Pre-Budget 2008 Analysis
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This was a tax cutting mini-budget covering everything from Air Passenger
Duty to UK REITS. However, there is plenty of warning of specific tax rises to
come in future years - should this Government still be in power! We have pulled
out the matters that are most pertinent for small businesses, but as with any
Budget further details are likely to emerge in the next few days so please
contract us if you have specific queries. Our December Newsletter will also
expand on any emerging issues.
In order to boost consumer spending across all sectors the standard rate of
VAT will fall from 17.5% to 15% for a limited period from 1 December 2008 to 31
December 2009, when it will return to 17.5%, as the Chancellor predicts that the
recession will be almost over by then.
This is going to be a right royal pain for VAT registered businesses as you
need to consider whether to, and how to pass on the VAT reduction. You do not
have to change your VAT inclusive prices, but you must change your accounting
system to record the correct standard rate of VAT as follows:
- You must record the VAT due on all your sales at the correct rate from 1
December 2008. The zero and reduced rates have not changed. Only VAT at the
standard rate has reduced to 15%, which amounts to 13.043% or 3/23 of the
gross figure, whereas VAT at the old standard rate of 17.5% is 14.894% or 7/47
of the gross.
A sale worth £470 including VAT at 17.5% on 28 November means you have
collected VAT of £70 from the customer. The same sale of £470 made on 1
December including VAT at 15% means you have only collected VAT of £61.30, so
you have kept an additional £8.70 profit from that sale.
- Any invoices issued from 1 December 2008 must show the new standard rate
of 15% for standard rated items. However, if your invoice is for something
that was completely delivered before 18 November 2008, or you were actually
paid for the complete sale before 1 December 2008, you should use the old
standard rate of 17.5%.
- If you have the sort of business that receives stage payments for long
contracts, such as in the construction industry, there are special rules to
consider. The relevant date for VAT is normally when you issue a VAT invoice
or receive a stage payment. So any invoices issued for stage payments received
on or after 1 December 2008 must have VAT accounted for at 15%, even if some
of the work was performed before 1 December.
- If you use the flat rate scheme for small businesses you need to look up
the new flat rate for your business sector in appendix E of the detailed VAT
guide on the HMRC website at
http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. Most, but not all of
these flat rates have changed from 1 December 2008 and you must apply the new
rate to your VAT inclusive sales if you want to stay in the flat rate scheme.
We can help you calculate whether you should stay in the scheme with your new
- If you use the cash accounting scheme you need to be particularly careful
about recording exactly when the sale was made and the invoice was issued.
This is because you need to pay over VAT of 17.5% for sales made before 1
December 2008 even if you receive the payment on or after 1 December 2008.
Please ask us to run through the VAT rules in relation to your particular
business. Remember this VAT change is only temporary, so all your systems will
have to be changed again on New Years Eve in 2009 before the standard rate of
VAT increases from 15% to 17.5% on 1 January 2010.
To help smaller businesses survive the recession the normal one year carry
back rule for trading losses is going to be extended to three years, but only
for a limited period. When a loss is carried back from the current year (year 0)
to year -1, and cancels out the profits in year -1, the tax paid for year -1 can
be reclaimed. This provides an immediate cash-flow boost for the loss making
The rules will be different for companies and for unincorporated businesses
such as sole-traders. In both cases the amount of loss carried back to year -1
will be unlimited as now, but the total loss which can be carried back to years
-2 and -3 cannot exceed £50,000. Losses not used against profits in earlier
years will be carried forward, assuming the business continues to trade.
- Companies. Where a loss is made in an accounting period
that ends between 24 November 2008 and 23 November 2009, that loss may be
carried back up to three years, subject to the £50,000 cap. Where the
loss-making period is less than 12 months the £50,000 cap is reduced
proportionately. The rules for surrendering a loss to another group company
will not be changed.
- Unincorporated businesses. If you trade as a partnership
or sole-trader you are taxed on the profits you make in the accounting period
that ends in the relevant tax year. For example the profits or loss for the
year to 31 March 2009 are taxed or relieved in the 2008/09 tax year that ends
on 5 April 2009.
In order to claim the extended three year carry back of losses you must
have a loss for the accounting period that is taxed in 2008/09. Young
businesses in the first four years of trading already get a three year carry
back of losses, so this extended loss relief is targeted at established
If you made a small profit in the year to 30 April 2008, taxed in 2008/09,
but a large loss in year to 30 April 2009, taxed in 2009/10 you will not get
the three year carry back. Because the loss has fallen into the 'wrong' taxed
year: 2009/10 instead of 2008/09 it can only be carried back for one year
instead of three years. In this situation you could change your year end to 31
March 2009 to capture the loss early and take advantage of the three year
Two years ago the rates of corporation tax for companies with 'small' profits
were set to rise on 1 April 2008 to 21% then on 1 April 2009 to 22%. The
Chancellor has now decided to postpone the second of those increases to 1 April
Small' profits are those that fall below the small company rate threshold of
£300,000. This threshold is proportionately reduced by the number of companies
associated with the main company. An associated company can be one run by your
spouse or civil partner, or another company over which you have control.
Last year the Government threatened to bring in legislation to tackle the
problem of couples sharing business income to save a bit of tax. This was going
to happen from April 2008, but was postponed until April 2009. It has now been
put back on the 'too difficult pile' until at least the recession is over. So
there are no immediate changes for family businesses.
The rates and thresholds of income tax have been set for 2009/10 as follows:
|Savings rate (on Savings income only)
||£0 - £2,440
||£0 - £37,400
However, an additional higher tax rate of 45% is promised from 6 April 2011
for those with total income above £150,000. These individuals will also lose the
benefit of the personal allowance (see below). The rates paid by Trusts will
also increase to 37.5% for dividends and 45% for other income from 6 April 2011.
In May 2008 the Chancellor increased the basic personal allowance to
compensate lower earners for the loss of the 10% tax band. This increase is
carried forward into 2009/10 as follows:
|75 and over
|Marriage under 75
|Marriage over 75
|Income limit for age allowances
There is a cap on the benefit of the personal allowances given to those aged
over 64 where their income exceeds the income limit given in the table above. A
similar mechanism of reducing the benefit of the personal allowance is proposed
for those with total income over the thresholds of £100,000 and £140,000 in
2010/11 and beyond.
The lifetime and annual allowance for pension contributions were set for the
five years from 2006/07 to 2010/11. These allowances will now be frozen at the
2010/11 rates until at least 2015/16, which will restrict the tax relief
available to very high earners:
- Life time allowance: £1.8 million
- Annual allowance: £255,000
There is no immediate change in the main rates of class 1 employers and
employees national insurance from 6 April 2009. However, a large rise in class 1
national insurance is proposed from 6 April 2011 to 11.5% for employees, to
13.3% for employers, and the additional rate payable above the upper limit is to
increase from 1% to 1.5%. This would bring in a significant amount of additional
revenue for the Government beyond 2011.
Class 3 national insurance is a voluntary class normally paid by people who
want to top up their NI contributions in order to receive the full state
pension. This voluntary rate is increasing from £8.10 per week to £12.05 per
week from 6 April 2009. So if you need to top-up your NI contributions it would
be best to do this while the rate remains at £8.10 per week.
From 1 April 2008 most empty business properties became liable to business
rates, when previously empty properties were exempt from rates. After much
protest, and a number of instances where properties were demolished, the
exemption from business rates is to be applied to all properties with a rateable
value of less than £15,000 for the tax year 2009/10 only.
Car tax (vehicle excise duty)
There was a lot of fuss after the Budget in March 2008 over the proposed
increases in car tax (VED) for older cars registered after 1 March 2001. These
increases in VED have now been scaled back to £5 per car per year for most cars
for 2009/10, but larger increases will apply for new polluting cars.
Just to prove this was a real Budget the duties on tobacco and cigarettes
increased from 6pm on 24 November 2008. Duties on wine and sprites go up from 1
December 2008. To compensate for the reduction in VAT, fuel duties are also to
increase from 1 December 2008 and then again on 1 April 2009!
About the Author
Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of
A M P Associates –
A specialist firm of chartered certified accountants and tax advisers based in
London and Surrey. Jonathan advises on a wide range of business and tax issues
and he is recognized for his proactive and innovative approach to taxation.
Jonathan can be contacted on 0845 009 8845 or email:firstname.lastname@example.org
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Article Published/Sorted/Amended on Scopulus 2008-11-27 12:13:13 in Tax Articles