Budget summary 2011 for entrepreneurs and business

Nice summary of budget and what it means for entrepreneurial businesses from BDO Tax Partner, Tony Spillett.

“By boosting the cut in Corporation Tax rate, Entrepreneurs’ Relief, R&D allowances for SMEs and the Enterprise Investment Scheme, as well as permitting non-doms to remit funds tax-free for investment in British business, he has given entrepreneurs what they wanted.”

The reforms to the foreign profits legislation, announcement of new Enterprise Zones and proposed 5.75% rate of corporation tax for offshore financing companies should be good news for larger businesses.

Headlines from the speech are as follows:

Corporate Tax

  • The main rate of Corporation Tax will now be reduced to 26% from 1 April 2011 and by 1% annually thereafter, now to 23%. The small profits rate will be reduced to 20% from 1 April 2011.
  • No changes were announced to thresholds for the small profits rate and main rate of Corporation Tax.
  • As previously announced, capital allowance rates are to be reduced to 18% (main pool) and 8% (special rate pool) from 1 April 2012 and the Annual Investment Allowance to reduce to £25,000 from the same date.
  • The duration of Short Life Asset elections is doubled from four to eight years for expenditure incurred after 1 April 2011.
  • The rate of R&D tax relief for SMEs will be increased to 200% from 1 April 2011 and 225% from 1 April 2012.
  • Further consultation from May 2011 on proposed 10% Corporation Tax rate on income from qualifying patents.
  • Foreign profits reforms will ultimately produce a 5.75% effective Corporation Tax rate on overseas financing income.
  • 21 New Enterprise Zones are to be funded, with scope for enhanced capital allowances where they are situated in areas of high value manufacturing.

These changes should be almost wholly welcomed by business. For many years we have called for a 20% main rate of Corporation Tax to increase the competitiveness of the UK – hopefully Mr Osborne will go all the way in future Budgets.

Global businesses will be scrutinising the impact of the changes to the taxation of foreign profits before moving (or moving back) to the UK.

Income Tax

  • As previously announced, the personal allowance is to increase by £1,000 to £7,475 from 6 April 2011, funded by a reduction in the higher rate threshold.
  • There will be a further increase in the personal allowance of £630 to £8,105 from 6 April 2012, with no corresponding reduction in the higher rate threshold.
  • No change to basic (20%), higher (40%) or top (50%) rates of tax, or tapering of personal allowances on earnings over £100,000.
  • There was no indication of when the top rate of tax may be reduced, but a commitment that it is “temporary”.
  • As previously announced, pension reform is to take effect from 6 April 2011 (tax relief on £50,000 annual allowance) with £1.5m lifetime allowance from 6 April 2012.
  • EIS income tax relief increased from 20% to 30% from 6 April 2011.
  • The annual investment limit in EIS companies increased to £1m from 6 April 2012, and the size of qualifying EIS and VCT business increased (fewer than 250 employees, no more than £15m of gross assets).

Non-doms have a new decision to make based on the increase to £50,000 of the annual charge, and the new option to remit funds to invest in UK business. UK domiciled individuals also have the opportunity to substantially reduce their income tax bill through investing in qualifying EIS companies.

National Insurance Contributions

  • As previously announced, Employees’ Class 1 Contributions increase to 12% (capped) and 2% (uncapped) from 1 April 2011, Employers’ Class 1 Contributions increase to 13.8%.
  • A long consultation period to start on merging NIC and income tax, but continuing to exclude pensioners.

Following the previous Government’s increase in NIC in the March 2010 Budget (which is about to take effect), further changes were not expected this time around. The long and winding road to unify Income Tax and NICs will keep many civil servants busy for years to come. We hope that the artificial distinction between these two taxes, and the consequent administrative burden, can be eliminated over the next few years.

Capital Gains Tax

  • No change was made to the headline 18% and 28% rates.
  • Entrepreneurs’ Relief remains at 10% but qualifying lifetime gains doubled to £10m from 6 April 2011.

It’s undoubtedly great news that the lifetime limit for Entrepreneurs’ Relief has been doubled (and has now increased tenfold within 12 months). However, it is unfortunate that a form of taper relief or indexation allowance was not introduced in relation to assets held for a long period of time, and that employees with less than a 5% shareholding and certain investment businesses remain totally excluded.

Indirect Tax

  • The 20% VAT rate remains unchanged.
  • The VAT advantage from buying low value items, eg CDs from outside the EU, is to be targeted.

Following January’s VAT increase, it was no surprise that VAT has largely remained unchanged.

For more detail, read the full summary here.