Budget 2007

We have summarised below some of the highlights announced by the Chancellor in the 2007 Budget.

If you require any further information please give me, Stan Blake , or Peter Taaffe a ring to discuss the issues. You should note however that at the moment our knowledge is based on the press releases published by HM Revenue & Customs and further information will not be available until the publication of the Finance Bill later in the year.

Business Taxes

• The standard rate of corporation tax (profits more than £1.5m) reduced from 30% to 28% from 1 April 2008 , but the small companies rate of corporation tax (profit less than £300k) is to be increased from 19% to 20% from 1 April 2007 rising to 22% from 1 April 2009 .

• There are significant changes to capital allowances:
  • A new annual investment allowance for the first £50,000 of expenditure on plant & machinery in the general pool will be introduced from 2008/09.
  • The extended first year allowances (50%) for small businesses is extended for one further year.
  • Writing down allowances for plant & machinery are to reduce from 25% to 20% from 2008/09.
  • Writing down allowance of long life assets increased from 6% to 10% from 2008/09.
  • Industrial Buildings Allowances and Agricultural Buildings Allowances to be phased out by 2010/11. There is an immediate withdrawal of balancing adjustment.

• A single new penalty regime is to be introduced for income tax, corporation tax, PAYE, NIC and VAT where the penalty is to be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of the disclosure by the taxpayer.

• New changes to the “enquiry window” will apply to Income Tax SA returns for 2007/08 and subsequent years, and company tax returns (except for large groups) for accounting periods ending after 31 March 2008 . Closure of the ‘enquiry window’ for a return filed on time will be one year after delivery of the return i.e. earlier than under current legislation.

The enquiry window for any return filed late will not change.

Personal Taxes

Most of the personal allowances and the bands at which the various rates of income tax are applied have increased by small amounts. The income tax starting rate limit and basic rate limit are increased to £2,230 and £34,600 respectively. The basic personal allowance has increased to £5,225 for the year to 5 April 2008 , an increase of £190.

• From 6 April 2008 the starting rate of 10% will be abolished on earned income only – the 10% rate will remain on savings and capital gains. There are no changes to the rates applicable to dividends. The basic rate will be reduced to 20%. The higher rate threshold for 2007/08 will be £39,825 rising to £43,000 by 2009.

• New NIC rules from April 2008 will increase the amounts collected from earners.
  
• The individual’s capital gains tax annual exemption will be increased to £9,200 for 2007/08.

• Pensioners will gain from future increases in allowances:
  • In April 2008 their allowances will increase by inflation plus £1,180.
  • Further increase in 2011 when the single person’s age allowance will rise to £10,000.

• From 2007/08 paper Self Assessment returns will have to be submitted by 31 October and electronic returns by 31 January following the end of the tax year concerned.

• The inheritance tax threshold has increased from £285,000 to £300,000 for 2007/08. The threshold will be increased to £350,000 by 2010/11.

• From 6 April 2008 annual ISA limit will be increased to £7,200 (maximum £3,600 cash).

• With regard to Enterprise Investment Scheme companies and Venture Capital Trusts:
  • companies with more than 50 full time (or part time equivalent) employees will not qualify.
  • companies cannot raise more than £2m under the scheme within any 12 month period.

• Maximum contributions to personal pensions – from the 6 April 2007 the maximum contributions is the lower of 100% of earnings or £225,000. Lifetime allowance £1.6 million. For Stakeholder pensions – a sum of up to £3,600 can be paid per annum irrespective of earnings.

• Minor benefits provided by former employers for retired former employees will be excluded from taxation.

• Measures introduced to remove individuals’ entitlement to tax relief on any pension contributions that are used to fund personal term assurance policies (excludes applications for policies before 29 March 2007 and the policy was taken out as part of a pension scheme before 1 August 2007 ). It does not affect the relief available for contributions paid by employers.

• National insurance contributions – the primary threshold limit is increased for 2007/08 to £100 per week (lower earnings limit £87). For the self employed the Class 2 national insurance rate increases slightly to £2.20 per week.

• The upper limits for national insurance contributions are to be increased by more than inflation and will be aligned with the point at which higher rate tax applies from 2009/10.

• Individuals who have bought a home abroad will not face a benefit in kind tax charge for any private use of the property if purchased through a company.

VAT

• The VAT registration threshold has been increased from £61,000 to £64,000 with effect from 1 April 2007 . Likewise the de-registration limit has also increased from £59,000 to £62,000 from the same date.

• With effect from 1 May 2007 the VAT private use of car charge will be based on the vehicle’s CO 2 emissions, not engine size.

• From 1 September 2007 record keeping requirements for businesses transferred as a going concern will be brought into line with other tax and regulatory regimes so that the seller retains the records, except in a few cases where the buyer retains the seller’s VAT number.

As mentioned above, if you require any further information, then please give us a call.

Sue Stephens
Tax Manager