Investment Property Accountants - WARR & CO

Investment Property Accountants

The 2008 Pre-Budget Report

On 24th November 2008 Alastair Darling delivered his Pre-Budget Report and introduced a number of tax cuts intended to stimulate the economy. The stimulus, however, comes at a price. Government borrowing is set to increase sharply and details were also announced about tax rises in the future to reduce borrowing.

We set out below the key changes taking effect now and in the future that are particularly relevant to our clients and their businesses. Over the coming months we shall examine some of these changes in depth.

Value Added Tax (VAT)

The standard rate of VAT will be temporarily reduced from 17½% to 15%. The reduction will cover the period from 1st December 2008–31st December 2009. Businesses will have to take particular care to ensure they use the correct rate. The rules are complex, but in most cases where a business supplies goods the tax point is the earlier of:

(a) the date the goods are supplied;
(b) the date the invoice is issued; and
(c) the date payment is received.

In the case of services it is often difficult to identify the point at which the service has been supplied and therefore in general the tax point is the earlier of:

(a) the date the invoice is issued; and
(b) the date payment is received.

Along with the reduction in the standard rate of VAT, there are also reductions in the rates applying to small businesses using the Flat Rate Scheme. These reductions are not so generous. For example, the flat rate applying to management consultants has been reduced from 12½% to 11% and the rate applying to IT consultants has reduced from 13% to 11½%.

Personal Allowances

The 2008 Budget in March saw an increase in the personal allowance from £5225 to £5435, a reduction in the basic rate of tax from 22% to 20% and the abolishment of the 10% starting rate on earned income. Following much criticism and a threatened rebellion by Labour MPs the Chancellor announced a temporary increase in the personal allowance to £6035 to compensate those who were worse off as a result of the loss of the 10% starting rate. The Chancellor has now announced that this temporary increase will be permanent and the personal allowance for the 2009/10 year has been set at £6475.

From 6th April 2010, individuals whose total income exceeds £100,000 will see their personal allowance tapered away at the rate of £1 for every £2 of income between £100,000 and £140,000 until the allowance has been reduced by up to 50%. Where an individual’s income exceeds £140,000 the remaining personal allowance will be completely tapered away again at a rate of £1 for every £2 of income above £140,000.

Tax Rates

From 6th April 2011 a new 45% tax rate will apply to the excess of an individual’s taxable income above £150,000. These top rate taxpayers will also see an increase in the rate they pay on dividends from 32½% to 37½%.

National Insurance

The disparity between the Primary Earnings Threshold (the starting point for paying National Insurance) and the level of the personal allowance which was caused by the temporary increase in the personal allowance will continue until 6th April 2011 so, for 2009/10 the Primary Earnings Threshold will be £5720. However, the Upper Earnings Limit will increase to £43875 to align it to the total of the personal allowance and basic rate tax band two years earlier than the lower alignment.

From 6th April 2011 the rates of National Insurance paid by employees and employers will increase by 0.5% to 11.5% and 13.3% respectively. The rate employees pay on earnings above the upper earnings limit will increase from 1% to 1.5%. There will be a similar increase in Class 4 contributions paid by the self-employed.

Corporation Tax

The increase in the small companies rate from 21% to 22% due to take effect from 1st April 2009 has been put back a year and so will now take effect on 1st April 2010.

Where a company incurs a trading loss it generally has the choice of carrying it forward to set against trading profits in the future, or carrying it back to set against its profits in the previous year. For accounting periods ending between 24th November 2008 and 23rd November 2009 it will be able to carry back a loss for up to three years. The loss that can be carried back in this way will be capped at £50,000.

Income Shifting

For many years owners of small businesses have taken advantage of a simple tax planning technique by arranging their affairs to split income between themselves and their spouse, partner, or other family members. In a simple example a businessman will operate using a small limited company. He will allocate half of the shares to himself and the other half to his (non-working) wife. He will draw a small salary from the company enabling it to make high profits. The company will then distribute those profits in the form of dividends to its shareholders. So half of the dividends will be paid to the businessman and half to his wife. His family will benefit because his wife will use her basic rate tax band against dividends that he would otherwise pay higher rate tax on. This simple tax planning technique can save a family a maximum of about £8000 per annum.

The government tried to show that existing Statute outlawed this kind of tax planning but were defeated in the House of Lords. In his 2007 Pre Budget Report, the Chancellor announced draft reforms and a period of consultation to consider plans the Treasury had devised to counter what he perceived to be tax avoidance. New legislation was expected to be introduced in the 2008 Budget. In the event and in response to the consultation process, the Chancellor announced that new draft reforms would be included in the 2008 Pre Budget Report and that legislation would take effect from 6th April 2009.

Now Income Shifting Regulations have been left on the back burner and will not be introduced in the immediate future. A very welcome relief for owners of small businesses.

A Light Note

Perhaps you would like to celebrate the temporary reduction in the VAT rate. You might decide to help boost the economy by stocking up on wine or cigarettes, or perhaps when you next call at a filling station you might decide to buy a full tank of petrol.

If so, you will be disappointed. Duty on alcohol, cigarettes and fuel is being increased on the same day as VAT is being reduced to maintain the government take at the same overall level.

Should you wish to discuss this article or for further information please email us or telephone Pete Edwards on 0161 477 6789

Date of Article: 25th November 2008

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This domain is owned by Warr & Co Chartered Accountants which is a member of the Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact Peter Edwards on 0161 477 6789 or email us at