Press release: March 2008

Chancellor Alastair Darling seems unlikely to be planning to spring too many surprises with his upcoming Budget. His Pre-Budget report, which has been widely circulated and debated, has already given strong indications that, as usual, there will be both winners and losers.

But the changes in many areas are significant and likely to give rise to great debate in the coming weeks and months.

For the "man on the street" personal tax rates are changing. The 10% starting rate band is on the way out whilst the basic rate band of tax will reduce from 22% to 20%. According to Stuart Sheldrick of LB Group, what this means in real terms, is that if your income is less than £17,000 per annum you will actually be worse off. (The starting rate of tax of 10% currently applies to the first £2230 of income, the basic rate from £2231 to £34,600, and above that a 40% rate applies).

Also the Government plans to align the tax and national insurance bands and therefore if your earnings are over £35,000 per annum your tax will go down but your national insurance will go up and again you will be in a worse position.

The rules regarding the tax treatment of non domiciles and the remittance of money are to change significantly, affecting thousands of people from Russian football club owners, through to your Polish factory workers.

It has been highly publicised that non domiciles will have to pay an annual charge of £30,000 (once they have been in the UK for seven years) or have their worldwide income subject to UK tax.

However, the more worrying change is that if a non domiciled individual has more than £1,000 of foreign income and chooses to remain on the ´remittance basis´ (i.e. only taxed on foreign income brought into the UK) they will not receive a UK personal allowance. This will be a huge loss to foreign lower-income earners.

The abolition of the taper relief regime for Capital Gains Tax has been highly publicised and amended since the Pre Budget report. In summary, from 2008/2009, gains below a lifetime limit of £1m on the sale of, or part, of a business will qualify for "entrepreneurs relief" and will be taxed at an effective rate of 10%. All other gains will be taxed at a flat rate of 18%.

"This change means winners and losers," said Stuart. "The losers could be those who have assets now and cannot bank the taper relief already generated or those with gains of over £1m on the sale of their business. The winners are likely to be those who own non-qualifying investments (e.g. buy to let properties) and are now going to pay only 18% as opposed to the previous potential 40% tax."

According to Stuart, green issues are also to the fore, in the form of reliefs that can be derived from purchasing "green" capital items. There are increased allowances for environmentally friendly machinery and green cars. The allowances for "gas guzzling" cars are also being reduced.

Following the highly publicised case of Arctic Systems*, in which the Revenue argued that the wife´s income should be assessed on the husband and therefore be taxed at higher rates, the Government is expanding the legislation. You now do not have to be married to be caught by this as it now effects "individuals".

* A husband and wife won a landmark victory against the taxman two years ago, as judges threw out the Government´s attempt to force small, family-run firms to pay thousands more in tax. Pundits at the time predicted that measures would be taken to prevent what they saw as loopholes in the system.

HM Revenue and Customs had pursued Geoff & Diana Jones for tax arrangements they had in place in their IT company, Arctic Systems, which had a turnover of approx £100,000. Mr. Jones paid himself a salary of £7,000 and his wife drew just £4,000 for admin work. They then shared the remaining amount, less tax and expenses, in dividends. This allowed them to pay less tax and national insurance. Mrs. Jones received more in dividends to take advantage of her lower tax rates.

Judges ruled that Mrs. Jones´ dividends did not constitute tax avoidance because they were dependent on the company´s performance.