So, the eagerly awaited emergency budget has been delivered, and after much media speculation, the Chancellor has surprised many with his package of spending cuts and tax rate changes.

Herewith a brief summary of the main points with a brief comment of the impact on businesses and individuals:

Business Taxation

Corporation Tax

- The main rate of Corporation tax to be reduced from 28% to 24% over a period of four years. Companies with profits in excess of £300k pay this rate.

- The Small Companies Rate (SCR) for companies with annual profits under £300k - will be reduced back to 20% from April 2011.

Comment:

The above is good news for our incorporated clients, who have seen the SCR rise from 19% to 21% in recent years.

The cut in Corporation Tax for small businesses also makes incorporation (trading though a limited company) more attractive for sole traders and partnerships, after the tax differences narrowing in recent years between incorporated and non incorporated businesses.

Capital Allowances

- Writing down allowances reduced from 20% to 18% from 2012

- Annual investment allowance reduced from £100,000.00 to £25,000.00 from 2012.

Comment:

The continuation of the Annual Investment Allowance is good news for our clients, effectively this means that all capital items up to £25k per annum bought by a business will be 100% tax deductable in the year of purchase.

In fact, many commentators predicted that the Annual Investment Allowance would be abolished! So, despite the reduction, it is business as usual for the taxable treatment of Capital Expenditure for small businesses who do not spend in excess of £25,000.00 per annum on capital items.

National Insurance

- Start-up businesses outside London and the South East to be exempt from NI for first 10 employees. Tax breaks worth up to £50,000 for 400,000 businesses, is expected to last three years and will allow businesses to avoid NI for 12 months.

- Rises in both Employers and Employees NI from April 2011

Comment:

Unfortunately, the NI exemption is only for start ups rather than existing businesses, and there are several conditions and anti avoidance rules to consider so please contact us if you would like to discuss further.

Despite the government stating in their election campaign that the NI rises would not be implemented, they will be introduced from April 2011 to 13.8% and 12% respectively.

Employees, who will be given an income tax break with the increased personal allowance, will see this saving reduced by paying additional NI.

Employers will see their employment costs rise as a result of the Employers NI, however to cushion the blow, there will be an above inflation rise in the employer threshold for NIC from April 2011. The entry point for contributions rising by £21 above indexation.

In the current economic climate, the wisdom of increasing a tax (by any other name) on growth, enterprise and jobs is, in our opinion, questionable to say the least.

We will continue to advise our clients on the most tax efficient way to extract funds from their businesses, taking into account all of the above changes in NI.

VAT

- VAT will increase to 20% from 4 January 2011.

Comment:

For businesses offering their services to the public or non VAT registered clients, this will have the obvious impact of increasing the sale price. Such businesses will have to make the choice of passing the rise on, or absorbing it within the sale price.

Many small businesses are on the Flat Rate Scheme for VAT and will, once again, have to factor another new rate into their VAT returns.

The cost to businesses of implantation of a new VAT rate is also considerable, once again systems and processes will have to be changed to factor in a new rate of VAT.

Personal Taxation

Capital Gains Tax

- Higher rate taxpayers will face an increase of 10% from midnight tonight, with the introduction of a new rate of 28%;

- Low and basic rate taxpayers will continue to pay 18% on capital gains;

- Entrepeneurs relief will be extended to the first £5m of lifetime gains.

Comment:

A mixed bag here. Higher rate taxpayers will pay considerably more in capital gains tax than before, and with the nigh on immediate introduction of the new rate, have no time to dispose of their capital items.

This move penalises savers, those who have invested in second homes, shares and other such investments and will prove to be one of the more unpopular measures within this budget. However, by capping the new rate at 28%, higher rate taxpayers can continue to pay considerably less tax than they do through revenue producing activities. Additionally, the new rate is considerably lower than the 40 - 50% rate that many experts predicted to be introduced.

Personal Allowance

- The personal allowance (the annual amount taxpayers can earn each tax year before tax is charged) will increase by £1,000.00 to £7,475.00 from April 2011.

Comment:

This will reduce the amount of income in which tax is paid although the income tax saving will be reduced by the additional NI charged.

Summary

The tax changes introduced today will affect all business owners, without exception. The above details the main points and the implications though is no substitute for detailed guidance and application, tailored to your circumstances.

We would be happy to discuss the implications in further detail for you and your business. Please contact us should we wish to arrange a consultation.

Action points to consider:

Pre January 2011

Ensure that your systems are geared to facilitate the new VAT rate of 20%.

For those on Flat Rate Scheme – Ensure that your new rate is obtained and used correctly in the overlap period of change.

Pre April 2011

For incorporated businesses, ensure salary / dividend levels are optimised for tax purposes taking into account today’s changes which will be introduced in the tax year commencing 6 April 2011.