The Chancellor himself said this was a Budget for “continuing to help people through the global recession and prepare people for the opportunities of the future”. In particular, he referred to a budget of “fairness and opportunity” and the need to “invest and grow our way out of recession”. It should have been a budget that delivered the kiss of life to the economy but what we got feels more like

a mere peck on the cheek.

 

Headline measures

 

The headlines were, of course, the increase in higher rate income tax to 50% (though this had previously been indicated that the increase in rate would be to 45%), the restriction to higher rate tax relief on pension contributions (we would presume that one of the main reasons for this is that the Government did not want high earners simply to sidestep the new higher rates of tax for 2010-11 by making enhanced pension contributions), and the withdrawal of the personal allowance for “high earners”.

 

There was some help for savers, with the increase in the amount that can be invested in an ISA to £10,200 although a majority of us will need to wait until next year to benefit from the increased level.

 

Taxation of foreign profits

 

For international businesses, following extensive consultation and several changes of heart by the government we now have the final version of the new foreign profits tax regime. The main features of this are as follows:

 

> All companies will be exempt from tax on foreign dividends received from July 2009 onwards. This aligns the treatment with that of UK dividends. The important point is that this will now apply to all companies whatever their size. Previously it has been proposed that the exemption would not be available to smaller companies.

 

> As a quid pro quo a debt cap will be introduced, but only for large companies. The effect of this will to be to restrict interest relief on loans used to finance foreign subsidiaries.

 

> The controlled foreign company rules, under which profits of overseas entities can be attributed to parent companies, are to be reformed to remove certain exemptions.

This is a natural consequence of the introduction of the general exemption for foreign dividends and is a revenue protection measure to ensure that the new regime is not exploited for avoidance purposes.

 

Non domiciled individuals

 

Following the substantial changes to the treatment of tax to non-domiciled individuals there are no major reforms this year but there are a few amendments which are largely aimed at tidying up some of the loose ends which such a major change inevitably creates.

The changes are mainly designed to take those individuals with very small amounts of foreign income or gains out of the new regime completely. The compliance burden of dealing with such small amounts under the extremely complex new rules is out of all proportion to any tax which is raised and therefore this is a sensible deregulation measure.

 

Personal allowances – non residents

Those claiming a personal allowance as a Commonwealth citizen will no longer be able to do so unless they have an entitlement under another separate provision, such as being an EU citizen or being a resident in a treaty country.

 

Dividends from non-resident companies

From 22 April 2009 individuals are entitled to a non-repayable tax credit on foreign dividends.

Previously the individual had to hold 10%of the shares to qualify for the credit. The effect of this is that a basic rate taxpayer will not pay any tax on a foreign dividend regardless of his level of shareholding. The rule only applies where the company paying the dividend is in a country with a double taxation agreement which has a non-discrimination clause. There is an anti-avoidance rule to deny the tax credit where there is treaty shopping, i.e when people deliberately divert profits into a regime which has a favourable tax treaty with the UK.

 

Capital allowances/Entrepreneurs relief

 

As ever the Chancellor has not been able to resist the temptation to make changes to the capital allowances system. The main change this year is the reintroduction of a 40% temporary first year allowance.  There is also a 100% allowance for businesses purchasing plant and machinery which is energy efficient, reduces water use or improves water quality. 

 

With other changes that came out of the Budget, it is somewhat of a disappointment that the small companies’ rate of corporation tax remains at 21% and did not revert to 20%. There were also no changes to capital gains tax, and in particular, no extension to Entrepreneur’s Relief. This is a shame as entrepreneurs need to be stimulated, not sedated!  

 

Tip of the month

 

If you think some of the changes may affect you and / or your business, do contact us to make sure that you understand the impact some of the changes and address any available opportunities.