Alistair Darling delivered his first Pre-Budget Report (PBR) on 9 October, 2007. One of the related press notices begins with the sentence: "The government recognises the contribution that small businesses make to the economy and that business owners should profit from the success of their business." After reading that, small business owners might have looked forward to the rest of the PBR, to see how the government was going to recognise the contribution they had made, and help them to profit from the success of their business. Sadly, they will have been very disappointed.
hitting small businesses
The Chancellor announced several measures that will hit small businesses, including:
l the abolition of capital gains tax taper relief
l plans to prevent ’income shifting’ in family businesses
l an increase of more than 17% in the company car fuel benefit-in-kind charge
l the ending of national insurance exemption for holiday pay schemes
l a new ’business rates sup- plement’.
These proposals will be a blow to hard-working entrepreneurs, coming on top of the increases in the corporation tax small companies rate from 19% last year to 22% in 2009.
For small businesses, the abolition of capital gains tax taper relief was definitely the worst of the Chancellor’s announcements. The government had previously announced that it intended to change the tax rules for ’private equity’ businesses, but the removal of taper relief will strike far beyond that and seriously affect small companies, shareholders and the self-employed.
At present, taper relief reduces the capital gains tax charge when an individual or trust sells or transfers an asset. The relief is particularly generous for business assets, such as shares in a trading company, or an asset that is used in a trade - for example, a property or goodwill. Gains on such assets are halved where the asset has been owned for at least a year, and reduced by 75% if the asset has been held for two or more years. This is a very valuable relief, which means that the effective tax rate for a higher-rate taxpayer is only 10% (25% x 40%), where a business asset had been owned for at least two years.
From 6 April 2008, however, there will be no taper relief at all. Capital gains tax will be charged at a flat 18% rate, irrespective of the type of asset, or whether the individual is a higher-rate taxpayer. For someone who had hoped to pay only 10% tax, this represents a massive 80% increase.
If that was not bad enough, the abolition of the indexation allowance for inflation between 1982 and 1998 - also from 6 April, 2008 - will make matters worse for individuals or trusts who hold assets that were acquired before 1998.
Anyone thinking of selling or transferring a business, a business asset or indeed a non-business asset in the near future will need to work out whether there will be a higher tax bill if it is sold after 5 April, 2008. If the answer is yes, every effort should be made to complete a sale before then, although care should be taken not to sell before an anniversary date, which would increase taper relief. If an outright sale to a third party is not possible, some thought should be given to engineering a ’disposal’, which will trigger the taper relief and, if applicable, indexation relief, which will otherwise be lost.
The ways in which this could be done depend on several factors, including the type of asset, whether the trade in question is carried on by a company, and family circumstances. For example, the asset could be transferred to another person or a trust or, in the case of a self-employed person, to a new company he or she has set up to continue carrying on the trade.
A recent House of Lords ruling declared that the payment of family company dividends to the low-earning wife of a husband who earned most of the company’s income was effective for tax purposes. As a result, the government intends to change the rules with effect from 6 April, 2008, so that it will not be possible to transfer income in this way by means of dividends or a share of profits.
Exactly how this will be done is not yet known, although it has been stated that things to be taken into account may include the actual work done by each individual, and the risks to which they are subject through the business. Draft rules will soon be published, and HMRC will then consult with advisers on how to make these as easy as possible to understand and operate. But the end result will be a higher overall tax bill for owners of some family businesses.
Where an employer provides a company car to an employee and pays for fuel for private use, the standard amount on which the annual fuel benefit-in-kind charge is based, depending on the car’s CO2 emission rating, will rise from £14,400 to £16,900 from 6 April, 2008 - an increase of over 17%.
This will increase the emp-loyee’s income tax bill and will also increase the national insurance cost for employers.
There are two things which employers can do to minimise costs. First, they need to look at whether it will still be worth paying for fuel for private use. An employee who does not use a company car on private journeys to a great extent, including home to office, will probably be better off paying for his own private fuel. It is important to note that the fuel benefit-in-kind charge is an ’all or nothing’ charge, which will not be avoided by the employee making a contribution towards the cost - he must pay for the cost of all private fuel.
Secondly, if a company car and private fuel are still to be provided, the choice of car is very important. As benefit in kind charges are based on the vehicle’s CO2 emissions, there can be an enormous difference in the tax and national insurance costs for cars of an identical price and standard, but with different CO2 emission ratings. Car manufacturers have responded to the changed environmental and tax climate, and a wide range of low-emission cars is now available.
For many years, holiday pay for employees has been exempt from national insurance contributions, where a third party operated a holiday pay scheme on behalf of the employer. This type of scheme was traditionally used in the construction industry, but other businesses have recently started to use it, purely for national insurance savings.
As a result, the exemption will be removed for all businesses, but the construction industry will be allowed to phase out the scheme over the next five years. Other businesses will have to revert to paying holiday pay in the same way as normal salary, and account for national insurance on it, from 30 October, 2007.
It is proposed that local authorities will be allowed to charge a business rates supplement of up to 2p per £1 of rateable value, in order to fund local development projects. The extra charge will apply to all business properties with a rateable value of more than £50,000.This is effectively a new local tax.
The PBR also contained some minor proposals to help small businesses, mainly by promising to simplify some income tax and VAT compliance procedures, but this will be of little comfort to those facing real tax increases. Far from recognising the contribution that small businesses make to the economy, this PBR will impose extra burdens and make it harder for business owners to profit from their success. n
l Paula Tallon is a tax specia-list at Chiltern, part of BDO Stoy Hayward LLP