DRAKE AND CO

Drake & Co

Chartered Accountants and Registered Auditors

22 April 2009

APRIL 2009 BUDGET

This newsletter is for the use of clients and others on request. It provides concise information on selected topical issues and you should seek our further advice on any matter before action is taken or refrained from as a result. We can accept no responsibility for loss occasioned to any person’s action or refraining from action as a result of reliance upon any information herein. You are reminded that many of the Budget proposals remain subject to ratification and/or amendment by Parliament so may yet be varied. Rates quoted are correct at 22 April 2009.

BUDGET - HEADLINE CHANGES

For most taxpayers this was a quiet budget as far as 2009/10 tax year is concerned.
There were some significant changes announced that would impact from 6 April 2010 but these must be viewed as somewhat speculative, partly because this Government has a track record of changing its mind between initial announcement and actual implementation, and partly because one must question whether a Labour Government will still be in power this time next year.
Some of the more important changes that have been announced for 2009/10 are:

INCOME SHIFTING

The Chancellor has still not legislated to tackle many of the advantages of a limited company structure for trading, including the supply of personal services (provided outside IR35), distributing earnings largely by dividend, which is common practice in the IT industry and for many other small businesses.
One piece of welcome relief announced prior to the budget was the postponement for a further year, to April 2010, of the introduction of new legislation designed to catch “income-shifting”, e.g. dividends routed to a non-working spouse, but in practice likely to have much wider ramifications.

IR35 UPDATE

There have now been many Court and Commissioners’ cases about the issues raised by IR35. One in 2008 (“Dragonfly”) was lost by the taxpayer and has raised much uncertainty, particularly where there is an agency involved in the contract. We recommend that you review again the circumstances of your contractual arrangements to ensure that you do not fall foul of IR35.
This remains an unsatisfactory aspect of the law, made more difficult because Employment Tribunals tend to be interpreting a number of contracting situations as acquiring employment rights, even where they would not be regarded as employment within the IR35 parameters.

COMMENCING SELF-EMPLOYMENT

Where anyone commences a self-employment or joins a partnership and is not already registered with HMRC as self-employed they must notify, or ask us to notify, HMRC within three months of commencing that self-employment, on pain at present of a starting fine of £100 for late notification.

CAPITAL GAINS TAX

For the first time in many years there have been no major changes to the capital gains tax rules.

TRADING LOSS RELIEF

The loss carry back proposals in the pre-budget report have been improved. For a company, the losses arising in corporation tax accounting period ending between 24.11.08 and 23.11.10 will be available for a three year carry back. For income tax, losses arising in 2008/09 or 2009/10 will also be available for three year carry back. There is a restriction of £50K of loss carry back by more than one year, for each loss making period. The £50K will be restricted where the accounting period is less than a year.
The Business Payment Support Scheme is being refined to permit Time to Pay applications to reflect current period losses which will be carried back against previous profits, even when the accounting year has not finished and/or the exact losses are not ascertained.

CAPITAL ALLOWANCES

Cars emitting no more than 160g/km are to be included in the main pool but will not attract the Annual Investment Allowance (“AIA”). They will attract a writing down allowance therefore of 20%. Cars emitting more are included in the special rate pool and will attract a writing down allowance of only 10%. Restrictions on lease payments will apply to higher emitting cars and to shorter term hire periods in excess of 45 days.
Motorcycles will no longer be treated as cars so will be eligible for AIA.
Businesses incurring qualifying capital expenditure in the main pool in excess of the £50K AIA will be able to claim for 2009/10 only a first year allowance of 40% on the excess over £50K, rather than 20%.

VAT

The VAT standard rate reverts to 17.5% from 15% on 1 January 2010. There will be legislation to try to prevent abuse of the system, e.g. pre-billing before the change in rate.
From 1 January 2010 U.K. businesses will be able to submit claims electronically to HMRC to reclaim VAT incurred in other EU countries. Claims can be made up to nine months after the calendar year in which the VAT was incurred.

EIS RELIEF

There have been a number of improvements to the EIS scheme. The previous rule that permitted only half of the amount invested to be carried back has been scrapped for 2009/10 onwards.

INCORPORATION OR SELF-EMPLOYMENT?

In spite of various changes to the tax regime, the system overall still significantly favours a limited company rather than self-employment, employment, partnership or LLP. The overall savings by incorporation as a limited company can be significant. There is also the benefit of limited liability.
Many of our clients have incorporated over the years and we will be pleased to advise anyone who is interested but has not yet taken this step. At a level of profit of £40K pa, the annual savings are over £3,000 pa.

RESEARCH AND DEVELOPMENT

The R&D tax credit rose from 150% to 175% for small companies and from 125% to 130% for large companies from 1 August 2008. This is a significant tax benefit and you should review your operations to identify whether you might be eligible.

SHARES ISSUED TO EMPLOYEES

Where shares are issued to employees or directors of companies there is often a requirement to file Form 42. Where we are aware of such share issues by a client in 2008/09 we will draw up the relevant Form 42 for approval but where an issue has been made that we are not aware of you will need to advise us if you wish to have our assistance with the form. There are penalties for late filing.

NATIONAL MINIMUM WAGE

This is currently £5.73 per hour for those aged 22 and over. For workers aged 18 to 21 the current rate is £4.77 per hour. For workers aged 16 who are no longer of compulsory school age, and 17 year olds the current rate is £3.53 per hour. The rates normally change in October but this year we have as yet had no notification of any planned changes to rates for October 2009. The minimum wage help line number is 0845 6000 678 or you can use www.berr.gov.uk

FURNISHED HOLIDAY LETTINGS

The current beneficial tax rules for furnished U.K. holiday lettings are in breach of E.U. law because they are restricted to only U.K. properties. Rather than alter the law to permit properties E.U.-wide to be brought into the scheme, it has been decided that the scheme will instead be scrapped for 2010/11 onwards.
Amongst other things this means that entrepreneur’s relief will no longer be available so if wishing to take advantage of entrepreneur’s relief, a sale by 5 April 2010 would be required.
If you have held property within the EEA that would have been eligible if the rules to date had allowed non-U.K. properties to be within the scheme, retrospective claims can now be made as far back as 2003/04 tax year and will be possible for 2009/10.

ISA

The ISA limit for 2009/10 is increased only for those aged 50 or more, to £10,200 (£5,100 for a cash ISA).

VAT ON INTERNATIONAL SERVICES

There is to be a fundamental change in 2010 to the rules related to place of supply of international services, which will lead to services generally being taxable where consumed. There will be amended time of supply rules and a requirement to enter services on EC sales lists. Most changes will be effective from 1 January 2010.

AGRICULTURAL PROPERTY AND WOODLANDS

Agricultural property relief and woodlands relief will be extended to apply to property in the European Economic Area from 22 April 2009.
This will therefore allow capital gains tax holdover relief for such property.

ANTI-AVOIDANCE

The Chancellor has in his budget introduced a number of proposals to combat tax avoidance, many of which are not detailed in this newsletter and affect relatively few individuals or companies. Should you have any tax planning schemes under consideration or in operation please contact us for an update.
There were a number of changes to many areas of taxation, not detailed in this newsletter, some of which may affect tax exposure and planning significantly for some individuals, trusts and businesses. The principal budget changes that we believe to be of wider interest only are set out in this newsletter.

2010/11 INCOME TAX CHANGES

The higher rate of 50% income tax (rather than 45% announced only five months ago) is now proposed to apply for 2010/11 (rather than a year later as previously announced). The rate on dividends will also be increased by 10% to match this increase. These higher rates are proposed to apply to taxable income over £150K p.a.
Individuals with “adjusted net income” of £100K will lose £1 of personal allowances for every £2 that their income exceeds this limit. This is also a change to the original proposals.
The rate of tax relief on pensions will be restricted to basic rather than higher rate for those with incomes of £150K or more. There will be anti-forestalling measures to prevent “excessive” contributions before 6 April 2010. The rules will impose a special annual allowance. It will be restricted so that it affects only those making contributions in excess of £20K in a tax year, but will also apply to contributions made by the employer, and to enhancements of benefits in defined benefit schemes.
The cap on company car list price of £80K will be abolished meaning that those with company cars above that list price will pay more tax on them as a benefit in kind.

TAX PENALTIES

Penalties for late payment of tax and late filing of returns will be amended. For the first time there will be a penalty on employers who pay PAYE/NI late during a tax year, with a rising penalty determined by the number of late payments made. There will also be penalties for late payment of corporation tax.

INCOME TAX PERSONAL ALLOWANCES

CAPITAL GAINS TAX EXEMPT AMOUNT

CAPITAL GAINS TAX RATES

Entrepreneur’s relief remains available for 2009/10.

INCOME TAX BANDS

There is a 10% band for savings income only of up to £2,440 in 2009/10 (2008/09: £2,320) but only if the individual’s non-savings income is below that level and then only up to that level.

NATIONAL INSURANCE RATES FOR EMPLOYEES

Contributions are deemed to be made on income between the lower earnings limit and the earnings threshold although none are actually made, thereby earning entitlement to certain state benefits.

NATIONAL INSURANCE FOR THE SELF-EMPLOYED

A certificate of exception must be applied for when annual profits are expected to be below the small earnings level of £5,075 pa for 2009/10. It is not automatic.

VOLUNTARY NATIONAL INSURANCE

COMPANY VANS – PRIVATE USE

There is no taxable benefit where an employee is required to take a van home at night but is allowed no other “substantial” private use.

STAMP DUTY LAND TAX

There are no changes except that the stamp duty holiday for residential properties up to the value of £175,000 remains until 31 December 2009.

FUEL RATES FOR COMPANY CARS

These rates are altered by HMRC on 1 January and 1 July and also will consider further changes if the cost of fuel moves by more than 5% since last reviewed.

CORPORATION TAX

The above thresholds change when there are any connected companies.

WORKING AND CHILD TAX CREDITS

Most elements and thresholds have increased for 2009/10. Details are available on request.

TAX FREE INCLUSIVE BUSINESS MILEAGE RATES

These rates include the VAT-inclusive petrol element.

An employee who receives less than these rates can claim tax relief from HMRC on the difference, up to the above levels.

COMPANY CAR AND FUEL BENEFIT

The income tax charge for availability of a company car is based on a percentage of the car’s original list price by reference to its CO2 emissions. The 2009/10 rates, unchanged from 2008/09, are:

For pre-March 2001 cars the emissions figure, if available, can be found at www.vcacarfueldata.org.uk

Different rules apply for cars without an emissions figure and different rates apply for gas, electric, LPG and hybrid cars.

Most cars aged 15 years or more and with a market value of £15K or more at the end of the tax year substitute market value at the end of the year of assessment for original list price. This makes many classic cars worth less than £15K a highly efficient company car as those remain based on original list price.

The car fuel benefit where any private fuel is provided is calculated by multiplying the fixed figure of £16,900 (2008/09: £16,900) by the relevant percentage from the table above.

VAT - QUARTERLY SCALE CHARGES

The scale charges and associated VAT liability are linked to the CO2 emissions of the vehicle and detailed tables of these rates have been published by HMRC. We have not reproduced the tables here but they can be found on HMRC’s website at BN69.

INHERITANCE TAX THRESHOLD

PENSION CAPS

VAT REGISTRATION LIMITS