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The Chancellor commenced his 2012 Budget by promising rewards for hard work and aspiration and a more competitive environment for businesses, with more of those on lower incomes being lifted out of tax but with the wealthier paying more. Overall we were promised far reaching tax reforms to make the UK more competitive.
But does the 2012 Budget deliver any of these grand statements for owner managed businesses?
Well the details were a little sketchy to say the least – but here are the key points of interest and our thoughts on each:
• The highest rate of corporation tax will fall from 26% to 24% from 1 April 2012 coming down further to 22% by 2014.
Bear in mind that this rate applies to companies / groups with total taxable profits in excess of £1.5million per annum. For smaller businesses the rate remains at 20%. Also there is no change in the thresholds used to determine the rate of corporation tax that you pay, so whilst the rate is lowered the requirement to pay corporation tax by quarterly instalments when the full rate of corporation tax is payable still remains.
• The highest rate of income tax will be reduced to 45% on income in excess of £150,000 from 6 April 2013. A measure that it is said will be financed by other taxes on the rich which will generate five times more – these include a range of anti-avoidance measures around stamp duty land tax, offshore property owning companies and restrictions on certain income tax relief’s.
Our view is that the further widening of the gap between the rates of corporation tax and income tax is likely to make more businesses seriously consider the tax savings available from incorporation.
• We are promised cost savings through the simplification of tax administration for up to 3 million of the smallest unincorporated businesses with turnover of less than £77,000. The proposal is that they will be taxed on a cash basis.
However, bear in mind that this proposal will only apply to unincorporated businesses. As detailed above, the disparity between income tax and corporation tax rates suggests that a sole trader or partnership business would be advised to consider incorporation much earlier and certainly before taxable profits reach £77,000.
• Improvements and reform will be made to the Enterprise Management Incentive Scheme (EMI) which helps SME businesses recruit and retain talent. Subject to State Aid Approval, additional support will be provided to help start-up businesses access the scheme and the limits on benefits available per individual will be more than doubled to £250,000.
EMI is a valuable employee incentive which gives share options to employees in a tax efficient manner. This does not require a cash outlay for the business and so can be a particularly valuable incentive. Any enhancements to the scheme to increase its accessibility would be welcome. Further details are expected shortly.
• Further anti-avoidance legislation is proposed to challenge any tax evasion which the Chancellor described as ‘repugnant’. Further resources have been made available to HMRC which we are told will raise £1 billion and will protect a further £10 billion for the Exchequer. The UK will have a general anti-avoidance regulation in place by 2013.
As always, rules designed to limit a few often cause restrictions on the activities of many. It remains as important as ever to ensure that the tax tail does not wag the commercial dog!
In his speech, the Chancellor referred us back to Adam Smith, by saying that the principles of a good tax system are fairness, simplicity, predictability and support. Not phrases usually associated with taxation, it has to be said, and it will remain to be seen if the public agrees that the Coalition Government are achieving this with their latest budget.
For a copy of the Tax Facts information, click here.
George Osborne will be delivering his next annual Budget on Wednesday 21 March 2012. At times when money is tight and trading is made more difficult many more of us are taking a closer interest in what the Budget will mean for us on a daily basis. We have therefore outlined below our thoughts ahead of the Budget and will be issuing a press release shortly after to confirm the detail and give our thoughts on how this will actually impact us.
As ever, the Budget will look to give reliefs in some respects but in order to offer these will have to make savings elsewhere.
Some hot topics for discussion include:
• Survival of the 50% rate of income tax
HMRC have been tasked with producing a report to ascertain how much tax the 50% rate for higher earners actually collected during its first year in place. Reference is therefore expected to be drawn to this report in the Budget Statement to either support it being kept or justify its removal. Many higher rate tax payers have planned to avoid the 50p rate of tax and so it may not have generated as much revenue as expected. Also, considering the 50p rate was originally pitched as a temporary measure there is a risk it will become a permanent tax if plans are not announced to confirm its reduction or elimination.
There are however strong indications to suggest that the 50p rate of tax will not be removed, or if it is removed that this will be compensated by further restrictions of tax relief for pension contributions. It is interesting to note that none of the commentators are suggesting an increase in the threshold for the 50% tax rate from the current limit of £150,000.
• Withdrawal of child benefit for higher rate tax payers
The current proposal is that Child Benefit will be withdrawn for all families where at least one member is a higher rate tax payer. This has been met with widespread criticism as families where two members have income just below the threshold would be entitled to the benefit whereas families where there is only one higher earner would lose entitlement to the benefit. It is thought that some revision may be made so that a combined threshold is used to create a fairer system.
• Further restrictions to the tax relief on pension contributions
This has been cast as a speculative alterative to the 50p tax rate. Reducing the relief available on pension contributions would be a very unwelcome move and goes against people saving to fund their own retirement however we will have to wait to see on this one!
• A possible new mansion tax
The Liberal Democrats have been proposing a Mansion Tax for some time and again it has been suggested this could be a possible introduction in exchange for the reduction or removal of the 50p income tax rate. It has been widely reported that the proposed additional 1% tax on properties over £2m is not popular with the Conservative MP's.
Please note that this blog constitutes our thoughts based on experience and what is being reported in the press and therefore is only speculation. The detail of the budget will not be confirmed until its delivery on Wednesday. We will publish a press release shortly after the Budget's delivery to confirm what key changes have been made and how they will impact us.
In the meantime if you have any questions please do not hesitate to contact Lesley Sutton at firstname.lastname@example.org