Budget Comment 2007

March 07 was a political landmark for Mr Brown, who presided over his eleventh budget as Chancellor, a feat he only surpassed by William Gladstone, who managed twelve.

What does the budget mean to you? Well frankly there was a lot of tinkering around the edges but fundamentally it was a budget geared towards generating the right sort of political headlines for a man who many consider will be our next prime minister.

Gordon grabbed the headlines by cutting the basic rate of tax from 22% to 20%, which is the lowest rate for 75 years. However, any gain for individuals will be offset by the abolition of the 10% starting rate band for Income Tax and also the alignment of the upper thresholds of National Insurance contributions.

For businesses he grabbed the headlines by cutting the main rate of corporation tax from 30 to 28% from the 1st April 2008. However there are significant issues for Personal Service Companies and small businesses was the increase in the small companies' rate of corporation tax. This will cumulate in a 22% rate from April 2009.

There was also some major changes in the capital allowance regime. Perhaps the most important for small businesses is the introduction of a new annual investment allowance for the first £50,000 of expenditure on plant and machinery from April 2008.

The following are the main points that will be of interest to C and S Finance clients:

Personal Tax

The government is modernising the personal tax system, the major change is the alignment with national insurance contributions.

From 2008/09:

  • The basic rate of income tax will be reduced from 22% to 20%.
  • The 10% starting rate of tax will be abolished for earned income and pensions. But to add complication it will still be available for savings income and capital gains.
  • The National Insurance Upper Earning Limit will be aligned with the threshold at which higher rate income tax becomes payable.

Tackling Managed Service Companies

The Government is targeting managed service companies as it considers them a significant and increasing risk to the Exchequer, and the loss of a level playing field for workers and businesses who pay the correct level of tax and national insurance. There is now a proposal document (published in March 07), which is intended to result is a change in the law around August. A detailed summary of these proposals can be found within the news section of our website.

If you work through a managed service company or umbrella company this will be of interest to you. It is well worth spending some time understanding how these proposals affect you. C and S Finance are happy to discuss with you with the potential impact of this on your personal circumstances.

Changes of Self Assessment Tax Return Filing Dates

New filing dates have been established for self assessment tax returns. For self assessment paper returns the deadline is now 31 October. The online filing date remains the same, 31 January. If you want the HMRC to calculate your tax liability then historically you would have had to do this by 30 September. This has now this has been amended to 31 October to align with the new filing date for paper returns. These changes apply to tax returns for 2007/08 and subsequent years.

VAT

Businesses can currently choose whether to file their VAT returns using paper or online. The Government has stated that is expects to require VAT returns to be filed online from 2010. They are also intending to change the date on which cheque payments are treated as having been made. This will ensure that payments that are made electronically are not penalised.

Corporation Tax Small Companies' Rate

The small companies' rate of corporation is to be progressively increased to 22% by FY09. There will be no changes to ring fence profit rates or marginal relief fractions.

From 1 April 2007, the small companies' rate will increase to 20% from 19% with further increases to 21% in 2008 and 22% in 2009. The current relief fraction is 11/400 which will change to 1/40 for non-ring fenced profits and remain at 11/400 for ring fenced profits. The small companies' rate for ring fenced profits will also remain at 19%. The small companies' rate broadly applies to profits up to £300,000.

These measures should be interpreted as part of the Governments aim to deter tax motivated incorporation.

Capital allowances

The overall effect from these changes will be to reduce allowances significantly. This will redress the balance of the chancellors cut in the main rate of corporation tax from 30% to 28%.

Plant and Machinery Allowances

There are significant changes proposed for the rates of allowance for expenditure on plant and machinery. From 2008/09 the main rate for allowances will be reduced from 25% to 20% pa. Additionally, the rates of allowances for fixtures integral to a building will be reduced from 25% to 10%. Conversely allowances for long life plant and machinery will be increased from 6% to 10%.

We see the new rate of 10% for fixtures and fittings leading to a greater debate on whether a fixture is integral or not.

FYA/Annual Investment Allowance

The 50% rate of first year capital allowances (FYA) for small business spending on plant and machinery will be extended by one year. The rate for medium-sized companies will remain at 40%. FYA will be replaced in 2008/09 by a new annual investment allowance which will be limited to the first £50,000 of expenditure.