1. Summary of Key Points
- UK politics are likely to impact on UK businesses more than usual in 2010.
- The UK economy debt mountain is twice the size of the maximum level targeted by the Government.
- Areas which get a favourable tax treatment might be easy targets to help reduce the debt.
- It still makes sense for many small businesses to operate as limited companies.
- Electric vehicles now attract very favourable tax treatment.
2. Background
The 2009 Pre-Budget report has a strong chance of being, in effect, the 2010 Budget – because Parliament will either already have been dissolved, or just be about to, at the normal Budget time in March or April 2010. In itself the Pre-Budget Report did not amount to much but the impact of the General Election in 2010 could have a greater impact on both business and personal taxes.
This note will deal with the impact of the Pre-Budget Report on business, especially small businesses. But also with the potential risks to the owners and directors of such businesses arising from the growing National debt.
3. What does it matter anyway?
As Michael Portillo has been quoted, “The real budget is the July 2010 one once the Tories are back in power.” It’s tempting to think that even Alastair Darling himself agrees, as most of his measures don’t take effect until 2011. But the next 12 months is not a great time to ignore the impact that our politicians can have on business, for two reasons:
- The prospect of a Tory Government or a hung parliament and what new legislation might be passed – after all in 1997 Labour made a lot of changes in its first 100 days.
- The state of the economy and the National debt mountain.
Acting on the assumption that nothing much will change in our tax laws until 2011 – just because Alastair Darling currently says it won’t – could turn out to be costly.
4. The economy
Darling began by saying he started from a “position of strength”. If that is true, I’d hate to see him starting from a weak position! The following are relevant facts:
- “No more boom and bust” turned out to be a prolonged boom followed by – in terms of the fall in GDP – the worst bust the UK has experienced since 1933.
- The “Golden Rule” followed by Gordon Brown, our Iron Chancellor, decreed that the national debt should peak at 40% of GDP over the business cycle. By the Government’s own figures it will reach 80% of GDP in the next year.
In my personal experience, I consider this to be the worst position the UK has been in since we had to go begging to the International Monetary Fund in the mid 1970s. Somebody will end up paying for the big spending splurge of the last ten years – probably most of us! – which makes good tax planning now all the more important.
Some aspects worth considering:
- ISAs are a great way to save in a vehicle which you can cash in any time.
- Pension saving still attracts a tax top-up. But they are taxable when you are paid them and you have to wait until retirement.
- The capital gains tax (CGT) rate – 18% – is currently further away from the top rate of income tax – 50% from April – than at any time since CGT was introduced in 1965.
All of these are areas which are vulnerable to changes as the country seeks to reduce the debt mountain. If you are considering doing any of the following in the next year, now may be a better time than after the election:
- Investing in a cash or shares ISA.
- Topping up a pension – especially if you pay income tax at the 40% rate.
- Selling shares, an investment property, or any other asset chargeable to CGT.
5. “Going Limited” still makes sense for many businesses
From April 2011, the Pre-Budget report will affect most small businesses in 2 ways:
- National Insurance rates for employees, employers and the self-employed will increase by 1%.
- The rate of corporation tax for small companies will increase by 1% from 21% to 22%.
In terms of the purely financial aspects of forming a limited company instead of operating as a sole trader or partnership, these two changes more or less balance out.
- The small company pays an extra 1% tax, but should not pay the extra NI if the owner shareholders are taking dividends.
- The sole trader or partnership will pay NI at 9% instead of 8%.
6. Electric Cars and Vans
I doubt you’ll see Jeremy Clarkson running an electric company car on Top Gear, but the Pre-Budget report suddenly makes them very tax-efficient:
- If you run an electric car or van as a company vehicle, there is a zero benefit-in–kind for the next 5 years.
- A new electric van can be fully expensed against tax in the year you buy it.