24th April 2009
From a taxation perspective, there were few surprises as most of the measures had already been announced in the pre-budget report in 2008.
There were a number of new incentives introduced in an effort to ‘kick start’ the economy and support specific industries such as car manufacturing and residential property.
In order to finance these and other initiatives which were introduced, the government will have to borrow unprecedented levels and introduce measures to increase the tax rates of the high earners. It has also promised to take a much stricter approach towards tax compliance and has promised to close tax loop holes and introduce mandatory disclosure of certain structures in an effort to increase revenue to the exchequer.
Chancellor Darling announced that an extra £500m is to be made available to kick-start building on housing projects held up because of the credit crunch. The aim is to deliver an additional 10,000 homes in England over the next 2 years. This package includes £400 million to re-start stalled housing developments. £100 million will be allocated to local authorities to build new social housing at higher energy efficient standards. The exact mechanics as to how this money will be spent have yet to be announced. However, the following measures were also announced:
1. Stamp Duty Land Tax (“SDLT”) - Extension of temporary increase in residential threshold
The temporary increase in the residential SDLT threshold (from £125,000.00 to £175,000.00) will be extended to 31 December 2009.
David Silva, Partner and Head of Real Estate comments: “The extension of the SDLT holiday will be of benefit to some first time buyers. However, by extending the holiday for only four months and by not extending the exemption to all properties, this measure is unlikely to kick start the housing market, particularly in the London area where there are few properties available for under £175,000.00. It would have been more beneficial if measures had been introduced to ensure greater availability of mortgage credit as this appears to be the greater impediment to purchasers at the moment.”
2. SDLT changes to shared ownership scheme relief
Legislation will be introduced in the Finance Bill 2009 to:
- Extend favourable SDLT treatment to purchasers under shared ownership schemes operated by profit making Registered Providers of Social Housing (RPSH), where the scheme is assisted by public subsidy.
- Extend the existing SDLT relief for purchasers by Registered Social Landlord (RSL) to profit making (RPSH) where the purchase is assisted by public subsidy.
- Simplify the SDLT treatment of purchasers under rent to shared ownership schemes (also known as “Rent to Home-Buy Schemes”)
3. Disclosure of SDLT tax avoidance schemes for residential property
The government last year mentioned that the SDLT disclosure rules would be extended to residential property where the value of the property is greater than £1 million and draft legislation will now be introduced effecting these proposed amendments.
4. Increase in standard rate of VAT
With effect from the 1st January 2010 the standard rate of VAT will be returned to 17.5%. (This will obviously affect both property and non property transactions).
However, anti-avoidance legislation will be introduced in the Finance Bill 2009 to prevent organisations from entering into arrangements to avoid the effect of the standard rate reverting back to 17.5%. The legislation will provide that in certain circumstances an additional charge to VAT of 2.5% (i.e. the difference in the current rate of VAT and the new rate) will be due. This legislation will be targeting those persons who do not have full VAT recoverability.
5. VAT-Simplifying the procedure for opting to tax land and buildings
With effect from the 1st May 2009 a new automatic permission condition will apply to businesses that have previously made exempt supplies in land and buildings and who want to opt to tax.
This will allow more businesses to opt to tax without seeking HMRC’s permission. Guidelines are to be issued on this by HMRC shortly.
1. Corporate Tax exemption for foreign dividends
Many companies will be happy to hear that the anticipated exemption for foreign profits will be introduced from July 2009. Under the new rule dividends from overseas subsidiaries will generally be exempt from UK tax.
2. Small companies’ rate of Corporation Tax
The proposed increase (in the pre-budget report) in the small companies’ rate of corporation tax from 21% to 22% has been delayed from 1st April 2009 to 1st April 2010. This rate currently applies to certain companies with profits chargeable to corporation tax of up to £300,000.00 (adjusted for group companies or associated companies).
3. Capital allowances – 40% first year allowance for one year
A new first year allowance of 40% will be available for expenditure incurred on certain plant and machinery in the twelve month period commencing 1st April 2009 (for corporation tax) or 6th April 2009 ( for income tax), where expenditure would otherwise only qualify for a writing down allowance of 20%. This allowance is in addition to the current annual investment allowance which gives tax payers a 100% tax deduction on £50,000.00 qualifying capital expenditure.
4. Carry back of trading losses
It was announced in the pre-budget report that, on a temporary basis, companies could carry back trading losses against the profits of the three preceding years and obtain a refund of tax. Legislation will now be introduced in the Finance Bill to extend (in effect double) the length of the period in which losses may be carried back. There are limits to the amount of losses which may be carried back.
Simon Hobbs, an Insolvency and Corporate Recovery Partner at IBB Solicitors comments “Businesses currently in financial difficulty may now be able to benefit from an increase in cash flow as a result of this measure, which is, of course, always welcome. The £50,000 limit will lessen its benefit in practice though.”
1. Increase in top income tax rate to 50% for high earning individuals from April 2010
From 6th April 2010 there will be a new rate of income tax for individuals with taxable income over £150,000. The pre-budget report promised that this rate would be 45% from 2011. Therefore not only is this new rate is 5% higher, it also takes effect in 2010 which is one year earlier than expected. This new rate of income tax will also apply to trust income.
Gillian Murray, an Estate Planning and Management Partner at IBB Uxbridge Solicitors comments: "This would seem to be a further attack on trusts based on Mr Brown's long-standing belief that all trusts are created for the purposes of saving tax, whereas they are very frequently used to protect vulnerable persons. So long as the trustees do not need to accumulate income there is no great deterrent, as much (if not all) of the extra income tax paid by trusts can be reclaimed by the beneficiary, if that beneficiary has a lower rate of tax liability. Otherwise trustees should investigate possible alternative ways of structuring the trust investments to avoid creating unnecessary accumulations of income."
2. Reduction in personal allowances
From 2010 the basic personal allowances for income tax will be abolished for individuals who earn in excess of £100,000
3. Restriction on tax relief for pension contributions
From April 2011 the availability of the higher rate relief on pension contributions to registered pension schemes will be restricted for those who are earning more than £150,000 a year.
The relief will be tapered so that those earning in excess of £180,000 a year will only be able to obtain relief for these contributions at the basic rate of 20%.
As there is an obvious opportunity for some forward tax planning, measures will be introduced in the Finance Bill 2009 to prevent individuals making pension contributions outside their regular pattern in the run up to the introduction of these new measures in 2011.
The above proposals are subject to amendment before the Finance Bill receives Royal Assent. Please note that this paper should be used for guidance purposes only and legal or other advice should be sought before relying on any information contained herein.