“Read My Lips: No New Taxes”
George Bush 1988

This summary consists of notes on the Budget presented to Parliament on 22nd March 2006 (as expanded by government press releases) together with other information relating to the fiscal year 2006/07. The information in the summary reflects our understanding of the Chancellor's proposals. No action should be taken without obtaining appropriate professional advice.

Gordon Brown's 10th and probably final budget allowed a glimpse into the future Labour Government. A policy of spending rather than cutting taxes appears to be likely under a Brown Government even if Gordon is no longer the Chancellor.

As far as the small owner managed business was concerned there wasn't too much to get excited about. Small business needs a steady taxation policy and after 10 years that is what we seem to have got.

The much expected attack on the tax avoidance industry where the line between tax avoidance and tax evasion grows ever closer and harder to define, never materialised. There was the usual anti-avoidance measures but nothing very consequential to most small business owners.

Perhaps the most interesting aspect for personal taxation was the realisation that Tax Returns will have to be in 2 months earlier than at present (or 4 months earlier if not filing online).

The other main points to be aware of from the budget include...

• The main income tax rates remain unchanged and personal allowances and income tax thresholds for 2006/07 have been increased in line with statutory indexation.
  
  
• The capital gains tax annual exemption for 2006/07will be £8,800.
  
  
• The inheritance tax nil rate band will be £285,000 for 2006/07 and will rise to £325,000 by 2009/10.
  
  
• Interest in possession and accumulation and maintenance trusts were attacked in respect of their use as Inheritance Tax planning vehicles.
  
  
• The zero rate threshold for stamp duty land tax was increased from £120,000 to £125,000 for residential property transactions.
  
  
• The 0% starting rate of Corporation Tax is being abolished as we already knew, with effect from 1 April 2006.
  
  
• Doubling of the investment limit in EIS schemes but a reduction of tax relief on venture capital trusts from 40% to 30%.
  
  
• Home computer loan schemes for employees to be abolished - but there's still time if you act quickly.
  
  
• First year capital allowance for small businesses increased from 40% to 50%.
  
  
• A higher band of vehicle excise duty is to be introduced for the most polluting new vehicles registered after 22 March 2006, defined as those with CO2 emissions above 225g/km. VED will be £210 for such cars. However, cars with the lowest rates of CO2 will not have to pay any VED and a graduated rate in between.
  
  

The starting and basic rate limits will be increased in line with statutory indexation and there will be no changes to the income tax rates. Other allowances, including the personal allowance will be increased by statutory indexation.

New Filing Deadlines
A key recommendation of the review of online filing by Lord Carter is the introduction of new filing deadlines for self-assessment income tax returns, which has been accepted by HMRC. The recommendation is for the present deadline of 31 January to be brought forward to 30th September or 30th November for online filing. This would take effect from 2008. This will have an affect on Accountants workloads which shifts the Tax Return season from April to Sept/Nov. What are we to do the rest of the year? - tax planning, of course!

At present payment of tax is intended to remain at 31 January but don't be surprised to see HMRC attempt to align this with the earlier filing date at some time thus creating a short-term increase in tax bills.

However, there is a carrot for early submission of your tax return with the enquiry window closing twelve months after filing. So the earlier you file your tax return the sooner the period will elapse when the Revenue can enquire into it.

Tax Credits
Tax credits including the working tax credit and the children's tax credit have been raised in line with average earnings.

From 6 April 2006, the notification threshold for changes in income between one tax year and another has been increased from £2,500 to £25,000 - this should greatly help the impact of changes in income and avoid the unpleasant position of having to repay tax credits when there is a significant rise in income.

The childcare element of working tax credit is presently limited to 70% of eligible childcare costs to a maximum of £175 for one child or £300 for two or more children per week. The 70% figure increases to 80% from 6 April.

Child Trust Fund
The chancellor has confirmed that additional money will be made available to children with Child Trust Fund accounts on their seventh birthday.

The qualifying conditions will be the same as for the initial award made available at birth, that is that the child is UK resident and the subject of a Child Benefit award on their seventh birthday. The carers of all eligible children will receive a further £250 voucher to invest in the child’s trust fund. Children living in families where the income is such that a full child tax credit award is due to be made on the child’s seventh birthday will receive a further £250, bringing the total award to £500. The current income level that would make the additional award available is family income of no more than £14,155 for 2006-07.

Enterprise Investment Scheme
From 6 April 2006, the annual investment limit in ordinary shares in qualifying companies is being doubled to £400,000, so doubling the amount of income tax relief available at 20% on the investment. Investments of up to £50,000 made in the first 6 months of the tax year can be carried back to the previous tax year. There is also a reduction in the amount of relevant assets a company can have (£7million before the investment and £8million after the investment - reduced from £15 million and £16 million at present).

Venture Capital Trusts
From 6 April 2006, there will be a reduction in the income tax relief from 40% to 30%, an extension to the minimum holding period from 3 to 5 years and a reduction in the amount of relevant assets the same as for the Enterprise Investment Scheme.

National Insurance & Income Tax Alignment
A review is to be carried out into the alignment of the income tax and national insurance systems. Whilst this may help the low paid and reduce admin on small employers it may well bring the national insurance upper earnings limit in line with the higher rate tax threshold, so increasing the NI liability of higher paid employees. It will be interesting to see how the Revenue publicity machine tries to continue the line that National Insurance is not a tax!

Modernising Trust Taxation
Further modernisation of the tax system for trusts was introduced. It is designed to make the taxation of trusts consistent across the income tax and capital gains tax regimes.

Pensions
As known about for some time, with effect from 6th April (commonly known as A Day) new pension rules come into effect. The changes will unify a new basis of operation for all pensions and provides various planning opportunities.

Home Computers
The £500 benefit in kind exemption for the private use of computers is abolished from 6th April 2006. Employees currently participating in these arrangements will not be affected by the change if they have been provided with the equipment before 6 April 2006. This does give companies and their employees a two-week window in which to arrange PC loans. Employers who are in the process of implementing computer loan schemes where salary sacrifices have already been made can follow through with the arrangements as long as they are in place before the new tax year.

Mobile Phones
From 6th April only one mobile phone can be loaned per employee for private use without a benefit in kind arising. Members of the employees family will not also be able to have a tax free mobile.

Company Car and Fuel Benefit
The figure for the company car fuel benefit charge will remain unchanged at £14,400 for 2006/07. The CO2 emissions level qualifying for the minimum petrol percentage charge (15%)will be 140g/km for 2006/07 and 2007/08. A new 10% rate is expected in 2008/09 for cars with CO2 emissions of 120g/km or less.

Nursery Vouchers
From 6 April 2006, the amount of nursery vouchers given to employees which remain free of tax and NICs increases from £50 to £55 per week. Employers have to record the name of the person caring for the child - i.e. the recipient of the voucher, and ensure that this person has been approved as a carer. Staff have to keep their employers up to date with their childcare arrangements, and if they fail to do this, or the employer does not notice that a carer's approval has expired, then there will be extra tax and NICs to pay.

The government also announced grants will be available for workplace nurseries for small and medium size businesses.

Eye Tests
There will be no taxable benefit where an employer provides an eye test or corrective glasses for an employee, whether an employee pays for this direct, reimburses the employee or a voucher is provided.

Corporation Tax
With effect from 1st April 2006 the 0% starting rate of Corporation Tax on the first £10,000 of profits is to be abolished. This was already known about from the pre-budget report but the date has now been fixed.

Capital Allowances
Small businesses will be able to claim first year allowances of 50% for expenditure incurred after 1st April 2006. Medium sized businesses will continue to be able to claim 40%. There is also a consultation exercise primarily concerned with claiming of allowances on expensive cars (presently costing over £12,000).

Leased Plant and Machinery
The tax treatment of leased plant and machinery is being aligned with that of plant and machinery acquired under other finance arrangements, for both lessors and lessees. It will not apply to leases of under 5 years.

Research and Development Expenditure
It is expected that the number of companies that can claim the 150% relief for R&D and the 24% payable tax credit will be increased by allowing companies with up to 500 employees to benefit.

Real Estate Investment Trusts (REITs)
As expected, there will be measures in the Finance Act for the introduction of REITs in the UK. Companies listed on a recognised stock exchange will be able to become REITs from 1st January 2007. Qualifying rental income and gains on the disposal of investment properties will be exempt from corporation tax. Distributions out of the REITs will be treated as UK property income and taxed in the normal way.

Income recognition for work in progress
UITF 40 "Revenue Recognition and Service Contracts" was issued in March 2005 and provides guidance for revenue recognition on contracts for services provided over a period of time such as with accountants and solicitors. In summary, it requires income to be brought into the accounts to the extent it has been earnt (work done) even if not yet invoiced. This can have the effect of causing one-off uplifts in taxable profits. There is legislation being brought in to enable those businesses affected to spread extra tax payments over 3 years or 6 years for those most affected.

Film Tax Relief
New tax reliefs are being introduced for film production companies. The rules will allow expenditure on producing or buying a film to be treated as revenue rather than capital. Where this results in a loss, the loss can be surrendered for a payable tax credit.

The regime will only apply to film production companies. Film production partnerships can no longer be used to shelter member's income from tax.

Group Relief
Group relief will be available from 1st April 2006 for foreign losses where the relief is not available in any other country for the relief.

Inheritance Tax Nil Rate Band
The inheritance tax nil rate band will increase to £285,000 from 6 April 2006. Further increase have also been set for future years up to £325,000 by 2009/10. After allowing for expected house price inflation, these increases may not be as generous as they seem.

Alignment of Inheritance Tax Treatment of Trusts
Changes are to be introduced to redefine the current IHT rules for accumulation and maintenance (A&M) and interest in possession (IIP) trusts. Previously, transfers to such trusts were exempt from IHT if the settlor survived seven years from the date of gift to these trusts and they were not liable to the 10 year IHT charge or the IHT exit charge. Future transfers will now incur a 20% IHT charge (above the nil rate band) and will also be subject to a 6% 10 year charge on the value of the trust assets at the time and there will be exit charges on payment to beneficiaries. This is to align them more with discretionary trusts. Similarly, transfer into the trusts will now be eligible for capital gain hold over relief. There will be exemptions to these new rules for some trusts.

Capital Gains Tax Annual Exemption
The annual capital gains tax exemption for individuals will rise to £8,800 from 6 April 2006 in line with inflation. The maximum annual exemption for most trusts will be £4,440.

Stamp Duty Land Tax - Residential
The threshold for stamp duty land tax on residential transactions is raised from £120,000 to £125,000. There is no change to the other rates and bands.

Turnover Limits
The VAT registration turnover limit rises to £61,000 from 1 April 2006. The deregistration limit increases to £59,000. The annual accounting limit is increased from £660,000 to £1,350,000 but the cash accounting threshold stays at £660,000. There is no change to the flat rate scheme turnover limit which stays at £150,000.

VAT Fuel Scale Charges
New scales apply from the start of the first accounting period beginning after 30 April 2006.

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