Budget highlights

The key changes that come into effect from 1 April 2011, or 6 April for income tax and capital gains tax, are:

• Main rate of corporation tax cut from 28% to 26%.
• Small profits rate of corporation tax cut from 21% to 20%.
• Personal allowance increased by £1,000 to £7,475.
• All National Insurance rates increase by 1%.
• R&D tax relief for small and medium sized companies increased from 175% to 200%.
• VAT compulsory registration turnover threshold raised from £70,000 to £73,000.
• Capital gains tax annual exempt amount raised from £10,100 to £10,600.
• Entrepreneurs' relief lifetime cap raised from £2 million to £10 million.
• Income tax relief on investments in EIS shares increased from 20% to 30%.

Small business tax

IR35

The Office of Tax Simplification (OTS) was tasked at reviewing how the tax system could be simplified for small businesses. Top of the list was the complex legislation known as IR35. The OTS interim report recommended that this burdensome tax rule should either be suspended or the way in which the legislation is administered by HMRC should be improved.

The Government has chosen to follow the second recommendation. IR35 is here to stay, but HMRC have been instructed to improve their guidance to businesses that are trying to operate IR35. Also in future investigations of companies potentially caught by IR35 will be carried out by a specialist teams within HMRC.

Tax reliefs to go

The OTS has suggested a list of more than 40 tax reliefs that could be abolished because they are rarely used, or are obsolete. Tax reliefs on this list of interest to small businesses include:

• Tax free meals for employees who cycle to work.
• Tax free late night taxis for employees.
• Enhanced tax relief for the costs of cleaning up contaminated land (land remediation relief).

Capital allowances

The main rates of capital allowances will change from April 2012 rather than April 2011. The annual investment allowance (AIA) will reduce from £100,000 per year to £25,000 per year, and the rates of writing down allowances for asset purchases not covered by the AIA will be cut from 20% to 18%, and from 10% to 8%.

Assets that are expected to have a short useful life can be treated separately for capital allowance purposes, maximising the allowances that can be claimed. From April 2011 a short life asset will be one with an estimated useful life of up to 8 years, increase from 4 years. This will benefit larger businesses that incurred expenditure on assets in excess of their AIA cap for the year. However, the record keeping required to claim short life asset treatment for many assts may be prohibitive.

Enterprise zones

The Government will create 21 Enterprise Zones around the country. The tax incentives for businesses locating to these zones may include enhanced capital allowances for manufacturing businesses, or a discount on business rates up to a cap of £275,000 over 5 years. There may also be relaxed planning consent and the provision of superfast broadband.

Employment and benefits

Merger of NI and income tax

When employers are asked what single action could simplify the tax system, most suggest merging income tax and national insurance contributions (NICs). This message has finally been heard by the Government, who will consult on how the operation of the national insurance and income tax could be combined.

This does not mean these two taxes will be merged. The Government has stated that NICs will not be charged on savings, dividends or pensions, and certain state benefits will continue to be paid based on the NICs paid by the claimant (the contributory principle). Any changes to NICs and tax will involve aligning the rules and mechanics for collection of the two taxes. However, don’t expect big changes any time soon.

Company Cars

The company car driver is hit in the pocket as usual by this Budget. The discounts in car benefit for alternatively fuelled cars (such as LPG or duel fuels) are all removed from 6 April 2011. The £80,000 cap on list price is also abolished, so the taxable benefit for very expensive models will jump significantly. In future years the taxable benefit of most cars will increase by 1 percentage point of the list price. Although electric cars and vans still have zero taxable benefit until at least 2015.

The taxable benefit for receiving free fuel for a company car is calculated as the percentage of the list price applied to a fixed value of £18,000. This value is set at £18,800 from 6 April 2011. The maximum taxable benefit of receiving fuel for private use will increase from £6,300 (for 2010/11) to £6,580 (for 2011/12).

Mileage allowance

If an employee uses their own car for business journeys they can claim a tax free and NIC free mileage allowance (AMAP) from their employer. This AMAP rate has been stuck at 40p mile since about 2002, but will be increased to 45p per mile from 6 April 2011. This rate applies for the first 10,000 business miles per year, any additional miles can be reimbursed at 25p per mile.

Investing in companies

Enterprise investment scheme (EIS)

Individuals who subscribe for shares in private trading companies under the EIS, can claim 20% income tax relief on the amount subscribed up to £500,000 per tax year. The rate of income tax relief will increase to 30% from 6 April 2011, and the cap on investment qualifying for income tax relief will rise to £1 million from 6 April 2012. Investment in EIS shares can also be used to defer tax on unlimited amounts of capital gains. This capital gains tax relief has not been changed.

Venture capital trusts (VCT)

The range of companies that can accept investments through the EIS or VCT schemes is to be increased from April 2012 to include those with gross asset values of up to £15 million, and with up to 249 employees. At present, only companies with gross asset values of no more than £7 million and with fewer than 50 employees can qualify for these tax-favoured investments. The cap on the amount a company can raise through these schemes in any year will also be increased from £2 million to £10

Savings and pensions

ISAs

The investment limit for ISAs is increased to £10,680 for 2011/12 with half that amount available to be invested in cash. A junior ISA is will be launched later in 2011. This tax exempt savings account will be available to all children resident in the UK who do not have a child trust fund account. The investment limits and other conditions for the junior ISA have not been announced.

Pensions

The level of total pension contributions from employers and the employee, that may be made with full tax relief is reduced to £50,000 per pension input period (PIP) ending in the tax year, from 6 April 2011. However, this cap can be expanded by bringing forward unused relief of up to £50,000 from each of the previous three tax years. If the annual allowance is exceeded the taxpayer must pay an annual allowance charge on the excess contributions at their marginal rate of income tax, but the pension fund may be able to pay this charge in certain circumstances.

The lifetime allowance for registered pension schemes will be cut from £1.8 million to £1.5 million from 6 April 2012.

Non-residents and non-domicile

There is currently no clear measure by which an individual can determine whether they should be treated as resident for tax purposes in the UK. The Government intends to introduce a legal test of tax residence with effect from April 2012.

Individuals who are domiciled outside of the UK (non-doms), and who have been resident in the UK for at least 7 out of the previous 9 tax years, must pay a remittance basis charge (RBC) if they want to exclude their off-shore income and gains from UK taxation. The Government is considering raising RBC from £30,000 to £50,000 per year for non-doms who have been UK resident for at least 12 years, from 6 April 2012. However, if the non-dom brings significant funds into the UK to invest in businesses, the annual RBC may be waived.