains tax Entrepreneur’s Relief up to £5million with immediate effect. These capital gains are taxed at 10% no matter what level of income and other gains you have.
This is a huge increase and is likely to be warmly welcomed by the business world.
The personal allowance is to increase by £1,000 next April to £7,475. The Chancellor made much of the fact that this increase removes about 880,000 people from the tax net altogether, but the rumour mill suggests that this was a sop to the Liberal Democrats.
Children and Tax Credits
There are big changes to the tax credit regime with effect from April 2010:
• Credits will begin to be withdrawn at £40,000
• The withdrawal rate will be 41%, meaning you lose 41p of credits for every £1 you earn above the income limits
• The baby element and the age 50+ element are to be withdrawn completely
• Claims can only be backdated one month
• The income disregard will reduce to £10,000 from April 2012.
The Chancellor explained in some detail his thoughts behind the decision to freeze Child Benefit at the current level for the next three years rather than means testing or taxing the benefit.
Furnished Holiday Lettings
The Chancellor announced that the favourable tax regime for holiday lettings is not to be abolished after all. Alistair Darling had announced in the 2009 Budget that they were to be abolished, only to postpone the plans just before the election.
This announcement by the Chancellor means you can continue to set any holiday lettings losses against your other income.
However, there is to be a review that will look at:
• Ensuring the rules apply to properties in the European Economic Area
• Making it more difficult to qualify as a holiday letting
• Changing the way losses are relieved.
Although this is good news for the landlords of holiday accommodation in the short term, the review means that there remains some uncertainty as we look towards the future.
The government is to consult about the best way to restrict tax relief on pension contributions but in a surprise move the age at which one has to purchase an annuity is to be increased to age 77.
This applies to everyone who reaches 75 after 22 June 2010.
And the other stuff….
Mr Osborne made no changes to the rate increases to alcohol (cider excepted), cigarettes and fuel, meaning that the increases announced by Mr Darling in March will stand. Cider producers and drinkers were cheering when the above inflation increases announced in March were cancelled – the Chancellor’s attempt at good news in a gloomy speech.
The introduction of a bank levy got cheers from all sides of the House of Commons, as did the announcement that the UK would not be joining the Euro in this parliament.
The silence on the subject of Inheritance Tax was deafening.
And lastly, for some reason not actually mentioned in the Budget speech, there are arrangements to regulate the (non) taxation of MPs’ expenses - see http://www.hmrc.gov.uk/budget2010/bn30.pdf!
Please contact Victoria Bishop on 01900 603623 or email@example.com in the first instance if you require any advice about any of the matters raised by the Budget.