UK: Budget 2009 - Immediate Reactions

Last Updated: 22 April 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

Comment by Sally Grimwood, Tax Director, Deloitte

Headline news from this Budget is the tax rises for higher earners from April 2010. From that date:

  • The tax rate for those earning more than £150,000 will be 50% (not 45% from 2011, as announced in the PBR).
  • The personal allowance will be withdrawn from those earning more than £100,000 (not halved and then withdrawn from 2011, as announced in the PBR). That represents a cost of £220 per month for those affected.

It's hard to see ways to shelter income from the 50% tax rate as there are also restrictions on pension contributions from April 2011 for those earning more than £150,000 - see the section on individuals below for more information.

Click here for HM Treasury's costings of each of the changes announced in the Budget - see Table A1 on page 160 (or page 153 as numbered). It's a good way to see the winners and losers at a glance. What's noticeable this year is that the scale of wins and losses is smaller than for past Budgets and PBRs - although when it comes to personal tax rises do read the footnotes at the bottom because the figures in the table itself don't take account of the changes already announced at PBR 2008. It's clear that when you add PBR 2008 to Budget 2009 then higher rate individuals are paying a whacking £7 billion additional tax per year. The rest of the measures might grab headlines but don't add up to that much.

The key measures for corporates

The big news on Foreign Profits is that we finally have a commencement date - the exemption for dividends starts from 1 July, and the worldwide debt cap will apply to accounting periods beginning on or after 1 January 2010. Our view is that the dividend exemption is largely fine but that the worldwide debt cap still has problems, so the deferral of the worldwide debt cap is appreciated. Note also that the extension to anti avoidance on interest deductions has disappeared. What we don't have is new legislation, and we're not expecting any until the Finance Bill is published on 30 April. Even then, we know that not all the legislation will be included in the first draft Bill as HMRC has already said that more will be added at the Committee stages. Most people will be glad to know the deadline to take action, but may want to hold fire on analysis until the legislation is out.

We now have SOX for Tax. Financial officers of large companies (basically those not defined as small or medium in the Companies Act) will be required to certify annually that their accounting systems are fit for tax purpose... and the critical question is how the CFO can get comfortable with their accounting systems and any assurances given to the CFO by the head of tax.

Two measures relating to intangibles are worth a look. First, the government will be consulting on the taxation of IP in general terms, with the vaguest hint that the Treasury might be considering a "royalty box" type regime. This is a great chance for companies to influence future policy, so give though to what you want to see. On the other hand, there is a retrospective change to the taxation of goodwill arising on intragroup transfers, putting beyond any doubt that the Revenue won't accept that such transfers create a new tax deduction.

The Chancellor announced the doubling of capital allowances to 40% for the current tax year. This will be of absolutely no benefit to those making losses, and worth very little to the profitable because the net present value is next to nil.

Finally, it looks as though pension contribution relief for corporates remains unrestricted, even though 50% individual taxpayers will find their relief restricted. There will be measures put in place to prevent employers making salary sacrifice pension arrangements for those 50% taxpaying people.

The key measures for entrepreneurial businesses

The 3 year £50k loss carry-back has been extended by a further year. As it's only worth c.£10k in cash tax for most businesses, it's nice enough but not nearly big enough to make a significant difference.

On the plus side, the Chancellor confirmed the Business Payment Support scheme will be extended. 100,000 taxpayers in financial difficulties have deferred £1.8 billion across all the taxes, and the extension beyond the current six month limit is much welcomed. We can help clients to apply for deferrals under the BPSS, and also help them improve their cashflow so that they can pay their tax when the deferral ends.

The key measures for VAT and Indirect

Non-specialists: don't panic if you can't spot any interesting announcements in the VAT area - it's because there's nothing interesting to spot! Most importantly, we have not seen an increase to the VAT rate to 18½% as had been widely predicted.

Specialists: there are some specific niche areas worth a look, and the Press Notices are here.

The key measures for individuals

From April 2011 tax relief for pension contributions will be restricted for those earning more than £150k, tapering to the same 20% level of relief as is enjoyed by basic rate tax payers. That could seem particularly harsh when you consider that a 40% taxpayer (e.g. somebody earning £100k) will still enjoy full relief. Further, it makes no sense for people nearing pensionable age to make contributions relieved at 20% if they're expecting to receive a pension in a couple of years' time that's taxable at 50%. It also looks like you won't be able to prefund your pension scheme this year, before the tax rate increase to 50% kicks in, and will have difficulty switching from employee to employer contributions.

As has been widely flagged in advance, the Stamp Duty Land Tax threshold extension from £125,000 to £175,000 will continue to the end of this year Extension of the SDLT threshold by 3 months. This will help perhaps 9,000 purchasers per month in pretty much all regions of the UK (other than London and the South East, where the average house price is still more than the limit), and will cost the Treasury c.£100 million. Obviously this will only be of interest to those looking to move.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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