THE BUDGET 2011

Budget highlights 2011 ... Some useful tinkering

This was a great Budget for business with a number of useful planning opportunities made available. There is, as ever, a need to plan in advance and read the fine print.

The further reduction in corporate tax rates is welcome and should encourage greater use of companies to save and defer tax on a wide range of activities.

The hints at abolition of the 50% tax rate will be welcomed by many and will encourage profit retention in corporate structures by owner managers.

Up to £10m of qualifying capital gains on sales of businesses will be taxed at 10%, but woe betides those who do not comply with the complex conditions. They could find themselves paying up to £1.8m too much tax!

There is more tax relief for charities and plenty of scope for tax mitigation for those making charitable gifts, both on death and through Gift Aid in lifetime.

Some non-doms may see more tax from April 2012, but also a potential loophole in new, well intentioned changes to the remittance rules.

All in all, plenty of tax planning opportunities for many to consider.

Personal planning

Welcome hints of change on 50% Income Tax front...

There was an encouraging announcement that the 50% top rate of Income Tax is regarded as a temporary measure. The Chancellor has asked HMRC to provide evidence of how much extra tax revenue has been generated from it.

Many people have argued that the total tax take actually diminishes above a certain tax rate and it would appear that the Chancellor is keen to share this empirical information with us in due course.

No date has yet been given for a possible reduction in the 50% rate.

We await developments with interest!

Entrepreneurs' Relief

The lifetime limit on gains qualifying for Entrepreneurs' Relief has been increased by a staggering 100% to £10 million from 6 April 2011.

The qualifying conditions remain the same, so it has become more important than ever for business owners to ensure that they comply. The maximum potential cost of losing this relief is now £1.8 million.

The relief was first introduced in April 2008 when the lifetime limit was £1 million. The limit was increased to £2 million in April 2010 and to £5 million in the Emergency Budget in June.

Individuals who have made qualifying gains in excess of the limits prevailing at the date of sale will not be allowed any additional relief on the excess. They will, however, be able to claim additional relief on qualifying gains made in the future. For example, if an individual sold a business in June 2008 and realised a gain in excess of £1 million, no additional relief is due on that sale. He or she will, however, be able to claim relief on up to £9 million of qualifying gains realised after 6 April 2011.

This relief is now more valuable than ever. The conditions for Entrepreneurs' Relief are complex and it is easy to miss out because of a technicality. Business owners must regularly review their position to ensure this relief is not lost. In some cases, the ownership of land, for example, can be structured to save large amounts of CGT on sale as well as Inheritance Tax on death.

Inheritance Tax and Charities...an interesting development

The Inheritance Tax nil-rate band remains frozen at £325,000 until April 2015. There have been no changes to any of the existing limits or reliefs, but there is one very interesting new opportunity to reduce liabilities on death from 6 April 2012.

Where at least 10% of a deceased's net estate is left to charity, the rate of Inheritance Tax will be reduced from 40% to 36% for deaths on or after April 6 2012. The net estate for this purpose is the amount left after deducting exemptions, reliefs and the nil-rate band.

The effect of this relief is that a gift to charity will cost the estate only 24% of the value that passes to the charity.

Example:

John, a widower, dies leaving an estate of £2 million. Originally his will stated that his whole estate passes to his children. The children will receive £1.33 million after Inheritance Tax has been paid.

If John includes a gift of 10% of his net estate to a registered charity, the charity will receive £167,500 and his children will receive nearly £1.29 million. Therefore the gift of £167,500 has only 'cost' the beneficiaries a little over £40,000.

This measure makes charitable giving by will much more attractive. Previously a gift to charity would have 'cost' the estate 60% of the donation. This will now be reduced to 24%. Wills may need redrafting and the merits of lifetime giving from a tax angle reviewed to take this measure into account.

Domicile and residence... the goal posts move again...

Non-UK domiciles' favourable tax treatment is to become generally less favourable from 6 April 2012. The remittance basis charge will be increasing to £50,000 for any non-domiciles who have been resident in the UK for 12 years or more. The £30,000 levy will still apply for those who have been resident for between seven and 11 years.

No tax charge will apply on any income and gains remitted to the UK by any non-domiciles for the purpose of 'commercial investment in UK businesses'.

Precisely what this latter phrase means is unclear at this stage and, although the sentiment to boost the economy is to be commended, it may open the door for avoidance.

The Government has further announced its intention to simplify some aspects of the tax rules for non-domiciles to reduce 'undue administrative burdens'.

The Government will be consulting on the long awaited introduction of a statutory definition of tax residence for individuals and expects to implement it in April 2012. This will provide clarification and certainty to tax payers and is a welcome move.

Although the new rules may increase the complexity of this area, the rules will hopefully provide greater certainty.

Stamp Duty Land Tax (SDLT)...a helpful change

Legislation is to be introduced to average out the rate of SDLT payable when a purchaser acquires more than one property from the same vendor.

Subject to a minimum charge of 1%, the rate of SDLT payable on multiple purchases will be determined by the rate applicable to a simple average of the aggregate purchase consideration divided by the number of properties.

This is a welcome relief for any property investor and has been designed to stimulate demand and increase the supply of private rented property. For example, if five flats are bought from the same vendor after 5 April 2011 for £1 million in total, the SDLT payable will reduce from £50,000 to £10,000.

The end of Employer Funded Retirement Benefits Schemes (EFRBS)?

Today's Budget documentation confirms that the 2011 Finance Bill will include amended legislation in respect of 'disguised remuneration'.

Disguised remuneration includes tax planning schemes where employers and employees use third-party arrangements, often involving trusts or EFRBS, to make sums of money available to employees in a way which enables them to reduce, avoid or defer income tax that would otherwise be payable if they were taken as a salary or bonus.

The legislation is expected to confirm that, in many instances, these types of arrangements will give rise to an immediate income tax charge, as if the bonus had been taken in the normal way.

There are many different types of tax planning arrangement available and although many will fall within the new legislation, others may not. Please contact us to discuss what may be possible and effective following the publication of the Finance Bill 2011.

Business

Companies become even more competitive

Corporation tax rates are to fall further and faster than previously announced. The main rate of corporation tax, currently 28%, will drop to 26% from 1 April 2011 and then fall by a further 1% for each of the next three years, so by April 2014 it will be just 23%. The small profits rate of corporation tax, which applies when annual profits are below £300,000, will be 20% from 1 April 2011 as previously announced.

This rate reduction will give companies additional funds to reinvest for growth and innovation: it will also mean higher post-tax profits available for distribution to shareholders, which, in turn, should encourage investors. Internationally, it increases the UK's attractiveness as a place to do business as, by 2014, we will have one of the lowest corporation tax rates in Europe.

The falling corporation tax rate, together with the increase in NIC from this April, means that owner-managers who are able to choose how to extract cash from their businesses will almost always be better off taking dividends rather than a salary or bonus.

Where there are non-working shareholders, or shareholdings are disproportionate to work effort, consider whether measures such as different classes of shares or even a share buyback, could help with the tax efficient extraction of cash. We would be delighted to meet with you to discuss what would work for you and your business.

Corporation tax rates continue to compare favourably with income tax rates and this will influence the choice of business structure, especially where there is a desire to retain profits.

Unincorporated business owners and members of LLP's may want to consider either incorporation or, for an LLP, introducing a corporate partner, in order to retain profits tax efficiently. Consultants paying income tax at 40%/50% may also want to incorporate to smooth profits when these vary from year to year.

Incorporation can be achieved very tax effectively and with the right advice, may enable a significant reduction in tax liabilities. We have advised many businesses to revise their structure to allow them to meet their commercial objectives and lower their taxes.

Extra Encouragement for Enterprise

The Budget gives extra incentives to investors to use the Enterprise Investment Scheme (EIS) to help fast growing companies. The Budget also confirms measures previously announced to make EIS and Venture Capital Trust (VCT) funding available to many more businesses.

From 6 April 2011, the rate of income tax relief given to EIS investors will increase to 30% (from 20%) on an investment of up to £500,000, which, along with the potential for tax free capital gains, makes it an increasingly attractive option, even though some of the ventures invested in may be high risk.

Investors and the companies they invest in will welcome the additional tax incentive being given which often enables start-up companies to grow rapidly with funding that would not otherwise be available to them.

In addition, from April 2012, both the EIS and VCT investor reliefs will be available to a wider range of companies, which meet the following conditions:

Less than 250 employees (currently less than 50)
Gross assets no more than £15 million before investment (currently £7 million)

Also,

Maximum annual amount that can be invested in a company using these schemes will increase to £10 million (currently £2 million)
The annual amount an individual can invest will increase to £1 million (currently £500,000)

All of the above are subject to state aid approval.

These investment schemes provide welcome Income Tax and Capital Gains Tax reliefs to investors who are prepared to accept a generally higher level of investment risk. The increase in funding level is likely to make the scheme much more attractive to companies seeking significant levels of new finance.

Enterprise zones...reborn

The Chancellor has announced 21 new Enterprise Zones, which means that the tax relief for certain commercial property investments in designated depressed areas, which was due to be withdrawn from April 2011, will continue.

The Government will consider, in a limited number of cases, the scope for introducing enhanced Capital Allowances to support Enterprise Zones in the assisted areas. Generally, the relief is 100% of qualifying expenditure in the year of investment.

Investments need to be held for seven years. If they aren't, the generous tax reliefs are clawed back upon disposal. Typically 90% of the cost of the property will qualify for 100% tax write off, so a 50% taxpayer could be in a very favourable position.

Businesses located in Enterprise Zones will also get up to 100% business rate discount for five years.

This is a very generous tax relief, but careful planning is necessary. There are plans available where only 30% of the cash needs to be found by the investor. Please contact us if you are considering investing in an Enterprise Zone.

Overseas branches

UK resident companies who have overseas branches will be able to make an irrevocable election to exempt the branch profits from UK corporation tax (but consequently any branch losses will not be available to reduce the UK company profits).

The measure will take effect for accounting periods commencing on or after Royal Assent to Finance Bill 2011.

This measure will be welcomed by companies with profitable branches as it will simplify the way they pay tax. Advice should be sought before making the election, especially if there is any possibility of branch losses or if significant tax is being paid in the overseas jurisdiction. The timing of making the election will be important.

The measure will also bring about consistency between the tax of branches and subsidiaries. A review should be undertaken to see which model of business is most appropriate for the future.

Controlled Foreign Companies

The rules for Controlled Foreign Companies (CFC's) are being reformed with the main changes taking place in 2012, but with interim measures applying for accounting periods beginning on or after 1 January 2011. The changes are designed to exempt from the current charging regime commercially justified activities that do not erode the UK tax base and to help businesses that operate globally.

These changes are one of a number of measures designed to help businesses located in the UK to compete internationally and are welcome.

Capital allowances, R&D tax credits and the abolition of certain reliefs

1. Short life assets
	Changes have been announced to the way in which capital allowances can be claimed on assets which may be sold or scrapped after only a few years of ownership. From April 2011, businesses can make a short life asset election on an item of plant and machinery if they expect to sell or scrap it within eight years (rather than four as now). The election ensures that the capital allowances claims are in line with economic depreciation over the period of ownership. For computer equipment and other assets with a limited life, this election can bring forward the tax deduction on capital expenditure which will be welcomed, particularly by those businesses affected by the reduction in the Annual Investment Allowance next April. However, it does mean that records need to be kept of each individual asset purchased.
2. Fixtures in buildings
	There is less welcome news where allowances claims are made retrospectively on fixtures in buildings. There will be consultation later this year on plans to introduce rules that businesses must pool their expenditure on fixtures in buildings within a short period of acquiring the building in order to qualify for capital allowances. This could be a measure to prevent certain retrospective claims to capital allowances. We will monitor this consultation closely and inform our clients of action required before any resulting changes are introduced. If you would like a review of your capital allowances to ensure you are claiming the maximum amount possible, please contact us.
3. Research and Development
	The total deduction for qualifying research and development expenditure (R&D) given to small and medium sized companies (SME's) is to be increased to 200% with effect from 1 April 2011. Further, it is proposed to increase the total deduction to 225% from April 2012. This is a valuable relief for SME's undertaking R&D resulting in an advance in science or technology and it is important to ensure the claim is maximised. We have made claims for many clients and would welcome the opportunity to discuss the possibility of making a claim for you.
4. Abolished reliefs
	Amongst the reliefs being abolished are two that we have claimed for a number of our clients. Flat conversion allowances (FCA's) and land remediation relief (LRR) are to be abolished sometime after 2012. FCA's provide a 100% first year deduction for the costs of converting certain commercial properties into residential flats. LRR gives an additional 50% relief for the costs of removing harmful substances from buildings and land i.e. asbestos and Japanese knotweed.

Fortunately, we have advance warning of the abolition of these reliefs, which gives us the opportunity to still make full claims where possible. Please contact us if you would like to know more and to see if they would be appropriate for your circumstances.

Using cars for business...more tinkering

HMRC's approved mileage allowance rates for people who use their own cars for business purposes rises from 6 April 2011 for the first time in eight years. The main rate increases to 45p. The 25p rate remains unchanged.

For company cars with CO2 emissions between 95g and 220g/km, the company car benefit decreases by 1% with effect from 6 April 2013.

For those who use company cars and the employer provides fuel for private journeys, the amount of fuel benefit will be increasing. Currently, the calculation of the fuel benefit is based on a figure of £18,000, regardless of the value or cost of the car. From 6 April 2011, the figure increases to £18,800.

If you have a company car, and especially if you are taxed on a fuel benefit, it would be worthwhile asking us to review the matter for you and advise you on your options.

Charities

The administration of Gift Aid is to be simplified. From April 2013, charities that receive small donations of £10 or less will be able to apply for a Gift Aid tax repayment without needing to obtain Gift Aid declarations from the donors. The repayment will be capped at £5,000 per year, per charity.

In addition, a new online system is being developed, which will hopefully reduce the administrative burden on charities in dealing with Gift Aid claims.

Finally, the underused Self Assessment donate scheme, which allowed taxpayers to direct their tax repayment to a chosen charity, will be scrapped from 2011-12. The scheme has not proved popular and is vulnerable to fraud.

VAT

The Budget was generally dry on VAT following announcement of the increase to 20% in the Emergency Budget last June. Only the changes to Low Value Consignment Relief (LVCR), the threshold below which goods can be imported from outside the EU VAT-free, made the speech.

The more technical points of this year’s Budget are summarised below.

Low Value Consignment Relief (LVCR)

LVCR is the threshold below which goods can be imported from outside the EU VAT-free. From 1 November 2011, LVCR is being reduced from £18 to £15. This will affect individuals or businesses importing goods from outside the European Union (including the Channel Islands), for example CD’s and DVD’s. HMRC will consider further measures in respect of LVCR in the budget of 2012 if discussions with the European Commission do not produce a workable solution to stop the exploitation of the relief.

Registration and de-registration thresholds

From 1 April 2011, the registration threshold of £70,000 will increase to £73,000 and the de-registration threshold will increase from £68,000 to £71,000. Both the registration and deregistration threshold for relevant acquisitions from other EU Member States will also be increased from £70,000 to £73,000.

Academies

From the 1 April 2011 academies will be able to recover VAT paid on purchases made to support their non-business activities, principally the provision of education, which would have normally have been recovered by the local authority. This will ensure academies have the same VAT recovery position as local authority controlled schools.

Treatment of business samples

Businesses that provide free samples will no longer need to account for VAT after the first sample. Legislation is to be introduced so that none of the samples are liable to VAT. This will create a saving for businesses who give away multiple samples to the same businesses free of charge.

Splitting of supplies

Businesses will no longer be able to use an avoidance scheme to apply zero-rating to the supply of printed matter where it was ancillary to a different rated service and supplied by a different company to that supplying the main service. Legislation will be introduced to stop artificial splitting of such supplies and ensure the whole supply is taxed at the VAT rate of the predominant supply.

Changes for 2012

The Government will be introducing legislation to replace a number of extra statutory concessions affecting the following:

- An anti-avoidance tax charge required within UK VAT groups where the concession allows the value of services, purchased by an overseas VAT group member and recharged to the UK, to be capped

- Diplomatic missions, international bodies, visiting NATO forces and European research in infrastructure consortiums to benefit from indirect tax and duty reliefs.

Legislation will be introduced to ensure the VAT treatment of public bodies carrying out their statutory duties in competition with the private sector will clearly reflect EU agreements.

Consultation will continue on the options for implementing a VAT cost sharing exemption into UK legislation to benefit charities, universities and housing associations.

HMRC will also be consulting on further on line filing of VAT registration and de registration applications, notifying changes, on line filing of returns and electronic payments of VAT to reduce contact with HMRC.

They are also launching a joint initiative with the DVLA to combat fraud on vehicles brought into the UK. From 2013 vehicles entering the country for permanent use on UK roads will need to be notified to HMRC online before the vehicle is registered with the DVLA.