Pre-Budget changes take effect

Last December’s Pre-Budget Report now seems like a distant memory. However a number of the important changes announced will shortly take effect. We provide a reminder of the major changes most likely to affect you.

Small companies’ 0% tax rate abolished

A starting rate of corporation tax of 0% was introduced in 2002 and applies to companies with taxable profits of £10,000 or less. Companies with profits between £10,000 and £50,000 currently enjoy a marginal relief from the small companies’ rate of 19%.

In 2004, the government thought the system was being ‘abused’ and introduced a ‘non–corporate distribution rate’ of 19% on companies to the extent that profits were distributed.

The result has been a complex system and the government has therefore decided to replace the non-corporate distribution and zero rates with a new single banding set at the current small companies' rate of 19%.

Many will welcome the abolition of a complex system but it does mean that all small companies will pay corporation tax at 19% whether profits are retained or distributed.

Pension loopholes closed

April 2006 (‘A’ day) will see the introduction of the long awaited new taxation regime for pensions. Due to concerns about potential abuse two new measures will be introduced at the same time as the new regime.

• The removal of the tax advantages for investing in residential property or certain other assets (such as fine wines, classic cars and art and antiques) from pension schemes which are ‘self-directed’ such as SIPPs and SSASs. The effect will be to remove all tax advantages from holding prohibited assets in these types of schemes.
• Pension ‘recycling’ will be blocked. This device works by taking a tax-free lump sum from a scheme which is reinvested back into another scheme giving further tax relief. This in turn allows a further tax-free lump sum to be paid out. The new rules will remove tax advantages in relation to lump sums which are artificially recycled in this way.

Tax spreading available for ‘contracts for services’ (UITF 40)

Changes were made in March 2005 which require income to be recognised as a ‘contract for services’ progresses, and before an invoice has been raised. This will mean that many businesses, including accountants and other businesses who work under service contracts, will be recognising income before an invoice has been issued to a customer and therefore before payment has been received.

Legislation will be introduced to allow businesses to spread any additional tax charged over three (or in some cases six) years. This is a most welcome response to lobbying by the professional bodies. Talk to us if you feel your business may be affected by these changes.

More certainty with tax credits awards

Claims are based initially on the previous tax year’s income. From April 2006 increases in income of less than £25,000 will be disregarded when finalising awards. The previous limit was £2,500. This change should mean that 90% of awards can be finalised without the need for adjustment.

VAT cash accounting scheme

Subject to EC approval the turnover limit for joining the cash accounting scheme will be increased from £660,000 to £1,350,000 with effect from April 2006. This is an increase of more than 100% and may benefit up to one million small businesses.

Please talk to us if you want to plan for any of the changes, most of which will be effective from April 2006.