Pre-Budget Report

PLEASE NOTE THAT THIS POST IS POST HAS BEEN WRITTEN FOR INFORMATION ONLY. YOU ARE ADVISED TO CONSULT A TAX SPECIALIST BEFORE INVESTING IN CAPITAL EXPENDITURE.

“Simplification” was the recurring theme of Alistair Darling’s first Pre-Budget report.

In addition to announcing sweeping changes to the tax relief given on the disposal of assets (“Taper Relief”), Mr Darling gave notice of changes in legislation to prevent amongst other things; Income Shifting, re-routing of employer pension contributions to new companies and using tax relief to delay urgent fire safety improvements on buildings.

Here’s a quick overview of the report:

Change to the Capital Gains Tax (CGT) regime from 6th April 2008 in which the rate of Taper Relief is simplified to a flat rate of 18% for the disposal of assets and the abolition of Indexation Allowance (a method of tax relief to offset the cost of inflation incurred on an asset).

Share identification rules have been simplified. With the changes to taper relief and the scrapping of the Indexation Allowance, from 6th April 2008 all shares of the same class in the same company will treated as a single asset. Certain anti-avoidance measures will stay in place.

Please note that the annual exemption will remain in place. For the current tax year 2007/2008 this stands at £9,200.

Mr Darling announced the start of a ’significant programme of tax simplification’. To get the ball rolling, three reviews will begin this autumn involving the HM Treasury and the HMRC who in turn will consult with businesses to see how a number of tax policies can be simplified.

To begin with, these reviews will focus on the following;

how to simplify VAT rules and administration in the UK and the EU

how anti avoidance legislation can best meet the aims of simplicity and revenue protection

how to simplify the corporation tax rules for related companies.

Tax relief for pension contributions. Employers generally get tax relief against their taxable profits for contributions paid to a registered pension scheme. Relief is given for the accounting period in which the contributions are paid.
Tax relief for some large contributions (above £500,000) may be spread over a period of up to four years. This system has been abused by some employers by routing these contributions through a new company. To combat this the government has announced that legislation will be introduced in Finance Bill 2008 to ensure that the rules that spread tax relief for large employer pension contributions relative to their contribution in the previous year cannot be circumvented.
Takes effect for payments made on or after 10 October 2007 under binding obligations entered into on or after 9 October 2007.

Fire safety capital allowances. From April 2008 capital allowances for expenditure on building alterations, made in response to a notice from a Fire Authority, will be withdrawn. This is an attempt by government to prevent businesses delaying vital safety work in order to get a prohibition notice simply to claim the relief. Note that relief for expenditure on fire safety equipment such as fire alarms and sprinkler systems will continue to be available for all businesses.

VAT and housing. Currently VAT is chargeable at 5% on renovations or alterations to residential properties that have been empty for at least three years. From 1 January 2008 onwards this reduced rate for VAT will apply only to renovations or alterations carried out to residential properties that have been empty for at least two years.

Income Shifting. In July 2007 Mr & Mrs Jones of Artic Systems Ltd won their long-running case against the HMRC in the House of Lords. The Jones’ crime had been to split their company’s profit equally between them as dividends and then arranged to be taxed separately as individuals. Since Mr Jones’ income ( and therefore his taxable income) was higher than that of his wife, the HMRC maintained that this action constituted a form of tax evasion.
Unsurprisingly, the UK government spat out its dummy and announced that it will shortly be releasing for consultation draft legislation to take effect from next April. Note that the legislation is only concerned with tackling income shifting where earnings arising from company dividends or profits from partnerships.

Company cars and the fuel scale charge.Where a car is provided for an employee’s private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions (at present the percentages range from 15% to 35% for most vehicles). Discounts are available for environmentally friendly cars and from 6 April 2008 a 2% discount for cars will be introduced that have been manufactured to run on E85 fuel.

Where fuel is provided free of charge to an employee for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit and a ‘multiplier’, which is at present stands at £14,400. For 2008/09 the figure will increase to £16,900.

National Insurance Contributions (NICs). In the last budget the Chancellor announced major changes to the limits between which NIC are payable. From April 6th 2008 the Upper Earnings Limit (UEL) – the point at which earnings are subject to NIC at a rate of 1% will be increased by £75 per week above indexation.
Similarly, from next April the upper profit limit for Class 4 NIC for the self-employed will also increase by the same amount. From April 6th 2009 the UEL will be set at the rate at which the higher rate of income tax is payable.

Tax relief for business cars: an Update. A second discussion document about business expenditure on cars in March 2007 and the treatment of cars for tax relief was issued by the government. Subsequently, the government has issued a summary of responses to the above proposals. Many respondents concur that reform is needed but no agreement has been reached. Therefore, the government has not yet issued how it plans to reform this area of tax relief.

Statutory Holiday Entitlement & National Minimum Wage

Statutory Holiday Entitlement increased from 20 days to 24 daysfrom 1 October 2007 for an employee working a five-day week (Pro-rata for part-time staff).

From 1 April 2009 Statutory Holiday Entitlement will increase again to 28 days for an employee working a five-day week.

National Minimum Rates also went up on 1 October 2007.

The rates are now as follows;

Development Rate for workers aged 18 – 22 years is £4.60 per hour

Development Rate for 16 & 17 year olds is £3.40 per hour

The Adult Rate is now £5.52 per hour

Accommodation Offset is now £30.10 a week (£4.30 a day)

Note these rates only apply to periods worked from 1 October 2007.

New Statutory Maternity Pay Arrangements

1st April 2007 heralded changes to the Maternity Pay Period. These changes apply where a baby is due on or after 1st April 2007.

As before the criterion remains the due date – the actual birth date is of no consequence. Nowadays it is recognised that women can give birth to live babies at 22 weeks. Therefore, in the case of a baby due on April 1st 2007 but actually born in late November 2006, the new arrangements apply from that date.

Key Changes

the Maternity Pay Period (MPP) has been extended from 26 weeks to 39 weeks.

the women chooses which day of the week the MPP begins – previously MPP kicked in on the Sunday after the woman took maternity leave;

A woman will able to carry out up to ten days’ paid work (Keeping in Touch days) for her employer without loss to Statutory Maternity Pay (SMP) during the weeks these days fall in - until recently women lost her SMP entitlement for the whole week in which she worked in whole or in part. Two points to bear in mind: firstly, regulations prohibit a woman from working for two weeks immediately after the baby is born and secondly, although it’s a matter entirely between the employer and employee, KIT days may be taken in any combination. However if the woman works only part of a day she will be deemed to have used a whole KIT day;

the weekly rate of SMP will be divisible by seven so that a daily rate can be used to enable SMP payments to slot in with existing pay practice – most useful where monthly pay is applied; and

the standard rate of SMP, Statutory Paternity Pay (SPP) and Statutory Adoption Pay (SAP) has risen to £112.75 per week from April 6th 2007.

Incidentally, the extension of the pay period to 39 weeks, together with the intoduction of KIT days during the MPP without loss of SMP applies also to SAP. Likewise, the ability to receive the benefit on a daily basis also applies to SPP and SAP.