Delivering his third Budget, earlier this week, the Chancellor of the Exchequer stated: 'We must stick to the course. So there will be no deficit funded giveaways today', writes Jeff Webber.
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He presented a Budget that is 'fiscally neutral over the five year period', with modest reductions in both taxation and spending. In this article we summarise some of the main tax measures that will affect businesses and individuals, and other measures that will help particular business sectors.
The headline - and much anticipated - measure was a reduction in the top rate of tax on income over £150,000 from 50% to 45%, but only with effect from 6 April 2013. This reduction (and the hope that a further reduction back to 40% will follow before too long) will reduce the incentive for individuals to shelter or defer taking income.
At the lower end of the scale, the standard personal allowance will be increased to £9,205 with effect from 6 April 2013. It is estimated that this will take a further 840,000 people out of the income tax net altogether, with over 23m other taxpayers benefiting to some extent.
The restrictions to personal allowances for those aged 65 and over have been attacked as a 'granny tax'. However, the rationale for the change, in view of the anticipated increase in the standard allowance to £10,000, is understandable, and it will eliminate complicated reductions in these allowances for those in receipt of higher incomes, with little more than a marginal adverse effect in many cases.
Company car benefit charges continue to rise. The fuel benefit charge will also increase from 6 April 2012. These changes will affect both national insurance contributions for employers and income tax for employees, so the position should be reviewed to ascertain whether the provision of a company car (and fuel, if applicable) is still tax-efficient. However, the additional 3% charge for diesel cars will be abolished from 6 April 2016, so diesel cars will then be taxed on the same basis as petrol cars.
Disappointingly, the proposed Seed Enterprise Investment Scheme, under which individuals will be able to obtain income tax relief on amounts subscribed for shares in new small trading companies (subject to maximum subscriptions of £100,000 per annum per individual, and £150,000 in total, per company), is to be more restrictive than was initially announced. The original proposals would have enabled such companies to be controlled by individuals who are associated (including business partners, spouses, parents and children), provided each individual held no more than a 30% interest in the company.
However, it was announced in the Budget that the interests of associated persons (other than siblings) will have to be taken into account for the purposes of the 30% interest test, meaning that it will not be possible for business partners or most family members to claim this relief for setting up their own new trading company. This will considerably restrict the attractiveness and usefulness of the new scheme.
The rate of Stamp Duty Land Tax (SDLT) on purchase of homes costing over £2 million is increased from 5% to 7% with immediate effect so, for example, the SDLT charge on the purchase of a home costing £2.5 million will be £175,000 instead of £125,000.
Corporation tax rates
In a surprise, but welcome, move, the main rate of corporation tax (for companies with profits over £1.5 million) will be 24% from 1 April 2012 - an additional 1% reduction on that previously announced. The rate will then be reduced to 23% from 1 April 2013, and 22% from 1 April 2014. The government hopes that this will help to dissuade companies from leaving the UK, and attract inward investment from overseas.
As previously announced, the rates of annual writing down allowances are to be reduced from 1 April 2012, from 20% to 18% in the case of plant and machinery, and from 10% to 8% in the case of long life assets and integral features in buildings. The annual investment allowance will also be considerably reduced from £100,000 to £25,000. These changes make it more important to transfer assets with a useful life of less than eight years to a separate short life asset pool, in order to accelerate allowances for those assets.
The 100% first year allowances for low emission cars will be extended for two years beyond the current expiry date of 31 March 2013. However, the qualifying emissions threshold will be reduced to 95g/km (down from 110g/km) from April 2013 to match EU emissions targets for 2015. These proposals will mean that businesses can claim 100% heightened allowances on any such purchases until at least March 2015, although it will be more difficult to meet the requirements to be granted the accelerated relief.
Enhanced capital allowances on plant and machinery investment will be available from 1 April 2012 for designated enterprise zones in London, Scotland and North Wales, in addition to the Enterprise Zones previously announced.
Tax simplification for small businesses
The government proposes to allow small unincorporated businesses with a turnover of up to £77,000 to prepare accounts on a cash basis and use a simplified expenses system for some categories of expense. This should help to make it easier for such businesses to calculate their tax liabilities.
Employment tax issues
The Enterprise Management Incentive scheme, under which employees can be granted tax-efficient options to buy shares in their company, has received a boost, with a long-overdue increase to the limit on the value of shares under option from £120,000 to £250,000, with effect from 6 April 2012. A change in the Entrepreneurs' Relief rules should, it appears, also enable employees with shareholdings of less than 5% to benefit from the 10% rate of capital gains tax on disposal of shares with effect from 6 April 2013 - a significant improvement on the current applicable rates of 18% and 28%.
The government has confirmed its intention to press ahead with full implementation of the PAYE Real Time Information system for all employers by October 2013. This will be a major change, and employers should not delay reviewing what needs to be done, especially with auto-enrolment of employees into a Qualifying Workplace Pensions Scheme also due to begin in October 2012.
The VAT registration threshold will be increased by more than the usual amount, from £73,000 to £77,000 from 1 April 2012.
From 1 October 2012, zero-rating for alterations to listed buildings used for residential or charitable purposes will be withdrawn. Such work will then be standard-rated, in line with repair works. Zero-rating will also be withdrawn from the sale of a freehold or long lease of some substantially reconstructed listed buildings.
Also from 1 October 2012, standard-rating will apply to:
* all sales of hot food (except freshly baked bread) for consumption on or off the premises;
* sales of sports nutrition drinks;
* the rental of specific chairs to hairdressers; and
* supplies of holiday caravans (i.e. those not designed for continuous all-year round occupation).
Boosts for particular sectors
* Corporation tax reliefs for the creative sector: corporation tax reliefs for the production of culturally British video games, television animation programmes and high end television productions (similar to the existing relief for film productions) will be introduced from 1 April 2013, subject to the grant of EU state aid approval.
* Additional government spending on infrastructure projects should create additional work for businesses and employees engaged in the relevant areas. Plans include new investment in road, rail, construction, housing, super-fast broadband, mobile coverage, aerospace technology and allowances for oil and gas production in the Shetland Islands area.
* Additional finance will be provided for businesses through the National Loan Guarantee Scheme, the Business Finance Partnership and the Enterprise Finance Guarantee scheme.
The government continues with its programme to clamp down on tax avoidance. Several measures have been announced to end particular schemes, including some involving capital allowances, asset-backed contributions to pension schemes and contrived losses arising from property businesses and the use of post-cessation reliefs.
The rate of SDLT for the purchase of UK residential properties costing over £2 million by entities such as companies and unit trusts has been increased to 15%. Although this is targeted at avoidance arrangements used by individuals, there may be adverse effects for new property development companies, because an exemption from the new higher rate will only apply to property development companies that are more than two years old. The final legislation will need to be carefully reviewed to establish exactly what the detrimental effects might be.
The government also intends to introduce a new package of measures in 2013 to tackle avoidance through the use of personal service companies by individuals.
In a broader measure, a General Anti-Abuse Rule will also be introduced in Finance Bill 2013. This will be designed to prevent tax avoidance through the use of any artificial or abusive scheme.
Although this Budget is broadly tax-neutral overall, there are as usual winners and losers, both for individuals and businesses. It is hoped that the government's determination to "stick to the course" will have the desired effect, restoring the fiscal balance whilst at the same time not endangering recovery, for which the outcome is still, at present, uncertain.
Jeff Webber is a tax director with BDO LLP. firstname.lastname@example.org