Survive the law
Summer 2010
Although the Chancellor’s Budget on 24 March was largely a political statement containing few surprises, a large number of measures survived the dissolution process and were rushed through Parliament before the general election. Small businesses and their owners in particular are both winners and losers from the changes in the Finance Act, which became law on 8 April.
Some of the more business-friendly measures included the annual investment allowance for capital expenditure on plant and machinery being doubled, so that up to £100,000 of expenditure can effectively be wholly written off against taxable profits, and entrepreneurs’ relief for individuals selling their business or certain business assets has also doubled. This means that up to £2 million of capital gains during a person’s lifetime can currently be taxed at the lower rate of 10% rather than the normal rate of 18% (a rate now likely to increase).
There was no increase in the 21% small profits rate of corporation tax (for taxable profits up to £300,000) or in the main 28% rate. The ‘Time to Pay’ scheme for businesses in financial difficulties has been extended over the life of the next Parliament and the amount of small business rate relief has been increased for the period from 1 October 2010 to 30 September 2011. During this period full relief will be given from business rates for qualifying businesses occupying premises with a rateable value of no more than £6,000, while relief will be tapered for values between £6,000 and £12,000.
The threshold for compulsory VAT registration has gone up to £70,000, and there are now simplified calculations for the VAT that partially exempt businesses can recover.
The downside on tax
On the other hand, the new 50% income tax rate took effect on 6 April 2010 for individuals with taxable income above £150,000. Despite the corresponding increase in the top dividend tax rate to 42.5%, it can still be beneficial in many cases to trade through a limited company. The national insurance rises for employers, employees and the self-employed from 6 April 2011 are unlikely to go ahead as planned. The Conservatives are reported to have agreed with the Liberal Democrats on a partial reversal of the measure for employers.The restriction in tax relief for pension contributions made by people with incomes of at least £130,000
(£150,000 including contributions) is still due to go ahead on
6 April 2011
Other measures
Elsewhere in the Budget, first-time home buyers will pay no stamp duty land tax on homes costing £250,000 or less for purchases after 24 March 2010 and before 25 March 2012. From 6 April 2011, there will be a 5% rate of stamp duty land tax on properties costing £1 million and more.
All personal allowances were frozen at their 2009/10 levels, including the basic £6,475 allowance that is available to taxpayers aged under 65. In 2010/11, the basic personal allowance of £6,475 will be progressively withdrawn down to nil for people with a total income above £100,000. As a result of this, the effective marginal tax rate for a person on income between £100,000 and £112,950 is 60%.
Except for the new top rates of 50% on income tax and 42.5% on dividends, there is no change in income tax rates or to the rate bands. The nil rate threshold for inheritance tax will be frozen at £325,000 until 2014/15.
Where taxpayers do not disclose their taxable income or gains and there is an offshore aspect to this tax evasion, such as an offshore bank account, HM Revenue & Customs will be able to charge penalties of up to 200% of the tax lost.
The tax changes introduced in the March Budget and the preelection Finance Act seem likely to survive under the new Government. The next Budget, due by late June, may contain more surprises than March's, including some unwelcome new tax changes. After all, the Treasury has forecast a £163 billion deficit for the current year.
