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.

Don’t be a Tax Turkey

Christmas is a time to give and to party. If you stick to the limits imposed by HMRC, this is one of the few times you can experience a free lunch – for real!

Here’s a brief lowdown on the tax implications for employers (and customers) hoping to spread some Christmas Cheer this year.

Xmas Gifts

Minor gifts such as a turkey, a bottle of wine or a box of chocolates are exempt from tax as long as all employees receive similar items.

Note here the words similar and all. In short, if the business is treating the directors to a weekend Spa break whilst giving the shop floor staff Christmas Puddings, you are breaking the terms of the exemption and the HMRC may regard the Spa Break as a taxable benefit.

Christmas Parties

Parties are not considered a taxable benefit where:

the function is available to the employees generally;
the function is available generally at a particular location (in other words, functions in other parts of the country qualify for the exemption subject to the same monetary limits and conditions);

The limit is £150 per head for the total cost of providing the party (to include transport or accomodation incidental to the event), divided by the number of attendees;

The total cost must include VAT and other costs, such as entertainment;

This exemption can be applied to more than one gathering in one year, but the aggregate cost may not exceed £150 if the full exemption is to be claimed;

VAT is reclaimable on the cost for employees;

Where a charge is made for guests, the VAT on those costs is likewise reclaimable. However, the sum charged for guests is treated as VAT- inclusive and the VAT element will be paid over as output tax.

Note that the key word here is attendee – you can’t claim the exemption for the employees that choose not to attend!

Benefits from Customers/Suppliers

Exemptions are made where:

Entertainment is provided to an employee, or a member of the employee’s family or household where is is provided by a third party not connected to the employer and not procured by the employer;

Company Policy does not prohibit staff from attending the function

A small gift is also exempt as long as it is:

not procured by the employer;

not a reward for a specific service;

limited to £250 and less;

not cash or securities or a voucher that can be converted to cash.