Pre-Budget Report 2007/08
Francesca Lagerberg, Head of Grant Thornton
National Tax Office, says: "With the net effect of today's
announcements resulting in over £1.8 billion of additional revenue
for the Exchequer over the next four years, the real beneficiary
from today's announcement will be the Government and public
spending."
In his first Pre-Budget Report (PBR), Chancellor Alistair
Darling chose to react to political pressure in respect of the
taxation of private equity investors, non-domiciled individuals and
Inheritance Tax (IHT), but failed to announce any major reforms on
Stamp Duty Land Tax (SDLT) in reaction to the Conservatives'
proposals for first-time buyers. The headline-grabbing changes were
focused on individuals and their investments in businesses and the
biggest surprise was the radical reform of Capital Gains Tax (CGT),
introducing a new flat rate of 18%.
However, businesses should see some benefits from
simplification: reviews were announced into VAT rules and
administration in the UK and EU, anti-avoidance legislation and how
it can best meet the aims of simplicity and revenue protection, and
how to simplify the Corporation Tax rules for related
companies. But the review of anti-avoidance rules may lead to
new proposals to introduce a General Anti-Avoidance Rule (GAAR). A
GAAR sounds attractive to politicians, but business and HM Revenue
& Customs (HMRC) have concerns about whether it is really
workable - will it just increase uncertainty and make Britain a
less attractive place to do business?
Inheritance tax
The nil rate band for each individual currently stands at
£300,000. However, for married couples and civil
partnerships, this is often wasted on the first death as assets
pass to the surviving spouse under the spouse exemption.
Therefore, on the second death, the total estate only benefits from
a single nil-rate band of £300,000 unless planning has been
undertaken.
The Chancellor announced that, from today, any unused nil rate
band from the first death would be transferred to the surviving
spouse or civil partner. Furthermore, this measure will be
backdated so that widows and widowers will benefit from any unused
exemptions from deceased spouses and civil partners.
Therefore, on the second death, up to £600,000 will be available to
offset against the estate before any IHT is payable.
Capital gains tax
There will be a rush on business sales before 6 April next year,
as many business owners are set to be hit with an 80% increase in
the Capital Gains Tax (CGT) they pay when disposing of their
businesses. The abolition of taper relief and a new CGT rate
of 18%, up from an effective rate of 10% (when business asset taper
relief is taken into account), will impact on many investors.
While the Chancellor can defend this change by stating that private
equity investors will pay a fairer share of tax - as the measure
has not been specifically targeted at that group of investors - it
will impact on all entrepreneurial investment.
Those set to gain from the 18% flat rate will be investors who
currently only benefit from the non-business rate of taper relief
(for example on residential property investment) that gives an
effective tax rate of 24% for higher rate taxpayers when assets
have been held for 10 years.
Non-domiciled individuals
The Chancellor announced a new scheme to charge non-domiciled
individuals an annual fee of £30,000 to benefit from their foreign
income being taxed on the remittance basis, higher than the £25,000
proposed by George Osborne at the Conservative Party conference
last week.
As the Government plans to impose the charge once an individual
has been resident in the UK for seven years, the clock is already
ticking and anyone who became resident in the UK before 5 April
2001 will pay the fee from 6 April 2008.
The Government is also consulting on introducing a higher charge
for those who have been resident for a period of 10 years.
Income shifting
The Government has confirmed it is going to legislate to
overturn the House of Lords decision in the "Arctic Systems"
case.
Mr and Mrs Jones worked considerably different hours in a
limited company (Arctic Systems Limited) in which they each owned
one share. The couple drew small salaries but, for the tax years in
question, they distributed the majority of their income in the form
of a dividend - which they shared equally, reflecting their holding
in the company. Mr Jones paid tax at a higher rate than his wife
and did the majority of the work in the business. HMRC argued that
the dividend being received by Mrs Jones was, in reality, income
that should have been taxed upon her husband, and sought to claim
tax on the difference.
HMRC used legislation known as the "settlement provisions" and
sought to reallocate the dividend from Mrs Jones to Mr Jones - and
recover the extra tax due. The attempt proved unsuccessful, with
the House of Lords ruling in favour of the Jones'.
As a result, HMRC is looking to change the taxation of dividends
and profit shares from partnerships and companies in cases similar
to the Jones'. The press notice issued by the Treasury asserts that
the factors which they will consider in setting future legislation
will include the work done by the individuals in the business, the
investments made and the risks to which they are subject through
the business. These factors may prove difficult to measure in
practice and provide uncertainty to businesses who could be left
unsure as to whether they are caught by the rule changes or not.
The Government will be consulting with a view to bringing forward
legislation effective from April 2008.
Green taxes
Covering the green agenda, the Chancellor announced that from
November 2009 he will replace Air Passenger Duty with a new duty
payable per plane - rather than per passenger.