Overview As the economic climate worsened and
slid from credit crunch to global crisis over recent months, it
became clear that the 2008 Pre-Budget Report (PBR) would be
dominated by macro economics.
In an unprecedented departure from 'Budget Purdah', the
Chancellor of the Exchequer, Alistair Darling, appeared on daytime
television on 30 October and promised there would be no tax
increases this time around. He indicated that his prescription for
the nation would be to put more money into people's pockets to
Mr Darling appeared on television again the day before the PBR
and much of his speech was common knowledge before he finally
addressed MPs. Consequently, there were no real surprises in the
thrust of the report and no last minute 'rabbit out of the
hat' finale as we came to expect with Mr Brown.
VAT reduction and subsequent tax increases
With all of that high-profile leaking, we had already been
softened up to expect a Robin Hood type budget where the
'better off' would be squeezed to pay more income tax so
that VAT could be reduced so as to encourage spending. The first
income tax increases relate to the restriction of personal
allowances and will impact on those with taxable incomes over
£100,000. These increases will be delayed for a year to April
2010, and then a year later there will be a new higher rate of 45%
on taxable incomes over £150,000. All of which could give us
an interesting political situation, bearing in mind that the latest
date for the next general election is early June 2010.
Small businesses were clearly in the Chancellor's thoughts
as indicated by his decision to delay the threatened increase in
the rate of corporation tax and to extend loss relief carry-back.
The Chancellor also listened to our plea not to introduce the
income shifting regime which, as proposed, would have required a
significant amount of additional record keeping for many family
businesses. Unfortunately, the formal report published today
indicates that the Treasury remains intent on taking action in
future so this may be just another temporary reprieve.
There are a series of measures to help small and medium-sized
businesses facing credit constraints, including a rebranding and
revitalisation of the existing 'Time To Pay' facility
whereby businesses in difficulty may spread their tax payments on
an affordable timetable.
Mr Darling said that his report comprised exceptional measures
to reflect the exceptional times. Certainly the way in which the
report was formulated via breakfast TV was wholly exceptional. It
remains to be seen whether we return to Budget secrecy in
1 Personal tax and trust
1.1 Income tax and National Insurance rates, thresholds
The proposed changes to personal tax rates, allowances and
limits, and National Insurance Contributions (NIC) rates and
thresholds are set out in Appendix 1.
Most of the personal tax allowances will be increased as usual
in line with inflation for 2009/10. However, the upper earnings
limit for NICs will be aligned with the higher rate threshold for
Several significant changes have been proposed to take effect
from 2010/11 and 2011/12.
From 2010/11 onward those with income exceeding £100,000
per annum will suffer a reduction to their personal allowance by
£1 for every £2 in excess of £100,000, up to a
maximum of half of the standard personal allowance. Those with
income exceeding £140,000 per annum will suffer a further
reduction to their personal allowance by £1 for every
£2 in excess of £140,000, up to a maximum of the full
standard personal allowance.
Further changes proposed for 2011/12 are as follows:
a new higher rate of tax of 45% will apply to income over
£150,000 per annum (37.5% on dividend income)
the rate of tax applicable to trusts will increase to 45%
(37.5% for dividend income)
the National Insurance primary threshold will be aligned with
the personal allowance for income tax, bringing all tax and
National Insurance thresholds into alignment
employers' and employees' NIC rates will increase by
0.5% as will profit-related contributions for the self-employed.
The existing additional 1% contribution for those earning in excess
of the upper earnings limit will increase to 1.5%.
Certain changes to the Tax Credit system in excess of inflation
have been proposed to take effect from 6 April 2009.
Comment: Those earning over £150,000 will
suffer a triple raid on their pockets from 2011/12. An individual
with income of £200,000 will suffer approximately
£6,400 more per annum in tax and NICs as a result of the
combination of the two tax changes and the NIC change.
The real sting, however, is on discretionary trusts where the
tax rate is increasing by 5% on all income, not just income in
excess of a threshold.
Against these tax increases the enhancement of Tax Credits is to
be welcomed for low to middle earners, some of whom will be up to
£520 per annum better off, though the complexity of the Tax
Credits system remains a concern.
1.2 Simplification of anti-avoidance rules:
With effect from Royal Assent to the Finance Bill 2009, one of
the mistakes in the anti-avoidance legislation for
employment-related securities will finally be corrected.
The amendment concerns the taxation of certain share
acquisitions where the employee acquires, at an undervalue, shares
not otherwise taxed to employment income tax.
Pre-Budget Report 2008 The most common examples
are where the shares are acquired partly-paid or where payment is
made in instalments. In these circumstances, the employee is
treated as receiving an interest-free loan by reference to the
outstanding amounts. These charges are generally brought to an end
only when the shares are sold.
If the employee sells before paying all instalments, there can
be tax due even when there is no profit. Similarly, if partly-paid
shares are sold, the employee will be taxed on a profit he/she
never makes. In both situations the treatment is to be
Similarly, where there is a scrip or bonus issue, the employee
may technically be caught under these provisions even though he/she
is effectively no better off because his/her other shares have
correspondingly fallen in value.
Comment: These amendments are long overdue. The
interesting question will be how HMRC will now treat possible
occasions when the charges arise before Royal Assent. At present,
there has been an unofficial pragmatic acceptance by HMRC that the
charges concerned are anomalous. It is just possible that its
sensible sympathetic approach may be jeopardized by the impending
1.3 Assistance for disabled company car
From April 2009, the tax charge for a company car with automatic
transmission provided for private use to a disabled employee
(someone entitled to a blue badge) will be based on the
manufacturer's list price and the carbon dioxide (CO2)
emissions rating of the equivalent manual transmission model.
Comment: The amount of the benefit of a company
provided car is calculated by applying a percentage derived from
its CO2 emissions rating to the manufacturer's list price for
the vehicle. This measure will extend the current minor tax
advantage enjoyed by disabled company car drivers who have their
taxable benefit measured according to the CO2 emissions rating of
the equivalent manual model car if they are provided with an
automatic. The emissions level is likely to be lower for the manual
version, as is the list price. This change will have limited
1.4 Leasing avoidance by film partnerships
A measure has been introduced, effective following the issue of
a technical note on 13 November 2008, to counter avoidance
involving businesses leasing films on long-funding leases.
Under current law, certain income streams were outside the
charge to income tax, if reliefs aimed at long-funding leases of
plant and machinery were exploited.
The new measure will counter such avoidance by classifying all
rental receipts as taxable.
Comment: A largely technical and narrowly
targeted clampdown further highlights HMRC's intolerance of
aggressive tax avoidance arrangements. This also further highlights
the recurring theme of reliefs being introduced only to be
gradually withdrawn as and when loopholes arising from their
complexity are discovered. (See also the commentary at 2.11 on
long-funding leases generally.)
1.5 Tax relief for travel by temporary
It has been decided not to make changes to the legislation
concerning relief for employee travel and subsistence expenses by
reference to temporary workers and those covered by overarching
employment contracts on which the Government had been consulting.
However, HMRC will be refocusing its efforts to ensure that the
current regime is correctly applied.
Comment: The Government had been concerned that
particular groups of workers were in a position, because of the
nature of their employment, to take much greater advantage of the
legislation concerning employee travel and subsistence expenditure
than had been intended when the regime was relaxed in 1998. The
consultation process has led the Government to believe that the
legislation should not be disturbed, however compliance in this
field is poor. It intends to tackle abuse through more vigilant
compliance inspections, presumably targeted at employment agencies
and other similar providers of temporary workers. If the
intelligence does not indicate an improvement in compliance, the
Government may be expected to come back to this at a later
1.6 Offshore disclosure facility
HMRC will be giving offshore account holders a fresh opportunity
to make voluntary disclosures of unpaid tax liabilities on the
interest received or otherwise on the source of the invested
Comment: HMRC offered the first offshore
disclosure facility in 2007 (known colloquially as an amnesty).
Taxpayers who gave a full disclosure were entitled to...