Pre Budget Report – Monday 5 December 2005
Most of the headlines following the Pre-Budget Report
focused on the economy, with Chancellor Gordon Brown cutting his forecast of UK
growth to 1.75% - compared to the prediction of 3-3.5% growth he made in the March
Budget.
Another headline-grabbing announcement was the news
that the Government will use additional revenues from taxation of the
However, the Report did include a number of significant
measures and tax changes, which we have summarised below.
Do please contact us for specific advice about how
these announcements might affect you or your business.
Contents:
Taxation of small companies and small businesses
Assistance for pensioners’ energy costs
Taxation of small
companies and small businesses
To end the perceived abuse of the “zero percent” starting rate of corporation tax, the Chancellor announced that the starting rate will be increased to 19%. In consequence of this change, the complex rules on non-corporate dividends will become redundant.
To continue to encourage investment by small businesses, the rate of first-year capital allowances will increase from 40% to 50% from April 2006.
To assist more small traders with their cashflow, the threshold for the VAT Annual Accounting Scheme turnover will be doubled to £1,350,000 from April 2006. Application has been made to the European Commission to have the rules amended to allow the Cash Accounting Scheme turnover threshold to be increased to the same level.
Budget 2005 intimated that the VAT fuel scale charge would be reformed to follow a carbon emissions basis in line with company car tax and fuel benefit charges.
After consultation, it has been decided that the new system will come into force on 1 May 2007.
The VAT treatment of financial services and
insurance is under review by the European Commission, and the Government will
monitor the progress of this review in deciding when to make the necessary
changes to
In addition, there will be a package of measures to modernise, simplify and provide greater certainty for businesses in dealing with certain VAT and land and property matters.
Personal
matters
The Chancellor announced increases in the
basic and age related tax allowances from
6 April 2006, as follows:
|
|
2005/06 £ |
2006/07 £ |
|
Personal allowance (reduces taxable income) |
||
|
Age under 65 |
4,895 |
5,035 |
|
Age 65-74 |
7,090 |
7,280 |
|
Age 75 and over |
7,220 |
7,420 |
|
Married couple's allowance (reduces tax) |
|
|
|
At least one spouse born before 6 April 1935 and elder spouse aged to 74 |
590.50 |
606.50 |
|
Elder spouse aged 75 and over |
597.50 |
613.50 |
|
Minimum amount |
228.00 |
235.00 |
|
Income limit for age-related allowances |
19,500 |
20,100 |
The Chancellor
announced that, with the exception of the lone parent element which remains
frozen, Child Benefit is to rise in line with inflation.
The child element
of Child Tax Credit will increase in line with average earnings, while the
disabled child element and severely disabled elements rise in line with
inflation.
Other changes:
The maximum
eligible childcare costs remain unchanged at £175 for one child and £300 for
two or more, but the percentage of eligible childcare costs increases from 70%
to 80%.
The
disregard in Tax Credits for increases in income between one tax year and the
next will rise from £2,500 to £25,000 with effect from April 2006.
Although the rates of most classes of Contributions remain unchanged, a small change was announced to the flat Class 3 voluntary rate. Also announced were changes in the thresholds.
The lower earnings limit for primary Class 1 Contributions will rise from £82 to £84. The upper earnings limit will rise from £630 to £645.
All changes are effective from 6 April 2006.
|
Class
1 (not contracted out) |
Employer |
Employee |
|
Payable on weekly earnings of £97.01 - £645 |
12.8% |
11% |
|
Over £645 |
12.8% |
1% |
|
Men aged 65 and over, and women aged 60 and over |
as above |
Nil |
|
Class 2 - flat rate, self employed |
£2.10 per week |
|
Excepted if earnings less than |
£4,465 per annum |
|
Class 3 - voluntary |
£7.55 per week |
|
Class 4 - self employed, on profits |
|
|
£5,035 - £33, 540 |
8% |
|
Excess over £33,540 |
1% |
|
(exempt if state retirement age is reached by 6 April 2006) |
|
Assistance
for pensioners’ energy costs
With the cold winter temperatures increasing the consumption of energy and the knock-on effect of increasing utility bills, the Chancellor announced measures designed to provide aid and support for those in most need.
The Winter Fuel Payments will continue to be paid for the duration of this Parliament at a rate of £200 to households with someone aged 60 or over, increasing to £300 where there is someone who is 80 or over.
In order to promote the installation of central heating systems, a discount of £300 will be available to pensioners, while those on Pension Credit will qualify for the free installation of a central heating system.
New
Deal for Lone Parents (NDLP+)
The NDLP+ pilots are currently researching
how more active support can be provided for lone parents. There will now be
support for the pilot schemes in the existing locations until 2008, and the
scheme will also be extended to
Support
for parents
In an extensive 68-page document the Treasury has outlined the next stage of its proposals for supporting families.
The measures announced include a £20 million budget for Parent Support Advisers to support a new school-based outreach role in over 600 schools. Other measures that are introduced as pilot schemes include Single Account Holder Pathfinders, a scheme in six to ten high-achieving Local Educations Authorities designed to establish whether a budget-holding lead professional model might have a role to play in the future management of school financing.
Another initiative announced will provide a pilot mentoring scheme for 600 looked after young people between the ages of 10 and 15.
As is usual with the Chancellor's announcements, there is a raft of measures designed to protect tax revenues.
The first area relates to legislation which is not yet in place – the pensions tax simplification which comes into effect from 6 April 2006 ('A-day'). One of the greatest headline features is the very wide expansion of items which can be held in Self Invested Personal Pensions (SIPPs), in particular residential property and certain other assets such as fine wines.
Measures will be introduced to ensure that tax relief for all such self-directed pensions is given only to those whose purpose in making the contribution is to provide themselves with retirement income. This will stop individuals claiming tax relief for pension contributions used to fund purchases of holiday and second homes for their or their family's personal use
The legislation will also remove tax advantages where lump sums are recycled back into funds in order to generate artificial levels of tax relief.
However the Government will encourage SIPPs to invest genuinely in indirect holding of residential property through vehicles such as the proposed UK Real Estate Investment Trusts (UK-REITs). Details will be published in the next few weeks.
The disclosure scheme introduced by Budget 2004 is to be extended, from April 2006, to cover income tax, corporation tax and capital gains tax. There will be modifications to existing disclosure rules and time limits.
Other measures, introduced with immediate effect, will deal with the creation and use of capital losses, stock lending, corporate intangible assets, pre-owned assets and a tightening of legislation on transfer of assets abroad to prevent income tax avoidance.
There will also be enhanced measures to tackle tobacco smuggling and spirits fraud.
To reduce the incentive for oils fraud, the duty rate for rebated gas oil ('red diesel') was increased by 1.22 pence per litre from midnight on 5 December. There are changes to the categories and definitions of those vehicles eligible to use rebated gas oil.
HM Revenue & Customs will be taking further steps to improve the accuracy and security of tax credits to minimise risks from non-compliance.
Measures
announced by the Chancellor included:
The
Chancellor also announced a proposal that the existing Wear and Tear allowance
for landlords will be made conditional on the energy efficiency level of the
property.
Consultations and proposals
Announcing a period of consultation, the Chancellor gave some indications of the Government’s proposals for a form of taxation on increases in property value arising from the obtaining of planning consent.
It is proposed that a planning-gain supplement (PGS) will be:
· introduced some time after 2007,
· calculated on the difference between the current value of the land and its value with full planning permission,
· payable under a form of self-assessment (to be administered by HM Revenue & Customs),
· on the commencement of development by the “chargeable person”, who will already have been identified in a “Development Start Notice” (likely to be the developer), and
· will apply to both residential and non-residential land.
The Chancellor stated that PGS revenues will be dedicated to the provision of infrastructure in local communities.
Leitch Review: what
skills will the
Lord Sandy Leitch was commissioned in 2004
to lead an independent review, evaluating the kinds of workplace skills that would
be required in the future, and looking at how the
The Review finds that while progress has
been made over the past decade, the
Lord Leitch draws attention to the fact that over a third of adults of working age leave school without qualification, and one in six adults do not have the literacy skills expected of an 11 year old.
Measures proposed to date are all designed to increase the number of adults with relevant qualifications by investing more in training, and to increase the proportion of adults with a degree.