in his eleventh and probably final Budget, the Chancellor Gordon Brown talked about continued growth for the economy, increased business investment, incentives to save, and support for families. Brown confirmed his intention to modernise the corporate tax system and announced measures to help combat climate change. Nothing too surprising here!
Things got more interesting when Brown went on to announce changes in the corporation tax rates, a complete revamp of the capital allowances system, and the removal of the income tax lower rate for certain types of income. However, it was not until the end of the speech that Brown delivered his pièce de resistance: a reduction in the income tax basic rate from 22 per cent to 20 per cent, although this will not take effect until next year.
The Chancellor announced a reduction in the full rate of corporation tax for companies with profits above £1.5 million from 30 per cent to 28 per cent, taking effect from April 1, 2008, coupled with an increase in the small companies’ rate of tax from 19 per cent to 20 per cent from April 1, 2007.
The small companies’ rate is set to increase to 21 per cent in 2008 and 22 per cent in 2009. This move is an attempt to align the tax treatment of small companies with that of individuals running their business as a sole trade or partnership.
Significant changes were announced to the capital allowances system, some of which were most unexpected. These will affect most businesses, whether sole trade, partnership or company, and are as follows:
• The temporary rate of 50 per cent for first-year capital allowances for small businesses’ expenditure on plant and machinery has been extended for another 12 months.
• From 2008-09, there will be a 10 per cent writing-down allowance for certain fixtures integral to a building. This is a decrease from the current rate of 25 per cent. The scope and detail of the provisions will be subject to comment in a consultation process.
• From 2008-09, the writing-down allowance for expenditure on plant and machinery will be reduced from 25 per cent to 20 per cent.
• From 2008-09 there will be an increase in the writing-down allowance for long-life assets from six per cent to 10 per cent.
• The introduction of an annual investment allowance on the first £50,000 spent on plant and machinery from 2008-09. The finer details of this measure will be subject to consultation.
• With regard to industrial business allowances (IBAs) and agricultural buildings allowances (ABAs), in most cases, balancing adjustments on balancing events are no longer available from March 21, 2007, and the writing-down allowance for the second user is now based on the ex-owner’s written-down value before sale (rather than after). The aim is for IBAs and ABAs to be phased out over a period of four years.
The reduction in the general writing-down allowance to 20 per cent and the larger reduction to 10 per cent for the allowance available for fixtures integral to a building will be very unpopular with businesses and is likely to cause much debate within industry over the next year.
The government announced in 2006 that it intended to take action to tackle managed service companies’ (MSCs) schemes that have been set up and used to avoid paying Pay As You Earn (PAYE) income tax and Class 1 NICs. This type of arrangement typically involves the use of a composite or umbrella-type scheme, where workers receive a limited salary and the balance is paid as dividends or other payments outside the PAYE/NIC regime. Draft legislation was released for consultation in December 2006.
With effect from April 6, 2007, for PAYE and from August 6, 2007, for NICs, any income received by individuals providing their services through MSCs will be deemed employment income. The consequence of this will be that MSCs will have to operate PAYE and Class 1 NICs on all income payments to individuals.
In addition, where an MSC incurs a PAYE /Class 1 NIC debt and that debt cannot be recovered from the company, HMRC may transfer the debt to specified third parties. This could result in a charge on businesses that use workers operating through MSCs.
Changes have been announced to the rules in respect of Enterprise Investment Schemes (EIS), Corporate Venture Schemes (CVS) and Venture Capital Trusts (VCTs), and the companies attracting investment under these schemes.
A new employee test is to be introduced so that the company (or group of companies) raising money under EIS or VCT must have fewer than 50 full-time employees at the date on which the shares are issued. In addition, changes have been made in respect of subsidiaries. Under current rules, where a qualifying trade is carried on by a subsidiary, that company must be a direct 90 per cent subsidiary of the parent company. Changes announced will allow the trade to be carried on by indirect subsidiaries, provided the 90 per cent test is met.
Currently, the amount of funds that can be raised by EIS, CVS and VCT companies is not limited. The only test that has to be met is in respect of gross assets. Gross assets cannot exceed £7m before the investment and £8m after. Under the new rules, no more than £2m can be raised in any scheme in the 12 months ending with the date of the investment.
The employee test and investment limits will not apply in relation to investments made out of funds raised by VCTs raised before April 6, 2007, nor to EIS or CVS shares issued before the date on which the 2007 Finance Bill receives Royal Assent. All the remaining measures will have effect on or after April 6, 2007.
One announcement made by the Chancellor which will prove popular is a reduction in the basic rate of income tax from 22 per cent to 20 per cent from April 6, 2008. At the same time, the 10 per cent starting rate will be abolished for earnings and pension income. However, this will continue to be available for savings income and capital gains. The rates for dividends will remain unchanged.
It has been confirmed that the enquiry window for income tax self-assessment and most company tax returns will be one year following the submission of the return (rather than the filing deadline). The changes will apply to income tax self-assessment returns for 2007-08 and subsequent years, and for company tax returns for accounting periods ending after March 31, 2008.
The introduction of different filing dates for paper and online self-assessment tax returns has been confirmed following successful lobbying by accountants and other agents on original proposals. These new deadlines will apply to tax returns that are issued on or after April 5, 2008, and will relate to the 2007-08 tax year and subsequent years.
For paper returns, the new filing deadline will be October 31. For returns filed online, the deadline will continue to be January 31. For tax-payers filing paper returns who want HMRC to calculate their tax liability, the filing deadline will move from September 30 to October 31, to align with the new paper return filing deadline.
The fuel scale charge system has been changed and the revised charges, which apply to tax periods beginning on or after May 1, 2007, are based solely on the CO2 emission levels of the car, mirroring the system used for benefit-in-kind purposes. The new table has 21 bands with 5g/km increments and is intended to broadly replicate the charges arising under the old system.
Overall, the budget will result in increased complexity with the tax system for owner-managed businesses. They seem to have lost out once again, this time with an increase in the small companies’ corporation tax rate which is unlikely to be compensated by the changes to capital allowances. Most taxpayers have been left un-enthused by the 2007 budget.
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