Budget 2008

1. Introduction
2. Income Tax
3. Capital Gains Tax
4. Corporation and Business Tax
5. Indirect Taxes
6. Stamp Duties
7. Domicile and Residence 
8. Miscellaneous

1. Introduction 

Well, how much new tax material can a Chancellor issue before his first Budget? Could Mr Darling have set a record?

On Capital Gains Tax and non-doms alone, we have all endured months of suddenly- announced reforms, so-called “consultation”, ill considered draft legislation, modifications, further fine-tuning and other guidance. These issues are of vital importance to those affected, yet sensible planning in anticipation of the new rules has so far been made difficult by the uncertainties.

Proposed new rules have also been set out in advance for income “shifting” (continuing an unpleasant connotation) between those who own and run smaller businesses, which have been widely regarded by tax advisers as unworkable. Mercifully, the introduction of these has been postponed.

Much water has gone under the bridge since Budget 2007 in another sense too. A year ago the Budget was seen to be a preliminary to a change of PM, and also perhaps to a snap general election. Green policies are now, more than ever before, centre-stage. How times have changed.

A surprising number of changes that were to come into effect in April 2008 were in fact announced a year ago by the current PM. These included:

• A whole new capital allowance regime for businesses and companies, where he gave away a new £50,000 annual investment allowance but cut back on the rate of most existing capital allowances and announced the abolition (by 2011) of allowances for industrial, hotel and agricultural buildings, 
• The drop in the basic rate of income tax from 22% to 20%, offset by the abolition of the 10% lower rate band, 
• The drop in the rate of corporation tax from 30% to 28%, offset by another step up in the small companies rate of corporation tax, from 20% to 21%.

When the spending side of the Budget and the need to maintain some control over fiscal balance is also considered, we had been wondering how much room for manoeuvre Mr Brown had left for Mr Darling.

In the event, most of these measures that had already been announced have been confirmed.

The capital gains tax reforms for individuals and trustees are to go through from 6 April. This will mean a flat rate of capital gains tax of 18%, but entrepreneurs’ relief will reduce the effective rate of tax to 10% for the first £1 million of gains on the sale of business assets in certain circumstances.

The changes for non-domiciled individuals and offshore trusts will also be implemented, and some concessions (but probably not enough) have been made in the light of representations.

The new capital allowance regime will go ahead. Until Budget 2008 there had been no announcement about the new rules for business cars. This has now been remedied, and in line with Mr Darling’s emphasis on environmental issues, the annual writing down allowance on from 1 April 2009 will depend on the level of CO2 emissions.

The changes to the rates of income tax and corporation tax that were announced last year have been confirmed. Not surprisingly, Mr Darling did not touch on the stings in the tail during his speech.

As noted above, the proposed new rules on income shifting have been deferred for a year, to allow for a further period of consultation. The previously stated intention to introduce new legislation to apply from 6 April 2008 has been abandoned.

The new material in Budget 2008 does not hugely impact on the overall burden of taxation. There have been further tax measures towards climate change, notably in respect of the banding of vehicle excise duties from 2009, a new ‘showroom tax’ from 2010 and a 10% increase in the revenues which are forecast to be generated from the second year of the new plane duty which is to start in November 2009.

Particularly targeted for benefits are families in poverty, and the elderly.

The detail in the press releases includes various new anti-avoidance measures and the introduction of a new approach to penalties. Provision is being made for compliance inspections to cover direct taxes as well as VAT and PAYE.

All in all, the voluminous Budget material includes 107 technical Budget Notes. This compares with 81 last year and is indeed a record we could all do without.


2. Income Tax 

2.1   Income Tax Allowances and Rates

From 6 April 2008 the starting rate band of 10% will be abolished for all non-savings income and the basic rate band will be reduced from 22% to 20%.

The 10% rate will still apply to the first £2,230 of taxable savings income provided that total non-savings income does not exceed £2,230. In addition, UK dividends will still be taxed at 10% up to the basic rate threshold and at 32.5% thereafter.

For 2008/09 the Personal Allowance increases in line with indexation to £5,435. The Personal Allowance for those over 65 will be increased £1,180 above indexation to £9,030 and for those aged 75 and over to £9,180.

Full details of allowance rates and thresholds applicable in 2007/08 and 2008/09 are set out in Tables A and B.

2.2   Gift Aid: Transitional Relief

Although the basic rate of income tax will be reduced to 20%, Charities will be able to claim Gift Aid from HMRC at a transitional rate of 22% for qualifying donations made between 6 April 2008 and 5 April 2011; providing charities with additional Gift Aid worth around £300m over three years. The transitional relief will not impact on the amount of higher rate tax relief that the donor might claim.

The Budget also announced a comprehensive package of measures in response to the Gift Aid consultation, including reforms to the auditing process; a programme for bringing additional smaller charities into Gift Aid; redesign of guidance; and the launch of targeted marketing tools.

2.3   Income of Beneficiaries under Settlor-Interested Trusts

Legislation will be introduced, effective from 6 April 2006, to ensure that income from a settlor-interested trust is treated as one of the highest slices of income. This corrects an anomaly that arose due to the 2006 Trust Modernisation measures.

The income of a settlor-interested trust is treated as that of the settlor for tax purposes, and any tax paid by the trustees is treated as tax paid on behalf of the settlor. A discretionary payment from such a trust, made to a beneficiary other than the settlor, has attached a non-repayable tax credit of 40% to ensure the income does not have tax paid or reclaimed on it twice.

Without these changes, trust income has been treated as charged before savings and dividend income and, therefore, a payment from a settlor-interested trust could push a taxpayer into the higher rate on such income, producing an artificially high tax liability.

2.4   Restrictions on Trade Loss Relief for Individuals

Loss relief claims against other income and gains (‘sideways loss relief’) by an individual carrying on a trade in a non-active capacity will be restricted as follows:

• No sideways loss relief will be available where a loss arises as a result of tax avoidance arrangements made on or after 12 March 2008: 
• There will be an annual limit of £25,000 on the total amount of sideways loss relief available for such trades, subject to transitional arrangements for basis periods straddling 12 March 2008.

An individual carries on the trade in a non-active capacity where an average of less than 10 hours a week is spent personally engaged in the commercial trading activities of the business.

These restrictions will not however apply to losses derived from qualifying film expenditure or to losses of a Lloyds underwriting business.

2.5   Double Taxation Relief: Income Tax

Credit for foreign tax paid by an individual after 6 April 2008 on income from a trade or profession, arising after 6 April 2008, will be restricted to the amount of UK tax due on the earnings.

2.6   Avoidance of Income Tax Using Manufactured Payments

As announced in January, the Finance Bill will contain a targeted anti-avoidance rule designed to prevent individuals achieving substantial tax deductions through manufactured payments.

There were a range of avoidance schemes being marketed under which individuals borrowed stock, accounted for deemed interest (the manufactured payment) and then returned the stock at a lower price, thus retaining the tax loss represented by the “interest” expense which could be set against other income.

New legislation will put the ineffectiveness of these arrangements beyond doubt. 

2.7   Double Taxation Treaty Abuse

A tax avoidance scheme using the Business Profits Article of Double Tax Treaties has been stopped.

The scheme worked by diverting income from a UK resident individual to a foreign partnership comprised of foreign trustees, while continuing to allow the income to belong to the UK resident as a beneficiary of the foreign trust.

Legislation is to be introduced to make clear that tax treaties do not exempt UK residents from UK tax on any profits of a foreign partnership to which they are entitled. This is to be treated as always having had effect.

With effect for income arising on or after 12 March 2008 legislation is to be introduced ensuring that the Business Profits Article cannot be read as preventing income of a UK resident being chargeable to UK tax. 

2.8   Income Tax Exemptions

Payments made under the following schemes will be exempt from Income Tax and disregarded for National Insurance Contribution purposes from 6 April 2008: 

• Return to Work Credit; 
• In-Work Credit; 
• In-Work Emergency Discretion Fund; and 
• In-Work Emergency Fund. 

2.9   Company Car Benefit Tax

Employees who are provided with a company car available for their private use are charged to Income Tax based on a percentage applied to the list price of the car, based on the CO2 emissions.

The percentage rate applied ranges from 15% to 35% with most diesel cars attracting a 3% supplement. The 15% rate for petrol cars applies where CO2 emissions are at or below 135 grams per kilometre for both 2008/2009 and 2009/2010.

Legislation introduced in the Finance Bill 2008 will set the rates of company car tax charge for 2010/2011 and subsequent years. This will lower the CO2 emissions threshold for the 15% rate to 130 g/km.

Where the car provided has been manufactured to run on E85 fuel (that is 85% ethanol and 15% petrol) the percentage will be reduced by 2% from 6 April 2008.

In addition, with effect from 6 April 2008, cars emitting 120 g/km or less will attract a lower 10% rate (13% for most diesels).

Car fuel benefits are also based on percentages derived from CO2 emissions and for 2008/2009 the multiplier for these percentages will increase to £16,900.

2.10   Employer Provided Vans: Fuel Benefit Rules

Legislation will be introduced in Finance Bill 2008 to ensure that the reimbursement of fuel for private use is not treated as earnings for tax purposes and therefore the same rules will apply to the provision of van fuel for private use as the rules currently in place for company car fuel.

The annual taxable figure in respect of private van fuel benefit remains at £500.

2.11   Individual Saving Accounts and Northern Rock Bank

As previously announced, legislation will be included in Finance Bill 2008 to allow individuals who withdrew cash from their Northern Rock ISAs between 13 September and 19 September 2007 to reinvest in a new ISA. The re-investment must be made between 18 October 2007 and 5 April 2008.

The re-investment of withdrawn funds may be made with the same or a different ISA provider and this will not count towards the investor’s annual ISA subscription limit.

2.12   Individual Saving Accounts and Other Saving Accounts: Reducing The Administrative Burden

From 6 April 2008 there will be no requirement for ISA managers to submit quarterly returns to HMRC. This will be replaced by an annual statistical return made after the end of the tax year. The requirement to make an annual ‘market value’ return is unchanged. In addition there will be no requirement to retain a copy of the written application from an investor for a new ISA.

Similarly, financial institutions operating the Tax Deduction Scheme for Interest (TDSI) will no longer be required to retain applications from investors for gross payment of interest. This change will take effect at a later date to be determined in regulations.

The financial institutions will instead be required to record the application information and send written confirmation to the customer. 

2.13   Taxation of Personal Dividends

Legislation will be included in the 2008 and 2009 Finance bills to extend the benefit of a notional tax credit to certain non-UK dividends.

From 6 April 2008, UK Resident individuals and UK and EEA Nationals with small shareholdings (below 10%) in non-UK resident companies will be entitled to a non-repayable tax credit equivalent to 1/9th of the distribution (i.e. 10% of the gross dividend). The previously announced proposal to set a maximum annual value on the qualifying non-UK dividends will not be introduced.

From 6 April 2009, such individuals with larger shareholdings will also be entitled to a non-repayable tax credit provided that a tax on the corporate profits is levied in the county of residence. Anti-avoidance measures will also be introduced in order to prevent abuse.

2.14   Funding Bonds

Legislation will be introduced in the Finance Bill, effective from 12 March 2008, to clarify how a repayment claim in respect of tax treated as paid to HMRC by a funding bond should be handled.

Where interest has been paid to an individual in the form of funding bonds, the tax on that interest is often also paid by the bond issuer to HMRC in the same form. The Finance Bill will confirm that HMRC can satisfy such a repayment by a transfer of the funding bonds. If the bonds held by HMRC are not in a denomination suitable for satisfying the repayment, they will be able to force the issuer to divide the bonds accordingly. 

2.15   Timing of Income Tax Payments by Unauthorised Unit Trusts

Legislation will be introduced in the Finance Bill, to take effect from the date of Royal Assent, to correct an unintentional change made in the Income Tax Act 2007 that delayed the payment of tax deducted from distributions by Unauthorised Unit Trusts.

Trustees of such Unit Trusts will be required to pay tax to HMRC via two payments on account, on 31 January and 31 July, and a balancing payment on 31 January of the following year.

2.16   Property Authorised Investment Funds

New regulations are to be introduced with effect from 6 April 2008 to provide a more favourable tax regime for authorised investment funds that invest mainly in property, UK Real Estate Investment Trusts (UK-REITs) or similar foreign companies.

Such funds will be able to elect for the new regime such that instead of rental profits, or income from REITs, being charged to Corporation Tax in the fund and distributions from the fund being made as dividends with a non-repayable tax credit, they will themselves be exempt from tax on their property income, and any distributions will be made under deduction of tax at the basic rate.

A basic rate taxpayer will have no further liability, and non-taxpayers and exempt bodies, such as charities, will be able to reclaim the tax deducted.

Funds will have to meet certain conditions, including:

• being incorporated as an open-ended investment company; 
• carrying on a property investment business (at least 60%); 
• a ‘genuine diversity of ownership’ condition; and 
• limits on the holdings of corporate investors and the type and amount of loan financing in the fund.

2.17   Venture Capital Schemes

Changes are proposed to the Enterprise Investment Scheme (“EIS”), the Corporate Venturing Scheme (“CVS”) and the Venture Capital Trust Scheme (“VCT”).

The amount qualifying for Income Tax relief under EIS is to be increased from £400,000 per annum to £500,000 for shares issued after 6 April 2008, subject to approval from the European Commission.

There will, however, be some limitation in activities that qualify under the three schemes. Activities relating to shipbuilding, coal or steel production will now no longer qualify for EIS and CVS reliefs for shares issued on or after 6 April 2008. For VCTs the change will affect funds raised on or after that date. 

2.18   Enterprise Management Incentives (“EMI”)

The Chancellor has announced minor amendments to EMI options granted on or after 6 April 2008. EMI has proved to be very popular with employees and employers in the past and it is now proposed that the individual limit for the market value of options granted will be increased from £100,000 to £120,000.

Due to EU rules on State Aid, two minor amendments are proposed:

• EMI will only be available to companies with less than 250 employees
• Companies involved in shipbuilding coal and steel production will no longer qualify for EMI 

 

3. Capital Gains Tax 

3.1   Capital Gains Tax Rates

The annual exemption for 2008/09 will be increased to £9,600 for individuals and £4,800 for the majority of trusts.

For 2008/09, capital gains will be taxed at 18% unless Entrepreneurs Relief is available.

3.2   Capital Gains Tax: Relief on Disposal of a Business (Entrepreneurs’ Relief)

As announced in the Pre-Budget Report, with effect from 6 April 2008 there will be a flat rate of Capital Gains Tax (CGT) of 18% for all assets. Other changes include: 

• Taper Relief (both business and non-business) will be abolished, as will indexation relief.
• For assets held at 31 March 1982, the market value at that date will be the base cost for CGT, even where this is lower than the cost of acquisition. 
• ‘Entrepreneurs’ Relief’ will provide an effective 10% tax rate on capital gains of up to a cumulative lifetime limit of £1 million (ignoring gains realised before 6 April 2008), where certain criteria are met.

To qualify for Entrepreneurs’ Relief the disposal must relate to: 

• the whole or part of a qualifying business (excluding investment business) owned by the individual throughout the period of one year ending with the date of disposal, or; 
• assets in use in a business at the time it ceased, where the individual had owned the assets for a period of one year at the date of cessation and the disposal occurs within three years of the cessation, or; 
• shares or securities in a company, subject to meeting the following criteria: 
  • The shares are in a trading company or holding company of a trading group
  • The shareholder must be an officer or employee of a group company 
  • The shareholder must own at least 5% of the ordinary share capital carrying at least 5% of the voting rights.

All of these conditions must be satisfied throughout the 12 months prior to the disposal, or the 12 months prior to the cessation of trade (provided that the disposal is made within three years of trade ceasing).

Where qualifying company shares or securities are sold, associated disposals of assets used in the company’s business may also be eligible for this relief. For example, this might be the premises occupied by the company.

Additionally, where disposals have taken place prior to 6 April 2008, but capital gains have been deferred until after that date, relief may be available under Entrepreneurs’ Relief. This will apply where gains have been deferred through the sale of shares in exchange for qualifying corporate bonds and all of the criteria for relief were met at the disposal date. Alternatively, where non-qualifying corporate bonds were obtained and the criteria are met when the bonds are redeemed, relief may be available

3.3   Offshore Funds: New Tax Regime

The Government will continue to review the Offshore Funds regime with a view to introducing a revised definition in Finance Bill 2009.

In order for a sale of a holding in an offshore fund to be taxed under CGT instead of Income or Corporation Tax, the offshore fund must be certified by HMRC as a qualifying fund.

A new measure, to be effective at a future date as appointed by Treasury order, will mean that to attain qualifying status an ‘offshore fund’ will no longer have to pay out at least 85% of the income each year, but be able to report its income to investors who will then be subject to tax on that reported income. The qualifying conditions for the new rules need only be proven at the outset, rather than annually, and it is envisaged that minor failures to keep to the conditions would not retrospectively lose the fund its qualifying status. 

3.4   Funds of Alternative Investment Funds

Currently, a gain made by an Authorised Investment Fund on a disposal in a non-qualifying offshore fund is taxed to Corporation Tax within the fund. A subsequent sale by an investor of units in the authorised fund may result in a charge to Capital Gains Tax.

Under proposed new regulations, effective from a date to be set by Treasury order, the tax burden will shift solely to the investor if the authorised fund elects to become a ‘Tax Fund of Alternative Investment Funds’ (Tax FAIFs). The Tax FAIF will be exempt from tax on its disposal of the non-qualifying offshore fund and an investor will then be chargeable solely to Income Tax on any gain made on his disposal.

4. Corporation and Business Tax 

4.1   Corporation Tax Rates

From 1 April 2008 the main rate for Corporation Tax will be reduced to 28%.

The Small Companies Rate will increase to 21% from 1 April 2008 and it has previously been announced that the rate will increase to 22% from 1 April 2009.

The thresholds for the Small Companies Rate and the Main Rate remain at £300,000 and £1,500,000 respectively.

The marginal rate of corporation tax applying to profits between £300,000 and £1,500,000 will be 29.75%

There are separate rules governing ring fence profits, which primarily relate to companies in the oil industry.

Full details of rates and thresholds applicable in 2007/08 and 2008/09 are set out in
Table I.

4.2   Associated Companies and Partnerships

The legislation relating to associated companies, which affects the rate of corporation tax payable on a company’s profits will be relaxed in relation to some Partnerships.

The legislation relies on a definition of “control” which is widely drawn. If a shareholder or director of a company was also a member of a partnership it was necessary to consider the rights or powers held by the other members of the partnership to establish the number of companies associated with the company in question.

New legislation will be introduced revising the definition of “control” from 1 April 2008 such that the rights and powers of other business partners will only be attributed to a shareholder or director when “relevant tax planning arrangements have at any time had effect in respect of the taxpayer company”. These arrangements will be defined as those involving the shareholder/director and the partner to secure a tax advantage by obtaining greater Small Companies Rate Relief.

4.3   Capital Allowances: Industrial Buildings Allowances, Enterprise Zone Allowances and Agricultural Buildings Allowances

Legislation will be included in Finance Bill 2008 to confirm the gradual withdrawal of IBAs and ABAs, as announced in Budget 2007.

The phased withdrawal of industrial and agricultural buildings writing-down allowances will have effect for chargeable periods ending on or after: 

• 1 April 2008 for businesses within the charge to corporation tax and
• 6 April 2008 for businesses within the charge to income tax.

There will be a transitional period for the three years from April 2008 whereby the amount of writing down allowance will be reduced by 25% in each year such that for the financial year beginning 1 April 2011 the amount of writing down allowance is reduced to nil.

Finance Bill 2008 will also include an anti-avoidance rule that will limit the amount of a writing-down allowance on a time-apportioned basis, where property qualifying for IBAs is transferred or sold between connected parties and the purpose, or one of the main purposes, of the sale or transfer is the obtaining of a tax advantage. 

Enterprise Zone Allowances

Enterprise Zone Allowances (EZAs - which primarily provide a 100% allowance for building in certain areas) will be withdrawn with effect from:

• 1 April 2011 for businesses within the charge to corporation tax and 
• 6 April 2011 for businesses within the charge to income tax.

The legislation will also provide that balancing charges in respect of EZAs will be retained for a limited period.

4.4   Capital Allowances: Plant and Machinery Allowances: Integral Features and Thermal Insulation

Legislation will be introduced to provide a new 10% writing down allowance on “integral features” of a building. The following assets will qualify as integral features:

• Electrical systems (including lighting systems.) 
• Cold water systems 
• Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system. 
• Lifts, escalators, and moving walkways. 
• External solar shading; and 
• Active facades

In addition, allowances for thermal insulation will be extended to expenditure on the thermal insulation of all existing buildings, used for any qualifying business, other than residential property business. All allowances for thermal insulation will, in future, be restricted to the new 10% rate, in place of the 25% rate that currently applies.

These changes will have effect in respect of expenditure incurred on or after:

• 1 April 2008 for businesses within the charge to Corporation Tax and 
• 6 April 2008 for businesses within the charge to Income Tax.

4.5   Capital Allowances: Plant and Machinery: Rate Changes and New Special Rate Pool

Legislation will be introduced to reduce the main rate of writing down allowance for new and unrelieved expenditure on general plant and machinery (including cars) from 25% to 20%.

The legislation will also increase the rate of writing down allowance on long life assets from 6% to 10%.

The measures have effect for the calculation of writing down allowances for chargeable periods ending on or after:

• 1 April 2008 for businesses within the charge to corporation tax and 
• 6 April 2008 for businesses within the charge to income tax.

For businesses whose chargeable period spans 1 April (Corporation Tax) or 6 April 2008 (Income Tax) a time-apportioned hybrid rate will have effect for unrelieved expenditure in any pool, including single asset pools. HMRC will provide a ready reckoner to assist businesses in calculating the hybrid rate. 

4.6   Capital Allowances Buying and Acceleration: Anti-Avoidance

Anti – avoidance legislation will be introduced to prevent avoidance of corporation tax through schemes that use arrangements intended to crystallise a balancing allowance on plant and machinery used for the purpose of the trade to make it available to a profitable group not intending to carry on the trade for the long term.

The measure will have effect where a company sells its trade, and so ceases to carry it on, on or after 12 March 2008. 

4.7   Overseas Pension Schemes

Migrant workers in the UK and their employers can obtain tax relief on contributions to non-registered pension schemes based outside the UK. New rules will ensure that those funds in non-UK pension schemes that have received UK tax relief are appropriately identified for the purposes of UK tax limits and charges on benefits so that they are equivalent to registered UK pension schemes.

For non-UK money purchase pension schemes, the measure will have effect for employer contributions paid on or after 12 March 2008. For non-UK defined benefit pension schemes, the measure will have effect on and after 6 April 2008.

4.8   Pensions: Regulation Making Powers

Legislation will be introduce in Finance Bill 2008 to provide for existing regulation making powers to be amended. This will allow certain payments from pension schemes to be taxed in the same way as other authorised payments made by pension schemes instead of as unauthorised payments. It will also allow the simplification of the administration of certain trivial commutation payments.

The measure will have effect on and after the date of Royal Assent. The regulations may have retrospective effect where this will not disadvantage anyone affected.

4.9   Pensions: Technical Improvements

Legislation will be included in Finance Bill 2008 to provide an exemption from the lifetime allowance test for small annual increases in pensions, and rounding. It will also allow greater flexibility in the choice of the Retail Price Index reference month including pension increases awarded within the first year of the pension commencing.

The amendments for small annual increases in pensions and rounding will be backdated to have effect on and after 6 April 2006. The change to the RPI reference month will have effect on and after 6 April 2008.

4.10   Approved Occupational Pension Schemes

Legislation is to be included in the 2008 Finance Bill to confirm that corporation tax relief for pension contributions is to be limited to payments actually made in the company’s financial year. Changes in legislation for “A Day” removed an express provision that prevented a tax deduction for expenses in the profit and loss account.

Although this apparently had no practical impact, the legislation is to be amended retrospectively to make this free from doubt.

4.11   Corporate Intangible Assets Regime: Anti-Avoidance

Legislation will be introduced in Finance Bill 2008 in relation to transactions made in respect of intangible assets (including royalties becoming payable) on or after 12 March 2008. In most cases the tax regime for intangible assets that applies to assets created or acquired on or after 1 April 2002 is beneficial, and therefore an anti-avoidance rule already exists to prevent older assets from coming under the current regime when they are transferred between related parties.

The legislation is being amended to clarify that the statutory tests for identifying related parties for this purpose are not affected by any company or partnership becoming subject to insolvency arrangements of any kind.

4.12   Employment-Related Securities

The Finance Bill 2008 will include legislation to clarify the deductions available for ‘amounts that constitute earnings’ in calculating taxable employment income. This is a correction following the Tax Law Rewrite, which had led to avoidance schemes that argued that deductions can include amounts that were exempt from tax and therefore reduce the amounts chargeable as employment income, chargeable as capital gains or increase Corporation Tax relief. No such deduction will be available for all relevant events and transactions occurring on or after 12 March 2008.

4.13   Research and Development (R & D) Tax Relief

Legislation will be introduced in Finance Bill 2008 to increase the rate of R & D tax relief to both small and medium-sized companies and to large companies.
Subject to state aid approval from the European Commission, the Government intends to introduce the following changes: 

• The rate of R & D Tax Relief for large companies will increase from 125% to 130% of qualifying R & D expenditure. 
• In the case of small and medium size enterprises, the rate of relief will increase from 150% to 175% for companies claiming enhanced deductions against profits.

To achieve approval from the European Commission, legislation will be introduced to exclude claims by companies whose most recent accounts are not produced on a going concern basis.
Additionally, a cap is to be introduced to restrict the amount of relief available to small and medium-sized companies to €7.5 million per R & D project.

There will also be amendments to the legislation applying to Vaccine Research Relief which will reduce the amount of relief available for all companies from 50% to 40% and to require large companies to make a declaration as to the incentive effect of the relief.

4.14   100% First-Year Capital Allowances for Natural Gas, Biogas and Hydrogen Refuelling Equipment

It is proposed that additional capital allowances will be available for “environmentally-beneficial” technologies.

Enhanced Capital Allowance Schemes that give 100% allowances for business investing in “energy efficient and water saving” schemes will be extended to cover new technologies when this year’s review is completed.

Similarly, 100% allowances will continue to be given for expenditure incurred on natural gas and hydrogen refuelling equipment. This scheme was originally due to end on 31 March 2008 but is now extended to 31 March 2013.

4.15   100% FYA: First Year Allowances for Expenditure on ‘Green’ Cars

A revised 100% first year allowance for expenditure on cars with CO2 emissions not exceeding 110g/km is to be introduced for five years until 31 March 2013. In addition, a transitional rule will be introduced to ensure that any leasing contracts entered into before 1 April 2008 involving cars which qualified under the old rules where the limit was 120g/km are unaffected by the reduction of the qualifying CO2 emissions limit to 110g/km.

This measure will have effect for expenditure incurred on or after 1 April 2008. 

4.16   Capital Allowances: Annual Investment Allowance

As previously announced, a new 100% Annual Investment Allowance (“AIA”) will be introduced for the first £50,000 of a business’s expenditure on most plant and machinery each year.

The new AIA will be available to:

• Any individual carrying on a qualifying activity (which includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office); 
• Any partnership consisting only of individuals; and 
• Any company, subject to the fact that groups will only be entitled to a single allowance per group.

The measure will have effect for expenditure incurred on or after:

• 1 April 2008 for businesses within the charge to corporation tax; and 
• 6 April 2008 for businesses within the charge to income tax.

The AIA will be pro-rated if the chargeable period is more or less than a year. Where a business has a chargeable period that spans 1 April (corporation tax) or 6 April 2008 (income tax) the maximum allowance is calculated as if the chargeable period began either on 1 or 6 April (as the case may be) and ended at the end of the chargeable period.

Where a business spends more than £50,000 in any chargeable period any additional expenditure will be dealt with in the normal capital allowance regime.

4.17   Capital Allowances: Introduction of First-Year Tax Credits

Companies within the charge to Corporation Tax that make a loss in a period in which they invest in certain designated energy-saving or environmentally-beneficial plant and machinery will be able to claim first-year tax credits in respect of qualifying expenditure incurred on or after 1 April 2008.

Losses attributable to 100% first year allowances on such plant and machinery will be able to be surrendered in exchange for a cash payment. The cash payment will equal 19% of the loss surrendered subject to an upper limit. The upper limit will be the greater of:

• The total of the company’s PAYE and national Insurance Contributions liabilities for the period for which the loss is surrendered; or 
• £250,000.

4.18   Capital Allowances: Small Plant and Machinery Pools

Legislation will be introduced to allow businesses to claim a plant and machinery writing down allowance of up to £1,000 where the unrelieved expenditure in the main pool or special rate pool is £1,000 or less. This will remove an administrative burden whereby currently businesses have to calculate writing down allowances on very small balances for many years.

The measure will have effect for chargeable periods beginning on or after:

• 1 April 2008 for businesses within the charge to corporation tax and
• 6 April 2008 for businesses within the charge to income tax.

4.19   Trading Stock

Where goods are either disposed of or appropriated from trading stock other than in the course of the trade, for tax purposes the profits should be adjusted to replace the actual proceeds with the market value.

This rule also applies where goods are acquired or appropriated into trading stock other than in the course of trade.

Although this rule has been in place for many years, legislation will be introduced in Finance Bill 2008 to put this on a statutory basis and preserve the current tax treatment. This will take effect for all transactions of non-trade appropriations of goods into or from trading stock on or after 12 March 2008.

4.20   Leased Plant or Machinery: Anti-Avoidance

Legislation will be introduced to counter an advantage which could be obtained either by generating a tax loss from lease payments where there is no commercial loss or by granting a lease over plant and machinery for consideration consisting largely of a capital sum as a premium.

The new rules will apply to payments made on or after 12 March 2008 for plant and machinery leased with other assets, and to transactions entered into on or after 13 December 2007 where no other assets are involved.

This measure also aims to counter tax advantages from the granting of a long-funding finance lease, from sale and finance leasebacks and lease and finance leasebacks, all applying with effect from 12 March 2008.

4.21   Controlled Foreign Companies: Anti-Avoidance

This measure is aimed to look through various schemes that have sought to take advantage by artificial means of the established rules that allow for relief from the CFC charge to UK tax. HMRC do not believe that any of these schemes work, but the new measure is intended to put this beyond doubt.

Draft legislation has been published to tighten up the technical CFC framework to make it clear that these schemes, which have used trust or partnership arrangements, do not work.

It is confirmed that where a foreign trust or special purpose vehicle that falls foul of the new legislation is being used for wholly commercial purposes, the existing exemption under the motive test should still apply. An advance clearance procedure for the motive test is available.

This new legislation will have effect on or after 12 March 2008. Where the changes are relevant to an accounting period that straddles this date, the accounting period will be split and the new rules will apply to the second part.

4.22   Financial Products Avoidance

This measure is in two parts. The first applies to large companies who enter into arrangements to avoid tax on returns from investments that are economically equivalent to interest. As an interim measure, legislation will close eleven specific types of disclosed arrangements that have been entered into to disguise interest as something else which is not taxable, or is covered by an artificial credit for overseas tax. The changes will apply to transactions relating to any time on or after 12 March 2008. It is intended to develop a generic anti-avoidance rule to counter disguised interest for 2009.

The second measure is designed to counteract disclosed schemes that allow lessors of plant or machinery to dispose of their rights for a tax-free sum. This will apply to arrangements entered into on or after 12 March 2008. 

4.23   Business Cars

Two reforms from April 2009 have been announced regarding the tax treatment of business cars. Both appear to apply to existing business cars as well as those acquired from April 2009 onwards.

Firstly, whereas from April 2008 business cars will attract 20% Writing Down Allowance (WDA), come April 2009 this will only apply to cars with CO2 emissions of 160g/km or less. Expenditure on cars with CO2 emissions above 160g/km will only attract 10% WDA. Subject to State Aid approval, cars leased to those in receipt of certain disability allowances will be placed in the main 20% capital allowance pool, regardless of the level of their CO2 emissions. It is unclear whether there will continue to be a restriction on capital allowances for “expensive” cars, i.e. those that cost more than £12,000.

Secondly, the tax relief for car lease rental payments will be reformed. Currently a proportion of the lease payments is disallowed where the car had a list price of more than £12,000. Under the new proposals, any disallowance will instead be 15% of the lease payments where the car would be in the 10% special rate pool. This suggests that from April 2009 there will no longer be any disallowance for leased cars with CO2 emissions of 160g/km or less.

5. Indirect Taxes

5.1   VAT: Turnover Limits

The registration threshold will rise by £3,000 to £67,000 from 1 April 2008. The de-registration limit rises similarly to £65,000.

The registration and de-registration limits for acquisitions from other European Union member states will also be increased from £64,000 to £67,000. 

5.2   VAT: Amendment to the Exemption for Fund Management

UK law is being amended to extend the VAT exemption for fund management to cover UK-listed investment entities (including investment trust companies and venture capital trusts) and some overseas funds. The measure will apply to supplies of services made on or after 1 October 2008.

5.3   Correction of Indirect Tax Returns

The limit up to which errors can be corrected on VAT returns is changing for periods starting on or after 1 July 2008. The current limit of £2,000 is being replaced by a new limit being the greater of £10,000 or 1% of net VAT turnover. Similar changes are being made to the error correction rules for Insurance Premium Tax, Landfill Tax, Climate Change Levy and Aggregates Levy. 

5.4   VAT: Changes in Fuel Scale Charges

Whenever a business funds private motoring by subsidising fuel, it must account for VAT fuel scale charges, that is, output tax.

The scale charge is based on carbon dioxide (CO2) emissions.

Businesses must use the new scales from the start of their next prescribed accounting period beginning on or after 1 May 2008.

5.5   VAT: Reduced Rate For Smoking Cessation Products

A reduced VAT rate of 5% currently applies to “over the counter” sales of smoking cessation products. 

Legislation is to be introduced to ensure that the reduced rate continues to have effect after 1 July 2008.

5.6   Transitional Period for “Fleming” Claims

Following the recent House of Lords judgment in the joined cases of Conde Naste and Fleming, a new transitional period has been introduced for the three-year cap on VAT refunds. VAT claims for under claimed input tax may be made for VAT periods falling between 1 April 1973 and 1 May 1997. VAT claims for over paid output tax may be made for periods falling between 1 April 1973 and 4 December 1996. Both types of claim must be submitted by 31 March 2009.

Changes are also being made to allow HMRC to issue assessments to adjust claims made under the above.

5.7   VAT: Option to Tax Changes

The rules concerning the VAT option to tax will change from 1 June 2008.

It will be possible to revoke an option to tax after 20 years (but not before 1 August 2009) with an automatic lapse in an option 6 years after a person ceases to have an interest in a property. The rules will alter for opted land or buildings acquired for use as dwellings or relevant residential purposes. The administration process will be simplified both in respect of multiple options and applications for permission to opt. 

5.8   Landfill Tax: Exemption For Waste From Cleaning Up Contaminated Land

Waste from cleaning up contaminated land disposed of by landfill is currently exempt from landfill tax, subject to obtaining a relief certificate from HMRC.

This exemption is to be phased out, with no new applications for exemption certificates to be accepted from 1 December 2008.

All certificates issued under the scheme will cease to be valid after 1 April 2012.

5.9   Landfill Communities Fund (LCF)

The maximum credit that landfill site operators may claim against their annual landfill tax liability for contributions made to bodies with objects concerned with the environment, enrolled under the LCF, is to be amended from 6.6% to 6%.

This will have effect from 1 April 2008.

5.10   Landfill Tax: Standard Rate

From 1 April 2008, the standard rate of landfill tax will increase from £24 per tonne to £32 per tonne.

Legislation will be included in Finance Bill 2008 to increase the standard rate by a further £8 to £40 per tonne as of April 2009. 

5.11   Hydrocarbon Oils: Duty Rates Changes and Rates Simplification

Legislation will be introduced in Finance Bills 2008, 2009 and 2010 to amend the duty rates for hydrocarbon oils and reduce the number of rates for heavy oils and light oils.

The simplification changes and the introduction of a rebate rate for biodiesel and bioblend will have effect on and after 1 April 2008.

5.12   New Aviation Duty Replacing Air Passenger Duty (APD)

Legislation will be introduced in Finance Bill 2008 to enable HMRC to proceed with the development of a new duty on aviation.

This will be formally introduced in November 2009, when it will replace air passenger duty.

5.13   Tobacco Product Duty: Rates

From 6pm on 12 March 2008, the rates of duty on tobacco products imported into, or manufactured in, the United Kingdom will be increased.

This means that the price of a packet of 20 cigarettes will increase by 11p.

5.14   Alcohol Duty: Rates

From Monday 17 March 2008, alcohol duty is increased by 4p on a pint of beer, 14p on a 75cl bottle of wine, 3p on a litre of still cider, 14p on a 75cl bottle of sparkling cider and 18p on a 75cl bottle of sparkling wine.

This is equal to a 6% increase in real terms on all alcoholic drinks. 

5.15   Calculation of Alcohol Duty

As of the date that Finance Bill 2008 receives Royal Assent, HMRC will no longer be able to disregard fractions of a penny in any amount of duty due.

HMRC will also introduce a common method of calculating the excise duty due on all categories of alcoholic drinks.

5.16   Removal of VAT Staff Hire Concession

Following an extended consultation, the current VAT staff hire concession will be removed on 1 April 2009. This concession allowed businesses to obtain temporary staff from agencies and only pay VAT on the agency fee as opposed to the wages element. In future, VAT will be charged on the entire consideration received, including the wages element. This measure will affect VAT registered businesses unable to recover all the VAT they incur, such as financial institutions, health providers, care homes, education providers, professional associations and charities.

6. Stamp Duties 

6.1   Stamp Duty Changes

One small change to Stamp Duty will have a very substantial administrative effect: after Budget Day, documents which would normally have required stamping with the minimum duty of £5 will no longer require stamping at all. Official estimates are that some 350,000 documents are presented for stamping each year, of which 68% are charged with the minimum duty.

The most important examples of documents that will no longer require stamping are stock transfer forms and other transfers recording gifts, declarations of trust and transfers on divorce or death.

Counterparts and duplicates will still need to be submitted for Adjudication however, even though no payment will be required.

Two small points clarify the extent of the Duty exemption for loan capital:

• As part of the program to encourage “Alternative Finance Arrangements”, it is confirmed that sukuk investments fall within the exemption 
• Although bonds whose rate of return depends in part on the results or value of the borrower are generally not exempt, where those bonds form part of a capital market arrangement and the right to interest is limited recourse, the exemption will be available from the date the Bill receives Royal Assent

6.2   Stamp Duty Land Tax Changes 

The Chancellor resisted demands for a general rise in the thresholds and rate bands for duty on conveyances of land but introduced a few modest reliefs whilst also closing some loopholes:

• Shared ownership schemes allow lower-income purchasers to buy only a part of their home with the balance being rented to them, normally by a housing association. Up to now, the occupier paid SDLT when they first entered into this arrangement. From Budget Day, the occupier can defer SDLT until they own 80% of the property 
• Last year, an exemption from SDLT was introduced for new homes which meet the zero-carbon standard. With effect from 1 October 2007, this exemption is extended to flats, offering complete relief from SDLT on first purchase of properties under £500,000 and a charge only on the excess for flats costing over £500,000 
• There is a slight easing of the anti-avoidance rules introduced in 2007 which charge SDLT on changes of interest within property investment partnerships. A transfer of interest with such a partnership will not attract SDLT and this amendment has retrospective effect.

Even though SDLT is not normally payable on property leases worth less than £125,000, there is still a reporting requirement. A simplification measure means that, later this year, the threshold for reporting the grant or assignment of leases will be raised to £40,000 and, in the future, agents such as lawyers will be able to sign necessary declarations on behalf of their clients.

Two SDLT avoidance arrangements are blocked from Budget Day:

• Some groups of companies had sought to take advantage of the SDLT exemption for transfers of property between group members by transferring a property between group members and then arranging for the vendor to leave the group before the new owner. This avoided any clawback of SDLT group relief when the transferee company left the goup. 
• Beginning in 2003, various elements of the Taxes Acts have been amended to permit “Alternative Finance Arrangements”, particularly financing arrangements that comply with Islamist principles. Some financial institutions have taken advantage of the provisions designed to facilitate re-mortgaging of property on alternative principles to acquire properties in special purpose vehicles, which could then be sold at the lower rate of Stamp Duty applicable to shares.

7. Domicile and Residence

7.1   Tax Law Rewrite: Remittance Basis and Foreign Dividend Income

Individuals claiming the remittance basis of taxation who are chargeable to Income Tax at the higher rate will be liable to tax at 40% rather than 32.5% on foreign dividend income remitted to the UK after 6 April 2008. This corrects an error introduced by the Tax Law Rewrite.

7.2   Residence and Domicile: The Residence Test and Day Counting Rules

The way in which the days in the UK are counted for the purposes of determining residence status will change from 6 April 2008.

An individual will be treated as present in the UK for these purposes if they are in the UK at midnight. This is a relaxation on the proposal announced in the Pre Budget Report to count both the day of arrival and departure.

There is an exemption for passengers in transit between two places outside the UK. Such days will be ignored provided that during this time they are not engaged in activities which are to a substantial extent unrelated to their passage through the UK. Attendance at a business meeting while in transit is considered to be sufficient to stop the exemption from applying. 

7.3   Residence and Domicile: Personal Allowances and the Remittance Basis

From 6 April 2008, UK residents paying tax on the remittance basis with unremitted foreign income and gains in excess of £2,000 a year will not be entitled to Income Tax personal allowances or the annual exempt amount for Capital Gains Tax.

These allowances will remain available in any year where the remittance basis is not claimed.

7.4   Residence and Domicile: Closing Loopholes in the Remittance Basis

There are to be a number of changes made to the remittance basis that will affect all UK residents paying tax on the remittance basis. The majority of the changes will have effect from 6 April 2008 although some will have effect from 12 March 2008.

“Ceased source” – the rules have changed so that, where income of a year is remitted to the UK after the source of the income has ceased, it will be taxable. In addition, where income arises in a year in which the remittance basis is claimed and the income is remitted to the UK in a later year without a claim under the remittance basis, that income will be taxable in the UK.

“Cash only” – relevant foreign income can only currently be taxed in the UK if brought in as cash. The rules are to be changed so that money, property and services derived from relevant foreign income will be classed as a remittance. There are some limited exemptions, including exemptions for personal effects and assets costing less than £1,000. Assets owned on 11 March 2008 will be exempt from the charge as will any assets in the UK on 5 April 2008.

“Claims mechanism” – foreign savings and investment income arising in a year in which the remittance basis is claimed will be taxed if it is remitted to the UK, irrespective of the year in which it is remitted and whether or not a claim to the remittance basis is made in the year in which the remittance is made.

Mixed funds – comprehensive rules will be introduced to determine how transfers from mixed funds are to be treated and charged to tax.

Alienation – legislation will be introduced to tax money or property brought into the UK, or services and benefits provided in the UK, that were funded out of untaxed foreign income or gains. Where this has been arranged by an individual, the individual will be taxed if the individual or their immediate family benefits in any way. “Immediate family” will be limited to spouses, civil partners and those living together as spouses or civil partners and their children or grandchildren under 18. It will also cover “close companies” of which any of them are participators and trusts of which any of them are settlors or beneficiaries.

Non-Resident Trusts – the following changes are proposed:

There will be extensive changes to the capital gains tax regime for non-resident trusts and these will differ from those detailed in the draft legislation published on 18 January 2008.

Trustees of non-resident trusts will be able to make an irrevocable election to rebase assets held at 6 April 2008 to remove chargeable gains relating to the period before 6 April 2008 from being taxed on non domiciled beneficiaries.

Non domiciled beneficiaries of non-resident trusts who claim the remittance basis will, from 6 April 2008, be taxed on the remittance basis on all UK and offshore assets.

Settlors and beneficiaries of non-resident trusts will not be required to disclose information to HMRC about trust assets in relation to which a remittance arose, or details of the trustees, provided they have made a correct return of their tax liabilities.

Beneficiaries of non-resident trusts may be required to provide additional information to HMRC where the trustees choose to make an election to rebase trust assets or where HMRC enquire into a beneficiary’s tax return.

Offshore Mortgages – interest and repayments of offshore mortgages from 6 April 2008 will be treated as a remittance. The legislation will include grandfathering provisions such that untaxed relevant foreign income used to fund interest repayments on existing mortgages secured on a residential property in the UK, will not be treated as a remittance on or after 6 April 2008. This will apply to payments made up to 5 April 2028 at the latest. The relief for existing mortgages will be lost if the terms of the loan are varied or any further advances are made after 12 March 2008

Legislation is also to be introduced to ensure that non-domiciled individuals are taxed on the same basis as UK domiciliaries for :

• chargeable gains in non-resident companies
• assets transferred abroad
• accrued income scheme
• capital gains tax losses

7.5   Residence and Domicile: Remittance Basis and Art for Public Display

Works of Art purchased offshore using unremitted and untaxed employment income, capital gains or other foreign income can be brought into the UK for public display, in an approved establishment, after 6 April 2008 and not be taxable under the remittance basis rules.

7.6   Residence and Domicile: Changes for Employment-Related Securities

Legislation is to be introduced to ensure that employment related securities acquired, or options granted, on or after 6 April 2008 to employees taxed on the remittance basis are subject to tax in the UK on the same basis as UK domiciled individuals.

However, employment related securities income will be apportioned so that any amounts relating to overseas duties will only be subject to income tax in the UK when remitted.

7.7   Residence and Domicile: The £30,000 Annual Charge

From 6 April 2008 UK-resident adults, who have been UK resident for at least seven of the nine immediately preceding tax years and have unremitted foreign income or gains in excess of £2,000 will only be able to claim the remittance basis of taxation on the payment of a £30,000 annual tax charge. Individuals can choose each year whether to claim the remittance basis or pay tax in the UK on their worldwide income.

The charge will be payable in addition to any tax due on UK income and gains or foreign income or gains remitted to the UK and is payable through the Self Assessment system. If it is paid from an offshore source directly to HM Revenue & Customs then the £30,000 will not be treated as a remittance. If it is repaid to the individual then it will be taxable as a remittance.

The £30,000 will be a tax charge on unremitted income and gains, or a combination, rather than a stand alone charge. The individual can choose what foreign income or gains the £30,000 is paid on. When the chosen income or gains is remitted to the UK it will not be taxed as a remittance. However there will be rules to ensure that any untaxed unremitted income and gains are deemed to be remitted before income and gains on which the £30,000 is paid.

There will be special rules on how the charge will be treated in the US under the UK/US double taxation treaty. 
 

8. Miscellaneous

8.1   Inheritance Tax Rates

From 6 April 2008 the Inheritance Tax threshold (the Nil Rate Band) is being increased, to £312,000. The value of estates or transfers in excess of this figure will continue to be taxed at 40% on death and 20% on chargeable lifetime transfers.

It has previously been announced that the threshold will rise to £325,000 in 2009/10 and £350,000 in 2010/11.

8.2   Pension Savings and Inheritance Tax

Legislation will be introduced to ensure that tax-relieved pension savings and lifetime annuities which are diverted to beneficiaries and connected persons are subject to unauthorised payment charges of up to 70% and inheritance tax where appropriate. Some provisions were previously mentioned in the 2007 pre-budget report.

This is an extension of previous provisions that were only applicable to alternatively secured pensions and will be effective for members of a scheme surrendering rights after 10 October 2007 or dying after 6 April 2008.

A further change is made to restore IHT protection to UK tax-relieved pension savings in overseas pension schemes, which will be effective from 6 April 2006. 

8.3   Inheritance Tax: Transitional Serial Interests

The 2006 Finance Act changes to the IHT treatment of Interest in Possession (IIP) Trusts included a transitional period to 5 April 2008 whereby the beneficiary of an IIP existing at 22 March 2006 could be changed (creating a transitional serial interest (TSI)) before 5 April 2008 without the trust falling into the relevant property regime.

The legislation introduced was not clear in respect of a TSI created for the same beneficiary as the original trust. Due to this uncertainty, the transitional period for TSIs has been extended to 5 October 2008 and further legislation will be introduced, dating back to 22 March 2006, to ensure the new rules have effect as intended.

8.4   Transfer of Nil Rate Bands

As previously announced, Finance Bill 2008 will include legislation to increase the IHT Nil-Rate Band (NRB) available on a death on or after 9 October 2007 by the proportion of any NRB unused on the earlier death to of their spouse or civil partner.

From 6 April a consequential CGT amendment will ensure that, where an IHT valuation now needs to be ascertained in order to assess the proportion of the NRB unused on the first death, any subsequent CGT computation will not need to be revised accordingly. 

8.5   HMRC Review of Powers, Deterrents and Safeguards: Penalties for Incorrect Returns & Failure to Notify a Taxable Activity

Legislation will be introduced to create a single penalty regime for incorrect returns and failure to notify a new taxable activity in respect of all taxes, levies and duties administered by HMRC with effect from 1 April 2009.

Also from 1 April 2009, individuals and businesses will face legislation aimed at reforming record-keeping requirements, new HMRC inspection and information powers and revised time limits for revising tax assessment.

It is intended that HMRC will be able to accept payments by credit card from Autumn 2008.

Measures will be introduced to make it easier for HMRC to tackle individuals and businesses who pay taxes late, including debt enforcement powers to seize goods.