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Overview 2007 | Budget Highlights | Personal Tax | Employee Tax | Business Tax | Value Added Tax

Budget Overview 2007

This is a summary of Gordon Brown's 11th budget report as Chancellor delivered on 21st March 2007.

The information in this summary is solely based on our understanding of the Chancellor's proposals and we have limited the areas covered to those we feel most applicable to our clients and candidates.

No action should be taken without obtaining appropriate professional advice and as ever the devil will be in the detail.

Budget Highlights

The major point of note was obviously the 2% cut in basic rate income tax, although when looking at more of the detail below you will see there were plenty of rises to counteract this.
Most of the tax rates and allowances for 2007/08 were already known but there were some significant changes for 2008/09 onwards.
Overall the budget was tax neutral. Whilst poorer families were probably the biggest winners and Mr Brown believes that 80% of us will be better or no worse off, the biggest losers were probably...

• Small businesses that saw the small companies' corporation tax rate increased from 19% to 22% by 2009.
  
• Higher earners, partly as a result of the National Insurance changes where those on incomes of £43,000 or more could end up paying around £1,000 more in NI.

Other key highlights included...

• A rise in the higher rate income tax threshold to £43000 by 2009.
• Decrease of 2% in the main corporation tax rate for larger companies.
• The abolition of the 10% starting rate of income tax on non-savings income.
• Some simplification of the tax system, mainly through tax bands and capital allowances.
• Increased personal allowances for pensioners.
• The inheritance tax nil rate band will rise to £350,000 by 2010.
• Tax credits remain a key part of Mr Brown's tax system for giving back to workers on lower incomes.
• Road tax on the highest polluting vehicles is increased to £300 and to £400 from next year. Least polluting vehicles to have the duty cut to £35.
• Tax relief on empty property is to be restricted to 6 months and to 3 months on empty retail property.
   

Personal Tax

Income Tax Rates

• From April 2008 the basic rate of income tax was cut by 2%, from 22% down to 20%.
  
• At the same time, this has been partly counteracted by scrapping the lower rate 10% tax band for non-savings income.

So there will be just 2 tax rates - 20% and 40%, apart from keeping the 10% rate for savings income which has kept some of the complexity.

Income Tax Bands
The income level at which 40% tax starts to be paid increases to £43000 (presently just over £38000) but not until 2009.

National Insurance
The upper earnings limit for National Insurance is being raised to bring it in line with the 40% income tax threshold to £43,000 in 2009 (presently £33,540).

Enquiry Window
For self assessment returns for individuals and companies, the enquiry window for HMRC to enquire into your Tax Return presently runs from 12 months from the filing deadline and so acts as a disincentive file your return early.

The enquiry window will now be linked to the date you actually file your return with effect from 2007/08 onwards.

Self Assessment Filing Dates
For 2007/08 and future years there are new filing dates for paper returns which have to be filed by 31st October (presently 31st January). Online returns continue to have the 31st January deadline and so for the 2007/08 returns they still have until 31st January 2009 to file.
 

Employee Tax

Employee Benefit Trusts
There is already a limit on the amount an employer can have as a tax deduction for contributions, which is limited to the amount actually paid to the employee within 9 months of the end of the accounting period, such payment also to give rise to tax and national insurance.
However, some employers have tried to go around these rules by declaring a trust over assets which they already control and claimed a tax deduction for the value of that declaration. The new legislation will ensure that no tax deduction is possible in these circumstances.

Company Car and Fuel Benefits

• Company car drivers who have a car capable of being run on E85 fuel will get a discount of 2% on the percentage applied to the list price with effect from 6th April 2008 for company car tax.
• The same 2% reduction will also apply for cars capable of being run on E85 fuel for company fuel tax.
• The figure for the company car fuel benefit charge to which the relevant percentage is applied will remain unchanged at £14,400 for 2006/07.
   

Business Tax

Corporation Tax

• Main corporation tax rate. This has been reduced by 2% from 30% down to 28% from April 2008. That applies for companies with profits in excess of £1.5 million.
  
• Small companies rate. That is companies with profits up to 300K who will be dismayed to see the small companies rate increased from 19% to 20% from April 2007, 21% from April 2008 and 22% from April 2009. This has been designed to reduce the tax differences between the self-employed and small companies, where Mr Brown claims individuals artificially incorporate themselves to pay less tax. Surely not!
  Greater consideration will now be required as to the tax benefits of incorporation for small businesses, especially with the reduction in the basic rate of income tax also coming into effect.
• The upper and lower profit limits remain unchanged.
  

Managed Service Companies and Contractors
The pre-budget announced draft legislation relating to managed service companies, so that those working under such arrangements, would pay the same tax and NI as employees from April 2007, with the MSC having to account for the tax and NI.

This budget aims to make it even more difficult to the avoid the new legislation. There will be a focus on looking at the nature and characteristics of the MSC to decide if it is an MSC. Where the MSC does not pay the tax and NI due, that debt will be able to be transferred to the directors of the MSC and the MSC provider. Also, for travel and subsistence purposes, the contractor will be treated as if employed by the end user, so not able to claim travel to where the duties are performed. The new regime will be very complex and expert assistance is critical. Using your own limited company, instead of a managed service company may be a viable alternative.

Capital Allowances
Overall there is to be a simplification of the capital allowances regime with increased allowances coming for new investment in plant and machinery.

• The temporary rate of 50% first years capital allowances on plant and machinery for small businesses is extended for one more year and for medium size businesses remains at 40%.
  
• From April 2008 there is a new system coming in. Small firms can claim a new 100% relief for new capital investment in plant and machinery up to £50,000 by means of a new "annual investment allowance" (AIA), which is effectively a 100% capital allowance. The new AIA is a cash flow benefit by speeding up the rate at which tax relief is given rather than being spread over a number of years.
  
• Allowances for pooled plant and machinery are to be reduced by aligning them with the economic rate of depreciation at 20% (previously 25%) from April 2008.
  
• Subject to consultation there will be a reduction in the capital allowances for fixtures that are integral to a building from 25% to 10% from April 2008.
  
• Annual relief for long life assets to be raised from 6% to 10% from April 2008.
  
• The expensive car rules will be removed, to be replaced with a system based on CO2 emissions.
  
• Industrial Buildings Allowances, Hotel Buildings Allowances and Agricultural Buildings Allowances to be phased out over the next four years.
  
• The tax credit for research and development will increase from 150% to 175% from April 2008 for small companies and from 125% to 130% for large companies.
   
  

Value Added Tax

Turnover Limits
The VAT registration turnover limit rises to £64,000 from 1 April 2007 (previously £61,000). The deregistration limit increases to £62,000 (presently £59,000).

VAT Fuel Scale Charges
These will in future be based on CO2 emissions with effect from accounting periods beginning on or after 1st May 2007.

Transfers of a Going Concern
At present, when a business is transferred as a going concern for VAT purposes, the seller has to transfer the VAT records to the purchaser. However, it will now be possible from 1st September 2007 for the seller to retain the records by applying to HMRC, unless the purchaser was to keep seller's VAT number.