Plain English Guide to the March 2008 Budget
We will concentrate on the issues likely to affect you and your business. If you have any questions please do not hesitate to contact your Accountant for advice.
Personal Tax rates
As previously announced, the government proposes to radically change the tax rates for April 2008 onwards when the 22% basic rate (£36,000) of tax will be reduced to 20%. The higher rate of tax will continue at 40%.
The 2008/09 personal allowances were announced in October 2007. The personal allowance for the under 65s is increased in line with inflation to £5,435.
In essence this calculates the new higher rate tax bracket starts at £41,435
So for a person on a salary of say, £12,000 per annum, they could receive £26,400 in dividends during the 2008/09 tax year and not pay any further personal tax on those dividends. (This assumes they have no other personal income whatsoever and are tax resident in the uk).
Corporation tax rates
The main rate of corporation tax which applies to companies with profits of more than £1.5 million falls to 28% from 30% from 1 April 2008 and that rate will be maintained in 2009. The small companies corporation tax rate which applies to companies with up to £300,000 of profits will increase from 20% to 21% from 1 April 2008. The intention is to increase this rate to 22% in 2009.
The government intended that legislation would take effect from 6 April 2008 to address ‘income shifting’. The government has reconsidered its position following a period of consultation with business and now believes that a further period of consultation will ensure that legislation in this area provides clarity and certainty for businesses and their advisers.
The government now intends to introduce legislation through Finance Bill 2009 and will not enact legislation effective from 6 April 2008.
Income shifting’ refers to a situation where one spouse or civil partner generates most of the profits of a business but the other receives a proportion of the profit and the couple save tax as a result. The delay in the starting date for any legislation is to be welcomed and hopefully the further consultation will produce a more reasonable result.
Below is an example by HMRC of a situation in which the original proposed legislation would have applied. Individual 1 and Individual 2 form a company, each owning 50 £1 ordinary shares. The business of the company is to provide the personal services of Individual 1. Individual 2 spends around five hours a week on back office duties for the business. In the first year they each receive a salary of £5,000 and dividends of £30,000. The salary received by Individual 2 is considered to be the market rate given the nature of the work done and time spent doing it. The company has no significant assets or liabilities.
If Individual 2 has no capital in the business and bears no risk the whole of the £30,000 would be treated as shifted income because Individual 2 is already receiving a market rate for the work done, has no capital in the business and bears no risk.
Of course, if Individual 2 does contribute more to the business than in the above example, then some or all of the income will not be treated as shifted income.
Tax free mileage allowances
The government has been consulting on changing the system and rates for tax free mileage allowances where an employee uses their own car for business purposes. It has been decided that the system will not change and the rates will be maintained at current levels. The current rates are:
- business mileage up to 10,000 miles – 40p
- business mileage above 10,000 miles – 25p.
The amount of miles you have travelled resets every 6th April
Capital gains tax (CGT) reform
The Chancellor surprised everyone with proposed major changes to the CGT regime last October. The changes affect individuals and trustees. The Chancellor has confirmed that legislation will be introduced with effect from 6 April 2008 to give effect to a new single rate of CGT at 18% but many business owners will continue to have the potential benefit of a 10% rate.
An annual exemption will remain in place and for 2008/09 this will be £9,600. The annual exemption allows the first element of gains made in a given tax year to be exempt from CGT.
For gains arising on or after 6 April 2008 changes to the CGT regime include:
- the withdrawal of taper relief
- the withdrawal of indexation allowance
- the introduction of Entrepreneurs’ Relief
Taper relief was introduced for disposals on or after 6 April 1998 and can reduce the amount of the gain chargeable to CGT. The amount of relief available depends on whether the asset is classed as a business or non-business asset and also on the length of time an asset has been held since 1998.
For gains arising on or after 6 April 2008 taper relief will no longer be available. The chargeable gain will be liable to tax at 18%, after deducting allowable losses, any other reliefs and the annual exemption.
In response to business leaders voicing their objections to the abolition of taper relief, the Chancellor has introduced a new Entrepreneurs’ Relief. The main effects of this relief are:
- the first £1m of gains qualifying for relief will be charged at an effective rate of 10%
gains in excess of £1m will be charged at 18%
an individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains.
The new relief is similar to Retirement Relief, which was phased out with the introduction of taper relief, but the new rules are designed to be simpler:
- there will be no minimum age limit
- relief will be available where the relevant conditions are met for a period of one year ending with the disposal / cessation.
Business A has been trading and has net assets of £100,000 when it decided to dissolve (close down).
It has been trading for at least a year (you’re going to be amazed at how bizarre this calculation is)
£100,000 x 5/9ths = £55,555.56
You can then remove the annual exemption of £9600. This leaves you with £45,955.56 to be taxed at 18% = £8272 personal tax.
Why the 5/9ths? Because the 18% rate is cut to the 10% rate by using a 5/9ths fraction.
This calculation has not been verified officially yet by HMRC and so it is an advisory calculation for the moment.
As soon as SJD Accountancy has further information we will let you know immediately.
Residence and domicile
The main proposal is that UK residents who are non-domiciled or not ordinarily resident, who wish to continue to be taxed on a ‘remittance basis’ rather than on their worldwide income and gains, will have to pay an annual tax charge of £30,000 on unremitted income and gains. Those with unremitted foreign income and gains of less than £2,000 will however be exempt from this charge.
What is a remittance basis? Effectively it means when and if the money/assets are brought into the UK. Unremitted income is money/assets that you leave offshore and do not use in the UK. If the £30,000 charge is applicable you will not be taxed when you bring the £30,000 into the UK to pay your tax bill.
The charge will apply if an individual has been resident in the UK for at least seven out of the previous nine tax years. Individuals will be able to decide each tax year whether to pay the charge and be taxed on the remittance basis or be assessed on their worldwide income and gains.
So how does this work?
If you leave out the flowery language, it goes like this. As a UK tax resident (domiciled or non-domiciled it doesn’t matter), you are required to report all of your worldwide income to the UK tax authorities and pay tax here. Any tax you have already suffered away from the UK will be taken into account. But for a charge of £30,000 you can now elect to have your non-UK income taxed elsewhere without having to declare it in the UK.
If that sounds strange to you then read on.
Imagine you are the owner of a UK football club and have an enormous amount of personal income arising in another country outside of the UK. You can now pay a £30,000 charge every year and lose the need to declare that income inside the UK.
If you do not fit into the bracket of having a very large income then you would be better off being taxed in the UK on your worldwide income (not claiming the remittance basis) and paying the tax on your non-uk income here as well.
Key changes include:
From 6 April 2008, the remittance basis must be specifically claimed. If no claim is made UK residents will automatically pay UK tax on worldwide income (with credit for foreign tax paid up to maximum of UK tax on the foreign income).
If the remittance basis is claimed and your unremitted income is more than £2,000 then you will not be entitled to personal allowances against income tax or annual exemption against capital gains tax.
The £30,000 charge only applies if you are resident in UK for seven or more years out of the last ten years AND your unremitted income is more than £2,000 AND the remittance basis is claimed.
children will not pay the £30,000 charge
the £30,000 charge may be creditable against foreign tax except in the USA. Note – it is a charge and not a tax so you will need to check in your domiciled country.
art works brought into the UK for public display or for repair and restoration will face no new tax charges
PLEASE BE AWARE – these rules are from our reading of the Budget website and later changes may occur in actual practice.
In addition, from 6 April 2008, when determining if an individual is resident in the UK, any day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes. There will be an exemption for passengers who are temporarily in the UK whilst in transit between two places outside the UK.