In this first edition of our new e-newsletter, 'Insight', Barbara gives you the tax team's analysis of the Chancellor's Pre Budget Report.

Email: bmm@hendersonloggie.co.uk

Overall, the impact of the VAT reduction on most businesses is likely to be extra workload and costs, as there will be a need to ensure accounting systems are able to cope with this new rate of VAT, and this could detract from the expected boost to sales.

For retailers, there will be a need to not only adjust prices, price lists & tags, menus and advertising but to ensure that accounting systems bring the new VAT rate to account. For manufacturing and wholesale businesses which are able to recover VAT fully, the change is unlikely to impact significantly, although there will be a reduction in the cash flow cost of goods bought. For small businesses which are not VAT registered, charities and partly exempt businesses, the change offers an opportunity to delay purchasing goods or services and achieving a reduced level of irrecoverable VAT.

There is also a new VAT fraction to replace one that has become very familiar. Where VAT is calculated from the VAT inclusive cost (eg mileage rates paid to employees) the ‘VAT Fraction’ will now be 3/23 rather than the current 7/47 from 1 December 2008.
 

HMRC will allow businesses in temporary financial difficulty to spread their tax bills over a period of time. This applies to all taxes paid by businesses, including corporation tax, VAT, PAYE, income tax and national insurance contributions. They have already set up a dedicated Business Payment Support Line. We welcome this support for businesses but have concerns that it might not be as simple as promised to agree a payment timetable. In particular, HMRC will require information on the business’s income and outgoings and may require further information before agreeing to a timetable. It is also possible that the timetable that is acceptable to HMRC is insufficient to ease pressure on the business.

With immediate effect there is to be a temporary extension to the trading loss carry back for both companies and unincorporated businesses. Normally a business can carry back trading losses against its profits or income arising in the previous year, reclaiming tax previously paid. As a result of this measure, businesses will be able to carry back trading losses for three years. The trading losses must be set off against profits from later years first. While the offset against profits from the preceding year is unlimited, there is a £50,000 limit set on the amount of the balance of unused losses which can be carried back to the earlier two years.

For companies the measure has effect for accounting periods that end between 24 November 2008 and 23 November 2009. For unincorporated businesses the measure provides relief for trading losses that arise in relation to the tax year ending 5 April 2009.

This measure is aimed at providing relief for businesses, albeit limited, that have previously performed well, but that are struggling in the current financial climate.
 

The rate of Corporation Tax for small companies (those with profits less than £300,000) will remain at 21% for the Financial Year to 31 March 2010. It had previously been announced that the rate would go up to 22% from 1 April 2009. This deferral will also provide relief to companies with profits between £300,000 and £1,500,000, as they benefit from marginal Small Companies' Relief.
 

There were a number of encouraging announcements in respect of additional funding and support from the Government. There is a new, albeit temporary, Business Finance scheme, also capital funds to be made available by the Government and a Business Link to help sound businesses access additional credit. There is yet little detail. We will have to wait until the New Year to see just how valuable and easy to access the loans will be.

• 45% rate of income tax for those earning £150,000+  from 6 April 2011 
• Personal allowances increased to £6,475 from 6 April 2009
• Relief for personal allowances reduced for earners above £100,000 from 6 April 2010
• National insurance contributions increased by 0.5% from 6 April 2011
• Increases in tax rates for trusts from 6 April 2011
• Income shifting proposals deferred