Significant
points and further information
| Business Tax | |
As announced last year, income tax rates and main allowances frozen, and NIC rates increased by 1% for employees, employers and self-employed.
As announced last year, introduction of new Working Tax Credit and Child Tax Credit from 6 April 2003, and new Pension Credit from October.
No significant changes to inheritance tax or to pension schemes.
Introduction of Child Trust Fund - £250 from the Government for every child at birth, to spend at age 18.
Small increases in 10% and 22% income tax bands.
TAX RATES AND ALLOWANCES (click on link to go straight to Personal Income Tax Table)
As announced last year, the main personal allowance is frozen, instead of increasing in line with inflation as normal. This effectively leads to a tax increase for anyone whose income has risen over the last year. The 10% and 22% bands have been increased by inflation.
The allowances for those aged 65 and above have been increased by more than the rate of inflation, representing a tax reduction.
The new system
of Tax Credits became effective on 6 April 2003.
Working Tax Credit (WTC) and Child Tax Credit (CTC) replace the previous systems of support for people on low incomes and people with children. The new credits are paid to claimants, rather than being an automatic adjustment to tax liabilities. Claims are made based on the joint income of a couple.
WTC will be
given to employed and self-employed people. It includes an element for childcare costs (up to 70% of
£200 pw), and is tapered away as income increases.
CTC has
elements for each child and for “the family”. This basic credit (£545 pa) will be paid to claimant couples with income of up to £50,000, and some entitlement will still be due on incomes up to £58,000 (£66,000 in the year a child is born).
For a family with substantial childcare costs, support of about £3,000 can be available even on an income of £35,000, significantly reducing the tax burden.
TAX
TRAP!
CHARITABLE GIVING
As announced last year, a new simplified procedure is to be introduced for assigning tax
refunds direct to a charity and claiming Gift Aid relief. However, this will only take effect for 2003/04 tax returns issued in
April 2004.
SUPPORT FOR CARERS
From 6 April 2003, new rules will apply to financial support given to adopters and foster carers. Adoption allowances will be
exempt from tax, and receipts from foster care will only be taxable if they exceed a limit which varies according to the number of children cared for.
NATIONAL INSURANCE CONTRIBUTIONS
(click on link to go straight to National Insurance Contribution Tables)
The Chancellor announced in April 2002 the increases which took effect on 6 April 2003, so he did not have to repeat the bad news this year.
At least, no further increases were announced, as some people had predicted.
Employees and employers will each pay an extra 1% of salary over £4,615 in 2003/04, and self-employed will pay an extra 1% on profits over the same level.
Employees will see the increase on their April 2003 payslip, while the self-employed will only suffer it when paying the 2003/04 tax on 31 January 2005.
Because of
the long delay between the announcement of the increase and its arrival, a number of ways of mitigating the impact have been raised in the last year, including the incorporation of self-employed businesses and the payment of dividends (which are not subject to NIC). There are no measures in this Budget to counter such plans, which may mean that the Government is not worried about them, or may mean that the Inland Revenue believe that existing rules can prevent avoidance unless taxpayers are very
careful.
TAX
TRAP!
If the new NIC rates hurt, it’s worth looking at ways to mitigate them – take advice.
The Chancellor referred in the speech to the new Pension Credit which will come into effect in October 2003. As with the new Tax Credits, it is a means-tested benefit which must be claimed; some payments should be due to single pensioners with income of up to £139 a week, and to couples with income up to £203 a week.
COMPANY CARS (click on link to go straight to
Benefits in Kind Tables)
The new system
of emissions-based tax charges on company cars was introduced last year and
continues. However, there are two
changes:
the minimum 15% benefit will apply to ratings up to 159g/km, tightened from 169 g/km in 2002/03.
the taxable benefit for free fuel used in a company car is now the same emissions-based percentage multiplied by a set figure of £14,400.
TAX
TIP!
Are you sure
the benefit of car and fuel are worth the tax you pay?
PERSONAL SERVICE COMPANIES
The “IR35” rules apply PAYE
and NIC where workers provide their personal services through a company to
someone who would otherwise be their employer.
Originally, only “business employers” were included, which meant that
a personal service company could be a very tax efficient arrangement for
employing domestic staff such as nannies and butlers.
The Budget has brought domestic staff within the IR35 rules from 10 April
2003, removing this advantage.
EMPLOYEE SHARE SCHEMES
approved schemes only lead to CGT on eventual disposal of the shares.
unapproved schemes lead to income tax, and often NIC, on acquisition of the shares.
However, a number of helpful changes remove unnecessary tax charges, for example where an employee leaves a scheme early as a result of injury, disability, redundancy or
retirement. It will also be possible to exercise approved options more frequently than once every three
years.
HOMEWORKING
Increasing
numbers of employees are working some or all of their time at home.
This has led to disputes over deducting household expenses as “incurred
in the job” – but the rules are very restrictive and few employees can
claim. The Budget will now allow an
employer to pay up to £2pw to an employee, with no tax charge arising to
subsidise extra costs incurred in working from home.
OTHER CHANGES
The Budget
introduces changes to a number of existing exemptions:
increasing the ceiling for annual staff parties from £75 to £150 a head.
increasing the limit on long service awards from £20 to £50 per year of
service
raising the limit on non-cash gifts from third parties from £150 to £250.
removing the limit on the number of “free breakfasts” which can be offered as an incentive for cycling to work (currently 6).
TAX
TIP!
PENSION CONTRIBUTIONS
The “earnings
cap” for personal pension contributions and occupational scheme benefits is
set at £99,000 for 2003/04 (2002/03: £97,000).
The maximum contribution for different ages are set out in the table.
The Government
has been consulting with interested parties about another radical change to the
pensions system. Detailed proposals
will be published in the summer, and may be in force as early as April 2004.
We have been assured that the new rules will preserve the right to take
part of the fund as a tax-free lump sum on retirement.
CHILD TRUST FUNDS
One of the most
striking proposals in the Budget speech is the establishment of a trust fund for
every child born from September 2002 onwards.
This is intended to start with £250 from the Government (£500 for
children from families entitled to the full Child Tax Credit), and parents and
others will be able to contribute to it. It
appears the child will be free to spend the money on reaching 18.
Further details are to be published later.
LIFE ASSURANCE POLICIES
A number of
detailed changes have been made to the taxation of life assurance policies,
attempting to remove anomalies and loopholes.
There has been speculation that the Chancellor could take away the right
to withdraw 5% tax-free each year from a policy – but this right remains
unchanged, except in connection with one very specific tax avoidance scheme.
CAPITAL
GAINS TAX (click on link to go straight to
Capital Gains Tax Table)
ANNUAL EXEMPTIONS AND TAX RATES
The annual
exemption for individuals has been increased to £7,900 for 2003/04 (2002/03: £7,700). Trustees receive half this figure (£3,950 for 2003/04; £3,850 for
2002/03), although this may be shared between trusts which have been set up by
the same person.
EMPLOYEE SHARE OPTION
In 2002, a
Court of Appeal decision (Mansworth vs Jelley) changed the Revenue’s view of
the tax consequences of employees exercising share options in their employer
companies. As a result, many
employees have discovered that they should have reported significant losses for
past years rather than gains, and the Revenue have received substantial
repayment claims. The Budget
changes the rules for options exercised from 10 April 2003 onwards so that these
losses will no longer arise.
TAX
TIP!
“SIMPLIFICATION”
Every year, the Chancellor claims to simplify CGT, but it always seems to be more complicated. This year’s measures include:
increasing the level of receipts which do not have to be reported in detail on the tax return (provided the gains are below the annual exemption)
extension of the higher rates of business asset taper relief to assets used by an unincorporated trade, even if the owner is not the trader (eg is the landlord of the trader’s building)
simplification of the taxation of “earn-out” deals.
simplification of the record-keeping for regular savings plans in unit trusts.
TAX
TIP!
RATES (click on link to go straight to Stamp Duty Tables)
RESTRICTION
OF SCOPE
From 1
December 2003 Stamp Duty will only apply to transfers of land, shares and
interests in partnerships. Intellectual
property and goodwill have been exempted by recent Budgets, but this change
removes any other property (such as debts) from the charge.
Non-residential land will also be subject to a nil rate where the
consideration does not exceed £150,000 (at present £60,000).
LEASES
As present,
duty on the grant of a lease is calculated at a percentage (between 1% and 24%,
depending on the length of the lease) of the average annual rent.
It is proposed to change this to a charge of 1% of the discounted value
of the total rent payable under the lease. This is likely to be significantly higher than the current charge in most
cases. This change will follow
after consultation.
TAX
TIP!
DISADVANTAGED
AREAS
Stamp duty
continues to be subject to a favourable scheme on 2,000 “enterprise areas”
(details can be found on the Revenue’s website).
Non-residential property is not charged to duty at all, and residential
property is only charged if the consideration exceeds £150,000.
INHERITANCE TAX (click on link to go straight to IHT table)
The
Inheritance Tax threshold is increased from 6 April 2003 to £255,000 (2002/03:
£250,000). It is estimated that
only about 5% of deceased’s estates have to pay the tax (which is an increase
of 1% from last year).
The rates of
tax remain unchanged at 40% for transfers on death and within three years of
death, and a tapered rate for transfers over three and less than seven years
before death. The rate for
transfers which are chargeable during lifetime remains 20%.
In spite of
regular predictions from professionals that the Chancellor will one day tighten
up the IHT rules, there were yet again no significant changes to the tax.
CORPORATION TAX (click on link to go straight to Corporation Tax Table)
RATES
There were no changes to the rates of Corporation Tax for the year to 31 March 2004, which therefore remain:
0% on profits up to £10,000
19% on profits up to £300,000.
30% on profits over £1.5m.
Different
marginal rates apply to profits between £10,000 and £50,000, and between £300,000
and £1.5m. These amounts are
reduced for periods of less than 12 months, and are shared between associated
companies.
RESEARCH
AND DEVELOPEMENT
Since 1 April
2000, small and medium-sized companies have enjoyed an enhanced deduction
(effectively a subsidy) for qualifying revenue expenditure on research and
development. A similar scheme was
extended to large companies in 2002.
The rules are to be simplified and extended, subject to agreement from the European Commission. Some of the more important changes for SMEs are:
lowering the minimum annual expenditure for a claim from £25,000 to £10,000
extending claimable “staff costs” to cover agency workers as well as employees.
simplifying the apportionment of costs where staff spend some time on R&D and some on other matters.
EMPLOYEE
BENEFIT TRUSTS (EBTs)
An EBT could
be used by a company to shelter profits while deferring the time at which
employees pay tax – the employer treated a payment into the trust as an
expense, but the employee paid tax only when the trust provided a benefit.
This
advantage has been closed down from November 2002 by denying the employer a
deduction if the employee does not receive taxable income within 9 months of the
payment in.
CAPITAL ALLOWANCES
Small
businesses which buy “information and communication technologies” (covering
most computer-related hardware and software, and also some mobile phones) have
enjoyed a 100% deduction for the cost since 1 April 2000. This was due to end on 31 March 2003, but has now been extended for
another year.
TAX
TIP!
Don’t assume the 100% relief will always be there – watch out next year.
Any business
can claim a 100% allowance for plant and machinery which is within certain
approved “green” categories. This
year a number of water-saving technologies have been added to the list,
including leak detectors and efficient taps. The equipment still has to be “used in the business” to qualify,
rather than merely being part of the business premises.
URBAN
REGENERATION COMPANIES (URCs)
To encourage
contributions by businesses to new URCs, such contributions will be deductible
as trading expenses for the payer.
LLOYD’S
UNDERWRITERS
The Lloyd’s insurance market is undergoing a programme of reforms, which included moving individual underwriters from unlimited to limited liability. The Inland Revenue is reviewing the tax treatment of this change, and will bring forward measures next year to remove a number of potential tax disadvantages which might arise on the change of status.
VALUE ADDED TAX (click on link to go straight to VAT Registration Table)
REGISTRATION
THRESHOLD
From 10 April
2003, the level of taxable turnover at which a business is required to register
for VAT increases by £1,000 to £56,000. The
level of predicted future turnover at which a business can register also rises
by £1,000 to £54,000.
SCHEMES
FOR SMALL BUSINESSES
The flat-rate
scheme, which allows small businesses to account for less output tax and not
claim input tax, was introduced last year for traders with turnover of up to £100,000pa.
This is increased to £150,000 with effect from 10 April 2003.
The level at
which a business can join the annual accounting scheme without already being
registered for a year is also increased from £100,000 to £150,000.
TAX
TIP!
At higher
turnover levels, these schemes can – in some cases – produce good savings.
VOUCHERS
The purchase
and sale of “face-value vouchers” leads to a number of VAT anomalies.
Up to now a person buying and selling vouchers (which include some mobile
phone top-up cards) has not had to account for VAT on sales, because the
vouchers are treated as cash rather than services.
From 9 April
2003, the issue of vouchers by a trader who will honour them on redemption
remains non-VATable; but the sale of vouchers by anyone else becomes chargeable
to VAT.
E-COMMERCE
The Budget includes provision which derive from European law changes to services sold over the internet. The measures are complicated, but in summary, from 1 July 2003:
if you are a UK-based business buying services which are downloaded from the internet, you will have to account for the “reverse VAT charge” if the seller is outside the UK.
if you are a UK-based business selling such services to anyone belonging outside the EU, you will no longer have to account for output tax on the sale.
COMPLIANCE
AND ENFORCEMENT
Once again,
the Chancellor has announced that money will be raised by spending on
investigations - £66 million to raise £1.6m over the next three years. It is hard to predict whether the ordinary taxpayer will notice.
In VAT,
unregistered businesses trading above the threshold which own up by September
2003 will not be charged penalties. However,
they will still have to pay all the outstanding VAT in full.
DOMICILE
AND RESIDENCE
AUTHORISED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS IN ENGLAND AND WALES TO CARRY ON INVESTMENT BUSINESS