Special Feature

2009 Budget - How Does It Affect You?

5th May 2009

On the 22nd April, Alistair Darling presented the 2009 Budget. But how does The Budget affect businesses within the UK, will much change?

Below is a summary of key points all businesses should be aware of together with comments and advice from The Local Bookkeeper.

Income Tax

The 50% rate of income tax will apply from 6 April 2010 on incomes above £150,000. The tax free personal allowance (£6,475 for 2009/10) will be scaled down to nil for those individuals who have taxable income of £100,000 or more. This means that once you have a taxable income of £113,000 you will be unable to benefit from the tax free personal allowance.

If you have a significant amount of funds retained within your own company you may consider withdrawing some of those funds in the current tax year while the highest rate of tax is only 40%, or 32.5% on dividends, and you have full use of your personal allowance.

Rates

The Chancellor confirmed that the standard rate of VAT will revert to 17.5% on 1 January 2010. If businesses try to avoid the VAT rate increase by paying early or by invoicing early at the current rate of 15%, they will have to pay a supplementary charge of 2.5%.

“This came as no surprise as it has expected that the short term gains for small businesses owners from the government would not last long. There has been suspicion arising for some time that Darling is intending to raise the rate to 22% by 2011 in a staggered format of returning to 17.5% in 2010 then 20% in 2011 and then finally finishing at 22% in 2012.”, explains the Managing Director of The Local Bookkeeper UK, a leading national bookkeeping and financial management firm that specialises in the small- to medium-sized businesses.

The idea behind this system is that the Chancellor is spreading out the raise in order to encourage spending in the short term.

Alex King continues, “However, although this may kick start the economy if the predicted spending does occur, it will also mean a repeat of last year’s administrative costs of small business when each rate change takes place. This policy will only be helping the small business owner in the short term for Alistair Darling is planning to introduce VAT increases in the coming years in an attempt to inject essential capital into revitalising the state of public finances.”   

Capital Gains

The annual capital gains exemption for 2009/10 has been set at £10,100 for individuals and £5,050 for most trusts. This exemption remains in place irrespective of the levels of gains made in the tax year. The rate of capital gains tax for 2009/10 is set at 18% for all taxpayers. These two measures mean that most individuals pay far less tax on capital gains than they do on earnings, savings, dividends or profits.

Business Tax

Businesses that make trading losses can typically carry back the loss to set against profits made in the previous accounting period. This one-year carry back facility was extended to three years last November, but only for sole-trader or partnership accounting periods ending in the year to 5 April 2009 (2008/09), or for company periods ending in the year to 23 November 2009.

As the recession is now expected to last longer than first thought, this loss relief extension will now apply to the following accounting periods:

• For unincorporated businesses: the periods ending in the tax years 2008/09 and 2009/10.
• For companies: the periods ending in the two years to 23 November 2010.

If you are having difficulties paying the tax due on the profits made in the earlier accounting period, which will be partly or wholly cancelled out by losses made in the current year, you can ask HMRC for time to pay the tax due.

Capital Allowances

All businesses can now claim 100% capital allowances for plant and machinery purchased each year under the Annual Investment Allowance (AIA). The AIA is capped at £50,000 per year for each business or group of companies.

Any expenditure in excess of the AIA cap goes into the relevant capital allowance pool and receives tax relief at either 10% or 20% per year. Now for one year only the excess expenditure, which is not covered by the £50,000 AIA limit, can qualify for a 40% first year allowance.

This 40% allowance will cover plant and machinery purchased in the year ending on 31 March 2010 by companies, or to 5 April 2010 by unincorporated businesses, but not cars, integral features, long life assets or leased equipment.

Registration limit

The compulsory VAT registration threshold will increase by just £1,000 to £68,000 on 1 May 2009. Businesses are obliged to register for VAT once their turnover for any 12 month period exceeds this limit, or if they expect their turnover to meet this threshold in the next 30 days. The turnover threshold, below which a business may apply to be deregistered for VAT, will increase to £66,000 on 1 May 2009.

Andy Small, Director at the Local Bookkeeper UK gives a helpful suggestion to business owners when considering their VAT schemes:

“If your business’s taxable turnover is less than £150,000, owners should look again at whether it would be more beneficial for you to stay within the flat rate VAT scheme. Since 1st December 2008, the flat rate has changed for differing trade sectors so many traders no longer find any cash advantage of being on the scheme. It tends to be only more beneficial for those businesses with lower overheads to stay on the scheme.”

International Transactions

If you buy or sell goods or services across international borders you need to be aware of changes in the VAT rules which are going to be phased in between 1 January 2010 and 1 January 2013.

Currently only businesses that sell goods into other countries need to complete an EC sales list, but from 1 January 2010 businesses that supply services to customers in other countries will need to complete this document every quarter.

The rules that govern when and where a service is treated as being supplied are also changing. From 1 January 2010 it will be easier to reclaim VAT incurred in another EU country, as the claim will be made directly to HMRC in electronic form.

Tax Avoidance

This year the Chancellor has declared that the names, addresses, and professions of taxpayers who are found to have deliberately understated their tax liabilities by £25,000 or more will be published on the HMRC website.

This will apply to businesses and individuals, but only after the case has been closed and the penalties have been agreed. Any taxpayer who makes a full disclosure of the tax due to HMRC will not be named in this way. Finally there will be no escape for tax defaulters.

Where HMRC has lost track of a taxpayer who owes them money, an employer or company will be forced to hand-over contact details of that individual.

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