This year’s pre-Budget report was awaited more eagerly than in previous years, with businesses and families looking to see how the government was going to help them through the recession.
The Chancellor began his speech by stating that his aim was to “provide support and protection for families and businesses when they need it most”. Will his proposals achieve that aim, or do they fall short? We look at the main tax measures and consider whether they will be a help or hindrance to business.
VAT
The headline measure was the temporary cut in the standard rate of VAT from 17.5 per cent to 15 per cent that will take effect on December 1, 2008 and last until December 31, 2009. The Chancellor stated that this, “by encouraging spending, will help stimulate growth”.
However, the general reaction from both businesses and consumers is that this is a relatively small price cut compared with the 20 per cent discounts that some retailers are offering to attract customers in the traditionally busy pre-Christmas period. It has also been suggested that any noticeable effect is more likely to occur in a year’s time, if people make some larger purchases just before the VAT rate returns to 17.5 per cent.
So businesses may have to wait some time to see any positive effect, but in the meantime they will incur real and immediate costs in implementing the change to the VAT rate. They will have quite a long ‘to do’ list, all at a time when cash is tight, including:
• repricing items;
• reprinting stationery such as invoices, price lists, menus, brochures and catalogues;
• adjusting equipment and accounting systems; and
• amending online information, ordering and payment systems.
Even small businesses that use the Flat Rate Scheme to simplify their VAT accounting will be affected, as the special flat rates for all categories of business will also change with effect from December 1, 2008.
All in all, the costs and administrative burden will be quite significant. Many businesses will not be able to pass on the full VAT reduction, and some have said that it is just too much trouble for the small amount involved. And they will have to repeat the whole process in 13 months.
Although the main thrust of the rate cut is to encourage consumers to spend, businesses that are wholly or partly exempt from VAT will benefit from lower VAT-inclusive bills.
Enhanced loss relief for businesses
For a period of 12 months, companies and unincorporated businesses will be able to carry back trading losses for up to three years, rather than just one year as at present.
The proposal will apply to companies that suffer a loss in an accounting period ending in the period November 24, 2008 to November 23, 2009. In the case of sole traders and partnerships, the relevant loss is a loss for the 2008-09 tax year. So, for example, if a sole trader or partnership has an April 30 year end, and they made a profit in the year ended April 30, 2008 but a loss thereafter, it appears that they would be unable to take advantage of this relief unless they changed their next accounting date to, say, March 31, 2009 - which could have adverse cash flow implications in the longer term. So once again, this measure may not clearly benefit all those businesses that it is intended to help.
The idea of extending the carry back period is good in principle, but its effectiveness is limited by:
• restricting the amount that can be carried back more than a year to just £50,000;
• not allowing a loss to be carried back more than a year against other income; and
• limiting the duration of this extra relief to a 12-month period.
Income shifting shelved
Perhaps the best piece of news for family businesses was the announcement that the ‘income shifting’ proposals have been shelved indefinitely. These proposals, drafted in 2007 after HMRC lost the Arctic Systems case, would have interfered with the way in which family businesses allocate profits, salaries and dividends. The draft legislation appeared unworkable and would certainly have required businesses and their advisers to spend a considerable amount of time each year in trying to decide whether income had been shifted. Hopefully, we can all now spend that time more profitably in looking after our businesses during this recession.
Delaying a corporation tax increase
The small companies’ rate of corporation tax that was due to have been increased from 21 to 22 per cent from April 1, 2009, will not now be changed until April 1, 2010. This will certainly be a welcome brief respite for companies.
Disappointingly, there will be no reduction in the main rate of corporation tax from 28 per cent, and the hopes of house buyers and house builders for an extension to the scope or duration of the Stamp Duty Land Tax holiday were similarly dashed.
Help in paying tax bills
The proposal to allow businesses more time to pay their income tax, corporation tax, PAYE & NIC and VAT liabilities is a very good idea.
However, instead of HMRC simply extending payment deadlines (or not chasing unpaid amounts) for a set period, businesses that are experiencing difficulties will need to contact a new Business Payment Support Service to discuss and agree an ‘affordable payment timetable’. Interest will still be payable on amounts paid late.
A reduction in the main rate of interest on overdue income tax and corporation tax payments from 6.5 to 5.5 per cent has already been announced, and will take effect from December 6, 2008.
HMRC says that it would hope to give a decision in about 10 minutes in most cases. This suggests that the process will be little more than a formality - although there is plenty of scope for inconsistency depending on the HMRC adviser to whom a caller happens to speak, and a general temporary relaxation might have been more helpful.
The Support Service telephone number is 0845 302 1435.
Employees’ and employers’ liabilities
The small benefit that some taxpayers will receive from the increases to their personal allowance in April 2009 will be outweighed by the increases in income tax and national insurance rates in April 2011. From that date, a new 45 per cent tax rate will apply to individuals with an income of more than £150,000, and there will be a 0.5 per cent increase in national insurance contributions for most employees. These increases may provide a fresh incentive for employers and employees to consider tax-efficient salary sacrifice arrangements.
Employers’ national insurance contributions will also be subject to a 0.5 per cent increase in April 2011, and in the meantime (in addition to the extra VAT administrative work) they will have to change payroll procedures to implement other tax and national insurance changes in April 2009 and April 2010.
Finally, it has been announced that no further action will be taken at present to restrict tax relief for travelling expenses incurred by workers for umbrella organisations.
Conclusion
Not all businesses will benefit from the tax “helps” offered in this pre-Budget report - the VAT reduction is unlikely to have a significant effect, and other measures will only apply to some businesses and sectors. However, the “hindrances” in the form of increased administrative burdens and compliance costs will apply to all VAT-registered businesses and any businesses with employees - the vast majority. It is certainly to be hoped that other measures, such as lower interest rates and encouragement to banks to start lending again, will contribute more to supporting businesses and stimulating the economy.
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