It has long been expected that the rate of tax relief on pension contributions would be restricted to the basic rate for higher earners. This has now been announced to come fully into effect from 6 April 2011. However, there are some interim measures that apply immediately. The key points of the new rules are set out below.

New regime from 6 April 2011

With effect from 6 April 2011, the Government plans to restrict the income tax relief on pensions contributions for anyone with taxable income of £150,000 or more.

Tax relief will be tapered down for those with incomes between £150,000 and £180,000 so that effectively it will be worth 20% for incomes over £180,000 which is the same as it is for a basic rate taxpayer.

Example 1

Brian has income of £145,000 in 2011/12 and makes pension contributions of £50,000. 

He will obtain higher rate tax relief on his contributions as his earnings are less than £150,000.

Example 2

Angela has income of £190,000 in 2011/12 and makes pension contributions of £50,000.

She will obtain basic tax relief only as her income exceeds £180,000.

Special Annual Allowance (applies from 22 April 2009 to 5 April 2011)

Between 22 April 2009 and 5 April 2011 special provisions will apply. Tax relief on contributions will be limited for individuals: 

• With income in excess of £150,000 in the tax year, or any of the preceding two tax years; AND
• Who increase the level of their regular ongoing pension contributions from the levels before 22 April 2009; AND
• Who make total pension contributions in excess of £20,000 in the tax year.

For such individuals a 'special annual allowance' will apply to set a limit on the pension contributions paid in the tax year that will obtain maximum tax relief. This allowance will be the greater of £20,000, or the 'protected pension input'. The protected pension input is the level of the regular ongoing pension contributions as established before 22 April 2009 (as below). Tax relief on pension contributions above that level will be restricted effectively to the basic rate by the application of a special annual allowance tax charge to recover the tax relief obtained above the basic rate of tax relief.

We only need to consider the protected pension input if you have already been making regular ongoing pension contributions before 22 April 2009 which exceed £20,000. This will be potentially very valuable as this will set the limit on the pension contributions that obtain maximum tax relief in the period 22 April 2009 to 5 April 2011. 

Regular ongoing contributions are the normal level of your pension contributions that you have made at least on a quarterly basis before 22 April 2009. This means that regular annual lump sum payments would not count towards the protected pension input.   

For example, if you have made regular monthly pension contributions totalling £30,000 in 2007/2008 and 2008/2009, this should count as your protected pension input. This would mean that you could contribute another £30,000 on this basis in 2009/2010 that would not exceed the protected input and would qualify for maximum tax relief.

Example 3

David has income of £160,000 in 2008/09 and £145,000 in 2009/10. He makes pension contributions of £15,000 in 2008/09 and £25,000 in 2009/10.

He is subject to the special annual allowance tax charge in 2009/10 as his income exceeds £150,000 in the preceding tax year. He has increased the level of his pension contributions in the year, and the total exceeds £20,000. The charge applies to the excess of £25,000 over £20,000.

Example 4

Ann has income of £200,000 in 2009/10. She makes regular monthly pension contributions totalling £50,000 in the year and also made similar contributions in 2008/09.

She is not subject to the special annual allowance tax charge as although her income exceeds £150,000 and total contributions exceed £20,000, she has not increased the level of her regular contributions.

Example 5

Paul has income of £160,000 in 2009/10. He makes a pension contribution of £15,000 in the year, having made no previous contributions.

He is not subject to the special annual allowance tax charge because whilst his income exceeds £150,000 and he has increased the level of his regular contributions, his total contributions are less than £20,000.

There are many points of detail in these interim rules and therefore each individual case would need to be considered on the basis of all relevant facts. 

It should also be stressed that these rules fall away from 6 April 2011 and from that date there will be no limit of £20,000, or the protected pension input, that will continue to obtain higher rate tax relief where earnings exceed £150,000.

Comment on this blog in the space provided below. Barry Hallam is a Tax Manager at Mercer & Hole. 

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With effect from Budget Day (22 April 2009), companies may release debts owed to them by connected companies (often, those under common ownership) without triggering a tax charge. Until now, a company that was released from a trading debt owed to a connected company would be taxed on this release – but the other company would not benefit from tax relief for granting the release. If the companies are not connected, the existing rules will continue to apply - the company that owes the trading debt will be taxed (unless the release is part of a statutory insolvency arrangement) and the creditor will continue to get tax relief.

For accounting periods beginning on or after 1 April 2009, the rule that only allows a company a tax deduction for interest payable to a connected company outside the loan relationship rules (normally when the lender is not resident in the UK) when it is paid, will be changed. In future, this will remain the case only where the lender is resident in a ‘non-qualifying territory’ (broadly, a tax haven).

Tax deductions for other interest will be granted on an accruals basis (ie they will follow the treatment in the accounts).

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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Currently interest paid by individuals on loans used to invest in certain companies or in partnerships may qualify for income tax relief.

However, HMRC believe that this relief is being exploited and so relief is being withdrawn where the loan and investment are part of an arrangement that eliminates any real commercial risk.

This may cause a problem for people who have invested in tax saving schemes in the past as the restriction applies to interest paid on or after 19 March 2009 irrespective of when the loan was taken out. 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Cathy Corns is a Corporate Tax Partner at Mercer & Hole.

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A client company has a subsidiary which will shortly cease trading and will eventually be wound up. The holding company will realise a capital loss which we want to set against a capital gain arising in another subsidiary. However, there is a problem – the rules which permit a group to 'deem' an asset to have been transferred within the group only apply to actual disposals of assets to someone outside the group. They do not therefore apply to liquidations or negligible value claims, etc and we were having to consider whether we needed to make actual transfers of assets to ensure that the gains and losses were both realised within one company.

Our problem may now be solved. With effect from the date that the Finance Bill 2009 receives Royal Assent (expected late July 2009) the rules governing group capital gains and losses will be changed to allow the gains and losses to be transferred. The former restrictions on transactions not involving disposals to third parties will no longer apply. This should make it much easier to ensure that capital gains and losses within groups can be matched.

 

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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It was a fairly uneventful VAT budget.

The Chancellor confirmed that the standard rate of VAT will revert back to 17.5% on 1 January 2010 as previously announced. Draft “anti forestalling” legislation has already been published and will be introduced in the Finance Act 2009 to prevent certain exempt businesses from planning to benefit from the rate increase.

There was speculation beforehand that the standard rate of VAT would increase to at least 18.5% and/or that the Chancellor would make use of new powers to extend the reduced rates of VAT but neither of these has happened.

Other VAT changes announced are:

• The annual VAT registration threshold has been increased from £67,000 to £68,000. The annual threshold for deregistration has been increased from £65,000 to £66,000.
• Revised fuel scale charges will apply to VAT returns on or after 1 May 2009.
• VAT exemption will apply to gaming participation fees (bingo and other games of chance) with effect from 27 April 2009.
• The rate of bingo duty will increase to 22% for any accounting period beginning on or after 27 April 2009.
• Other miscellaneous changes to the rules for bingo and games of chance.
• A package of changes to harmonise cross border supplies of goods and services and to reduce fraud, will be introduced on 1 January 2010 as part of an EU wide exercise. The UK has announced new rules in relation to EC Sales Lists for goods and services, overseas VAT refunds and the time and place of supply of certain cross border services.  
• A reduced VAT rate of 5% will apply to bases for child car seats.
• A minor simplification of the option to tax 'permission' rules where previous exempt supplies have been made.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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UK companies that are members of groups may see their tax position affected by a number of changes announced in this year’s Budget. The new measures are:

• Dividends and other distributions received from foreign companies will largely be exempt from corporation tax (CT) in the same way as distributions from UK companies currently are. (This will also apply in many cases to UK companies that are not members of groups but receive dividends or other distributions).
• Tax deductions for finance expenses (largely interest) incurred by UK members of a group will be subject to a cap, unless all group members meet the definition of a small or medium sized company.
• Changes to the controlled foreign company (CFC) regime for companies with interests in overseas companies.
• The rules that require companies to obtain approval from HM Treasury before undertaking certain transactions involving subsidiaries not resident in the UK will be repealed and replaced by a need to file a post-transaction  report – and then only for foreign investment transactions of £100 million or more.

The changes will take effect from different dates:

1. The changes to the taxation of distributions will apply to dividends and other distributions received on or after 1 July 2009. 
2. The debt cap applies to finance expense payable in accounting periods beginning on or after 1 January 2010.
3. The changes to the CFC regime have effect for accounting periods starting on or after 1 July 2009, though provision will be made for companies with accounting periods that straddle this date. Transitional rules will apply in some circumstances, until 1 July 2011.
4. The new reporting requirement will apply to transactions undertaken on or after 1 July 2009.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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The Budget has seen the temporary re-introduction of first year allowances (FYAs) for purchases of qualifying plant and machinery. Allowances of 40% will be available to companies, partnerships and individuals carrying on qualifying activities (which includes trades and ‘normal’ property businesses) in excess of the annual investment allowance (see below) subject to the following:

• the expenditure must be incurred in the year to 31 March 2010 (for companies) and 5 April 2010 (partnerships and individuals).
• must not relate to specific proscribed assets, including for example, long life assets, cars and assets for leasing.

Unusually, there appears to be no restriction on the amount of the expenditure or the size of business incurring the costs.

The annual investment allowance (AIA), introduced last year, allows businesses (or groups, where related businesses carry on similar activities) to claim a 100% deduction from taxable profits for £50,000 of expenditure on eligible plant and machinery. 

Confusingly, the definition of eligible plant and machinery for AIA purposes differs quite significantly from that for qualifying plant and machinery for FYAs.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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The normal rule for company trading losses is that they can be carried back and set off against the profits of the previous year. With the onset of the recession many companies did not have sufficient profits to make use of their losses in this way. In the Pre-budget Report last year it was therefore announced that losses of up to £50,000 could be carried back for three years. However, this only applied to losses made in accounting periods ending in the period 24 November 2008 to 23 November 2009.

The three year carry back is to be extended for a further year, to accounting periods ending in the period 24 November 2009 to 23 November 2010. The extension will again be limited to £50,000, giving a total of £100,000 over two accounting periods. The losses will be offset against later years first.

Equivalent changes will be made to the carry back rules for sole traders and partnerships for losses in the tax years 2008/09 and 2009/10.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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Investors in small, relatively high-risk, trading companies may be eligible for special tax reliefs under the Enterprise Investment Scheme (EIS) or the Venture Capital Trust (VCT) scheme. The equivalent scheme for companies is the Corporate Venturing Scheme (CVS). Some welcome changes to these reliefs have been announced today.

Previously it was necessary for 80% of the money to be used by the company for a qualifying purpose within 12 months of the investment and the remaining 20% to be used within 24 months. This rule has been relaxed and, for investments made on or after 22 April 2009, it will simply be necessary for 100% of the money to be used within 24 months.

For individual EIS investors, an even more useful change is made to the ability to claim relief in the previous tax year. Subject to there being sufficient income in charge to tax, the individual can claim for the income tax relief (20% of the amount subscribed) to be given in the tax year prior to the year of investment. This was previously limited to shares issued before 6 October and to half of EIS subscriptions up to an overall limit of £50,000 subscribed. For 2009/10 these restrictions are lifted, allowing the relief for the total EIS investment (limited to £500,000 subscribed) to be carried back.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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On the individual capital gains tax exemption - this has been set at £10,100 for 2009/10.

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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The last few days have seen a number of issues of draft legislation that will be confirmed in the Budget and included in the Finance Bill but taking effect well before the Act is passed.  These include:

• Business cars - changes to the first draft legislation - http://www.hmrc.gov.uk/briefs/company-tax/brief2009.htm.
• Anti-avoidance on life policies - http://www.hmrc.gov.uk/offshorefunds/statement-finance-sec.htm.
• Anti-avoidance on employment income - http://www.hmrc.gov.uk/news/pta-announcement.htm.

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As mentioned in earlier blogs, this year’s Budget will be given by the Chancellor on 22 April 2009 – it has been delayed until after the G20 summit, which is then immediately followed by the Easter recess.

At this time of year many tax professionals try to second-guess what the Chancellor may announce in his Budget. Turmoil in the world’s markets makes these predictions harder than ever – he needs to increase the tax take, but will higher taxes cripple an already weakened economy?

We do know that the rate of VAT is set to revert to 17.5% on 1 January 2010. There are already cries for the 15% to be retained, but if it does go up next year would he be tempted to fix the rate at 20%?

Scrapping higher rate tax relief on pension contributions has often been put forward as something the Chancellor might consider – will this be the year that it happens?

As usual, we will just have to wait and see! 

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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The Chancellor will make his Budget statement on Wednesday 22 April 2009.  We will be providing analysis of Budget announcements on the day.
 

 

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Over the last 24 hours there have been a number of blogs posted in relation to the 2008 Budget announcement – on both SME Plus blog and our sister blog Tax Plus blog.

For your reference and convenience please find below a list of the respective blogs posted:

SME Plus

Budget 2008 - Pension Tax Relief
Budget 2008 - Capital Allowances
Budget 2008 - Enterprise management incentives ("EMI") share options
Budget 2008 - VAT
Budget 2008 - Trade losses for individuals...
Budget 2008 - Pensions
Budget 2008 - Associated companies
Budget 2008 - ISAs
Budget 2008 - Income shifting
Budget 2008 - Corporation tax simplification...
Budget 2008 - Enterprise Investment Scheme
Budget 2008 - Previously announced

Tax Plus

Budget 2008 - All Settled Offshore?
Budget 2008 - The Remittance Basis - Offshore Mortgages
Budget 2008 - Non Doms and Capital Losses
Budget 2008 - Personal allowances and the remittance basis
Budget 2008 - Non Doms and the £30,000 charge for the remittance basis
Budget 2008 - VAT
Budget 2008 - Changes to taxation of foreign dividends
Budget 2008 - Relaxation on Residence Test and Day Counting Rules

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The previously announced reduction in basic rate income tax from 22% to 20% from 6th April created concerns for 2 sectors.

Firstly, charities were concerned that they would lose out because Gift Aid donations would only benefit from 20% income tax relief with a resulting reduction in the gross donation.

Secondly individuals making personal pension contributions would only benefit from 20% tax relief at source instead of 22%. For instance a personal pension contribution of £78 would be worth £100 after basic rate tax relief in 2007/08. After 6th April the same £78 contribution becomes £97.50 after basic rate tax relief. This represents a small but significant reduction in your pension fund. Higher rate tax payers can claim back a further 20% through self assessment, increased from the previous 18% but the gross pension premium is still reduced for the same initial investment.

It was pleasing to see the Chancellor act on the concerns of charities and add 2% relief to Gift Aid donations for a transitional period.

It was a shame that the same generosity was not extended to the millions of us trying to save for our retirement.

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Although most of the changes on capital allowances have been known about for several months, there are a couple of minor tweaks announced today.

• The 100% first year allowance on cars with very low CO2 emissions will continue for an additional five years, until 31 March 2013, but the qualifying emissions threshold will be reduced from 120g/km to 110g/km driven 
•  Small balances left on capital allowances pools will be able to be written off where the balance has been reduced to £1,000
  

In addition, there is confirmation of new rules to allow companies (not unincorporated businesses) to surrender losses in return for a cash repayment from HMRC. This will apply to losses created by claims to 100% first year allowances on certain energy-saving or environmentally-beneficial plant & machinery, It will not be available where those losses could be used in some other way, for example against other taxable income or surrendered as group relief.

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Companies thinking of offering EMI share options to employees will have three new factors to consider: 

•  the market value (at the date of grant) of the shares covered by the option is to increase to £120,000; 
• the company offering the option must have fewer than 250 employees; and
• new restrictions are being placed on the company’s activities.
  

The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.

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The main VAT changes announced in the Budget today are;

1. With effect from 1 April 2008, the annual VAT Registration/deregistration limits have
   increased to £67,000/£65,000 respectively. 
2. Revised fuel scale charges will apply for VAT return periods beginning after 1 May 2008.
3. A transitional period has been announced for VAT refund claims to 31 March 2009. This follows recent litigation relating to the three year capping rules introduced in 1996/7.
4. Withdrawal of the staff hire concession with effect from 1 April 2009.
5. A package of simplification measures for the option to tax.
6. Extension of the VAT exemption for fund management services.
7. The limits for correcting errors on VAT returns have increased from £2,000 to the greater of £10,000 and 1% of turnover.
   
   Full details of these changes will be contained in our Budget Tax Bulletin to be issued shortly.
   
   

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... are being restricted for tax purposes. At present an individual who carries on a trade, on however part-time a basis, can, subject to certain detailed restrictions, set this loss off against other income and gains. Anti-avoidance legislation introduced in the 2007 Finance Act restricted the offset of tax losses for non-active or limited partners. In the Revenue’s view this merely resulted in individuals entering into loss-making trades on a sole trader basis purely for the tax relief on the losses. As a result this legislation is being introduced with effect from 12 March 2008 for individuals who spend less than ten hours a week on a sole trader activity; for existing trades the loss relief is restricted to £25,000 pa and for new trades, where tax avoidance is a motive, offset relief is abolished.

This is clearly designed to counter the sale of certain investment products that relied on tax losses as part-funding. However, they may well affect other genuine arrangements that “just happen” to meet the tests.

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There appear to be no dramatic new announcements relating to pension planning in this budget. As previously announced the annual allowance increases to £235,000 for 2008/09. The lifetime allowance becomes £1,650,000.

Individuals who have not reviewed their pension arrangements since the 2006 'Pension Simplification' should do so now. In particular transitional protection against the effects of the lifetime allowance can be applied for. The deadline for applying for this protection is 5th April 2009.

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When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.

With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.

Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.

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The budget confirmed previously announced increases to ISA allowances for 2008/09.  From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.

Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.

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Legislation and consequently its introduction is being delayed for 12 months – party time!

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The 2008 budget included possible incentives for individual savers and investors at two opposite extremes of the market.

Firstly the announcement of more consultation on the Savings Gateway to encourage lower income individuals to save regularly in deposit accounts. This was originally consulted on in 2001 and has been trialed since. We shall wait and see whether a scheme whereby the government matches an individuals savings will actually be implemented.

Secondly the governments want to simplify the Enterprise Investment Scheme (EIS) to encourage investment in smaller, high-risk trading companies. These schemes allow an investor to benefit from 20% income tax relief as well as CGT deferral for reinvestments and gains free of CGT where income tax relief has applied. The government wants to increase the limit for income tax relief from £400,000 to £500,000 for 2008/09. This will be subject to State aid approval. In addition a consultation to try to encourage more investment is to be undertaken. This consultation will focus on various matters but will include how to increase awareness of these schemes amongst investors as well as the possibility of carrying back tax relief being extended to carry forward.

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…but don’t hold your breath; the proposals, when formulated, will only apply to companies with less than 10 employees and turnover under £750,000. This may not be quite what most SMEs were hoping for.

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The Chancellor has today announced an increase in the individual investor limit from £400,000 to £500,000 – subject to EU State Aid approval. The detailed tests for companies and investors otherwise appear to remain unchanged.

Whilst this is good news for companies seeking to raise funds – one word of warning. State Aid approval can take a long time to come through.

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Much of what will be included in this year’s Finance Bill was known long before the Chancellor stood up to make his Budget speech. The main items of relevance to businesses are summarised here, with links to earlier postings:-

• Corporation Tax – from 1 April 2008 the main rate will be reduced from 30% to 28% and the small companies’ rate increased from 20% to 21%. 
• Homes abroad owned through a company – removal of a benefit in kind tax charge where the company is owned by individuals and the sole activity of the company is to hold an overseas property for occupation by the individuals and/or letting. 
• Loss Relief – restriction of loss relief for interest payments made on certain qualifying loans in a partnership or a small company. Effective from 9 October 2007 this measure tackles a tax avoidance scheme which sought to advance the time at which relief could be claimed.
• CGT reform for individuals & trusts (not for companies) – abolition of indexation allowances and taper relief, and introduction of a flat rate of 18%, (subject to new entrepreneurs’ relief) from 6 April 2008.
• Research & Development – extension of SME tax relief schemes to include mid-sized companies with fewer than 500 employees.
• Company gains on life policies – to be brought within the loan relationship legislation.
• Capital Allowances – a range of new measures, including the reduction of annual writing down allowances to 20%, introduction of an Annual Investment Allowance of £50,000 and the reduction in the rate of allowances available for integral fixtures.
• Leased plant & machinery – changes to bring the proceeds of sale from finance leaseback arrangement into charge to tax, and other anti-avoidance changes to long funding lease rules.
  

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Chancellor Alistair Darling will deliver his first full Budget on Wednesday 12 March 2008. The 2008 Budget comes amid the gloomiest economic situation for more than a decade, with volatile financial markets, a credit crunch and falling house prices.

Mr Darling will present the Budget to the House of Commons at 12.30pm and we will of course be blogging on SME Plus Blog and Tax Plus Blog during the course of the afternoon, providing analysis on the key highlights.

If you do not already subscribe to our blogs click here for SME Plus Blog or here for Tax Plus Blog to ensure you get our comment and analysis as and when it happens.

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