UK: Budget 2009

Last Updated: 24 April 2009
Article by Smith & Williamson

Introduction

We have certainly been living in interesting times, to misquote the old Chinese proverb, with the worst recession since the end of World War II, a meltdown in the banking system and a huge hole in public finances.

That sort of scenario would usually be expected to result in immediate increases in the main taxes, but in the Pre-Budget Report (PBR) in November 2008 the Chancellor announced an immediate temporary reduction in VAT in an attempt to stimulate spending on the high street. He did however warn of increased national insurance contributions (NIC) and income tax rates, although these would be delayed until April 2010 and April 2011 respectively.

During the period since November the economic news got worse and the media speculated whether the planned tax and NIC increases might be brought forward. Moreover, the usual scare stories about the possible restriction of tax relief on pension contributions seemed this year to be linked to official sources.

With that background it was perhaps no surprise to hear that the planned tax rises for those with higher incomes will all be brought in next year rather than being phased in over two years and, worse still, the planned 45% rate for those with income in excess of £150,000 will be superseded by a 50% rate.

With effect from 2011, those with income in excess of £150,000 will see their pension tax relief restricted. Or will they? There will of course have to be an election by June 2010 and so it is conceivable that a new government might have a different view.

The Chancellor confirmed that there would be no increases in direct tax rates for 2009/10. His clear focus for this year will be on introducing business incentive initiatives designed to kick-start the economy on the basis that the sooner we get through the recession the sooner tax revenues should recover.

1 Personal and trust tax

1.1 Income tax and National Insurance rates, thresholds and limits

The proposed changes to personal tax rates, allowances and limits and NIC rates and thresholds are set out in Appendix 1.

Several significant changes have been proposed to take effect from 2010/11 as follows:

  • taxpayers with an 'adjusted net income' exceeding £100,000 per annum will suffer a reduction to their personal allowance of £1 for every £2 in excess of £100,000. The maximum reduction is the full amount of the personal allowance;
  • a new higher rate of tax of 50% will apply to taxpayers with income over £150,000 per annum (42.5% for dividend income);
  • the rate applicable to trusts will increase to 50% (42.5% for dividend income).

'Adjusted net income' takes into account specific deductions including payments made to pension schemes, gift aid donations and trading losses.

Comment: Those earning £200,000 will suffer approximately £7,600 of additional tax per annum as a result of the combination of the increased tax rate of 50% and the reduction in personal allowance. A graph which illustrates this increase is set out in Appendix 2.

Although the increase in the basic rate band for 2009/10 of approximately 7.5% appears generous, it should be contrasted with the 0.5% increase given in 2008/09 and can therefore simply be seen as a balancing to the usual 3% to 4% annual increase.

The top rate of income tax was originally announced in the 2008 PBR to be an increase to 45% (not the 50% now proposed), to be introduced from 2011/12 (not 2010/11 as now proposed). A nasty double hit for those affected.

The new 50% rate of tax will apply to discretionary trusts, but without the benefit of the £150,000 band. It is therefore worth considering converting discretionary trusts into revocable life interests. Not only will this remove the anomaly of higher rates of tax suffered by discretionary trusts receiving dividend income, but it will also remove the need for beneficiaries with income of less than £150,000 to seek a tax repayment. There should be no capital gains tax (CGT) or inheritance tax (IHT) disadvantages of creating revocable life interests.

1.2 The remittance basis: Minor amendments

By way of background, UK residents are always assessable on UK income and gains on the arising basis. The remittance basis is an alternative basis of taxation which can apply to foreign income and gains (though there are some specific items of foreign income and/or gains that the remittance basis cannot apply to, such as gains under a policy of life assurance, life annuity or on a capital redemption policy) and can only be accessed by certain individuals. The individual must either be UK resident and domiciled but not ordinarily resident in the UK (in which case he/she is taxable on foreign gains on the arising basis with the remittance basis only applying to his/her foreign income) or a UK resident foreign domiciliary (in which case the remittance basis applies to foreign income and foreign chargeable gains).

Readers will be aware from previous Smith & Williamson publications that Finance Act 2008 (FA 2008) significantly changed the remittance basis provisions. While there were no changes to either who could be a remittance basis user or the underlying principle behind the remittance basis, practically everything else changed with effect from 6 April 2008. In particular, the means of accessing the remittance basis (broadly a claim must be made and a financial penalty suffered) and the meaning of 'remitted to the UK' changed fundamentally.

The package of reforms was highly complex and controversial and to draw a line under the reforms the Chancellor in his Budget 2008 speech made a commitment that the present Government would make no further substantive changes to the tax regime for foreign domiciliaries in this Parliament or the next.

Within the spirit of the Chancellor's statement the financial secretary to the Treasury established the Residence & Domicile (FA 2008) Stakeholder Group to provide a forum in which HM Revenue & Customs (HMRC), Her Majesty's Treasury (HMT) and representatives of tax advisers and the accountancy profession, law societies and others, could discuss and review the operation of the new FA 2008 residence and domicile legislation to ensure that it was working as intended by Parliament. The package of minor amendments announced follows on from the detailed consultation.

Comment: The extensive consultation that has been carried out by HMT/HMRC with external stakeholders is very welcome (it is unfortunate that such consultation was not undertaken before the PBR 2007 when the FA 2008 changes were first announced).

It is understood that the bodies who sent representatives to the Residence & Domicile (FA 2008) Stakeholder Group meetings have found it to be a constructive and helpful process. It is hoped that the Group will continue as there are likely to be further issues arising, in particular once tax return preparation for 2008/09 is underway.

Proposed measures such as the extension of the exemptions for the import of goods, the measures with respect to individuals with small amounts of foreign income and the application of the remittance basis without a formal claim, are a positive set of pragmatic changes that will remove some unnecessary administrative burdens and will reduce the risk of inadvertent non-compliance particularly by those on low incomes. We particularly welcome the retrospective nature of the relieving changes.

We would have liked to see further amendments (particularly with respect to the very wide definition of relevant person which we feel is both impractical and can significantly deter investment in the UK).

Importation of goods

Property (including money) brought to, or received or used in the UK, for the benefit of a relevant person, which represents or is derived from foreign income or foreign chargeable gains constitutes a remittance.

There are transitional provisions (which only apply where relevant foreign income (most commonly foreign savings income, foreign trading profits and profits from a foreign property business) was used to acquire the asset) and five specific exemptions where goods are imported. These exemptions are as follows:

  • the less than £1,000 de minimis rule (this means that the notional remitted amount is less than £1,000);
  • the personal use rule (applicable only to clothing, footwear and jewellery);
  • the repair rule;
  • the temporary importation rule (the property can remain in the UK for no longer than 275 countable days in total); and
  • the public access rule (where the property is a qualifying work of art, collector's item or antique, of educational, scientific or cultural value).

For so long as one or more of these rules apply, the property is exempt property such that the normal rules with respect to remittances to the UK are disapplied. Should the property be in the UK at a time when none of the relevant rules apply and the individual is UK resident, the remittance amount that would have been taxable when the property was first brought into the UK will come into charge.

The current legislation provides that only the public access rule applies regardless of whether the goods derive from relevant foreign income, foreign employment income or foreign chargeable gains, with the other exemptions only applying where the asset is derived from relevant foreign income. It has been announced that with effect from 6 April 2008 (that is with retrospective effect) these exemptions will be extended to apply to qualifying property derived from foreign employment income and foreign chargeable gains as well as relevant foreign income.

Comment: This is a highly welcome simplification measure which will significantly reduce the compliance burden on UK resident foreign domiciliaries. We particularly applaud the decision to backdate the effective date to 6 April 2008.

It should be remembered that the change is only with respect to the exemption provisions and does not apply to the transitional provisions in this area which do only apply where the property derives from relevant foreign income.

Importation of property

Taking into account the above change the less than £1,000 de minimis rule applies with respect to the importation of property of any description provided the notional remitted amount is less than £1,000. The notional remitted amount is the amount that would be treated as remitted if the exemption did not apply, which means it is the amount of foreign income or gains used to acquire the property. There are special anti-avoidance valuation provisions with respect to assets which form a set and only part of the set is imported to the UK. The notional remitted amount is such portion of the total value of the relevant foreign income used to acquire the set as is just and reasonable, having regard to what has been remitted to the UK and what has been left offshore. This specific anti-avoidance measure will be repealed and in its place there will be a statutory valuation rule modelled on this current specific provision which will be applied for the purposes of both the £1,000 de minimis rule and when determining the value of any property imported into the UK. This new rule is to have effect from 22 April 2009.

Comment: The statutory rule will apply if, for example, on or after 22 April 2009 an individual imports one of a set of two valuable vases derived from remittance basis foreign income or gains (the set costing £650,000 with the single vase imported costing £200,000 if it had been bought on a stand alone basis) and the vase remains in the UK for over 275 days (such that the temporary importation rule is not in point). In such a situation, the charge will be the just and reasonable valuation for the vase imported when taking into account the set as a whole and what has been imported.

Gift aid donations

The gift aid provisions allow charities to claim tax relief on any gifts of money from individuals, provided the donor has signed a valid gift aid declaration. It is necessary for the donor to have paid sufficient income tax and/or CGT in the tax year to cover the basic rate tax on the gross donation. If this is not the case, the tax provisions provide for an additional income tax charge on the donor such that he/she has paid sufficient tax to frank the gift.

It was always the Government's intention that in situations where a taxpayer is required to pay the £30,000 remittance basis charge (that is where the UK resident is eligible to access the remittance basis, does not qualify for the automatic remittance basis, is over 18 at some point in the tax year, has been UK resident for at least seven of the preceding nine tax years and wished to claim the remittance basis) the remittance basis charge payment should be able to frank a gift aid payment. There is, however, a problem with the existing legislation such that this result is not achieved. Finance Bill 2009 will amend the provisions to ensure that the original policy intention is achieved and that tax paid with respect to the remittance basis charge will frank gift aid payments. The change will be retrospective having effect from 6 April 2008.

Individuals with small amounts of foreign employment income

With effect for Self Assessment tax returns for 2008/09 onwards individuals in receipt of UK employment income will not have to file a return where:

  • they meet certain conditions with respect to foreign income and gains; and
  • the only reason for their having to submit the UK Self Assessment tax return is that they receive foreign employment income in the tax year (so this exemption will not apply to the selfemployed and is unlikely to apply to higher rate taxpayers).

The conditions with respect to the foreign income and gains are as follows:

  • the overseas employment income for the tax year is less than £10,000;
  • the only other foreign income the individual has is bank interest of less than £100 for the tax year;
  • the individual does not realise any foreign chargeable gains; and
  • both the foreign employment income and foreign bank interest are subject to foreign tax.

Where these conditions are met, depending on the tax rates applicable in the foreign territory, the exemption from filing a tax return may mean that the individual will pay less tax than would otherwise be the case.

Comment: This is a pragmatic measure to save both taxpayers and HMRC from the compliance burden of having to complete and process tax returns where there is little or no UK tax at stake. Again the fact that this measure has effect from 6 April 2008 is welcome.

Application of the remittance basis without a formal claim

One of the fundamental changes that FA 2008 made to the taxation of foreign domiciliaries was that it introduced the rule that for tax years from 2008/09 onwards the arising basis of taxation is the default basis on which UK residents are taxed. The general rule is that foreign domiciliaries have to make a claim to be taxed on the remittance basis for each tax year that they wish it to apply and there is a financial consequence attached to making that claim. However, FA 2008 provides that the remittance basis can apply to a foreign domiciliary without a specific claim having to be made for a tax year in the following two distinct situations.

  • The individual's aggregate unremitted foreign income and foreign chargeable gains for the tax year equates to less than £2,000.
  • In the relevant tax year the individual: -
    • has no UK income or gains; -
    • does not remit any foreign income or foreign chargeable gains; and –
    • is either under 18 throughout the tax year or UK resident in not more than six of the preceding nine tax years.

An individual who comes within the second point above will always want to access the remittance basis of taxation as this will be the most beneficial way that he/she could be taxed as a UK resident.

However, an individual falling within the first point may not wish to be taxed on the remittance basis as the arising basis might be more beneficial (as foreign dividends are taxed at 10% or 32.5% on the arising basis but at 20% or 40% on the remittance basis). The policy intention was not to force people who meet the conditions, such that they can access the remittance basis automatically, to be taxed on that basis should they not wish to be. Finance Bill 2009 will amend the legislation such that it is made clear that qualifying individuals can opt out of the automatic remittance basis and this amending legislation will be effective from 6 April 2008. In addition, with effect from 6 April 2008, the qualifying conditions with respect to individuals falling within the second point will be loosened such that an individual can meet the conditions if he/she has UK income or gains of no more than £100 which have been taxed in the UK. The other qualifying conditions will be unchanged.

The remittance basis and the settlements legislation

The settlements legislation is the name given to complex anti-avoidance provisions that were designed to ensure that a settlor does not reap any tax advantages where property is settled onto a trust with respect to which:

  • the settlor retains an interest;
  • the settlor does not retain an interest but receives a capital sum; or
  • the settlor does not retain an interest but a minor child of the settlor receives income.

The legislation can apply to income received by any settlor-interested trust regardless of its residence status. Broadly, the legislation works by treating the income which arises to the settlement as if the income arose to the settlor directly, which means that tax is due at his or her marginal tax rate. There are specific rules for foreign domiciliaries who are remittance basis users. Such individuals are not subject to tax on foreign income arising within the settlement unless it is remitted to the UK. The wording of the legislation is such that where a remittance is made the income is only treated as arising under the settlement in the tax year that the remittance takes place.

These rules were not amended as a result of FA 2008 changes and, accordingly, do not sit comfortably within the new remittance basis regime. Legislation will be introduced to clarify the interaction between the remittance basis regime and the settlement legislation, and this will have effect from 22 April 2009.

In addition, retrospective legislation will be enacted, which will have effect from 6 April 2008, to enable FA 2008 transitional provisions, which override the general definition of remitted to the UK in certain cases where foreign income arising prior to 6 April 2008 would otherwise be deemed to have been remitted, to apply to income arising to the settlement prior to 6 April 2008 but not remitted to the UK until on or after that date (the provision within the settlements legislation deeming the remitted income to have arisen in the tax year of remittance will be overridden to allow the transitional provisions to apply).

Comment: Enacting legislation to clarify the interaction between the remittance basis regime and the settlement legislation appears sensible. The retrospective amendment such that income arising to the settlement prior to 6 April 2008 can fall within the transitional provisions is very welcome.

Not ordinarily resident employees and HMRC Statement of Practice 1/09

For 2009/10, HMRC has issued Statement of Practice 1/09 (SP 1/09) which sets out how it will treat transfers made from an offshore account which contains only the income relating to a single employment contract, and how earnings should be apportioned between UK and non-UK employment where an employee is UK resident but not ordinarily resident and taxed on the remittance basis. This replaced Statement of Practice 5/84 (SP 5/84) which was withdrawn with effect from 6 April 2009.

The Government intends to replace SP 1/09 with legislation in Finance Bill 2010. The delay of one year is to allow for an adequate period of consultation with external stakeholders.

Comment: The rules with respect to foreign employment income, where individuals are not ordinarily resident, are more generous than those for other UK resident employees. Where the duties from a single office or employment are performed both inside and outside the UK, the foreign earnings part is only taxable on the remittance basis. Given that at the time that salary payments were made it was not known what proportion of the payment relates to foreign earnings it has been common practice for the entire amount to be paid into an offshore account.

There needed to be an accepted practice for determining what was remitted from the account and SP 5/84 was introduced to deal with the practicalities of this situation by determining that any remittances from the account, not in excess of the final amount determined to relate to UK income, was matched to UK earnings.

Following the enactment of FA 2008 there were considerable concerns with respect to what would happen for 2008/09. HMRC announced in March 2009 that for 2008/09 SP 5/84 will continue on the same basis as in 2007/08. This means HMRC will accept that the treatment in SP 5/84 is allowable even where this is more favourable to the taxpayer than the legislative provisions. Given that this is concessionary, HMRC reserve's the right to withhold the concession in particular cases where it feels the concession is used for tax avoidance purposes.

To fall within the new SP 1/09 individuals may have had to make some changes to their banking arrangements prior to 6 April 2009, such as:

  • making arrangements to receive their salary into a bank account held solely in their own names (that is the salary cannot be paid into a joint account);
  • ensuring income from other employment(s) is not credited to that same bank account; and
  • ensuring income from other sources is not credited to that same bank account – other than interest earned on that account.

It is unfortunate that it took until March 2009 for information to be available in respect of this area. It is, however, welcome that legislation will only be enacted after adequate consultation.

Meaning of the term 'participator' as it applies in the relevant persons' definition

The concept of relevant person is central to the FA 2008 provisions defining 'remitted to the UK'. Where the foreign income or foreign chargeable gains arose or accrued prior to 6 April 2008, for the purposes of the charging provisions, the legislation defines 'relevant person' to mean just the individual with respect to whom the foreign income or foreign chargeable gains arose or accrued. Where the foreign income arose or the foreign chargeable gains accrued after 5 April 2008, a relevant person is defined as: (a) the individual, (b) the individual's husband or wife, (c) the individual's civil partner, (d) a child under 18, or grandchild under 18 of someone within one of the above categories, (e) a close company in which a person falling within any other categories is a participator, (f) a foreign company, that would be a close company if UK resident, in which a person falling within any other category is a participator, (g) the trustees of a settlement where a person falling within any other category is a beneficiary or (h) where specified conditions are met a body connected with such a settlement. For the purposes of this legislation individuals living together are treated as husbands and wives/civil partners. A relevant individual is someone within categories (a) to (d).

The term participator is not itself defined and it is not apparent that references to a close company include subsidiaries of companies. The policy intention was that such entities would be included and, with effect from 22 April 2009, the legislation will be amended to provide appropriate definitions such that this objective is met.

Comment: The amendment itself is not surprising. The inclusion in the definition of relevant person of a close company in which a person falling within any other categories is a participator is, however, deterring investment in the UK and is, accordingly, regrettable.

1.3 Taxation of personal dividends

Under current law, UK resident (and non-UK resident Commonwealth and European Economic Area (EEA) individuals are entitled to a non-repayable dividend tax credit of one-ninth of the distribution against their UK tax liability where:

  • the distribution is from a UK resident company; or
  • the distribution is from a non-UK resident company which is not an offshore fund and where the shareholder owns less than a 10% shareholding.

With effect from 22 April 2009, the eligibility of the non-repayable tax credit will be extended to individuals who own shareholdings of 10% or greater in the distributing non-UK resident company.

However, the tax credit will only be available if the source country is a 'qualifying territory', being a territory which has a double taxation agreement with the UK containing a non-discrimination article. HMRC will be permitted to vary the list of qualifying and non-qualifying territories. There will also be anti-avoidance measures to ensure that these new rules are not subject to abuse.

Comment: This change is welcomed to bring the position of shareholders with holdings of 10% or more in line with shareholders of less than 10% of the company. It will be interesting to see how wide ranging the anti-avoidance measures will be when Finance Act 2009 is published.

1.4 Taxation of distributions to individuals from offshore funds

Since 6 April 2008, individuals with shareholdings of less than 10% in non-UK resident companies have been entitled to claim a non-repayable tax credit. However, the ability of shareholders to receive a similar tax credit in respect of holdings in offshore funds was withdrawn as some collective investment schemes sought to secure tax advantages by locating their cash and bond fund ranges offshore.

Finance Bill 2009 will remove the restriction to the non-repayable dividend tax credit for individuals in receipt of offshore fund distributions, irrespective of the size of the holding, where the offshore fund is largely invested in equities.

However, where the offshore fund holds more than 60% of its assets in interest bearing (or economically similar) form, any distribution will be treated in the hands of the UK individual investor as interest.

Both of these changes will take effect from 22 April 2009.

Comment: The first change brings the tax treatment of such equity based distributions in line with those of non-UK resident company distributions and is therefore welcomed. The second change results in higher tax liabilities for the shareholders as the tax rates applicable will be those applied to savings income (20%/40%) as opposed to 10%/32.5% for dividends and no tax credit will be available. It is interesting to note that the dividend credit does not apply to trustees' investments.

1.5 UK tax exemption on dividends for Lloyd's corporate members

Corporate members of the Lloyd's insurance market will no longer pay corporation tax on UK dividend income received on or after 1 July 2009.

Tax on foreign dividends will also broadly be exempted under the separate foreign profits measures.

Comment: This represents a tidying up provision to bring Lloyd's corporate members into line with general insurance companies who do not currently pay tax on UK dividends.

1.6 Anti-avoidance: Interest relief

From 19 March 2009, tax relief for interest payments on loans used by individuals to invest in partnerships or small ('close') companies will be denied when this is done for the purpose of tax avoidance.

Comment: The new measure has been introduced following notification to HMRC of schemes to exploit the existing provisions of allowing income tax relief for loan interest paid against the investors' other income, particularly in relation to arrangements where the borrower is guaranteed to make a profit as a result of the availability of that relief.

1.7 Financial Services Compensation Scheme (FSCS): Payments representing income

Legislation will be introduced in Finance Act 2009 to bring into the charge to income tax accrued income received with compensation paid to individuals as a result of defaulting financial institutions. The measure is to ensure that the financial institutions' customers are in the same position as if the accrued interest were paid by the defaulting financial institution and will apply to payments received on or after 6 October 2008.

1.8 Furnished holiday lettings in the EEA

It has been brought to the Government's attention that the specification that furnished holiday accommodation must be situated in the UK may not be compliant with European law and the following has been announced:

  • the special rules for furnished holiday letting will be repealed from tax year 2010/11 onwards;
  • for the current tax year and prior years (where the return can be amended or where a claim can still be made) HMRC will regard the furnished holiday letting rules as applying to furnished holiday accommodation situated anywhere in the EEA provided the other qualifying conditions are met;
  • until 31 July 2009, where a property is not situated in the UK but meets all the other furnished holiday accommodation rules and is situated elsewhere in the EEA, HMRC will accept late amendments, claiming one of the reliefs or other favourable treatments, for income tax and CGT tax returns for the tax year ending 5 April 2007 and corporation tax returns for accounting periods ending on or after 31 December 2006;
  • taxpayers are still in time to file amendments to tax returns for the tax year ending 5 April 2008.

Comment: It is apparent that the repeal of the favourable income tax and CGT treatment for qualifying furnished holiday lettings from tax year 2010/11 has been caused by the reluctance of the Government to allow the provisions to apply to qualifying furnished holiday lets anywhere in the EEA. We expect an outcry from the holiday and tourist industry echoing that which occurred in the 1980s (following a change in the late 1970s to the old HMRC practice of regarding the provision of holiday accommodation as a business activity) and which led to the introduction of the current legislation.

If the proposals go ahead, 2009/10 will be the last year for which an owner will be able to claim entrepreneurs' relief on the disposal of a qualifying furnished holiday let. This could result in a rush to try to sell qualifying properties before 5 April 2010 and the resulting surplus of properties for sale could delay any recovery in the housing market in popular tourist areas around the UK.

Where in previous tax years taxpayers have let residential properties in other EEA

countries it will be necessary to check whether they meet the qualifying conditions

and to see whether favourable amendments or claims can be made. For example:

  • a claim for business asset taper relief can be made (provided the tax return amendment is submitted by 31 July 2009) if a property situated in (say) Spain would have qualified as a furnished holiday let throughout the period of ownership by the individual (which was at least 12 months) and was disposed of in 2006/07;
  • a sideways loss relief claim can be made with respect to a loss in tax year 2006/07 (provided the tax return amendment is submitted by 31 July 2009) if it resulted from letting in the tax year a property which apart from being situated in Spain would have qualified as a furnished holiday let;
  • similar claims can be made for 2007/08 within the usual self assessment time limits.

1.9 UK personal allowances and reliefs for non-resident individuals

Certain non-UK residents can claim the personal allowance in the tax year. The individuals who may qualify are:

  • an EEA national;
  • a resident of the Channel Islands or the Isle of Man;
  • a person who has previously resided in the UK and is resident abroad for the sake of his/her own health, or that of a member of his/her family who is resident with the individual;
  • a person employed in the service of any territory under Her Majesty's protection;
  • a person employed in the service of a missionary society;
  • a person whose late spouse or late civil partner was employed in the service of the Crown; or
  • a UK, Republic of Ireland or Commonwealth citizen.

In addition non-UK resident individuals may be able to claim the personal allowance under the provisions of a relevant Double Tax Treaty.

From 6 April 2010, Commonwealth citizenship will no longer be sufficient for a non-UK resident to be entitled to claim the UK personal allowance. This is because HMRC has been advised that allowing a non-UK resident individual to claim the UK personal allowance purely by virtue of being a Commonwealth citizen is not compatible with the Human Rights Act. HMRC believes that the vast majority of individuals affected will still be able to benefit through other means such as the provisions of a relevant Double Tax Treaty.

Comment: The Government appears to have had no choice in this matter.

It should be remembered that an individual who will be affected by this change may not actually have been claiming the personal allowance as his/her UK income profile may mean that the disregarded income provisions are more favourable.

1.10 Child Trust Fund: Payments for disabled children

Currently, contributions of up to £1,200 per annum can be made into a Child Trust Fund account by family and friends for children born on or after 1 September 2002. From April 2010, the Government will make an additional contribution of £100 per annum to each Child Trust Fund account of a disabled child. Severely disabled children will receive an additional contribution of £200 per annum.

Comment: This is a welcome additional contribution to the Child Trust Fund and it is noted that the additional Government contributions will not count towards the £1,200 per annum maximum.

1.11 Substantial donor rules

The substantial donor rules were introduced to counter the abuse of charitable status by those who influence or set up charities with a view to avoiding tax rather than with any charitable intent.

Where a charity enters into a specified transaction with a 'substantial donor' (or someone connected to a substantial donor), this is treated as non-charitable expenditure which may result in a tax charge for the charity.

Under current law, a substantial donor is a person that makes tax relievable donations of £25,000 or more to a charity in 12 months, or £100,000 or more in a period of six years.

From 23 April 2009, this relievable gifts threshold of £100,000 in a period of six years will be increased to £150,000. The annual limit of £25,000 is unaffected.

Comment: The increase in threshold is welcomed although it is disappointing that further measures were not introduced to reduce the burden on charities. Proposals such as an anti-avoidance motive test have been put forward and the Government plans to launch further informal consultations on this matter.

1.12 Inheritance tax: Extension of agricultural property and woodlands relief to land in the EEA

Agricultural property relief (APR) reduces the value of qualifying agricultural property subject to IHT. Woodlands relief (WR) allows IHT to be deferred on the value of timber or underwood until it is sold. Where APR applies, the CGT legislation will generally also allow hold-over relief on the deemed gain on a gift or sale at an undervalue. Current UK tax legislation only allows APR where the property is situated in the UK, the Channel Islands or the Isle of Man, and WR is only available where the woodland is located in the UK.

The territorial restrictions are contrary to European Union (EU) law and the European Commission (EC) requested that the British Government review the reliefs. This review has been completed and the following changes will be made:

  • with effect from 22 April 2009, both reliefs will be extended to apply to qualifying property situated anywhere in the EEA;
  • IHT paid on or after 23 April 2003 in relation to agricultural property located in an EEA state at the time of the chargeable event will be eligible for repayment with Finance Bill 2009 providing that the earliest deadline for reclaiming overpayments will be 21 April 2010;
  • for deaths before 22 April 2009, WR can be claimed where the other qualifying conditions are met and the land is in an EEA state. The general time limit for such claims is within two years of the date of death and
  • Finance Bill 2009 will provide that the earliest deadline for reclaiming overpayments will be 21 April 2010; Finance Bill 2009 will extend hold-over relief to agricultural property in EEA states which has been farmed by a person other than the owner; and
  • hold-over relief will also become available in respect of previous disposals of agricultural property located in a qualifying EEA state. The time limit for claiming hold-over relief is currently five years from 31 January following the tax year to which the claim relates. Claims to relief in respect of the tax year 2003/04 onward can still be made (with the 2003/04 deadline being 31 January 2010). The reductions to the time limits for claims that are to come into effect mean that claims for 2004/05 and 2005/06 will have to be made by 1 April 2010.

It should be noted that the changes to the time limits for making a repayment claim for overpaid IHT will come into effect from 1 April 2011. This may be pertinent as it will reduce the statutory time limit for making repayment claims where IHT has been paid and APR is available from six years to four.

Comment: There were concerns that rather than extend the relief to qualifying property within any EEA state the reliefs would be abolished or the relief reduced significantly. This would have been a significant blow for the farming community and the Government's decision to extend the reliefs in the way it has is to be welcomed.

1.13 Three line accounts threshold

It is currently possible for unincorporated businesses, and persons in receipt of rental income, to include on the annual Self Assessment tax returns a simple 'three line' declaration of income, expenditure and profit. All others must provide a considerably more detailed breakdown.

The condition to qualify to submit returns on this simplified basis is that turnover must not exceed £30,000 for an unincorporated business, £15,000 for a rental business. It is proposed that these be increased in line with the VAT registration threshold (£68,000 from 1 May 2009).

The proposed change is with a view to it being introduced from the 2009/10 tax returns, and if adopted to be confirmed in the 2010 Budget.

The change will not affect the statutory Self Assessment record keeping requirements.

Comment: This proposal has 'simplification' stamped all over it and in the bulk of cases this result will be achieved. It will still however be necessary to maintain meticulous financial records in anticipation of an HMRC enquiry.

2 Business

2.1 Corporation tax rates

The main rate of corporation tax applicable to taxable profits above £1.5m for the financial year commencing 1 April 2010 is to be kept at 28% for profits other than ring fence (North Sea oil extraction) profits. Ring fence profits at this level will remain subject to corporation tax at 30%.

The Budget also gave confirmation of the PBR announcement that the small companies' rate of corporation tax would remain at 21% for the financial year commencing on 1 April 2009 (19% for ring fence profits). The lower and upper limits for marginal relief calculation remain unchanged at £300,000 and £1.5m respectively. The fraction used for calculating marginal relief will remain at 7/400 (11/400 for ring fence profits).

Comment: The deferral of the increase in small companies' corporation tax rate to 22% was announced in the 2008 PBR and this pledge has been honoured.

2.2 Extension of trading loss carry back for business

To help businesses of all sizes with cashflow in respect of tax losses, the Chancellor announced an extension to the carry back rules for trade losses in the 2008 PBR, covering losses incurred in accounting periods ending within a 12-month period. Budget 2009 has announced an extension to this facility to cover losses incurred in accounting periods ending in the next 12-month period. The rules for companies and unincorporated businesses are slightly different.

For companies with losses incurred in accounting periods ending on or after 24 November 2008 and on or before 23 November 2010, it will be possible to elect to carry back up to £50,000 of unrelieved trade losses for each 12-month period within the set dates, against any profits of the previous three years. The £50,000 limit will be adjusted pro-rata for accounting periods ending within the above dates that are less than 12 months. This will also limit the total loss relief for all accounting periods ending in each 12-month period to £50,000. The loss will be set against later years before earlier years.

The existing loss reliefs (carry back against any profits of the previous 12 months, or unrestricted carry forward period against future losses from the same trade) will continue. In addition to normal businesses, the extension applies to losses incurred in the oil and gas ring fence regime and losses incurred in a furnished holiday lettings (FHL) business (subject to the proposed changes for FHL businesses.

For unincorporated businesses with losses incurred in the 2008/09 tax year, it will be possible to carry back up to £50,000 of unrelieved trade loss against profits of the same trade, or the same profession or vocation, or the same furnished holiday business, for the three years before 2008/09. The same three-year loss carry back facility applies to losses incurred in the 2009/10 tax year.

The guidance at PBR 2008 indicated that the new extended loss relief rule would apply only where a claim for relief is first made under ITA2007 s64 (relief for loss against general income of the loss making year or the previous tax year or both). If such a claim is possible the relief will also be available where no claim is made due to the absence of other profits in the loss making year or the previous year, if it would otherwise be possible to make a claim. The new loss relief will be available against profits of a later year before an earlier year. The loss claim can also reduce the National Insurance liability.

Although claims for loss relief will be accepted when they can be made under the existing rules for claiming any repayment of tax will only be made as soon as possible after Budget day (presumably after Royal Assent in 2009).

Comment: The new corporate loss relief is referred to as an 'extended' loss relief, and it will be available for offset against any type of profit of previous years. The guidance therefore implies that where the loss can be fully utilised in the immediately preceding year there will be no option to carry back £50,000 to the two years preceding that instead. In view of the state of Government finances it is perhaps unsurprising the £50,000 limit to this relief has not been increased.

It appears the £50,000 limit is a restriction per company rather than a restriction per group, and that the loss period will coincide with the current period of economic downturn (accounting periods ending on or after 24 November 2008 and on or before 23 November 2010).

For unincorporated businesses, relief is only available against previous profits from the same trade. The one year period announced in PBR 2008 would have meant that the results of many unincorporated businesses adversely affected by the downturn may not have been eligible for the extended relief. It is pleasing that this relief has been extended.

2.3 Temporary FYAs: General plant or machinery

The Government has announced a temporary rate of 40% for First Year Allowances (FYAs) on plant or machinery expenditure qualifying for the general pool (otherwise attracting writing down allowances of 20%). The expenditure must be incurred in the 12-month period from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses, and there is no limit to the amount of qualifying expenditure for which relief can be claimed.

Excluded from qualifying for the FYA will be plant or machinery expenditure such as:

  • special rate expenditure such as long-life assets and integral features (including electrical, lighting and cold water systems, space or water heating systems, lifts and escalators and external solar shading);
  • cars;
  • assets for leasing.

Unincorporated businesses with a 30 April 2009 year end will be able to claim a 40% FYA for that accounting period on qualifying expenditure incurred between 6 April 2009 and 30 April 2009. They will also be able to claim 40% FYA on qualifying expenditure incurred during their next year end, 30 April 2010, for qualifying expenditure incurred between 1 May 2009 and 5 April 2010.

A 30 April 2009 year end for an established business will form the basis of their assessment for 2009/10 and any claim for the FYA must be made by 31 January 2012.

A company with a 31 March year end will be able to claim the 40% FYA for qualifying expenditure incurred between 1 April 2009 and 31 March 2010 and will need to make the claim by 31 March 2012.

Comment: The temporary FYA of 40% is a welcome aid for capital intensive businesses who have been disadvantaged by the FA 2008 reduced rates of allowance which were used to finance the cut in the main corporation tax rate. Unlike the annual investment allowance (AIA), the amount of expenditure which can qualify for the 40% FYA is not restricted, though expenditure on integral features and cars will not qualify.

It may be possible to use these allowances to increase trade losses that can be carried back to earlier periods (after exhausting certain loss reliefs).

2.4 Enhanced capital allowances on energy saving and water efficient technology

Changes to the categories of qualifying expenditure for 100% FYA on energy saving and water efficient plant or machinery have been announced.

The energy efficient scheme list will be revised to include one new technology (uninterruptible power supplies) and two new sub-technologies (air to water heat pumps and close control air conditioning systems).

Three existing sub-technologies (air source: single duct and packaged double duct heat pumps, ground source: brine to air heat pumps and water source: packaged heat pumps) will be removed.

Comment: While it is useful to have extra categories of energy efficient expenditure which qualify for 100% writing down allowances, this regime remains relatively complex to apply and it would have been helpful if the regime could have been simplified.

2.5 Anti-avoidance involving plant and machinery leasing

With effect from 13 November 2008 the following anti-avoidance measures involving plant or machinery (P&M) leasing took effect

  • the disposal value for lessees under long funding leases was been amended so that it became the higher of (i) the full lease rentals less finance costs and (ii) market value;
  • the opportunity to claim capital allowances (or even FYA) on the current market value of plant or machinery on which allowances have already been claimed, using a combination of long funding finance and long funding operating leases was blocked.

With effect from 22 April 2009 the definitions of sale and lease back arrangements in existing capital allowance anti-avoidance legislation is amended to ensure a wider range of transactions are caught and amendments are made to ensure initial payments under a lease do not escape taxation.

The long funding leasing rules were introduced with the intention of removing the tax distortion for a decision on financing the purchase of P&M between using either bank loan or capital, or alternatively using lease finance. These rules seek to transfer the right to capital allowances from the lessor (legal owner of the P&M) to the lessee, in the case of a long funding lease.

Prior to these rules a business which was unable to make immediate use of the tax allowances arising from plant or machinery could access these tax benefits using lease finance. A long funding lease is an operating lease with a length of five years or more, or a finance lease exceeding either five or seven years in length depending on the terms and accounting of the lease.

Comment: Although detailed rules assist taxpayers with certainty, the regular changes to correct weaknesses in anti-avoidance legislation show that greater thought needs to be given to its design.

2.6 Capital allowances on cars

Budget 2008 announced a new capital allowance regime for cars, commencing in April 2009, it is implemented with effect from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses, and was confirmed by HMRC on 1 April 2009 together with amended draft legislation incorporating anti-avoidance provisions. The main provisions of the new regime are:

  • 100% FYA for cars with CO2 emissions not exceeding 110gms/km;
  • capital expenditure on business cars will be allocated to the special rate pool (10% rate of writing down allowance) where CO2 emissions exceed 160gms/km;
  • capital expenditure on business cars will be allocated to the general pool (20% rate of writing down allowance) where CO2 emissions do not exceed 160gms/km;
  • business cars costing £12,000 or more where expenditure was incurred before the commencement date will remain in single asset pools attracting the 20% rate of writing down allowance for a five-year period to 31 March 2009 for companies and 5 April 2014 for unincorporated businesses, after which any remaining balance will be transferred to the main P&M pool; and
  • anti-avoidance provisions will prevent or restrict balancing allowances being triggered on single asset car pools where the disposal relates to a 'relevant transaction' (for example a sale and leaseback transaction involving connected persons), or where a group company whose only business is providing company cars is wound up within the group in order to trigger the balancing allowance.

As part of the new regime for cars, the previous lease rental restriction based around a formula comparing cost of the car and £12,000 will be replaced with a flat rate disallowance of 15% of the hire cost for hire cars with CO2 emission levels above 160 gms/km. The precise scope of this restriction has been clarified to cover all hire cars unless one of the following two conditions applies:

  • the hirer hires
  • the car for a period of 45 consecutive days (or linked periods) or less, or; the car is hired for and sub-leased for a period exceeding the 45 days and the sub-lessee is not an employee of the hirer (or someone connected with the hirer).

Comment: The new regime for capital allowances on cars has been discussed for some time, and now that it is in operation, should lead to simplification of administration. The balancing allowances previously available on disposals from single asset car pools are of course no longer available for new capital expenditure, as any balance of unrelieved expenditure will remain in the pool for writing down over future accounting periods.

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