Known knowns

By ACCA’s Budget team

A lot of what will be announced tomorrow we already know about. We’ve got about 15 pages worth of pre-announcements that we could go through but for space reasons we’re going to go through a ‘Top 10’*:

1. Rates and allowances

Income tax rates, allowances and thresholds for the 2011/12 tax year have already been announced.

With effect from 6 April 2011, the personal allowance for those under 65 will increase by £1,000 to £7,475.  The basic rate limit will also reduce by £2,400 to £35,000.

The rates of employee’s and employer’s Class 1 and Class 4 national insurance contributions (NICs) will rise by 1% with effect from 6 April 2011. This will be partly mitigated by increases to the earnings threshold and lower profits limit.

2. Corporation Tax

The main rate of corporation tax will reduce from 28% to 27% from 1 April 2011.

The Small Profits rate of corporation tax reduces from 21% to 20% from 1 April 2011.

Finance Bill 2011 also includes provisions with effect for accounting periods ending on or after 1 April 2011 to extend the benefit of corporation tax small profits relief by simplifying the definition of associated companies. This measure puts Extra Statutory Concession C9 on a statutory footing and extends it.

3. Pensions

The Annual Allowance reduces from £255,000 to £50,000 with effect from 6 April 2011.

The Lifetime Allowance is also set to reduce from £1.8 million to £1.5 million on 6 April 2012.

Following the announcement of the above changes in October 2010, the government had been consulting on options to enable individuals to meet high Annual Allowance charges out of pension benefits.  A summary of responses together with a written ministerial statement were published on 3 March 2011.

The government has decided that individuals with AA charges above £2,000 will be able to elect for the full liability to be met from their pension benefit. Schemes will be required to operate this facility only where an individual has exceeded the AA outright within that scheme in the relevant year.

The previously announced proposals to remove tax rules that currently require members of registered pension schemes to secure an income, usually by buying an annuity, by the age of 75 will take effect from 6 April 2011.

Further details are available in the December 2010 issue of In Practice.

4. Tax Credits

The June 2010 Budget set out several substantial changes to the tax credit system.  The changes to child tax credit (CTC) and working tax credit (WTC) taking effect from 6 April 2011 are as follows:

• The baby element of CTC will be removed from 6 April 2011.
• The withdrawal rate will be increased from 39% to 41%.
• Families with household income above £40,000 will start to have their family element tapered away from 6 April 2011 at a rate of 41%.
• The Consumer Price Index (CPI) will be used to uprate all of the tax credit elements from April 2011 and the child element of CTC will increase by an additional £150 on top.
• The previous announcement that those aged 60 and over would be able to qualify for WTC by working at least 16 hours per week will still go ahead from April 2011.
• The tax credit income disregard will change from £25,000 to £10,000 from 6 April 2011.
• WTC will be frozen for three years from April 2011.
• The proportion of costs covered by the childcare element of CTC will be reduced to 70% from 80%.

Further details of the changes are available on the HMRC website here and here.

5. Disguised Remuneration

The June 2010 Budget announced that legislation would be introduced from April 2011 to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce tax liabilities.

Further written ministerial statements concerning the measures were issued on 6 December 2010 and 9 December 2010. The draft provisions were also published on 9 December 2010.

HMRC issued FAQs in relation to the draft legislation on 21 February 2011, including indications of some proposed changes to the draft legislation arising from the consultations.

The legislation will have affect from 6 April 2011, but there are anti-forestalling rules which introduce similar provisions as from 9 December 2010.  The tax charge under the anti-forestalling rules arises on 6 April 2012.

6. iXBRL – Online filing

From 1 April 2011 onwards, all companies and organisations will have to file their Company Tax returns online for any accounting period ending after 31 March 2010.

Additionally, accounts and computations must be filed in a set format - Inline eXtensible Business Reporting Language (iXBRL).

From the same date, companies and organisations will have to pay any Corporation Tax and related payments due electronically.

HMRC has published guidance on how to manage the transition to online filing including advice on tagging and penalties.

HMRC has also provided guidance and a form to help make a 'reasonable excuse' claim in appropriate circumstances, for those unable to submit their online Company Tax Returns on time from 1 April 2011.

Further information on the online filing requirements is available on the ACCA website.

7. Office of Tax Simplification

(a) Tax Reliefs Review

The Chancellor asked the Office of Tax Simplification to carry out a review of all tax reliefs by Budget 2011, identifying changes that can be made to simply the tax system.

The OTS published its final report of the review of tax reliefs on 3 March 2011.  The report recommended that 45 reliefs should be abolished; 17 reliefs should be simplified and 54 reliefs should be retained.  The OTS also found that there are 8 expired reliefs which should be removed from legislation.

The report contains recommendations to the Chancellor, with a formal response expected as part of Budget 2011, leading to consultation of draft legislation under the new policy making approach with amendments possibly included in Finance Bill 2012.

(b) Small Business Tax Simplification Review

The OTS was also asked to provide an interim report to the Chancellor by Budget 2011 that identifies areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses and recommend priority areas for simplification.

On 10 March 2011, the OTS published the interim report highlighting several priority areas for reforming the taxation of small businesses. A formal response from the Chancellor is expected in due course.

8. Capital allowances

Several changes to capital allowance rates and limits were announced in the 22 June 2010 Budget.

Legislation will be introduced in Finance Bill 2011 to reduce the level of the annual investment allowance from £100,000 to £25,000 with effect from April 2012.

The rates of writing-down allowances are also due to reduce with effect from 1 April 2012 (corporation tax) or 6 April 2012 (income tax) as follows:

• From 20% to 18% per annum for expenditure allocated to the main rate pool; and
• From 10% to 8% per annum for expenditure allocated to the special rate pool.

For businesses with chargeable periods spanning 1 April (CT) or 6 April (income tax) a hybrid rate will be required.

Further details were published in the June 2010 issue of In Practice.

9. Controlled Foreign Company (CFC) Reform

A new CFC regime is expected to be introduced in Finance Bill 2012, although there are interim improvements to the current CFC rules to be included in Finance Bill 2011.

The new regime will be a mainly entity based system that will operate in a targeted way by bringing within a CFC charge only the proportion of overseas profits that have been artificially diverted from the UK.

It is expected that the government will publish further details on the new CFC regime for consultation in Spring 2011.

Further details can be found in the Corporate Tax Reform documents on the Treasury website.

10. Corporate Capital Gains – Simplification measures

The previous government announced its intention to simplify some of the tax rules for related companies at the 2007 Pre-Budget Report. Since then there have been periods of consultation and three main areas of reform were identified.

Legislation will be introduced in Finance Bill 2011 to simplify rules in the following areas:

• Value shifting
• Capital losses after a change of ownership
• De-grouping charge.

The measures will take effect at the date the Finance Bill 2011 receives Royal Assent.

*There is loads more that we could have talked including: PAYE coding changes, patents, the climate change levy, real-time PAYE information collection, and overseas business entertainment etc.