Individuals

For anyone under 65, the personal allowance increased to £7,475 on 6 April; another step towards the Government's long-term objective to increase the personal allowance for those in this age bracket to £10,000. With a slight decrease in the basic rate limit to £35,000 and the planned increase of 1% for all classes of National Insurance Contributions (NIC) still going ahead in April 2011, overall, lower earners and basic rate tax payers will be slightly better off.

It was welcome news that the 50% tax rate for high income earners (over £150k) is only to be a temporary measure, but disappointing that no announcement was made on when it will be removed.

As speculated prior to the Budget, an announcement was made that the Government will consult on reforms to integrate the operation of Income Tax and NIC; more details will be published later this year.

A regime whereby tax and NIC run side by side based on much more closely aligned rules would be welcomed and would ease the burden on businesses and tax payers; however, a fully merged tax and NIC system with a single combined rate of tax would seem too complex to be resolved in our lifetime.

Non-Domiciles

An individual's domicile is effectively their place of origin and belonging. Currently, any non-UK domiciled individuals who are resident in the UK and remit foreign income or gains into the UK are taxed on this income. It is planned that from April 2012 (subject to consultation), that this existing charge will be increased from £30,000 to £50,000 for those who have been UK resident for 12 years or more and who wish to retain access to the remittance basis which is, in a lot of cases, a more favorable tax regime. The £30,000 charge will remain for those who have been resident for at least 7 of the past 9 years and fewer than 12 years.

Furthermore, whilst the £50,000 charge will impact on any Irish domiciled persons who are resident in the UK, it is important to note that in a measure to boost UK inward investment, the charge is proposed to be removed for any non-domiciled individual who remits any foreign income or gains for the purpose of commercial investment in UK businesses.

Business

In a further bid to increase the attractiveness of the UK as a place for business, the main Corporation Tax rate is reduced from 28% to 26% from 1 April 2011. With a further 1% reduction for the next three years, the rate will become 23% by April 2014.

As announced previously, the small companies’ rate decreased from 21% to 20% from 1 April 2011.

It is clear to see that the reduction in Corporation Tax is attractive; there will be many more cases now for UK businesses to consider introducing a corporate into their structure.

The publication of the Treasury document ‘Rebalancing the Northern Ireland Economy’ on 24th March also commented on the rate of Corporation Tax in Northern Ireland. At first glance, it appears that Northern Ireland may be set to benefit from its own reduced rate of corporation tax to align it with that of its neighbours in the Republic. However, this will be subject to a process of consultation. The cost of funding such a decision will be high on the agenda for the NI Executive given that the cost of any reduction in Northern Ireland's rate of corporation tax would have to come out of Northern Ireland's ‘Block Grant’.

Another welcome boost for companies will be the increased rate of relief for qualifying Research & Development (R&D) expenditure. Subject to EU approval, the rate of relief for SMEs is set to increase from 175% to 200% from 1 April 2011 with a further increase to 225% from April 2012.

While it was disappointing that this relief has not been extended to sole traders and partnerships, the increase in relief for SME companies will still have a significant impact on businesses involved in R&D and will result in a welcome boost for many.

Capital Allowances

The past few years have seen many businesses investing in new plant & machinery due to the favorable Annual Investment Allowance (AIA) which meant that full tax relief was given in respect of expenditure up to £100,000. Unfortunately good things don't last forever and from April 2012, as announced previously, the amount which qualifies for AIAs will be dramatically reduced to £25,000.

On the plus side, businesses that incur expenditure on plant & machinery (excludes cars and integral features) can opt for assets with a short life of less than 8 years (increased from 4 years) to be placed in a separate short life asset pool. This will mean that should the asset be disposed of within 8 years, balancing allowances can be claimed quicker should the asset be sold at a loss. An example would be a computer which will almost always be sold for significantly less, if sold for anything at all, than what was originally paid for.

One final point to note on Capital Allowances is the extension of the scheme known as Business Premises Renovation Allowance. Any business that invests in renovating commercial premises in disadvantaged areas that have been vacant for a period of 12 months or more will be able to avail of the 100% allowance for a further 5 years. Given that Northern Ireland as a whole is a qualifying region, we expect this relief to become a more regular part of tax planning in the future.

Enterprise Investment Scheme & Venture Capital Trusts

From 6 April 2011, the increase in tax relief from 20% to 30% under the Enterprise Investment Scheme (EIS) should further encourage investment in UK businesses. The EIS scheme works by giving Income Tax relief to investors who subscribe for shares in unquoted companies which are carrying on a qualifying trade (most trades conducted on a commercial basis will qualify).

Proposals are also announced to extend the scope of the relief including extending the thresholds for the maximum size of qualifying companies for EIS and Venture Capital Trusts (VCT), and for the annual amount that an individual can invest under EIS and obtain tax relief on to be increased from £500,000 to £1million. These proposals are subject to EU approval with planned implementation next April.

Taxation of Foreign Branches

Currently UK resident companies are liable to Corporation Tax on their worldwide profits including those relating to any foreign branches. Credit is available for any foreign tax suffered subject to a maximum of any Corporation Tax charged on those profits in the UK. New proposals will now allow UK companies to make an election to have all of their foreign branch profits exempt from UK Corporation Tax. The election is irrevocable and if put in place no relief will then be available for any foreign branch losses. This measure aligns the tax treatment of foreign branches to those of foreign subsidiaries.

This will be beneficial for UK companies who have a profitable foreign branch e.g. in Ireland where the rate of Corporation Tax is currently lower than that in the UK.

Entrepreneurs Relief

Gains qualifying for Entrepreneurs Relief will continue to be taxed at the favourable 10% rate with the life-time limit on capital gains qualifying for the relief doubling from £5 million to £10 million, taking effect from 6 April 2011.

It is clear that the Government has a commitment to reward entrepreneurial behaviour in order to drive growth in the UK economy.

Summary

On the whole, it was a good budget for businesses and their investors, and the clear aim is a budget for growth.

It may in the short-term lift business confidence at a difficult time, but the key question is will this confidence be sustained?

Lesley Austin is Senior Tax Manager with Cavanagh Kelly Chartered Accountants.

Tel: 028 8775 2990

Email:lesley.austin@cavanaghkelly.com
Web: www.cavanaghkelly.com