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The 2010 Budget was published on 22nd June 2010.
The new Chancellor had to balance the need to cut the country's Budget deficit without threatening the fragile economic recovery - "Tough, but fair" was the message as George Osborne announced a package of spending cuts and tax rate changes.
As usual there are winners and losers. Company tax rates are set to fall and personal allowances are up, but we all appear to be losers in the overall increase in VAT.
The main announcements are set out below but for an in depth analysis, produced in conjunction with ACCA, please follow the link
Please contact us if you have any queries or you would like any further information.
Announcements affecting small and medium sized businesses
Corporation Tax – Rates
The Chancellor has announced that:
- legislation will be introduced to cut the main rate of corporation tax (CT) to 27 per cent for the Financial Year (FY) commencing 1 April 2011;
- the small profits rate of corporation tax for FY 2011 will be 20 per cent. This will be legislated in Finance Bill 2011; and
- there will be further cuts in the main rate in future years: 26 per cent in 2012-13, 25 per cent in 2013–14, 24 per cent in 2014-15.
Capital Allowances: Plant and Machinery - Rate Changes
The Government has announced that the rates of writing-down allowances (WDAs) for new and unrelieved expenditure on plant and machinery will be reduced:
- from 20 per cent to 18 per cent per annum for expenditure in the main rate pool; and
- from 10 per cent to 8 per cent per annum for expenditure in the special rate pool.
Expenditure on long life assets, thermal insulation, integral features and cars with emissions of 160g/km or more (in the case of cars purchased on or after April 2009) is allocated to the special rate pool.
These rate changes will take effect from 1 April 2012 (for corporation tax) or 6 April 2012 (for income tax).
For businesses whose chargeable period spans 1 April (corporation tax) or 6 April 2011 (income tax) there will be a hybrid rate for unrelieved expenditure in any pool, including single asset pools. There will be two hybrid rates, one for expenditure previously relieved at 20 per cent and the second for expenditure previously relieved at 10 per cent
Annual Investment Allowance - Changes to allowance
The annual Investment Allowance (AIA) allows most businesses, regardless of size, to reduce their taxable profits by the full amount of their annual capital expenditure on most plant or machinery (apart from cars) up to a maximum amount, which is currently £100,000 a year.
The maximum amount of the AIA will be reduced to £25,000 a year with effect from April 2012. Details of the transitional provisions will be published in good time before the reduction takes effect
Regional Employer NICs Holiday for New Businesses
On 22 June 2010 the Budget Report stated:
'The Government will shortly announce details of a scheme to help new businesses in targeted areas of the UK that need it most. During a three year qualifying period, new businesses which start up in these areas will get a substantial reduction in their employer National Insurance Contributions (NICs).
Within the qualifying period, these employers will not have to pay the first £5,000 of Class 1 employer NICs due in the first twelve months of employment. This will apply for each of the first 10 employees hired in the first year of business and operate in selected countries and regions.
Subject to meeting the necessary legal requirements, the scheme is intended to start no later than September 2010. Any new business set up from 22 June which meets the criteria set out in the forthcoming announcement will benefit from the scheme.'
The countries and regions which will benefit will be Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.
Announcements affecting individuals and employees
Income Tax and National Insurance
The Income Tax and National Insurance rates and allowances for the current 2010-11 tax year were announced in the Pre-Budget Report in December 2009.
However some changes to personal allowances and National Insurance contributions were announced in the 22 June Budget:
- The personal allowance for people aged under 65 will increase by £1,000 in April 2011. This means the amount of income you can receive without having to pay tax on it will rise from £6,475 to £7,475 for the 2011-12 tax year.
- The personal allowance for under 65s will be increased by £1,000 in April 2011. This will benefit 23 million taxpayers and remove hundreds of thousands of people from Income Tax altogether
- Employers' National Insurance contributions threshold - the threshold at which employers start to pay National Insurance will be raised by £21 per week above indexation in April 2011
- Employers' National Insurance contributions exemption – in the Greater South East region, new businesses will be exempted from up to £5,000 of employer contributions for each of their first 10 employees hired
Child Tax Credit and Child Benefit
The June 2010 Budget announced welfare reforms around Child Benefit, Child Tax Credit and Working Tax Credit. Higher earning families will no longer get Child Tax Credits and Child Benefit rates will be frozen for three years. Basic details are:
- The government will increase the child element of Child Tax Credit by £150 above indexation in April 2011 and £60 above indexation in April 2012. Indexation is a way of measuring the cost of living
- Families earning more than £40,000 per year won’t get Child Tax Credit from April 2011
- The baby element of the Child Tax Credit will be removed from April 2011
- From April 2011, Child Benefit rates will stay the same for three years
Changes to claiming Child Tax Credit and Working Tax Credit
There will be changes to the income levels (thresholds) and withdrawal rates for claiming Child Tax Credit and Working Tax Credit from April 2011. These include:
raising the second withdrawal rate (the amount taken off your tax credit entitlements depending on your income) to 41% from 6.67% lowering the amount of your income not taken into account to £10,000 from £25,000.
Benefits and the Retail Price Index (RPI)
Benefits and tax credits will be worked out using the Consumer Prices Index (CPI) instead of the Retail Prices Index from April 2011. The CPI is a way of measuring inflation - the average changes from month to month in the prices of UK goods and services.
Pensions
From April 2011, there will be a ‘triple guarantee’ so the basic State Pension will rise by either:
- earnings – the average increase in UK wages that year
- prices – how much the cost of living increases that year
- 2.5 per cent
The basic State Pension will rise each year by whichever gives the highest amount.
Pensions tax relief for high earners
From April 2011 the government plans to reduce the annual allowance for tax relief on pension contributions.
There are already plans in place to reduce tax relief on that date for people who earn more than £130,000.
Public sector pensions
The government will set up a commission to investigate the cost of public sector pensions. Its early findings will contribute to the Spending Review on 20 October 2010, with a full report in time for next year’s Budget. As previously announced, the commission will be headed by former Labour cabinet minister John Hutton.
Other general areas of interest
Change to the standard rate of VAT
The standard rate of VAT will increase to 20 per cent on 4 January 2011.
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 the reduced 5 per cent rate, such as domestic fuel and power, are not affected by this change.
There are no changes to the Cash Accounting or Annual Accounting Scheme. However there are changes to the flat rate scheme percentages.
Anti-forestalling legislation will be included in the Finance Bill 2010 to prevent the 17.5 per cent rate applying to supplies of goods or services that are provided on or after 4 January 2011, subject to certain conditions.
Capital Gains Tax - Rates and Entrepreneurs' Relief
From 23 June 2010 there will be two main rates of capital gains tax (CGT), 18 per cent and 28 per cent, in place of the single rate of 18 per cent for all gains. The rate paid by individuals will depend upon the amount of their total taxable income. Gains qualifying for entrepreneurs’ relief will be taxed at a rate of 10 per cent, and the lifetime limit of gains qualifying for entrepreneurs' relief will be raised to £5 million (from the previous figure of £2 million). Gains of trustees or personal representatives of deceased persons will be charged at 28 per cent.
Council Tax
The government will work with local authorities to freeze council tax in 2011-12
Bank Levy
The Government will introduce a levy based on banks’ balance sheets from 1 January 2011, intended to encourage banks to move to less risky funding profiles.
The Government believes that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.
The levy is not insurance against failure nor a fund for future resolution, it is a contribution reflective of economic risk.
Final details will be published later this year, following consultation
Child Trust Fund - Restriction of government contributions
The Government announced on 24 May 2010 that it intends to reduce and then stop all government contributions to Child Trust Funds. Subject to legislation, the Government intends to reduce government contributions at birth, and to stop government contributions at age 7, from August 2010. The Government also intends for HMRC to stop issuing new Child Trust Fund vouchers from 1 January 2011. There is no immediate effect on Child Trust Funds. Legislation is required to implement the Government’s intentions and until that legislation is in place Child Trust Funds will continue as usual.
Saving Gateway
The Government has announced that the Saving Gateway is not affordable given the need to reduce the deficit. It will, therefore, not be introduced in July 2010.
Furnished holiday lettings rules
The furnished holiday lettings rules (FHL) will not be withdrawn from 6 April 2010 (1 April 2010 for companies).
Since 22 April 2009 (Budget 2009), HM Revenue & Customs (HMRC) has applied the current FHL rules to UK taxpayers with qualifying holiday lettings situated elsewhere in the European Economic Area (EEA). Such businesses can currently choose whether to be taxed under the FHL rules or under the normal rules for property businesses. These arrangements will continue to apply for the tax year 2010-11.
The Government will publish a public consultation over the summer about plans to change the tax treatment of furnished holiday lettings from April 2011. The consultation will specifically look at a proposal which would:
- ensure the FHL rules apply equally to properties in the EEA;
- increase the number of days that qualifying properties have to be available for, and actually let as, commercial holiday letting; and
- change the way in which FHL loss relief is given.
Full details about the proposed changes will be published over the summer.
Draft legislation will be published in the autumn, with a view to inclusion within Finance Bill 2011.
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