Budget Summary for Commercial Clients - March 2006 

Introduction

With his sights fixed firmly on number 10 Downing Street, not number 11, Chancellor Gordon Brown's budget features a number of measures designed to create popular support, whilst preserving his reputation as a ‘no-risk’ Chancellor by keeping most changes at the levels required by inflation only. The budget features a large number of anti-avoidance provisions, which include the extension of the powers of HM Revenue and Customs (HMRC) to exchange information with foreign tax authorities regarding indirect as well as direct taxes and a general extension of the types of tax avoidance measures that must be notified to HMRC. However, hidden in the depths of the HMRC budget notes are a couple of bombshells.

General

The theme is again one of most changes being only what is necessary to keep pace with inflation, with an emphasis on fighting tax avoidance and the introduction of a number of measures aimed at reducing various pernicious VAT frauds, typically involving mobile phones and computer chips. The proposal to create ‘summer schools for entrepreneurs’ is a novelty.

VAT

The registration threshold for VAT is increased from £60,000 to £61,000 and the deregistration limit is increased from £58,000 to £59,000 from 1 April 2006. There are a number of changes introduced to help HMRC fight ‘missing trader’ VAT fraud. One ‘interesting’ change is that HMRC are to be given the explicit right to enter any premises connected with any supply of goods, including premises used for storing goods for others, and to mark or stamp goods. In addition, HMRC will be permitted to specify additional records that must be kept if they suspect that ‘the additional records might assist in identifying supplies on which VAT might go unpaid’.

One ominous note is that HMRC are to ‘fundamentally re-write’ the option to tax buildings and land for VAT rules, contained in Schedule 10 of the Value Added Tax (VAT) Act 1994, but no details are given as to what those changes will be. Property owners and developers take note!

Corporation Tax Rates

The abolition of the 10 per cent rate of corporation tax on the first £10,000 of profits not paid out in dividends by small companies was announced in the 2005 pre-budget report: this is abolished from 31 March 2006.

Land Development Tax

Strangely, the budget contained nothing on Land Development Tax (also known as Planning Gain Supplement), which was expected to be introduced to tax windfall gains arising on land and properties as a result of planning permission being granted. Whether this suggests a change of heart on the part of Mr Brown is anyone’s guess. Watch this space!

Capital Allowances

Small businesses will welcome the increase in first-year allowances for the purchase of new equipment from 40 per cent to 50 per cent. Research and development allowances are also being increased for some companies.

Mobile Phones Blow

The exemption from a benefit in kind charge on mobile phones and computers that are supplied to employees or family members of employees and which can be used for private purposes has always been anomalous and it has now been abolished insofar as it applies to computers. A limit of one per employee has also been placed on the number of mobile phones which can be provided without a benefit in kind charge being payable.

Landlords – Energy Saving Allowance

The tax relief available for landlords to insulate their tenanted properties is being further enhanced from 6 April 2006 to include draught proofing and insulation for hot water systems.

Landfill Tax

The standard rate of landfill tax will be increased from £18 per tonne to £21 per tonne. This will probably cause a sharp rise in the cost of skip hire.

Stamp Duty Land Tax (SDLT)

The replacement for the old Stamp Duty, this tax has spawned a plethora of problems since its introduction in 2003. In order to ease these, a number off common transactions will be taken out of the scope of SDLT. These are:

• a gift of property where the donee or beneficiary agrees, or is required, to pay capital gains tax or inheritance tax arising on the gift;
• the payment of a landlord’s reasonable costs on the grant, variation or termination of a lease; and
• a covenant by an agricultural tenant to assign entitlement to the Single Farm Payment to the landlord on termination of the tenancy.

The threshold for Stamp Duty Land Tax (SDLT) has been frozen at £150,000 for commercial properties and the threshold for the higher rate of duty has been frozen at £250,000.

Summary

The Chancellor has announced a budget which increases the effective powers of the Customs side of HMRC in particular and is firmly aimed at reducing tax avoidance and fraud. The tax bite on small companies and those supplying mobile phones to family members will also increase sharply.

We recommend that when considering any of the issues mentioned here, you take professional advice before taking any action.

For press releases outlining the budget measures, see the Inland Revenue website at http://www.inlandrevenue.gov.uk

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• The Made Simple Group