Pre-Budget Announcement …

November 2008

This document is simply a summary of the most relevant proposals, based on the Chancellor's speech, Treasury press releases and other notices issued at the time of the speech. We will provide updates through Round Up and extra bulletins as clarification is received. If past performance is any guide, there may well be significant detail that has not as yet been made available. The detail is likely to contain many surprises - such as the increase in tax levels for trusts to the new highest level of income tax. The 1st December edition of Round Up will contain details of all rates proposed for NIC, income tax etc. as well as additional details on many of the issues summarised here.

Ensuring Financial Stability

A cornerstone of the proposals is to restore confidence in the financial system by restoring stability. Gordon Brown and his Chancellor will use the UK's chairmanship of the G20 in 2009 and their presence at EU gatherings to emphasise the need for greater supervision and deposit protection arrangements for banks operating cross border.

Rights Issue Review Group

This working group co-chaired by HM Treasury and the FSA published its report on 24 November 2008. The Chancellor has announced that he intends adopting the report in full. This will enable companies to raise capital through rights issues more quickly. The process can currently take 39 days, the proposals should reduce this to 32 days and, in some cases, it could reduce to 16 days

Review of Offshore Financial Centres

The Chancellor has announced a review of the 'opportunities and challenges of the UK's crown dependencies. The review will concentrate on financial supervision and transparency; fiscal arrangements; financial crisis management and resolution arrangements. Broadly, the Chancellor has raised questions over the current system which sees these dependencies not contributing to the UK Treasury while still looking to it as the support of last resort. Interim conclusions from the review will be contained in the 2009 Budget.

Fiscal stimulus

The Government will act to support the economy through the downturn by bringing forward £3bn of capital spending in a number of sectors including transport, housing and regeneration, health and education, and the environment. This package will support different industries and jobs across the country. This is not 'new' money; it is merely an acceleration of spending already committed so that it impacts on the economy as early as possible.

Supporting Business

The Government is taking action to help businesses - primarily small and medium sized enterprises (SMEs) to respond to the 'challenging economic climate' they currently face.

Finance

A package of measures will be introduced to help SMEs facing credit constraints making use of the Governments new relationship with UK banks: early in 2009, the Government will launch a Small Business Finance Scheme - a new temporary guarantee scheme to enable up to £1 billion of new Government supported lending by banks; the Export Credits Guarantee Department, in conjunction with the banks, will introduce a temporary guarantee scheme to support a £1 billion facility providing smaller exporters with better access to short-term working capital; the Government will also make available a capital fund of £50 million providing equity or quasi-equity to SMEs who are overleveraged; earlier in November 2008, Advantage West Midlands launched a transition fund for viable SMEs facing financial difficulties. Other Regional Development Agencies will launch similar loan funds, now totaling £25 million, to help businesses over the next six months. The package of measures above includes £110 million of contribution from RDAs.

Loss Relief

To further help the cash flow position of businesses that have recently become loss-making, trading loss carry-back will be temporarily extended from one to three years for up to £50,000 of losses. This measure will apply for one year from 24th November 2008 for companies and unincorporated businesses.

Spreading Tax Payments

HMRC will provide a new service for businesses in temporary financial difficulty and unable to pay their tax bills to spread payment of their bills over a timetable they can afford. The service will cover all taxes paid by business, including corporation tax, VAT, PAYE, income tax and National Insurance Contributions.

Tax Rates

The Government is deferring for one year the planned increase in the small companies' rate of corporation tax. The rate will remain at 21% during 2009-10.

Business Rates

The Chancellor has proposed a temporary increase in the threshold at which an empty property becomes liable for business rates. For the financial year 2009-10 empty properties with a ratable value of less than £15,000 will be exempt from business rates.

Interest-free payment of backdated business rates bills

The Government plans to give more time to pay some backdated business rates bills issued before 31 March 2010. Business facing such bills will be able to pay their liability for previous years in equal interest-free installments over 8 years, rather than immediately.

Taxation of foreign profits

The Chancellor has announced that a balanced package of reforms to the taxation of foreign profits will be introduced in the Finance Bill 2009 to deliver an exemption from tax for most foreign dividends received by large and medium sized groups, regardless of the level of shareholding. A Targeted Anti-Avoidance Rule will apply to protect against any avoidance activity seeking to exploit these dividend exemptions.

Income Tax and NIC

Some ups and downs in the world of income tax with moves to reduce the tax take from those with lower income levels while raising tax for the highest earners. With an election in the offing, Labour are keen not to be seen to be breaking promises made in previous election campaigns and are therefore deferring their proposed increase in the higher rate income tax band until after the election.

Higher Rate Income Tax

For those with income in excess of £150,000, the excess will be subject to tax at 45% from the 2011/12 tax year.

A new 37.5% rate of tax will apply to taxable dividend income which would otherwise be taxable at 45% from this date.

Trust Taxation

The dividend trust rate and the trust rate of tax will be increased to 37.5% and 45% respectively from 6 April 2011. This measure will clearly have a significant impact on an area that has undergone enormous change since 2006 and investment in income producing assets is likely to be considered extremely unattractive by the majority of trustees.

The Personal Allowance

The PBR proposals around the Personal Allowance are somewhat mixed.

The £600 increase in the personal allowance and the £1,200 reduction in the basic rate limit announced in May are to be made permanent. In April 2009, the Government will increase the personal allowance by £130 above indexation. This is on top of the £600 increase for 2008-09. From April 2010 the personal allowance will be restricted to half its value for those with incomes over £100,000, so that it is worth the same as to a basic rate taxpayer, and to zero for those with incomes over £140,000.

Income Shifting

The Government apparently believes that income shifting between couples with differing tax rates is unfair. The Government has consulted on this issue but, given the current economic challenges, is deferring action and will not bring forward legislation in the Finance Bill 2009. The Government will instead keep this issue under review.

National Insurance Contributions (NICs)

From April 2011 there will be a 0.5% increase in the employer, employee and self-employed rates of NICs (both main and additional rates). There will also be an increase in the point at which people begin to pay NICs to align this with the income tax personal allowance.

Employers' and employees' contributions

In line with the Social Security Contributions and Benefits Act 1992, the lower earnings limit for employees' Class 1 contributions is to be raised to £95 a week. It is set at the level of the basic state pension for a single person from April 2009, rounded down to the nearest pound. This is the lowest level of weekly earnings that can count towards entitlement to contributory benefits.

The primary and secondary thresholds for Class 1 contributions will increase in line with inflation to £110 a week. Employees and employers will pay no Class 1 contributions on earnings below this level.

The upper earnings limit for employees' Class 1 contributions will be raised to £844 a week, aligning it with the weekly equivalent of the higher rate threshold, the level at which higher rate tax starts to be paid.

The standard main rate of employees' Class 1 contributions below the upper earnings limit will continue to be 11 per cent, and above the limit the rate will continue to be 1 per cent.

The standard rate of employers' Class 1 contributions will continue to be 12.8%.

The self-employed

The flat rate of Class 2 contributions will increase to £2.40 a week. Those with earnings below the annual small earnings exception can apply to be exempted from paying Class 2 contributions; this limit will be raised to £5,075.

The annual lower profits limit for Class 4 contributions will increase in line with inflation to £5,715.

The upper profits limit for Class 4 contributions will be raised to £43,875, to align it with the level at which higher rate tax begins to be paid.

The self-employed will pay Class 4 contributions on all their profits above the lower profits limit. The rate of Class 4 contributions will continue to be 8 per cent on profits below the upper profits limit, and 1 per cent on profits above that limit.

Child and Working Tax Credits rates and Child Benefit

Child Benefit is increasing to £20 for the first child, and in line with inflation for subsequent children. These changes will be brought forward from April 2009 to 5 January 2009. All elements of the Working Tax Credit, apart from the childcare element, are increasing in line with inflation. The limits on eligible childcare costs in the childcare element remain at £175 for one child and £300 for two or more children. The proportion of childcare costs payable through the childcare element of WTC remains at 80%. The child element of the Child Tax Credit is increasing by £75 above average earnings indexation. This includes the Government's commitment to increase the child element by £50 above indexation in April 2009, and also brings forward the Government's commitment to increase the child element by £25 above indexation in April 2010 to April 2009. The elements for disabled children and severely disabled children are increasing in line with inflation from April 2009. The family element and baby addition remain unchanged. The income threshold for receiving maximum CTC only is increasing to £16,040, equivalent to the effective threshold for lone parents and couples receiving both WTC and CTC. The threshold for receiving maximum WTC remains at £6,420, and the threshold for receiving maximum family element of CTC remains at £50,000. The withdrawal rate for the family element remains at 6.67%, and for the rest of tax credits at 39%. The disregard for changes in income during the tax year remains at £25,000.

Pensions

From April 2011, the lifetime and annual allowances for tax-free pension savings will be held constant at £1.8 million and £255,000 respectively, for five years, up to and including 2015-16. There has been no proposal to restrict tax relief on pension contributions despite widespread expectations.

Supporting people in later life In April 2009 the level of a full State Pension will rise in line with RPI to £95.25 a week. In addition, the Chancellor announced a payment in the New Year of £60 for each pensioner, equivalent to bringing forward uprating of the basic State Pension from April to January. A £60 payment will also be made to 2.5m individuals who are in receipt of certain other benefits. The Chancellor also announced an above-indexation increase in Pension Credit's minimum income guarantee to £130.00 for single pensioners and £198.45 for couples in 2009-10.

The Saving Gateway The Government will seek to encourage saving through the introduction of Saving Gateway accounts through a range of financial institutions such as banks, building societies, credit unions and the Post Office. The Saving Gateway will be introduced nationally in 2010 for people on qualifying benefits and tax credits and Government will add £0.50p to the account for each £1.00 saved.

Vehicle Excise Duty

Since 2001, post-2001 vehicle excise duty (VED) has been based on different rates depending on carbon dioxide emissions from cars. Budget 2008 announced further reform of this structure, to reflect changes to the fuel efficiency of vehicles.

The Pre-Budget Report confirms the introduction of new VED bands in 2009. However, it also announces that to reduce pressures on motorists during the current economic downturn there will be no significant rate changes until 2010, and no driver in any given band will pay more than £30 more in that year. Details of this reform include:

From April 2009, six new bands of VED will be introduced, taking the total to 13. However, VED rates will not increase by more than £5 for any car in this year;

From April 2010, in order for the new bands to create an environmental incentive, the Government will start to separate out the 13 differential rates;

From April 2010, a differential First-Year Rate for new vehicles will be introduced as announced in Budget 2008, in order to provide a stronger signal to consumers at the point of purchase; and

Cars that emit over 225 g/km, but were registered between 1 March 2001 and 23 March 2006, will be moved into new band K in 2009 and stay there in 2010. This will mean that they maintain their exemption from the top rate of VED.

Cars registered before 2001 - which account for around a third of the fleet - are not subject to these reforms, because comprehensive data on their CO2 emissions is not available. Instead, pre-2001 cars are subject to a separate VED regime, based on engine size.

Value Added Tax

The Chancellor has proposed a reduction in the rate of VAT by 2.5% to a new 15% level. Increased spending is one of the most straightforward ways of reducing the length and depth of a recession and the Chancellor hopes that by reducing VAT he will encourage consumer spending rather than relying solely on direct State spending. The reduction is a temporary one which will start on Monday 1st December and will run for 13 months. Its effects will not be felt when buying fuel or alcohol as duties for these items are to be increased. Alcohol duties will increase by 8% while fuel charge increases are listed elsewhere in this report.

Green Issues

The Pre-Budget Report contributes to meeting the UK's ambitious long-term environmental goals, while supporting low-carbon growth by:

Introducing a green stimulus - ensuring part of the fiscal stimulus supports low-carbon growth and jobs by accelerating £535 million of capital spending on energy efficiency, rail transport, and adaptation measures; Successfully securing inclusion of aviation in the EU Emissions Trading Scheme from 2012 and holding Europe's first Phase II carbon auction on 19 November 2008; Retaining the Renewables Obligation to provide financial support for large-scale renewable electricity and extending it by at least ten years, ensuring investors can plan with confidence for the future; and Following a fall in pump prices by over 20 pence per litre from their summer peaks, the postponed two pence per litre fuel increase will go ahead on 1 December 2008.

At the same time, the Pre-Budget Report shows how environmental policies can respond flexibly to help people and businesses through tough times, while reducing carbon emissions:

Installing 600,000 insulation measures this winter, up to 70 per cent on last winter, through the £6.8bn Home Energy Saving Programme, half of which is funded by energy companies; Continuing to provide a clearer environmental signal through reform to vehicle excise duty, while ensuring that no driver in any given band will pay more than £5 extra in 2009 or £30 extra in 2010; and Reforming air passenger duty from 1 November 2009, moving from two to four distance bands to improve environmental signals.

Aviation

In his 2007 PBR, the Chancellor announced consultation on proposals to replace air passenger duty (APD) with a per plane tax. The Government has listened to the points made during the consultation process, and its decision on aviation taxation has been determined by the need to ensure greater stability in tax policy at a time of economic uncertainty while maintaining its commitment to environmental objectives. The Government has decided to reform the APD regime rather than proceed with a per-plane tax. From 1 November 2009, APD will be structured around four distance bands, set at intervals of 2000 miles from London. This reform will ensure that those flying farther, and therefore contributing more to emissions from aviation, will pay more.

Auctioning Allowances in Phase II of the EU EUTS

The UK held the first ever auction of carbon allowances under Phase II of the EU Emissions Trading Scheme (EU ETS) on 19 November. Four million allowances were sold raising over £54 million. The EU ETS caps emissions from power generation and heavy industry and covers around half of UK carbon dioxide emissions.

Fuel duty

As a result of falling oil prices, pump prices have now fallen by more than 20 pence per litre from their July peaks. The Pre-Budget Report therefore announces that the 2 pence per litre increase in fuel duty planned for 2008 will now take place on 1 December 2008. However, as a result of the 2.5 per cent cut in VAT this December, the cost of petrol and diesel will fall for private motorists who should see no increase in the price they pay at the pump this year from this measure.

The Pre-Budget report also confirms that, as pre-announced in Budget 2008, main fuel duties will further increase by 1.84 pence per litre on 1 April 2009; and 0.5 pence per litre above indexation on 1 April 2010. The duty differential for compressed natural gas will be maintained and the differential for liquefied petroleum gas will decrease by 1 pence per litre.

Vehicle excise duty (VED)

Changes to this year's VED rates will take effect from 1 April 2009. On 1 April 2009, new emissions based VED bandings will be introduced for all cars registered on or after 1 March 2001. Both VED rates for cars and light goods vehicles registered before 1 March 2001 will increase by £5 in 2009. In 2010, the higher rate will increase by £15 and the lower rate will be frozen. The standard VED rate for light goods vehicles registered on or after 1 March 2001 will increase by £5 in 2009. The discounted rate for eligible light goods diesel vehicles achieving early compliance with Euro 4 and 5 emissions standards will also be increased by £5. In 2010, the standard rate will be increased by £15 and the discounted rate will be frozen. VED rates for motorbikes, Heavy Goods Vehicles (HGVs), Special Types Vehicles, Combined Transport vehicles and all related vehicles will be frozen in 2009.

Supporting low carbon technology and infrastructure

The Secretary of State for Energy and Climate Change confirmed on 24 November 2008 that the Government is committed to retaining the Renewables Obligation for large-scale renewable electricity and will extend it by a further ten years to at least 2037. This will ensure that investors can plan with confidence for the future, making renewable electricity more viable.

Protecting Tax Revenues

Further improvements to avoidance scheme disclosure regime

The Government announced further amendments to the disclosure regime, introduced in the 2004 Budget. HMRC is simplifying and improving the procedure by which users of disclosed schemes report the Scheme Reference Number (SRN) back to HMRC. This will clarify how and when users are to report SRNs and will improve identification of users of these avoidance schemes, enhancing the Government's ability to respond to avoidance swiftly and in a targeted fashion.

Leasing: anti-avoidance

The Government announced on 13 November that it would take action, effective from that date, to prevent a loss of tax:

On transactions involving the leasing of plant or machinery under long funding leases; On the sale of a company that is an intermediate lessor of plant or machinery; and On rents payable on long funding leases of films.

Further consultation on principles-based approach to tackling avoidance in the area of financial products.

Consultation documents, including draft legislation, were published on 24th November on principles-based legislation to counter avoidance involving disguised interest and transfers of income streams, with the intention, if appropriate, of introducing legislation in Finance Bill 2009. This follows consultation and subsequent work with stakeholders on proposals introduced in the 2007 Pre-Budget Report. The principles-based approach is intended to tackle this kind of avoidance in a simpler and clearer way than through frequent legislative fixes.

Real Estate Investment Trusts (UK-REITs) - Companies that are not property investment companies and UK-REITs

The Government states that it considers UK-REITs, launched in January 2007 and designed to provide a new tax regime for property investment companies, to have been a marked success. However, some businesses that are not property investment companies, as they do not have high enough income coming from the rental of property to third party tenants, have developed corporate structures that would allow them to participate in the UK-REITs regime. The Government has announced that it will legislate in Finance Bill 2009 to prevent this. Draft legislation will be issued in the New Year to ensure that changes do not create any unintended consequences for existing UK-REITs.

Qualified Investor Schemes (QIS)

This measure, which will apply from 1st January 2009, is intended to replace QIS tax rules that effectively limit most investors to a 10 per cent share of any one fund, by a genuine diversity of ownership rule. QIS are a type of Authorised Investment Fund (AIF) which may only be marketed to sophisticated investors. They have wider investment powers than other types of AIF.

Current tax regulations for investors in a QIS impose a different form of tax charge on substantial investors (those investors with a 10 per cent or greater holding) in a QIS to that which otherwise applies to investors in all types of AIF.

The measure will amend the regulations to remove the specific tax charge on substantial investors and will allow all investors in a QIS to benefit from the tax regime applying to authorised investment funds, subject to a condition that investment in the QIS will not be limited to specific individuals or companies ('the genuine diversity of ownership rule').

Individual Savings Accounts and Multilateral Institutions

This proposal, which will come into force on 16 December 2008, extends the list of investments that can qualify for the ISA regime (stocks and shares) to include bonds which are issued by Multilateral Institutions (as defined by the Organisation for Economic Cooperation and Development (OECD)).

Please note that the opinions expressed in this letter must not be construed as statements of fact – you should carry out your own further research before coming to a decision and before taking any action.

The views in this letter represent the opinions of Aisa and should not be construed as a statement of fact. Further advice should be sought before actioning any investment or tax advice. The Financial Services Authority does not regulate opinions on the economic outlook, nor does it regulate some forms of tax advice or comment such as this.

Dated 26 November 2008 – valid for 12 months. Aisa Direct Ltd, authorised and regulated by the FSA as Independent Financial Advisers. 1 Fordbrook Business Centre, Pewsey, SN9 5NU

* This newsletter has been prepared with all possible care to ensure its accuracy. It is based on our current understanding of legislation and HMRC practice. 

* Neither Aisa Direct Ltd nor any of its employees can accept responsibility for any errors or omissions. You should seek further professional advice prior to action.