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The pre-budget report - help or hindrance

publication date: Nov 28, 2007
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author/source: Paula Tallon
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The Chancellor began his speech by stating that his aim was to “provide support and protection for families and businesses when they need it most”. Will his proposals achieve that aim, or do they fall short? We look at the main tax measures and consider whether they will be a help or a hindrance to business.

VAT

The headline measure was the temporary cut in the standard rate of VAT from 17.5 per cent to 15 per cent that will take effect on 1 December 2008 and last until 31 December 2009.

The Chancellor stated that this, ‘by encourage spending, will help stimulate growth’. However, the general reaction from both businesses and consumers is that this is a relatively small price cut compared with the 20 per cent discounts that some retailers are offering to attract customers in the traditionally busy pre-Christmas period.

It has also been suggested that any noticeable effect is more likely to occur in a year’s time, if people make some larger purchases just before the VAT rate returns to 17.5 per cent.

So businesses may have to wait some time to see any positive effect, but in the meantime they will incur real and immediate costs in implementing the change to the VAT rate. They will have quite a long ‘to do’ list, including repricing items; reprinting stationery such as invoices, price lists, menus, brochures and catalogues; adjusting tills, other equipment and accounting systems; and amending online information, ordering and payment systems.

Even small businesses that use the Flat Rate Scheme to simplify their VAT accounting will be affected, as the special flat rates for all categories of business will also change with effect from 1 December 2008.

Enhanced loss relief for businesses

For a period of 12 months, companies and unincorporated businesses will be able to carry back trading losses for up to three years rather than just one year as at present.

The proposal will apply to companies that suffer a loss in an accounting period ending in the period 24 November 2008 to 23 November 2009. In the case of sole traders and partnerships, the relevant loss is a loss for the 2008/09 tax year. So, for example, if a sole trader or partnership has a 30 April year end, and they made a profit in the year ended 30 April 2008 but a loss thereafter, it appears that they would be unable to take advantage of this relief unless they changed their next accounting date to, say, 31 March 2009 – which could have adverse cash flow implications in the longer term! So once again, this measure may not clearly benefit all those businesses that it is intended to help. The idea of extending the carry back period is good in principle, but its effectiveness is limited by restricting the amount that can be carried back more than a year to just £50,000; not allowing a loss to be carried back more than a year against other income; and limiting the duration of this extra relief to a 12-month period.

Income shifting shelved

Perhaps the best piece of news for family businesses was the announcement that the ‘income shifting’ proposals have been shelved indefinitely. These proposals, drafted in 2007 after HMRC lost the Arctic Systems case, would have interfered with the way in which family businesses allocate profits, salaries and dividends. The draft legislation appeared unworkable and would certainly have required businesses and their advisers to spend a considerable amount of time each year in trying to decide whether income had been shifted.

Delaying a corporation tax increase

The small companies’ rate of corporation tax that was due to have been increased from 21 per cent to 22 per cent from 1 April 2009 will not now be changed until 1 April 2010. This will certainly be a welcome brief respite for companies.

Disappointingly, there will be no reduction in the main rate of corporation tax from 28 per cent, and the hopes of house buyers and house builders for an extension to the scope or duration of the Stamp Duty Land Tax holiday were similarly dashed.

Help in paying tax bills

The proposal to allow businesses more time to pay their income tax, corporation tax, PAYE & NIC and VAT liabilities is a very good idea. However, instead of HMRC simply extending payment deadlines (or not chasing unpaid amounts) for a set period, businesses that are experiencing difficulties will need to contact a new Business Payment Support Service to discuss and agree an ‘affordable payment timetable’. Interest will still be payable on amounts paid late. (A reduction in the main rate of interest on overdue income tax and corporation tax payments from 6.5 per cent to 5.5 per cent has already been announced, and will take effect from 6 December 2008.)

HMRC says that it would hope to give a decision in about 10 minutes in most cases. This suggests that the process will be little more than a formality. The Support Service telephone number is 0845 302 1435.

Employees’ and employers’ liabilities

The small benefit that some taxpayers will receive from the increases to their personal allowance in April 2009 will be outweighed by the increases in income tax and national insurance rates in April 2011. From that date a new 45 per cent tax rate will apply to individuals with income of over £150,000, and there will be a 0.5 per cent increase in national insurance contributions for most employees. These increases may provide a fresh incentive for employers and employees to consider tax-efficient salary sacrifice arrangements.

Employers’ national insurance contributions will also be subject to a 0.5 per cent increase in April 2011, and in the meantime (in addition to the extra VAT administrative work) they will have to change payroll procedures to implement other tax and national insurance changes in April 2009 and April 2010.

Finally, it has been announced that no further action will be taken at present to restrict tax relief for travelling expenses incurred by workers engaged by umbrella organisations.

Conclusion

Not all businesses will benefit from the tax ‘helps’ offered in this Pre- Budget Report – the VAT reduction is unlikely to have a significant effect, and other measures will only apply to some businesses and sectors. However, the ‘hindrances’ in the form of increased a d m i n i s t r a t i v e burdens and compliance costs will apply to all VAT-registered b u s i n e s s e s and any businesses with employees – clearly, the vast majority! It is certainly to be hoped that other measures, such as lower interest rates and encouragement to banks to start lending to businesses again, will contribute more to supporting businesses and stimulating the economy.

Paula Tallon is partner with BDO Stoy Hayward LLP, chartered accountants.