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Business Tax

The main rate of corporation tax will fall from 28% to 27% in 2011/12 and then by a further 1% a year until it reaches 24% in 2014/15. This will be the fifth lowest rate in the G20. The small companies rate, which applies to companies with profits of below £300,000 a year (with tapering for those with profits between £300,000 and £1.5 million), will fall from 21% to 20% in 2011/12.

Capital allowances on plant and machinery, currently available at 20% per annum, will be cut to 18% from April 2012. The annual investment allowance, which enables businesses to claim 100% of capital expenditure against tax, will be cut from £100,000 to £25,000 from the same date. The message, if you spend large amounts on equipment, is to do it before April 2012.

VAT

The standard rate of VAT rises from 17.5% to 20% from 4 January 2011. This is still well short of the 25% charged in Denmark, Sweden and Hungary. The median VAT rate in the EU is in fact 20%. Anti-forestalling legislation will be introduced, effective from 22 June 2010. This will aim to prevent invoices being raised in 2010, with VAT at 17.5%, in respect of goods and services actually provided in 2011.

Rumours abounded before the Budget about the imposition of VAT on food, children’s clothes and the printed word, all of which are currently zero-rated. This did not happen. Lord Higgins, Financial Secretary to the Treasury from 1972 to 1974 and responsible for steering the original VAT legislation through the Commons, wrote recently that the idea behind the zero-rating was to protect low-income families. The basic structure of VAT should remain the same, he said.

National Insurance

Employee’s and employer’s national insurance will rise by 1% from April 2011. The threshold at which employers have to start paying national insurance will rise from £110 to £131 a week. This £131 will be adjusted for inflation and the exact figure will be published in the autumn. For employees earning less than £20,750, the employer will have a lower national insurance bill.

New businesses outside London and the South-East will benefit from relief from up to £5,000 of employer’s national insurance on the first ten employees they hire in their first year of business. This scheme will last three years.

Capital Gains

Fears that middle income earners would be hard hit by punitive capital gains tax on the sale of shares, while villages would see their local economy collapse as second homes were abandoned, proved overblown. Basic rate taxpayers see no change in capital gains tax, which continues to be charged at 18%; higher rate taxpayers are charged at 28% from 23 June 2010, well short of the 40% or even 50% which was feared. The annual exempt amount remains at £10,100.

There is still no indexation allowance for individuals. Prior to the 1998 overhaul of the capital gains tax regime, inflationary gains were not taxed; indexation was removed for post-1998 gains and replaced with a taper relief system until 2008, when this in turn was abolished. The quid pro quo was a lower rate of capital gains tax, which has now crept up again. However, entrepreneurs selling business assets (broadly, shares in their own companies) continue to benefit from a 10% rate provided that their lifetime gains do not exceed £5 million (up from £2 million).

Income Tax

The personal allowance for under-65s rises by £1,000 to £7,475 in 2011/12. To ensure that higher rate taxpayers do not benefit, it is anticipated that the threshold at which higher rate income tax of 40% applies will be reduced by £2,500 and the threshold for the additional rate of 50% will be reduced by £1,650. These figures will be confirmed in the autumn. Higher rate taxpayers will see an additional income tax bill of £100, and those earning above £100,000 will see higher increases.

Just a reminder that the higher rate threshold is currently £37,400. Added to the personal allowance of £6,475, this means that the level at which an individual below 65 pays 40% income tax is £43,875. The Government’s plans will reduce this to £42,375.

The last Government announced the abolition of loss relief on furnished holiday lettings from 6 April 2010, but the relief will now continue. There may be changes in April 2011.

There have been no firm announcements on the changes to pension tax relief for those earning above £150,000; relief is due to be restricted to 20% from April 2011. The Chancellor has, however, made a commitment to simplify the alarmingly complex rules. It is believed that one option under consideration is to allow full tax relief to continue but to reduce the maximum annual contribution available for tax relief from its current level of £255,000 down to maybe £45,000 or even £30,000.

The above constitutes an outline of the some of the more significant points in this year’s Budget. The advance notice of most of the changes gives you time to prepare for them. For further information and advice, please contact Peter Hughes.

23 June 2010