Pre-Budget Report 2008

Author:Ms Joss Dalrymple
Profession:Smith & Williamson
 
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Introduction

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

boost spending.

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

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.

Conclusion

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

future.

1 Personal tax and trust

1.1 Income tax and National Insurance rates, thresholds

and limits

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

income tax.

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:

employment-related securities

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

corrected.

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

change.

1.3 Assistance for disabled company car

drivers

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

impact.

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

workers

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

date.

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

funds.

Comment: HMRC offered the first offshore

disclosure facility in 2007 (known colloquially as an amnesty).

Taxpayers who gave a full disclosure were entitled to...

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