Budget Report March 2011

Introduction

 

This Report, which was written immediately after the Chancellor of the Exchequer delivered his Budget Speech, is intended to provide an overview of the latest announcements and recent measures most likely to affect you or your business.

Throughout this guide we have included tips and ideas for effective tax and financial planning, but it is important to remember that this planning should be an ongoing, year-round process, not something that is left until the last minute.

We can help you to reassess your plans regularly, and adapt them as your personal and business circumstances change. With our help, you can plan for a rewarding and financiall y secure future.

Please note: while most taxation changes take effect from the start of the financial year, or tax year, some may not take effect until 2012, or later. Where relevant, details of these changes have been included in this Report. Throughout the Report, ‘HMRC’ refers to HM Revenue & Customs.

 

 

 

 

Budget Highlights

 

 Osborne presents 'a Budget for growth'

Chancellor George Osborne heralded his second Budget as one ‘for enduring growth and jobs’. Despite revealing significant cuts in the economic growth forecasts for 2011 and 2012, the Chancellor insisted that the Government’s fiscal plans were on course.

The Chancellor’s speech included a range of measures intended to boost business enterprise. Among the key announcements was an increase in the planned reduction in corporation tax, with rates falling by 2% from April, and 1% in each of the following three years, to reach 23%, accompanied by an adjustment in the bank levy to ensure that banks do not pay less tax as a result. The scrapping of £350 million of business regulations and a three-year moratorium on new regulations for firms with fewer than 10 staff were also confirmed, and the business rate relief ‘holiday’ for small businesses will be extended for another year. Sweeping changes to the Enterprise Investment Scheme were also announced, alongside a doubling of Entrepreneurs’ Relief, which rises to £10 million from 6 April. The small companies R&D tax deduction will also rise to 200% in April, and to 225% next year.

Acknowledging that the cost of living and the high price of oil pose a problem for many British families, the Chancellor confirmed a number of measures aimed at providing support. While a postponing of the planned rise in fuel duty had been anticipated, the Chancellor went a step further by cutting the duty by 1p a litre, and introducing a Fair Fuel Stabiliser, measures which will be paid for by additional taxes on North Sea oil firms. In addition to the planned increase in the income tax personal allowance, another future rise will take the allowance to £8,105, in April 2012. Meanwhile, first-time buyers will be offered further help to purchase new property by means of a proposed shared equity scheme, and help for those with mortgage arrears will be extended. Also of interest was the announcement of a 10% inheritance tax discount for taxpayers who leave at least 10% of their estate to charity, and a simplification of the Gift Aid scheme.

The Chancellor stated his intention to make the UK the ‘most competitive tax regime in the G20’, but also outlined plans to abolish 43 tax reliefs. Tobacco duty rises by 2% above inflation. While air passenger duty rates have been frozen, users of private jets will be subject to passenger duty for the first time.

Also of note for the future were plans to consult on a merger of the income tax and national insurance regimes, proposals to review the effect of the ‘temporary’ 50% tax rate, and the long-term creation of a flat-rate state pension worth around £140 a week.

 

Economic overview

UK economic growth forecasts were downgraded from 2.1% to 1.7% for 2011, and from 2.6% to 2.5% for 2012, which the Office for Budget Responsibility (OBR) put down to the weaker than expected final quarter of last year, the rise in world commodity prices, and higher than expected inflation. However, the OBR said that the effect ‘creates scope for slightly stronger growth in later years’.

Meanwhile, inflation, which is currently at a two-year high, is predicted to stay between 4% and 5% this year, falling to 2.5% in 2012. The Chancellor confirmed that the target for Consumer Price Index (CPI) inflation will remain at 2%.

National debt is expected to be 60% of GDP this year, rising to 71% in 2012 and falling to 69% by 2015. Borrowing is expected to fall from £146 billion this year to £122 billion next year, reaching £29 billion by 2015/16.

The Chancellor also revealed that the OBR will become a permanent fixture.

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Capital Taxes

 

Capital Gains Tax (CGT)

Entrepreneurs' Relief

Inheritance tax (IHT)

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Income Tax and Personal Savings

 

Income tax rates

 

 

 

 

 

Personal allowances (ages are as at the end of the tax year)

 

 

The personal allowance for those aged under 65 increases from 6 April 2011 to £7,475 and from 6 April 2012 to £8,105. The advantage to higher rate payers is countered by a lowering of the higher rate threshold, to £35,000 from 6 April 2011 and to £34,370 from 6 April 2012.

 

 

Age-related allowances are reduced by £1 for every £2 that adjusted net income exceeds £24,000 (£22,900), to a minimum PA of £7,475 (£6,475).The MCA is reduced by £1 for every £2 by which the income of the spouse or civil partner with the most income exceeds £24,000 (£22,900), subject to a minimum of £2,800 (£2,670).

Where income exceeds £100,000, the PA, including the minimum age-related allowances, is reduced to nil by £1 for every £2 that net adjusted income exceeds £100,000.

 

Qualifying time deposits

Interest paid on sums held in qualifying time deposit (QTD) accounts is subject to tax, but is currently paid gross to account holders. From 6 April 2012, tax will be deducted at source from taxable interest paid on new QTDs.

 

Pension savings

The annual allowance for tax-privileged pension saving is being cut from 6 April 2011, from £255,000 to £50,000. Where premiums paid in the pension input periods ending in the preceding three years are less than £50,000, unused relief may be carried forward. Where pension savings exceed the limit, a tax charge will arise – if the charge exceeds £2,000 the individual will be able to elect to have it met from the pension benefit, with the scheme paying the tax when the charge arises.

Meanwhile, the lifetime allowance on money that can be accrued in a pension fund and still receive tax relief, is set to fall from £1.8 million to £1.5 million from April 2012.

 

Pensions: requirement to buy an annuity

The pensions tax rules that make it obligatory for members of registered pension schemes to secure an income, usually by buying an annuity, by age 75 are to be removed. This will involve, amongst other things, changes to the rules applying to income drawdown arrangements.

With effect on or after 6 April 2011:

• individuals with defined contribution pension savings from which they have not yet taken a pension will be able to defer a decision to take benefits from their scheme indefinitely
• individuals with a lifetime pension income of at least £20,000 a year will be able to gain access to their drawdown pension funds without any cap on the withdrawals they may make
• the age 75 ceiling will be removed from most lump sums to which entitlement arises and the tax rate on lump sum death benefits will be 55%.

Pensions taxation

Legislation will be introduced in the Finance Bill 2011 to remove the tax charge on borrowing linked to the cost of setting up, managing or administering the National Employment Savings Trust (NEST), subject to conditions. It will also remove the tax liability on any interest payments on late pension contributions made by an employer to qualifying pension scheme. In addition it will provide a regulation-making power to deal with any unintended tax consequences that may emerge as a result of the implementation of NEST and the employer duty provisions as set out in the Pensions Act 2008.

This measure will have effect on or after 6 April 2011 apart from the removal of the tax liability on any interest payments, which will have effect on or after Royal Assent.

 

Domicile and residence

It is proposed that from April 2012 the existing £30,000 annual Remittance Basis Charge (RBC) will be increased to £50,000 for resident, non-domiciled individuals (non-doms) who have been UK resident for 12 or more years. The current £30,000 RBC will continue to apply for those who have been resident for at least 7 out of the last 9 years, and fewer than 12 years. However, the remittance basis tax charge will not apply where non-doms remit foreign income or gains to the UK for the purpose of commercial investment in UK businesses.

Some aspects of the current tax rules for non-doms will be simplified. A proposed statutory residence test is expected to bring clarity.

 

Individual Savings Accounts (ISAs)

The Chancellor has confirmed that the annual ISA subscription limit for 2011/12 will rise from £10,200 to £10,680, up to £5,340 of which can be invested in a cash-only ISA.

Following the closure of the Child Trust Fund to new entrants earlier this year, the Government has announced that tax-free Junior ISAs will be launched from Autumn 2011. They will be available to UK resident children under the age of 18 who do not have a Child Trust Fund account, as a cash or stocks and shares product.

 

Furnished Holiday Lettings (FHL)

Following a consultation on the tax rules for FHL, the law will be changed by the Finance Bill 2011 so that:

• FHL in both the UK and European Economic Area (EEA) will be eligible as qualifying FHL within the (revised) special tax rules. This is the current situation but is not within the legislation
• the minimum period over which a qualifying property must be available for letting to the public in the relevant period is increased from 140 days to 210 days in a year with effect from April 2012
• the minimum period over which a qualifying property is actually let to the public in the relevant period is increased from 70 days to 105 days in a year with effect from April 2012
• losses made in a qualifying UK or EEA FHL business may only be set against income from the same UK or EEA FHL business (existing rules allow set off against general income)
• a ‘period of grace’ will be introduced to allow businesses that do not continue to meet the ‘actually let’ requirement for one or two years to elect to continue to qualify throughout that period.

 

Reduced childcare relief for higher earners

Those joining employer-supported childcare schemes providing childcare vouchers or directly-contracted childcare on or after 6 April 2011 will, if they are higher rate or additional rate taxpayers, have the value of their tax relief restricted to match the value to basic rate taxpayers’. This will be achieved by introducing new income tax exempt limits of £28 per week for higher rate payers and £22 per week for additional rate payers.

 

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Business Tax & Investment Incentives

 

Corporation Tax

Corporation tax rates and bands are as follows:

 

 

The main rate of corporation tax will be reduced to 25% for the financial year commencing 1 April 2012 and to 24% for the financial year commencing 1 April 2013.

 

Associated companies

A new measure amends corporation tax small profits rate legislation. It will ensure that companies are not held to be associated through an attribution of rights (solely by virtue of relationships between individuals), but only where the level of commercial interdependence between the companies themselves makes it appropriate to do so.

The tax effect on companies which are held to be associated is to lower the profit threshold at which they fall within the main rate of corporation tax, in proportion to the number of associated companies.

 

Patents

A reduced 10% rate of corporation tax for profits arising from patents will come into effect from 1 April 2013.

 

Capital allowances

The rates of writing down allowances (WDAs) for new and unrelieved expenditure on plant and machinery will be reduced from 20% to 18% per annum for expenditure allocated to the main rate pool, and from 10% to 8% per annum for expenditure allocated to the special rate pool. This will have effect for chargeable periods ending on or after 1 April 2012 for businesses within the charge to corporation tax and on or after 6 April 2012 for businesses within the charge to income tax.

The Annual Investment Allowance (AIA) will be reduced from the current limit of £100,000 to a new limit of £25,000. This will have effect from April 2012.

The period over which expenditure can be given short life asset treatment will be increased from four years to eight years. This will have effect for expenditure incurred on or after 1 April 2011 for businesses within the charge to corporation tax and on or after 6 April 2011 for businesses within the charge to income tax.

 

Research and development (R&D)

The additional corporation tax deduction given to SMEs for qualifying R&D expenditure will increase from 75% to 100%, giving a total deduction of 200%. Subject to State aid approval, this will have effect for expenditure incurred on or after 1 April 2011. A further increase to 125% will have effect for expenditure incurred on or after 1 April 2012.

 

Controlled foreign companies (CFCs)

The following changes to the CFC rules will be introduced in Finance Bill 2011:

• an exemption for certain intra group trading transactions where there is little connection with the UK
• an exemption for CFCs with a main business of intellectual property (IP) exploitation where the IP and CFC have minimal connection with the UK
• a statutory exemption which runs for three years for foreign subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime
• an alternative to the current de minimis exemption, which will increase the limit to £200,000 profits per annum, and the replacement of the need to calculate chargeable profits with an accounts based measure
• extension of the transitional rules for superior and non-local holding companies until July 2012.

A full reform of the CFC rules will be introduced in 2012.

 

Foreign branches

Legislation will be introduced to allow a UK resident company to make an irrevocable election for all of its foreign branches, located anywhere in the world, to be exempt from UK corporation tax on their profits. If an election is made, no relief will be available for foreign branch losses. This will have effect for accounting periods commencing on or after Royal Assent.

 

Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)

Subject to State aid approval, the rate of income tax relief given under EIS will increase to 30% for shares issued on or after 6 April 2011.

For EIS and VCTs, the following increases will, subject to State aid approval, be introduced for shares in investee companies that are issued on or after 6 April 2012:

• the employee limit to fewer than 250 employees
• the size threshold to gross assets of no more than £15 million before investment
• the maximum annual amount that can be invested in an individual company to £10 million
• the annual amount that an individual can invest under the EIS to £1 million.

Companies whose trade consists wholly or substantially in the receipt of Feed-In Tariffs (FITs) or similar subsidies will only be eligible for the two schemes where commercial electricity generation commences before 6 April 2012. Shares issued before 23 March 2011 will not be affected.

 

Business rates

The Government will offer up to 100% business rate discount for five years to businesses located in any of the 21 new Enterprise Zones.

The small business rate relief ‘holiday’ will be extended by one year from 1 October 2011.

 

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Tax & Travel

 

Car and fuel benefits

The taxable petrol and diesel car benefit is based on the car’s CO₂ emissions. It is calculated using the car’s UK list price and applying the ‘appropriate percentage’ as shown in the table below. The first two lines of figures in the table relate to qualifying low emissions cars (QUALECs).

The car fuel benefit is calculated by applying the same percentages to the fuel multiplier, which for 2011/12 is £18,800.

For cars which cannot produce CO₂ engine emissions under any circumstances when driven (‘zero emission cars’, including those powered solely by electricity), the appropriate percentage is reduced to 0%, thereby reducing the car benefit charge to nil.

For cars emitting between 1 and 75g/km the appropriate percentage is reduced to 5% (8% for diesel) for 5 years from 6 April 2010.

 

List price cap

With effect from 6 April 2011, the list price cap of £80,000 is withdrawn. This will increase substantially the tax charge for drivers of very expensive cars. For example for a car with a list price of £170,000 and CO₂ emissions of 320g/km, the annual taxable benefit will increase from £28,000 to £59,500.

 

Future changes

From 6 April 2012 the table of tax bands will be extended down to a new 10% band for cars emitting up to 99g/km. This will replace the existing 10% band, so that QUALECs will no longer exist as a separate category. The rate for emissions of 100g/km will be 11% and will increase by 1% for every 5g/km to a maximum of 35%, as at present.

 

VAT on fuel for private use in cars

Where businesses wish to reclaim the input VAT on fuel which has some degree of private use, they must account for output VAT on a scale charge.

The table shows the VAT chargeable for quarters commencing on or after 1 May 2011.

 

Mileage rates

Changes to the HMRC business mileage rates are announced from time to time. The rates at 6 April 2011 are as follows:

 

 

The fuel only advisory rates relate to company cars only. They can be applied as a tax-free maximum rate for employees claiming for petrol used on business journeys and for employees reimbursing their employers with the cost of petrol used for private journeys.

HMRC will consider claims for a higher maximum rate, if it can be demonstrated that it is necessary for an employee to use a car with higher than average fuel costs.

 

Car costs – Vehicle Excise Duty (VED) rates

VED (‘Car Tax’) rates also reflect emissions, with lower scale rates for cars using alternative fuels. The following table shows the rates which apply from 1 April 2011 for cars registered on or after 1 March 2001:

 

Company vans

The taxable benefit for the unrestricted private use of vans is £3,000. There is a further £550 taxable benefit if the employer provides fuel for private travel.

 

 

The flat rate of £3,000 is reduced to nil for vans emitting zero CO₂. There is no fuel benefit for such vans.

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Value Added Tax

 

 

Online registration and online filing

Following the Minister for the Cabinet Office’s statement of 23 November 2010 on the “Digital Agenda”, subject to consultation on the detail, the Government will mandate online VAT registration, de-registration and variations. The Government will also put forward regulations which, subject to consultation, will require all remaining VAT customers to file their VAT returns online and pay electronically for periods beginning on or after 1 April 2012.

 

Low value consignment relief (LVCR)

The Government will reduce the LVCR threshold from £18 to £15 from 1 November 2011. This is the threshold below which goods imported from outside the European Union (including the Channel Islands) are VAT-free. The person (or business) to whom the item is addressed is classed as the importer.

 

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Duties

 

Alcohol duty

The impact of the changes on retail prices on or after 28 March 2011 for typical alcoholic drinks is equivalent to:

• 54p on a bottle of spirits
• 4p on a pint of beer
• 15p on a bottle of wine.

The Finance Bill 2011 will introduce legislation for a new duty on beers exceeding 7.5% abv that are produced in, or imported into, the UK. The new duty is to be levied in addition to the existing general duty on beer.

The legislation will also change the taxation of low strength beers by introducing a reduced rate of general beer duty at or below 2.8% abv and above 1.2%. Small Brewery Beer relief will still be available on general beer duty payable on beers above 7.5% abv but it will not apply to the new high strength beer duty. The relief will also not apply to beers at or below 2.8% abv qualifying for the new reduced rate.

 

Tobacco products duty

From 23 March 2011 the duty rates for tobacco products are increased by 2% above RPI. Duty on hand rolling tobacco will increase by an additional 10%. The Government is also restructuring cigarette duty to support health objectives. As a result, ad valorem duty on cigarettes will decrease to 16.5%, and specific duty will increase by 25% above the RPI. This will target the duty increase on cheaper cigarettes, adding 50p to a packet of economy cigarettes and 33p to a packet of premium cigarettes. These changes came into effect on 23 March 2011.

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National Insurance Contributions

 

As previously announced for 2011/12, the main and additional rates of NICs will increase by 1%.

 

 

 

Changes to payment dates - Class 2 NICs

From April 2011, HMRC will issue just two payment requests in the year in October and April, showing payments due by 31 January and 31 July, respectively. This means that the due dates for payment of 2011/12 Class 2 NICs will be 31 January 2012 and 31 July 2012.

 

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Other Measures:

 

Charities, Gift Aid and SA Donate

The existing rule whereby the benefit received by individuals and companies as a result of making donations to charities and community amateur sports clubs in excess of £10,000 is to remain at 5% of the value of the gift, but the monetary cap on the value of such benefits is to increase from 1 April 2011 (companies) and 6 April 2011 (individuals) from £500 to £2,500.

The option to have self assessment repayments donated to charity under the SA Donate scheme is to be withdrawn in respect of:

• tax returns for the tax year 2011/12 onwards
• tax returns for years up to and including 2010/11 where the repayment is made on or after 6 April 2012.

The Government is to consult on a scheme to encourage donation of pre-eminent works of art or historical objects to the nation in return for a tax reduction.

From April 2013, a new scheme will allow charities to claim Gift Aid on up to £5,000 of small donations without the need for Gift Aid declarations.

 

‘Tainted’ charitable donations

The law will be changed to deny tax relief on charitable donations where one of the main purposes of the donation is to receive an advantage for the donor or a connected person directly or indirectly from the charity. These donations will be known as ‘tainted donations’ and there is no monetary limit on the amount of the donation which may be caught by these rules.

The rules will affect charity donations made on or after 1 April 2011 and replace the existing ‘substantial donor’ rules.

 

New data-gathering powers for HMRC

The Finance Bill 2011 will include measures to ‘modernise’ HMRC’s information powers by introducing a single set of general rules.

Notably, HMRC will be able to specify the format in which data is to be provided so that it may be more easily processed. The Government claims that the latest reforms will:

• allow HMRC to use bulk information powers to gather specific pieces of information about a group of taxpayers, for use in risk analysis
• introduce specialist ‘unnamed taxpayer’ powers that are narrowly defined in law to be used in very specific circumstances during a compliance check, such as when it is not clear who the taxpayer is
• allow HMRC to apply to the tribunal for increased daily penalties where data is not supplied
• cover data about certain foreign taxes
• provide a penalty if a person is aware of an inaccuracy when providing information or documents and to correct a minor error in the legislation.

These changes are expected to be introduced from 6 April 2012 and will lead to a significant increase in HMRC’s powers.

 

Security for PAYE & NICs

Legislation in Finance Bill 2011 will introduce a power to allow HMRC to make regulations enabling them to require a security from employers for PAYE that is seriously at risk. The measure will also introduce a criminal offence for non-payment of a security.

Once the new power is in place, HMRC will use existing powers to make equivalent provision in respect of NICs.

 

Disguised remuneration

New measures will ensure that income tax and NICs on employment income are not avoided or deferred through the use of trusts or other intermediaries, including Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS).

The legislation will have effect on or after 6 April 2011 and applies to rewards which are earmarked for an individual employee or otherwise made available on or after that date.

In addition, anti-forestalling provisions apply to the payment of sums (including loans) and the provision of readily convertible assets for the purposes of securing the payment of sums (including loans) where the sum is paid or the asset is provided between 9 December 2010 and 5 April 2011 where, if paid or provided on or after 6 April 2011, they would be caught by the legislation.

 

Mutual Assistance Recovery Directive (MARD)

Legislation will be introduced in Finance Bill 2011 to enable the UK to implement the MARD agreed by EU Finance Ministers during 2010. Under this Directive EU Member States can provide each other with assistance in the recovery of tax debts and duties, which includes service of documents and exchanging information in connection with the recovery of claims.

This measure fulfils the UK’s EU obligations by implementing the directive which provides reciprocal arrangements for recovering and enforcing tax debts and for the exchange of information across the EU.

The Directive becomes fully applicable on 1 January 2012 and the UK legislation transposing the Directive and setting out the detailed rules will come into force on that date.

 

Online tax calculator

The Government will build an online personal tax calculator by 2012 to allow individuals to estimate how much income tax and NICs they pay.

 

Move from RPI to CPI

From April 2012 the default indexation assumption for all direct taxes including income tax, NICs, inheritance tax, capital gains tax and ISAs, will move from the Retail Price Index (RPI) to the Consumer Price Index (CPI).

 

Simplifying the tax system

Ahead of the 2011 Budget, the Office of Tax Simplification (OTS) published its final recommendations for reforming the UK’s tax system.

The OTS, which was tasked with conducting a review of the UK’s tax relief system, has identified 47 reliefs which it says should be abolished and 17 which need to be simplified. It proposes that a further 37 reliefs should be examined in greater detail.

The report recommends the abolition of tax-free luncheon vouchers and relief on late night taxis. Others identified for removal include trade union subscriptions and the business premises renovation allowance.

Among those it suggests simplifying are: Entrepreneurs’ Relief; principal private residence relief; real estate investment trusts; and the enterprise investment scheme. The OTS also called for a wholesale review of inheritance tax and capital gains tax.

In the Budget, the Chancellor agreed to abolish 43 ‘complex reliefs’ but the most significant announcement for the long-term was the Government’s intention to consult on the possibility of ‘merging’ national insurance and income tax in future years.

 

 

 

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2011/12 Tax Calendar

 

April July October January (12)

May August November February (12)

June September December March (12)

 

April 2011

May 2011

 

June 2011

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July 2011

 

 

August 2011

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September 2011

 

 

October 2011

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November 2011

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December 2011

 

 

January 2012

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February 2012

 

 

March 2012

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