There was good news and bad news for small businesses in this Pre Budget Report.
The good news is the freezing of the corporation and income tax rates other than the promised 50% rate of income tax which will be introduced for income over £150,000 and personal allowances are also frozen at the 2009/10 levels.
The bad news will come from April 2011 when NI rates are set to surge upwards. Corporation tax may also increase in this month. Businesses with empty commercial properties may qualify for an exemption from business rates but only until 31 March 2011. There are further anti-avoidance rules to prevent high earners from gaining top level tax relief on pension contributions. Tax incentives are introduced to encourage you to buy electric cars and vans, but just how many milk-floats do you need?
Corporation tax for companies with ‘small’ profits was set to rise on 1 April 2010 to 22%, a rise originally planned to apply from 1 April 2009. However, the Chancellor has decided to postpone this increase for a second time. The corporate tax rate for companies with ‘small’ profits will now remain at 21% until at least 1 April 2011.
‘Small’ profits are those that fall below the single company threshold of £300,000. Companies with profits of £1.5 million or more pay corporation tax at 28%. Profits that fall in the range £300,000 to £1.5 million are taxed at a marginal rate of 29.75%
These profit thresholds are proportionately reduced by the total number of companies associated with the main company. An associated company is any company that is under the common control of an individual, group of related individuals or another company. Thus if you control two companies those companies are associated and only the first £150,000 (£300,000/2) of the annual profits of each company will be taxed at 21%.
Currently any companies controlled by your spouse or civil partner are also associated with your own company, even if your spouse’s company has no commercial links to your own company. This associated rule is under review by the Taxman so it may be relaxed from April 2010 where the companies have no commercial links.
As previously announced the standard rate of VAT will increase from 15% to 17.5% on 1 January 2010. The Chancellor emphasised that he has no plans to make further changes to VAT, so we can be fairly certain that the VAT rates will remain as they are, at least until after the election.
The Taxman is aware that some businesses, particularly entertainment venues and pubs, will be trading at midnight on 31 December 2009 when the standard rate of VAT changes. By concession those businesses can treat their standard rated sales made before they close before 6am on 1 January as chargeable to VAT at the 15% rate. This concession does not apply to online retailers or to catalogue companies.
If your business is registered to use the flat rate scheme for small businesses, the flat rate used to determine how much VAT to pay to the Taxman will also change with effect from 1 January 2010. The new flat rates for each business sector are found in the Pre Budget Report Press Notice no. 33 on the HMRC website at http://www.hmrc.gov.uk/pbr2009/pbrn33.htm
Most, but not all, of these flat rates have reverted to the rates that applied before 1 December 2008. However, some rates have been increased by a greater amount to reduce the gain some businesses make by using the flat rate scheme. You may find that the new flat rate for your business sector does not produce the savings for your business as it did previously. If so you can leave the flat rate scheme at any time. We can help you calculate whether it is beneficial for you to stay in the flat rate scheme or not.
There is no immediate change in the main rates of class 1 employers and employees NI from 6 April 2010. From 6 April 2011 a 0.5 per cent rise was planned but this has been increased to 1% for most rates of NI as shown below.
- Employer’s class 1 above primary threshold 2009/10 – 12.8% : 2011/12 – 13.8%
- Employer’s class 1A and 1B 2009/10 – 12.8% : 2011/12 – 13.8%
- Employee’s class 1 below up earnings threshold 2009/10 – 11% : 2011/12 – 12%
- Employee’s class 1 above upper earnings threshold 2009/10 – 1% : 2011/12 – 2%
- Self-employed class 4 between lower and upper profits thresholds 2009/10 – 8%: 2011/12 – 9%
There is also likely to be increases in the reduced rates of NI for contracted out contributions for both employers and employees, but those rates have not been confirmed as yet.
This increase in NI rates is double the increase announced in the 2008 Pre Budget Report. It amounts to a 7.8% rise in NI costs for employers in respect of the wages of every person employed. Employees will also suffer a 9% to 10% increase in NI charges, and the self-employed will be paying at least 12.5% more in NICs in 2011/12.
There will be an increase in the point at which individuals start to pay NI, meaning that people with an income below £20,000 will be protected from this change.
These NIC increases will bring in a significant amount of additional revenue for the Government from April 2011.
From 1 April 2008 most vacant business properties became liable to business rates, when previously such properties were exempt from rates. In last year’s Pre Budget report the Chancellor announced an exemption from business rates for empty properties which had a rateable value of less than £15,000, but only for the 2009/10 financial year.
This exemption is now to be extended for the year to 31 March 2011, and expanded to cover empty properties with a rateable value of less than £18,000. The higher threshold reflects the increase in rateable values following the business rates revaluation that comes into effect from 1 April 2010.
Furnished Holiday Lettings
The favourable tax concessions for the commercial letting of furnished holiday lets will be removed with effect from 6 April 2010 for unincorporated businesses and from 1 April 2010 for companies. Hoteliers and bed and breakfast proprietors are not affected by these changes.
- Losses – future profits and losses from furnished holiday lettings will be treated as income from a property business, and thus relief for losses will be available only against the property lettings business. Any current losses from the furnished holiday lettings, which have not been used before April 2010, will be carried forward to be set against the future property lettings business.
- Pensionable income – from 6 April 2010 income from a furnished holiday lettings business will not count as pensionable income, which may reduce the amount of pension contributions available for tax relief in any tax year.
- CGT – the capital gains reliefs associated with disposing of a property used in a commercial furnished holiday letting business will cease to apply for disposals made after 5 April 2010. However entrepreneurs’ relief will apply to disposals after 5 April 2010 of FHL property, but only if the disposal is made within three years of the deemed disposal date on 5/4/2010.
A stamp duty ‘holiday’ was announced for residential property in September 2008, which effectively raised the lower threshold property values where SDLT is imposed at 1%, from £125,000 to £175,000. This lower threshold will revert to £125,000 on 1 January 2010. Where the residential property is located in a disadvantaged area the threshold from which the 1% rate of SDLT is imposed is £150,000.
SDLT is normally imposed at the completion date for the property sale, not the date on which contracts are exchanged. If the buyer takes possession of the property before the completion date, SDLT is charged on that earlier date. To take advantage of the zero rate of SDLT on a property costing no more than £175,000 you need to complete or take possession of the property before 1 January 2010.
CGT on Homes
Some commentators expected the rules that exempt one’s ‘main home’ from capital gains tax on sale would be tightened up. This has not happened. Instead there is a relaxation of the rules where part of the home is occupied exclusively by an adult in care, and the owner of the property is paid to care for that adult. In such cases the whole of the property will qualify for exemption from capital gains tax.
All the income tax rates and thresholds will be frozen from 6 April 2010, with the exception of the 50% rate of income tax that will apply on income above £150,000.
2010/11 Income Tax Rates
- Savings rate (on savings income only) 10% for £0 – £2,440
- Basic rate 20% for £0 – £37,400
- Higher rate 40% for £37,401 to £150,000
- Additional rate 50% for over £150,000
All personal allowances have also been frozen at the 2009/10 rates for 2010/11 as follows:
Personal allowances: 2010/11
- Under 65 – £6,475
- 65-74- £9,490
- 75 and over – £9,640
- Minimum marriage allowance* – £2,670
- Marriage allowance born before 6 /4/1935* – £6,965
- Blind persons allowance – £1,890
- Income limit for age allowances – £22,900
* given at 10% rate only
Tax Relief for Pensions
Some incredibly complex rules were brought in from 22 April 2009 to discourage those with incomes above £150,000 from piling money into their pension schemes. This was because tax relief on pension contributions will be reduced for these high earners from 6 April 2011.
Many people with earnings around the £150,000 mark thought up cunning plans to reduce their taxable income to just below £150,000, so they wouldn’t be caught by the restrictions on tax relief for pensions. In response to this planning the Government has changed the rules, by stating that anyone with income above £130,000 will be caught by the pension relief restrictions with immediate effect.
Although the value of an estate that is exempt from inheritance tax was set at £350,000 with effect from 6 April 2010, this exempt threshold is to be frozen at the current level of £325,000. The justification for this freeze is that property prices have not increased over the last year.
COMPANY CARS AND VANS
Electric cars are cool! Or so the Government would like us to believe. From 6 April 2010 if you provide your employee with an electric car or van for their own use, it will be a tax free benefit. What’s more when your company buys a new electric van from 1 April 2010 it will be able to write-off the full cost for tax purposes in the year of acquisition. This tax treatment already applies to all new low emission and electric cars. These new tax incentives only apply to fully electric vehicles, hybrids don’t count.
The taxable benefit charged for the use of ordinary company cars and vans, and fuel for those vehicles, is set to increase from 6 April 2010. For example the driver of a car with CO2 emissions of 160g/km is currently taxed at 20% of the vehicle’s list price. From 6 April 2010 the driver of the same car will be taxed at 21% of its list price. Currently the fuel benefit for that vehicle is based on a fixed value of £16,900, From 6 April 2010 this value will increase to £18,000. Hence the taxable benefit of having free fuel for the car will increase from £3,380 to £3,780.
The taxable benefit charged when fuel is provided for private use in a company van will increase from 6 April 2010 from £500 per year to £550 per year.