Gordon Brown’s ninth Budget statement presented him with the classic dilemma of announcing measures that would have popular appeal - and thereby enhance Labour’s prospects at the upcoming General Election but which would, at the same time, continue to demonstrate his famously ‘prudent’ management and stewardship of the economy. Specific voter groups were appeased by specific reliefs with the funding for these initiatives coming from businesses.
But what does it mean for smaller businesses? The Chancellor has announced an intention to enter into consultation with smaller businesses aimed at reducing their compliance burden. This move is, of course, to be welcomed but it should be noted that the UK system of taxes is rapidly reaching a limit in complexity and radical initiatives are required in order to reduce the level of red tape.
A 100 per cent relief has been announced in relation to the capital costs arising on conversion or renovation of business premises in designated disadvantaged areas. Individuals or companies who own or lease properties in disadvantaged areas that have been unused for at least 12 months will be able to secure full tax relief for any capital costs incurred in bringing those premises back into business use. This provision will encourage the redevelopment of commercial property in specific areas. However, it should be borne in mind that the provision will be a temporary feature and, in time, will be abolished.
A limited number of taxpayers have implemented complex schemes aimed at securing a deduction under the intangible fixed asset regime. The Revenue has confirmed its intention to introduce tax planning in order to mitigate the benefits of such schemes.
The Chancellor reiterated his commitment to education and confirmed that from September 1, 2005, payments of up to £15,000 may be made free of tax and NIC by employers to employees who are in full-time education. The payments must, however, relate to specific items of expenditure such as accommodation and travelling costs. Tuition fees are specifically excluded.
There will be no tax charge for employees who buy, on an arms’ length basis, computer equipment and bicycles previously loaned to them by their employer. This move will simplify reporting of such transactions.
With regard to company cars, the company car fuel benefit charge has been frozen for 2005/2006 at £14,400. The company car benefit charge is calculated using the car manufacturer’s list price, multiplied by a percentage determined by reference to the CO2 content of the car’s exhaust. Tax deductions are available where cars are powered by alternative fuels.
When it comes to tax avoidance, a number of measures have been announced specifically in order to counter specific financial schemes that have been disclosed by taxpayers and promoters to the Revenue under the FA 2004 tax-disclosure rules. It is clear from the changes announced that the tax-disclosure rules introduced by the Chancellor are having a substantial impact in that they are providing the Revenue with advance warning of tax planning strategies deployed by tax payers. The Revenue, armed with this knowledge, has underlined its willingness to act decisively in those areas where it feels that abusive tax practices are being carried out.
While the Revenue has confirmed its intention to act in relation to specific schemes, it is not clear whether the relevant legislation will be drafted so as to catch only these specific abuses, or whether the provisions will be more widely drafted on a ‘catch all’ basis.
On Stamp Duty and Stamp Duty Land Tax a raft of changes have been announced, including the withdrawal of an exemption for Stamp Duty Land Tax in relation to commercial property transfers in disadvantaged areas. In addition, the government has extended the scope of the tax disclosure rules introduced by the Finance Act 2004 to Stamp Duty Land Tax schemes and introduced measures to counteract specific Stamp Duty and Stamp Duty Land Tax planning strategies.
From April 1, 2005, the annual VAT registration and deregistration thresholds will be increased by £2,000 to £60,000 and £58,000 respectively. An extension has been announced to the disclosure rules to include two new schemes, namely the exploitation of differences between the UK and other EU member states of vouchers and arrangements involving the option to tax in relation to supplies of land and property.
On pensions a number of technical amendments were announced in relation to schemes as a precursor to the introduction of the new pension tax regime on April 6, 2006.
The government has also announced that the Pension Protection Fund will be tax exempt and will not be subject to tax in relation to its income and gains. Furthermore it will not be required to account for tax on the payments made to potential claimants.
When it comes to trust taxation, in the 2004 Budget, the Chancellor announced a series of proposals which were intended to simplify the taxation of UK trusts. During consultation with various professional bodies a number of concerns were raised. The main points raised during consultation were published on March 16, 2005.
It has been announced that the Inland Revenue will carry out further development work and a discussion paper has now been published. Draft legislation is likely to be published later this year and further consultations will be initiated before the proposed legislation is introduced.
In the meantime, it is proposed that legislation will be introduced in the current Finance Bill to implement two measures that were proposed in 2004:
• A new tax regime for trusts with vulnerable beneficiaries (to be backdated to April 6, 2004);
• A standard rate band of £500 for all trusts taxed at the rate applicable (effective from April 6, 2005).
The proposal for a 40 per cent tax rate applicable to trusts to combat tax avoidance remains in place.
On capital gains it has previously been possible for individuals who have left the UK to realise a capital gain tax free, and to return to the UK without incurring a tax liability on their return even if they had been resident outside the UK for less than five complete tax years. Such individuals would have been regarded as “temporary non-residents”.
This form of avoidance was possible if the individual became resident in a country which had a favourable capital gains clause in its double-tax treaty which effectively denied taxing rights to the UK. Legislation is proposed which will confirm that the Inland Revenue will, in future, be empowered to charge capital gains tax if an individual realises a gain by disposing of assets at a time when he is resident in another country, even if the country of residence has a clause in its tax treaty with the UK which gives taxing rights only to the overseas country.
In conclusion, one of the distinguishing features of this budget was the impact that the disclosure rules for tax schemes are having and, in particular, the Revenue’s willingness to act decisively. The elimination of tax anti-avoidance and other perceived abusive tax practices represent a very personal crusade for the Chancellor - this can only reduce the opportunities for significant tax planning in future.
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