|
|
|
|
| |
2008 Budget Outlook |
|
|
 |
Welcome to the DMS 2008 Budget outlook. We have picked out the main issues likely to affect our clients and we hope
you find the information useful. We the new Non-Dom changes we have been flooded with queries. In light of this DMS
has decided to specialise in this area and are currently putting an expert team together...so watch this space.
In the mean time if you would be interested in a seminar specifically on the non dom tax changes then please reply
indicating so.
We look forward to working with you in 2008.
Income Tax and National Insurance
Personal tax rates and allowances
The changes to income tax mean a tax increase for many basic rate taxpayers with the removal of the starting rate band
and a marked increase in National Insurance for higher rate taxpayers:
- Removal of the 10% starting rate of tax for earned income from 6 April 2008.
- The basic personal allowance increases to £5,435 .
- The basic rate has been reduced from 22% to 20% for non-savings income and the starting rate of 10% will only be available to savings income. No other rates have changed.
Starting rate
- The starting rate of 10% for the tax year applies to the first £2,320 of taxable savings income (i.e. after allowances and reliefs).
- The starting rate does not apply to trusts. It also does not apply to non-savings income (e.g. salary, pensions).
Basic rate
- The basic rate applies to the next £36,000 of taxable income.
- The rate of tax depends on the type of income within the band:
- Savings and non-savings income - 20%
- UK dividend income - 10%
- Gains on life insurance bonds - 20%
Higher rate
- Higher rate tax applies on remaining taxable income at the following rates:
- Savings and non-savings income - 40%
- UK dividend income - 32.5%
- Gains on life insurance bonds - 40%
- Personal income tax allowance and basic rate limit to be raised in line with inflation for 2008/2009.
- National insurance rates to remain unchanged for 2008/2009. Upper limit increases from £34,640 to £40,040 for 2008/2009; other limits increased in line with inflation.
So for our Limited company clients with say a salary of £12,000pa and no other income, you can now receive £26,400 in dividends
during the 08/09 Year and not pay any further personal tax.
Corporation Tax
The reduction in the full rate of corporation tax will potentially leave more profitable companies with
additional money for investment; pension planning can help to offset the tax increase for companies taxed
at the smaller companies' rate (broadly companies with profits up to £300,000:
An increase to the small companies' rate of tax from 20% to 21% from 1 April 2008. A further
1% increase to 22% from 1 April 2009.
A cut in the full rate of corporation tax from 30% to 28% from 1 April 2008. The full rate
from 1 April 2009 will remain at 28%.
Income Shifting
The one major surprise in the Budget was the announcement that the proposed rules to stop income shifting
are to be postponed for 12 months pending consultation.
Income shifting? refers to a situation where one spouse or civil partner generates most of the profits
of a business but the other receives a proportion of the profit and the couple saves tax as a result.
The draft rules, which were designed to overturn the decision in the Arctic Systems case were widely seen
as unworkable and it is hoped that a more practical set of rules will emerge next year. The Government
remains committed to tackling income shifting but it has also announced a more wide-ranging review of
small business tax compliance.
Capital gains tax (CGT) changes
As widely covered, all capital gains arising on individuals and trustees from 6 April 2008 are to be
charged at a single 18% rate.
An annual exemption will remain in place and for 2008/09 this will be £9,600. The annual exemption
allows the first element of gains made in a given tax year to be exempt from CGT.
For gains arising on or after 6 April 2008 changes to the CGT regime include:
- the withdrawal of taper relief
- the withdrawal of indexation allowance
- the introduction of Entrepreneurs' Relief
Taper relief
Taper relief was introduced for disposals on or after 6 April 1998 and can reduce the amount of the gain
chargeable to CGT. The amount of relief available depends on whether the asset is classed as a business
or non-business asset and also on the length of time an asset has been held since 1998.
For gains arising on or after 6 April 2008 taper relief will no longer be available. The chargeable gain
will be liable to tax at 18%, after deducting allowable losses, any other reliefs and the annual exemption.
Entrepreneurs' Relief
In response to business leaders voicing their objections to the abolition of taper relief, the Chancellor
has introduced a new Entrepreneurs' Relief. The main effects of this relief are:
- the first £1m of gains qualifying for relief will be charged at an effective rate of 10%
- gains in excess of £1m will be charged at 18%
- an individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains.
Residence and domicile
The proposed changes in taxation that were included in draft legislation published on 18 January 2008
will come into force from 6 April 2008. Whilst the Government appears to have taken on board some of
the representations that have been made by various professional bodies, nevertheless the tax regime
from 6 April 2008 will be much more stringent than it is now.
The main changes that will apply from 6 April 2008 are as follows:
Residence
- Days for which an individual was present at midnight will be counted in arriving at the total
number of days for which an individual is present for UK tax residence purposes. This single change
reduces the effective number of days for which a regular visitor can be present in the UK, before
becoming tax resident, to one of the lowest in the World.
- There will however be an exemption for days in which an individual is in the UK only in
transit between two places outside the UK.
Domicile
The main proposal is that UK residents who are non-domiciled or not ordinarily resident, who wish
to continue to be taxed on a 'remittance basis' rather than on their worldwide income and gains,
will have to pay an annual tax charge of £30,000 on unremitted income and gains. This charge is in
addition to any tax due on UK income and gains or foreign income remitted to the UK.
The charge will apply if an individual has been resident in the UK for at least seven out of
the previous nine tax years. Individuals will be able to decide each tax year whether to pay the
charge and be taxed on the remittance basis or be assessed on their worldwide income and gains.
Those with unremitted foreign income and gains of less than £2,000 will however be exempt from this charge.
It will be down to the individual to nominate what foreign income or gains it relates to.That income
or gain will not be taxed if it is subsequently remitted, although rules will ensure that untaxed income
or gains not remitted are deemed to be brought into the UK first.
Remittance basis
Unremitted income is money/assets that you leave offshore and do not use in the UK. If the £30,000
charge is applicable you will not be taxed when you bring the £30,000 into the UK to pay your tax bill.
New legislation surrounding 'remittance' will capture a wide range of instances when money or property
is available to the benefit of an individual in the UK. This extends to goods brought to the UK and
services procured overseas but with a UK benefit.
Legislation will be introduced to determine how amounts remitted from a mixed fund (of income, gains and
capital) are to be taxed. The legislation will also prevent, in certain circumstances, 'alienation'
of income overseas; this formerly provided opportunities for tax free remittances. There will be a
test of whether the individual or their immediate family benefits in the UK.
Interest payments to service an overseas mortgage where the loan has been advanced into the UK will
be brought within the definition of a remittance.
Various amendments end the 'rule of source', which meant that remittance basis interest from, say, a
non-UK deposit account would not be taxed on being brought to the UK so long as the income generating
account did not exist at any time in the tax year of remittance. Going forward such income will be taxed
on the remittance basis regardless, even if the individual has elected to be taxed on a worldwide basis
in the year of remittance.
Amendments are to be made to the regime which taxes gains in overseas companies or trusts. Non- UK domiciled
settlors of non-UK trusts will remain exempt from tax, however, non-UK domiciled beneficiaries of non-UK
trusts will be brought into the remittance basis on trust gains. Remitted payments from the trust will
not be charged to tax if matched against trust gains prior to 6 April 2008. Provisions will allow non-domiciled
individuals to obtain relief for overseas capital losses which arise in a year when they elect to be taxed
in the UK on their worldwide gains.
Trustees will be able to elect to rebase assets held at 6 April 2008 to exclude any gain relating to the
period up to that date from being taxed on non domiciled beneficiaries. There are detailed rules relating
to the matching of capital payments from trusts to gains. Reassurance has been given over the amount of
information to be provided to HMRC in connection with the gains giving rise to tax on the remittance basis.
The accrued income scheme will be extended to non-domiciled individuals. The legislation which taxes income
and gains arising from a relevant transfer of assets abroad will be changed to bring non-domiciled
individuals within the remittance basis.
Example for many of our DMS clients
In order to determine whether our clients need to pay the £30,000 we are asking our clients to list all
their world wide assets and record what net income each one produces along with taxes to pay in the country
of jurisdiction. An example may be as follows -
- Australian born UK ordinary resident in the UK for more than 7 years - caught by new rules
- Trades shares in Australia - no CGT in Australia but subject to UK CGT @ 18%
- Has a rental property in Australia? usually negative geared so asset makes losses. If profits
subject to Australian Income Tax at Non Resident rates and UK income tax @ 40%. Tax relief can be sought
for Australian Tax paid.
- Earns bank interest and dividends in Australia - 10% with-holding tax deducted in Australia.
In the UK subject to 40% tax with relief for WHT paid.
So in the above case in rough figures the client would need to make over £75,000 (AUD $150,000) in income
or £167,000 (AUD$334,000) in capital gains or a mixture in between depending on what was capital and what
was income before electing to pay the £30,000. If the amount is less these amounts the client would just
pay on an arising basis.
There are many potential tax planning ideas that can potentially be done to reduce these impacts.
Obviously keeping cash in offset mortgage accounts which don't generate income and making capital (18% tax)
rather than income (40% tax) are 2 straight forward ideas.
In Summary
Most of the changes announced by the Chancellor show some relaxation from the draft legislation published
in January. However, and even taking them into account, there can be no doubt that the UK tax environment
for individuals seeking to become non-UK resident, and for persons who are currently non-UK resident but
who may be considering a move to the UK, will be far more severe than is currently the case. At the same
time, non-UK domiciled persons will face more stringent taxation on personal overseas income and capital gains,
and on income and gains arising from offshore trusts.
We are still awaiting the draft clauses that will give effect to the proposals announced in the Budget.
Until the content of these is known, and the Finance Bill receives Royal Assent, there will remain some
areas of uncertainty in this complex area of taxation.
A final note of comfort may be taken from the Government statements issued on Budget Day, which indicate
that no substantial changes to this area of taxation are proposed for the remainder of this or the
next Parliament.
Countering avoidance
Double taxation treaties
Legislation is to be introduced in Finance Bill 2008 to reinforce legislation within the Finance (No2) Act
1987, stipulating that double tax treaties do not exempt UK residents from UK tax on profits of a foreign
partnership. Certain arrangements rely on the business profits article of double tax treaties to exempt
profits from UK tax. In addition to providing clarity on the 1987 legislation, provisions will be included
to ensure that the business profits article cannot be used to prevent income of UK residents being chargeable
to UK tax.
These changes are BAD NEWS for many contractors using schemes relying on the above laws. We have spoken to
many contractors in the last week affected by these changes and if you would or your friends would like to
discuss alternative arrangements please contact us at info@dms-london.co.uk
Sundry changes
Various changes are being made to counter a number of avoidance schemes notified under the disclosure rules.
These include:
- Schemes involving arrangements to avoid tax by disguising amounts that are in substance interest
- Preventing individuals avoiding income tax by making manufactured payments in the course of a sale and
repurchase or stock lending arrangements
- Manufactured payments to avoid income tax
Compliance checks
HMRC is currently undertaking a review of all of its powers to enforce tax compliance. A new penalty
regime for direct taxes was introduced last year and further reforms are announced in the Budget.
A whole raft of differing powers which set out HMRC's right to inspect taxpayers' records will be replaced
by a set of new powers which will apply across all of the taxes from April 2009. These powers include:
- Power to inspect records specified in tax legislation
- Power to visit business premises to inspect records
- Power to require third parties to provide information which is relevant to a person's tax Liability
However, a proposal to give HMRC powers to undertake inspections of records at private premises
has not been proceeded with.
Penalties
The new penalty regime announced last year is to be extended to indirect taxes. There will be four
categories of 'offences':
- Innocent error - nil
- Failure to take reasonable care - 30%
- Deliberate understatement - 70%
- Deliberate understatement with concealment - 100%
Mitigations will be available where a taxpayer makes a disclosure. Where there is a failure to notify HMRC of a
taxable activity similar penalty will apply. The new penalties will come into operation between 2009 and 2010.
Indirect taxes
Revised VAT turnover limits
The annual taxable turnover test, which determines whether a person must be registered for VAT, is to be
increased from 1 April 2008 to £67,000 (from £64,000). The threshold which determines whether a person may
apply for deregistration is to be increased from 1 April 2008 to £65,000 (from £62,000). The registration
and deregistration threshold for acquisitions of goods from other EU Member States will increase to £67,000.
Correcting errors on previous returns
For certain indirect taxes there is currently the capacity to make an adjustment on a current return in
respect of errors made on previous returns where the quantum of those errors amounts to less than £2,000.
For accounting periods commencing after 1 July 2008 this figure is to be increased to the greater of £10,000
or 1 per cent of turnover subject to an upper limit of £50,000 for most of the taxes effected (including VAT).
This is a measure which decreases the burden on smaller businesses to separately disclose errors which
can now be 'self-accounted' without specific correspondence with HMRC (subject to the new limits).
|
| |
|
| |
|
|
 |
 |
Dynamic Management Solutions Limited is a company registered in England and Wales with company number 3652783
and whose business address and registered office is 8 Quarles Park Road, Chadwell Heath, Essex RM6 4DE
|
|
|
