spring residential conference queens’ college, cambridge 4 – 6 april 2008

SPRING RESIDENTIAL CONFERENCEQueens’ College, Cambridge4 – 6 APRIL 2008

Tolley® Tax Training

BUDGET 2008: INITIAL REACTIONLecture by Chris Jones BA CTA (Fellow) ATT

DisclaimerThe views expressed in this material do not necessarily represent the official views of the CIOT or LexisNexis. No responsibility for loss occasioned to any person's action or refraining from action as a result of reliance upon any information in the material can be accepted by the CIOT, Chris Jones other contributors, or LexisNexis. Legislation, case law and tax practice are complicated and these course notes should not be regarded as offering a complete explanation of every topic covered

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BUDGET 2008

INITIAL REACTION

Chris Jones BA CTA (Fellow) ATTDirector – Tolley Tax Training


INTRODUCTION


DOES SIZE REALLY MATTER?!

• 270 pages of Budget Day Notices

• Much of which had been pre-announced

• I’ve picked up various Budget Day summaries which vary between 8 and 20 pages– Small is beautiful!


TAX RATES & ALLOWANCES


PERSONAL ALLOWANCES

• Main personal allowance £5,435– Up 4%

• Age-related allowances increased by nearly 20%– But only an inflationary rise for income

limit & married couple’s allowance


INCOME TAX RATES• On the surface there looks to be

simplification:– 0 to £36,000 Basic rate: 20%– Over £36,000 Higher rate: 40%

• But, the 10% starting rate is still around for unearned income up to £2,320

• Dividend rates remain at 10% and 32.5%


NATIONAL INSURANCE• No changes in rates

Employees Self-Employed

Up to £5,435 0% 0%

Next £34,605* 11% 8%

Above £40,040 1% 1%

* Up 15% on 2007/08 – costing some up to £400 more From 2009/10 the NIC bands will be aligned with

income tax bands


INITIAL REACTION• Changes benefit higher rate taxpayers• Employees on lower income could pay more

tax• Alignment of tax and NI limits will result in

even more income being subject to higher rates– Additional 10% for employees– 7% for the self employed

• Don’t worry, it’s all part of simplification!


CORPORATION TAX

• Main rate fell to 28% from 1 April 2008

• Small Companies’ Rate became 21%– Expected to rise to 22% a year from now

• Marginal rate for profits between £300,000 and £1.5m becomes 29.75%– Likely to fall to 29.5% from 1.4.09


INITIAL REACTION• The 2% reduction in CT rate is to improve the

UK’s competitive position• However, this countered by:

– Phasing out of IBAs– Reduction in capital allowances rates

• Changes favour non-manufacturing sector– Which is less likely to be hit by recession

according to some commentators


ADMINISTRATION OF TAX


PENALTY TABLE

Reason Penalty Min. reduced penalty (unprompted

disclosure)

Min. reduced penalty (prompted disclosure)

Careless action 30% 0% 15%

Deliberate but not

concealed

70% 20% 35%

Deliberateand concealed

100% 30% 50%

Penalties contained in Sch 24 FA 2007 to extend to failure to notify of a new taxable activity for return periods commencing on/after 1 April 2009 for all taxes & Class 2 NIC


HMRC TO MODERNISE ITS POWERS• HMRC have launched three consultation

documents as part of their work to modernise their powers, deterrents and accompanying safeguards. 1. Payment, repayment and debt

2. Compliance checks

3. Charging civil penalties to all other taxes, levies and duties for which HMRC are responsible (except Tax Credits)


COMPLIANCE CHECKS

• Reform proposed across all taxes

• Alignment and modernisation of record keeping requirements

• New inspection and information powers

• Alignment and modernisation of time limits for making tax assessments and claims


INITIAL REACTION

• Controversial proposals include:– New power to inspect records at business

premises (for IT & CT) with no right of appeal

– Power to require third parties to supply information and documents

– Greater freedom for HMRC to use such powers outside the enquiry window


PERSONAL TAXATION


INCOME SPLITTING• The Chancellor announced in the PBR that

legislation will be introduced to reverse the decision in Arctic Systems

• They will prevent individuals from disassociating themselves from income where the result is that it is taxed at a lower rate on another person

• Proposals put back to 6 April 2009 pending further consultation


INITIAL REACTION• The Government estimated they would raise

£25m in additional revenue from these measures in 2008/09– Rising to £260m in 2009/10!

• The proposals published on 6 December raised a large number of concerns– Which the CIOT drew attention to in its response

to the consultation


RESIDENCE• 183 days physically present in the UK• 91 days or more on average over 4

years• From 2008/09 physical presence based

on taxpayer being in the UK at midnight• Exclusion for transit passengers

through the UK– By air, sea or rail


INITIAL THOUGHTS

• Pattern of working in the UK

• Frequent visitors for short trips

• Previous years impact on 4 year test

• Record keeping


DOMICILE CHARGE• Non UK domiciled taxpayers will have to pay

£30k per annum to use the remittance basis for overseas income and gains– With no entitlement to personal allowances or the

CGT annual exemption• Those who choose not to will be liable to UK

tax on all worldwide income/gains– Subject to normal DTR rules

• Exemption where offshore income/gains arising are not above £2,000– Originally this was going to be £1,000


WHO DOES THIS APPLY TO?

• Non-doms who have been UK resident in 7 out of the last 10 years– Excluding the current year

• Taxpayer may elect to which income/gains the £30k will apply– Which might enable the IRS in the USA to

grant double tax relief


MIXED FUNDSRemittances taxable as income first:

1. Employment income 2. Relevant foreign earnings3. Relevant foreign income4. Foreign chargeable gains5. Other income or capital

Interest paid on an offshore mortgage used to purchase a property in the UK will be treated as a remittance

In respect of new loans or additional borrowing taken out from 6 April 2008


LOOPHOLES CLOSED

‘Temporary absence’ loophole

‘Ceased source' loophole

‘Claims mechanism’ loophole


“CLOSE COMPANY” GAINS• S.13 TCGA 1992 attributes gains of

non-resident “close” companies to UK resident & domiciled individuals

• This is now extended to non-domiciled individuals resident in the UK– From 6 April 2008

• Remittance basis applies to gains on assets situated abroad


OFFSHORE TRUST GAINS• Attribution of gains under s.86(1)(c) will

apply to all non UK domiciled settlors resident in the UK– From 6 April 2008

• This also extends to deemed gains under s.87 in respect of capital payments– What about existing unremitted gains?

• Gains will be taxable on a remittance basis• An irrevocable election to rebase trust assets

held on 6 April 2008 will be possible


OPEN LETTER FROM DAVE HARTNETT• No additional disclosures required by those

using remittance basis regarding the source of such remittances

• No retrospection on trust gains– Accrued or realised prior to 6 April 2008

• Remittances to pay the £30k tax will not be taxable itself– Provided it is remitted directly to HMRC

• Art brought in for public display will continue to be tax free


INITIAL REACTION• To some non-doms £30k represents “a drop

in the ocean”• To others there will be a stark choice

– Enjoy personal reliefs but pay tax on worldwide income/gains or

– Pay £30k

• Calculations will need to be performed• LITRG have commented that the de-minimis

limit should be aligned with the personal allowance


EMPLOYMENT TAXATION


COMPANY CARS• Changes ahead in 2008/09• Lower Co2 threshold falls to 135g/km

– Adding an extra 1% on the BIK percentage– Threshold to fall to 130g/km for 2009/10 & 2010/11

• A new 10% BIK rate applies to fuel efficient cars (<120g/km)– 3% diesel supplement applies

• Electric-only cars continue at 9%• 2% reduction on BIK where cars are

manufactured to run on E85 fuel


INITIAL REACTION

• It’s good to see tax breaks for lower polluting vehicles

• Can you find one you actually want to drive or be seen in?

I have!!


BUSINESS TAX


ANNUAL INVESTMENT ALLOWANCE• Available to all businesses in the UK after 1 April 2008• Will be expected to cover all capex for 95% of UK

businesses• AIA = first £50,000 written off • Covers any expenditure that goes into:

– Short life assets– General 20% pool– General 10% pool (ie long life assets and integral fixtures– But not cars or buildings– 100% Enhanced Capital Allowances remain as well (repayable

tax credit proposal as for R&D)


ELIGIBILITY• Singleton company = 1 x AIA• Group (Cos Act Definition) = 1 x AIA• But associated companies get their own AIA• Every sole trade or partnership gets 1 x AIA • Separate and distinct businesses receive

their own AIA• Splitting rules should “only apply to a very

small minority of businesses”


ALLOCATING EXPENDITURE• Businesses may choose how to allocate

expenditure• To maximise capital allowances it will be

better to allocate the AIA firstly to integral plant/long life assets– As they only obtain a 10% WDA

• Any balance is then allocated to general plant– Obtaining a WDA at 20%


ILLUSTRATIONPlant Integral/LLA Allowances

£ £ £

Additions 40,000 30,000

AIA -20,000 -30,000 50,000

Balance 20,000 Nil

WDA at 20% -4,000 4,000

Pool clf 16,000 Nil

Total allowances 54,000


INTEGRAL FIXTURES• P&M in buildings• “Integral” to the building or“productive

equipment?”• The combined long life asset pool and

integral fixtures pool will only receive a 10% WDA

• Environmentally friendly plant still attracts a 100% FYA


HMRC EXAMPLE: PLANT

• Company year end 31 Dec 2008

• Company is small

• Spends £30,000 on new lorry on 1 Feb

• Spends £45,000 on lathe on 30 Nov


ALLOWANCES• On Lorry – FYA of £15,000, balance into pool

next year for 20% WDAs• On Lathe – More Complex

– AIA - £50,000 x 9/12 = £37,500– Balance of £7,500 into Pool– WDA thereon 3/12 @ 25% = 6.25%– 9/12 @ 20% =15.00%

• 21.25%

– i.e. £1,594, WDV c/fwd £5,906 for 20% WDAs


PAYABLE ECAs• 100% allowance may not be worth much if all

it does is enhance a loss– Disincentive to invest in energy efficient

technology

• Companies will be able to surrender the ECA in return for hard cash– Does not apply to expenditure on energy-efficient

cars– Applies to expenditure incurred on/after 1 April

2008


COMPUTING THE REPAYMENT• The surrendered loss will be lower of:

– Loss in accounting period– The ECA

• Repayment will be 19% of the surrendered amount– Capped at the lower of the company’s PAYE/NI

liability during the period of loss and £250,000

• Claimed on CTSA return– Amount must be specified


INTERACTION WITH R&D

• Both R&D and ECA credits can be claimed in the same period

• Loss in year = £100k– R&D deduction = £75k– ECA deduction = £50k

• Optimum claim?

• ECA: £50k (at 19%), R&D £50k (at 16%)


INITIAL REACTION

• Good news for smaller businesses

• Reduction in WDAs will hit larger businesses– May be countered by the 2% reduction

in the main CT rate

• Careful timing of capital expenditure– December year end: AIA is £37,500 in

2008


CARS

• Low Co2 cars to continue to receive 100% FYA until 31 March 2013

• However, from 1 April 2008 Co2 limit drops to 110g/km– That now rules out my Fiat 500!

• Grandfathering for leases entered into prior to 1 April 2008


TRADING STOCK• Sharkey v Wernher (1955) requires

stock to be withdrawn at market value• GAAP/IAS only requires adjustment at

cost• Doubt over durability of the 1955

decision– Mason v Innes

• Now put onto a statutory footing


INITIAL REACTION

• Sharkey v Wernher is as unfair now as it ever was

• Paying tax on profit that has not been earned

• So why embody this in statute?


SIDEWAYS LOSS RELIEF• The partnership rules have now been

extended to sole traders• Where the individual spends less than

10 hours per week on average personally engaged in the activity

• Loss relief will be restricted to £25,000 per annum– Where tax avoidance was the main reason

for investing


CORPORATION TAX


ASSOCIATED COMPANIES

• Rules have been applied to create some very unjust results

• HMRC want to return to the “roots” of the rules– To prevent business splitting to take

advantage of the SCR (and now the AIA)

• Proposals are being put forward


BUDGET 2008

• Business partners’ rights and powers will not be attributed to each other

• … provided there are no tax avoidance arrangements in place

• This is a welcome change– Especially for film partners

• But it’s only a start!


SAVINGS AND INVESTMENTS


VENTURE CAPITAL SCHEMES

• EIS maximum investment limit to increase to £500,000– Subject to EU State Aid approval

• Shipbuilding, coal and steel production becomes an “excluded activity” for share issues on/after 6 April 2008


ENTERPRISE MANAGEMENT INCENTIVES

• Limit increases from £100,000 to £120,000 from 6 April 2008– CSOP options eat into EMI allowance

• Qualifying companies must have fewer than 250 employees

• Have the CGT changes almost killed off EMI schemes?


OVERSEAS DIVIDENDS• From 6 April 2008 UK-resident shareholders

will obtain a 10% tax credit in respect of overseas dividends– Provided he/she owns less than 10% of the

company’s share capital

• The £5,000 cap will not be implemented• From 2009 holders of 10% or more will gain a

tax credit where the overseas company pays a local equivalent of corporation tax on its profits


PENSIONS & IHT

• IHT charge will apply on unauthorised lump sums paid to scheme members in receipt of an annuity or income– Where he/she dies aged 75 or older

• This applies from 6 April 2008 and will extend to alternatively secured pensions


INHERITANCE TAX


TRANSITIONAL SERIAL INTERESTS• Applies where IIP held prior to 22

March 2006 and…• The IIP comes to an end prior to 6 April

2008 and…• Another IIP arises• Trust continues as an IIP Trust

– i.e. the discretionary regime does not apply at this stage


BUDGET 2008• The period will be extended to 5

October 2008– Giving trustees more time to reorganise

their affairs

• A new life interest granted in favour of the same life tenant will not give rise to a chargeable transfer– As HMRC originally thought!


CHARITIES


GIFT AID

• The fall in the basic rate of tax adversely affects charities

• Repayment falls to 20/80ths– As opposed to 22/78ths

• Until 2010/11 charities will be able to claim 22/78ths of the net payment despite the fall in the basic rate


TRUSTS


SETTLOR-INTERESTED TRUSTS• Income is treated as that of the settlor• Tax paid by trustees is paid on the settlor’s

behalf• Rules ensure there is no double taxation

when income is distributed• Further change to ensure this income is the

top slice to prevent savings income and dividends being pushed into the higher rate band– Change backdated to 2006/07


VALUE ADDED TAX


GENERAL

• From 1 April VAT registration threshold became £67,000– Deregistration threshold became £65,000

• Co2 related fuel scale charges published

• 5% reduced rate extended to smoking cessation products


THREE YEAR REPAYMENT CAP• Cap was introduced in 1996 to restrict

repayments of VAT– Input tax under-recovered– Output tax overpaid

• Legislation was retrospective• Absence of transitional rules was in

breach of EU rules– As given by Fleming v Conde Nast


CORRECTION IN FB 2008

• Cap cannot apply to entitlements arising before:

• 4 December 2006 in respect of output tax overpaid and

• 1 May 1997 in respect of input tax incurred and under-recovered


OPTION TO TAX

• Rules came in on 1 August 1989

• Option to tax cannot be revoked within 20 years of being made– Unless revoked within first three months

• As first revocations will start in 2009 further rules will be incorporated into a revised Schedule 10 of VATA 1994


You have been listening to Chris Jones…

… see you at dinner!

SPRING RESIDENTIAL CONFERENCEQueens’ College, Cambridge4 – 6 APRIL 2008

spring residential conference queens’ college, cambridge 4 – 6 april 2008

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