Business & Accountancy Services
Emergency Budget June 2010
Emergency Budget 2010 Headlines
THE MAIN PROVISIONS OF THE EMERGENCY BUDGET 2010
1. Business Tax
Corporation tax rates
The main rate of corporation tax will be reduced from 28% to 27% from 1 April 2011. There will be further 1% reductions in the main corporation tax rate in each of the next three years to bring the rate down to 24% by 1 April 2014.
The small profits rate of corporation tax will be reduced from 21% to 20% from 1 April 2011. The previous Government had planned for the rate to rise to 22%.
Capital allowances: reduction in writing down rates
The Government has announced that the rates of writing-down allowances (WDAs) for new and unrelieved expenditure on plant and machinery will be reduced:
• from 20 per cent to 18 per cent per annum for expenditure in the main rate pool; and
• from 10 per cent to 8 per cent per annum for expenditure in the special rate pool.
Expenditure on long life assets, thermal insulation, integral features and cars with emissions of 160g/km or more (in the case of cars purchased on or after April 2009) is allocated to the special rate pool.
These rate changes will take effect from 1 April 2012 (for corporation tax) or 6 April 2012 (for income tax).
For businesses whose chargeable period spans 1 April (corporation tax) or 6 April (income tax) there will be a hybrid rate for unrelieved expenditure in any pool, including single asset pools. There will be two hybrid rates, one for expenditure previously relieved at 20 per cent and the second for expenditure previously relieved at 10 per cent.
The Annual Investment Allowance allows businesses to set the full amount of their annual capital expenditure on most plant and machinery (apart from cars) against their taxable profits, subject to an annual maximum amount. The current maximum amount of £100,000 is to be reduced to a new limit of £25,000 from April 2012. Details of the transitional arrangements are yet to be published.
In a joint statement, UK, France and Germany have confirmed their intention to introduce a levy on banks. The UK measure, which will be based on the bank’s adjusted balance sheet, will take effect from 1 January 2011. The levy will apply to UK banks and building societies as well as foreign banks operating in the UK and is expected that the levy will raise over £2 billion annually.
Draft legislation has been released to address a problem which, in HMRC’s view, can arise when a company pays certain dividends to another company. Near the end of 2009 HMRC started to take the view that amounts lawfully paid by companies as dividends, which arose from an earlier reduction of capital, might for corporate shareholders be taxable as a chargeable gain, rather than as an exempt dividend, as had previously been their view. The proposals should ensure that such dividends are not to be taxed as a chargeable gain. They will have full retrospective effect for payments from UK resident companies. For payments from non-UK resident companies, the changes only apply from 1 July 2009.
The Chancellor confirmed the Government’s commitment to reviewing IR35 or rules surrounding contracting issues and small business tax. However, details are yet to be published.
Loan relationships anti-avoidance
HMRC have announced extensions to the existing anti-avoidance rules regarding the ‘derecognition’ of loan relationships or derivative contracts, applicable to debits and credits arising on or after 22 June 2010.
The Government also intends to publish a Technical Note early in July 2010 containing proposals for generic anti-avoidance legislation in respect of schemes involving derecognition, with a view to legislating in Finance Bill 2011.
R&D tax relief
Later this year, the Government will consult on a long term approach to the taxation of R&D, based on the proposals contained in Sir James Dyson’s March 2010 report, ‘Ingenious Britain’. The report suggests that R&D tax credits should be refocused on high tech companies, small businesses and new start-ups in order to stimulate a new wave of technology. It was also announced that the proposed tax relief for UK video games will not now go ahead.
Tackling tax avoidance
The Government announced its intention to consult on several anti-avoidance measures. This includes arrangements using trusts and other vehicles to reward employees as announced in March 2010. Legislation will take effect from April 2011. It will also review whether the introduction of a general anti-avoidance rule (GAAR) would be appropriate.
2. Personal and Employment Taxes
Capital Gains Tax (CGT): rates and Entrepreneurs’ relief
A new rate of CGT of 28% (currently 18%) is introduced from 23 June 2010 and will apply to all gains arising on or after that date. It applies for individuals with total taxable income and gains above the upper limit of the basic rate income tax band (£37,400 for 2010/11), trustees and personal representatives of deceased persons. Otherwise the rate of CGT will remain at 18%, for individuals.
Although the anticipated rise in the rate of CGT for higher rate taxpayers has not been aligned with the rate of income tax as first anticipated, a further increase has not been ruled out for 2011/12.
The Annual Exempt Amount remains unchanged at £10,100 for 2010/11.
The rate of CGT on gains qualifying for entrepreneurs’ relief is unchanged at 10% but the lifetime limit on gains will increase from £2 million to £5 million.
Budget announces that in 2011-12, the income tax personal allowance for under 65s will be increased by £1,000 in cash terms, taking it from £6,475 in 2010-11 to £7,475 in 2011-12. To ensure that the majority of higher rate taxpayers will pay the same total level of income tax and National Insurance Contributions (NICs) as previously planned, the Government will also reduce the basic rate limit for tax by £2,500, and the upper earnings and profits limits for NICs by £1,650, based on current estimates of the Retail Prices Index (RPI). Exact figures for the basic rate limit and higher rate threshold will be confirmed in the autumn.
The increases in employer’s and employee’s NIC rates as announced by the previous Labour government are still in place. However the threshold at which the employers will start to pay has increased by £21 per week above indexation.
The upper earnings limit and the upper profits limit will maintain alignment with the income tax higher rate threshold. Employee and employer rates
(Class 1 primary)
(Class 1 secondary)
Earnings per week
Below primary threshold / secondary threshold
Above primary threshold/ secondary threshold*
Above upper earnings limit
*Reduced rate for married women between primary threshold and upper earnings limit is 4.85 per cent for 2010-11 and 5.85 per cent for 2011-12. The reduced rate applies to women married before 6 April 1977 who have elected to pay a reduced rate of class 1 contributions.
Class 2 (per week)*
Profits per year
Below small earnings exception
Small earnings exception to lower profits limit
Not available **
Lower profits limit to upper profits limit
Not available **
Above upper profits limit
Not available **
*Class 2 NICs are paid at a weekly flat rate of £2.40 by all self-employed persons. Those with profits less than, or expected to be less than, the level of the small earnings exception may apply for exemption from paying Class 2 contributions.
**The exact figure for Class 2 for 2011-12 will be determined by data available in the autumn.
Regional employer NIC holiday for new businesses
There will be a regional employer NIC holiday for New businesses setting up in certain regions during a 3 year qualifying period. They will not have to pay the first £5,000 of employer’s Class 1 NICs due in the first 12 months of employment for each of the first ten employees hired in the first year of business. The exact criteria for qualifying for the scheme will be published shortly.
The countries and regions which will benefit will be Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.
The NIC holiday will start as soon as is practicable, probably from 6 September 2010, but with some relief for those businesses setting up between 22 June 2010 and the date of the scheme commencement.
Furnished holiday lettings
The previous government had stated that the furnished holiday lettings rules would be withdrawn with effect from 6 April 2010. It has been announced today that this change will now not take place.
The measure affects individuals, partnerships, trustees and companies who let furnished holiday accommodation situated within the UK or anywhere else within the European Economic Area, and who are liable to UK tax on the income and capital gains from the property.
The beneficial rules will continue to apply during the tax year ended 5 April 2011 in the same way as they previously applied. However, the government is considering introducing changes to the rules with effect from 6 April 2011. This might include increasing the number of days that qualifying properties have to be available and actually let as commercial holiday letting.
Basic State Pension and Pension Credit
The Government will uprate the basic State Pension by a triple guarantee of the highest of earnings, prices or 2.5 per cent from April 2011. The CPI will be used as the measure of prices, consistent with the Government's decision to index all benefits and tax credits by the CPI, although the basic State Pension will increase by at least the equivalent of the Retail Prices Index (RPI) in April 2011 to ensure its value is at least as generous as under previous uprating rules. The standard minimum income guarantee in Pension Credit will increase in April 2011 by the cash rise in a full basic State Pension.
Pensions - Removal of compulsory annuitisation
The government has confirmed that from 6 April 2011 it will end the effective requirement to convert an individual’s pension fund to an income at the age of 75. Interim changes come into effect imediately for all those about to turn 75: the stricter minimum and maximum limits on income withdrawal will be deferred to age 77 instead of the current age 75. The new rules will be finalised next year.
Pensions - Higher rate relief Restriction
The government intends to reverse the previous government’s proposals to restrict higher rate tax relief for those with incomes over £150,000, considering instead a simpler regime which caps the annual allowance at between £30,000 and £45,000, subject to discussion with interested parties. The anti-forestalling measures for 2009/10 and 2010/11 will not be disturbed.
The annual allowance limits the pension savings that can be made by or on behalf of an individual, with tax relief at the individual’s highest marginal rate. Pension savings in excess of this amount attract an annual allowance charge, currently of 40%.
The government will also consult on other measures to alleviate other aspects of the restriction especially the impact on those with variable earnings and members of final salary schemes.
From 6 April 2011 the ISA limits of £10,200, of which £5,100 can be in cash, will be increased annually in line with the retail prices index (RPI). The limits will be calculated by reference to the RPI for September before the start of the tax year. The new limits will be announced in advance of the start of each new tax year. If the RPI is negative, the ISA limit will remain unchanged. The cash ISA limit will continue to be half the value of the stocks and shares ISA limit.
Changes to tax credits, child benefit and Child Trust Funds
From April 2011 the CPI will be used to index tax credits.
The child element of the Child Tax Credit will increase by £150 above CPI in April 2011. The baby element of the Child Tax Credit will be removed from April 2011.
In addition, there will be changes to the thresholds and withdrawal rates as set out below. Child and Working Tax Credits rates
£ per year (unless stated)
Income thresholds and withdrawal rates
First withdrawal rate
Second income threshold
Second withdrawal rate
From April 2011 there will be an acceleration in the rate at which the tax credits will be withdrawn and a reduction in the second income threshold from £50,000 to £40,000 with further reductions in the following year. Additionally, the baby element and 50+ element will be removed from 6 April 2011 and 6 April 2012 respectively.
The rates of child benefit for the first and subsequent children will be frozen for three years from April 2011.
The Government announced on 24 May 2010 that it intends to reduce and then stop all government contributions to Child Trust Funds. Subject to legislation, the Government intends to reduce government contributions at birth, and to stop government contributions at age 7, from August 2010.
Housing Benefit to be reduced by £1.8bn by the end of Parliament
3. Indirect Tax
VAT and other indirect taxes and excise duties - Penalties for late filing of returns and payment of tax
Quarterly returns - £100 penalty on the first occasion that a quarterly return is filed late. This failure also starts a penalty period which is set for one year. For each subsequent failure within the penalty period, the penalty escalates by £100 (up to a maximum of £400 per failure) with the penalty period being extended to one year from the date of the last failure. For prolonged failures, an additional penalty of 5% of the tax on the relevant return will be imposed at 6 and 12 months from the due date.
Monthly returns - £100 for the first three defaults in any penalty period and £200 for the next three up to a maximum of £400 per failure.
Businesses that pay tax late will also suffer penalties:
Quarterly returns - first late payment will start a penalty liability period of one year. A further default in that period will result in a penalty of 2% of the tax paid late. Subsequent defaults in the penalty period will result in penalties increasing to 3% and then to a maximum of 4% for the fourth and subsequent defaults. Prolonged defaults will be penalised at 5% of the tax at 6 and 12 months from the date of failure.
Monthly returns - after the first failure the tax geared penalties are 1% for the first three failures in any penalty period, 2% for the next three up to a maximum of 4% per failure.
The implementation of new penalties for late filing and late payment requires changes to HMRC's computer systems and internal processes and is to be staged over a number of years.
VAT rate to rise to 20% with effect from 4 January 2011
There will be an increase in the standard rate of VAT to 20% with effect on 4 January 2011. There will be anti-forestalling provisions. The reduced (5%) rate remains unchanged. There is to be no change to the VAT base so goods and services that currently qualify will remain zero-rated or exempt. The Flat Rate Scheme Rates will change on 4 January 2011.
Insurance premium tax (IPT) increases from 4 January 2011
The higher rate of IPT charged on certain insurance contracts relating to electrical appliances, motor vehicles and travel will be increased to 20% with effect from 4 January 2011. The standard rate of IPT (currently 5%), will increase to 6% on 4 January. The IPT law contains provisions that will largely prevent the current rates from applying to policies coming into force after 4 January 2011.
The proposed 50p per month landline duty, which was to be imposed on all fixed telephone lines to finance high speed broadband access, is abolished and so won’t come into force at all.
Stamp Duty Land Tax (SDLT)
The Government will examine whether further changes to the SDLT rules on ‘high value’ property transactions are needed to prevent avoidance.
As announced in the March 2010 Budget, the rules for correcting mistakes in SDLT returns to claim a repayment of tax are to be amended. The proposed changes will align the rules with the income tax, CGT and corporation tax legislation contained in the Finance Act 2009.
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