“Read My Lips: No New Taxes”
George Bush 1988

This is a summary of the announcements of the Chancellor in his 9th pre-budget delivered on 5 December 2005. The information in the summary reflects our understanding of the Chancellor's proposals. No action should be taken without obtaining appropriate professional advice.

Tax avoidance was a central issue. Most of this was against particularly aggressive schemes and specific action is being taken to counter many of the schemes reported to HMRC. There will be changes to the 2004 disclosure regime for tax avoidance which are aimed at helping HMRC to detect and respond to tax avoidance quickly. This regime will be extended to all income tax, corporation tax and capital gains tax.

Various measures were announced to counter tax avoidance through companies creating artificial capital losses, stock lending, relief for corporate intangible assets and capital losses on disposals of rights conferred by certain insurance policies. Measures will also counter inheritance tax avoidance by the use of second-hand interests in foreign trusts, as well as the avoidance of tax on pre-owned assets. HMRC has said that it will monitor schemes for avoiding income tax and national insurance contributions on remuneration, especially during the bonus-paying season. Any ensuing legislation may be backdated to 2 December 2004.

Basic Allowances
The basic personal allowance and starting point for national insurance contributions will rise in 2006/07 to £5,035. The rates of employers’, employees’ and class 4 NICs will stay unchanged. The flat rate of NIC for the self-employed will remain at £2.10 a week for 2006/07. The 2006/07 income tax allowances and NIC rates and thresholds are as follows:

Tax credits
The Tax Credit system has been amended to limit overpayments and mitigate some of the worst effects of the system. One of the significant flaws in the current system is that awards are made provisionally and then revised after the end of the tax year, but this can leave claimants with significant debt when either their income increases significantly one year on another, or there is a change in their personal circumstances.

The income disregard is intended to smooth the effect of change in income by disregarding an increase in income for the purposes of revising a tax credit award after the year end. At present the income disregard is £2,500 per annum, so claimants with income increases of less than this amount from one year to another will not have to repay tax credits already received as a result of the increase in their income.

However, it is intended to increase the income disregard to £25,000 for 2006-07 and subsequent years.

This means that most claimants will not be faced with a repayment on renewal, and for those with income increases in excess of this amount, only the excess over £25,000 will affect the prior year’s tax credit claim.

As previously announced, the childcare element of working tax credit will rise in 2006/07 to 80% of costs up to £175 a week for a single child (ie a payment of up to £140 a week) and £300 a week for two or more children (ie a payment of up to £240 a week). The level of childcare costs covered will remain unchanged, but the other elements of working tax credit will rise in line with inflation. The first income threshold for working tax credit will be frozen at £5,220. The child element of child tax credit will increase by 4.4% to £1,765 in 2006/07. However, the family element of child tax credit and baby addition will remain unchanged at £545 for a third year. For those claimants not entitled to working tax credit, the first income threshold (at which child tax credits other than the baby and family element start to be withdrawn) will rise to £14,155. The second threshold (at which the baby and family elements start to be withdrawn) is again unchanged at £50,000.

Child Trust Fund
Child Trust Fund accounts came into being on 6 April 2005. The intention is for a child to have some savings when they reach the age of 18.

Any child born since 1 September 2002 will receive at least £250. Those from low income families will receive £500.

The government has stated that there will be a further universal payment when the child reaches seven years old (again there will be a larger payment for lower income families). Consultation is ongoing regarding issues such as the timing of the payment, fairness, simplicity and public awareness.

Family and friends are also encouraged to contribute to the fund, as up to £1,200 a year can be paid to each account, and there is no tax to pay (either income tax or capital gains tax) on any interest or gains made on this money.

Statement of Account
You'll be able to understand your statement of account. The of the statement of account you receive outlining your tax liabilities is to be redesigned so that taxpayers can understand it!

There was a time, not so many years ago, when Inheritance Tax (IHT) was a concern only of the very wealthy. However, increasing house prices have brought more and more people within the IHT net. Arguably, people's homes should be exempted from this tax, as they are from Capital Gains Tax, to reduce the burden. However, the Chancellor's approach has instead been to increase the IHT threshold (ie the amount below which no tax is due). The nil rate band for 2006/07 is £285,000.

Corporation Tax - First £10,000 profit no longer tax free
The rate of corporation tax for small companies will be a single band of 19% from 1 April 2006. The 0% rate for the first £10,000 of undistributed profits will be abolished following the large number of self-employed people who decided to incorporate to reduce their liability to tax and national insurance contributions. This may be a hard pill to swallow for those trapped in incorporation. However, there are still tax and other advantages to incorporation but they have been reduced a little.

First Year Capital Allowances
First year capital allowances for small businesses will be extended to 50% in the year from 1 April for companies and 6 April 2006 for unincorporated businesses. The government intends to introduce at some point a new range of first year allowances for cars that will depend on their carbon dioxide (CO2) emissions. This would build on the existing 100% first year allowances for cars with very low emissions.

Work in progress -The impact of accounting standards
A welcome change will impact on businesses – mainly in the service sector – that will have to pay more tax on work in progress as a result of guidance by the Accounting Standards Board in a circular known as UITF Abstract 40. The Finance Bill 2006 will contain measures enabling most businesses to spread any extra tax charge over three years. Those businesses that are most severely affected will be able to spread the charge over six years.

Film taxation
New incentives for culturally British films will replace the existing reliefs from 1 April 2006. Films costing £20 million or less will be allowed an enhanced deduction of 100% of allowable production costs with a payable cash element of 25%. Films costing over £20 million will be allowed an enhanced deduction of 80% with cash payable of 20%.

Goodbye to Form 42
The need for FORM 42 on most new incorporations is to be removed. The form was used to report the issue of new shares when companies are formed and was just an administrative burden with no  purpose.

Planning Gain Supplement (PGS)
Consultation is proceeding on the introduction of a Planning Gain Supplement, a tax on gaining planning permission. The basis for calculation would be the difference between the land value with full planning permission and the land value in its current use. This would be multiplied by the rate of PGS.

Annual Exemptions
The annual exemption for 2006/07 is increased to £8,800 (trustees - £4,400).

VAT Annual Accounting
The turnover threshold at which companies can qualify for the VAT annual accounting scheme will be increased to £1,350,000 from April 2006. The government will also raise the Cash Accounting Scheme turnover threshold to the same level, subject to the agreement of the European Commission.

SIPP's - investment in residential property attacked
The government will remove the tax advantages for self-invested personal pensions (SIPPs), small self-administered schemes (SSASs) and all other forms of self-invested pensions that invest directly in residential property and certain other ‘prohibited assets’, such as fine wine, art and antiques. Indirect investments, eg unauthorised unit trusts, that are a close proxy for direct investment in prohibited assets will be treated in the same way as direct investments. Any attempt to invest in prohibited assets will attract tax penalties on the member (at 40%) and on the pension scheme. If the value of the prohibited asset(s) exceeds 25% of the scheme value, the scheme may be de-registered and suffer a 40% tax charge on its total value. The pensions industry had been led to believe such investments would be allowed and many would have planned to do so.

The government ‘is minded’ to allow investment in such assets through ‘genuine diverse commercial vehicles’, such as real estate investment trusts (REIT) but will monitor their use to ensure that the funds are not used to circumvent the new rules on prohibited assets. The rules will generally take effect from 6 December 2005, subject to transitional reliefs.

Recycling of tax-free lump sums
From 6 April 2006, new legislation will remove the tax advantages of recycling lump sums drawn from pension schemes to make further pension contributions. This change will not affect lump sums drawn in the normal course of taking pension benefits. A number of other minor technical changes were also announced.

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