Budget Report 2008 22 March 2008

This Report, which was written immediately after the Chancellor of the Exchequer delivered his Budget Speech, is intended to provide an overview of the announcements most likely to affect you or your business.

Throughout this guide we have included tips and ideas for effective tax and financial planning, but it is important to remember that this planning should be an ongoing, year-round process, not something that is left until the last minute.

We can help you to reassess your plans regularly, and adapt them as your personal and business circumstances change. With our help, you can plan for a rewarding and financially secure future.

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Brown Hails Britain's 'New Economic Stability'

Chancellor Gordon Brown delivered his 11th consecutive Budget to the House of Commons, amid growing speculation that it could be his last before he embarks on a political leadership campaign.

In a Budget focused largely on education, sport and the environment, the Chancellor presented a picture of economic stability for the UK, reporting that both inflation and economic growth are on target, at 2% and 2-2.5% respectively.

The Chancellor announced a number of measures aimed at encouraging innovation and enterprise. These include an extension of R&D tax credits so that companies with 500 employees can claim higher credit, and a major enhancement of the Enterprise Investment Scheme relief. The Chancellor also announced plans to increase employer involvement in education, in a bid to match skills with the needs of business.

For the most part tax thresholds are increased in line with inflation. The Chancellor announced a nominal rise in the stamp duty land tax threshold to £125,000, and the inheritance tax threshold will also see a further increase to £325'000 by 2009/10.

One of the more radical announcements related to Vehicle Excise Duty, with the Chancellor revealing that the duty will rise to £210 for most polluting vehicles, and will be phased out entirely for those producing the lowest emissions.

Other measures announced include the legislation for Real Estate Investment Trusts (REITs), and training to boost the careers of working women.

Economic Forecasts For 2007-2008
Growth		2-2.5%
Inflation		2%
Government spending		£552 billion
Health spending		£96 billion
Social protection spending		£151 billion
Public Sector year end net debt		£493 billion
Government Receipts		£516 billion
Net borrowing		£37 billion
Business Tax And Investment Incentives CORPORATION TAX
Financial year to	31-3-2007	31-3-2006
Taxable profits
First	£10,000 19%	£10,000 0%
Next	£40,000 19%	£40,000 23.75%
Next	£250,000 20%	£250,000 20%
Next	£1,200,000 32.5%	£1,200,000 32.5%
Over	£1,500,000 30%	£1,500,000 30%
Non corporate distribution rate	N/A	19%
Small companies' marginal relief fraction
£10,000-£50,000	N/A	19/400
£300,000- £1,500,000	11/400	11/400

Capital Allowance For Small Business

The rate of first year allowance for capital expenditure by small business on plant and machinery is increased from 40% to 50% for the period of one year from 1 April 2006 for companies and from 6 April 2006 for businesses subject to income tax.

Research And Development (R&D) Tax Credits

Two changes are proposed to the existing rules relating to R&D tax relief and vacancies research relief:

* the period for claiming an enhanced deduction for R&D expenditure is to be aligned to the time limit for R&D tax credits and becomes the first anniversary of the filing date for the company's corporation tax return. Transitional rules will apply to enhanced deduction claims for accounting periods ended before 31-3-2006. These claims will need to be made by the earlier of the current time limit for claims (six years after the end of accounting period in which the claim is made) and 31-3-2008.

* the definition of R&D qualifying expenditure is to be extended to include payments made to clinical trial volunteers. This will apply to expenditure by large companies from 1-4-2006 and for SMEs from when state aid approval has been received by the Government from the European Commission (EC)

The Government also intends to provide additional support to firms with between 250and 500 employees through the R&D tax credit system. Details of the proposals will be published later in the year following state aid discussions with the EC.

Venture Capital Schemes

The Chancellor has announced significant changes to the Enterprise investment Scheme (EIS), the Corporate Venture Scheme (CVS) and the Venture Capital Trust Scheme (VCT). For EIS investors, the annual investment limit for income tax purposes is doubled to £400,000.Investors in VCTs will now only benefit from Income tax relief at 30% (currently 40%). Another change is the reduction in the maximum size of companies able to raise money under the EIS, VCT and CVS schemes; this is reduced to £7 million before the investment and £8million afterwards ('the gross asset test'). This is a major reduction from the previous limits of £15million before and £16 million afterwards.

However the Chancellor has increased the minimum holding period for VCT investments from three to five years. All of the above changes take effect from 6 April 2006 except that the new gross assets test will not apply in relation to sums raised by VCTs prior to 6-4-2006 nor to to EIS or CVS shares subscribed for before 22-3-2006.

The meaning of investment under the VCT legislation has been changed in that with effect from 6-4-2007,a VCT must have 70% by value of its investments represented by qualifying holdings and no more than 15% of that total investment in any single company. This will mean that any money held by a VCT after 6-4-2007 will be treated as investment.

Film Tax Relief

The Chancellor has chosen this year to reform film tax relief rather than extend the previous relief which will continue to apply to those films which commenced principal photography on or before 31 March 2006, provided the film is completed before 1 January 2007. The existing relief will also continue to apply to films acquired before 1 October 2007.

The new relief will apply from 1 April 2006 to UK film producing companies (FPCs) incurring expenditure on the production of British films. Each film will be treated as a separate trade for tax purposes. The new rules will provide a deduction on a minimum of 80% of total UK qualifying expenditure (which must in turn be at least 25% of total production expenditure). An additional deduction of 100% will be due for films with total qualifying production expenditure (QPE) of £20 million or less, 80% otherwise. Where this results in a loss, this can be surrendered for a tax credit, payable at 25% for films with up to £20 million of QPE and 20% for all other qualifying films.

Group Relief

Following the European Court of Justice decision in the case of Marks and Spencer plc v Halsey in December 2005, the Government is to legislate to bring the group relief legislation into line with EC law. The new relief will apply from 1 April where a UK parent company has a foreign subsidiary (including an indirectly held subsidiary) which has incurred a foreign tax loss that is unrelievable in the home state (or elsewhere) and where that subsidiary is either resident in the EEA or has incurred the losses in a permanent establishment in the EEA.

The foreign losses will be relievable against UK profits only where all possibilities of relief have been exhausted and future relief is unavailable in the country where incurred or in any other country.

The foreign tax loss will need to be recomputed under UK tax principles. The UK claimant company will need to be able to demonstrate that the losses meet all the relevant conditions of the legislation..

Anti-avoidance rules have already been pre-announced to apply from 20 February 2006 to prevent loss relief where arrangements are made either to prevent foreign losses being made unrelievable outside the UK, where they otherwise would have been relievable or where foreign losses are generated that would not have existed but for the availability of relief in the UK and where the main purpose or one of the main purpose of those arrangements was to obtain UK tax relief.

Corporate Capital Losses

As announced in the 2005 Pre-Budget Report, anti-avoidance legislation effective from 5 December 2005 is being introduced to prevent schemes or arrangements aimed at gaining tax advantage from capital losses. This legislation is aimed at preventing:

• the contrived creation of corporate capital losses
  
  
• the buying of capital gains and losses; and
  
  
• the conversion of income streams into capital gains and the creation of a capital gain matched by an income deduction, where the gains are then wholly or partly covered by capital losses.

Charities

The existing legislation only exempted charities from tax if the trade was carried on a primary purpose of the charity or it was carried on by the charity's beneficiaries. In many cases however, the trade of the charity became mixed with a non-exempt trade so that the tax exemption would become 'tainted' and leave the charity potentially expose to tax on the trade as a whole. This problem has now been overcome by introducing a new measure which allows a trade to be split and the profits apportioned between the exempt and taxable activities. Up until now HM Revenue & Customs has usually agreed to split the activities into separate trades but this approach was not strictly supported by case and always left charities potentially exposed. The new measure which takes effect for chargeable periods commencing on or after 22 March 2006 will remove the previous uncertainty.

This Budget has also tried to address the misuse of charitable funds and reliefs both by individuals and companies. The anti-avoidance provisions announced on Budget Day will tackle these abuses in three ways. The First will be to restrict the dealings that a charity can have with its substantial donors who are defined as those giving £25,000 or more in a single twelve month period or £100,000 or more over a six year period. 'Dealings' has a fairly wide meaning and involves the majority of commercial transactions, payment, exchanges, remuneration and investments. A breach of the rules may involve withdrawal of tax relief from the charity.

The second anti-avoidance measure is to introduce a direct link between non-charitable expenditure incurred by a charity and a loss of tax relief on a pound basis. Lastly the present legislation restricts the benefits which individuals and close companies can receive as a result of making a gift to a charity. a new anti-avoidance provision will apply the same restrictions to gifts made by non-close companies. These anti-avoidance measures take effect on or after 22 March 2006 except for the third measure which will affect donations to charities made on or after 1 April 2006.

Taxation Of Leased Plant And Machinery

Legislation is to be introduced, applicable from 1 April 2006, to align the tax treatment of plant and machinery which is leased or acquired with other forms of finance. The legislation will apply to leases to be known as 'long funding leases'. It will not apply to leases of less than five years' duration and to leases between five and seven years, where certain conditions are met.

The new tax treatment applying to long funding leases will be:

• the lessor will be taxed on the proportion of the rental income that reflects the financing charges and will not be able to claim capital allowances;
  
  
• the lessee will be able to claim capital allowances and receive a deduction for that part of the rentals relating to the finance element.

The proposed legislation will include provisions for certain transitional arrangements, companies within tonnage tax and for elections by lessors to apply the legislation to leases not exceeding £10 million in value.

Miscellaneous And Anti-Avoidance

The treasury has been watching the activity of leasing companies for some time and has been aware that these companies are commonly set up within a wider group context so that capital allowances can be used to mitigate other group companies tax liabilities. A new measure has therefore been introduced to crystallise this deferred tax recovering the full benefit of the capital allowances claimed when the leasing company is sold. The sale will trigger the end of an accounting period and the tax will crystallize. In compensation, the company will be given an equal amount of tax relief in the next accounting period. This applies where changes in economic ownership of lessor companies occur on or after 5 December 2005.

Where a subsidiary company of a UK company become non-resident in the UK for tax purposes before 1 April 2002 as a result of the operation of a double tax treaty, with effect from 22 March 2006 that company will be brought within the controlled foreign company legislation under certain circumstances.

Capital Taxes

Capital Gains Tax (CGT)

Exemptions And Rates Of Tax

The annual exempt amount has been increased in line with inflation for 2007/2008 to £9,200 (2006/07 £8,800) for individuals.

The CGT liability is calculated as if the gains in excess of the annual exemption were the top slice of the individual's savings income.

Trusts

The annual exempt amount is increased to £4,600 (2006/07 £4,400) for most trustees. The exemption is divided where there are several trusts created by the same settler. Capital gains of trusts are taxed at the special trust rate of 40%. Changes are being introduced to bring the main trust-related definitions and tests for tax on income and chargeable gains into line with each other, mostly with effect from 6 April 2006.

Bed And Breakfasting

The Government is to introduce measures, applicable to acquisitions on or after 22 March 2006, which will prevent avoidance of CGT by schemes exploiting the 'bed and breakfast' identification rules. The rules were designed to prevent individuals and others disposing of shares and acquiring identical holdings shortly afterwards for the purpose of realizing a capital gain free of tax (because it is covered by the annual exempt amount) or a capital loss which can be set against other gains while still, in effect, holding on to the investment. The amendment will close a loophole and prevent advantages being gained by persons who are 'Treaty non-resident'.

Inheritance Tax

Exemptions And Rates Of Tax

It was confirmed that the IHT threshold would rise to £285,000 for 2006/07 and £300,000 for 2007/08. To continue to provide certainty for families, it was further announced that the threshold will be increased by more than the expected statutory indexation to £312,000 in 2008/09 and £325,000 in 2009/10.

The rate of IHT remains unchanged at 40%, with a reduced rate of 20% for chargeable lifetime transfers. It was estimated that he number of taxpaying estates in 2007/08 will be about 37,000, around six in 100 deaths.

Trust Reforms

The IHT exemptions which are presently apply to 'accumulation and maintenance' trusts (A&Ms) and/or 'interests in possession' trusts (IIPs) will be available only in certain prescribed circumstances. Otherwise IHT charges will apply in the same way as for all other trusts, preventing them from being used to shelter wealth from IHT. In effect all lifetime transfers into A&M or IIP trusts will be immediately chargeable to IHT and the usual regime of ten-yearly and exit charges will apply, unless the trust is set up for a disabled person. There will be transitional arrangements for existing trusts.

Pension Forms

Measures will be introduced to legislate an existing IHT concessions by practice for pension scheme members who die under the age of 75, and to set out how IHT is to charged on death on or after age 75 where funds are held in an alternatively secured pension.

Duties

Vehicle Excise Duty (VED) And Road Fuel Duty

With effect from 23 March 2007 VED rates for cars with the very lowest carbon emissions (band A) will be reduced to zero. VED rates will also be reduced for bands B and C by £35 and £5; frozen for bands D and E; and increased by £25 for band F. A new higher band (band G) will be introduced for the most polluting new vehicles (emissions above 225g/km and registered from 23 March 2006). The VED rates for cars and light goods registered before March 2001 will be frozen in the lower band and increased by £5 in the higher band. Road fuel duties will increase from 1 September 2006 by 1.25 per litre except for the duty on liquefied petroleum gas which will increase by 2.25p per litre.

Other Duties Or Levies

From 6pm on 22 March 2006 tobacco duty rates will rise in line with inflation and a similar rate of increase will apply to duties on beer and wine, with effect from midnight on 26 March 2006. There is no increase in duty on spirits, cider and sparkling wine.

The rates of Climate Change Levy will remain unchanged for 2006/07 and will increase in line with inflation for 2007/08. The temporary 50% rate for 2006 for energy used in horticulture will be abolished on or after 1 April 2006.

The excise definition of a gaming machine is to be more closely aligned with the Gambling Act 2005 for any licences commencing on or after 1 August 2006.

Stamp Taxes And Duty

While the rates for stamp duty land tax (SDLT) remain unchanged, the threshold for paying SDLT on residential property is increased from £120,000 to £125,000 from 23 March 2006.

The current alternative finance relief will be extended to all persons, allowing parity of SDLT treatment to companies, clubs, trustees, etc. This measure has effect for all alternative finance purchases on or after the Royal to Finance Bill 2006.

A series of SDLT measures is to be introduced from Royal Assent to Finance Bill 2006 so as to simplify and clarify the rules on the following:

• transfers of an interest in a partnership
  
  
• 'successive linked leases'
  
  
• variations in rent
  
  
• rent reviews under agricultural tenancies
  
  
• interim rents under business tenancies
  
  
• 'backdated' leases
  
  
• notifying assignments of leases.
  

On or after 12 April 2006 certain transactions will be taken out of the scope of SDLT. These transactions are:

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

A SDLT charge will be introduced on the transfer of property into a unit in consideration of the issue of units. This charge will be by reference to the market value of the land and buildings transferred and will have effect from 22 March 2006.

Company Cars

Car Benefit

The threshold CO2 emissions rate has been frozen at 140g/km until 5 April 2008. The threshold for 2008/09 will be 135g/km. The rate of the taxable benefit ranges from 15% to 35% of list price (plus certain accessories) for most petrol or diesel-powered cars.

You can find your taxable percentage of the list price for 2006/07 using the following table:

CO2in g/km TAXABLE % CO2in g/km TAXABLE % CO2in g/km TAXABLE % Petrol Diesel Petrol Diesel Petrol Diesel Less than 145 15% 18% 175 to 179 22% 25% 210 to 214 29% 32% 145 to 149 16% 19% 180 to 184 23% 26% 215 to 219 30% 33% 150 to 154 17% 20% 185 to 189 24% 27% 220 to 224 31% 34% 155 to 159 18% 21% 190 to 194 25% 28% 225 to 229 32% 35% 160 to 164 19% 22% 195 to 199 26% 29% 230 to 234 33% 35% 165 to 169 20% 23% 200 to 204 27% 30% 235 to 239 34% 35% 170 to 174 21% 24% 205 to 209 28% 31% 240 and over 35% 35%

Diesel cars are generally subject to a 3% surcharge - with some exemptions, the taxable benefit for a diesel car is 3% higher than for a petrol car with identical CO2 emissions. The 3% surcharge was waived for cars which complied with Euro IV emissions standards, and this applies to 5 April 2006. Thereafter, the waiver applies only to Euro IV compliant cars first registered no later than 31 December 2005.

The discounts for lower emissions vehicles are simplified from 6 April 2006, at:

• 2% for bi-fuel lpg and petrol cars manufactured or converted before type approval
  
  
• 3% for hybrid electric and petrol cars
  
  
• 6% for electric-only cars.

It is also worth noting that while the costs of converting to bi-fuel lpg and petrol after type approval are excluded from the calculation of car benefit, there is no discount for such cars, after 5 April 2006.

In addition, with effect from 2008/09, there will be a reduced taxable percentage rate of 10% for those cars with CO2 emissions of 120g/km or less.

Car Fuel Benefit

The multiplier for car fuel benefit has not changed since the current scheme was introduced. It stands at £14,400.

Car And Fuel Benefit Calculation

The amount chargeable to income tax (user) and Class 1A national insurance contributions (employer) for 2006/07 is calculated by multiplying list price (car benefit) or the fuel multiplier (fuel benefit) by a percentage based on the rate at which the car emits carbon dioxide (CO2, in g/km) (see table above).

Take a car with a list price of £18,000 when it was first registered (say 31 March 2006) and which emits carbon dioxide at a rate of 180g/km.

Car Benefit Petrol Diesel List price £18,000 £18,000 Taxable percentage 23% 26% Taxable benefit £4,140 £4,680 Tax (22% taxpayer) £911 £1,030 Tax (40% taxpayer) £1,656 £1,872 Employer's Class 1A NIC £530 £599

Fuel Benefit Petrol Diesel Multiplier £14,400 £14,400 Taxable percentage 23% 26% Taxable benefit £3,312 £3,744 Tax (22% taxpayer) £729 £824 Tax (40% taxpayer) £1,325 £1,498 Employer's Class 1A NIC £424 £479

Company Vans

With a fundamental change due in 2007, no changes were announced for 2006/07. Currently, company van users whose private travel is permitted to go beyond home to work are taxed on £500 benefit (£350 if the van is more than four years old), covering the use of the van and fuel. From April 2007, such users will be taxable on £3,000 for the use of the van, plus a further £500 if the employer provides fuel.

Van And Fuel Charges 2006/07 2007/08 (Inc. Fuel) Van more than four years old Tax (22% taxpayer) £ 77 £ 770 Tax (40% taxpayer) £140 £1,400 Employer's Class 1A NIC £ 44.80 £ 448 Van less than four years old Tax (22% taxpayer) £110 £ 770 Tax (40% taxpayer) £200 £1,400 Employer's Class 1A NIC £ 64 £ 448

Vat On Scale Charge For Quarters Commencing On Or After 1 May 2006

Engine Size Petrol Diesel Up to 1400cc £40.66 £38.72 1401 - 2000cc £51.53 £38.72 Over 2000cc £75.66 £49.30

Mileage Rates

Changes to HM Revenue & Customs business mileage rates are announced from time to time. The current rates are as follows:

Vehicle First 10,000 miles Thereafter Car -Fuel Only Advisory Rates Engine Capacity Petrol Diesel LPG Car/Van 40p 25p up to 1400cc 10p 9p 7p Motorcycle 24p 24p 1401- 2000cc 12p 9p 8p Bicycle 20p 20p Over 2000cc 16p 13p 10p

The HM Revenue & Customs advisory rates can be applied as a tax-free maximum rate for employees claiming for petrol used on business journeys and for employees reimbursing their employers with the cost of petrol used for private journeys. HM Revenue & Customs will consider claims that is necessary for an employee to use a car with higher than average fuel costs.

Car Costs- VED Rates

Band Co2 Emissions g/km Petrol Diesel A 100 and below £0 £0 B 101 - 120 £40 £50 C 121 - 151 £100 £110 D 151 - 165 £125 £135 E 166 - 185 £150 £160 F 186 - 225 £190 £195 G* 226 and above £210 £215

*cars registered from 23 March 2006

Income Tax And Personal Savings

Income tax rates 2006-07 2005-06 Starting rate band to £2150 £2090 Tax rate 10% 10%    Basic rate band-next £31,150 £30,310 Non savings rate 22% 22% Savings rate 20% 20% UK dividend rate 10% 10%    Higher rate-income over £33,300 £32,400 Tax rate excluding UK dividends 40% 40% UK dividend rate 32.5% 32.5%

Personal Allowances(ages are as at the end of the tax year)

2006-07 2005-06 Allowances that reduce taxable income Personal allowances under 65 £5,035 £4,895 65 to 74* £7,280 £7,090 75 and over* £7,420 £7,220 Allowances that reduce tax Married couple's allowance (MCA) Age of elder partner 72 to 74* 606.50 590.50 75 and over* 613.50 597.50 Minimum 235.00 228.00

• higher allowance for those aged 65 or more are scaled back when income exceeds £20,900(2006/07,£20,100). MCA is only available where at least one partner was born before 6 April 1935.

Landlord's Energy Saving Allowance

The allowance enables landlords to claim an income tax deduction against rental income for the cost of loft or cavity wall insulation in a dwelling they let. The Chancellor announced that with effect from 6April 2006 the deduction will also apply to the cost of draught proofing and insulation for hot water systems.

Computers And Mobilephones

Employees with the private use of a computer provided by their employers have been exempt from tax on the first £500 of annual benefit in kind. This exemption is to be withdrawn, with effect from 6 April 2006.

In addition, the exemption on the private use of employer provided mobile phones will be restricted with effect from 6 April 2006, to cover one phone per employee.

Further measures were announced:

• to ensure that no charge to tax will arise if the mobile phone is provided under a salary sacrifice scheme, and
  
  
• to exempt from tax and NICs the provision of a mobile phone through the use of vouchers, so long as any phones so loaned would have been exempt if the voucher had not been used.

Eye Tests And Glasses-VDU Users

Employees using VDUs are entitled to have the cost of eye tests and glasses for VDU use paid for by their employers.

To ensure that no tax charge under the benefit in kind or voucher rules arises, the list of exempt benefits and vouchers will be amended with effect from 6 April 2006 to cover the position whether the cost of the tests and glasses is paid direct to the provider, or by reimbursing the employee for the cost, or by the provision of a voucher.

Qualifying Life Insurance Policies

The tax advantages of certain life policies have been lost as a consequence of the re-testing of policies on the variation of their terms. Variation may have occurred where there is a change in the method of calculating the investment return or on transfers of insurance business from one insurance company to another. The Chancellor announced that variations of the type described on or after 7October 2005 will be disregarded, as will variations on an insurance business transfer.

Pensions-'A' Day-6 April 2006

As announced prior to today's Budget statement there are widespread changes which come into effect on 6 April 2006.

From 'A' day there is no limit on the amount that may be contributed to a registered pension scheme. The maximum amount on which an individual can claim tax relief in any tax year is the greater of the individual's UK relevant earnings or £3,600.

If total pension input exceeds the annual allowance of £215,000 there is a tax charge at 40% on the excess. This limit does not apply in the year that full pension benefits are taken.

Maximum age for tax relief 74 Minimum age for taking benefits 50 Lifetime allowance charge -lump sum paid 55% -monies retained 25% On cumulative benefits exceeding £1,500,000* Maximum tax-free lump sum 25% *subject to transitional protection for excess amount

Under the original rules applying from 6 April 2006, those applying for enhanced protection under the new pension rules would have been denied that protection if they had an ongoing term assurance (life cover) policy written under pension rules (sometimes referred to as 226A and section 621 policies) or belonged to schemes which include stand-alone entitlements to death benefits. Finance Bill 2006 will contain confirmation that the continuing existence of these arrangements will not deny enhanced protection.

It will be recalled that the Chancellor announced, in the 2005 Pre-Budget Report, that the rules for self directed pension schemes would remove the tax advantages for investments in residential property and certain other assets-such as fine wines, classic cars, art and antiques.

It also worth noting:

• that the rules preventing recycling of tax-free lump sums will not, under current proposals, be triggered where no more than 30% of the lump sum is recycled, and
  
  
• that the threshold under which lump sums of less than £15,000 will not trigger the rule will be linked to the standard life time allowance.

Value Added Tax

From 1 April 2006 1 April 2005 Standard rate 17.5% 17.5% VAT fraction 7/47 7/47 Turnover Turnover Registration last 12 months or next 30days over £61,000 £60,000 Deregistration next 12 months under £59,000 £58,000 Cash accounting scheme up to £660,000 £660,000 Annual accounting scheme up to £1,350,000 £660,000 Optional flat rate scheme up to £150,000 £150,000

Anti Avoidance Measures

In order to combat Missing Trader International Fraud, dependant upon EU agreement, the person responsible for accounting for VAT on sale of certain goods such as mobile phones, computer chips and other similar electronic items, will be changed from the seller to the purchaser.

From Royal assent to the Finance Bill 2006, HM Revenue & Customs will be able to direct that additional specified records be kept such as mobile phone IMEI numbers. The existing powers of HM Revenue &Customs to inspect and mark goods will also be clarified.

With effect from royal Assent to the Finance bill 2006, new rules to specify circumstances where credit vouchers become liable to VAT will be introduced to combat schemes where no VAT is ever levied.

Reduced Tax Extension

From 1 July 2006 the sale of all contraceptive products, including sales by retailers, vending machines and the internet will be liable to the 5% reduced rate. Products supplied by the medical practitioners or health professionals will be unaffected by this measure.

Partial Exemption

Business that operates special methods rather than standard method will be required to declare and demonstrate that the method proposed is fair and reasonable before it will be approved. In addition the rules for the recovery of VAT for partly exempt business making overseas supplies will be simplified. These measures will take effect from April 2007.

Option To Tax

From Royal Assent to the Finance Bill 2006 the option to tax provisions will be made clearer and easier to use. New appeal rights for refusals will be introduced.

Supplies Of Goods Under Finance Agreements

The right of finance companies to treat returned goods as 'neither a supply of goods nor services' and thus avoiding charging VAT on the second sale, is to be removed. This will apply to cars and a wide range of goods where VAT on the first sale can be adjusted. The charges apply to agreements entered into on or after 13 April 2006 where the goods are delivered on or after 1 September 2006.

Church And Faith Buildings

The refund scheme for certain works will be extended to 2010/11, and will include professional fees and fixtures and fittings such as bells, pews, organs and clocks.

National Insurance Contributions (NICs)

2006/07 Employer Employee Class 1-not contracted out Lower earnings limit £84 Weekly earnings bands Up to £97 Nil Nil £97.01-£645 12.8% 11% Over £645 12.8% 1% Men65 and over and women 60 and over as above Nil Class 1A On relevant benefits 12.8% Nil Class 2 Self employed £2.10 per week Limit of net earnings for exception £4,465 per annum Class 3 Voluntary £7.55 per week Class 4* Self employed on profits £5,035- £33,540 8% Excess over £33,540 1% *Exemption applies if state retirement age was reached by 6 April 2006

Other Measures Announced

UK Real Estate Investment Trusts

Companies and groups can elect to join the UK Real Estate Investment Trust (REIT) regime with effect from 1 January 2007. The regime exempts qualifying rental income and gains on disposals of investment properties from corporation tax. Any other profits or gains made by the REIT will be subject to corporation tax.

Distributions paid by REIT out of the tax-exempt property income or gains will be treated as UK property income. They will be paid out to investors with a deduction of basic rate income tax at 22%. Dividends paid out of other profits will continue to be taxed in the usual way.

Companies or groups wanting to become REITs will pay an entry charge of2% of the market value of their investment properties at the date of conversion. the charge will be collected a t the same time as any corporation tax is due for the first accounting period of the regime. The charge can be spread over four years, in installments of 0.5%, 0.53%, 0.56%, and 0.6% if preferred.

To join the new regime, a company must be UK resident for tax purposes and its shares must be listed on recognized stock exchange. No one investor must be beneficially entitled to 10% or more of distributions or control 10% or more of the share capital or voting rights.

The conditions that relate to the business are:

• 75% or more of its assets must be investment property
  
  
• 75% or more of its income must be rental income, and
  
  
• The ratio of interest on loans to fund the tax-exempt business to the rental income of that business must be less than 1.25:1
  
  
• At least 90% of the tax exempt profits must be distributed each year.

Modification And Extension Of The Disclosure Regime

The disclosure regime is to be extended from 1 July 2006 to include the whole of income tax, corporation tax, and capital gains tax. The existing regulations will be revoked and the new regulations will contain hallmarks that will fall into three groups:

• Three generic hallmarks that target new and innovative schemes
  
  
• A hallmark that targets mass marketed tax products; and
  
  
• Hallmarks that target areas of particular risk

Two specific hallmarks will concern:

• Schemes intended to create losses to offset income or capital gains tax, and
  
  
• Certain leasing schemes.

Time limit for disclosure of schemes devised in-house is to be reduced to 30 days from the date that the scheme is implemented. Neither individuals nor businesses that are SME's will have to disclose in-house schemes.

Alternative Finance Agreements

Finance Act 2005 introduced legislation to deal with finance arrangements that are structured so that they donot involve the payment or receipt of interest-for example, those that are Shari' a compliant. Amounts equating economically to interest are charged to tax on the same basis as interest.

New provisions provide for two additional alternative finance arrangements to be taxed on a level playing field to products involving interest. They are:

• An agency- style contract, which is equivalent to a saving account
  
  
• A partnership-style arrangement used to finance the purchase of property or other assets.

The provisions are applicable to arrangements entered into on or after 6 April 2006 for income tax purposes and 1 April 2006 for corporation tax purposes.

In addition, low-cost alternative finance arrangements by employers to employees are to be taxed in the same way as equivalent loans that give rise to interest. This provision is applicable for arrangements entered into on or after 22 March 2006.

Landfill Tax

The standard rate of landfill tax will be increased from £18 per tonne to £21 per tonne for standard rate of disposals of waste made on or after 1 April 2006. The lower rate of tax which applies to inactive wastes disposed at landfill, remains at at £2 per tonne.

Dormat Accounts Of Holocaust Victims

Compensation payments made by foreign banks and building societies to Holocaust victims or their heirs will be exempt from tax. Payments of interest and capital from the dormant accounts will qualify. The exemption particularly relates to payments made under the Restore UK initiative or the Claims Resolution Tribunal arrangements for dormant accounts in Switzerland.

The exemption will apply to payments made in the 1996/97 tax year or any later year of assessment. In order to qualify for exemption, the original account holder must be a 'victim of National-Socialist persecution'.