Emergency Budget June 2010

Transcription

1 Emergency Budget June 2010

2 Emergency Budget June 2010 Introduction This Budget Alert is based on the Budget Speech presented to the House of Commons by the Chancellor of the Exchequer, the Rt Hon George Osborne, on Tuesday 22 June 2010 and on related Government announcements. After the daily diet of news reports on the parlous state of the UK economy and speculation as to precisely what painful measures would be introduced to deal with the problem, the waiting is now over. The emergency Budget, the first of its kind from a UK coalition Government and the last to be brought to the Chamber in Gladstone s battered old red Budget box, was trailed in the morning newspapers as the toughest and most important Budget in 30 years. George Osborne, the youngest Chancellor since Randolph Churchill in 1886, had the unenviable task of trying to please both his fellow Conservatives and his Liberal Democrat coalition partners. Both would inevitably have to compromise and both would have their political courage and loyalty tested. So what did we get? In the view of the Chancellor, we got a Budget that was tough but fair, setting the course for a balanced budget and falling national debt by the end of this Parliament. The pain will be felt by all sections of society, but with the rich paying proportionately more. As widely expected, the rate of VAT has been increased to 20%, although this increase will not come into effect until 4 January So retailers can expect a bumper Christmas, especially if the January sales start in November. A similar increase will apply to the higher rate of insurance premium tax, with the standard rate moving up from 5% to 6%. But against this doom and gloom, many will be relieved that everyday essentials such as food and children s clothing, as well as other zero-rated items such as newspapers and printed books, will continue to be exempt from VAT for the life of this Parliament. An increase in the rate of capital gains tax had been promised but there was some doubt as to whether this would be as high as 40% or even 50%. In the event, the reality is not as bad as had been feared. Those whose taxable income and gains fall within the basic rate income tax band will continue to pay capital gains tax at 18% and only those who are higher rate income tax payers will pay a new capital gains tax rate of 28% from midnight on Budget Day. The lifetime limit for qualifying gains eligible for entrepreneurs relief, which results in an effective 10% rate of capital gains tax, has been raised from 2m to 5m which will go some way towards helping entrepreneurs. However, the lack of indexation or taper could mean that many taxpayers will pay tax not on gains but on inflation. The main rate of corporation tax is to be reduced by 1% for each of the next four years, leading to a corporation tax rate of 24% from April This will make the UK tax rate the eleventh lowest in the OECD, and fifth lowest in the G20, and is clearly an element in achieving the coalition Government s aim to make the UK s corporate tax regime the most competitive in the G20 by the end of the next Parliament. This fall in rates will be funded in part by the reduction in the rate of capital allowances from 20% to 18% (and, in some cases, from 10% to 8%), together will a decrease in the Annual Investment Allowance from 100,000 to 25,000, all of these changes taking effect from April Furthermore, small companies will benefit from a new 20% rate of corporation tax from April However, the UK s competitiveness will undoubtedly be affected by talk of a General Anti-Avoidance Rule (or GAAR) which the Government is to discuss with interested parties as part of its wider work on improvements to the tax policy making process. Labour s so-called tax on jobs has been addressed by raising the level at which employers start to pay national insurance contributions by 21 per week above the normal inflationary increase to the threshold from April However, the 1% rate increase announced by the previous Government will go ahead as planned. The upshot of the change is that the cost of employing people on incomes below 20,000 will be less than it is today and indeed some 650,000 will be taken out of this tax altogether. And to encourage entrepreneurs, the Government is to announce a three-year scheme to exempt new businesses in targeted regions from up to 5,000 of employer contributions for each of the first 10 employees hired in their first year of business. As the financial crisis facing the country started in the banking sector, the Chancellor felt it was only fair and right that banks should make a more appropriate contribution to reflect the many risks which they generate. As a result, banks will be subject to a new bank levy from January 2011, a measure that is also to be followed by the French and the Germans. Whilst the Chancellor was keen to play this particular European card, it is interesting to note that he has given his assurance that the UK will not be joining the euro during the life of this Parliament. It is regrettable that there are still question marks over the controlled foreign company regime, the taxation of intellectual property, foreign branches and R&D tax credits. Those looking for answers in these areas are going to have to wait until the autumn. However, as these are all important areas for stimulating investment, the sooner the information is produced, the better. Business loathes a policy vacuum.

3 Budget 2010 It is noteworthy that a number of the Budget Notices have a familiar ring about them, having appeared in a not-too-dissimilar form in March. And as a final point, this Budget will generate two Finance Bills. The first will be published shortly to ensure swift Royal Assent for the Government s key priorities. Then, given the exceptional circumstances this year and in order to clear inherited measures in a manner consistent with proper Parliamentary scrutiny, a further Finance Bill will be published in July in draft for comment, before appearing in final form in the autumn. We begin with the ITEM Club s economic report, analysing the implications of the Chancellor s proposals. The ITEM Club is sponsored by Ernst & Young. ITEM Club The following commentary reflects the views of Peter Spencer of the ITEM Club: The Budget had to demonstrate that the new Government could meet its twin goals of deficit reduction and economic recovery, whilst being fair and dodging any fault lines within the coalition. This was never going to be easy. We certainly saw an ambitious fiscal target: the elimination of the structural current deficit over the next five years. Although there were no big surprises, the overall package was much tighter than most had envisaged, arguably about as much as the Chancellor could expect the public to swallow. That should satisfy the financial markets, at least until they see the detail of the Spending Review in October. But we will not be in a position to assess the feasibility of this package and the likely impact on the delivery of public services until then. However, the real worry is that the extra 40bn of fiscal tightening that this involves could seriously undermine the recovery. That would also damage the headline borrowing figures, arguably the ones that ultimately matter for financial markets and interest rates. For the first time, the Office for Budget Responsibility s (OBR) before and after forecasts give us an estimate of the effect of the Budget on the wider economy. However, this impact seems to us to be too small. For example, in 2011, with VAT rising to 20% and current spending around 10bn lower than the Pre-Budget forecast, the growth in consumption and GDP is estimated to be just 0.3 percentage points lower. The OBR assumed that consumers will react to having lower incomes by dipping into savings rather than making any significant adjustments to their spending, an assumption which looks overly optimistic. The overall impact on GDP is neutral in 2012 and positive in the next two years, as the beneficial effect on investment and exports outweigh the effect of spending cuts and tax increases. Having said that, the various announcements add up to a wellconstructed package that should not only reduce the risk to the recovery but be seen to be fair when viewed as a whole and avoid straining the tensions within the coalition. Delaying the increase in VAT until January will help maintain spending over the Christmas period and delay the impact on the CPI which is critical to the outlook for interest rates. The two-year pay freeze in the public sector will mean that the reduction in workers real take home pay will be felt gradually rather than kicking in immediately. This freeze will also help to maintain the level of services available as expenditure is cut back. Lower paid workers will be exempt from the pay squeeze. This may help defuse any criticism that public sector workers are paying for the mistakes of the banking industry, as will the new bank levy. This may look a little thin, raising only an estimated 2bn initially. Yet it is likely to prove to be the thin end of a very fat wedge, especially if Germany, France and other countries move in a similar direction, reducing the effects of fiscal and regulatory migration. The increase in capital gains tax (CGT) to 28% on those in high tax brackets will also help to balance the effect of the budget across the income scale. This rate, while less than expected, represents a reasonable compromise between the coalition partners. It also allowed the Chancellor to keep the CGT system simple, while reducing the loss of income tax revenue. The package was remarkably business-friendly, particularly for small businesses opening up in the regions where the public spending axe will cut deepest. Hopefully, the Budget will help resolve the uncertainty that has been holding back business spending, allowing company cash flows to be released for investment. It is going to be tough but at least we all know where we stand. This time the consumer is in no position to pull us out of recession and the thrust has to come from business spending and entrepreneurial initiative. Without that response, it will certainly be very hard for the Government to pull off the trick of retrenchment and recovery. Employment tax Pensions: Changes to the restrictions on pensions tax relief The Government has announced its intention to introduce new legislation to restrict pensions tax relief for high income individuals. This will replace the legislation introduced by FA 2010 and its objective is to raise at least the same amount of extra tax but without unnecessary complexity to the tax system. FA 2010 introduced legislation to apply from 6 April 2011 to restrict tax relief for high income individuals to the basic rate. This affects individuals with income (before deductions and reliefs) of 180,000 or over with a tapered rate of relief applying on incomes between 150,000 and 180,000. The income limits include the value of any pension benefit funded by their employer. The restriction of tax relief is to be delivered through self assessment, with a new high income excess relief charge applying. There has been widespread criticism of the complexity of the new legislation, particularly in terms of the calculation of the high income excess relief charge for members of defined benefit (DB) schemes. It is evident that the Government has listened to the concerns of the pensions industry and employers about the incredible complexity of the new regime and the additional administration and costs that will result. 2

4 The Government has indicated that it would prefer a simpler system and has said that a scheme involving an annual allowance of between 30,000 and 45,000 may deliver the additional tax expected to be collected under the current legislation. This would represent a significant reduction to the annual allowance, currently set at 255,000. The indication is that the actual level will be influenced by a number of policy design features in the new regime, including the appropriate level of the lifetime allowance. This was one of the methods of restricting pension tax relief that was mentioned in the consultation document issued in The previous Government was of the view that that was not a fair approach as it would still allow those on high incomes to receive greater tax relief than basic rate taxpayers. The proposal to introduce a less complex system is a welcome change and the Government has indicated that it will seek input from employers, pension schemes and other representatives to determine the best design of the new regime to be effective from 6 April Some of the issues to be considered will be: How pension accrual in DB schemes would be valued Options to ensure basic rate taxpayers are not subject to restriction Whether and how flexibility can be provided for individuals who are required to pay any tax charges that may result The administration and compliance The overall objective is to have a pensions tax regime that will be simple to operate and meet the Government s objective to raise extra tax. Changes to pension taxation Legislation is to be introduced to allow the National Savings Employment Trust (NEST) to register with HMRC as an occupational pension scheme and to be subject to the same tax rules as other tax-registered pension schemes. The Pensions Act 2008 places an obligation on employers to ensure that their employees are active members of a pension scheme and to make employer contributions. NEST is the default pension scheme for employers who do not already operate a company pension scheme and is due to be introduced in October This measure was originally announced in the Budget on 24 March By being able to register with HMRC and operate as an occupational scheme for tax purposes, members of NEST and contributing employers will benefit from the tax reliefs provided to registered pension schemes. Bank bonuses In addition to the announcement of the bank levy, the Chancellor announced the Government s intention to tackle what it regards as unacceptable bank bonuses. The Government intends to consult on a remuneration disclosure scheme and, in partnership with its international counterparts, will explore the costs and benefits of a financial activities tax on both profits and remuneration. In the upcoming review of its Remuneration Code, the Financial Services Authority has been asked to: Contemplate imposing more stringent requirements on the deferral and award of variable pay Examine methods for strengthening the link between performance and remuneration to ensure that incentives are aligned with the firm s long-term performance Consider how to vary capital requirements to offset risk in remuneration practices. Whilst initial post-budget concern will be around the bank levy on balance sheets, additional taxation on remuneration within the banking sector is a very real possibility under the coalition Government. Regional employer national insurance contributions (NIC) holiday for new businesses The Government has announced that a scheme will be established no later than September 2010 to help new businesses set up outside the Greater South East (London, the South East and the East) to reduce the costs of employer Class 1 NIC. The scheme, which lasts for three years, allows employers in new businesses set up on or after 22 June 2010 to claim a NIC holiday for each of the first 10 employees it employs during the first 12 months of employment, in the first year of business. The maximum amount of Class 1 employer NIC that can be saved for each employee is 5,000. Details of how the holiday scheme is to work will be provided in due course. Whilst any reduction in the employer Class 1 NIC to boost employment is welcomed, a similar NIC holiday scheme set up in the 1990s had little take-up by employers due to the administrative burden of submitting claims. It is hoped that the experiences of operating the previous holiday scheme will mean that the claim procedure under the proposed new scheme will be simpler and that administration will be kept to a minimum. Review of the Pay As You Earn (PAYE) system The Government announced that it wishes to explore how the PAYE system could be improved in order to reduce costs and make the system easier for employers and HMRC to administer. The PAYE system is an important and fundamental part of the UK tax system. As an initial step, the Government intends to consult with employers and payroll providers in the summer on mechanisms that could support more frequent or real time PAYE data. The Government has an excellent opportunity to simplify the PAYE system. However, the devil will be in the detail and we await to see what it proposes. 3

5 Review of powers: Financial security for PAYE and national insurance contributions (NICs) The Government has decided to continue with the consultation announced in the March 2010 Budget regarding the proposal to introduce powers for HMRC to require a financial security from employers who have a history of serious non-compliance in terms of late or nonpayment of PAYE and/or NIC. The consultation will ask for comments on the sanction of a new criminal offence for failing to provide a financial security, which would be penalised by a criminal fine of up to 5,000. The consultation will take place later this year and the draft clause and regulations will be published as part of the consultation document. The Government s decision to continue with the consultation exercise highlights its concerns about serious non-compliance by certain employers. Enterprise management incentives (EMI) The Government restated the amendment announced in the March 2010 Budget required to comply with EU guidelines. In March it was announced that, in order to comply with EU State Aid guidelines, the requirement that a company granting qualifying EMI options must carry on a trade wholly or mainly in the UK, (or in the case of a group, that at least one group company satisfy this requirement) be replaced by the requirement of having a permanent establishment in the UK. It should be noted that the definition of permanent establishment is that set out in Chapter 2 of Part 24 of the CTA The change of definition of permanent establishment is administrative and hence the relaxation will still allow more companies to operate EMI plans in the future. Seafarers earnings deduction Seafarers earnings deduction (SED) will be extended to European Union (EU) and European Economic Area (EEA) residents who pay UK tax on their earnings as a seafarer. SED can provide 100% UK tax relief on earnings from duties performed as a seafarer wholly or partly outside the UK during an eligible period. One of the qualifying conditions is that the seafarer must be ordinarily resident in the UK. This condition will be extended so that EU/EEA residents can claim SED on their earnings as a seafarer that are liable to UK income tax. The measure was originally announced in the 2009 Pre-Budget Report and the Government has stated that the deduction will be in force from 6 April Personal tax Personal tax rates and allowances and national insurance contributions (NIC) The personal allowance for individuals aged under 65 will be increased, but this will apply for basic rate taxpayers only. From 6 April 2011 the personal allowance for individuals aged under 65 will be increased by 1,000 to 7,475 for basic rate taxpayers only. To ensure that higher rate taxpayers do not benefit from this increase, the basic rate income tax limit will be reduced. In addition, the basic rate limit will be frozen until 2013/14. To maintain the alignment of the NIC upper earnings/profits limits with the income tax higher rate threshold (the total of the personal allowance and the basic rate income tax limit), from 6 April 2011 the NIC upper earnings/profits limit will be reduced accordingly. Also from 6 April 2011 the secondary NIC threshold (i.e. the point at which employers begin to pay Class 1 NIC) will be increased by an extra 21 per week above inflation. It has been announced that the 50% tax rate, which took effect from 6 April 2010, will remain in place for the time being. The exact amounts of the reduced basic rate income tax limit for 2011/12 and secondary threshold for employers Class 1 NICs will not be known until publication of the RPI for September. The increase in the personal allowance is in line with the coalition Government s long-term objective to raise the personal allowance to 10,000 for basic rate taxpayers. As a result of the reduction in the levels at which the 40% higher rate of tax and the 2% rate of NICs begin to be paid, the majority of higher rate taxpayers will not benefit from the measure. As promised by the coalition Government, the increase to the secondary threshold for employers NICs will largely reverse the employer NIC rate rise planned for April However, the NIC rate rises for both employers and employees remain in place. Capital gains tax (CGT): increase in CGT rates After midnight on 22 June 2010, for individuals there will be two main rates of CGT, 18% and 28%, and gains of trustees and personal representatives of deceased persons will be charged at 28%. For assets sold between 6 April 2010 and 22 June 2010, the flat rate of 18% CGT will still be applicable. 4

6 Individuals For assets sold on or after 23 June 2010, it will be necessary for individuals to calculate their total taxable income for 2010/11 and total taxable gains post-22 June 2010 in order to determine the applicable CGT rate. Where taxable income for the 2010/11 tax year plus total taxable gains (post-22 June 2010) exceeds the income tax basic rate band ( 37,400 for 2010/11), the 28% rate will apply to gains (or any parts of gains) above that limit. In calculating the CGT payable, individuals will be able to utilise losses and the annual exemption (frozen at 10,100 for 2010/11) in the way which minimises the tax due. There are special rules for connected party losses. Gains arising in 2010/11, but before 23 June 2010, will continue to be liable to CGT at 18%, and will not be taken into account in determining the rate (or rates) at which gains arising on or after 23 June 2010 should be charged. A deferred gain (e.g., into an EIS investment) which comes back into charge on or after 23 June 2010 will be chargeable at 18% or 28% depending on the level of income and gains. Trustees For disposals post-22 June 2010, a flat rate of 28% will apply. Trustees can also utilise losses and the annual exemption (maximum 5,050 for 2010/11) in the way which minimises the tax due. Where capital distributions are matched with stockpiled gains from a non-uk resident trust, the rate of tax could be as high as 44.8%. It was expected that CGT might be aligned with income tax rates up to 50%, so an increase to 28% is more palatable, although it is somewhat surprising that the change has been introduced mid-year rather than from 6 April It is, however, disappointing that there is no indexation relief or taper relief for long-term savers. The possible difference in rates between individuals and trusts may affect the decision to settle assets into trust. CGT: Entrepreneurs Relief From 23 June 2010 the lifetime limit on gains qualifying for entrepreneurs relief will increase from 2m to 5m. The relief operates to reduce the rate of CGT to 10%. Where prior to 23 June 2010, individuals or trustees have made qualifying gains above the previous 2m limit ( 1m limit before 6 April 2010), no additional relief will be allowed for the excess. However, if further gains are made on or after 23 June 2010, individuals or trustees will be able to claim relief on up to a further 3m of those additional gains (or up to 4m where the earlier 1m limit applied), giving relief on accumulated qualifying gains up to the new limit of 5m. In determining at what rate(s) an individual should be charged to CGT on any other gains, those gains qualifying for entrepreneurs relief are set against any unused basic rate band before nonqualifying gains. Entrepreneurs relief was introduced with effect from 6 April 2008 and reduces the amount of the capital gain taxed on the disposal of qualifying business assets where the required conditions are met throughout a one-year qualifying period. The relief up until 5 April 2010 was subject to a lifetime limit of 1m, although this was replaced by a limit of 2m for disposals post 5 April With effect from 23 June 2010, this will increase to 5m. The relief is available if an individual (or trustees of certain life interest settlements) makes a disposal of business assets. Business assets include: A business or part of a business. Trust assets used for the purpose of a business carried on by the qualifying beneficiary of the trust. Assets that were in use for the purpose of the business when the business ceased. Shares or securities of certain companies (see below). The company must, within the qualifying period, be: The individual s (or beneficiary s) personal company (i.e., he or she must hold at least 5% of the ordinary share capital and voting rights in the company) and either a trading company or the holding company of a trading group. The individual/beneficiary must be either an officer or employee of that company (or a group company). Whilst there is no distinction between the CGT rate for business and non-business assets, individuals and trustees will welcome the increase in entrepreneurs relief. The additional tax saving of the 3m additional limit will be a maximum of 540,000. Indexing individual savings account limits As announced in the previous 2010 Budget, the individual savings account (ISA) annual limits will increase in line with the retail price index (RPI) from the 2011/12 tax year onwards. The current ISA subscription limits of 10,200 of which 5,100 can be saved in a cash ISA will be linked to the RPI from 6 April 2011 onwards. The new limits will be calculated by reference to the RPI for September before the start of the following tax year. For convenience, this will be rounded up to a multiple of 120 (to help monthly savers) and in years when the RPI is negative, the limits will remain unchanged. Following indexation, the cash ISA limit will be half the value of the stocks and shares ISA limit. As commented previously, this measure will be welcomed by savers. 5

7 Venture capital schemes The Government has announced measures which will make the final four changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) schemes agreed with the European Commission as a condition for their approval by them as approved State aids. Those affected include EIS and VCT scheme investors, companies receiving investment under the schemes and VCTs themselves. The four changes to the VCT scheme are summarised as follows: The current UK tax legislation requires shares making up a VCT s ordinary share capital to be included in the official UK list throughout the relevant accounting period. This will be replaced with a requirement that the shares are instead admitted for trading on any EU regulated market. VCTs will be able to be listed on markets throughout the EU/European Economic Area (EEA). The requirement for 30% of the VCT s qualifying holding to be represented throughout the relevant accounting period by holdings of eligible shares will increase to 70% and the definition of eligible shares will include shares which may carry certain preferential rights to dividends. The proposed legislation will exclude shares in a company from qualifying where it is reasonable to assume that the company would be an enterprise in difficulty for the purpose of the European Commission s Rescue and Restructuring Guidelines. The current EIS and VCT legislation requires that the company s qualifying trade is carried on wholly or mainly in the UK. With effect from the date when the new legislation is introduced, companies issuing shares will simply be required to have a permanent establishment in the UK. The changes will have effect from a date to be appointed, with the exception of the second measure above which will not affect monies raised by the VCT before that date. These changes will in part be welcomed by investors, companies and VCTs as they increase the availability of EIS and VCT investments across the EU and EEA. Pensions: deferring the effective age requirement to purchase an annuity Legislation will be introduced with effect from 6 April 2011 to end the effective requirement to purchase an annuity from age 75. Furthermore, transitional measures are being implemented for individuals who reach the age of 75 on or after 22 June 2010 where they have not yet bought an annuity. Currently, members of money purchase schemes who do not purchase an annuity by the age of 75 are subject to strict minimum and maximum income withdrawal limits from the age of 75. Furthermore, they are also subject to tax charges of up to 70% where the individual dies after they reach 75 and any of the fund is not used to pay either pensions to dependants or make charitable donations. Specific IHT charges also apply to certain pension scheme members who die after the age of 75. The coalition Government has announced that it will end the effective requirement to use a pension fund to buy an annuity by age 75 with effect from 6 April Pending implementation of the necessary changes, from 22 June 2010, the age by which pension scheme members are required to buy an annuity will increase from 75 to 77. This change will also apply for the purposes of the inheritance tax charge that specifically applies to pension scheme members aged 75 and over. The coalition Government has announced that it will consult shortly on the detail of the changes being introduced from 6 April 2011, but, in the meantime, the transitional arrangements will allow individuals aged 75 to defer their annuity purchase until the new legislation is in force. Non-domiciled individuals As announced in the Coalition Agreement, the Government has confirmed that it intends to review the taxation of non domiciled individuals. The coalition Government has stated that such a review will assess whether changes can be made to the current rules to ensure that non-domiciled individuals make a fair contribution to reducing the deficit in return for greater certainty and stability for those bringing skills and investment to the UK. The Government has not given any timescale for when such a review will be finalised. Furthermore, there are currently no indications as to what measures, if any, will be introduced. Whatever the Government proposes, it is hoped that it will allow sufficient time for proper consultation with the representative bodies. Employee trusts It is confirmed that the March 2010 Budget announcement to restrict the tax benefits of employee benefit trusts will also apply to employer financed retirement benefit schemes (EFRBS). The March 2010 Budget announced action to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce liabilities of employees and directors to income tax, NIC or to avoid restrictions on pension tax relief. The Government has confirmed that this measure has been extended to include EFRBSs. The legislative measures will come into effect from April The extension of these rules to EFRBSs was anticipated. No details of the proposed measures have yet been announced. Deduction of income tax at source With effect from the date of Royal Assent, HMRC will have the power to make regulations to amend the reporting and collection process where individuals and other noncorporates deduct basic rate income tax at source on certain payments made by them 6

8 Currently, where an individual and other non-corporates make certain payments of interest, patent royalties or other annual payments, they are required to deliver an account of that payment to HMRC without delay. HMRC may then make an assessment on that person for income tax equal to the sum required to be deducted. This proposed change will allow HMRC to amend the current rules relating to the time and manner in which persons need to report and pay the income tax deducted from such certain payments. In HMRC s consultation document of 5 March 2010, views were invited on whether using a designated form (as companies currently do) would assist individuals in the reporting and payment of such basic rate tax deducted at source. It is hoped that any changes will make it easier for the individuals to report and pay the tax deducted at source. Income tax adjustments between settlors and trustees As previously announced in the March 2010 Budget, from 6 April 2010, individuals who are taxed on income arising to a trust they have set up (a settlor-interested trust) and who receive a repayment of income tax must pay this over to the trustees. These payments will be disregarded for inheritance tax purposes. Since 6 April 2010, the trustee income tax rate is 50% (42.5% on dividends). In the case of a settlor-interested trust (broadly a trust from which the settlor/spouse/civil partner/minor child can benefit), the settlor is also subject to income tax on the trust income at his or her marginal rate as if it were his or her own income. In order to avoid double taxation on the same trust income, and to ensure that the settlor suffers neither a gain nor a loss in respect of such income, the settlor may receive a repayment of tax if he is liable to income tax at a lower rate than the trustees. From 6 April 2010, the settlor will be required to pay any such repayment to the trustees, this payment being disregarded for inheritance tax purposes. This change ensures that the settlor does not benefit from the difference between his marginal rate and the trust income tax rate. Instead, the benefit passes to the trust. The effect is that the overall tax suffered on such income is still set by reference to the settlor s marginal rate. Indirect tax VAT: change of standard rate Following intense speculation in the press, it is confirmed that the standard rate of VAT will increase to 20% from 4 January As a consequence of this, anti-forestalling legislation will be introduced to prevent the 17.5% rate applying to goods and services supplied after the rate increase. This will be done by way of a supplementary charge of 2.5% in certain circumstances. A temporary reduction in the standard rate of VAT to 15% was announced in the 2008 Pre-Budget Report for a 13-month period from 1 December 2008 until 31 December This was introduced as part of a fiscal stimulus package to provide further support for growth and incomes during the economic downturn. The standard rate reverted back to 17.5% on 1 January Faced with unprecedented levels of debt, the Government has now confirmed that the standard rate of VAT will increase to 20% from 4 January This follows a general trend of VAT rate increases across Europe as governments wrestle with ballooning deficits. Zero-rated supplies (such as basic foodstuffs, children s clothing and books) and supplies subject to VAT at the 5% reduced rate (such as domestic fuel and power) are not affected by the change. As was the case with the 1 January 2010 reversion, targeted anti-forestalling measures will be introduced which create a supplementary charge to VAT of 2.5% in certain circumstances in order to prevent the 17.5% rate applying to goods and services supplied after the rate increase. The Budget material relating to this announcement includes a draft of the anti forestalling legislation. In broad terms, the supplementary charge will apply where a standard-rated supply spans the VAT rate change (i.e., a prepayment is made, or an advance VAT invoice is issued, before the rate increase in respect of goods or services supplied after the rate increase), the customer is unable to recover the VAT charged on the supply in full and one or more of the following conditions are met: The supplier and customer are connected with each other The supplier (or someone connected with the supplier) finances a prepayment for the goods or services The supplier raises an advance VAT invoice where payment is not due in full within six months of the invoice date A supplementary charge will also apply where the value of the supply (and any related supplies) exceeds 100,000. However, it should not apply if the prepayment or the issue of an advance VAT invoice reflects normal commercial practice. These anti-forestalling measures will have effect for transactions on and after 22 June 2010 (i.e., they will not have retrospective effect). Changes to the VAT flat rate scheme will be introduced as a result of this measure and will take effect from 4 January The threshold for the payments on account regime (currently an annual VAT liability of 2 million) will also be increased next year. The increase in the standard rate of VAT will come as no real surprise to the majority of businesses, but the longer run-in period will be welcomed. It would appear that the Government has heeded some of the perceived criticism associated with the 1 January 2010 reversion of the VAT standard rate to 17.5% by delaying the rate increase this time until 4 January 2011, being the first normal working day in Whether HMRC will set up special arrangements for businesses that operate beyond midnight on 3 January 2011 (e.g., by allowing them to account for VAT at 17.5% on takings received up to the end of trading of the 3 January session or some other time on the morning of 4 January) remains to be seen. 7

9 To some extent, businesses will be able to call upon experiences of changes necessary for the 1 January 2010 reversion. Retailers again face a number of specific issues, including the need to re-price goods on shelves. At least the new VAT fraction ( 1 / 6 ) will be easier to remember! Aside from the significant additional funds that this 2.5% VAT rate increase will raise, from a political perspective, the Government will no doubt take some comfort from the fact that this still leaves the UK standard rate below the EU average. VAT: cost sharing exemption The intention to introduce the cost sharing exemption provided for in EU law has been restated. Article 132(1)(f) of the VAT Directive requires Member States to introduce an exemption for costs shared between members of a group of persons who are carrying on an exempt business or a non-business activity. The UK Government has not implemented this exemption into UK law as yet, but is now promising a formal consultation in the autumn. The exact cost will need to be shared between the members of the cost-sharing group. The exemption in EU law is clearly intended to apply to bodies such as charities carrying on a non-taxable activity, and to businesses carrying on an exempt activity. The announcement concentrates on the charity sector and merely mentions other affected sectors as did the original announcement in March. It is not clear whether financial services businesses are intended to be included. However, it is difficult to see how HMRC could implement the provision selectively, and this exemption is available to the financial services industry in other EU Member States. The exemption will remove the added VAT cost which can arise when resources are shared between a number of bodies. We hope that the provision will be introduced in a comprehensive way, including for example a wide range of exempt businesses and cost sharing between group members in different EU countries. VAT: change to zero-rating of qualifying aircraft The changes to the rules for the zero-rating of qualifying aircraft will now take effect from 1 January 2011, rather than 1 September Following infringement proceedings by the European Commission, the UK rules governing the zero-rating of aircraft are being amended. Currently, zero-rating can apply where an aircraft weighs at least 8,000kg and is not designed or adapted for recreation or pleasure use. Under the new rules, zero-rating will apply where an aircraft is used by an airline operating for reward primarily on international routes. The effective date for the new rules has been pushed back to 1 January 2011 to take account of industry concerns surrounding the original implementation date. VAT: previously announced measures The emergency Budget contained a number of VAT measures which had previously been announced in the March 2010 Budget. These measures cover changes in the following areas of VAT: Place of supply rules for certain supplies of natural gas, heat and cooling (effective 1 January 2011) Postal services supplied by Royal Mail (effective 31 January 2011) Lennartz VAT accounting (effective 1 January 2011) Penalties for late filing of returns and payments of VAT (to be staged over the next few years) Air passenger duty (APD): change to the basis of aviation taxation The Government has announced that it will explore changes to aviation tax with a view to changing from a per passenger duty to a per-plane duty. Any major changes will be subject to consultation. Moving to a per-plane duty is likely to discourage airlines from flying planes with large numbers of empty seats. Insurance premium tax (IPT): change of rates The rates of IPT will increase on 4 January 2011 the standard rate from 5% to 6% and the higher rate from 17.5% to 20%. The increase in the higher rate of IPT coincides with the new rate of VAT effective on 4 January 2011, and the standard rate is to be increased from the same date. The increase in higher rate IPT keeps the tax in line with the new VAT rate of 20%. While 2.5% higher from January, this tax is limited and specific. Travel insurance is the main area impacted, together with certain insurance sold with motor vehicles or some consumer goods. Increasing the rate along with VAT makes sense as the higher rate was introduced to combat VAT avoidance associated with value shifting. The standard rate increases to 6%, but this will still be one of the lowest IPT rates across Europe. The new rates will take effect for premiums received on or after 4 January 2011 if the insurer uses the cash receipt method of accounting. For insurers using the special accounting scheme (as most do), the new rate will apply to premiums written into their records from that date. Anti-avoidance measures are already included in FA 1994 to cover increases in the rate, including the application of the increased rate to certain premiums received between the date of announcement and the date of change. 8

10 Tobacco products duty: long cigarettes Changes have been announced in tobacco products duty so that the duty payable on individual cigarettes may increase when they exceed 8cm in length (excluding the filter). From 1 January 2011, cigarettes greater than 8cm length (excluding filter) will be taxed as a separate cigarette for each additional 3cm in length for the purposes of specific duty calculation. Currently each 9cm or part thereof in length is taxed as a separate cigarette. This provision was apparently introduced as an anti avoidance measure. Alcohol duties: proposed changes The recent increase in cider duty has been reversed, but the Government has announced a wider-ranging review of alcohol taxation and pricing. The 10% above inflation increase in cider duty which was announced in the March 2010 Budget will be reversed with effect from 30 June The duty will revert to a level that matches the duty increases of other alcohol products in the Budget. New alcohol taxation measures will be announced in the autumn and these will include minimum apple or pear juice levels for ciders in order to be able to benefit from the lower duty rate. The new measures will be part of the Government s attempt to address binge drinking, but will temporarily appease cider drinkers who felt targeted in the last Budget Landline duty withdrawn The Government announced the withdrawal of the proposed landline duty. The landline duty of 50p per month had been proposed to take effect from 1 October 2010 and was to be introduced to fund the roll-out of super fast broadband. Corporate tax Reduction in main rate of corporation tax and corporation tax reform The Government announced four annual reductions in the main rate of corporation tax. The Government signalled its aim in the Coalition Agreement to reduce the headline corporation tax rate in order to make the UK the most competitive corporate tax regime in the G20. The headline rate will be reduced over the next four years to 24%, starting with a 1% cut from 1 April In addition, the Government has committed to set out a more detailed programme for reform in the autumn and also to establish a business forum. The business forum will consult with international businesses on the UK s tax competitiveness and will be chaired by the Exchequer Secretary. It is widely recognised that a low headline rate of corporation tax is a significant incentive in attracting inward investment. The reduction being proposed is, therefore, welcome news as the UK s main corporation tax rate had started to lag behind those of other countries in the G20. The Government has announced its commitment to improve competitiveness through a lower tax rate and a more territorial approach. It is anticipated that further details will be released as part of the detailed reform. Whilst the reduction in corporation tax rate will be welcomed by most large companies, this will have an impact on the controlled foreign company calculation for groups relying on the exemption for overseas companies which do not pay less than three quarters of the tax which would otherwise have been paid on its income had it been tax-resident in the UK. In addition, the ongoing changes in the tax rate will need to be considered from a deferred tax perspective. If groups are accounting under IFRS or UK GAAP, both IAS 12 and FRS 19 require a change in law to be reported and accounted for in an entity s financial statements in the period they are substantively enacted (usually the third reading in the UK Parliament). Furthermore, the timing of when changes in tax law are reflected in an entity s financial statements may differ between IFRS and other generally accepted accounting principles (e.g., US GAAP). It is surprising that there were no specific announcements on interest deduction restrictions in view of all the speculation in the run up to the Budget. It is anticipated that this will form part of the business forum discussions. Reduction in corporation tax small profits rate The Government announced a reduction in the small profits rate of corporation tax. Companies with profits below the lower limit of 300,000 will benefit from a reduction in the rate of corporation tax to 20%. This will be legislated in the Finance Bill The small profits rate was previously due to rise to 22% with effect from 1 April The Government has reversed this rate increase on the basis that it would be detrimental to the growth of small businesses and is anticipating that this reduction in the tax rate will benefit some 850,000 companies. Capital allowances changes From 1 April 2012 (corporation tax) or 6 April 2012 (income tax), there will be a 2% reduction in the rates of capital allowances, the main rate pool going down from 20% to 18%, and the special rate pool from 10% to 8%. In addition, from April 2012 the 100% annual investment allowance (AIA) will be reduced from 100,000 to 25,000. 9

11 The Coalition Agreement promised to reform the corporation tax system and reduce headline rates, by simplifying reliefs and allowances, whilst protecting manufacturing industries. This was widely expected to include both a simplification of the existing capital allowances regime, and a significant reduction to the existing rates of relief. This was better than expected news for businesses investing in plant and machinery, which will benefit from the reduction in the corporation tax rate for one year before the capital allowances rates fall. Individuals and partnerships, however, will see a reduction to their capital allowances without a corresponding reduction in their tax rate. The biggest surprise has been that the capital allowances regime has not been simplified, merely the rates reduced, and many may have preferred simplification. Not only have businesses been given time to plan for the reduction in writing down allowances with the reduction being deferred until 1 April 2012, but the lobbying by different sectors appears to have paid off, with the reductions not being as harsh as expected. These changes will result in a timing issue for obtaining tax relief rather than a removal of allowances, affecting cashflow in the near-term. The full allowance will be recovered in the long-term. The main disappointment surrounds the reduction of the 100% AIA from 100,000, introduced only three months ago, to 25,000 per year, and this is likely to hit small businesses the hardest. This relief was introduced initially to simplify the tax depreciation regime for those businesses spending less than 50,000 per annum on plant or machinery, although the Chancellor states that 95% of business will still benefit from this revised 25,000 limit. The change in rates will introduce transitional arrangements for business whose chargeable periods span 1 April (corporation tax) or 6 April (income tax). This will be in the form of a hybrid rate, on a similar basis to that applied to the changes introduced with effect from 1 April Zero-emission goods vehicles: 100% first year allowances As announced in the previous 2010 Budget, businesses incurring expenditure on new zero-emission goods vehicles will qualify for 100% first year allowances (FYA). The expenditure will qualify for the new 100% FYA if: The vehicle cannot under any circumstances produce CO2 emissions when driven. It is of a design primarily suited to the conveyance of goods or burden. The expenditure is incurred between 1 April 2010 and 1 April 2015 for corporation tax, and between 6 April 2010 and 6 April 2015 for income tax. The general exclusions from FYAs will apply, including the exclusion of expenditure on assets for leasing. FYAs have been available on cars with low CO2 emissions since Finance Act This measure supports the extension of the availability of FYAs to new and not second hand zeroemission goods vehicles which was first introduced in the 24 March 2010 Budget. The restatement of the previous Government s intention to introduce this measure is welcome at a time of wider fiscal upheaval. It is, however, disappointing that an opportunity to remove the less favourable treatment of lessors of such vehicles has not been seized by the new Government. Film tax relief: multi-year claims The Government is adopting its predecessor s intention to introduce legislation to ensure that the amount of film tax relief claimable is not dependent on the spending pattern in cases where the expenditure is incurred over a number of periods. To prevent a situation where losses are stranded in earlier periods, the Government will introduce legislation to bring in the concept of a relevant unused loss (RUL). A RUL will be any available loss not previously surrendered or set off against profits. This RUL will then be utilisable in future periods. This amendment will be deemed to have had effect for accounting periods ending on or after 9 December This proposal corrects an unintended anomaly in the original legislation and should enable companies to obtain the full amount of relief that may otherwise not have been available. Its adoption by the current Government is welcome evidence of its stated intention of introducing greater fairness into the tax system. Video games relief withdrawn The new relief proposed in the March Budget for the UK video games industry has been withdrawn. The previous Government announced in the March Budget its intention to introduce a new tax relief to help support game development by the UK video games industry. No details of the relief were announced the intention was for consultation on the form of the relief to take place later on in This will come as a disappointment to the video games industry, which was widely welcoming this new relief as an incentive to the development of the industry in the UK. However, the withdrawal of the proposed relief cannot be too great a surprise given the overall fiscal tightening that was the theme of this Budget. Changes to R&D credits The previous condition that small or medium-sized enterprises (SMEs) own any intellectual property (IP) derived from the R&D to which the expenditure is attributable has been removed. The change will have effect for expenditure incurred by the SME on R&D in an accounting period ending on or after 9 December