UK Budget Report
12th March 2008

BUDGET REPORT
12 March 2008

PERSONAL TAX

Tax rates for 2008/09

The tax rates will change in April 2008 to abolish the 10% starting rate and to reduce the 22% basic rate to 20%.  The starting rate will continue to be available for savings and investment income and capital gains. There are no changes to the tax rates applicable to dividends.

Allowances

The 2008/09 personal allowances were announced in the Pre-Budget Report. The personal allowance for those aged under 65 is £5,435.  The personal allowance for 65-74 has been increased to £9,030 and the personal allowance for over 75’s will be £9,180.

Individual Savings Accounts (ISAs)

The overall annual investment limit is increased to £7,200 with a maximum of £3,600 in cash.

Retrospective legislation will allow investors who withdrew cash from their Northern Rock ISAs between 13 and 19 September 2007 inclusive, to reinvest in a new ISA between 18 October 2007 and 5 April 2008 without breaching their annual investment limits.

Gift Aid

As the basic rate of tax is being reduced from 22% to 20%, the amount of tax reclaimable by UK charities and community amateur sports clubs under gift aid will be reduced.  In order to compensate for this a transitional relief supplement of 2% will be applied to qualifying donations in the years 2008/09, 2009/10 and 2010/11.

Income Shifting

Following the protracted case of Arctic Systems which finally ended in defeat for HM Revenue and Customs last year, the Government has proposed legislation intended to undo the tax advantage gained by income shifting arrangements.

The Government has considered the responses received to the recent consultation and believes that a further period of consultation will ensure that legislation in this area provides clarity and certainty for businesses and their advisers. The Government now intends to introduce legislation through Finance Bill 2009 and will not enact legislation effective from 6 April 2008.

Company cars and the fuel scale charge

Where a car is provided for an employee’s private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions. The percentages range from 15% to 35% for most cars.  The discounts available are as follows:

• 2% for cars manufactured to be capable of being run on E85 fuel
• 2% for bi-fuel cars or those which run on LPG only
• 3% for hybrid electric cars
• 6% for electric only cars (in practice the taxable benefit will be 9% of the price).

If free fuel is provided for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit.  The figure has increased from £14,400 to £16,900 in 2008/09.

CORPORATE AND BUSINESS TAX

Tax motivated incorporation

The government has moved to discourage small businesses from incorporating for tax reasons by increasing the tax they will pay on profits up to £300,000, from 20% to 21% with effect from 1 April 2008. The small companies corporation tax rate will further increase to 22% in 2009.
 
In contrast, the corporation tax paid by large companies with profits of £1.5 million or more will be cut from 30% to 28% from 1 April 2008.
 
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 32.5% from 1 April 2008.  This will fall to 29.75% from 1 April 2009.

The overall effect of the measures will be to reduce the tax advantages of incorporation over the next few years as the rates change.

Capital allowances

The system of capital allowances will be significantly revised from 2008/09.

The amendments are:

• Industrial Buildings Allowances (IBAs) and Agricultural Buildings Allowances (ABAs) will be phased out, with final withdrawal of both regimes by 2011.  The WDA, on buildings, will be reduced from 4% to 3% from 1 April 2008.
• Writing down allowances for plant and machinery will be cut from 25% to 20%.
• Writing down allowances for certain fixtures in a building will be cut from 25% to 10%.
• Writing down allowances for long life assets will be increased from 6% to 10%.
• The writing down allowances on cars costing £12,000 or more will continue to qualify for a 25% allowance subject to a maximum of 25%.
• A new annual investment allowance will be introduced offering a first year allowance of 100% on the first £50,000 of investment in plant and machinery (except for cars).
• In addition, a 100% first year allowance is available on energy saving or environmentally beneficial equipment.  The company will be able to reclaim a tax credit from HMRC.

Research and development tax relief

Research and development (R&D) tax relief gives enhanced tax relief to companies who undertake qualifying R&D projects. The company must spend at least £10,000 on qualifying items in one year. The changes taking effect are:

• large companies will be able to claim 130% relief, increased from 125%.
• small and medium sized companies will be able to claim 175% relief, increased from 150%.

Tax relief for business cars

The following proposals have been made in respect of business vehicles:

• the existing 100% first year allowances for cars with CO2 emissions up to 120g/km will be retained.
• the general plant and machinery capital allowances pool will be used for cars with CO2 emissions between 121 and 165g/km.

Enterprise Investment Scheme (EIS)

From 6 April 2008, subject to EC state aid approval, the limit on which an investor can claim EIS income tax relief will be increased from £400,000 to £500,000.

Enterprise Management Incentives (EMI)

Currently, employees cannot hold qualifying EMI options (taking into account Company Share Option Plan options also granted to them) with a total market value at the date of grant of more than £100,000. For EMI options granted on or after 6 April 2008, this limit will be increased to £120,000.

VAT thresholds

The VAT registration limits increase with effect from 1 April 2008 as follows:

• the threshold for compulsory registration is £67,000.
• the threshold for voluntary deregistration is £65,000.
  

CAPITAL TAXES

Capital gains tax (CGT) annual exemption

The annual exemption for 2008/09 will be £9,600.  For most trusts the exempt limit is increased to £4,800.

CGT rates of tax

The introduction of a new standard rate of 18% comes into effect from 6 April 2008. 

We also see the withdrawal of indexation allowance and taper relief for individuals and trustees from 6 April 2008.  Other reliefs, such as those relating to principal private residences, losses brought forward, Enterprise Investment Scheme and Venture Capital Trusts and business asset rollover relief will continue to be available.

CGT Entrepreneurs' Relief

The Chancellor has introduced an Entrepreneurs' Relief which gives an effective 10% rate for the first £1m of lifetime capital gains on the disposal of trading businesses and on certain disposals of shares in trading companies.

The £1m may be made up of any number of disposals after 5 April 2008 and unlike the former retirement relief (on which the rules are based) there is no minimum age qualification.

There is, however, a one year qualifying period and other conditions to be met. Trustees will also be able to claim, jointly with a 'qualifying beneficiary'.

Inheritance tax (IHT) threshold

The IHT nil rate band is increased to £312,000 with effect from 6 April 2008.

In the Pre-Budget Report, the Chancellor announced a new concession for married couples and civil partners. With effect from second deaths on or after 9 October 2007 the unused percentage of the nil-rate band from the first death estate can be carried forward and added to the nil-rate band available to the second. The combined threshold for couples is therefore set at a maximum of £624,000 for 2008/09.

This new arrangement applies no matter how long ago the first death occurred.