As ever, this yearís Budget contained many warm words to reassure small businesses: it spoke of, ìreforms that promote enterprise, support business growth, simplify the tax system, and enhance flexibility and promote science, innovation and skills,î and, ìensuring a modern and fair tax system where everyone pays their fair share of tax.î
Elsewhere, and less positively, the Chancellor covered his announcement on the Family Business Tax simply by saying, ìWe will continue to be vigilant against tax avoidance,î and leaving everyone to find the relevant paragraph in the Red Book. However, he increased the amounts that can be invested in ISAs, simplified reporting requirements for ISA managers and made special provision for ISAs held by Northern Rock customers who withdrew their funds amid the panic of last September: certain types of avoidance are evidently still not frowned on by the Treasury.
Whether the Budget really does offer a fair deal to the UKís freelancers, who are a vital component in any strategy to promote enterprise, flexibility and opportunity, must be judged on the basis of the hard content within it. While there is one predominant headline where family businesses are concerned, beyond this the Budget can be characterised as one full of crucial little details rather than significant changes.
* Family Business Tax (ìincome shiftingî)
* Capital Gains Tax
* Umbrella companies and expenses
* HM Revenue and Customs
* Tax simplification reviews
* Enterprise strategy
* Small firms loan guarantee scheme
* Business support simplification
* Procurement opportunities
* NICs
* Tax treatment of cars
Family Business Tax (ìincome shiftingî)
The big story for freelancers in this yearís Budget is the Chancellorís surprise decision to delay legislation on ìincome shiftingî until Budget 2009; previous statements had indicated clearly that the Family Business Tax would be announced today and come into force on April 6th this year.
PCGís managing director John Brazier said: ìWe are glad that Mr Darling has taken notice of not just the experts but the thousands of people who signed the petition on the 10 Downing Street website, the MPs who signed the Early Day Motion against the proposals and others. There has been a clear consensus that the FBT proposals would not have worked. We hope the next phase of consultation will result in a sensible outcome.
PCG will update its Guide to the Family Business Tax to reflect the changed schedule, and will provide full input to the Government. The intent to press ahead with this measure still seems clear in the Treasury, but the message seems to be getting through that the measure will not work.
Capital Gains Tax
In last yearís Pre-Budget Report, plans were announced to introduce a flat rate of Capital Gains Tax at 18%, and abolish the taper relief used by many freelancers when winding down their limited companies. Todayís Budget confirmed that this change would go ahead, while at the same time introducing a new ìentrepreneursí reliefî.
The relief works by excluding 4/9 of the gain from charge, and so giving an effective marginal rate of 10%. However, as neither this nor taper relief actually operates by straightforwardly charging a rate of 10% - each excludes part of the gain, then charges the full rate on the rest ñ the tax charges on the same gains under the new and old regime will in many cases be different. Exactly how these differences will stack up depends on individual circumstances.
The new enterpreneursí relief is subject to a lifetime allowance of 1million, which will apply only to gains made from April 6th; for gains beyond this amount, the relief will not be available, although PCG anticipates that this will be a problem for few freelancers.
Umbrella companies and expenses
Paragraph 4.70 of the Budget states:
The Government is concerned at the growing use of structures, such as ìumbrella companiesî or overarching contracts of employment with employment businesses, to obtain tax relief for travel expenses that would not be available to other workers. It will monitor the use of these structures and, if necessary, consider action in the future.
This is a not unexpected consequence of the Managed Service Company rules introduced last year: HMRC and the Treasury are concerned that some former MSC users have switched to PAYE umbrellas specifically to exploit the expenses rules they operate under. Some operators in the field are blatant in advertising that contractors should claim expenses for overnight accommodation even when they have stayed with friends, or use similar tactics. PCG members generally have little time for that sort of scheme.
PCG understands that this announcement in the Budget refers exclusively to this set of contractors, and HMRC are not attempting to target contractors' expenses more broadly. We will be working with the Treasury and HMRC to ensure that contractors can continue to claim fair reimbursement for expenses they incur.
HM Revenue and Customs
1) Taxpayersí Charter
The Budget confirmed that a project is to be launched to introduce a new Taxpayersí Charter, following the initial announcement on January 10th.
This will begin with a consultation exercise, to which PCG will alert members when it is published.
2) Compliance Checks
The Finance Bill will include legislation on new compliance checking powers for HMRC, following on from two rounds of consultation over the last twelve months. The new powers, which in many cases replace existing provisions of varying kinds across different taxes, include:
* no penalty for an innocent mistake
* 30% of tax owed for a failure to take reasonable care
* a power to inspect records that must be kept by law
* a power to require additional information
* a power to visit and inspect business premises
* repeal of VAT and PAYE powers to inspect private residences without consent
* a power to require third parties to provide information
3) Penalties
The Budget confirms that the new penalty regime introduce in last yearís Finance Act to cover VAT, PAYE, CGT, ITSA and CTSA will now be extended to other taxes and duties. The new penalties are expected to apply for return periods after April 1st 2009, where the return is due on or after April 1st 2010.
The penalty structure works as follows:
* 30% of tax owed for a failure to take reasonable care
* 70% of tax owed for deliberate understatement
* 100% of tax owed for deliberate understatement which is then concealed.
All penalties can be substantially reduced where the taxpayer discloses information voluntarily to HMRC
4) Payment
Two significant changes have been announced to how taxes can be paid.
Firstly, HMRC will begin taking payments by credit card, although the charge for this will be passed on to the taxpayer; this facility is expected to be available from the autumn. Secondly, HMRC will gain new powers to offset payments of tax owed and repayments of tax overpaid against each other. As this will of necessity be a manual process, its impact is not expected to be significant in the short term.
5) ìProtecting Tax Revenuesî
A document entitled ëProtecting Tax Revenuesí, setting out HMRCís strategy towards collecting the taxes it is owed, was published alongside the Budget. PCG will be considering its contents carefully, and is slightly alarmed that the Budget speaks of, ìchallenging those who attempt to pay less than their fair shareî without any reference to the obligation on taxpayers to pay what they owe in law.
Tax simplification reviews
In the Pre-Budget Report of 2007, three reviews of areas for tax simplification were announced. Reviews of certain VAT provisions and Corporation Tax for related companies were found not to be relevant for PCG members, but PCG did respond fully to a review of anti-avoidance legislation. The initial results of this have been announced today as plans to repeal a small range of outdated anti-avoidance rules on bond washing, employment securities and other schemes.
Given the amount of legislation that the Government seeks to introduce under the banner of ìanti-avoidanceî, PCG is disappointed that the results of this review have so far been so trivial. The Budget also announced, for instance, that a new piece of legislation on ìfinancial products avoidanceî is scheduled for Finance Bill 2009.
A fourth review has been announced, looking at the simplification of CT returns and calculations for small companies. This focuses on the burden associated with making returns to Companies House, and having to adjust these to make Corporation Tax returns.
Further updates on all four reviews are due to be published alongside this yearís Pre-Budget Report; PCG is pleased to see that, if nothing else, the work of the reviews is ongoing.
Enterprise Strategy
The Department for Business Enterprise and Regulatory Reform (formerly the DTI) has been developing a new Enterprise Strategy for some months:
it was released alongside the Budget under joint DBERR and Treasury branding.
One of its key themes is better regulation: it proposes an approach of allocating ìregulatory budgetsî, which set out the amount of new regulation each department may introduce, and which may not be exceeded.
Consideration is being given to developing a pilot scheme for this idea, and PCG will contribute to this whenever possible; we do, however, question the idea of a regulatory ìbudgetî given that government overall is supposed to be reducing burdens on business ñ the ìbudgetî approach seems to create an assumption that regulation will increase.
Other ideas include: reviewing all existing legislation to ensure that it is compliant with the Hampton Principles of better regulation; exempting small firms from regulatory requirements, or applying simpler compliance regimes; an independent review of regulatory guidance, to ensure it is reliable and therefore reduce compliance costs.
A fund is to be established to assist women entrepreneurs, and the Government intends to fund a ìhigh level media campaignî around the issue.
Small Firms Loan Guarantee Scheme
The Budget announced that the funds available under the Small Firms Loan Guarantee Scheme are to be increased by 20% for twelve months.
Eligibility for the scheme will be extended to businesses over five years old who have ìgrowth aspirationsî. While most PCG members wish to supply their services to a range or succession of clients and not become employers, these changes may nevertheless be of interest to some.
Business Support simplification
As part of the Governmentís long-standing target of reducing the 3,000 business support schemes available to no more than 100, the Budget has announced that the information, diagnosis and brokerage services associated with all Regional Development Agencies, UK Trade and Investment and several other bodies will be merged with Business Link.
Obsolete schemes will be closed, or notice of their closure given, by the start of 2010, it was also announced.
Procurement opportunities
The Government is setting up an advisory committee to look into the barriers faced by small businesses in tendering for public sector contracts. It will be chaired by Anne Glover, and PCG will be making representations to it. It will also consider whether it is viable to set a target of 30% of all government procurement contracts going to SMEs within five years.
NICs
A consultation document on the collection of Class 2 and Class 4 NICs from the self-employed was issued alongside the Budget. PCG will be seeking input from members and responding as appropriate.
Tax treatment of cars
The Budget has announced reforms of the Vehicle Excise Duty such that higher tax will be payable on cars that emit higher levels of carbon dioxide. Six new bands within VED will be created to establish these changes; from 2010-11, it is proposed to extend the zero rate of VED to all new cars that emit 130g per kilometre of carbon dioxide or less.
Fuel duty rates will rise by 2 pence per litre on October 1st 2008 (delayed from April 1st), 1.84 pence per litre on April 1st 2009, and by 0.5 pence per litre above indexation on April 1st 2010.
Full PCG Budget analysis
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