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Below is a summary of the Budget changes relevant to small UK businesses and their owners.

Corporation tax

• Small company rate to reduce to 20% from April 2011
• Main company rate to fall to 27% from April 2011 followed by 1% annual reductions over the next 3 years to reach 24% by April 2014

VAT

• Standard rate of VAT to increase to 20% from 4 Jan 2011
• Sectoral rates for the Flat Rate scheme will increase at the same time as published here

Capital gains tax

• Annual exemption of £10,100 is unchanged
• Tax rate for basic rate payers remains at 18%
• Tax rate for higher rate taxpayers increases to 28% from midnight 22 June 2010
• 10% rate for entrepreneurs extended to £5m of gains in lifetime

Income tax

• £1,000 increase in Personal Allowance for tax to £7,475 with effect from April 2011
• However, the higher tax/NI rates will kick in sooner to offset the Personal Allowance increase for higher earners

National Insurance

• As previoulsy announced, NI rates will increase by 1% from April 2011
• The threshold at which NI becomes payable for employers will increase to £131 per week from April 2011
• Small businesses, in certain areas, set up over the next 3 years will be exempt from the first £5k of employer’s NI on up to 10 employees’ wages

Capital expenditure

• The maximum expenditure for immediate tax relief is reduced from £100k to £25k pa with effect from April 2012
• Other expenditure attracts reduced tax relief of 18% or 8% (previously 20% and 10%) for accounting periods ending April 2012 onwards

Furnished holiday lets

• No changes immediately so the generous tax reliefs continue for UK and EEA properties
• However, the government has announced a tightening of the rules from April 20011 - more details will be published in due course

Figures have been released showing just how bad the Taxman is at answering the telephone. 

For the 2008/09 year 103 million phone call attempts were made to the HMRC but only 57% of those calls were actually answered - down from 71% in the previous year.

To add insult to injury, HMRC estimate that if you are lucky enough to get to through to someone, there is an 11% chance that the advice you are given is wrong!

The VATman has got tougher recently on businesses asking for extra time to pay their VAT bills.

In Jan-Mar 2010 the HMRC rejected 11% of all applications compared to just 5% in Jan-Mar 2009.

However, in our opinion, there were a lot of spurious applications being accepted in 2008/09 without much testing so this is more a reflection of more thorough checking than a change in any rules.  However, if the rejection rate increases further this would be cause for concern.

The Conservative and Liberal Democrat coalition recently published its joint programme for government outlining the agreements reached on key tax and business policies.

Among the measures introduced was a pledge to review IR35 as “part of a wholesale review of small business taxation”. The document said that IR35 would be replaced “with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility”.

Other key tax pledges:

• The personal allowance threshold will go up to £10,000 over the course of the next few years.
• The increase in employer NI thresholds proposed by the Conservatives in their manifesto will go ahead.
• Non-business capital gains tax rates will increase significantly to be close to the relevant income tax rate, with exemptions for entrepreneurial business activities.
• Tax avoidance reforms to be introduced based on Lib Dem proposals.
• Corporation tax headline rates to be reduced.

We say:

• Don’t hold your breath for the abolition of IR35.  Whilst there may be some tweaking we don’t expect wholesale changes. 
• Given the state of the economy we expect more bad news than good news in the tax world starting with the Emergency Budget on 22 June 2010.

Non-UK residents have to be careful not to spend too many days in the UK in any one tax year otherwise they can become UK resident meaning additional tax liabilities.

Non-residents who have had to stay in the UK longer because of the travel disruption caused by the recent volcanic ash cloud can claim to ignore those days if the total number of days spent in the UK in the year amount to less than 183.  This is the ‘exceptional circumstances rule’.

As of April 2010, the number of years the Taxman can go back to investigate past tax returns has changed.  Below is the new position:

Normal investigation time limit - 4 years for income tax, corporation tax, capital gains tax, PAYE and VAT

Careless mistakes - 6 years for income tax, corporation tax, capital gains tax and PAYE but 4 years still for VAT

Deliberate mistakes - 20 years for income tax, corporation tax, capital gains tax, PAYE and VAT

Further details can be found on the HMRC website.

The proposed changed to the tax rules governing furnished holiday lets have been dropped from the 2010 Finance Bill due to lack of Parliamentary time before the General Election.  They were due to take effect from 6 April 2010.

This effectively means that the rules return to how they had been up to 5 April 2010 which gives such properties significant tax breaks compared to other residential lettings.

Below are details of the more relevant changes in tax rates and thresholds as announced by Mr Darling in today’s 2010 Budget.  Changes are effective from 1 April 2010 for companies and 6 April 2010 for individuals unless stated otherwise.  Further details can be found on the HMRC website.

Surprisingly there were no increases announced (for now) to the rate of VAT or capital gains tax although we think this is more to do with the forthcoming General Election than the economic state of the country.

Income tax

A new rate of 50% introduced for earnings in excess of £150k pa (the equivalent effective rate for dividends increases from 25% to 36.1%).

The personal allowance is withdrawn at the rate of £1 for every £2 of earnings in excess of £100k pa.

Company tax

Previously announced increase in small company rate to 22% is deferred (again) until April 2011.

NIC

No changes this year but a general 1% increase is planned from April 2011.

VAT

Registration threshold increases to £70k pa.

Stamp duty

A temporary SDLT exemption for first time buyers of residential property valued up to £250k.  The exemption applies for transactions between 25 March 2010 and 25 March 2012.

A new 5% SDLT rate for residential properties purchased for over £1m with effect from April 2011.

Pensions

The annual allowance increases to £255k while the lifetime allowance increases to £1.8m.

Other

Annual investment allowance for the purchase of capital assets is doubled to £100k.

Special tax rules for Furnished Holiday Lets are withdrawn (previously announced).

ISA allowance increases to £10,200 (up to 50% can be saved as cash).

Entrepreneurs lifetime limit for capital gains is doubled to £2m.

HMRC has confirmed that the official rate of interest will be reduced from 4.75% to 4.00% as of 6 April 2010.  This interest rate is used to calculate the taxable benefit on interest-free and ‘cheap’ employment related loans. 

The average rate for 2009/10 has also been confirmed at 4.75%.

Click the link for details of previous rates.

A recent tax tribunal case considered the tax deductibility of work clothes for a TV newsreader who was an employee of the BBC.

The newsreader claimed tax deductions for: 

• Professional hairdo and colouring £975
• Professional clothing for studio    £3,231
• Laundry of professional clothes   £325

Unfortunately, the tax tribunal disallowed all claims.

The Tribunal found that:

• Her clothes were “not of a special character”, they were the same as worn “off-duty”.
• There were no express terms concerning clothing in her contract.
• Laundry and hairdressing was disallowed: an employee is not performing her duties when her clothes are being cleaned or when she is sitting in a hairdressing salon.

Further, the tribunal confirmed that it is impossible to divide the business and private benefit of such expenditure such that no apportionment of the costs are possible.

Link to the case: Ms Sian Williams v HMRC TC 00397