Budget 2008 and end of year

It may have been said to be a tame budget with the popular headlines concerning alcohol and cars. However it is a technical budget with 107 Budget Notes running to 270 pages. Many topics had either been announced in advance or are of very restricted interest. Some extracts of relevance to SME business are reproduced below.

In addition there were a number of press notices running to 47 pages the most relevant (and which "made my day") being the deferment of the Income Shifting legislation until 2009. Hopefully the government will come up with a more workable solution to the problem they perceive.

The end of the tax year is fast approaching and two thoughts to draw to your attention are:-

a) maximising dividend withdrawals to fully utilise the basic rate band (for which a calculator can be downloaded from our website here. If you require explanation please let us know.

b) any action to maximise business asset taper relief for capital gains prior to the introduction of entrepreneurs relief on 5th April 2008. Email us if you have any questions on this matter.

Ian

Ian Stewart FCA, CTA
Stewart Gorman Evans Ltd
Emstrey House North,
Shrewsbury Business Park
Shrewsbury SY2 6LG

01743 235236            www.sge.uk.com

Registered in England and Wales, Company number 4931684

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SIMPLIFICATION OF ASSOCIATED COMPANIES RULES

Legislation will be introduced in Finance Bill 2008 to revise the definition of ‘control’, solely for the purposes of SCR, by amending the wording of section 13(2) of ICTA and inserting new subsections 4A, 4B and 4C into section 13 of ICTA.

8. The new wording and subsections will ensure that the rights or powers held by business partners will be attributed only when “relevant tax planning arrangements have at any time had effect in respect of the taxpayer company”. “Relevant tax planning arrangements” will be defined as arrangements which involve the shareholder or director and the partner and secure a tax advantage by virtue of greater relief under section 13 of ICTA.

CAPITAL ALLOWANCES: PLANT AND MACHINERY: ANNUAL INVESTMENT ALLOWANCE

7. On and after 1 April 2008 (corporation tax) or 6 April 2008 (income tax) most businesses, regardless of size, will be able to claim the new AIA on the first £50,000 spent on plant or machinery (subject to the exclusions set out in paragraphs 18-19). Businesses will be able to claim the AIA in respect of expenditure on long-life assets and integral features (see BN07), as well as on general plant and machinery. 8. Where businesses spend more than £50,000 in any chargeable period, any additional expenditure will be dealt with in the normal capital allowances regime, entering either the special rate or main pool, where it will attract WDAs at the appropriate rate, (see BN08).

CAPITAL ALLOWANCES: SMALL PLANT AND MACHINERY POOLS

Legislation will be introduced in Finance Bill 2008 to allow businesses to claim a plant and machinery writing-down allowance (WDA) of up to £1,000 where the unrelieved expenditure in the main pool or the new special rate pool (see BN08) is £1,000 or less. This is in response to comments made by business in consultation on the proposal to introduce the new AIA (see BN12) which is part of the business tax reform package announced at Budget 2007.

CAPITAL GAINS TAX: RELIEF ON DISPOSAL OF A BUSINESS (ENTREPRENEURS’ RELIEF)

Comment beyond the scope of this summary but limited to gains of £1 million and assets which previously qualified for Business Asset Taper Relief may not now qualify for Entrepreneurs’ relief e.g. assets rented to family companies.

RESTRICTIONS ON TRADE LOSS RELIEF FOR INDIVIDUALS

7. Legislation will be introduced in Finance Bill 2008 to restrict the amount of sideways loss relief that can be claimed by an individual, other than a partner, carrying on a trade in a non-active capacity. Where a loss arises to an individual carrying on a trade in a non-active capacity as a result of tax avoidance arrangements made on or after 12 March 2008, no sideways loss relief will be available for that loss. Otherwise there will be an annual limit of £25,000 on the total amount of sideways loss relief that 8. For these purposes an individual, other than a partner, carries on a trade in a non-active capacity where the individual spends an average of less than 10 hours a week, in a relevant period, personally engaged in activities of the trade carried on commercially and with a view to the realisation of profits from those activities.an individual may claim from trades carried on in a non-active capacity.

DOUBLE TAXATION TREATY ABUSE

2. UK residents are taxable on their income wherever it arises. A wholly artificial scheme seeks to avoid UK tax by artificially diverting income of a UK resident individual to a foreign partnership comprised of foreign trustees. The scheme is designed to ensure that the income nonetheless continues to belong to the UK resident as they will be a beneficiary of the foreign trust. Legislation will be introduced in Finance Bill 2008 to: • clarify, retrospectively, legislation introduced in 1987, which itself was retrospective, so that it has effect as intended. This will ensure that, notwithstanding the wording of any double taxation treaty, UK residents pay UK tax on their profits from foreign partnerships; and • prevent tax avoidance through the misuse of Double Taxation Treaties by UK residents.

VAT: INCREASED TURNOVER THRESHOLDS FOR REGISTRATION AND DEREGISTRATION

The measure increases the taxable turnover threshold which determines whether a person must be registered for VAT from £64,000 to £67,000. 3. The taxable turnover threshold which determines whether a person may apply for deregistration will be increased from £62,000 to £65,000. The existing conditions for determining entitlement or liability to deregistration remain unchanged.

INDIRECT TAX RETURNS: CORRECTION OF VAT ERRORS This measure increases the de minimis £2,000 limit to the greater of £10,000 or 1 per cent of turnover, subject to an upper limit of £50,000 for VAT.

VAT: OPTION TO TAX LAND & BUILDINGS

This measure will simplify the legislation relating to the option to tax land and/or buildings. It will also introduce minor changes to enable taxpayers to revoke an option to tax after 20 years and make a number of associated changes to improve practical administration of the option to tax.

HMRC REVIEW OF POWERS, DETERRENTS AND SAFEGUARDS: PENALTIES FOR INCORRECT RETURNS & FAILURE TO NOTIFY A TAXABLE ACTIVITY

The new provisions for incorrect returns will provide for penalties in line with Schedule 24 to FA 2007, which are based on the amount of tax understated, the nature of the behaviour and the extent of disclosure by the taxpayer. There will be no penalty where a taxpayer makes a mistake but there will be a penalty of up to: • 30 per cent for failure to take reasonable care; • 70 per cent for a deliberate understatement; and • 100 per cent for a deliberate understatement with concealment.

HMRC REVIEW OF POWERS, DETERRENTS AND SAFEGUARDS: COMPLIANCE CHECKS

2. Legislation will be introduced in Finance Bill 2008 to reform the rules for checking that businesses and individuals have paid the correct amount of IT, CGT, CT, VAT and PAYE or claimed the correct reliefs and allowances. 3. There will be three elements: • aligned and modernised record keeping requirements; • new inspection and information powers; and • aligned and modernised time limits for making tax assessments and claims.

RESIDENCE AND DOMICILE: THE RESIDENCE TEST AND DAY COUNTING RULES

Under the current rules, when deciding if an individual is resident in the UK for tax purposes all days spent in the UK are normally counted, except for days on which the individual arrives in, or departs from, the UK. At the Pre-Budget Report it was proposed that days of arrival and days of departure should count as a day of presence in the UK, subject to an exemption for transit passengers. 5. The changes announced today mean that on and after 6 April 2008, any day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes.