One of the highlights of this year’s budget was the generous tax allowances on information and communications technology equipment. This should give a boost to small (as defined in the Companies Act) contractors and consultants by providing greatly increased tax allowances on purchases of communication and IT systems.
The first-year capital allowance on such systems will increase to 100%. This opportunity, which started on 1 April, will be available only for three years. Previously, only 40% of the purchase could be claimed against tax in the first year but, from last week, the whole value of the purchase becomes tax-deductible. Clearly, this recognises that firms need support in keeping up with the IT revolution.
So, if you are thinking of purchasing IT equipment, it is advisable to do it before your business year-end. This will ensure that the cash flow benefits are maximised. It may also be worth considering a change of accounting year in certain circumstances where the expenditure is likely to have a significant impact on tax and where delivery of the equipment is unlikely to be made before the year-end.
Other capital allowances for small and medium-sized businesses (as defined in the Companies Act) remain unchanged, and first-year allowances for capital expenditure will remain at 40% (excluding cars, ships, railways, long life assets and assets for lease or hire).
Landfill tax
The rate of tax for active waste increased from £10/tonne to £11/tonne on 1 April, and will increase by a further £1/tonne for the next four years, bringing the standard rate to £15/tonne by 2004. Liability is also being extended to operators that are not holders of waste-management licences for their sites. An exemption will apply to disposals of qualifying materials used to restore sites. These changes will apply from Royal Assent.
Building subcontractors
The chancellor also announced several changes to the construction industry tax scheme. From 6 April, the rate of tax that must be deducted from payments to subcontractors without exemption certificates falls from 23% to 18%. This is intended to help subcontractors with their cash flow.
From 6 May, a subcontractor that has an exemption certificate for gross payment will no longer have to send its own copy to the main contractor but can retain it for its own records.The turnover threshold for companies that have CIS6 certificates to qualify for CIS5 certificates has been reduced from £5m to £3m with effect from 21 March. This should help smaller companies, as the CIS5 certificate does not have to be presented before payment can be made against it, which was a particular problem for contractors working on multiple sites.
Capital gains tax
Business assets will have to be held for only four years (previously 10) to achieve maximum taper relief. This applies to disposals on or after 6 April. At the same time, the bonus year will be dropped for business assets but retained for non-business assets.
A new 10% on the first £1500 of gains (if this band is not used by income) is introduced.
Research and development expenditure
Research and development tax credits were announced in November 1999 and confirmed in the budget. This relief is available for small and medium-sized companies spending more than £25 000 on qualifying research and development expenditure. The relief, which came into force on 1 April, is 150% on qualifying expenditure.
Pension premiums
Proposed changes to the rules affecting personal pension premiums mean that the carry-forward rules, that is, the ability to carry forward unused relief from one year and use it in any of the next six years, were abolished yesterday and replaced by a new “use it or lose it” regime.
The rules that allow a premium paid in the year to be treated as paid in the previous year for tax purposes will also be modified. You will still be able to elect to go back one year, but to do so, the premium must be paid and an election made by 31 January of the following tax year. In other words, payment made by 31 January 2002 (tax year 2001/02) can be treated as if made on 5 April 2001 (tax year 2000/01) if an election is made by 31 January 2002.
If finances allow, it is therefore worth maximising pension contributions for the years 1999/2000 and 2000/01 to optimise any unused relief. The rules for retirement annuities remain unchanged.
Employers’ NI on benefits-in-kind
Employers now have to pay National Insurance contributions on most benefits-in-kind provided to employees. Contributions have been payable on company cars and car fuel for some years under Class1A – this was extended on 6 April. As a result, a company car is a big money-earner for the chancellor, at the user’s expense. It is generally best to take a cash option.
Value-added tax
The turnover threshold for compulsory registration for VAT has increased from £51 000 to £52 000 a year and the deregistration threshold has risen to £50 000 from £49 000. The new thresholds came into effect on 1 April. Substantial increases in the VAT fuel scale charge for taxing private fuel were announced. Increases of 18.5% for diesel cars and 21% for other cars are effective for VAT accounting periods starting on or after 6 April 2000.
Inheritance tax
The threshold has been raised from £231 000 to £234 000 in line with inflation. For most people, their home is their biggest asset, and while house price rises continue to outstrip inflation, the number of people falling into the inheritance tax net looks set to increase.
Stamp duty
In an effort to control escalating house prices, the chancellor proposed increases in the rate of stamp duty. The duty has risen 0.5% to 3% on property disposals worth more than £250 000 and has risen 0.5% to 4% on property worth more than £500 000. Whether this measure, together with the abolition of MIRAS, will slow down the housing market remains to be seen, but many commentators have predicted that there will be little impact. Stamp duty on property leases are exempt from duty if the lease is for less than seven years and rent less than £5000 (previously £500). Some intellectual property (criteria not yet released) is exempted from stamp duty on sales since 28 March 2000. Stamp duty on shares remains 0.5%. The government will consult on stamp duty relief for the first sale of property developed on brownfield sites. There has been much debate on the regeneration of brownfield sites, and stamp duty relief may help provide an impetus for developers. Stamp duty on property other than shares Applies to disposals of commercial properties and goodwill.Business and personal taxation
There are no changes in Corporation Tax rates, although from 1 April a tax rate of just 10% is levied on profits up to £10 000 for trading and property investment companies. William Hague took great pleasure in attacking the chancellor for not referring to the anti-avoidance measures relating to “personal service companies” (IR35), which came into force on 6 April. These rules will affect many who operate as consultants through their own companies, and require them to pay out most of their income in the form of salary, with PAYE and NICs accordingly. Although these measures have been heavily criticised, they have been enacted. Some small construction businesses may be caught by the Personal Service Company rules. Income tax rates for individuals will increase in line with inflation, as previously announced.Postscript
Nick Antoniou is a partner in Smith & Williamson Chartered Accountants, specialising in business services. He can be contacted on 0181-446 4371 or na@smith.williamson.co.uk.Always take professional advice before applying the contents of this article.
