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December 2006 Pre-Budget
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This is a summary of Gordon Brown's 10th pre-budget report as Chancellor delivered on 6th December 2006. The speech at 37 minutes was his shortest ever!
The information in this summary is based on our understanding of the Chancellor's proposals. No action should be taken without obtaining appropriate professional advice and as ever the devil will be in the detail.
The background was that the economy is expected to grow by 2.75% in 2006 and 2.75% to 3.25% in 2007, which is ahead of budget.
Business was probably largely disappointed although not surprised with the tax measures in the report with no sign of a reduction in business taxation. Tolley's Tax Handbooks have doubled in size since the Chancellor came to power and there was nothing to help reduce the complexity of the tax system.
There was an emphasis on trying to improve the skill levels of UK workers although we have to wait to see how much of this burden will fall on the employer. The focus was on green taxes and spending plans focused on investment in education and training as well as defence.
Perhaps as evidence of his desire for another job, the Chancellor went beyond the remit that budgets normally cover, such as introducing additional protection for intellectual property rights. There was also reform of the planning system for major infrastructure projects to make it independent of Government, increased assistance for shared equity home schemes and savings to be achieved through increased efficiency in the public sector.
We now summarise the main tax effects of the pre-budget.
TAX AVOIDANCE
As is now familiar with this Chancellor there were more measures designed to crack down on tax avoidance.
Managed Service Companies
The Government is taking action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance. Draft legislation has been published and the Government is consulting on the draft legislation to implement these measures with effect from 6th April 2007.
A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as "composite companies" with perhaps 10 to 20 workers being put through the same company or "managed personal service companies" with one for each worker but managed by the scheme provider on behalf of the worker.
It is proposed that income that is received by workers through MSCs will be subject to employment levels of tax and NI. It will be the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.
In addition the rules for tax relief on travel expenses will be the same as for other employed workers.
Whilst in many cases these companies should be caught by existing legislation, they do not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, it is proposed to allowing recovery of them from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties. They will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which is proving too labour intensive for HMRC. How they will catch MSC providers based outside of the UK remains to be seen.
The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies. As a result of this we believe that taxpayers operating through MSCs at present should be seeking advice on setting up their own personal service company instead.
Other Anti-avoidance Measures
Most of the other measures were aimed at the more sophisticated schemes including...
- A new power to investigate tax avoidance schemes where it is believed the promoter has failed to comply with its statutory disclosure obligations.
- Schemes to enable individuals, trustees and personal representatives to gain a tax advantage from contrived capital losses have been closed.
- Some stamp duty schemes that involve leases, partnerships and sub-sales to avoid stamp duty have been closed.
- Some artificial schemes to reduce company taxation have had measures introduced to tackle them including those using manufactured payments, exchange gains and losses, annual payments, double tax relief, lease and leaseback and controlled foreign companies.
- The Government has put additional resources into tackling Missing Trader Intra-Community fraud.
TAXES ON EXPENDITURE
Air Passenger Duty
There is an increase in the rates of air passenger duty with effect from 1st February 2007 to recognise the environmental costs of flying, doubled in most cases.
Road Fuel Duties
The main road fuel duties were increased in line with inflation by 1.25p per litre. The Chancellor announced that he was rejecting an above-inflation rise, and reinstating the escalator that raised fuel duty steadily.
PERSONAL TAX
Basic Allowances
All income tax allowances for 2007/08 will increase in line with inflation. The basic personal allowance will rise in 2007/08 to £5,225. The lower earnings limit for employees' Class 1 contributions is raised to £87 per week with the primary and secondary thresholds increased to £100 per week in line with inflation. The rates of employers’ and employees’ NICs will stay unchanged.
For the self-employed, the flat rate of NIC will rise to £2.20 a week for 2007/08 with the Class 2 exemption limit raised to £4635. The annual lower profits limits for Class 4 contributions is increased to £5,225 and the upper limit to £34,840, both in line with inflation. The rate of Class 4 contributions remains at 8% on profits below the upper profits limit and 1% above it.
Tax credits
There is a rise of £80 in the child element of the Child Tax Credit to £1,845 per year from April 2007 in line with the increase in average earnings. The family element (normal and baby addition) remains frozen at £545 per year. For those claimants not entitled to working tax credit, the first income threshold (at which child tax credits other than the baby and family element start to be withdrawn) will rise to £14,495. The income threshold for CTC family element only remains at £50,000 per year.
The maximum eligible childcare costs remain at £175 for one child and £300 for two or more children. The percentage of eligible childcare costs remains at 80%. The disregard in Tax Credits for increases in income between one tax year and the next remains at £25,000.
Child Benefit
Child benefit is to rise to £64 per week and will be paid from the 29th week of pregnancy.
Individual Savings Accounts
Individual Savings Accounts and their tax advantages which had only been promised to exist until 2010 will be made permanent to provide greater certainty for providers and savers. In addition, there is the introduction of a package of reforms to ISAs to simplify the regime. It is proposed that there will be an overall annual investment limit of at least £7000, PEPs will be brought within the ISA wrapper, the Mini/Maxi distinction within ISAs will be removed, Child Trust Funds will be able to rollover into ISAs on maturity and transfers from the cash into the stocks and shares components of ISAs will be allowed.
6 Year Time Limit for Repayment of Tax
Legislation is to be introduced to prevent taxpayers making a claim for repayment of direct tax under a mistake of law more than six years after the date of payment. This aligns the limitation period with that for repayment claims in respect of direct taxes paid under assessment as a result of a mistake in a tax return.
CAPITAL TAXES
No Stamp Duty for Zero Carbon Homes
An ambition was announced for all new homes to be zero carbon by 2016, with a time limited stamp duty exemption for the vast majority of new zero-carbon homes.
Planning Gain Supplement
The property industry had been expecting further news on the planning gain supplement but it was just a case of further consultation being announced and so the new tax will not now be introduced until 2009 at the earliest.
BUSINESS TAXES
Construction Industry Scheme
It was confirmed that the new CIS scheme will be introduced in April 2007, contrary to some rumours that it may be delayed. However, there is a 2% increase in the standard rate of tax deduction up to 20%. The higher rate of deduction will be 30% as expected.
Clearance Procedure for Tax Planning Schemes
It was announced that to help large business the recommendations of the report by Sir David Varney the Revenue chief will be implemented in full to allow a new clearance procedure to sign off tax planning schemes within 28 days.
Film Tax Relief
There will be new tax reliefs in the New Year for the British Film industry to help encourage production of new films.
Controlled Foreign Companies
Measures were introduced following a win by the taxpayers in the Cadburys-Schweppes case at the European Court of Justice that will allow companies to establish subsidiaries in low tax jurisdictions to take advantage of the lower tax rates. The idea is that HMRC will disregard any profits that arise from genuine economic activity in other member states. However, somewhat controversially it only allows profits on labour in a CFC to be tax-exempt with profits from capital not being tax exempt. There is likely to be a lot of disagreement over this point. There has been increased concern over the competitiveness of the British Tax system compared to others. The changes will be implemented in the 2007 Finance Act.
Alignment of Filing Dates
Further to previous consultation, HMRC and Companies House are to continue working towards having a joint filing date for accounts and company tax returns by 2010 and review the need to reduce the filing period for company tax returns at a later time. So the plans to align the filing dates have effectively been shelved in the short term.
From 2008 the window for HMRC to open an enquiry into a company tax return will be linked to the date that the return is submitted rather than the deadline by which it was supposed to be filed. This is to be welcomed.
Landlord's Energy Saving Allowance
The present allowance of £1500 for individuals who let residential property for expenditure on certain energy saving items is extended until 2015 and is now per property rather than per building, so will help those with flats in the same building. Corporate landlords are also to qualify.
Real Estate Investment Trusts
Whilst the legislation to introduce these was contained in the last Finance Act, some amendments were announced to make it easier for new companies to become REITs.
VALUE ADDED TAX
Partial Exemption "Special Method"
From 1 April 2007 businesses will be required to declared the suitability of their proposed "special method" for the calculation of VAT before it is approved by HMRC. This is designed to speed up the approvals process for those that use the partial exemption special method. However, if the declaration is made and HMRC later determine that the method is not "fair and reasonable" and the person who made the declaration knew or should have known this, HMRC can recalculate the VAT owed. So whilst speeding up the process, it can leave the taxpayer with some uncertainty.
Retention of Records on Transfer as a Going Concern
Changes will be introduced to require the seller to retain their vat records unless the buyer takes over the seller's vat number.
PENSIONS
Alternatively Secured Pensions
Having brought in the so called simplification of pensions, we now have changes happening already.
Anti-avoidance rules subject to industry consultation are to be introduced with effect from 6th April 2007 in relation to transferring pension funds to dependents by the use of Alternatively Secured Pensions (ASP) to avoid inheritance tax.
At present, those aged over 75 with a pension fund have not had to buy an annuity with their pension fund. Instead they could draw an income from an ASP and on death, those assets would pass free of inheritance tax to their dependents.
The changes mean the ASP must pay at least 65% of the amount that could be paid as a pension had the ASP funds been used to purchase an annuity, to avoid too much income being reinvested in the fund. Currently there is no requirement to draw any income. Anything below this level will have a 40% tax charge. In addition any transfer of an ASP on the member's death will have an tax charge of 40% or 55%.