Budget 2009

The Chancellor delivered his second Budget speech on 22 April 2009. What were the main changes introduced and have they given us any hope for the future in this time of economic downturn?

Has the Chancellor given us any hope for the future?

The 2009 Budget exposed the real state of the public finances and the downturn in the economy. The Chancellor, however, appeared optimistic that his outlined package of reforms would lead us down the path to recovery. The proposed bounce back in the economy is to be supported by extra investment and changes introduced to grow the economy, including employment support, training for unemployed young people, assistance for small businesses and green incentives. These investments must, however, come at a cost.

Who is going to plug the shortfall?

Individuals earning over £150,000 appear to be those set to recoup the majority of the Chancellor's dwindling tax receipts and fund these growth incentives. These individuals were dealt a triple blow in the Budget - starting with an increase in the top rate of tax from the current 40% to 50% for those with an income over £150,000 and a reduction in the personal allowance for those with incomes over £100,000 at a rate of £1 per £2 income until it reaches nil, both taking effect from 6 April 2010.

From April 2011, tax relief on pension contributions will be restricted for those with incomes over £150,000 and then tapered down to 20% for incomes over £180,000, with forestalling provisions in place from Budget Day to prevent those affected from taking undue advantage of current provisions in place for tax relief.

Stamp Duty Land Tax (SDLT)

For those individuals who are not at the higher end of the earnings table, and are trying to get on the housing ladder, the Budget brought an extension to the SDLT holiday. This applies to the purchase of residential homes costing not more than £175,000, and is extended by four months to 31 December 2009. This measure is an attempt to help not only individuals but also house builders trying to sell homes. However, as average house prices nationally are over £150,000, it could be argued that this will not have a dramatic effect.

Is there any help for businesses?

A series of measures were announced in the Budget to help businesses facing temporary financial difficulties. One example is the extension of the loss carry-back rules for businesses which were first announced in the Pre-Budget Report in November. This enables carry back of losses for the two years to 5 April 2010 or 23 November 2010 for up to three years, allowing current losses arising to be offset against past profits, resulting in a cash flow boost. However, although a welcome extension, the relief only allows up to £50,000 of trading losses to be carried back, meaning that the relief will not be as valuable as it could have been.

More good news for businesses is that the Government has stated its on-going commitment to helping struggling businesses with its 'time to pay' tax measures plus offering incentives for new investment.

It was also confirmed in the Budget that the reduced standard rate of VAT to 15% (previously 17.5%) would remain in place until the end of 2009. This will be welcomed by both businesses and consumers alike, who at a time when they are struggling to deal with difficult market conditions, another change in the VAT rate could deter sales and increase administrative costs and have a negative effect on businesses.

Were there any changes which affect international companies?

The Budget announcements included the start dates for the proposed rules on the taxation of foreign profits for UK resident companies, which have recently been subject to consultation. This should reduce the uncertainty for companies, helping to stem the tide of companies leaving the UK, although the scope of the current UK controlled foreign company (CFC) issues still need to be addressed.

A dividend received by any UK resident company, which has a ten percent shareholding in a foreign company, will now be exempt from UK taxation if it is received on or after 1 July 2009. The big change is that this exemption will now include small sized companies as well, which was not the case with previous proposals introduced in the November Pre-Budget Report.

The widely criticised new 'debt cap' rules, which will restrict tax deductions for interest expenses, will only apply to accounting periods commencing on or after 1 January 2010. This deferral is welcome as it will enable companies to understand the impact of the rules before they need to report their results.

Francesca Lagerberg, Head of Tax at Grant Thornton says: "The Budget covers a diverse range of issues and affects both individual taxpayers, businesses and corporate bodies. Full details, comment and analysis on the 2009 Budget can be found on the Grant Thornton budget comment website.

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