Budget 2006 Overview

Mr Brown delivered his 10th consecutive budget on 22nd March 2006.
The following is a summary of the main points mentioned and measures proposed.

Note the rates can be found on the Inland Revenue site at Tax Rates and Allowances

Economy

• Following accusations that his predictions for economic growth were too optimistic, Mr Brown revised his figures in September 2005. Unsurprisingly he announced that these figures would be met.
• The economy will improve by between 2% to 2.5% in 2006 and 2.75% to 3.25% in 2007.
• Inflation was currently running at 2% and ‘on target’.
• The chancellor promised that there would be no return to ‘boom and bust’
• Net public investment has risen to £26 billion
• The governments forecast for borrowing this year has been increased to £36 billion.
• Mr. Brown stated that the economy requires 14 million ‘highly skilled ‘ workers. It currently has only 9 million and is facing ever increasing competition from emerging economies such as China and India.

Duty

• Alcohol - Duty up 1p on a pint of beer and 4p on a bottle of wine (75cl) but frozen on spirits, sparkling wine and cider.
• Tobacco products - Tax on tobacco products will rise at a rate of 2.65% in line with inflation.
• Road tax - With regards to Vehicle Excise Duty (VED) rates for cars with the lowest emissions (Band A) will reduce to zero. VED rates will also be reduced for cars within B and C bands by £35 and £5 respectively, frozen for those within bands D and E, increased by £25 for vehicles within band F and a new band (G) for the most polluting vehicles (those with emissions above 225g/km and registered after March 2006)
• Road fuel - Road fuel duty will remain frozen until 1 st September 2006 at which point it will increase by 1.25 ppl and 2.25 ppl for LPG.

Income Tax and Employment

• Personal allowances - to increase to £5035 (2005-6 £4895)
• 10% band increased to £2150 (2005-6 £2090), and higher rate band (40%) to start at £33300 (2005-6 £32400)
• Computers used at home -The exemption from taxable benefits in kind for the first £500 for employees using company provided computers at home will be withdrawn from 6 th April 2006.
• Provision of mobile phones -The allowance for employees family members to have mobile telephones provided by their company without being charged a benefit in kind will also be withdrawn. Provision of mobile telephones will now be restricted to one per employee.
• Provision of eye tests and glasses - Employees who use VDU’s will now be entitled to the costs of eye tests and provision of glasses paid for by their employers without it being a taxable benefit. This will apply whether paid direct by the employer or reimbursing the employee.
• Provision of fuel for private motoring - Fuel multiplier (£14400) to be frozen for 2006/7

Other changes include

• Child element of child tax credit increased to £1765, disabled child element increased to £2350 and severely disabled child element increased to £945.
• Child trust fund to include £250 and £500 at age seven.
• Tax free childcare voucher to rise to £55 per week or £238.33 per month per parent.

Business Taxation

• Corporation tax rates - The starting rate of 0% for the first £10000 of taxable profits and the non corporate distribution rate will be abolished from 1 st April 2006. This will leave a simpler system where profits will be chargeable to corporation tax at the small companies rate of 19% (up to £300000) or the main rate of 30% for profits greater than £1500000 with marginal relief for profits between these two figures.
• First year allowances on Plant and machinery for small businesses - The rate of first year capital allowances for expenditure on plant and machinery by small businesses will be increased to 50% for one year from 1 st April 2006 for companies and 6 th April for businesses subject to income tax.
• Changes to EIS, CVS, and VCT’s - Significant changes to the Enterprise Investment Scheme (EIS), the Corporate Venturing Scheme (CVS) and the Venture Capital Trust Scheme (VCT) were announced. For EIS investors, the annual investment limit for income tax purposes is doubled to £400,000. Investors in VCTs will now benefit from income tax relief at 30% (currently 40%). The maximum size of companies able to raise money under the EIS, VCT and CVS schemes has been reduced to £7 million before the investment and £8 million afterwards (‘the gross assets test’). This is a major reduction from the previous limits of £15 million before and £16 million afterwards. The minimum holding period for VCT investments has been increased from three to five years. All of these changes take effect from 6th April 2006 except the new gross assets test which will not apply in relation to sums raised by VCTs prior to 6th April 2006,nor to EIS or CVS shares subscribed for before 22nd March 2006.The meaning of ‘investment’ under the VCT legislation has been changed in that with effect from 6th April 2007, a VCT must have 70% by value of its investments represented by qualifying holdings and no more than 15% of that total investment in any single company. This will mean that any money held by a VCT after 6th April 2007 will be treated as an investment.
• Reforms to film relief tax - This year the chancellor has reformed film tax relief rather than extend the previous relief which will continue to apply to those films which commenced principal photography on or before 31st March 2006, provided the film is completed before 1st January 2007. The existing relief will also continue to apply to films acquired before 1st October 2007.The new relief will apply from 1st April 2006 to UK film producing companies (FPCs) incurring expenditure on the production of British films. Each film will be treated as a separate trade for tax purposes. The new rules will provide a deduction on a maximum of 80% of total UK qualifying expenditure (which must in turn be at least 25% of total production expenditure). An additional deduction of 100% will be due for films with total qualifying production expenditure (QPE) of £20 million or less, 80% otherwise. Where this results in a loss, this can be surrendered for a tax credit, payable at 25% for films with up to £20 million of QPE and 20% for all other qualifying films.
• Corporate capital losses - Anti-avoidance legislation effective from 5th December 2005 is being introduced to prevent schemes or arrangements aimed at gaining a tax advantage from capital losses. This legislation is aimed at preventing, the contrived creation of corporate capital losses, the buying of capital gains and losses and, the conversion of income streams and the creation of a capital gain matched by an income deduction where the gains are partly or wholly covered by capital losses.
• Extension to group relief - Legislation to bring UK Group Relief legislation in line with EC law. This will apply from 1 st April 2006 where a UK parent has a foreign subsidiary which has incurred a foreign tax loss that is unrelievable in the home country and where that subsidiary is either resident in the EEA or has incurred the losses in a permanent establishment in the EEA. Foreign losses will be relievable against UK profits only where all possibilities of relief have been exhausted and future relief is unavailable in the country where incurred or in any other country. The foreign tax loss will need to be recomputed under UK tax principles. The UK claimant company will need to be able to demonstrate that the losses meet all the relevant conditions of the legislation. Anti-avoidance rules have already been pre-announced to apply from 20th February 2006 to prevent loss relief where arrangements are made either to prevent foreign losses being made unrelievable outside the UK, where they otherwise would have been relievable or where foreign losses are generated that would not have existed but for the availability of relief in the UK and where the main purpose or one of the main purposes of those arrangements was to obtain UK tax relief.
• Leased plant and machinery (leasing reform) - From 1st April 2006, the tax treatment of plant and machinery which is leased or acquired will be aligned with other forms of finance. The legislation will apply to leases to be known as ‘long funding leases’. It will not apply to leases of less than five years’ duration and to leases of between five and seven years, where certain conditions are met. The new tax treatment applying to long funding leases will be that the lessor will be taxed on the proportion of the rental income that reflects the financing charges and will not be able to claim capital allowances. The lessee will be able to claim capital allowances and receive a deduction for that part of the rentals relating to the finance element. The proposed legislation will include provisions for certain transitional arrangements, companies within tonnage tax and for elections by lessors to apply the legislation to leases not exceeding £10 million in value.

VAT

• Fuel scale charges - Revised scale charges are published which must be applied from the start of the first VAT accounting period beginning on or after 1st May 2006.
• Registration limits - From 1st April 2006 the registration threshold rises from £60,000 to £61,000.
  The taxable turnover threshold which determines whether a person may apply for deregistration will be increased from £58,000 to £59,000. The registration and deregistration limits for relevant acquisitions from other European Union Member States will also be increased from £60,000 to £61,000
• Annual accounting scheme - The turnover limit for using this scheme will rise from £660,000 to £1,350,000 from 1st April 2007. Special provisions effectively backdate this increase to 5th December 2006 for businesses which exceeded to old limit after that date.
• Reduced rate of VAT for contraceptive products –In line with the governments sexual health strategy the rate of vat charged on ‘over the counter’ contraceptive products is reduced form 17.5% to 5%.
• Directions on additional records keeping - From the date of Royal Assent, Customs will have greater powers to counter fraud in mobile phone and similar trades. HMRC will be able to issue directions requiring a business to keep specified records relating to goods that they have traded (for example, IMEI numbers for mobile phones). The measure will only be exercised where HMRC has reasonable grounds to believe that the additional records might assist in identifying supplies on which VAT might go unpaid. This fraud most commonly arises from supplies of mobile phones and computer chips, but to 'future-proof' this legislation the scope of the measure will not be limited to goods of this type.
• Clarification of inspection powers - From the date of Royal Assent HMRC officers will enjoy wider, explicit powers to enter premises and inspect goods in connection with VAT, including the right to mark any goods inspected (e.g. by applying an HMRC date stamp to the outer packaging) and to record details of the goods by any means (including electronic scanning of barcodes). Customs have always assumed these rights, but the right to stamp packaging and scan barcodes has been disputed by some businesses.
• Phone cards - Existing rules will be tightened up to prevent the supply of credit vouchers, i.e. face value vouchers issued by one person and redeemed by another, without VAT becoming chargeable either on supply or redemption.
• Supply of goods under finance agreements – Where goods are returned to finance companies before an agreement is completed, either when the customer exercises their right to return the goods and make no further payments, or where the finance company exercises its rights when the customer defaults on the agreement, the Chancellor proposes to remove the entitlement of finance companies to treat such returned goods as ‘neither a supply of goods nor services’ for VAT purposes, when sold for a second time, where there is a requirement to adjust the VAT charged on the initial sale.
  This change will apply to all finance agreements entered into on or after 13th April 2006 where the goods concerned are delivered on or after 1st September 2006.
• Partial exemption changes - "Informal consultation" will be held on two changes that will strengthen and simplify the special method regime, prior to implementation from April 2007.
  The first change will require a business to declare that its proposed special method is fair and reasonable before gaining approval for its use. HMRC will then be able to set aside a method that the business should have known was not fair and reasonable in order to recoup VAT that has been incorrectly reclaimed. This change is intended to help HMRC approve special methods more quickly. The second change will facilitate ‘combined methods’ that cater for the recovery of VAT relating to overseas supplies. This change will simplify the rules for partly exempt businesses that make overseas supplies.
• Anti-avoidance - The Budget introduces a new legal provision to combat Missing Trader Intra Community (MTIC) fraud in specified goods such as mobile phones, computer chips and some other similar electronic items. It changes the person who is liable to account for and pay the VAT on the sale of such goods.
  Normally the seller of the goods accounts for and pays the VAT chargeable on the sale but this change, when implemented, will require any VAT-registered business purchasing certain goods, which will be specified in secondary legislation, to do so instead. It also introduces a consequential change allowing adjustment of the VAT on the sale when full payment in relation to it has not been made within 6 months. Implementation requires agreement with other EU member states.

Sundries

• Stamp duty land tax - The rates of Stamp Duty Land Tax (SDLT) have remained unchanged but the threshold is increased from £120000 to £125000 from 23 rd March 2006
• Inheritance tax – exemption threshold increased to £325,000. Provision for further increases in subsequent years are as follows 2007-8 £300,000, 2008-9 £312,000 and 2009-10 £325,000.

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