“In what may well be his last Pre-Budget Report, the Chancellor announced a surprisingly large package of measures.  Whilst there was some welcome news, there were sadly also some missed opportunities and one or two initiatives that could well back-fire.

”A new one-off tax on bankers’ bonuses over £25,000 of 50%, to be charged to the employer, on top of the individual’s tax liability.  Whilst some action in this area was only to be expected, this massive increase in tax seems very likely to lead to people who really are top banking talent to relocate abroad and continue working from a place where their income may not be taxed in the UK at all.  Further, the fact that the tax will be levied on the employer means that the banks can only be expected to encourage this activity.

”The Stamp Duty Land Tax holiday for properties with a value of up to £175,000 will end on 1 January 2010, as previously planned.  This is a missed opportunity for the revival of the UK property market.  An extension of this holiday, together with a substantial increase in the limit below which it takes effect, would have cost relatively little, but could have inspired enormous confidence.

”Small companies corporation tax rate, which was to increase in 2010/11 to 22%, will remain at this year’s 21%, and this is clearly helpful for a very small number of struggling companies.  However, it clearly does not help any businesses that are currently making short term losses, which are in real need of some help.  Deferring tax rate increases on profits that are currently dwindling will cost the economy little, and is principally a soundbite.

”The Inheritance Tax nil rate band, above which IHT is charged, is to be frozen at £325,000 for next year, instead of the planned increase to £350,000.  This will lead to yet more middle-income people being drawn into the net of this tax that was initially introduced with regard to the very wealthy only.

”Anti-avoidance measures to protect £5 billion of tax revenue.  This received arguably the biggest reaction from the House, and there is no doubt that people should not be illegally evading their tax responsibilities.  However, this amount of tax is around a half of 1% of each of both tax revenues and the UK’s total debt.  Solving this problem is clearly necessary, but it is not going to make very much difference.

”A reduced 10% corporation tax for profits derived from patents is intended to boost innovation, but not all innovators operate through limited companies, and this tax incentive will lead to more regulation for creative people as they find themselves forced to incorporate.

”VAT will return to a rate of 17.5%, and the Chancellor said that he had no further announcements to make on VAT.  This is welcome news in the light of recent concerns that there might have been an increase to 19% or even 22% or 23%.”

It has been announced today that the current Chancellor’s third Pre-Budget Report (PBR), will be unveiled on 9 December. PBR 2009 will be the last of its type before next year’s General Election, and will reveal the Government’s latest tax and economic forecasts, departmental spending plans and planned changes to the fiscal framework. 

With the country still deep in what is now officially the longest recession since records began, TIM GREGORY and CLARE CROMWELL, partners at Saffery Champness Chartered Accountants, set out eight measures that could help assist the economy and potentially encourage a return to growth: 

• Deferral of National Insurance increases.

To start with, Tim proposes suspending these planned increases: “With unemployment at alarming levels, another cost of creating and maintaining jobs is the last thing the workforce needs.” 

• Reverse the restrictions on tax relief for pension contributions.

“The Chancellor should not be afraid to think again on tax relief for pension contributions,” says Tim. “With a proposed increase in the top rate of tax to 50% (51.5% for earned income), top earners and entrepreneurs are going to shoulder a large burden of tax increases in the coming years, which will inevitably discourage some from putting 100% into helping to rebuild the economy.” 

“The new rules that effectively increase their taxes further just because they wish to save for their retirement are simply unfair. The termination of the ‘quid pro quo’ of full tax relief on money going into a pension in exchange for full taxation of an annuity coming out amounts to double taxation, and should be reversed before it takes full effect.” 

Clare Cromwell adds, “For years the government has been encouraging people to build up their pension pots but there is now a decreasing incentive for people to add to their pensions.” 

• Don’t tinker further with CGT!

Tim Gregory says: “The prospect of an increase in Capital Gains Tax is a real fear, given the very large difference between the 18% flat rate and the proposed 50% top rate of income tax. At the extreme, some have spoken of an equalising of the rate, although this seems extremely unlikely to happen, as part of the package in the introduction of a flat rate for CGT was the abolition of any allowance for price increases.” 

“For many years, personal taxpayers had the indexation allowance, and then in 1998, taper relief was introduced. The abolition of these was accompanied by a reduction in the top CGT rate from 40% to 18%, similarly recognising that you just cannot put a heavy tax burden on general price increases.” 

• Extend the Stamp Duty holiday

“A Stamp Duty “holiday” for properties less than £175,000 was extended in the 2009 Budget to the end of this year,” says Tim. “It was introduced to help stimulate a housing market that is still barely showing signs of any real recovery. 

“A further extension of this holiday, and perhaps including higher value homes, could get this market moving again without any significant loss to the Exchequer.” 

• Remove the restriction on personal allowances

Clare Cromwell says: One of the stranger announcements in the last PBR was the disclosure that the basic personal allowance would be subject to income limits. 

“The effect of this restriction is to create a marginal income tax rate of 61.5% for those earning between £100,000 to £113,000. This anomaly should be looked at again.” 

• Reform of Inheritance Tax.

Tim says: “All of the main political parties are looking at changes for Inheritance Tax (IHT). It was originally introduced to tax only the particularly wealthy who chose to hold onto their wealth well into their old age. But even with the current state of the property market, there are many people who are pushed into the IHT net purely because of the value of their home.” 

Tim proposes that the level above which IHT is charged could be increased substantially, or a possible alternative could be to exempt the main home from IHT altogether. 

• ‘Stick with the programme’ on VAT.

“There has been some speculation that the anticipated increase in VAT from January may be revised so that it goes beyond a return to the previous 17.5%, with fears that it may be increased to 19% or even as much as 22%. I hope this does not occur,” Tim says. 

“Although there would be obvious extra revenue for the Exchequer, at least initially, it would do nothing to stimulate retail demand. It would very likely reduce retail sales (net of VAT), and would probably reduce demand. Whilst a reduction in demand might curb fears of inflation in the short term, it clearly could not assist in the general economic recovery.” 

• Give companies a break on Corporation Tax.

“It is often said that lower taxation promotes growth more effectively and there can be no doubt that now is a time to stimulate enterprise,” Tim concludes. 

“A reduction in the rate of Corporation Tax could well help companies to grow whilst not impacting on the total tax take, since more profits would be taxed.”

With offices in almost 100 countries around the world, Nexia International is currently the10th largest network in the world. Its member firms have representation in 520 offices worldwide, and the organisation is and one of the most flexible of similar independent ‘mid-tier’ global networks.

Saffery Champness’s membership of Nexia International means that whenever the interests of our clients acquire an international dimension, we are able to put them in touch with appropriate tax and business advisers to provide the local expertise that may be needed to progress their plans, whilst we continue to work with both the clients and these additional advisers in relation to UK taxation or other applicable issues arising from their overseas activities.

Differences in regional taxation treatment, reporting, culture and other factors particular to that jurisdiction can potentially impede international mobility and, in such circumstances, access to reliable sources of professional knowledge can be invaluable. Nexia International offers our clients a valuable resource that can help them “get things done” at reasonable cost and to timetable, whenever their plans acquire an international dimension.

Our firm also plays a highly visible role in the future development of the network, with partners of our firm serving on its International and European Boards of Directors, the International Tax Committee, and as Nexia’s Deputy Chairman.

If you feel that this might be of use, please do get in touch with your usual client partner or Saffery Champness contact for more information.

The proposed 50% tax rate for 2010/11 and beyond is now well-known, but the headlines often hide the detail. The effect of the various recently-announced tax changes will be much more costly, and affect many more people, than might first be apparent.

Boosting the higher tax rate, and then boosting it a little more

Those who are fortunate enough to have income of £150,000 or more will have the new additional rate of tax to contend with. For 2010/11 onwards 50% will be levied on income, other than dividend income, above £150,000.

For dividend income otherwise taxable at the new 50% rate, the rate will be 42.5%. This means that dividend income above the threshold which is currently taxed at an effective rate of 25% after the notional tax credit will be taxed at an effective rate of just over 36%. This is an increase of more than 44% in the effective tax rate on dividends.

For trustees, the impact is even worse, since they will have to pay the 50% tax rate (42.5% on dividends) on virtually all trust income. Whilst this is mitigated where a beneficiary can reclaim tax in relation to distributions made, retained funds in trusts will suffer a huge additional tax burden.

The personal allowance – now you see it…

From 6 April 2010 the full personal allowance will be restricted for those with income of more than £100,000, by £1 for every £2 that the income exceeds £100,000.

This means that an individual with income of £112,950 or more (based on the 2009/10 personal allowance) will not receive any personal allowance in 2010/11. The consequence of this is income between £100,000 and £112,950 will be taxed at a marginal rate of 60% in 2010/11.

Not just the rich

The future tax landscape has been portrayed by many parts of the media as an attack on the wealthy, and the two changes above can certainly be seen as that. However, the changes to National Insurance contributions (NICs) have been underplayed by both the media and the Government, but these will hit everyone, from the highest to the lowest of earners.

It is proposed that from 6 April 2011, the main rates of Class 1 and Class 4 NICs will be increased by 0.5% to 11.5% and 8.5% respectively. The additional rate (payable on income over the Upper Earnings Limit, £43,875 for 2009/10) will also increase from 1% to 1.5%.

The Class 1 employer rate of NICs will be increased by 0.5 per cent to 13.3% and this increased rate will also apply to Class 1A and Class 1B contributions on benefits in kind and PAYE settlement agreements.

A half of one percent may not sound very much, but for those struggling on a low income, any reduction in their take home pay will clearly have an impact.

Perhaps more crucially, the extra half percent on employers at a time when it seems likely the economy will still be struggling could have serious implications for reducing unemployment levels.

In addition to the proposed increase in rates, the Upper Earnings Limit for NICs has already been amended. For 2009/10 the point at which an employed higher earner starts to pay 1% Class 1 NICs as opposed to 11% Class 1 NICs was aligned with the level at which people started to pay higher rate income tax.

This means that a higher rate taxpayer will pay £383.50 more in Class 1 NICs in 2009/10 than they would have done in 2008/09. For people who pay Class 4 NI, the increase is £268.45.

These amounts are the same for any higher rate taxpayer, regardless of how much more than the threshold their income is, and so clearly has a greater impact for those with incomes nearer the bottom end of the scale.

It is clear that the UK Government has a big financial hole to fill, and is seeking to do so in any way it can. However, it is interesting that the Treasury itself has forecast that most people will find a way in due course to reduce the impact on them of the new 50% income tax rate.

This article first appeared in the September edition of Saffery Champness’s ‘Private Client’ newsletter.

Furnished Holiday Lettings have for a number of years attracted a very favourable tax treatment. The income is treated not as rental income, but as trading income.

This means that the expenses of running the property and any associated capital allowances can be set-off against other personal income to reduce an individual’s tax liability. In addition FHL properties attract favourable capital gains tax rates and reliefs upon sale or other disposal.

Most of the beneficial aspects of this tax treatment will be abolished from 6 April 2010 but, in the meantime, the FHL rules are being extended to include qualifying properties not just in the UK, but anywhere within the European Economic Area (EEA, being the 27 EU Member States plus Iceland, Liechtenstein and Norway).

This extension has retrospective effect, so that amended tax returns for the years 08/09 and 07/08, and potentially earlier years, can be submitted to treat any income and expenses from qualifying properties within the EEA under the same terms that have previously benefited UK properties.

This may result in a worthwhile tax refund for some people, especially where a property that now qualified has since been sold. The treatment can also be applied for the current tax year.

In order for a property to qualify as an FHL, a number of conditions need to be met: the property must be available to let as furnished holiday accommodation for a minimum of 140 days per year, and must actually be so let at commercial rates for at least 70 days.

In addition, the property must not normally be let to the same person for more than 31 days throughout a period of 7 months in each year.

This still means that there is a significant proportion of the year during which the owner (or anyone else) can use it for their own private, longer-term use without losing the property’s ‘FHL’ status.

The changes in the rules not only create a potential tax refund for past years in respect of EEA properties, but also present a window of opportunity for the immediate future in respect of properties both in the EEA and the UK.

This should encourage owners of furnished holiday accommodation to consider very carefully their future intentions with regard to their properties.

If they are holding the property with the intention of future resale then the removal of the significant Capital Gains Tax savings may encourage some to look to sell the property in this current tax year to benefit from the advantageous tax treatment whilst they can.

It is unlikely that the current depressed state of the property market in most countries would encourage a new decision to sell, but if the intention exists in any case, then an adjustment to the timetable could save a significant amount of tax.

On the other hand, if the property is being held as a long-term ‘family’ asset and the current owner’s intention is to pass it on to their children then the removal of the FHL rules means that the property will no longer qualify for CGT holdover relief after 5 April 2010.

It may well be worth considering gifting the property to a younger family member before the end of the current tax year, even if this was not something that was intended for another few years.

Although there has also recently been a tightening up on the rules that allow holiday accommodation to qualify for Business Property Relief from Inheritance Tax (distinct from the FHL rules), there is no indication as yet that this relief might also be in danger of being withdrawn.

This article first appeared in the September edition of Saffery Champness’s ‘Private Client’ newsletter