Alistair Darling’s first Budget contained no major surprises. Many of the taxation measures it outlined had already been announced last year, and most of the new proposals were targeted at certain specific areas. The outlook for owners of many small and family businesses is not quite as bad as was feared several months ago, but some measures will adversely affect the road transport industry.
Firstly, in a very welcome move, the Chancellor has postponed the introduction of the controversial ‘income shifting’ rules. These proposals would increase the overall income tax bill for many family companies and partnerships where a profit share or dividend is paid to a family member, and would involve business owners and their accountants in nightmarish annual calculations to determine whether their family arrangements fell foul of the rules.
The proposals have been roundly condemned as unworkable by trade organisations, professional bodies and tax advisers, and it is to be hoped that the government will take on board the many representations that have been made, and seriously reconsider these plans.
Secondly, the Chancellor had already announced that he had backed down from his original proposal to tax all capital gains at 18 per cent. Owners of small businesses
will still be able to dispose of their businesses and pay tax at only 10 per cent on gains of up to £1 million. This ‘lifetime allowance’ will apply to sales of business assets that have been owned for at least a year, including shares in trading companies where the shareholder is a director or employee who owns at least 5 per cent of the ordinary share capital and controls at least 5 per cent of the voting rights.
This will alleviate the very real concerns of many small business owners that a tax increase of up to 80 per cent on the sale of their business would seriously reduce the funds that would be available when they retired.
Larger businesses will benefit from the reduction in the main rate of corporation tax from 30 per cent to 28 per cent from 1 April 2008. Although the small companies’ rate will increase from 20 per cent to 21 per cent, the basic rate of income tax on the salaries or profit shares of business owners will be reduced from 22 per cent to 20 per cent.
Major changes to the capital allowances rules from April 2008 will have a mixed effect. A new Annual Investment Allowance (‘AIA’) will enable businesses to claim immediate 100 per cent relief on the cost of plant and equipment, up to an annual limit of £50,000. This means, for example, that if a small business buys equipment costing £50,000, it will be able to claim an immediate £50,000 deduction, which is considerably better than the First Year Allowance (‘FYA’) of £25,000 that it would be able to claim at present.
However, this will not help transport operators that are small or medium-sized businesses and that spend much higher amounts on buying and replacing vehicles each year. Currently they can claim a FYA of 50 per cent (in the case of small businesses) or 40 per cent (for medium-sized businesses). So, for example, a medium-sized business can currently claim a FYA of £200,000 in respect of a new vehicle costing £500,000, but from April 2008 it will only be able to claim an AIA of £50,000, followed by an annual writing down allowance (‘WDA’). The additional bad news here is that the WDA will be reduced from 25 per cent to 20 per cent, although it will be available in the year of purchase (in addition to the AIA), which is not the case at present.
The Chancellor has once again added an extra 2p per litre to fuel duty. All businesses are suffering from the effects of record oil prices, and it is disappointing that the Chancellor did not recognise this, and do more than just postpone an increase until October 2008. The worrying trend is set to continue, with an extra 0.5p per litre increase in real terms planned for 2010.
The Chancellor also announced that he would be looking into a national road pricing system, which will no doubt have significant implications for major road users.
The government is committed to reducing CO2 emissions and increasing energy efficiency, and taxation measures are increasingly being used to help to achieve these goals. Although high CO2 emissions will result in higher taxes, individuals and businesses that reduce CO2 emissions will be rewarded with lower taxes, so this is one area where businesses have a real say in how much tax they pay.
Motoring is high on the CO2 emissions agenda, and the Chancellor announced details of the CO2 emission-related road tax that will apply to new cars from 2010. There will be no charge for low-emission cars, but a charge of £950 will apply to those with the highest emissions. Clearly, there will be an opportunity to save tax by making careful choices.
In the meantime, CO2 emissions already form the basis for the following tax costs or deductions:
• Capital allowances for business cars – 100 per cent relief is available for cars in the lowest emission category
• Car and fuel benefit in kind scale charges for employees
• VAT fuel scale charges
• Annual road tax
The potential savings for employers and employees, in corporation tax, income tax, national insurance, VAT and road tax can amount to thousands of pounds per car over a typical three-year period, simply by choosing a low-emission car, and this must now be an important factor in purchasing decisions.
The emission-based trend is set to continue in the future, with the London congestion charge moving to this basis in October 2008. A national road pricing system may well also be emission-based.
Increases in other taxes such as Landfill Tax, Aggregates Levy and Climate Change Levy will also inevitably filter through into increased costs for most businesses.
The respite given to some small businesses this year may only be brief, as future government borrowing requirements suggest that more tax increases, rather than reductions, lie ahead.
Reed Business Information Limited.©2008
