2010 BUDGET SUMMARY
Alistair Darling delivered the 2010 Budget on 24 March 2010. Below is a summary of the key announcements. Please contact Conor Brindley if you require any further information concerning any of the announcements.
Business Taxes
• Annual Investment Allowance
From April 2010, the annual investment allowance (AIA) will be doubled to £100,000.
Broadly speaking, the AIA is effectively a 100% capital allowance available to all businesses on most expenditure on plant or machinery.
• Capital distributions – corporation tax treatment clarified
The rules on the taxation of income distributions received by corporation tax payers will be extended so that they apply to certain capital distributions. The legislation will have retrospective effect.
Part 9A of the Corporation Tax Act 2009 introduced a new corporation tax regime for UK and overseas source distributions from 1 July 2009, which expressly excludes distributions that are capital in nature. Essentially, Part 9A exempts from corporation tax all income distributions by UK or non-UK companies unless the distribution falls within certain anti-avoidance rules. By contrast, distributions that are capital in nature may be subject to corporation tax on chargeable gains unless, for example, the substantial shareholding exemption or another exemption or relief is available. This change means that distributions will not be prevented from falling within the distribution exemption regime in Part 9A of the Corporation Tax Act 2009 because they are capital in nature.
• Corporation Tax Rates
The main rate of corporation tax for the year commencing 1 April 2011 will remain at 28% for companies and groups whose profits for the accounting period exceed £1.5 million. As announced in the 2009 Pre-Budget Report, the rate for companies paying tax at the small companies rate (those with profits of less than £300,000) will remain at 21% for the tax year 2010-11. Rates for marginal relief will similarly remain unchanged.
• No tax deduction when a loan to a participation of a close company is released or written off
Legislation will be introduced in the Finance Bill 2010 to deny a corporation tax deduction to a close company releasing or writing off a loan to participator. This change will take effect for loans released or written off on or after 24 March 2010.
When a close company makes a loan to a participator, the company must pay HMRC a sum equal to 25% of the loan. If the debt is released or written off by the company, the debt is treated for the borrower's purposes as a dividend (that is, it will be grossed up and treated as income received by the borrower for the tax year in which the release took place). The borrower is treated as having paid tax at the dividend ordinary rate on the grossed-up amount. Accordingly, the borrower will have no further tax liability unless he is a higher rate taxpayer. However, for the company's purposes, the debt released or written off was not treated as a dividend and, accordingly, the company was entitled under the loan relationship rules to claim a tax deduction for it.
• Reform of the investment funds tax rules
The government announced that it will consider various reforms to the UK tax rules applying to investment funds. The government intends to:
• Work with industry to ensure that the stamp duty reserve tax rules relating to investment funds only apply to investments in underlying funds if they are themselves primarily invested in UK equities.
• Consult on whether establishing a tax-transparent contractual fund vehicle would be beneficial for the UK.
• Work with industry to address issues for authorised investment funds investing more than 20% in both reporting and non-reporting offshore funds
• Review the tax rules relating to investment trusts with a view to modernising the rules.
• Venture Capital Scheme
Legislation is to be introduced to implement the four changes to the Enterprise Investment Scheme (EIS) and the Venture Capital Trust scheme (VCT), to meet commitments given to the European Commission to obtain state aid approval. The four changes are to:
• Replace the current rule that requires at least 50% of a company's qualifying activities to be in the UK with a requirement to have a permanent establishment (PE) in the UK.
• Prevent "enterprises in difficulty" from being eligible for investment under the schemes.
• Replace the current requirement that VCTs must be listed in the UK with a requirement that their shares must be traded on an EU "Regulated Market".
• Require VCTs to hold at least 70% of their qualifying holdings in "eligible shares" (eligible shares requirement).
The first three changes will have effect from the date the Finance Bill 2010 receives Royal Assent (irrespective of when the money was raised from the EIS or VCT investment); the eligible shares requirement will have effect for monies raised by the VCT after the date of Royal Assent.
The government has decided not to go ahead with the proposed new "small enterprise" qualifying requirement (intended to replace the current gross assets and number of employees requirements for both EIS and VCT purposes).
The government has announced it will work with industry to review the case for increasing the employee limit to either 100 or 250 employees, the gross assets limit to £15 million before the investment and £16 million afterwards and the annual investment limit to £5 million for qualifying companies.
• Zero-emission goods vehicles – 100% first year allowance
A 100% first year allowance on all expenditure incurred on new (not second-hand) zero emission goods vehicles from 1 April 2010 for companies (6 April 2010 for unincorporated businesses) until 31 March 2105 (5 April 2015 for non corporates) will be available.
Employment Taxes
• Amendments to enterprise management incentives (EMI) legislation
The EMI rules will be changed to allow companies with a permanent establishment in the UK to grant EMI options. The change will apply only for EMI options granted on or after the date on which the Finance Bill 2010 receives Royal Assent.
• Employer supported childcare – relaxation of rules
Legislation will be introduced to amend the "generally available to all employees" condition that must be met for employer-provided childcare and childcare vouchers to be exempt from tax and NICs. HMRC has indicated that the change will take effect retrospectively from 6 April 2005.
Currently, employer-provided childcare and childcare vouchers benefit from exemption if, among other conditions, they are provided under a scheme that is open to the employer's employees generally. Many employers only offer these benefits through salary sacrifice arrangements. This effectively excludes employees if the salary sacrifice arrangement reduces the employee's earnings below the national minimum wage (and therefore excludes all employees). The measure will introduce an exception to the generally available to all employees condition in the case of such low-paid employees.
• Income Tax Rates
Personal allowances are to be frozen at their 2009-10 level (£6,475 for individuals under 65), as are the rate bands for basic (20%) and higher (40%) rate tax. Finance Bill 2010 will introduce an additional rate of 50% on income in excess of £150,000 and provisions reducing personal allowances at the rate of £1 of personal allowance for every £2 of income above £100,000.
• NIC rates and thresholdings
For 2010-11, with two exceptions, all NICs rates and thresholds are unchanged from 2009-10. The two exceptions are:
• The (LEL), which is linked to the basic State Pension, will increase by £2 from £95 per week to £97 per week.
• The special Class 2 rate for Volunteer Development Workers will increase by 10p from £4.75 per week to £4.85 per week, because this is linked to the LEL.
For 2011-12, in addition to the 0.5% increases announced at the 2008 Pre-Budget Report:
• The main rates of Class 1 (employee) and Class 4 (self-employed) NICs will be increased by a further 0.5% to 12% and 9% respectively.
• The employer rate for Class 1, 1A and 1B contributions will be increased by a further 0.5% to 13.8%.
• The additional rate of Class 1 and 4 NICs will be increased by a further 0.5% to 2%.
• The primary threshold and lower profits limit will be increased by £570 to compensate the lowest earners.
• No taxable benefit for electric cars
For the five tax years from 6 April 2010 to 5 April 2015 no income tax charge on benefits will arise on cars with zero CO2 emissions (and which are incapable of producing such emissions). Employees who have the benefit of a car provided by their employer are liable to tax at a rate that is calculated as a percentage of the cost of the car, the applicable percentage being determined by the emissions of the vehicle. The Finance Bill 2010 will amend the existing provisions to introduce both the zero rate charge and a new reduced rate of 5% on ultra-low emission cars. Zero-emission vans will also benefit from the new zero benefit charge.
• Review of tax treatment of growth shares, JSOPs and similar arrangements
HM Treasury have announced that there will be a "consultation in summer 2010 on taxing ... returns from geared growth, following the increased use of tax-motivated arrangements involving employment-related securities" . . . "to ensure that income from employment is taxed correctly".
This appears to refer to arrangements such as growth share plans and shared growth/joint ownership and carried interest arrangements, which are intended to secure that employees pay capital gains tax (at 18%) rather than income tax (at 40 or 50%) on gains on shares (and other securities) or interests in them.
Environment
• Changes to enhanced capital allowances rules
The list of expenditure qualifying for enhanced capital allowances (ECAs) will be revised. The changes are:
• The addition to the energy efficient scheme list of two new sub-technologies: permanent magnet synchronous motors and biomass fired warm air heaters.
• The removal of one existing technology (compact heat exchangers) and one sub-technology (liquid pressure amplification).
• The tightening of the criteria for taps and showers in the water efficient scheme.
Broadly speaking a business can claim ECAs if it incurs qualifying expenditure on designated energy-saving plant and machinery and environmentally beneficial plant and machinery.
Personal Tax
• Capital gains tax rate and exemption
The rate of capital gains tax (CGT) remains 18%. The CGT annual exempt amount for the tax year 2010-11 has been set at £10,100.
• Entrepreneurs’ Relief
With effect from 2010-11, the lifetime limit for the purposes of entrepreneurs' relief is to double from £1 million to £2 million. This means that the taxpayer will suffer capital gains tax (CGT) at an effective rate of 10% on the first £2 million of lifetime gains (CGT at 18% being charged on 5/9 of the gain) made on the sale of a business or of shares in a personal company (one in which the taxpayer holds at least 5% of the ordinary share capital and controls at least 5% of the votes for a period of at least 12 months preceding the sale).
Property
• SDLT – increase in nil rate threshold
The government has announced that it will provide a two-year stamp duty land tax relief for first-time buyers of residential property in the Finance Bill 2010. The relief will be available where the effective date falls on or after 25 March 2010 and before 25 March 2012. Where the relief is available, the nil rate threshold is effectively doubled so that residential purchases up to £250,000 will not be subject to SDLT.
The relief is limited to individuals who satisfy all of the following conditions:
• They acquire a wholly residential property, which can be either freehold or leasehold (where there are at least 21 years left to run on the lease).
• They have not previously bought residential property anywhere in the world.
• They intend to occupy the property as their main or only home.
• If the property is acquired jointly, all the purchasers must satisfy the above conditions.
These extra conditions only apply where the consideration exceeds £125,000. The nil rate of SDLT on residential purchases not exceeding £125,000 continues to apply as before.
• New 5% SDLT rate
The government has also announced that it will provide for the introduction of an additional 5% rate of SDLT for residential property over £1 million in the Finance Bill 2010. The new higher rate will apply to residential purchases where the effective date is on or after 6 April 2011. Currently, the highest rate of SDLT applicable to residential property is 4% where the chargeable consideration exceeds £500,000. All other SDLT rates and thresholds remain unchanged.
VAT
There is no change in the rates of VAT.
• Increases to VAT registration and deregistration thresholds
The following increases in the VAT registration and deregistration thresholds have been announced:
• The taxable turnover registration threshold (which triggers the obligation to register for VAT) will increase from £68,000 to £70,000.
• The taxable turnover deregistration threshold (which triggers the right to apply for deregistration) will increase from £66,000 to £68,000.
• The taxable turnover registration and deregistration thresholds in respect of relevant acquisitions from other member states will increase from £68,000 to £70,000.
The increases have been implemented by statutory instrument made on 24 March 2010 and will take effect from 1 April 2010.
This publication is intended merely to highlight issues and not to be comprehensive nor to provide legal advice. Conor Brindley heads up the Tax Group at Rosenblatt and be contacted at Conor Brindley