Budget 2010

Introduction

George Osborne described his first Budget as ‘the unavoidable Budget’ in which spending cuts outweighed tax increases by a ratio of 77% spending cuts to 23% tax increases. The capital gains tax changes were less harsh than many feared. The new top rate of 28% is much less than the 40% or 50% rates that had been threatened and it was a relief that the annual exemption will stay at £10,100. The increase in the lifetime limit for entrepreneurs’ relief from £2 million to £5 million will be welcomed by business owners.

The planned reduction in corporation tax rates had been anticipated, while the cuts to capital allowances were less than some had predicted.

On pensions tax relief, the Government is reviewing the complex provisions that were to limit higher rate tax relief for people with high incomes from April 2011 and seems to be considering reducing the annual allowance from £255,000 to between £30,000 and £45,000. The Government will also abolish the current rules that effectively force people to buy annuities with their pension funds at age 75 and will consult on the details.

The big revenue raiser will be the VAT increase in the new year, but the main part of the package – the spending cuts – will be announced in the autumn.

Budget highlights

• The standard rate of VAT will be 20% from Tuesday 4 January 2011.
• The personal allowance will rise by £1,000 in 2011/12, but higher rate taxpayers will not benefit because the basic rate limit will be cut.
• From 23 June 2010, the rate of capital gains tax will increase to 28% for higher and additional rate taxpayers, but will remain at 18% for basic rate taxpayers.
• Entrepreneurs’ relief will continue at 10% and from 23 June 2010 the lifetime limit will be raised to £5 million per person.
• The main corporation tax rate will fall to 27% from 1 April 2011 and be reduced by 1% a year in the following three years.
• The small profits corporation tax rate will reduce to 20% from 1 April 2011.
• The annual investment allowance will be cut to £25,000 from April 2012. The writing down allowances for plant and machinery will also be reduced.
• The effective requirement to buy an annuity at age 75 will be scrapped from April 2011.
• There will be a temporary exemption for employers’ national insurance contributions of up to £5,000 per employee for each of the first ten people employed by new businesses in certain regions, broadly outside London and the South East of England.

Other announcements

Review of HM Revenue & Customs powers

A range of changes are to be introduced to HM Revenue & Customs powers. These have been extended considerably in recent years although the changes announced are not expected to become fully operative before 1 April 2012. The changes relate to the modernising of information and inspection powers; and aligning the record-keeping rules and the time limits for assessments and claims with changes made to other taxes and duties. The existing information and inspection powers will be changes as shown in the table below.

This plan supersedes that which was announced in the March 2010 Budget.

We recognise that our clients are concerned regarding HM Revenue & Customs powers - if you would like to discuss the overall extent to which HM Revenue & Customs can extend their rights, do please contact us.

Penalties for late filing of returns and payments of tax

The last ten years has seen a gradual increase in the requirement to file returns on time with a penalty arising for late filing. Measures announced today are designed to "complete the reform of the penalty regime." The measures announced today were heralded in the March 2010 Budget and are now amended as follows:

Penalties for late filing returns (quarterly)

• a £100 penalty immediately after the due date for filing (whether or not the tax has been paid);
• the failure also starts a penalty period, which is set for a year;
• if there are further failures within the penalty period, then the fixed penalty escalates by £100 for each of those subsequent failures, up to a maximum of £400 per failure. The penalty period is also extended to the first anniversary of the latest failure;
• if any of the failures are prolonged, then additional penalties of 5 per cent of the tax on the relevant return are charged at six and 12 months from the date of the failure; and
• if, by failing to make the return, the taxpayer is deliberately withholding information to prevent HM Revenue & Customs from correctly assessing the liability to tax, then penalties of up to 100 per cent of the tax on the return may be chargeable.

Penalties for late filing returns (monthly)

• This is a very similar structure to the quarterly model above, except that the fixed penalties are £100 for the first six failures in any penalty period, and then £200 for any subsequent failures.

Penalties for late payments (quarterly)

• Where a tax payer first pays late, although there is no penalty, it does start a penalty period, which is set for a period of a year;
• if there are further failures within that period will attract a penalty of 2 per cent of the unpaid tax, as well as extending the penalty period to the first anniversary of the latest failure;
• a third failure within the period will attract a penalty of 3 per cent with further failures attracting a maximum of 4 per cent; and
• if any of the failures are prolonged, then additional penalties of 5 per cent of the unpaid tax are charged at 6 and 12 months from the date of the failure.

Penalties for late payments (monthly)

• This is a very similar structure to the quarterly model above, except that, after the first failure, the tax-geared penalties are 1 per cent for the next 3 failures in any penalty period, 2 per cent for the next 3 failures, etc. up to a maximum of 4 per cent per failure.

Bank levy

Effective from 1 January 2011, a much anticipated bank levy based on the banks' balance sheets will be introduced which is expected to raise £2 billion in extra revenue. The levy will be set at a rate of 0.07 per cent, with a lower initial rate of 0.04 per cent in 2011.

Income tax and shared lives carers

With effect from 6 April 2010 qualifying shared lives carers may claim a new relief to be known as the qualifying care relief.

Those shared lives carers whose earnings are less than the tax free allowance will not be taxed on their income from providing shared lives care. Those whose shared lives earnings are more than the tax free allowance have the option to choose a simplified method for calculating their profits.

Landfill tax

This is a change involving the departments of HM Revenue & Customs and HM Treasury.

Currently HM Treasury must have regard as to whether material being landfilled is commonly described as inactive or inert when deciding whether or not to include it in an Order that lists the materials that qualify for the lower rate of tax. The change which comes into force from Royal Assent will specify that the Commissioners for HM Revenue & Customs must publish the criteria that HM Treasury will have regard to when determining what material is lower rated, and will publish revised criteria when necessary. HM Treasury will take account of these criteria when listing in an Order the materials that qualify for the lower rate of tax, for any disposals made, or treated as made, on or after 1 April 2011.

Trusts and compensating asbestos victims

An announcement has been made that supersedes the March Budget press release.

With effect on and after 6 April 2006 trustees of certain trusts are exempt from capital gains tax (CGT), inheritance tax (IHT) and income tax (IT). The trusts that will benefit are those established on or before 23 March 2010 as part of an arrangement made by a company with its creditors and specifically to pay compensation to, or in respect of, individuals with asbestos related conditions.

Trustees are subject to IHT changes every 10 years on the value of property held in trust above the IHT nil rate band (£325,000) and also on certain payments made out of the trust. Trustees are also liable to income tax on income arising to the trust, and CGT on disposals of certain trust assets.

Provided the trust is specifically established for the purpose of paying asbestos-related compensation for individuals, the trust is exempt from CGT, IHT and IT.

Pensions taxation - NEST

NEST is the National Employment Savings Trust. With effect on and after Royal Assent NEST will be registered with HM Revenue & Customs for tax purposes.

Insurance premium tax increase (IPT)

With effect on or after 4 January 2011 the rates of IPT are as follows:

Note: For insurers using the cash receipt method to account for IPT, the new rates will have effect for premiums received under taxable insurance contracts on or after 4 January 2011.

Budget 2009:

In an unusually late April Budget, Alistair Darling introduced important tax and other changes against a background of deepening economic difficulties in the UK and globally.

There was welcome news for savers in the increase of the ISA limit to £10,200 and the cash ISA limit to £5,100, although this was restricted to investors aged 50 or over in the current tax year, and it will only be extended to others from 2010/11.

Those with high incomes were targeted in three announcements. An increase in the top rate of tax was heralded in the Pre-Budget Report last November, along with restrictions to the personal allowance. But the provisions turned out to be tougher than originally proposed and will now be introduced a year earlier.

There were rumours of the removal of higher rate tax relief for pension contributions but no announcement was made in the Pre-Budget Report. The relief will start to be withdrawn for people with incomes over £150,000. The full provisions do not come into force until April 2011, but there are temporary measures to stop a rush to make unusually large pension contributions in the next two years.

Budget highlights

• ISA limits will be raised to £10,200 (£5,100 for cash deposits) in 2009/10 for anyone aged 50 or more. The higher limits apply to all investors from 6 April 2010.
• A first year capital allowance of 40% will apply to qualifying capital expenditure if it exceeds the £50,000 annual investment allowance in the 12 months from April 2009.
• The small companies corporation tax rate will remain at 21% for the financial year 2009 as previously announced.
• For broadly the next two years, businesses will be able carry back their trading losses of up to £50,000 for three years rather than just one year.
• Tax relief on pension contributions will be restricted to the basic rate for individuals with incomes over £180,000 from 6 April 2011. Relief will be tapered for incomes over £150,000. From 22 April 2009, only basic rate tax relief on contributions will be available where contributions exceed the greater of £20,000 a year or the individual’s ‘normal pattern of contributions’.
• There will be a top rate of income tax for 2010/11 of 50% (42.5% on dividends) for individuals with incomes of more than £150,000. The rate applicable to trusts will also rise to 50% (42.5% on dividends) from 6 April 2010.
• The personal income tax allowance (£6,475 in 2009/10) will be withdrawn at the rate of £1 for every £2 of income over £100,000 from 2010/11.