In the firing line
Alistair Darling delivered his first Pre-Budget Report this month. As Chancellor, he announced several measures that will hit small businesses. Tax specialist Paula Tallon highlights some of the things to look fo
At present, taper relief reduces the capital gains tax charge when an individual or trust sells or transfers an asset. The relief is particularly generous for business assets, such as shares in a trading company, or an asset that is used in a trade - for example, a property or goodwill. Gains on such assets are halved where the asset has been owned for at least a year, and reduced by 75% if the asset has been held for two or more years. This is a very valuable relief, which means that the effective tax rate for a higher-rate tax-payer is only 10% (25% x 40%), where a business asset had been owned for at least two years.
From 6 April, 2008, however, there will be no taper relief at all. Capital gains tax will be charged at a flat 18% rate, irrespective of the type of asset, or whether the individual is a higher-rate taxpayer. For someone who had hoped to pay only 10% tax, this represents a massive 80% increase.
If that were not bad enough, the abolition - also from 6 April, 2008 - of the indexation allowance (an allowance for inflation between 1982 and 1998) will make matters worse for individuals or trusts who hold assets that were acquired before 1998.
Anyone thinking of selling or transferring a business or a business asset (or indeed a non-business asset) in the near future will need to work out whether there will be a higher tax bill if it is sold after 5 April 2008. If the answer is yes, every effort should be made to complete a sale before then, although care should be taken not to sell before an anniversary date which would increase taper relief. If an outright sale to a third party is not possible, some thought should be given to engineering a 'disposal' which will trigger the taper relief and, if applicable, indexation relief, which will otherwise be lost forever.
Prevention of 'income shifting'
The Chancellor confirmed that the government is to press ahead with
another attack on family businesses. This follows a recent House of Lords ruling that the payment of family company dividends to the low-earning wife of a husband who earned most of the company's income was effective for tax purposes. Having lost that case, the
government intends to change the rules, with effect from 6 April, 2008, so that it will not be possible to transfer income in this way by means of
dividends or a share of profits.
It is not yet known exactly how this will be done, although it has been stated that the things to be taken into account may include the actual work done by each individual, and the risks to which they are subject through the business.
Increase in company car fuel benefit in kind charge
Where an employer provides a company car to an employee and pays for fuel for private use, the standard amount on which the annual fuel benefit-in-kind charge is based, depending on the car's CO2 emission rating, will rise from £14,400 to £16,900 from 6 April, 2008 - an increase of over 17%. This will increase the employee's income tax bill, and it will also increase the national insurance cost for employers. An employee who does not use a company car on private journeys to a great extent will probably be better off paying for his own private fuel. As benefit in kind charges are based on the vehicle's CO2 emissions, there can be an enormous difference in the tax and national insurance costs for cars of an identical price and standard, but with different CO2 emission ratings.
nI exemption for holiday pay schemes
For many years, the payment of holiday pay to employees has been exempt from national insurance contributions, where a third party operated a holiday pay scheme on behalf of the employer. This type of scheme was traditionally used in the construction industry, but other businesses have recently started to use it purely for the national insurance savings. As a result, the exemption will be removed for all businesses, but the construction industry will be
allowed to phase out the scheme over the next five years. Other businesses will have to revert to paying holiday pay in the same way as normal salary - and account for national insurance on it - from 30 October, 2007.
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