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December Tax Update
18 January, 2011

In his Autumn Statement on 29 November 2010, Chancellor George Osborne presented his reaction to the economic forecasts of the Office for Budget Responsibility, and also outlined the Government's plans for reforming corporate tax over the next five years.
In his Autumn Statement on 29 November 2010, Chancellor George Osborne presented his reaction to the economic forecasts of the Office for Budget Responsibility, and also outlined the Government’s plans for reforming corporate tax over the next five years.
 
Shortly afterwards, on 9 December, the Government published draft clauses of the Finance Bill 2011, as part of its policy to publicise tax changes early, allowing proposed legislation to be scrutinised and improving predictability in the tax system.
 
This factsheet rounds up some of the main draft tax measures announced on 9 December. Full details can be found on the Treasury website at
 
 
Income tax and personal allowances
 
For 2011/12, the personal allowance for those aged under 65 will increase by £1,000 to £7,475. This is intended to be the first step towards the Government’s longer term aim of increasing the personal allowance to £10,000.
 
However, the basic rate limit will reduce from the current £37,400 to £35,000. Therefore individuals will pay 40% tax rather than the basic rate of 20% when their total income exceeds £42,475.
 
The ‘additional rate’ of income tax of 50% – which applies to taxable income above £150,000 – will be maintained for 2011/12. 
 
If dividend income is part of total income this is taxed at 10% where it falls within the basic rate band, 32.5% where liable at the higher rate of tax and 42.5% where liable to the additional rate of tax.
 
 
Furnished Holiday Lettings (FHL)
 
Historically, income from FHL in the UK has broadly been treated as trading income, with certain specified tax advantages (see below), although it remains chargeable as property income. The rules are to be changed, partly to encompass the requirement to extend relief to FHL in the European Economic Area (EEA).
 
The law will be changed by Finance Bill 2011 so that:
 
• FHL in both the UK and EEA will be eligible as qualifying FHL within the (revised) special tax rules. This is the current situation but is not within the legislation;
 
• the minimum period over which a qualifying property must be available for letting to the public in the relevant period is increased from 140 days to 210 days in a year with effect from April   2012;
 
• the minimum period over which a qualifying property is actually let to the public in the relevant period is increased from 70 days to 105 days in a year with effect from April 2012;
 
• losses made in a qualifying UK or EEA FHL business may only be set against income from the same UK or EEA FHL business; and
 
• a “period of grace” will be introduced to allow businesses that don’t continue to meet the “actually let” requirement for one or two years to elect to continue to qualify throughout that period.
 
 
All other aspects will remain the same so that the commercial letting of furnished holiday accommodation is treated as a trade for the following purposes:
 
• capital allowances;
 
• certain capital gains reliefs (including business asset roll-over relief, entrepreneurs’ relief, relief for gifts of business assets, relief for loans to traders and exemptions for disposals of shares by companies with a substantial shareholding); and
 
• relevant UK earnings when calculating the maximum relief due for an individual’s pension contributions.
 
 
Apart from conditions already mentioned, the following conditions must also be met:
 
• the business must be carried on commercially, and with a view to a profit;
 
• the total periods of “longer term occupation” must not exceed 155 days during the relevant period (normally the tax year). A period of “longer term occupation” is a letting to the same person for longer than 31 continuous days.
 
 
Generally, the changes have effect on and after 1 April 2011 for companies and 6 April 2011 for individuals and partnerships. The increase in the number of days for which a property is actually let or available in order to qualify for FHL will have effect from 1 April 2012 and 6 April 2012 for companies and individuals (and partnerships) respectively.
 
 
‘Junior ISA’
 
Following the demise of the Child Trust Fund (CTF), the Government has announced that it will create a new tax-free Junior Individual Savings Account (ISA). It intends to publish draft legislation – including detailed secondary legislation – in spring 2011.
 
The new Junior ISA will have similar terms and conditions to the adult version. Investments will be available in cash or stocks and shares and all returns will be tax-free. Annual contributions will be capped, although the annual investment maximum has yet to be announced. Funds placed in a Junior ISA will be owned by the child but investments will be locked in until the child reaches 18 years of age. They can then withdraw their money without losing any tax benefits.
 
The Government has confirmed that Junior ISAs should be available by autumn 2011. However, this means that there will be a period of around a year when parents of newborn children will not be able to invest in either a CTF or a Junior ISA. Consequently, eligibility for the new ISA will be back dated to ensure that no child born after the end of CTF eligibility will miss out on the opportunity.
 
Unlike CTFs, the Government will not be making any direct contributions into the Junior ISA. However, parents will be able to invest money for their children without having to pay tax on it. Currently, anti-avoidance rules mean that parents who transfer their own money into their child’s name have to pay the tax on interest where it exceeds £100 per year. The Junior ISA will give parents an exemption from this.
 
 
2011/12 ISA subscriptions
 
As announced in the Labour Government’s last Budget, increases in the annual investment allowance for cash and shares ISAs will be linked to the Retail Price Index (RPI). HMRC has confirmed that the annual subscription limit for 2011/12 will rise from £10,200 to £10,680, up to £5,340 of which can be invested in a cash-only ISA.
 
 
National Insurance Contributions
 
The Government has confirmed that the changes to the rates of National Insurance Contributions (NICs) announced by the previous Government would be made. From April 2011 a further 1% will apply to the rates applicable to employers, employees and the self-employed. The main rate of Class 1 (employee) NICs will be 12%, while the Class 4 rate will be 9%. The employer rate will increase to 13.8%. The additional rate of Class 1 and 4 contributions payable will be increased from 1% to 2%.
 
From April the level at which employees start to pay contributions will increase to £139 per week (the primary threshold) and for employers the weekly limit will be £136 (secondary threshold). The primary and secondary thresholds were aligned at £110 for 2010/11. 
 
The upper earnings limit and the upper profits limit will continue to be aligned with the income tax higher rate threshold of £42,475.
 
 
‘Tainted’ charitable donations 
 
The Government has released draft legislation to deny tax relief on charitable donations where one of the main purposes of the donation is to receive an advantage for the donor or connected person directly or indirectly from the charity. These donations will be known as ‘tainted donations’ and there is no monetary limit on the amount of the donation which may be caught by these rules. 
 
The rules will affect charity donations made on or after 1 April 2011 and replace the existing ‘substantial donor’ rules.
 
 
Pensions: requirement to buy an annuity
 
The pensions tax rules that make it obligatory for members of registered pension schemes to secure an income, usually by buying an annuity, by age 75 are to be removed. This will involve, amongst other things, changes to the rules applying to income drawdown arrangements.
 
With effect on or after 6 April 2011:
 
• individuals with defined contribution pension savings from which they have not yet taken a pension will be able to defer a decision to take benefits from their scheme indefinitely
• individuals with a lifetime pension income of at least £20,000 a year will be able to gain access to their drawdown pension funds without any cap on the withdrawals they may make
• the age 75 ceiling will be removed from most lump sums to which entitlement arises
• the tax rate on lump sum death benefits will be 55%
• there will be certain transitional arrangements.
 
 
Employer-supported childcare (ESC)
 
The current limit on the amount of exempt income associated with childcare vouchers and directly contracted childcare for employees in an ESC scheme, is £55 per week. From 6 April 2011 this will be restricted in cases where employees join a scheme and their earnings and taxable benefits are liable to tax at the higher or additional rates.
 
At the beginning of the relevant tax year, employers will be required to estimate the level of employment earnings that their employee is likely to receive during that year (ignoring potential bonus and overtime payments, but including other known taxable benefits). Income for the purpose of the calculation will be reduced by the personal allowance as shown on the individual’s tax code for the relevant employment.
 
If the level of income is within the basic rate band, the employee will be entitled to relief on up to the full £55 per week, but if it exceeds the 50% rate threshold for the year, the employee will be entitled to relief on just £22 per week; and if it is between the above two bands the employee will be entitled to relief on £28 per week.
 
Anyone already in a scheme by 5 April 2011 will not be affected by these changes as long as they remain within the same scheme. The existing tax and NICs exemptions for workplace nurseries will remain.
 
Tax relief for ESC schemes applies only if a number of conditions are met. One of these conditions is that the scheme must be open generally to employees (i.e. available to all). Many employers use salary sacrifice or flexible remuneration arrangements to provide access to schemes. These arrangements cannot be applied to workers earning at or near the National Minimum Wage (NMW) because of legislation in that area, which means that the schemes strictly fall outside the conditions for the relief.
 
The new measure amends the conditions to allow employers to make their ESC schemes unavailable to those employees earning at or near NMW levels, where the schemes are delivered through salary sacrifice or flexible remuneration arrangements. This does not prevent employers from offering ESC schemes to these employees that do not rely on salary sacrifice arrangements. 
 
This measure ensures that employers can continue to offer ESC schemes that rely on salary sacrifice arrangements, without compromising tax relief for employees. This is consistent with the Government’s objective of keeping the tax system as simple as possible. The measure does not undermine the protection afforded to employees earning at or near the NMW, and does not prevent employers continuing to offer ESC schemes to these employees.
 
 
Corporation tax rates
 
It has already been announced that the main rate of corporation tax (generally applying to companies with profits of more than £1.5 million)  is to reduce from 28% to 27% from 1 April 2011, with progressive annual 1% cuts so that the main rate will be 24% by 1 April 2014. 
 
The Government has confirmed that legislation will be introduced to reduce the main rate of corporation tax to 26% from 1 April 2012. 
 
Also with effect from 1 April 2011, the small profits rate of corporation tax (which generally applies to companies with up to £300,000 of profits) is to reduce from 21% to 20%. The effective marginal corporation tax rate for profits between £300,000 and £1.5 million will therefore be 28.75% from 1 April 2011.
 
 
Associated companies
 
A new measure amends corporation tax small profits rate legislation. It will ensure that companies are not held to be associated through an attribution of rights (solely by virtue of relationships between individuals), but only where the level of commercial interdependence between the companies themselves makes it appropriate to do so. 
 
The tax effect on companies which are held to be associated is to lower the profit threshold at which they fall within the main rate of corporation tax, in proportion to the number of associated companies.
 
 
Corporate capital gains simplification
 
As part of the Government’s determination to simplify various aspects of the tax system, considerable consultation has led to proposals to simplify particular aspects of corporate capital gains:
 
• Simplifying the rules for the calculation of chargeable gains “degrouping charges” for companies
• Removing some existing restrictions on the use of capital losses within a group of companies after a change of ownership
• Replacing existing “value shifting” provisions with a new targeted anti-avoidance rule.
 
 
VAT on business samples
 
Where businesses provide samples of their products free of charge to individuals for marketing purposes, the first sample is currently not liable to VAT. Legislation will be introduced in Finance Bill 2011 to extend the relief so that none of the samples is liable.
 
 
Beer duty
 
The Finance Bill 2011 will introduce legislation for a new duty on beers exceeding 7.5% abv that are produced in or imported into the UK. The new duty is to be levied in addition to the existing general duty on beer.
 
The legislation will also change the taxation of low strength beers by introducing a reduced rate of general beer duty at or below 2.8% abv.
 
Small Brewery Beer relief will still be available on general beer duty payable on beers above 7.5% abv but it will not apply to the new high strength beer duty. The relief will also not apply to beers at or below 2.8% abv qualifying for the new reduced rate.
 
 
To discuss how the announcements may affect your business and your personal finances, please contact us.
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