Pre Budget 2008

After many years where the Pre-Budget Report has been of little significance or excitement, in 2008 Alistair Darling bucked the trend with numerous changes both major and minor.

The most significant changes to be announced in the Pre-Budget Report are as follows:

VAT
The standard rate of VAT is to be reduced from 17.5% to 15% from 1st December 2008 for a period of 13 months. Thereafter, it will return to 17.5%.

Income Tax
A new highest rate of tax is to be introduced from 2011-12. Tax will be charged at the rate of 45% on income in excess of £150,000 but will reportedly only affect the top 1% of the population. Dividend income of those with income in excess of £150,000 will be charged at 37.5% rather than 32.5% as now. From 2011-12, the rate of tax on trust income will increase to 45% and on dividends received by a trust, to 37.5%.

For those earning between £100,000 and £140,000 the personal allowance is to be reduced by £1 for every £2 of income above that level down to a minimum of half of the personal allowance. In addition, for those on income of £140,000 or more the personal allowance is to be reduced by £1 for every £2 of income above that level and could be eliminated completely.

National Insurance Contributions
The rates of National Insurance (NIC) are to be increased for employers, employees and the self-employed. However, this change will not take place until 2011/12, at which time all rates are to be increased by 0.5%. This will mean that employers pay 13.3% rather than 12.8% and employees will pay 1.5% on higher levels of income, estimated to be around £45,000 at that time. They will also pay 11.5% on income between the starting rate and that level.

As a balancing measure, the starting point for NICs will be unified with that for income tax from 2009-10 and the Chancellor has stated that this means that those earning £20,000 or less will find the measure broadly tax neutral.

Corporation Tax
The Chancellor had previously announced that the corporation tax rate for small companies would increase by 1% per annum until it hit a top level of 22%. However, as a short term measure, this increase has been deferred for 2009 and the rate will remain at 21%, with the 22% rate coming in one year later from 1 April 2010.

In an attempt to help smaller companies, there is also to be a facility – available from 24 November 2007 to 23 November 2009 – enabling losses of up to £50,000 to be carried back for three years rather than just one as at present.

Tax Deferrals
A further measure that is intended to aid smaller companies is with regard to spreading the payment of tax. The Chancellor today announced that companies that are in difficulties will be able to spread their tax liabilities which will include VAT, Corporation Tax, Income Tax and NICs. His initial announcement indicated that in the right circumstances companies will be able to defer these liabilities with the assistance of a new Business Payment Support Service without any pre-set limit on the period of the deferral.

Child Benefits
The increase in Child Benefits, to £20 per week for the first child and £13.20 for subsequent children, that had originally been expected to take effect in April 2009, has been brought forward by three months to 5 January 2009.

Pension Schemes
On ‘A’ Day, 6 April 2006, the limits for Lifetime Allowances and Annual Allowances were announced up to 2010-11. In that year, the Lifetime Allowance will be £1.8m and the Annual Allowance £255,000. It is now proposed that those levels will be held for the ensuing five years to 2015-16.

Excise Duties
With effect from 1 December 2008, the rates of duty for alcohol will be increased by 8%. As from 6pm on 24 November, the date of the Pre-Budget Report, the amounts of tobacco excise duty are also increasing by 4% on products other than cigarettes and the ad valorem duty on cigarettes will increase from 22% to 24%. These increases are to offset the reduction in VAT.

VAT Flat Rate Scheme
At the moment, there are two measures to determine whether businesses can use the flat rate scheme. The first of these is that taxable turnover is less than £150,000; the second test is that total income must be less than £187,500. From 1 April 2009, the second of these measures is to be scrapped. A further measure is also introduced with regard to companies in the scheme that have high annual income. If annual income exceeds £225,000, a business will have to leave the scheme. For this purpose, the measure to be used is the income on which VAT is calculated.

Air Passenger Duty
There are to be changes to the rules relating to air passenger duty for travel on or after 1 November 2009. These include people who have already booked tickets for fights from that date.

The current two band system is to be replaced by a new system with four bands based on the distance in miles travelled. These are then sub-divided between those travelling standard class and those in all other classes of travel, who will pay twice as much duty in each band.

The rates vary from £11 in 2009-10 for journeys of up to 2000 miles to £55 for those travelling over 6000 miles in standard class. In other classes, the equivalent rates are £22 and £110. In 2010-11 the range is from £12 - £85 for standard class travel and £24 - £170 in other classes.

In all cases, the distances are based on the figure between London and the capital city of the destination country or territory. This could produce anomalies, for example, in trips to large countries such as China.

Disabled Company Car Drivers
It is proposed that from 6 April 2009, legislation will be introduced to extend the beneficial rules for disabled company car drivers using an automatic car. This will allow them to use the lower list price of an equivalent manual car to work out the car benefit charge, where applicable.

Company Cars
New rules are to be introduced from 1 April 2009 for businesses within the charge to corporation tax and 6 April 2009 for those within the charge to income tax.

From that date, two new capital allowance plant and machinery pools will be created for cars. One will apply to cars with CO2 emissions over 160g/km and the other will be for those with lower emissions.

The pool for cars with emissions under 160g/km will attract writing down allowances at 20%, while the new special rate pool for those with higher emissions will only attract allowances at 10%.

There will be a transitional period of “around five years” during which the old “expensive” car rules will continue to operate for cars purchased prior to April 2009.

There are also new rules for lease rental cars where there will be a flat rate disallowance of 15% of relevant payments in respect of cars with CO2 emissions of 160g/km or higher. Once again, expenditure under leases that commence prior to the relevant date will continue to be subject to the old rules.

In an extension to the legislation, certain hire cars, such as taxis and cars leased to disabled people, which have previously been exempt from the expensive car rules, will be subject to the new legislation. The good news is that this will not extend to motorcycles, which will qualify for annual investment allowances.

Loan Relationships: Connected Companies
The Chancellor announced that changes will take effect for company accounting periods beginning on or after 1 April 2009 in relation to certain transactions between connected companies.

The first change relates to the release of trade debts between connected companies. At present, a creditor that formally releases a trade debt to a connected debtor is denied a deduction for the loss on the debt. However, the debtor may be taxed on its profit. Under the proposed change, the debtor company will no longer be taxable on the debt release.

The second change is currently not yet clarified but relates to deductions for interest paid by a debtor company to a connected creditor. It is expected that more concrete proposals will be announced either before the next Budget or at that time, extending the ‘late paid interest’ rules to UK companies.

To find out more information about how the Pre-Budget report will affect you please contact us.