Chartered Accountants Canterbury and Business Advisers in Kent Burgess Hodgson

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TAXING TIMES (22/04/08)

This year is becoming a challenging one for most businesses. In this article, we look at the tax position following the recent Budget, how businesses and consumers might be affected and what can be done to reduce your tax burden

The new tax rules

With previous Governments, the Budget used to herald a raft of new provisions, effective from either 6pm on Budget night or a week or two later at the start of a tax year. We now have a rather different system where changes are announced well in advance, sometimes in the previous Budget, but, as in the case last year, with the October 2007 pre Budget Report announcing some major tax changes.
The March 2008 Budget confirmed most of the changes and included a huge number of detailed provisions, 107 budget notes running into 270 pages. The Burgess Hodgson Budget Team were ploughing through these on the afternoon and evening of March 12 to bring you our inter-active coverage on our website.

The major tax changes coming into effect from the start of this tax year are as follows:

• The new Capital Gains Tax regime was confirmed by the Chancellor, introducing a new flat rate tax of 18%.

• After considerable lobbying from business groups, the 10% rate of tax for the first million of gains on business assets was added to bring this rate into line with the existing rate of 10% for business gains. However, sales of larger businesses will suffer the additional 8% rate of tax.

• Holders of approved share options such as under an Enterprise Management Incentive Scheme may not qualify on a sale following exercise as the rules require that the shares must be held for at least 12 months and provide for at least 5% of the voting rights. This is considerably different from the former taper relief that accrued from the date of grant of the option rather than the date of exercise.

• One of the results of the flat rate of 18% is that it reduces the rate of tax charged on sales of investment assets, notably property and shares which were previously taxed at up to 40%. This is the lowest rate of tax on these assets since Capital Gains Tax was introduced in 1965. Future Governments may well decide to increase the rate on these assets in future years.

• The controversial new rules for non domiciled individuals were also introduced, albeit with some minor changes. Individuals resident in the UK for at least seven out of the last nine tax years will pay tax on their worldwide income and gains, unless they elect to pay an annual charge of £30,000. The Budget announced some minor changes with an increase in the de minimus level of income to which the new rules will not apply to £2,000 per annum, and exempting children from the £30,000 charge. There were also changes to the taxation of overseas trusts, including bringing non domiciled individuals receiving capital payments within the charge to tax.

• The new rules have received justifiable criticism that they only apply to non domiciles with modest amounts of overseas income; the very wealthy will be able to retain their assets overseas and not be particularly concerned about the £30,000 per annum charged. However, the ability to resort to the “remittance basis” for a particular year by payment of the £30,000 charge does open up significant tax planning opportunities, particularly for non domiciles selling businesses.

• The Chancellor’s proposals to strengthen the rules on residence are softened somewhat. The original proposals that any day in which a person was present in the UK would count towards the “91 day average” in determining whether a person is resident or not was changed to only include days in which a person is in the UK at midnight. Effectively, therefore, days of departure from the UK or day trips can continue to be ignored, and this will particularly benefit those overseas residents who make frequent business trips to the UK.

• The personal rate of Income Tax was reduced to 20% from 22% as had previously been announced, but the lower rate of 10% was abolished. Although we have what is historically a very low basic rate of tax, the overall tax burden as a percentage of the country’s Gross Domestic Produce is around 37%, and rising to catch up with the overall European average of around 40%. The overall rate of tax in America is far lower at 27%.

• The gap between Corporation Tax rates for large and small companies is being reduced. For some years the rates have been 30% and 19% respectively, from 2009 they will be 28% and 22%. These rates are low compared to other countries (for example the US rate of 40%) and we frequently find that clients with international structures prefer to pay Corporation Tax in the UK compared to other EU countries.

• The increase in Inheritance Tax thresholds to £312,000 per individual, announced in the pre Budget Report was confirmed. Married couples and civil partnerships can also take advantage of an overall exemption of £624,000 effectively divided between them, which will simplify the drafting of Wills and remove the need for some of the post death Deeds of Variation.

• A major change announced in the Budget was deferral of the “income shifting” provisions for a year. These were proposed in the pre Budget Report following HM Revenue & Customs’ loss in the Arctic Systems case, and would have taxed distributions of profit, particularly by way of dividend, between family members in companies. The original rules attracted a considerable amount of criticism and one hopes that the new rules, when drafted, will be considerably more workable than the previous drafts.

Finally, there are two common themes running through modern taxation structures: anti avoidance legislation and the environmental issues.

• Over the last few years we have seen a huge number of anti-avoidance provisions, and this year’s Budget is no different. Most of the old fashioned one-off schemes, involving a series of what might best be described as “unusual” transactions, such as a payment of a substantial fee to the promoter or the disappearance of a tax liability, now no longer work. However, in its attempts to stamp these out, the Government unfortunately often hits normal business arrangements as well. There are still many opportunities to use the available exemptions quite legitimately to reduce tax, with careful planning allied to getting the best overall result for a client’s business.

• Environmental issues flow through many of the tax provisions, and are likely to become much more prominent in future years. The taxation of motor vehicles, car and fuel benefits is now based upon emissions, and most businesses (especially those involved in construction) will be affected by the increases in landfill tax. The rate of tax increased from £24 per tonne to £32 per tonne on April 1, 2008, and the Budget announced a further increase to £40 per tonne on April 1, 2009.