| Enews - March 2007 | ||||||||||
Introduction As normal in the world of tax and business, March has been a busy month. Most notably Chancellor Gordon Brown presented his eleventh Budget on Wednesday 21 March 2007. This is expected to be his last before he makes a bid to become Prime Minister. The content of the Budget has been well reported and documented elsewhere but we take the opportunity to highlight a few points for you in relation to proposed changes to income tax, national insurance and corporation tax rates. Please browse through this month’s articles using the links below and contact us if any issues or questions arise.
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Corporation tax changes
The Chancellor has moved to discourage small businesses from incorporating for tax reasons by increasing the tax they will pay on profits up to £300,000, from 19% to 20% with effect from 1 April 2007. The small companies’ rate will further increase to 21% in 2008 and to 22% in 2009. In contrast the corporation tax rates for large companies, broadly those with profits of £1,500,000, are set to be cut from 30% to 28% from 1 April 2008. It remains to be seen whether these changes, taken together with the changes to tax and national insurance detailed below, take away the attraction of limited companies from a tax point of view. Certainly, no immediate changes to business structures are required because of the corporation tax increase to 20%.
Income tax rates There has been a lot of publicity about the announcement that the government propose to reduce the basic rate of income tax from 22% to 20%. This change is due to take effect from 6 April 2008 and not from 6 April 2007. 2008/09 The proposal is to radically change the tax rates for 2008/09 onwards when the 10% starting rate will be abolished for earned and pension income and the 22% basic rate of tax will be reduced to 20%. The higher rate of tax will continue at 40%. The starting rate will continue to be available for savings and investment income and capital gains. There are no changes to the tax rates applicable to dividends. 2009/10 The Chancellor also announced that the point at which people will start paying the higher rate of tax will be increased significantly to £43,000 from 2009/10. Not all good news - watch the national insurance (NI) There is, however, a significant sting in the tail for those with earned income. For 2007/08 there is no change in the rates of NI but there are significant proposed changes to the limits between which NI contributions are payable. For 2007/08 the lower and upper earnings limits (UEL) increase by inflation so that employees will pay 11% NI on earnings between £100 and £670 per week. Employees continue to pay contributions of 1% on earnings above the UEL. For 2008/09 the UEL will be increased by £75 per week above indexation. The upper profits limit for Class 4 NI for the self-employed will also be increased in 2008/09 by £75 per week above indexation. In 2009/10 the UEL will be aligned with the point at which the higher rate of income tax becomes payable. The government claims the increases in NI are aimed at simplifying the tax system but it comes at quite a cost to employees and the self-employed.
Construction industry scheme With less than one month to go, HMRC have been issuing packs to contractors to help them with the new rules. The new system which includes the introduction of a new monthly return will include:
Do get in touch if you want help dealing with the new return.
Employers end of year returns The employers annual returns P35 and P14 (P60) are due for submission to HMRC by 19 May 2007. There is a tax free incentive payment due of £150 for small employers with less than 50 employees who successfully file their returns electronically. HMRC have issued their usual guidance and a list of things to check for in the year end paperwork. Unfortunately there are some errors in the guidance with regard to the national insurance limits used. Use the links below to access the original guidance together with the changes. HMRC have also announced that their online system with be unable to process returns at all between 4 and 6 April and will be able to accept returns but not issue acceptance or rejection notices on 7 and 8 April. The shutdown of the system is due to them running the annual tax year rate change updates.
National Minimum Wage increases The new National Minimum Wage rate of £5.52 (£5.35) an hour from October 2007 has been announced. Other rates rise from £4.45 to £4.60 for 18-21 year olds, and from £3.30 to £3.40 for 16-17 year olds. HMRC are responsible for enforcing the NMW and have recently started a programme of targeted enforcement. As reported in last months enews employers must pay the arrears or face a potential fine of £200 per employee.
Consultation on workplace disputes The Department of Trade and Industry and has launched a consultation to look at how to improve the way employment disputes are resolved. The consultation follows a wide-ranging independent review. The government has said that it is committed to piloting any new approach to dispute resolution that follows the consultation. Alistair Darling welcomed the independent review and said: ‘Workplace disputes are expensive and wasteful for employers and stressful for employees. We want to find the best way to reduce the numbers, get them solved earlier, and keep the system fair for everybody.’ Michael Gibbons, who carried out the review, said: ‘In conducting this Review I was struck by the overwhelming consensus that the intentions of the 2004 Dispute Resolution Regulations were sound and there was a genuine attempt to keep them simple. However they have had unintended consequences which have outweighed their benefits. I have therefore made recommendations today to bring about effective resolution of disputes as early as possible.’ The DTI is seeking views from businesses, individuals, trade unions, representative bodies, and other interested parties. The consultation will close on 20 June 2007. To take part in the consultation and read the full press release click on the link below.
Check your state retirement pension entitlement A recent case has once again illustrated the difficulties for people who don’t check their own state pension entitlement and later find out that there are ‘holes’ in their record. The case in question was Rose v R&C Commissioners and concerned the taxpayer who reached the state pension age on 25 September 2000. A few months before he was 65, the taxpayer was sent a pre-retirement estimate of his pension by the DWP and objected when he was told that he would not receive a full state retirement pension. He was referred to HMRC. In broad terms, a male pensioner is entitled to a full basic pension if he has paid or been credited with the requisite number of NICs for 44 of the 49 years, starting with the contribution year in which he became 16 and ending with the contribution year ending before the year in which he became 65. The taxpayer had spent some time in the forces and also was in full time education for several years after he was 16 and before he started full time work. However, the contribution records showed that he received credits for only part of the period of education and that he had paid no voluntary contributions at the time or since. When this became clear, the taxpayer offered to make good the deficiency but HMRC refused to accept any additional contributions as he was out of time. The Special Commissioner found that, after a detailed examination of the facts, documents and HMRC’s evidence, that the taxpayer’s contribution record was a reliable record. The taxpayer’s contention that the record was incomplete or inaccurate was dismissed. Based on the evidence, the Special Commissioner was satisfied that HMRC had sent the taxpayer notice of the non-payment and details of the position of someone who did not pay. HMRC did not dispute that the taxpayer failed to pay as a result of his ‘ignorance or error’. However, based on the evidence, the taxpayer was aware at the time of his choices, or would have been aware of them if he had read the leaflets he was sent and made enquiries. He chose at that time not to enquire or not to pay and so chose not to exercise due care and diligence in protecting his contribution record. The taxpayer’s appeal was dismissed. This case illustrates the problem faced by many in that we put these things to one side to deal with at a later date. Don’t miss out on your pension entitlement. State pension entitlement can easily be checked by asking for a pension forecast.
VAT fuel scale charges In previous enews we have advised you of HMRC’s intention to change significantly the VAT fuel scale charges payable by businesses on the provision of fuel for private motoring for their company car drivers. The system of calculating the output VAT charge on a simple cylinder banded table is withdrawn for the businesses first VAT return commencing after 1 May 2007. The new 21 band table will obviously take some getting used to and relies on knowing the benefit in kind percentage which is linked to the CO2 emissions of the car and the type of engine. Under the benefit in kind system there are discounts available for environmentally friendly cars. The output VAT charge for a quarter is found by looking up the relevant percentage in the table.
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