Budget Report 2011

23 MARCH 2011

Summary of the taxation provisions

Introduction

After two Budgets and three Finance Acts in 2010, the 2011 Budget looked as if it might be a relatively mundane affair. In the event, it was anything but. George Osborne revealed a 'Budget for growth' with a range of business-friendly measures, including a surprise extra 1% reduction in the main rate of corporation tax and a doubling of the limit for entrepreneurs' relief. Although the Chancellor had no spare cash to play with – the Budget was fiscally neutral – he managed to produce a 1p per litre cut in fuel costs when a 5p increase had been due from next month. He also confirmed that the 50% income tax rate would be 'temporary'.

Mr Osborne polished his tax reformist credentials, announcing the abolition of 43 out-dated reliefs and setting in train several major tax consultations. These include a review of the integration of income tax and national insurance contributions (NICs), a topic which many previous Chancellors have considered briefly before kicking into the long grass.

There were some tax rises, generally well hidden from public gaze, such as the sharply increased tax on North Sea oil companies.

Budget highlights

• The main rate of corporation tax will be cut to 26% from April 2011 and will be reduced by 1% a year thereafter to 23% in 2014.
• The personal allowance is projected to increase to £8,105 in 2012/13, with a corresponding reduction in the basic rate band to £34,370.
• Enterprise investment schemes (EISs) and venture capital trusts (VCTs) will be reformed, with an increase in the rate of tax relief on EIS investments from 20% to 30% from April 2011 and a doubling of the EIS investment ceiling from April 2012 along with an increase in the size of companies that can be funded by the schemes and the amounts they can raise.
• From April 2012, there will be an increase to £50,000 in the annual charge for non-domiciled individuals who have been UK resident for 12 or more years and who wish to benefit from the remittance basis of taxation.
• Charities will benefit from a variety of measures, including simplification of gift aid and a new inheritance tax relief.
• The lifetime limit for entrepreneurs' relief will be increased from £5 million to £10 million from 6 April this year.
• The rate of R&D tax credit for small and medium-sized enterprises (SMEs) will be increased to 200% from April 2011 and to 225% a year later.
• The Government will consult on the integration of income tax and NICs.

PERSONAL TAXATION

Income tax bands and personal allowances

All income tax rates for 2011/12 will remain at their 2010/11 levels. The personal allowance will rise to £7,475 and there will also be a £2,400 decrease in the basic rate limit, taking it to £35,000.

In 2012/13, the personal allowance will increase to £8,105 based on current inflation assumptions, with a corresponding decrease in the basic rate limit, leaving the effective higher rate threshold unchanged at £42,475 (ie £8,105 + £34,370). In subsequent years, the personal allowance will increase by at least the equivalent of the retail prices index (RPI), until it reaches £10,000.

Saver Protect your personal allowance. In 2011/12, your personal allowance is reduced by 50p for every pound your income is over £100,000. If you can reduce your income below £100,000, eg by making a pension contribution or choosing tax-efficient investments, you should benefit from the full allowance.

National insurance rates and bands

The main and additional rates of national insurance contributions (NICs) will increase by 1% from 6 April 2011 as previously announced. The primary threshold for employees will increase to £139 a week and the secondary threshold for employers will increase to £136 a week.

Indexation of direct taxes

From April 2012, the default indexation basis for all direct taxes, including income tax, NICs, inheritance tax and capital gains tax will move from the RPI to the consumer prices index (CPI). The change will apply for each year from 2012/13, except where there are specific policy commitments to make increases by different amounts, such as the personal allowance.

The employer NICs secondary threshold, the starting rate limit for savings income, income tax age-related allowances, age-related income limits, married couples' allowances and blind persons allowance will be over-indexed compared to the CPI and continue to rise by the equivalent of the RPI for the course of the current Parliament.

Income tax and NICs reform

The Government will consult on reforms to integrate the operation of income tax and NICs and the modernisation of the administration of the personal tax system.

Online tax calculation

By 2012, the Government will build an online personal tax calculator to allow individuals to estimate how much income tax and NICs they should pay.

Enterprise investment schemes (EISs) and venture capital trusts (VCTs)

The rate of EIS income tax relief will rise from 20% to 30% from 6 April 2011. From 6 April 2012:

• The annual EIS investment limit for individuals will double to £1 million.
• The qualifying company size limits for EISs and VCTs will rise to 250 employees and the gross assets ceiling will increase to £15 million.
• The annual investment limit for qualifying companies (EIS and VCT) will rise to £10 million.

All changes are subject to EU State aid clearance.

Review of non-domicile taxation

The Government will consult on reforms to the taxation of UK resident non-domiciled individuals from April 2012. The proposals will include increasing the existing £30,000 annual charge to £50,000 for non-domiciled individuals who have been UK resident for 12 or more tax years and who wish to retain access to the remittance basis of taxation.

There is also a proposal to remove the tax charge when non-domiciled individuals remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses.

Statutory residence test

The Government will consult on the introduction of a statutory tax residence test for individuals, with legislation proposed for the Finance Bill 2012.

Furnished holiday lettings

From April 2011, new tax rules for furnished holiday lettings will take effect, so that loss relief may only be offset against income from the same business. The letting and availability thresholds will be increased from April 2012.

Employer-supported childcare and voucher schemes

From 6 April 2011, the main weekly tax exemption will remain at £55. However, for those who join the scheme after 5 April 2011, the exemption will be £28 for higher rate taxpayers and £22 for additional rate taxpayers. The condition that the scheme has to be 'open generally' will be relaxed for employees with earnings at or near the minimum wage. The change will be retrospective from 6 April 2005.

Approved mileage allowance payments (AMAPs)

The rate at which employers can pay a tax-free mileage allowance to employees who use their own cars for business will increase from 40p a mile to 45p from 6 April 2011. The lower 25p rate for mileage over the first 10,000 miles in a tax year is unchanged. The 5p passenger allowance will be extended to volunteers.

Company car tax rates

The appropriate scale percentages will be increased by one percentage point for 2013/14 for vehicles with CO2 emissions between 95g/km and 220g/km. Rates for emissions below 95g/km will not change.

think ahead Take care in choosing your next company car. Company car tax scales are being revised for 2011/12 and will alter again in 2012/13. If you are changing your car, make sure you know what tax you will pay now and in the next tax year.

Fuel benefit charge

From 6 April 2011, the fuel benefit charge multiplier for calculating the tax payable on fuel provided by employers for company cars will increase from £18,000 to £18,800.

Company vans

The van and van fuel benefit charges will remain at £3,000 and £550 for 2011/12.

Expenses paid to MPs

The Finance Bill 2011 will include legislation (effective from November 2010) to ensure that the existing tax exemption for MPs' accommodation expenses will continue to apply, following a simplification made to the MPs' expenses scheme by the Independent Parliamentary Standards Authority (IPSA).

ISA limits

The limit for 2011/12 is as follows: £10,680 of which up to £5,340 can be saved in cash. From April 2012, the CPI rather than RPI will be used as the default assumption for the indexation of the ISA limits.

Junior ISAs

All UK resident children aged under 18 who do not have a Child Trust Fund will be eligible for Junior ISAs, and the accounts are expected to be available from autumn 2011. Draft regulations setting out further details will be issued in the week starting 28 March 2011 together with the Finance Bill.

Qualifying time deposits

From 6 April 2012, tax will be deducted at source from interest paid on new qualifying deposit accounts, which currently pay interest gross for fixed term deposits of £50,000 and over.

Restricting pensions tax relief

The annual allowance for tax-privileged pension saving will be £50,000 from 6 April 2011. The lifetime allowance will remain at £1.8 million, reducing to £1.5 million from April 2012 as previously announced. Unused annual allowance of up to £50,000 a year can be carried forward for up to three years. In certain circumstances, individuals with annual allowance charges over £2,000 will be able to meet these from their pension benefit, with schemes paying the tax when the charge arises.

think ahead Maximise pension contributions while you still can. The lifetime allowance will be cut from £1.8m to £1.5m in 2012/13, but you will be able to claim 'fixed protection' and a £1.8m allowance before 6 April 2012. If you do so, you will lose the protection if you (or your employer) make any pension contributions after 5 April 2012.

Pensions annuitisation

The Finance Bill 2011 will remove the effective requirement to annuitise by age 77 (previously 75) from 6 April 2011, as announced in last June's Budget. Legislation in the Finance Bill 2011 will also allow savers who have reached the age of 75 to align multiple drawdown pension funds under the same scheme, so that funds can be valued annually on the same date.

Employer asset-backed pension contributions

The Government will consult on changing the tax rules to limit the amount of tax relief available to employers when they make asset-backed contributions ('in specie' contributions) to their defined benefit pension schemes. The effect will be that the tax relief accurately reflects the increase in the fair value of pension plan assets.

Disguised remuneration

The Finance Bill 2011 will implement proposals published in December 2010 to target arrangements that seek to avoid or defer payment of income tax or NICs due on employment income or avoid restrictions on pensions tax relief, for example employee benefit trusts (EBTs) and employer financed retirement benefit schemes (EFRBS). Following representations, some changes have been made to the draft schedule to exclude certain matters such as arrangements that cannot be used for tax avoidance, eg defined employee car ownership schemes and certain short-term loans.

Reduction in the contracted out rebate

The level of the contracted out rebate for defined benefit pension schemes will be reduced from 5.3% to 4.8% from 6 April 2012 as announced in February. The option of defined contribution contracting out (including personal pensions) is already set to end from the same date.

Support for mortgage interest (SMI)

The waiting period for new working-age SMI claimants will remain at 13 weeks for a further year from January 2012. The limit on eligible mortgage capital for working-age claimants will also be left unchanged at £200,000 for one year from the same date.

Life insurance

The Government will introduce legislation to change the corporate tax treatment of protection business to align it with the tax treatment of other trading entities. The change will be effective from 1 January 2013.

CAPITAL TAXES

Capital gains tax (CGT) annual exemption

The annual exemption will increase in line with statutory indexation to £10,600 for 2011/12. From 6 April 2012, the annual exemption will be indexed by reference to the CPI instead of the RPI.

Saver Share your gains. If you are a higher or additional rate taxpayer, you will pay 28% on all capital gains above your annual exemption. If your spouse or civil partner is a basic rate taxpayer, they will only pay 18% on gains above their annual exemption until their basic rate tax band is exhausted.

CGT entrepreneurs' relief

The lifetime limit on gains qualifying for entrepreneurs' relief will rise from £5 million to £10 million from 6 April 2011. Qualifying gains are taxed at 10% rather than 18% or 28%.

CGT rollover relief

Legislation will be included in the Finance Bill 2012 to restore CGT rollover relief for disposals of entitlement to payments under the EU's single payments scheme for farmers.

Inheritance tax (IHT)

The IHT nil-rate band will be indexed by reference to the CPI instead of the RPI from 6 April 2015. Until then it is frozen at £325,000.

New IHT avoidance schemes involving some transfers into trust will have to be disclosed under the disclosure of tax avoidance schemes (DOTAS) rules from 6 April 2011.

A reduced rate of 36% will be charged where 10% or more of a deceased person's net estate (after deducting IHT exemptions, reliefs and the nil-rate band) is left to charity. The measure will apply where death occurs after 5 April 2012.

think ahead Now may be the time to make lifetime gifts. The Office for Tax Simplification has concluded that 'there should be a proper review of inheritance tax'. Any reform seems unlikely to make the current treatment of outright lifetime gifts more favourable than today's rules for potentially exempt transfers.

Stamp duty land tax (SDLT)

Bulk purchasers of residential property will be able to claim a new relief under which the rate of SDLT is determined by using the mean consideration per dwelling instead of the aggregate consideration. The relief will be available for transactions on or after Royal Assent to the Finance Bill 2011. In the autumn, the Government will announce the outcome of its review of the SDLT relief for first-time buyers.

Legislation in the Finance Bill 2011 will aim to ensure that SDLT-avoidance schemes exploiting three areas do not work. The changes clarify the relationship between the rules for sub-sales and alternative finance, narrow the definition of 'financial institution' for alternative finance and counter the effect of an engineered reduction in market value when properties are exchanged.

BUSINESS TAX

Corporation tax rates

The corporation tax rates will be reduced for the year ended 31 March 2012 and are as follows:

The main corporation tax rate will be cut by 1% a year over the next three years to 23%.

Saver You may save tax by trading through a company. Profits retained in a company may be taxed at only 20% – compared with up to 50% income tax plus NIC.

Think ahead: Get the timing right for your investment in new business equipment. At present, businesses of any size will generally benefit from immediate tax relief on the first £100,000 a year spent on most types of equipment. However, this allowance will fall to £25,000 from April 2012. So it could be worth bringing forward major investments.

Associated companies

The relevant profit limits for corporation tax are reduced proportionately where a company is associated with other companies. The associated company provisions are simplified from April 2011. Under the revised provisions, companies will be associated with each other where:

• They are commonly controlled by attributing the rights of 'connected individuals', and
• Substantial commercial interdependence exists between the companies.

Capital allowances

From April 2012, short life assets treatment will be available for plant likely to be sold or scrapped within eight years. This will increase the range of assets for which a short life asset election can be made.

As already announced, from April 2012, the annual investment allowance (AIA) expenditure limit will reduce to £25,000 and the annual writing down allowance (WDA) will be 18% (8% for special rate pool expenditure).

The 100% enhanced capital allowances (ECAs) scheme will be revised in the near future to include the most energy efficient plant. ECAs may be introduced on eligible expenditure in new enterprise zones where there is a 'strong focus' on high value manufacturing.

think ahead Get the timing right for your investment in new business equipment. At present, businesses of any size will generally benefit from immediate tax relief on the first £100,000 a year that is spent on most types of equipment. However, this allowance will fall to £25,000 from April 2012. So it could be worth bringing forward major investments.

Accounting for leases

The current tax treatment of leases will continue despite the recent changes made to generally accepted accounting principles (GAAP) for lease transactions.

Research and development (R&D) tax relief

Companies can claim enhanced allowances on their R&D spend. The rate of relief for small and medium-sized enterprises (SMEs) increases to 200% from April 2011 and to 225% from April 2012 subject to State Aid approval. Other proposed R&D changes which are likely to be enacted next year include:

• Abolishing the rule limiting R&D tax credits to the company's PAYE and NIC payments for the relevant period;
• Removing the £10,000 minimum expenditure rule for all companies; and
• Modifying the large companies' R&D relief for contracted work.

Corporate groups

As previously announced, from 9 December 2010 the anti-avoidance rules dealing with pre-entry (capital) losses, value-shifting and depreciatory transactions will be relaxed and revised to give more clarity.

Degrouping charges will cease to apply in cases where the sale of the relevant group company is also exempted from tax (typically, where the substantial shareholdings exemption applies). This measure will take effect from Royal Assent. From 23 March 2011, anti-avoidance rules will aim to prevent the artificial exploitation of the 'associated companies' degrouping charge exemption.

International aspects

For accounting periods starting after 31 December 2010, various 'interim' changes have been made to the controlled foreign company (CFC) regime. New CFC rules are expected in 2012, which will include a finance company partial exemption. Broadly, qualifying overseas group financing activities will pay 25% of the main UK corporation tax rate. From April 2011, the UK's transfer pricing rules will be revised to incorporate the latest version of the OECD transfer pricing guidelines.

From Royal Assent, UK groups will be able to elect for their foreign branch profits to be permanently exempted from UK tax. This election will be irrevocable and will cover all future periods – notably any branch losses would not be relieved.

A 'patent box' regime will be introduced from April 2013, as previously announced. This will enable UK-based companies to enjoy a reduced 10% corporation tax rate on their patent income.

The Finance Bill 2012 is expected to include simplifying measures to the debt cap rules.

Modernisation of investment trust companies tax regime

The Finance Bill 2011 will implement a modernised tax regime for investment trust companies.

Other measures

Bank levy – increases to the levy have been announced.

Time to pay initiative – the Business Payment Support Service will continue to support businesses in temporary financial difficulty.

Review of small business tax and IR35 – the Office of Tax Simplification will be examining these areas with a view to easing compliance burdens. However, the Government has decided to retain IR35.

Saver Sharing with your spouse. If you run a company or business, make sure that your spouse/partner is appropriately paid and pensioned for any work and that they share in the profits if possible.

CHARITIES

Gift aid

Donors will be able to receive benefits valued up to £2,500 as a result of making a donation to a charity of more than £10,000 under gift aid. However, the benefit must not exceed 5% of the gift. The measure has effect for individual donations from 6 April 2011 and for corporate donations from 1 April 2011.

From April 2013, a new scheme will allow charities to claim gift aid on up to £5,000 of small (£10 or less) donations without the need for gift aid declarations. An online system will be introduced in 2012/13 for charities to claim gift aid. To help fund this, the Government will withdraw the scheme by which individuals can donate tax repayments to charity under self-assessment. The withdrawal applies for repayments for 2011/12 onwards and tax returns up to 2010/11 where the repayment is made after 5 April 2012.

Gifts of works of art

The Government will consult over the summer on a proposal to encourage donations of pre-eminent works of art and historical objects to the nation in return for a tax reduction.

Substantial donors

New rules from April 2011 will deny relief where a donor enters into arrangements with the main purpose of obtaining a financial advantage from the charity. They will replace existing rules over a transitional period.

In-year repayments of income tax to charities

Provisions in the Finance Bill 2012 will replace an extra-statutory concession under which HMRC makes repayments of tax to certain charities without requiring a tax return to be completed.

VALUE ADDED TAX (VAT)

Registration and deregistration thresholds

From 1 April 2011, the VAT registration threshold will increase from £70,000 to £73,000 and the deregistration threshold will increase from £68,000 to £71,000.

Saver Some small businesses may be better off operating within the VAT flat rate scheme. This considerably simplifies VAT compliance because the amount of VAT is based on a set percentage of turnover according to the business sector.

Fuel scale charges

New VAT fuel scale charges for taxing the private use of business fuel will replace the existing rates from 1 May 2011.

VAT quarterly fuel scale charges (inclusive of VAT)

Effective from 1 May 2011.

Where the CO2 emissions figure of a vehicle is not a multiple of five, the figure is rounded down to the next multiple of five to determine the level of charge.

Low value consignment relief

The threshold below which goods imported from outside the EU (eg from the Channel Islands) are VAT-free will be reduced to £15 (from £18) from 1 November 2011. The Government will also explore options for limiting the scope of the relief.

Business samples

VAT relief for businesses providing samples for marketing purposes will be extended to the whole of a series of samples given to any one individual or business instead of just the first sample.

Grouping

Legislation in the Finance Bill 2012 will replace an extra-statutory concession which ensures that VAT groups and businesses with overseas branches are treated equally in respect of services bought from third parties.

Online registration and filing

All businesses will have to file VAT returns online and pay electronically from 1 April 2012.

don't forget – VAT cash accounting. Businesses with a turnover of less than £1.35 million can choose to account for VAT on a 'cash' basis. This is particularly useful where the business carries a significant amount of trade debtors, because the VAT on 'sales' only needs to be paid over when the customer pays.

VAT zero-rating for printed matter

Zero-rating will be withdrawn for ancillary printed matter connected to the supply of a differently rated service.

MISCELLANEOUS

Tax simplification

Following a review of reliefs by the Office of Tax Simplification, the Finance Bill 2011 will abolish seven obsolete reliefs. A further 14 reliefs will be removed by the Finance Bill 2012. They include late night taxis, luncheon vouchers, provision of meals on cycle-to-work days and grants for giving up agricultural land. Another 22 reliefs will be removed some time after 2012. They include life assurance premium relief, capital allowances for flat conversions and safety at sports grounds, stamp duty disadvantaged area relief, transfers to registered social landlords, compensation for mis-sold pensions and land remediation relief.

Islamic finance

Regulations will introduce direct tax rules for Sharia-compliant variable loan arrangements and derivatives in 2011.

Tax avoidance schemes

The Government will consult on further changes to the 'hallmarks' for schemes that have to be disclosed to HMRC under the DOTAS rules.

The Government will also consult in May 2011 on proposals to counter the continued marketing and use of highly aggressive and artificial tax avoidance schemes, with a view to listing the schemes in regulations and attaching statutory consequences for the user, such as a surcharge for late payment of tax.

National insurance contributions (NICs)