UK: Pre-Budget Report Briefing - If It Counts, It's Covered

Last Updated: 10 December 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

INTRODUCTION

With UK GDP contracting more sharply than expected at Budget 2009, the purpose of the Pre- Budget Report (PBR) is to maintain economic stability. The Chancellor refrained from increasing rates of income tax beyond those previously announced. The rates for corporation tax and capital gains tax are unchanged.

As anticipated, a one-off tax of 50%, payable by banks, was announced on bonuses over £25,000. The restoration of the VAT rate back to 17.5% from 1 January 2010 was confirmed and no subsequent increase in the VAT rate was announced. Other key measures include:

  • A further increase in National Insurance Contribution rates of 0.5% from 2011, in addition to the 0.5% increases announced in PBR 2008;
  • A delay in the increase in the corporation tax rate for small companies to 22% until 2011; and
  • The introduction, in 2013, of a new 10% corporation tax rate on income from UK patents.

There are other measures in relation to tax avoidance schemes and reporting. New business and personal reliefs are modest.

Business Tax

Bank Payroll Tax

Finance Bill 2010 will include provision for a special Bank Payroll Tax. This will broadly apply to employees performing 'banking services' who are either UK resident or perform UK duties and are awarded a bonus between 9 December 2009 and 5 April 2010. It will not apply where the payer has no discretion as to the amount of the bonus due to a contractual obligation existing as at 9 December 2009. The tax liability will fall on the bank and will be chargeable at the rate of 50% on the amount by which the bonus exceeds £25,000.

The payroll tax will be payable on 31 August 2010 and will not be deductible when calculating the bank's taxable profits or losses.

Small companies' rate of corporation tax

The planned increase in the small companies' rate of corporation tax for the financial year starting 1 April 2010, from 21% to 22%, has been deferred by one year.

Worldwide debt cap

Draft legislation has been published to address several areas of technical difficulty identified in the worldwide debt cap rules. The changes are as outlined in the HMRC technical note published on 10 November 2009 and relate largely to issues relating to securitisation companies, partnerships, group treasury companies and guarantee fees. The problems relating to the treatment of derivatives under the debt cap rules have not yet been addressed and are still under consideration by HMRC.

Simplification of capital gains rules

HMRC have announced that they will issue a consultation document that will detail proposals to simplify the capital gains regime for groups of companies. No date has been announced but this is expected to be published soon.

Stamp duty and SDRT

The Government has confirmed it will legislate in reaction to HSBC Holdings Plc, a European Court of Justice case declaring the 1.5% SDRT charge on the issue of UK shares into EU clearance services to be illegal. The Government does not plan to reverse that decision but wants to counteract arrangements under which EU clearance services or depositary receipt systems could be used to route UK shares into non-European equivalents free of the 1.5% stamp duty and SDRT charges.

The measure will be backdated to take effect from 1 October 2009, the date on which the decision was released.

Research and Development (R&D) changes

The requirement in the SME regime for Intellectual Property (IP) derived from R&D expenditure to be owned by the claimant company is abolished. This means that affected companies undertaking their own R&D work will be able to claim under the SME regime without considering their IP ownership. In addition, more SMEs carrying out subsidised R&D will now be able to claim the large company R&D benefit.

This change simplifies the rules for SMEs and removes one of the conditions which has caused most confusion and concern. It will have effect for any expenditure incurred by SMEs on R&D in accounting periods ending on or after 9 December 2009.

Patent box

A 'patent box' regime is to be implemented in April 2013. Income from UK registered patents will be taxed at 10% but the regime is restricted to patents granted after the legislation is passed. There will be consultation on this measure with business in time for Finance Bill 2011.

Leasing

New measures will be introduced to prevent a potential inequity in the Sale of Lessor Companies provisions. These provisions impose a charge and provide a matching relief designed to recoup the tax timing benefit enjoyed by the selling group and return the benefit to the buying group. In certain cases, companies have had difficulty in utilising this relief. Therefore, the PBR announces measures to elect for an alternative treatment to prevent this.

Additional measures were announced to tackle specific avoidance schemes using 'Schedule 10' and other schemes which involve leasing companies being subject to corporation tax on substantially less than their commercial profits.

Excess capital allowances

Draft legislation has now been published in respect of measures announced on 21 July 2009 which seeks to prevent companies buying a company with 'excess' capital allowances.

Measures will be introduced to restrict the utilisation of any 'excess' allowances purchased, subject to a main purpose test, with effect from 9 December 2009.

Taxation of foreign branches

HMRC have announced that they will engage in preliminary discussions concerning the possibility of a move to a UK tax exemption for foreign branches. No timeframe has been given. Currently, the UK imposes corporation tax on all foreign branches, with credit for any foreign taxes paid.

Controlled Foreign Company (CFC) reform

In last year's PBR, the Government announced the separation of the CFC reform from the review of taxation of foreign profits. The Government has now announced that details on the proposed shape of the new CFC regime will be published in January. No start date is mentioned.

Risk transfer schemes ('under' and 'over'-hedging)

Following a period of consultation, the Government has published revised draft legislation to combat certain structures which hedge exposure to risk (usually foreign exchange risk) using the group's taxable profits, thereby 'transferring risk' to HMRC.

The new draft legislation attempts to ring-fence any 'uneconomic' losses arising so that they can only be brought into account for tax purposes to the extent that the group has taxable profits from the same arrangement. It will apply from 1 April 2010.

Further comments on the draft legislation are invited by 31 January 2010.

Unallowable purpose tests consultation: response document

HMRC have published a summary of responses to the consultation document on simplification of unallowable purpose tests that was published in July 2009. The document sets out a framework for the design of new purpose tests and includes draft guidance on interpretation of purpose tests.

In response to the consultation, HMRC will redraft the proposed framework to strengthen the practical impact of the guidance and to clarify when a purpose test is appropriate. The revised framework will be available from summer 2010.

Transactions in securities (TIS) consultation: response document

HMRC have published a summary of responses to the TIS consultation document published on 31 July 2009. HMRC anticipate that legislation implementing the income tax changes will form part of Finance Bill 2010. HMRC are now also considering representations that the TIS legislation should be repealed in its entirety for companies. It is unlikely that that this would form part of Finance Bill 2010.

Tax and accountancy: changes to accounting standards on financial instruments

The Government has announced that additional powers will be taken in the Finance Bill enabling the Treasury to make regulations to amend the corporation tax treatment of financial instruments in response to unwelcome effects of proposed accounting reforms. The reforms relate to the classification and measurement of financial assets and liabilities, de-recognition, impairment and hedge accounting. The Government is consulting informally on the nature and extent of any necessary regulations.

Personal and Employment Taxes

National Insurance contributions (NIC) rates and thresholds

NIC rates and thresholds will be unchanged, with a few limited exceptions, for 2009/10 and 2010/11.

From 2011/12, in addition to the 0.5% increases that were announced in PBR 2008, the Government has now confirmed that there will be a further increase of 0.5% to each of those rates, bringing the total increases for Class 1 and Class 4 NICs to 1%. The primary threshold and lower profits limits will also be raised by £570. This is intended to compensate lower earners for the additional increase in NIC rates.

Pensions: special annual allowance charge

In Budget 2009, the Chancellor announced that, from 6 April 2011, higher rate tax relief for pension contributions would be restricted for those with 'relevant income' over £150,000.

At the same time, measures were introduced with effect from 22 April 2009 to prevent individuals increasing their regular contributions to circumvent this change. There will now be a reduction in the anti-forestalling threshold from £150,000 to £130,000. Tax relief will remain available for those with income below £130,000.

As a result, for individuals with income over £130,000, who have increased their regular pattern of pension savings, tax relief may be restricted if total pension savings for the year exceed £20,000 or, in certain circumstances, £30,000.

The measure will apply to increases in pension savings on or after 9 December 2009.

Staff canteens

Where free or subsidised meals are provided in a canteen, or otherwise on an employer's premises, this benefit is currently exempt from tax and NIC. The exemption will now be disapplied where such benefit is provided in conjunction with a salary sacrifice or flexible benefits arrangement. Instead, the benefit will attract tax and employer's class 1A NIC.

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

HMRC have changed their interpretation on the availability of EIS reliefs where the company concerned trades through a partnership. Reliefs will no longer be available for investment in such companies. HMRC's new view is that because the other partners also carry on the trade, the investment does not meet the qualifying conditions.

Changes have also been introduced to EIS and VCTs to effectively target relief at small companies. Other minor changes will be made to reflect the requirements of the European Commission when agreeing that these schemes do not amount to State Aid.

Indirect Taxes

VAT rate to return to 17.5%

In his pre-Budget report, the Chancellor confirmed that, as planned, the VAT rate will return to 17.5% with effect from 1 January 2010. No additional increases were announced.

VAT flat rate scheme

As a result of the return of the VAT rate to 17.5% in January, the simplified VAT flat rate scheme that can be used by businesses with a turnover of up to £150,000 is being revised. The percentages applied by businesses using the scheme will be increased to take account of the rate rise and various other technical changes. The new rates will have effect from 1 January 2010.

Administration services to be subject to Insurance Premium Tax (IPT)

There will be a change in the law to reverse the effect of a court decision that 'unbundled' services connected with a home insurance product were not subject to IPT. HMRC has published draft legislation and an explanatory note. The change affects premiums received after 9 December 2009.

Climate change levy: reduced rate changes

The reduced rate of climate change levy, which is available to energy intensive businesses under climate change agreements, is to be increased from 20% of the main rate to 35% of the main rate. The change is expected to be made in Finance Bill 2010, to take effect from 1 April 2011. Affected businesses will need to issue new certificates to their suppliers to confirm entitlement to the revised rate.

Compliance and Administration

Tackling offshore evasion

Following a series of incentives for taxpayers to report offshore income, HMRC have announced they will be consulting on a package of deterrents and new tools to help tackle offshore tax evasion. This includes a notification requirement for certain new offshore bank accounts and a tougher approach to penalties for offshore non-compliance.

Business Payment Support Service (BPSS)

The BPSS introduced twelve months ago is to continue. The service allows businesses facing temporary financial difficulties more time to pay their tax bills as part of the 'Time to Pay' arrangements.

Businesses seeking 'Time to Pay' arrangements worth £1 million or more will be required to provide an Independent Business Review to support their request. It is expected that this new requirement will be implemented from April 2010.

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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