The detailed fiscal changes announced today in Mr Darling’s first Budget are summarised below. In large these simply confirm changes announced in Budget 2007 (always intended for implementation in April 2008) or in the Pre Budget report of October last.

Click here for Budget 2008 rates and allowances

PERSONAL TAX

There were no new announcements regarding income tax and National Insurance, but the changes announced in budget 2007 will take effect from April 2008.

• The basic rate of income tax falls to 20% from 22% but the lower rate of 10% is abolished.
• The first £36,000 of taxable income will be taxed at 20% and 40% thereafter.
• Dividends will still be taxed at 10% at the basic rate and 32.5% for higher rate taxpayers.
• The 10% tax rate is retained for investment income on very low earners.
• Capital gains tax annual exemption up to £9,600 for 2008/09.
• Inheritance Tax nil rate band up to £312,000.

National Insurance

The National Insurance contribution bands will be increased significantly meaning that employees and self-employed individuals (including professional partnerships) will face higher PAYE and tax liabilities.

• National Insurance Class 1 (employees) upper earnings limit up £100 to £770 per week.  Rate remains at 11% on salary before the upper earnings limit and 1% thereafter.
• National Insurance Class 4 (self-employed) upper profit limit increased by £5,200 to £40,040.  Rate remains at 8% on profits before the upper profit limit and 1% thereafter.

By increasing the lower bands more income becomes taxable at the higher rate.

Savings & investments

• ISA limits increased to £7,200, with a maximum of £3,600 in cash, up slightly on the previous years.
• All remaining PEPs, TESSAs and TOISAs are converted into ISAs.
• New rules are introduced to allow money in cash ISAs to be transferred into stocks & shares ISAs (but not vice versa).
• Anyone who withdrew money from a Northern Rock ISA in September 2007 can put it back into an ISA without losing the tax benefits, providing they do so before 5 April 2008.  The re-investment will not count towards the annual subscription for 2007-08.

Non-UK resident company dividends

• Dividends from non-UK resident companies are taxable income in the UK.  Taxpayers will now claim a 10% non-repayable tax credit, so that non-UK companies are treated the same as UK companies.
• Shareholders must own less than 10% of the distributing non-UK resident company.  Dividends will still be taxed at either 10% or 32.5% depending on whether the taxpayer pays basic or higher rate tax.

CHANGES TO NON RESIDENCE RULES / NON DOMICILIARIES

The pre-budget announcements were largely confirmed as below:
  

• From April 2008, any non-domiciled individual who claims the remittance basis will lose their entitlement to the income tax personal allowances and capital gains tax annual exemption.
• Otherwise they can opt to be taxed on worldwide income and gains and retain these allowances.
• Various anti-avoidance measures have been introduced including
  • Assets purchased from unremitted income and then brought into the UK will be treated as a remittance, although personal chattels (clothing and jewellery) will be exempt.
  • Abolition of the ceased-source rule – e.g. if you close one interest-earning bank account and transfer the income to another account, the remittance of the original income will still be taxable.
  • Alienation of income overseas where it is transferred to another person who remits it and from which you then enjoy the benefit will now be treated as your remittance.
• Works of art purchased from unremitted income and brought into the UK for public display will be tax-exempt.
• Individuals who have been resident but not domiciled for less than 7 of the last 10 years can continue to claim the remittance basis.
• Those who have been resident for more than 7 of last 10 years can continue with remittance basis on payment of £30,000 charge.  Tax will still be payable on remitted foreign income.
• If unremitted foreign income is less than £2,000, new rules do not apply.
• Paying the £30,000 from offshore funds will not be a remittance providing the money is paid direct to HMRC.
• New rules will not apply to under 18s.
• Decision to pay £30,000 should be made each year; can opt in and out depending on level of foreign income.
• £30,000 will be set against specific income or gains, thereafter any actual remittance of the same income/gains will not be taxable.
• Treasury hopes to reach agreement with US tax authorities that the £30,000 will be deductible from US tax liabilities.

Offshore Trusts

The main concessions with regard to the changes to the non domicile rules came with respect to the rules for offshore trusts

• The proposal to extend the capital gains tax charge on settlors to non-domiciled individuals has been abandoned.
• Trust can elect to rebase assets held at 6 April 2008 so as to exclude prior gains being taxed on beneficiaries.
• The proposals requiring disclosure of trust assets has also been dropped.
• Where a non-UK domiciled beneficiary receives a payment from an offshore trust, it will be taxable either on an arising or remittance basis, depending on how they elect for their offshore income to be treated.

TRUSTS

Whilst we had not anticipated any changes to the Trust regime the Revenue have made the following changes.

• The transitional period for serial interest has been extended for a further six months to 5 October 2008.
• The legislation on the transfer of the unused nil rate band from the death of the first spouse to the surviving spouse’s death has been amended to close a misinterpretation in relation to the value of the property passing on the first death which under the 2007 Finance Act could not be ascertained until the surviving spouse’s death.

BUSINESS TAX

The business tax changes largely reprised announcements previously made but for completeness are summarised in full:

• Main rate of corporation tax - Companies earning annual profits in excess of £1.5m (as scaled down by the number of associated companies and accounting periods of less than 12 months) will from 1 April 2008 decrease from 30% to 28%. Today’s budget confirmed that this rate will continue to apply from 1 April 2009 onwards.
• The Small Companies Rate - However corporation tax for companies with annual profits up to £300k (as reduced by the number of associated companies and accounting periods of less than 12 months) will increase from 20% to 21% from 1 April 2008 and 22% from 1 April 2009. Companies earning profits within the marginal rate band, (i.e. annual profits between £300k and £1.5m for a company with no associates) will be subject to an effective rate of tax on those profits of 29.75% and 29.5% from 1 April 2008 and 2009 respectively.
• First Year Allowances - Other than for specified assets the first year allowances (“FYAs”) regime has been withdrawn.
• New Capital Allowances Regime - From 1 April 2008 there are various proposed reforms to the capital allowances system including: 
  • The introduction of an Annual Investment Allowance (“AIA”).whereby a business’s first £50,000 of plant and machinery spend will qualify for effectively a first year allowance of 100%. The AIA should be available to most sole traders and non group companies irrespective of size. However only partnerships consisting of individuals qualify. In addition for groups only a single allowance is available for the group. The AIA is also restricted for “related” companies. For expenditure above £50,000 only the WDA is available. Where the accounting period straddles 1/6 April 2008 the amount of AIA is reduced on a pro rate basis.
  • Creation of a new classification of assets referred to as “integral features of a building”. Expenditure on such assets will be separated into a new special rate pool which will attract a writing down allowance of 10%, a decrease from 25%. Although this classification will also include assets that did not previously qualify for capital allowances. Assets that are integral features of a building will include thermal insulation, electrical systems, cold water systems, ventilation/air systems, lifts, escalators, moving walkways, external solar shading and active facades. However expenditure on replacing these assets must also be allocated to this special rate pool thereby barring a revenue deduction which would have otherwise been claimed.
  • From 1 April 2008 the rate of writing down allowances is reduced from 25% to 20%. 
  • From 1 April 2008 writing down allowances on long-life asset expenditure will increase to 10% from 6%. A long life asset is one that can reasonably expect to have a useful economic life of at least 25 years. 
  • Industrial and Agriculture buildings allowances are being phased out from 1 April 2008 over four years whereby the annual writing down allowance will reduce each year by 1%. The annual writing down allowance for the year to 31 March 2009 will therefore be 3%.  In addition, although not subject to the phasing out rules enterprise zone allowances will be withdrawn from April 2011. Since 21 March 2007 balancing adjustments on  disposals non – enterprise zone buildings is not brought into account and the purchaser’s entitlement to allowances will be based on the previous owners qualifying expenditure. Balancing adjustments for enterprise zone buildings will be retained for a limited period.  
  • These changes will create “hybrid” pools and will increase the compliance burden for the first accounting period post 1 April 2008, especially for those accounting periods that straddle this date.
  • Losses arising from capital expenditure incurred by a company on certain designated “green technologies” can be surrendered in exchange for a tax credit payment. The tax credit will equate to 19% of the loss surrendered up to a maximum of £250,000 (or if less the company’s PAYE and NIC payments
  • The scheme whereby businesses can claim 100% FYAs on the purchase cost of new cars with low C02 emissions is to be extended by five years until 31 March 2013 with one amendment. From 1 April 2008 the qualifying emissions threshold which defines a low CO2 car is to be reduced from 120g/km to 110g/km.

RESEARCH AND DEVELOPMENT

The Research and Development (“R&D”) tax relief available to small and medium enterprises is to be increased (currently 150%) so that the tax relief equates to 175% of the actual R&D spend. This is to have effect from 1 April 2008 and is subject to state aid approval. The rate of the payable credit on losses surrendered (currently 24%) is likely to remain unchanged. For large companies the R&D relief is to increase, from 1 April 2008 by 5% to 130%.

CAR BENEFIT CHARGE

• With effect from 6 April 2008 for cars with CO2 emissions of 120 grams per kilometre (g/km) or less a  new lower rate of 10%  for petrol cars, 13% for diesel cars, will come in to force.
• The 15% CO2 emissions has been set for the next three years.   For 2008/09 and 2009/10, 15% will be charged on cars with CO2 emissions of 135 g/km or less.  For 2010/2011 the threshold will be reduced to cars with emissions of 130 g/km.
   

CAPITAL GAINS TAX

• The changes introducing the new flat rate of capital gains tax were confirmed with the main change to the “simplifications” announced in the pre budget report being the confirmation of the new Entrepreneurs’ Relief
• The relief for individuals (and trusts)  has the effect of reducing the effective rate of capital gains tax from 18% to 10% on qualifying gains of up to a lifetime limit of £1 million. Qualifying gains include gains arising on sale of trading businesses (sole trader or partnership),shares in “personal” trading companies and from asset disposals associated with the disposal of a qualifying business or shares. Further details of this relief will be on our website in the next few days

 
VENTURE CAPITAL SCHEMES

• The Enterprise Investment Scheme limit is to increase from £400,000 to £500,000.  This increase is subject to state aid approval but once received will have effect for investments on and after 6 April 2008.
• Activities of ship building and coal and steel production are to be excluded from all three venture capital schemes, the Enterprise Investment Scheme, the Corporate Venturing Scheme and the Venture Capital Trust Scheme. 

ENTERPRISE INCENTIVE SCHEME

• The individual employee limit on the grant of EMI qualifying options is to increase from £100,000 to £120,000 in respect of options granted on or after 6 April 2008.  
• The scheme is to be limited to Qualifying Companies with fewer than 250 employees.  This will have effect in respect of options granted on or after the date the Finance Bill receives Royal Ascent.

STAMP DUTY / STAMP DUTY LAND TAX

Again many of the SD and SDLT announcements were already known or targeted avoidance arrangements: 
 

• Instruments transferring stocks and shares previously chargeable with £5 Stamp Duty will in future be exempt and will not need to be presented for stamping: this provides an effective exemption where the consideration given for the shares is £1,000 or less ( or is stamp-able at the £5 fixed rate).  The measure will have effect for instruments executed on or after 13 March 2008.  
• The notification threshold for land transactions in respect of a lease for a period of 7 years or more will only require notification where chargeable consideration other than rent is more than £40,000 or where the annual rent in more £1,000.  The revised notification threshold takes effect for land transactions on and after 12 March 2008. 
• The SDLT group relief provisions are amended to target avoidance schemes under which assets are transferred within a group without incurring an SDLT charge and the purchasing company sold on to a third party.  The change will be effective for transactions on or after 13 March 2008. 
• Avoidance legislation is to be introduced to prevent the perceived abuse of alternative finance structures not using conventional mortgage arrangements to purchase property. 

GIFT AID FOR CHARITIES

• Charities claim back the basic rate tax on donations under gift aid.
• To prevent them from losing out when basic rate tax is cut from 22% to 20% from April 2008, charities can reclaim an additional 2% tax under transitional rules.

Transitional rules will apply until April 2011.

VAT

• Registration threshold increases to £67k, effective from 1 April.  The de-registration threshold increases to £65k.
• The exemption for fund management services will be changed in the UK legislation, effective from 1 October.  (NB. Changes of treatment under directly effective EU law already apply, but are open to dispute).  Management of closed ended funds will become exempt, but management of trust based schemes will be withdrawn.
• Voluntary Disclosure rules to be changed from 1 July.  The threshold for an error requiring voluntary disclosure (rather than correction on a return) will increase from £2,000 to £10,000, or 1% of the correction period’s turnover, whichever is higher, but subject to an upper limit of £50,000.
• A transitional period of warning in respect of caps on claims of overpaid VAT has been introduced following the Fleming decision, and lasts until 31 March 2009.  The three year cap is also to be increased to four years next April.  HMRC’s period of assessment will likewise be increased to four years.
• A new mis-declaration penalty regime, geared more closely to the degree of fault inherent in an under-declaration, will be introduced from next April.
• Various technical changes will be made to the rules for opting to tax properties.
• The existing Staff Hire Concession will be withdrawn from 1 April 2009.  this has enabled agency staff generally to be supplied with VAT only charged on the commission element, but not the salary element.  VAT will apply to the entire charge from next April.

ANTI-AVOIDANCE MEASURES

As ever today’s announcements included a very substantial number of anti avoidance measures which in many cases are familiar only to those involved. The main measures introduced include:

• Measures introduced to tackle a number of avoidance schemes notified under the disclosure rules introduced in Finance Act 2004.  These target arrangements which seek to give rise to amounts that are in substance are interest but which are designed not to be taxable as interest.  
• Certain lease schemes intended to allow lessors of plant and machinery to dispose of the right to taxable income in exchange for a tax free sum are also targeted.  
• The controlled foreign companies (CFC) legislation is  tightened to block a number of artificial avoidance schemes that rely on the use of a partnership or a trust to escape a CFC charge.
• Legislation to prevent avoidance of corporation tax through schemes that use arrangements intended to crystallise a balancing allowance on plant and machinery used for the purposes of the trade to make it available to a profitable group not intending to carry on the trade is introduced.  
• Changes are made to the investment manager exemption in order to simplify the approach in defining transactions that are within the scope of the IME and to remove one of the conditions that must be met.  
• Measures are to be introduced to prevent the diversion of income of an UK resident individual to a foreign partnership comprised of foreign trustees (the “Manx partnership scheme”). 
• Further restrictions on transfers of sideway loss relief are introduced targeted at sole traders who spend less than 10 hours a week on their business.  No sideways loss relief will be available to offset their losses against other income and gains. Similar rules were introduced for non-active partners in partnerships in 2007.

SELF ASSESSMENT AND OTHER TAXES

• Following on from the Chancellor’s repetition of many of last year’s announcements, it is important to remember that new tax return submission dates apply for 2007/08.  If you submit your tax return online the submission date remains at 31 January 2009.  However if you use a paper version, the deadline is now 31 October 2008.
• HMRC are given the power to waive interest and surcharges on tax paid late as a result of the severe flooding that affected the UK in June/July 2007.
• Legislation is to be introduced to allow individuals and businesses to pay tax duties etc. by credit card.  Taxpayers who choose to pay in this way will be charged the transaction fee that HMRC will itself be charged.