Budget 2010

24 MARCH 2010

Summary of the taxation provisions

Introduction

With the country likely to go to the polls on 6 May, Mr Darling's third Budget was predictably as much a political exercise as a conventional set of announcements. While many of the measures had been set out in last December's Pre-Budget Report, there were also some surprises. These included the increased stamp duty land tax rate on residential property over £1 million from 6 April 2011 and the doubling of capital gains tax entrepreneurs' relief to £2 million only two years after its introduction.

The parliamentary timetable is such that much of the Budget will not become law before the current session of Parliament ends (12 April for a 6 May election).

Past experience (eg 2005) suggests that there will be a relatively short and non-controversial Finance Act rapidly enacted before the election. A longer and more contentious Bill will then be introduced in the new Parliament, whatever happens at the polls. The Conservatives are committed to introducing another Budget within 50 days of the election if they win.

Budget highlights

• Freezing the inheritance tax nil rate band at £325,000 between 6 April 2010 and 5 April 2015.
• Confirming the ISA allowance as £10,200 for 2010/11 and indexing it thereafter.
• Doubling the capital gains tax entrepreneurs' relief to £2 million per person for disposals after 5 April 2010.
• Doubling the annual investment allowance for investment in plant and machinery to £100,000 a year from April 2010.
• Confirming that the small companies' corporation tax rate will remain at 21% for 2010.
• Increasing the stamp duty land tax rate from 4% to 5% for purchases of residential property over £1 million starting in 2011/12.
• Raising the threshold for stamp duty land tax to £250,000 for first time buyers from 25 March 2010 for two years.
• Substantially increasing the minimum amount a VCT must invest in eligible shares.
• Imposing standard rate VAT on postal packets and parcels from 31 January 2011.
• Confirming the revised restrictions on pension tax relief from 2011/12.
• Introducing a penalty for tax evasion of up to 200% where there is an offshore element.

This summary has been prepared very rapidly and is for general information only. The proposals are in any event subject to amendment before the Finance Act is passed. It is recommended you seek competent professional advice before taking any action on the basis of the contents of this publication.

Income tax allowances, reliefs and credits

The main allowances, starting rate savings band and basic rate band for 2010/11 are unchanged from 2009/10. Furthermore, as enacted in the Finance Act 2009, from 2010/11:

• A 50% 'additional rate' will apply to taxable income over £150,000;
• The corresponding rate for dividends will be 42.5%;
• The basic personal allowance will be gradually reduced to nil for individuals with 'total income' of over £100,000. The reduction will be £1 for each £2 of income over £100,000, so that those with 'total income' above £112,950 will not receive any personal allowance.

Individual savings accounts (ISAs)

From 6 April 2011 and over the course of the next Parliament, the annual ISA limits will increase each year in line with the RPI. The new annual limits will be rounded to the nearest multiple of £120, with the revised amounts published at least four months before the start of the new tax year. The subscription limit from 6 April 2010 is increased to £10,200, of which up to £5,100 can be saved in cash.

Saver: Protect your personal allowance. In 2010/11 your personal allowance is reduced by 50% for every pound your income is over £100,000. If you can reduce your income below £100,000, eg by making a pension contribution or choosing tax-efficient investments, you should benefit from the full allowance.

Real estate investment trusts (REITs)

At present, a UK REIT must pay cash dividends (property income distributions) to meet the requirement under the REIT tax rules to distribute 90% of the profits from its property rental business. From the date of Royal Assent, a UK REIT will be able to issue stock dividends instead of making a property income distribution.

Life assurance policy deficiency relief

Deficiency relief, which can arise when a loss occurs under a life assurance policy, will be available to reduce income tax due at the new additional rates of 50% (and 42.5% for dividends). The relief will be restricted for arrangements made after 21 April 2009 and policy surrenders after 5 April 2010, where the aim is to secure a tax reduction greater than the income tax due on earlier chargeable events.

Financial compensation

Legislation will be introduced to ensure that if the Financial Services Compensation Scheme (FSCS) acts to protect policyholders, there will be broadly the same tax treatment as if the FSCS had not intervened. The measure will have effect from the date of Royal Assent.

Venture capital schemes

A venture capital trust (VCT) is currently required to hold at least 30% of its 'qualifying holdings' in 'eligible shares'. This minimum is to increase to 70%. The definition of 'eligible shares' will be amended to include shares that carry certain preferential dividend rights. The requirement for VCTs to be UK listed will be replaced by a requirement that they should be admitted to trading on any EU regulated market.

Company shares will be excluded from qualifying for enterprise investment schemes (EISs) and investment by VCTs if the company is an 'enterprise in difficulty' under EU guidelines. The current rule that a company must have a qualifying trade carried on wholly or mainly in the UK will be replaced with a requirement that the company must have a permanent establishment in the UK.

The changes will be included in a Finance Bill to be introduced as soon as possible in the next Parliament and generally will have effect from the date of Royal Assent. The revised definition of eligible shares for VCTs will not affect funds raised by the VCT before then.

Don't forget: The new 50% income tax rate (42.5% for dividends) will apply to all trusts that accumulate income. If you are a trustee, you should consider whether you could save tax by restructuring the way in which the trust's investments are held.

Pensions tax relief

From 2011/12 tax relief on pension contributions will be restricted for:

• Employees with total annual income of £130,000 or over before deduction or relief for pension contributions and charitable donations and whose income (before such deductions or relief) together with the value of any employer pension contributions is £150,000 or over; and
• Other individuals with total income of £150,000 or over before deduction or relief for pension contributions and charitable donations.

A taper will apply for those with incomes between £150,000 and £180,000, gradually reducing relief on pension contributions until it is restricted to basic rate only.

The new restrictions will replace the special annual allowance charge.

Think ahead: Maximise the pension contributions on which you can get full tax relief. If your total income is £130,000 or more, the tax relief on your pension contributions may be limited in 2009/10 and 2010/11. From 2011/12, you may only qualify for basic rate relief.

Pension schemes: lifetime allowance and annual allowance

Pension taxation

A number of technical changes to pension tax legislation will be made to cater for the launch of the National Employment Savings Trust (NEST), which is due to begin in 2012.

Income tax adjustments between settlors and trustees

From 6 April 2010, settlors who receive repayments of tax on trust income because their personal tax rate is lower than the trustees' rate will be required to pass such repayments to the trustees. These payments to trustees will be disregarded for inheritance tax purposes.

Remittance basis

The remittance basis of taxation can apply to individuals who are either not domiciled or not ordinarily resident in the UK. Legislation will clarify that the definition of a 'relevant person' for remittance basis purposes includes subsidiaries of non-resident companies which would be close companies if they were resident in the UK. The change will take effect from 6 April 2010.

Guardianship orders

Payments made to individuals who care for children under special guardianship orders or residence orders will be free from income tax with effect from 6 April 2010.

Company cars and vans

Cars and vans that cannot produce CO2 emissions (eg electric-only vehicles) will be subject to a 0% scale charge. For cars with CO2 emissions of 75g/km or less, the appropriate percentage scale charge will be 5% (8% for diesels). Both new charges will last for five years from 6 April 2010.

Saver: Postpone selling your business. If you are selling your business, consider delaying the disposal until after 5 April this year when the limit for entrepreneurs' relief doubles to qualifying gains of £2 million. The tax rate is 10% instead of 18%.

CAPITAL TAXES

Stamp duty land tax (SDLT)

There will be relief from SDLT on purchases of residential properties that cost up to £250,000, where the transaction is completed on or after 25 March 2010 and before 25 March 2012. This relief can only be claimed by first time buyers who intend to occupy the property as their main home. To help fund this temporary tax relief, an additional rate of SDLT will be introduced at 5% on residential properties costing £1 million or more, where the transaction is completed after 5 April 2011.

Special rules apply to partnerships that ensure SDLT is not charged on transfers of land or property made between the partners or between a partner and the partnership. Anti-avoidance rules will be introduced to ensure that contrived partnerships are not used to avoid SDLT where it would otherwise be due.

Where SDLT is overpaid because of a mistake in a land tax return, the tax can be reclaimed within six years. From 1 April 2011, claims for repayment of overpaid SDLT must be made within four years. It will no longer be necessary for the overpayment to have arisen from a mistake in the land tax return.

Stamp duty land tax (based on consideration)

Capital gains tax

The rate of capital gains tax for 2010/11 remains at 18%. The capital gains tax annual exemption has also been frozen at £10,100, with the exemption for trusts generally set at £5,050.

Entrepreneurs' relief

Entrepreneurs' relief reduces the effective rate of capital gains tax to 10% on gains arising on the disposal of businesses and certain business assets. Individuals are restricted to claiming this relief on up to £1 million of lifetime gains made after 5 April 2008. This limit is to be increased to £2 million for disposals made after 5 April 2010. No additional relief is given for gains that exceed £1 million made before 6 April 2010.

Saver: Postpone selling your business. If you are selling your business, consider delaying the disposal until after 5 April this year when the limit for entrepreneurs' relief doubles to qualifying gains of £2 million. The tax rate is 10% instead of 18%.

Inheritance tax

The nil rate band for inheritance tax has been frozen at £325,000 until 5 April 2015. The rate of inheritance tax on death remains at 40%.

Business tax

Corporation tax rates

The main rate of corporation tax will remain at 28% from 1 April 2011. The small companies' rate will continue at 21% from 1 April 2010.

Associated companies and groups

The Government intends to reform and simplify the associated company rules as they apply to the small companies' rate, following recent consultation. The changes will take effect from April 2011. The Government is also consulting on detailed proposals for simplifying capital gains rules for groups of companies.

Annual investment allowance (AIA)

The AIA, which gives 100% tax relief for investment in plant and machinery, will double to £100,000. The increase will have effect for expenditure from 1 April 2010 for corporation tax and from 6 April 2010 for income tax. Where an accounting period straddles the effective date, the maximum allowance will be apportioned between the periods falling before and after the date. For example, for a company making up accounts for the 2010 calendar year, the AIA will be 3/12 x £50,000 + 9/12 x £100,000 = £87,500.

A new anti-avoidance rule will disallow property loss relief against general income to the extent that the loss is attributable to the AIA. The rule will apply to losses arising as a result of relevant tax avoidance arrangements entered into on or after 24 March 2010.

Think ahead: Get the timing right for your investment in new business equipment. Businesses of any size will generally benefit from immediate tax relief on the first £100,000 a year spent on most types of equipment. Expenditure over £100,000 in a year may just qualify for the 20% annual writing down allowance. So it could be worth spreading major investments over two or more trading years.

Share incentive plans (SIPs)

Legislation will be introduced to deny a corporation tax deduction to companies that pay money to SIP trustees to buy shares from director-shareholders, but no real value is transferred to employees under the SIP. The measure is directed at avoidance schemes and will have effect for payments made and alterations to share capital or rights attached to shares taking place from 24 March 2010.

Video games industry relief

A tax relief for the UK video games industry will be introduced following consultation, subject to state aid approval from the European Commission.

Enterprise management incentives (EMI)

A company that wishes to grant EMI options to its employees will no longer have to operate 'wholly or mainly' in the UK but will instead be required only to have a 'permanent establishment' in the UK. Where options are granted by the holding company of a group, at least one company in the group will need to have a permanent establishment in the UK. The change is being made to ensure that EMI complies with EU state aid rules, and will take effect from Royal Assent.

Zero-emission goods vehicles

Business expenditure on new, unused zero-emission goods vehicles, including electric vans, will qualify for a 100% first year allowance. The measure will have effect for five years from 1 April 2010 for corporation tax and from 6 April 2010 for income tax.

It will be of practical benefit only where business expenditure exceeds the annual investment allowance.

Company share option plans (CSOPs)

Options under a tax-advantaged CSOP can no longer be granted over shares in a company that is under the control of a listed company. The change, which takes effect from 24 March 2010, counters avoidance arrangements being used to circumvent the £30,000 financial limit on an individual's CSOP share options.

Loans to participators

Close companies will be denied a corporation tax deduction for a loan to a participator (broadly shareholders and certain loan creditors) that is written off or released. Close companies (generally companies under the control of five or fewer participators) are charged tax when they make a loan to a participator, which is repaid only if the loan is repaid. Where a loan is written off, the company may be entitled to a corporation tax deduction under the loan relationship rules. Write-offs from 24 March 2010 will no longer qualify for such a deduction.

Saver: You can save tax by trading through a company. A business with profits of about £50,000 can save the owner over £3,700 in tax and national insurance if it is set up to trade through a limited company rather than a sole trader.

Loan relationships

Power will be introduced to amend the corporation tax rules on loan relationships and derivative contracts where they are needed because of changes in accounting standards. Such changes may be made from Royal Assent, but may be retrospective where the revision to accounting treatment takes effect earlier than that date. Smaller companies that have adopted the Financial Reporting Standard for Smaller Entities (FRSSE) are less likely to be affected than larger companies.

Bank payroll tax (BPT)

Banks, building societies and certain other financial businesses are liable to 50% BPT on bonuses of more than £25,000 that are awarded to employees from 12.30pm on 9 December 2009 until 5 April 2010. The details are largely as published in the 2009 Pre-Budget Report, but there are some changes. They include clarification of the date when relevant remuneration is taken to be 'awarded' and which businesses are included. Bonuses to employees who visited the UK for no more than 60 days in the 2009/10 tax year will not be liable to BPT. Taxable companies will have to submit a return to HMRC and pay the tax by 31 August 2010.

Improved 'Time to Pay Scheme'

The Chancellor announced in his speech that the improved 'Time to Pay Scheme' will be extended for the whole of the next Parliament.

Business rates

The level of small business rate relief in England will be increased for one year, from 1 October 2010, to give full relief for eligible businesses occupying premises with a rateable value of up to £6,000 and tapering relief to £12,000.

The temporary increase in the threshold for empty property relief to a rateable value of £18,000 will be extended for a further year in 2010/11, as announced in the Pre-Budget Report.

Value added tax (VAT)

Registration and deregistration thresholds

The VAT registration threshold will increase to £70,000 (from £68,000) from 1 April 2010. The threshold at which a business can apply for deregistration will rise from £66,000 to £68,000 from the same date.

Partial exemption and option to tax

The Government has confirmed that the basis on which partially exempt businesses calculate the amount of VAT they can recover will be simplified from 1 April 2010. Simplifications to the option to tax regime from the same date are also confirmed.

Postal services

Standard rate VAT (17.5%) will be charged on the conveyance of postal packets by the Royal Mail, including Parcelforce, from 31 January 2011. The service is currently exempt. Letters will remain exempt from VAT.

Place of supply of gas, heat and cooling

UK VAT-registered customers currently have to account for VAT as a reverse charge on supplies of natural gas received from suppliers established abroad.

The existing rules also cover electricity and will be extended to include supplies in all categories of natural gas pipeline, but will be limited to supplies involving natural gas pipelines that are located in the EU or linked to such pipelines. Relief from VAT at importation will be extended to all natural gas imported through a network. The amended rules will also apply to heat and cooling supplied through networks.

Don't forget: Register for VAT in time! If you are running a new business, you may be too busy to notice how much your turnover has grown. Track your sales in the 12 months up to the end of each month. If the total tops £70,000, you must register for VAT within 30 days. If you delay, the penalties can be painful.

Reverse charge for emissions allowances

A reverse charge for supplies of emissions allowances will replace the interim zero rate for these services that was introduced on 31 July 2009. The charge will be introduced by extending the missing trader intra-community (MTIC) fraud rules to services (they currently apply only to goods) and will have effect from 1 November 2010.

Zero-rating of qualifying aircraft

The definition of aircraft that can be supplied zero-rated will be based on the status of the customer instead of weight and usage. From 1 September 2010, supplies of aircraft will be zero-rated only where they are used by airlines operating for reward chiefly on international routes.

'Lennartz' accounting

The recovery of VAT will be restricted for immovable property, boats and aircraft that are used for both business and private purposes. At present, VAT on these assets is recoverable upfront and in full, subject to any partial exemption restriction. VAT is then payable over subsequent years in respect of the private use of the asset. This is known as 'Lennartz' accounting after the relevant case. The measure will restrict VAT recovery to the business use proportion of the asset, excluding any private use by the taxpayer or the taxpayer's staff. Changes to the capital goods scheme will also be introduced so that it will take account of changes in private use over later years.

The changes implement the EC Technical Directive 2009/162/EU and will have effect from 1 January 2011. As a result, rules on recovery of VAT on directors' accommodation will be redundant and will be repealed from the same date.

Revenue protection legislation will be introduced to ensure that existing Lennartz accounting users continue to pay the VAT due under the accounting mechanism. It will be treated as always having had effect.

Quarterly fuel scale charges (figures inclusive of VAT)

Where the CO2 emissions figure of a vehicle is not a multiple of five, the figure is rounded down to the next multiple of five to determine the level of charge.

Don't forget: VAT fuel scales are based on emissions. If you provide your employees with fuel for their company cars, the amount of VAT you can recover is based on the car's CO2 emissions. This is another reason to provide low emission vehicles to your employees.

ANTI-AVOIDANCE

Disclosure of tax avoidance schemes (DOTAS)

The DOTAS legislation will be revised to:

• Change the trigger point for the disclosure of actively marketed schemes;
• Include a new requirement for a person who introduces a client to a notifiable scheme to provide HMRC with the name and address of the scheme promoter;
• Increase the penalties for failure to comply with a disclosure obligation, subject to determination by the Tribunal;
• Introduce a new requirement for promoters to provide HMRC with periodic information about clients who implement a notifiable scheme.

Regulations not dependent on the Finance Bill will be introduced to revise and extend the DOTAS 'hallmarks'. National insurance contributions regulations will mirror the tax changes in primary and secondary legislation, to the extent that they concern income tax. All these changes are expected to come into effect in autumn 2010.

Transactions in securities

HMRC powers, deterrents and safeguards

HMRC will have powers to:

• Charge penalties of up to 200% of the tax from 1 April 2011 on taxpayers who fail to provide a full account of their income tax or capital gains tax liabilities, where the failure is linked to an offshore matter;
• Require financial security from employers from 6 April 2011 where amounts due under PAYE or NICs obligations are seriously at risk.

Sideways loss relief

Legislation will be introduced to prevent the exploitation of sideways loss relief. The changes take effect from 21 October 2009.

Charities

The Government will continue to examine a new 'purpose test' as part of a replacement of the anti-avoidance rules relating to substantial donors to charities.

Legislation will also be introduced to counter a tax avoidance scheme involving relief for gifts of shares to charities, with effect from 15 December 2009.

MISCELLANEOUS ISSUES

Charity tax reliefs

The definition of a charity for Gift Aid will be altered to include registered charities located in EU member states from 6 April 2010, and will include charities in Iceland and Norway from a later date. This will allow donors with UK income to receive tax relief for donations to such charities. The rules concerning all charitable tax reliefs and exemptions will be revised to ensure they are effective for UK and non-UK organisations.

Trusts for asbestos victims

Where a company has set up a trust before 24 March 2010 to pay compensation to asbestos victims, the trustees will be exempt from income tax, capital gains tax and inheritance tax. This tax relief applies from 6 April 2006.

Landfill tax

The standard rate of landfill tax applied to active waste will be increased from £48 per tonne to £56 per tonne from 1 April 2011. The lower rate remains at £2.50 per tonne, although the categories of material that qualify for the lower rate will be reviewed and any changes will apply from 1 October 2010.

The maximum tax credit that payers of landfill tax can claim for contributions made to environmental bodies will be reduced from 6% to 5.5% from 1 April 2010.

Aggregates levy

The standard rate of aggregates levy will rise from £2 per tonne to £2.10 per tonne from 1 April 2011. The 80% tax credit payable to aggregates producers in Northern Ireland will continue until 31 March 2021.

Landline duty

Landline duty of 50p per telephone landline per month will apply to local loop networks from 1 October 2010.

Don't forget: Review your will. The IHT nil rate band was frozen at £325,000 this year, even though share prices have risen strongly and property prices are now nearly 10% up over the last twelve months. You may need to revise your will to allow for these changes in value.

National insurance contributions (NICs)