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IT’S A GAME OF GIVE AND TAKE
A busy tax partners view of the Budget - some early comments from Donald Parbrook
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For reasons best known to the world of journalism, there were predictions of a rather low key Budget. In fact, this was really another one of Gordon’s big stinkers. As if the creation of 58% more tax law over the last five years wasn’t good enough, he’s bombed the tax practitioner with his final stealthy measures and this one, whilst innocent enough, is going to give us all another thick volume of law.
Our rather dull standard glossy Budget summaries and booklets will no doubt appear on this website and through the post over the coming day or two – in the meantime, let’s look at what has really happened!
No doubt David Cameron will be exasperated by the catchy tax cutting headlines – Corporation Tax down to 28% from 30% and income tax down from 22% to 20%. However, it’s fair to say that these rather sexy sounding measures are nothing more than a cynical manipulation of the system with no real saving to most taxpayers.
I am perhaps starting to mature and grow rather cynical but it’s fairly obvious to all that the spending plans need to be funded. So, how come the headline tax cut?
Well, let’s start with the personal tax changes. Some years ago the Chancellor justified the introduction of a new 10% starting rate of income tax – an extra tax band – in order that the lowest earners would benefit most (laudable sentiments). This 10% rate is now being abolished (poorest people=losers) as it’s no longer required due to working tax credit (so he says). Actually, it’s not true to say it is being abolished…..to keep things at a level of maximum complexity it will still be around, but only for investment income and capital gains. So, for the most part, it’s history. This makes almost every working person a couple of hundred worse off. I’ve crunched some numbers and even with the new 20% main income tax rate most of the lower earning basic rate taxpayers will be at LEAST £100 per annum worse off.
Don’t forget, this was an announcement for 2008 – so we don’t know exactly how he’ll set the tax bands so it might not be so very bad. A favourite Chancellor trick – to announce so far in advance the good news doesn’t dent his finances for a while…
That said, he’s also “aligning” (dangerous word) personal tax and national insurance bands a little. What this means is that the amount of national insurance paid by higher earners will increase as the NI “ceiling” at which the 10% band stops is being increased by £4,700 over inflation within the next couple of years. So, another few hundred of us all there. Interestingly, the reduction in the main tax rate to 20% favours people earning the most – since they benefit from the 2% saving across the full basic rate band. What’s really happening is people will pay 30% tax and NI from about 6k to about 40k by 2008. After 40% it’s 41% combined rate.
Let’s look at corporation tax….and what great news…28%...hmm.. He may tell us that this is a competitive rate but for an economy such as Scotland which competes globally against all manner of countries it is still high and we miss out on some of the sexy 0% rates on reinvested profits available in other younger EU states. And, it gets better!...this is the large (“mainstream”) company rate so smaller businesses can skip past this paragraph and go straight to the bed news below……so why am I not happy about 28%....well, apparently, the stock market rose on this good news after the Budget, but fell later in the day as people realised there was a price to pay for the 28% rate…..
Capital allowances are a system by which people get tax relief for capital expenditure. The system is sometimes complicated (made more complicated by endless additional tweaks by Gordon himself) and to “simplify” it he is going to, basically, reduce the allowances for almost every situation in 2008. This includes abolishing industrial buildings allowances (and agricultural and hotel type ones). He will also reduce the main rate of relief from 25% per annum to 20% per annum and “fixtures” incorporated in a building will be at 10% -the new long life asset rate. This change appears to be the way to pay for a better headline grabbing rate. On the plus side R&D credit relief is being improved further and there’ll be a small immediate write off for a limited amount of capex (subject to consultation).
A real big nasty that appears likely to kick our clients in the teeth is the increase in the Small Company Rate of tax. At the moment there is a 19% rate for up to £300,000 of profit with a tapering increase as profits rise towards the main 30% at £1.5M of profit. The small company rate will be 20% this coming year and will rise to 22% over the next couple of years. For a business with profits of £300,000 this is a £9,000 tax rise. Ulp!
The justification for this is to discourage tax motivated incorporation – well, Gordon, you only have yourself to blame for such incorporations by virtue of your heinous national insurance charges creating large differentials in tax cost. Some of the smallest companies will remember the 0% corporation tax band Gordon introduced (lots of trumpets in the background), the 10% rate and then it’s withdrawal under “anti-avoidance measures”. The new overall rise is not good news for the smaller company.
At the end of the day, it’ll still be better for many businesses to incorporate than stay as sole trader/partnership but he has now completely reversed himself back to where he started in 1997!.
Also, the rate change will hurt worse than you’d think – has nobody noticed the 300k/1.5M limits haven’t increased in years? A lovely bit of fiscal drag, forcing more real world tax out of the system. I’d have to check but it must be a good half dozen years or more since the bands increased.
Contrary to the post speech reaction and worry in my quick and dirty client email on Budget Day, the 50% first year allowances rule for plant for small businesses will continue until the new rules bite in 2008. That’s good news.
And, on the plus side, there’s some sense on holiday houses. Historically, foreign advice was often to hold your Spanish (say) holiday house via a limited company to avoid various heirship issues and inheritance taxes overseas. However, this could cause a UK tax nightmare as the taxable benefit in kind rules would apply if the holiday house owner didn’t pay his company market rent for the time his house was available to him (all year then). The Revenue have relented and said if the company only really has one holiday house, no benefit applies. Great news, even if it doesn’t have apparent retrospective impact….
Office administrators will want to note that fuel scale charges will, from May this year, be calculated completely differently – based on car CO2 levels. As a result your cashier/book-keeper will need to know the CO2 of each and every car in your fleet where you recover VAT. Please note that it is perfectly acceptable to recover VAT on the business mileage only (or not at all) in order to avoid the scale charge!!
Other things the Chancellor said (did I hear correct?) was a £300 (then £400 in another year) tax disc for top band high CO2 cars. £35 at the bottom so a real incentive appearing to drive a noddy town car about. Not sure I fancy the commute from Helensburgh down the fast but accident rife A82 in one each day but maybe the 4x4 was a mistake. He also said that he’s going to reduce rates rebates so that empty commercial property will have a rebate for a maximum of 6 months, reduced to 3 months for offices or shops. I haven’t read more on this but it was in his speech – I wonder if the many vacant shops in our less sought after town centres might have their values suppressed further?! Not great news- a bit of a stick and not much carrot there.
Within the 65 releases (190 pages) of Budget “notes”, there’s a host of other things – mainly minority interest items such as aggregates levy, landfill tax, gaming duty, anti-avoidance measures, minor charity changes, vat on energy saving products etc. I’ll try to pick these up as they relate to various clients but do call or email into your normal office contact if you have a question.
In summary, an interesting Budget. As I reflect on it, I can see no new schemes or plans really – this time the big news is a serious tinkering with the company tax rates and capital allowances regime. This will affect many businesses and, I dare say, most of the smaller clients we have are losers. The 20% tax rate is a total load of rubbish. I’m in favour of simplification and party withdrawing the 10% band doesn’t help much.
Reflecting on the Chancellor’s various Budgets it’s definitely not his worst. That said, it’s another 2 inches of tax law I could do without.
- Disclaimer – please read-
The above article was written by Donald Parbrook CTA, tax partner with Milne Craig CA on 21st March 2007, based upon the Budget Notes published after the Chancellor’s speech. The views are his opinion and no reliance should be placed on the contents at this stage. Clients and other parties should seek engaged professional advice from a qualified adviser. The author does not seek to make any political comment and sincerely believes there would be pros and cons to any alternative Chancellor or party being in power which would merit similarly cynical critique.
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