Budget 2009 highlights

 
The economic backdrop to Mr Darling's 2009 Budget was definitely the bleakest since the second World War.

Forced to tear up his previous growth forecasts, the Chancellor's priority was to clearly demonstrate how he plans to tackle the parlous state of the nation's finances, with the economy currently shrinking by a forecast 3.5 per cent and Government borrowing destined to be some £175bn in 2009/10 (12 per cent of GDP).

His options for further fiscal stimulus were therefore severely limited but he seems to have started to fill the gap by some restraint on public spending, imposing tax increases on high earners and a perhaps optimistic hope that an improving economy will boost his tax coffers.

We already knew that the UK faced significant tax hikes over the next few years but the Chancellor has gone further than his previous Pre-Budget Report (PBR) proposals in 2008 by accelerating and increasing personal tax rates for the highest earners.

Our key Budget 2009 highlights are:

Personal taxes

 For 2009/10

• Income tax personal allowance for 2009/10 is £6,475.
• The annual capital gains tax exemption is £10,100.
• The NIC upper earnings' limit is to be aligned to the income limit at which higher rate income tax 'kicks-in' (ie £43,875 - being personal allowance of £6,475 and the higher rate band of £37,400).

From April 2010

The 2008 PBR proposals to increase top income tax rates have been advanced to 6 April 2010. Key points are:

• People earning over £100,000 will see their personal allowances being phased out on a tapered basis with the allowances being completely eliminated where their income is broadly £112,000 (this is even worse than the PBR 2008 proposals).
• Incomes over £150,000 will be charged to a new 50 per cent top rate of income tax (not 45 per cent). There is a corresponding increase for tax on dividends which will rise to 42.5 per cent on the gross dividend (an equivalent rate of just over 36.1 per cent on the net cash dividend - a large increase on the existing effective rate of 25 per cent. Owner managers might wish to consider accelerating dividend payments before April 2010 and then lend the money back to the company to maintain working capital.

From April 2011

Personal pension contribution relief will be restricted (to 20 per cent) for those earning over £150,000 with measures to prevent the 'abnormal' acceleration of pension contributions paid from today.This will be a hard-blow to high earners wishing to shelter their income tax liabilities by making substantial pension contributions.

Business taxes

Foreign dividend exemption

We now have confirmation that from July 2009 UK companies will be exempt on most foreign dividends. This is highly beneficial for international groups repatriating dividends from their foreign subsidiaries. This exemption will now apply to all UK companies (irrespective of size).

The quid-pro-quo is that the widely feared debt-cap proposals will also be introduced (along the lines already announced) for accounting periods starting after 31 December 2009. Broadly, these rules will restrict corporate tax relief on intra-group interest paid to overseas affiliates (up to a maximum level of interest paid on 'external' interest).

Corporation tax rates

Corporation tax rates for the year ended 31 March 2010 (FY 2009) are:

• Main rate - 28 per cent.
• Small companies' rate - 21 per cent.

Capital allowances

A 40 per cent First Year Allowance on plant and machinery will be available for expenditure for the 12 months to 31 March 2010. In practice, this will be for expenditure not attracting the current Annual Investment Allowance (AIA) which is available on the first £50,000 of expenditure on plant and machinery. The current 20 per cent Writing Down Allowance remains.

There are new rules for tax relief for business expenditure on cars.  Capital allowances will now be dependent on emission levels, with a 100 per cent First Year Allowance being retained for cars with emissions of not more than 110g/km. Hire charges for cars will only be restricted for cars emitting over 160g/km using a flat rate of 15 per cent.

Other provisions

The 2008 PBR announced that loss-making companies will be able to enjoy a temporarily extended three year carry back of losses (up to a cap of £50,000 for the earliest two years) to relieve taxable profits of the previous three years. This relief has now been extended to apply to losses generated in accounting periods ending between 24 November 2008 and 23 November 2010. The current one year carry back rule remains unlimited.

A mismatch is being corrected within the corporate debt rules, the main practical effect of the change will be to enable trading debts to be released on a tax-free basis (in the debtor company) on intra-group trading debts. This change applies to trading debts released from today (a change from the 2008 PBR start date). As before the creditor company cannot obtain tax relief on the amount written-off. 

The Chancellor confirmed the continuation of the widely welcomed ability for cash-strapped businesses to defer their tax payments, and a new instalment payment scheme is to be introduced on a permanent basis after April 2011. 

The reduction in VAT to 15 per cent will continue to December 2009.

Other measures

The Budget confirms the introduction of new HMRC powers and safeguards covering PAYE, VAT, income tax, capital gains tax and corporation tax and new time limits for tax claims and assessments (which will become just four years). There will be an unpleasant 'name and shame' list for deliberate tax defaulters.

The detailed HMRC press releases contain various anti-avoidance measures which seek to collect £1bn of tax over the next three years.

Detailed commentary from BDO

Our full analysis will be posted here later. We hope you find this useful. If you would like advice on how the Budget will affect you or your business please do not hesitate to contact Peter Rayney, Tax Partner, or your local BDO adviser .