The hidden budget - an expert view
Chartered accountant, Paula Tallon, a partner of BDO Stoy Hayward LLP, gives the Budget an expert perusal and unearths some hidden gremlins
In his 2009 Budget Report the Chancellor decided to address the huge fiscal deficit with a combination of short-term borrowing, tax increases and more public sector cost-cutting. He intends to provide further help for businesses - partly paid for by the tax increases - but this additional help is rather limited and disappointing.
In this summary, I will look firstly at the forthcoming tax increases and then at the extra help for businesses. Finally, the Budget Report contains an alarming amount of material on new penalties and compliance measures that will apply to both businesses and individuals.
Tax - who will pay the price?
Reducing the fiscal deficit involves higher taxes, and Mr Darling has brought forward the day of reckoning, with high earners bearing the brunt of the cost.
In his 2008 Pre-Budget Report the Chancellor proposed a new top income tax rate of 45% for individuals with incomes of over £150,000, with effect from April 2011. This has now been revised - the new top rate will be 50%, and the increase will take effect a year sooner, from April 2010.
In addition, from April 2010 individuals with income of over £100,000 will see their income tax personal allowance gradually reduced to nil in one rather than two stages.
Also from April 2010, the top rate of income tax for dividends will be increased to 42.5% for individuals with income of over £150,000. Here, there may be an opportunity for companies to pay dividends before April 2010, with the shareholder loaning funds back to the company.
Furthermore, from April 2011, individuals with incomes of over £150,000 will gradually lose higher-rate tax relief for pension contributions. At an income level of £180,000, relief will only be available at 20%. It will not be possible to obtain higher-rate relief by paying higher contributions before April 2011 - the Chancellor thought of that one!
But it's not just the well-off who will be hit. Mr Darling omitted to mention in his speech that he had already decided to raise national insurance contributions by 0.5% from April 2011, so most employers and employees will be helping to meet the cost of the credit crunch and recession for many years to come.
Additionally, several new anti-avoidance measures are being introduced which will affect individuals and businesses.
How will businesses be helped?
The best tax news for most businesses was probably the announcement that a 40% first year capital allowance will be available for expenditure on equipment in the 12 months from April 2009. There is no limit on the amount of qualifying expenditure, unlike the current 100% Annual Investment Allowance which is only available for expenditure of up to £50,000 (and which remains available in addition to the new 40% allowance).
This measure will especially help larger businesses that spend significant amounts on equipment. Sadly, the extra relief will only be available for a year, so businesses that plan to buy or replace expensive assets should ensure that they do so before April 2010.
The facility to carry back trading losses for three years instead of just one year will now last for another year. For companies, losses in accounting periods ending between 24 November 2009 and 23 November 2010 will now also qualify. For unincorporated businesses, losses arising in 2009/10 will now also qualify. Unfortunately, the cap on the amount of losses that can be carried back an extra two years remains at a disappointingly low £50,000.
The proposal to introduce a tax instalment payment scheme after April 2011 should help businesses, but details are yet to be worked out.
More penalties on the way
New penalties for submitting incorrect tax returns, and new powers for HM Revenue and Customs (HMRC) already came into effect on 1 April 2009. However, the need to maximise tax revenues and prevent tax evasion has led the Chancellor to go further:
From April 2010 employers will become liable to new penalties for repeated late payment of monthly PAYE amounts in any 12-month period. There will be no penalty on the first occasion, but a penalty of 2% of the late-paid amount will apply on the second occasion, rising to 5% on the third and all subsequent occasions. And it will not end there - any payment that is more than six months late will incur an additional 5% penalty, followed by still another 5% if it is over 12 months late.
New higher penalties will also be introduced for the late filing of most types of tax return, including PAYE
From a date to be announced, taxpayers who become liable to a penalty of at least £25,000 for deliberate tax evasion will be 'named and shamed'. This could have serious repercussions for some taxpayers.
It is also proposed that taxpayers who deliberately evade tax of at least £5,000 will have to submit more detailed returns for up to five years afterwards.
From a date to be announced, large companies will have to nominate a senior accounting officer to take responsibility for ensuring that the company's accounting systems are adequate for the purposes of accurate tax reporting. The nominated individual will have to certify annually to HMRC that this is indeed the case, and they can become personally liable to a penalty for failing to ensure that systems are adequate or for giving an incorrect certificate to HMRC!
A worrying note on which to end this summary - but an indication of where HMRC is going. Businesses which fail to meet their tax payment or tax filing obligations will clearly need to tighten their procedures if they are to avoid substantial extra costs from next year onwards.
