Gordon Brown’s 10th and possibly final Budget contained some nasty surprises together with some sweeteners for businesses of all sizes.
How the Budget affects small firms
Corporation tax rates
The u-turn on the 0% corporation tax rate on profits of less than £10,000, announced in the pre-budget report in December 2005, was confirmed. For small companies with taxable profits of less than £300,000 the rate of tax will be 19%. For companies with profits above £1.5m the full rate of 30% will be payable. Marginal relief is given to smooth the transition from one rate to another.
First year allowances
The rate of first year allowances for expenditure by small businesses on qualifying plant and machinery will be increased to 50% for new expenditure incurred between April 6, 2006, and April 5, 2007. A small business is one that satisfies two of the following conditions: not more than £5.6m in turnover; not more than £2.8m in assets; not more than 50 employees.
Self-assessment filing date change
Measures were announced to move the deadline for income tax self-assessment returns to September 30, where returns are on paper, or November 30, where the returns are filed online. Currently, self-assessment tax returns must be filed by January 31 following the tax year. It is intended that these changes will be effective from 2008 and will be
introduced on a phased basis. By 2012 it is expected that all income tax self-assessment returns will be filed by these dates.
In addition to this, computer-generated paper substitute returns currently used by accountants will no longer be accepted. For many businesses the change in these filing deadlines will increase pressures to prepare the necessary information in time. This is particularly true for sole traders and partners who have to prepare accounts.
Venture capital schemes
Some changes to Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) were announced in the Budget.
The Chancellor announced that a new income tax relief for investors in Venture Capital Trusts (VCTs) would be decreased to 30%. Previously the rate had been 40%. In addition, the minimum period for which investors must hold their shares will increase from three years to five years.
Bigger changes were announced for EIS investments. The doubling of the income tax relief for the annual investment limit to £400,000 is a welcome increase. However, the change in the gross assets test will mean that less companies will be eligible for EIS relief.
Under the current rules the gross asset of the company raising money under EIS must not exceed £15m immediately before the investment and £16m immediately after. These limits were reduced to £7m and £8m from April 6, 2006.
Announcements in connection with the current exemptions for computers and mobile phones came as a big surprise. The exemptions for computers have been around since 1999 and the government has actively encouraged Home Computer Initiative (HCI) schemes which rely on this exemption.
Under current rules, no taxable charge arises where an employee is provided with computer equipment with a value of up to £2,500. This is on the basis that there is no transfer of ownership in the property and the scheme is available to all employees. Without the exemption, the employee would be subject to a benefit in kind on 20% of the value of the assets, ie £500.
The removal of the exemption will affect businesses that were considering the introduction of these schemes. HM Revenue & Customs (HMRC) has confirmed that where existing schemes are in place a benefit-in-kind charge will not arise.
Mobile phones were also under attack and limits placed on the exemption. The new measures, which were introduced on April 6, 2006, will mean that only one tax-free mobile phone is available per employee.
Thresholds and rates
The VAT registration threshold was increased to £61,000 from April 1, 2006, and the de-registration threshold up to £59,000.
The turnover limit for using the annual accounting scheme has been increased to £1.35m per year from April 1, 2006.
How the Budget affects large firms
Research & development
The government is extending the employee limits for a company to qualify as a small- to
medium-sized enterprise, which will give these companies the ability to claim cash back from HMRC for R&D investment. The limit relating to company employees has been doubled from 250 to 500 employees.
Companies that employ between 250 and 500 employees will be able to benefit by claiming a tax credit; previously they would only have been able to claim an additional deduction for the qualifying costs. These companies will now be able to surrender any losses for cash back at a rate of 24% of the underlying R&D investment. The time limit for making this claim will be two years from the end of the accounting period.
Stamp duty reconstruction relief
Stamp duty is broadly restricted to the transfer of shares. Currently, certain exemptions are available for companies carrying out reorganisation. Due to the strict conditions of these reliefs a slight change in shareholdings could result in stamp duty becoming payable. The provisions announced confirm that relief will not be denied, if the proportion of shares in the new entity has to change slightly for practical reasons.
Stamp duty land tax (SDLT): withdrawal of unit trust seeding relief
The Chancellor announced that SDLT relief for seeding unit trusts with property ended from 2pm on March 22, 2006. This move will prevent the relief contained within Section 64A Finance Act 2003 from being used to avoid SDLT on certain high-value commercial property transactions.
This was not an entirely unexpected move by the Chancellor and it is, in some ways, surprising that HMRC did not move earlier in order to prevent the relief from being used in this way.
The Treasury will have been aware, even before the introduction of the SDLT disclosure provisions, that literally billions of pounds of UK real estate interests were being transferred to offshore unit trusts in order to avoid a potential SDLT charge to purchasers on the acquisition of their interests.
The attack on tax avoidance schemes using employment-related securities and options is continuing. Where an option is granted as part of a tax avoidance scheme, it will be taxed as though it was a convertible security. This means there will be an income tax charge on the grant of the option as well as on its exercise.
The tax charge arising on the grant is calculated by taking the value of the option on the grant, ignoring any resting period and performance conditions. It is possible that the tax charge on the grant may be more than the value of the shares! The employee is taxed again when the option is exercised, but as though he had converted one security into another. Where the underlying shares are readily convertible, assets tax and national insurance contributions will also be due.
A second provision strengthens the penalty regime on the operation of PAYE on employment-related securities and options. Where retrospective legislation has been enacted the employer must operate PAYE on the date that the retrospective legislation becomes law. Also, the employer must collect tax from the employee within 90 days of the enactment of the legislation. Failure to do so could result in the employee facing further tax as the unpaid amounts are treated as employment income.
Paula Tallon is director and head of direct tax at Chiltern, email: email@example.com.
Colin Fulcher, president of the National Association of Master Bakers, runs Lilleys Bakery, which has three shops in Essex.
He was not impressed by the Budget. “The Chancellor hasn’t done much for anyone, unless they have children, and I’m quite surprised that he’s done nothing for OAPs.”
Mr Fulcher added: "He’s put the threshold of inheritance tax up – I’d like to see that abolished entirely. People work hard and when businesses get passed down to children, shops have to be sold to pay the tax. That doesn’t seem right.” In terms of investment, Mr Fulcher said: “I don’t know of any business that has money kicking around for investment, so the changes the Chancellor has made won’t help. It seems that Mr Brown wants to become Prime Minister and so has tried not to offend anyone.”