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Darling takes steps to 'shorten the
slowdown'
Set against
a backdrop of global economic uncertainty, Chancellor
Alistair Darling has announced a raft of measures in this
year's much-anticipated Pre-Budget Report, aimed at stimulating
the economy and boosting consumer confidence.
Emphasising the wider global recession, and highlighting
the crisis in the banking system as the cause of economic
slowdown in the UK, the Chancellor announced that borrowing
will increase to £78bn this year, and revised his economic
growth forecast from 2.5% to 0.75% for 2008.
The Chancellor unveiled a £20bn package, effective until
April 2010, supposedly designed to help individuals and
businesses to weather the storm. This includes some significant
tax measures, with a cut in VAT from 17.5% to 15% for
a period of 13 months, from 1 December.
The temporary increase in the basic personal tax allowance,
worth £120 a year, has also been made permanent, and the
tax reduction will rise to £145 in 2009/10. However, from
2011 those earning in excess of £150,000 a year will be
subject to an income tax rate of 45%, and national insurance
contributions will also rise by 0.5% from 2011.
The Chancellor announced help for businesses, in the
form of a deferral of the 1p increase in corporation tax
for small firms, and new measures allowing businesses
to spread the payment of all taxes to HM Revenue &
Customs. A temporary small business finance scheme worth
£1bn will also be made available, and there will be an
increase in the empty property relief threshold, as well
as tax breaks for foreign dividends for medium and large
firms.
Other measures announced include: additional support
for mortgage holders; early increases in child benefit
and the state pension; and a new state supported savings
scheme. Meanwhile, duty on fuel, alcohol and tobacco will
be increased to offset the reduction in VAT, and new rates
of vehicle excise duty will be phased in over time.
Do please contact us for specific advice about how these
announcements might affect you or your business.
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Value Added
Tax (VAT)
Changes to the standard rate of VAT
In a move that will affect all businesses registered for VAT, the standard
rate of VAT has been cut from 17.5% to
15%, effective from
Monday 1 December 2008. The rate will remain at 15%
until 1 January 2010 when it will revert to 17.5%.
Zero-rated
supplies, such as basic foodstuffs, children’s clothing
and books; exempt supplies, such as education and health;
and supplies subject to VAT at 5%, such as domestic fuel
and power are not affected by this change.
Anti-forestalling
legislation will be introduced in the 2009 Finance Bill
to ensure that businesses are not able to use artificial
arrangements to reduce the VAT rate on goods or services
to be provided after the VAT rate reverts to 17.5% where
there is no current economic activity. Genuine commercial
transactions should not be affected.
The
measure includes two consequential changes. Firstly, it
amends the percentages used in the flat rate scheme for
small businesses to reflect the reduction in the standard
rate of VAT.
Secondly,
it introduces a change to the timing of credit notes issued
following a change of rate.
Operative date
The
15% rate will have effect for:
• supplies of goods and services made on or after 1 December
2008;
• imports on or after 1 December 2008; and
• acquisitions of goods from other Member States on or after
1 December 2008.
The
anti-forestalling legislation will have effect for arrangements
entered into on or after 25 November 2008.
The
consequential changes to the flat rate scheme percentages
and the timing of credit notes will have effect on and
after 1 December 2008.
Credit notes for payments received and VAT invoices issued
in advance of
1 December 2008
Where
payment has been received or a VAT invoice issued before
1 December 2008, VAT will have been charged at 17.5%.
But where that payment or invoice relates to goods or
services that are provided after 1 December 2008, the
VAT rules allow the supplier to apply the new VAT rate,
15%, to the earlier payment or invoice.
Suppliers
who choose this option are required to issue a credit
note to their customer, if they have issued a VAT invoice,
to evidence the credit for the reduction in VAT that is
now due. The VAT Regulations specify that such a credit
note must be provided to the recipient of the supply within
14 days after the change of rate. This time limit will
be extended to 45 days.
Further information
Detailed
information is provided in two supplementary documents:
These can be seen on the HMRC website at www.hmrc.gov.uk
Flat Rate Scheme entry rules
With effect from 1 April 2009, the test that requires a business to check that its total
income is less than £187,500 for entry into the VAT Flat
Rate Scheme will be removed. Instead, eligibility to join
the scheme will be determined solely by the taxable turnover
of the business, which must be less than £150,000.
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Measures for business
A wide range of tax and other measures affecting businesses
were announced by the Chancellor, with the stated aim
of assisting businesses in the difficult economic climate.
Corporation
tax: Small companies’ rate (SCR)
The Government had planned to increase the small companies’
rate (SCR) of corporation tax from 21% to 22% from 1 April
2009. However, this has now been deferred until 1 April
2010.
Legislation will now be introduced in the 2009 Finance
Bill to maintain the SCR for all profits, apart from ring
fence profits, at 21% from 1 April 2009 and effectively
maintain the marginal rate (used to ‘smooth’ the difference
between the main rate of corporation tax and the SCR)
at 29.75%. Profits limits will remain the same.
Extension of trading loss carry back
The period for which current trading losses from businesses
can be carried back against previous profits is to be
extended from the current one year entitlement, to a period
of three years, with losses being carried back against
later years first.
The amount of losses that can be carried back to the
preceding year is unlimited. After carry back to the preceding
year, a maximum of £50,000 of the balance of unused losses
is then available for carry back to the earlier two years.
This is a temporary measure for one year only. A company
may make a loss relief claim under the new rules when
it makes its return for an accounting period ending in
the period 24 November 2008 to 23 November 2009.
Unincorporated businesses may make a loss claim under
the new rules as soon as they have calculated their losses
for their basis period for the 2008/09 tax year.
HMRC will make repayments arising from loss relief claims
received under the new rules on or after Budget Day 2009.
Finance for SMEs
The
Chancellor announced various measures designed to help
SMEs with working capital and
investment needs.
Early
in 2009, the Government will launch a Small Business Finance
Scheme – a new temporary guarantee scheme to enable up
to £1 billion of new Government supported lending by banks.
The
Export Credits Guarantee Department, in conjunction with
the banks, will introduce a temporary guarantee scheme
to support a £1 billion facility providing smaller exporters
with better access to short-term working capital. The
Government will also make available a capital fund of
£50 million to convert SMEs’ debt into equity.
Earlier
in November 2008, Advantage West Midlands, a Regional
Development Agency (RDA), launched a transition fund for
viable SMEs facing financial
difficulties. Other RDAs will launch similar loan funds,
now totalling £25 million, to help businesses over the next six
months.
The
Government has said that it ‘welcomes the commitment’
of UK lenders to approach the European
Investment Bank (EIB) to access these funds. Following
negotiations between UK banks and the EIB, £1 billion of EIB funds will
be available to SMEs in the
UK by the end of 2008.
Early
in 2009, the Government will launch, in conjunction with
Business Link, a new portal to direct credit-worthy SMEs
who are experiencing problems accessing credit to the
appropriate scheme.
Empty Property Rate Relief
The
Government is temporarily increasing the threshold at
which an empty property becomes liable for business rates.
For the financial year 2009/10, empty properties with
a rateable value of less than
£15,000 will be exempt from business rates – exempting
an estimated 70% of empty properties.
Interest-free payment schedule for backdated business
rates bills
To
reduce the cash flow impact on businesses, given current
economic difficulties, the Government will legislate to
give more time to pay certain backdated business rates
bills issued before 31 March 2010. Businesses facing such
bills will be able to pay their liability for previous
years in equal interest-free instalments over 8 years, rather than immediately. Beneficiaries
will include several occupiers of ports who have been
affected by recent rating reviews.
Income shifting
The controversial proposed legislation designed to prevent ‘income shifting’
will not now be introduced in April 2009.
However, the Government has restated that it ‘firmly believes it is unfair’
to allow a minority of individuals to benefit financially
from shifting part of their income to someone else who
is subject to a lower rate of tax.
Taxation of foreign profits
The
Government will bring forward a package of reforms to
the taxation of foreign profits, with the object of making
the UK a ‘more attractive location’ for
multinational business. Measures will include an exemption
from tax for most foreign dividends received by large
and medium sized groups, regardless of the level of shareholding.
The Government will also continue to examine options for
reform of the Controlled Foreign Company (CFC) rules.
Any reform will aim to improve the way the CFC rules achieve
their objective of taxing profits diverted from the UK.
New Business Payment Support Service
HMRC has introduced a new Business Payment Support Service,
which is designed to assist those businesses whose cash
flow has been adversely affected by the economic downturn.
The service allows business owners who are concerned
about making their tax, national insurance and other payments,
to contact HMRC to discuss a range of payment options
tailored to their business needs.
The scheme includes a Business Payment Support Line
for new enquiries, which is available on 0845
302 1435, and is open from 8am to 8pm Monday to Friday,
and 8am to 4pm at weekends.
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Personal measures
Income tax
Following the compensation arrangements arising from
the abolition of the 10% rate band, the Government will
make permanent the £600 increase in the personal allowance
with a further increase of £130 above indexation, meaning
basic rate taxpayers pay £145 less a year in tax in 2009/10.
The basic rate limit for 2009/10 will be increased by
£800 above indexation. The Chancellor announced the tax
thresholds and personal allowances for 2009/10 as follows:
| Income Tax |
|
2008/09 |
2009/10 |
| |
|
|
|
| Starting rate band * |
|
£2,320 |
£2,440 |
| Tax rate |
|
10% |
10% |
| Basic rate band |
|
£34,800 |
£37,400 |
| Tax rate |
|
20% |
20% |
| Basic
rate for dividend income |
10% |
10% |
| Higher rate – income over |
£34,800 |
£37,400 |
| Tax rate |
|
40% |
40% |
| Higher
rate for dividend income |
32.5% |
32.5% |
| |
| * 10% rate for savings income
up to the starting rate limit within the basic rate
band. Where taxable non-savings income does not
fully occupy the starting rate band the remainder
of the starting rate band is available for savings
income. |
| |
|
|
|
| Personal
allowances |
|
|
|
| (age at the end of the tax year) |
|
|
|
|
Under 65 |
|
£6,035 |
£6,475 |
|
65 - 74 |
|
£9,030 |
£9,490 |
|
75 and over |
|
£9,180 |
£9,640 |
| Higher allowances scaled back if income
exceeds |
£21,800 |
£22,900 |
|
|
|
|
|
From 2010/11, those with gross income in excess of £100,000
will lose some or all of their personal allowances. The
basic allowance will be scaled back in two stages:
where gross income is between £100,000 and £140,000, to
a minimum of 50%, and
where gross income exceeds £140,000,
to a minimum of £0.
The scaling will be achieved by reducing the allowance
by £1 for every £2 by which gross income exceeds the £100,000
and £140,000 thresholds.
Also announced for 2011/12 are new higher rates of tax:
for those with higher incomes, a tax rate of 45% will apply
to savings and non-savings income over £150,000
a new 37.5% rate of tax will apply to taxable dividend
income above £150,000
the rate of tax for trusts will
be increased to 45%, with trust dividend income liable
at 37.5%.
National Insurance Contributions
For 2009/10 the Upper Earnings Limit (UEL) for primary
Class 1 National Insurance Contributions (NICs)
will be aligned with the level at which people start to
pay higher rate income tax. The UEL will therefore be
£43,875 (2008/09 £40,040). This is equivalent to £844
per week (2008/09 £770).
The Class 1 and Class 4 rates of contribution remain
unchanged until April 2011.
Class 2 NICs increase by 10p
to £2.40 per week and Class 3 voluntary contributions
go up by £3.95 to £12.05 per week. The Government is to
reduce the burden on the self-employed by aligning the
payment dates of Class 2 NICs
with those for Self Assessment liabilities. This will
reduce the number of bills issued. There will also be
improved information to contributors.
For 2011/12, and thereafter, the Chancellor announced
an increase of 0.5% to the main NIC rates:
the Class 1 primary (employee) rate increases to 11.5%
on earnings between the primary and upper thresholds and
to 1.5% thereafter
the Class 1 secondary (employer) rate increases to 13.3%
on earnings over the primary threshold
Class 1A and Class 1B NICs will
also increase to 13.3%
Class 4 NICs will increase to 8.5%
(1.5% above the upper limit)
Pension savings
The limits on annual and lifetime investment have risen
each year since 2006/07 and will continue to do so until
2010/11. The Chancellor announced that the limits will
stay the same for the following five years – at £255,000
and £1.8 million.
Child benefit
The Chancellor announced that the increase in child
benefit rates due in April 2009 will be brought forward
to 5 January 2009.
The weekly rate for the first child will increase to
£20, with the rate for other children increasing to £13.20
per week.
Child tax credit
Bringing forward promised increases in CTC, the Chancellor
announced that the child element will increase to £2,235
from April 2009, while the disabled child element will
increase at the same time to £2,670.
State Pension
The Chancellor announced that although the full State
Pension will not rise to £95.25 per week until April 2009,
it will make a payment of £60 to pensioners “in the new
year”, equivalent to bringing forward the rise.
Also, the standard minimum income guarantee in Pension
Credit will rise by £5.95 to £130 per week for single
pensioners and by £9.10 to £198.45 a week for pensioner
couples.
Saving Gateway scheme
A new state supported saving scheme, the Saving Gateway,
is to be rolled out nationally in 2010, in a bid to encourage
up to eight million low income earners to save money.
Under the scheme, the Government will contribute 50p
for every £1 that is saved. A maximum payment of £300
will be made once an account holder has been saving for
two years, and the contribution will only be applied for
those months in which no withdrawals have been made.
The Saving Gateway will be available through a range
of banks, building societies, credit unions, and the Post
Office.
Mortgages
The Government has said it is committed to supporting
households, through:
increasing the generosity of the Support for Mortgage Interest
scheme
extending the Mortgage Rescue scheme to cover second charge
lending
obtaining a commitment from major lenders not to initiate
repossession action until at least three months after
an owner occupier goes into arrears
better access to free and impartial
debt advice.
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Green measures
Fuel Duty
The Chancellor announced that the reduction in pump
prices means the 2p per litre increase on fuel duty will
take effect from 1 December 2008. Further increases of
1.84p per litre from 1 April 2009 and 0.5p per litre above
indexation from 1 April 2010 will go ahead, as planned.
Vehicle Excise Duty
Six new bands of VED will be introduced in 2009, the
Chancellor announced, taking the total to 13.
By 2010 the rate bands will start to separate out, with
increases of up to £30 that year. Also due in 2010 is
the First-Year Rate – the new higher Year One VED rate
for new cars.
Air Passenger Duty
New air passenger duty rates will apply from 1 November
2009, based on four distance bands, and increase from
1 November 2010, when the maximum standard rate will stand
at £170.
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What they said…
In these exceptional economic circumstances, I want
to take fair and responsible steps to protect and support
businesses and people now – while putting the public finances
on the right path for the future.
Chancellor of the Exchequer, Alistair Darling
Listening to the Chancellor's
speech, no one can be in any doubt that the Prime Minister's claim to have abolished boom and bust is one of
the biggest deceits ever told to the British public.
Shadow
Chancellor, George Osborne
If
I were marking the Chancellor’s report card, I’d say ‘could
do better’.
David
Frost, British Chambers of Commerce
Many of these measures […] will
give small businesses a welcome breather from the taxman
and allow them to concentrate on sustaining their business,
supporting their staff and growing the economy in the
long term.
John Walker, Federation of Small Businesses
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