Budget 2009

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The Chancellor presented his 2009 Budget Report on 22 April 2009. The following review considers the proposals that are relevant to payroll and includes changes, some of them pre-announced, that are to be made by means of the Finance Bill 2009, which had its first reading on 28 April 2009.

Income tax and National Insurance contributions – April 2009
All of the changes to tax and NICs rates, allowances and thresholds that were announced in the Pre-Budget Report (PBR) to take effect from 6 April 2009 are confirmed without any change.

The Finance Bill 2009 (FB), clauses 2 and 3, increases

• the basic rate limit to £37,400, £800 more than required by statutory indexation
• the personal allowance to £6,475, £130 more than required by statutory indexation.

Income tax changes – April 2010
The changes announced in PBR to the personal allowance from April 2010 and to income tax rates from April 2011 have been amended, as follows. Both changes are now effective from April 2010. A further change prevents the personal allowance from being increased automatically in line with inflation from April 2010.

1. From April 2010, the basic personal allowance will be gradually reduced to nil when “adjusted net income” (ANI) exceeds £100,000. Clause 4 of FB makes the necessary changes to the legislation found in sections 35 to 37 of the Income Tax Act 2007 (ITA).

   For example, if ANI were £105,000, the personal allowance would be reduced by £2,500.

   The same reduction also applies to the higher, age-related personal allowances. Currently, where the ANI of a person age 65 or over exceeds an income limit, set at £22,900 for 2009/10, the age-related allowance is reduced by a half of the excess, but to no lower than the basic personal allowance for someone under age 65. If the ANI of a person age 65 or over exceeds £100,000, the remaining personal allowance will also be reduced proportionately to nil.

   A taxpayer’s ANI is the same measure of income that is used already to reduce the age-related personal allowances for taxpayers from age 65. As defined in section 58 of ITA, an individual’s ANI is

   • “net income”, i.e. the total of the individual’s income subject to income tax less specified deductions, in particular trading losses and payments made gross to pension schemes,
   • less the grossed-up amount of any Gift Aid contributions,
   • less the grossed-up amount of any pension contributions which have received tax relief at source, and
   • plus any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income.

   (The PBR proposal was for a two-stage reduction from April 2010, a half of the personal allowance when earnings exceed £100,000 and the remainder when earnings exceed £140,000.)

2. Clause 4(5) of the FB has the effect of preventing in the personal allowance (under age 65) from being increased automatically for the 2010/11 tax year. The automatic inflation-linked increases resume from 2011/12. The £6,475 allowance may, therefore, continue to apply throughout 2010/11.
3. From April 2010, a new higher tax rate of 50% will apply to taxable income above £150,000. The FB makes no reference to this change; it should be expected to be included in the 2010 Finance Bill. (The PBR proposal was for a new tax rate of 45% from April 2011.)

Statutory redundancy pay
There is to be a one-off increase in the weekly statutory redundancy pay (SRP) ceiling from October 2009, from £350 to £380. The SRP weekly limit is reviewed automatically every February but the Work and Families Act 2006 made provision for it to be increased on a single occasion by more than the RPI. A Private Members’ Bill, the Statutory Redundancy Pay (Amendment) Bill, currently before Parliament, would have the effect of linking the automatic annual increase to the increase in average earnings.

Company Cars
Section 53 and Schedule 28 of FB make the following changes to the calculation of the benefit charge for cars made available for the private use of employees. All of the changes are effective from the 2011/12 tax year.

1. The £80,000 “price cap” that is applied to the list price of a company car in order to limit its cash equivalent will be abolished. This is Step 4 of the method set out in section 121 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) for calculating the cash equivalent of the value of a car. The subsequent steps, 5 to 8, are not renumbered as a result of this change. The effect of the change is that the “appropriate percentage” (normally 35% for cars of this value) is applied to the car’s full list price after any adjustments for accessories and capital contributions.
2. The lower CO2 emissions threshold for the application of the “appropriate percentage” is 135 g/km for 2009/10, 130 g/km for 2010/11, and 125 g/km for 2011/12. The full charging Table for those tax years is as follows:



3. The “appropriate percentage” applied to electrically-propelled cars registered from 1998 onwards will be reduced from 15% to 9%. This is a simplification measure – the 9% already applies by means of a 6 percentage point reduction from the 15% charge. A further cosmetic change is the removal of any reference to “electrically-propelled cars” from the appropriate percentage chart for cars registered before 1 January 1998 as no such cars exist.

Other related changes, which were announced in Budget 2009 but are not included in the 2009 Finance Bill, are as follows:

Changes effective from 2011/12:

• The discounts that are applied to
  • hybrid (electric and petrol) cars,
  • bi-fuel (petrol and road fuel gas) cars,
  • bio-ethanol cars, and
  • Euro 4 compliant diesel cars, registered before 1 January 2006
    will be abolished, with the effect that a car’s “appropriate percentage” will be derived solely from its CO2 emission rating.
• There will be no changes from April 2011 to the 10% charge applied to “qualifying low emissions” cars, i.e. cars with emissions ratings that do not exceed 120 g/km, irrespective of their fuel type.

Changes effective from 2012/13:

• The 10% charge for “qualifying low emissions” cars will be abolished.
• The range of percentages currently used to calculate the tax on company cars (i.e. 15% to 35%) will be replaced by a range that starts at 10%.

Consideration is being given to abolishing the 3% diesel supplement for diesel cars that meet the future Euro 6 emissions standards.

The combined effect of all of these changes is that, from April 2012, there will be a single range of “appropriate percentages” applying to all cars except diesels, ranging from 10% up to 35% (although this top threshold has yet to be confirmed). There will still be a 3% supplement for all diesel cars, other than, if confirmed and if any are available by then, any diesel cars that meet Euro 6 emissions standards.

Automatic cars for disabled employees
Section 138 of ITEPA already makes special provision for disabled employees who are provided with an automatic transmission car. In determining the CO2 emissions figure that is to be used to obtain the “appropriate percentage” for calculating the car benefit charge (Step 5 of the calculation method), the emissions figure for an “equivalent manual car” may be used if that is less than the emissions figure for the automatic car. The conditions for this concession are that

• the employee holds a disabled person’s badge, and
• by reason of a disability, the employee has to drive an automatic transmission car.

An “equivalent manual car” is a car that

• is first registered at or about the same time as the automatic car, and
• does not have automatic transmission, but otherwise is the closest variant available of the make and model of the automatic car.

Clause 54 of FB adds a further concession to the calculation of the car benefit charge for disabled employees, with effect from 6 April 2009. A new section (124A) is added to ITEPA that allows, in obtaining the list price for calculating the car benefit charge (Step 1 of the calculation method), the list price of an “equivalent manual car” to be used if that is less than the list price of the automatic car. The conditions that must be met for this concession are identical to those for the existing concession for CO2 emissions levels.

The combined effect of both the section 124A and 138 concessions is that, where a disabled employee is provided with a company car and, because of the disability, the car has to be an automatic car, the tax charge would be the same as if the employee were not disabled and were provided instead with an equivalent manual car.

Tax exemption for health-screening and medical check-ups
A tax exemption covering the provision of health screenings and medical check-ups was introduced in August 2007 by means of an addition to the Income Tax (Exemption of Minor Benefits) Regulations 2002. The exemption was included in those regulations because one of the conditions for the exemption was that the benefits had to be made “generally available” to all of an employer’s employees.

This 2007 exemption was revoked from 6 April 2009 in order to remove the “generally available” requirement. Clause 55 of FB introduces a replacement tax exemption by means of the addition of a new section (320B) to ITEPA.

With effect from 6 April 2009, the new exemption provides that no liability to income tax arises in respect of the provision for an employee, on behalf of an employer, of a health-screening assessment or a medical check-up on condition that no more than one health-screening assessment and no more than one medical check-up are provided by the employer, or by any concurrent employers, in a tax year.

In this context,

• “health-screening assessment” means an assessment to identify employees who might be at particular risk of ill-health, and
• “medical check-up” means a physical examination of the employee by a health professional for (and only for) determining the employee’s state of health.”

Pension schemes
From 2011/12, the tax relief on pension contributions will be restricted to the basic rate where an individual’s annual income is £150,000 or more. The relief will be tapered until it is 20% for those with incomes of £180,000. An appropriate method of limiting tax relief for defined benefits schemes and personal pension schemes will be the subject of a consultation exercise. The legislation required to introduce these tax relief provisions is not included in the 2009 Finance Bill and should be expected to be set out in the 2010 Finance Bill.

However, to prevent large sums being paid into pension funds in advance of April 2011 in order to obtain tax relief at 40%, transitional provisions apply immediately, i.e. from 22 April 2009. These transitional measures, as introduced by Clause 71 and Schedule 35 of the FB, are in the form of a “special annual allowance charge”. This is a 20% income tax charge on pension contributions and benefits accrued in excess of a special annual allowance of £20,000 for individuals whose relevant income is £150,000 or more. It will not apply to those who have never earned in excess of £150,000 a year, or continue with their regular, at least quarterly, pattern of contributions or normal benefit accrual.

The Schedule also enables high-income individuals to ask their schemes to refund pension contributions that they have paid in the 2009/10 tax year, which may otherwise create a liability to the special annual allowance charge. The repayments are subject to a 40% income tax charge on the scheme, recovering the individual’s tax relief.

Tax avoidance schemes
HMRC has begun to publish details of selected avoidance schemes that are thought to be ineffective, in order to discourage potential users. HMRC will challenge these schemes when encountered. A small number have been listed already and may be considered at http://www.hmrc.gov.uk/avoidance/spotlights.htm.

Business Payment Support Service
The Business Payment Support Service (BPSS) was launched following the 2008 Pre-Budget Report in November 2008. It is designed to help viable businesses that, due to economic conditions, are having difficulty in meeting payments due to HMRC, including VAT, income tax, NICs, Corporation Tax and PAYE. In such circumstances, wherever possible, HMRC will agree to spread any payments due over a time which meets the individual business’ circumstances.

Budget 2009 announced that the service is being enhanced by taking into account the fact that a business is likely to make a loss for the year when deciding how much time can be given for a business to pay any IT or CT due on its profits from last year. These arrangements do not require legislation as they fall within HMRC’s administrative powers.

Clause 107 of FB makes statutory provision for liabilities for penalties and surcharges for late payment of taxes to be removed when the taxpayer makes representations to HMRC to pay the tax over an extended period. These representations must be made before the penalty or surcharge becomes due and an agreement to pay over time must be reached.

However, if the taxpayer enters into an agreement to defer payment of an amount of tax, but then does not meet all of the terms of the agreement or make all of the agreed payments, the clause permits HMRC to impose the penalty suspended under the arrangement, at their discretion.

The clause is effective for tax deferral agreements reached on or after 24 November 2008.

Information about the Business Payment Support Service is available at http://www.hmrc.gov.uk/pbr2008/businesspayment.htm.

Consultations
The government is to consult on

• the issue of false self-employment status in the construction industry, with a view to finding a long term solution.
• the work of tax agents whose work falls below professional standards.

Close monitoring of serious tax defaulters
The Chancellor announced that individuals and businesses that incur a penalty for deliberate evasion in respect of tax of £5,000 or more will be required to submit returns for up to the following 5 years showing more detailed business accounts information and detailing the nature and value of any balancing adjustments within the accounts. There is no reference to this measure in the Finance Bill.

Publication of details of serious tax defaulters
The names and details of serious tax defaulters are to be published on the HMRC’s website. The arrangement would apply to persons who have had a penalty imposed where the potential lost revenue exceeds £25,000. The information that may be published is

1. the person’s name (including any trading name, previous name or pseudonym),
2. the person’s address (or registered office),
3. the nature of any business carried on by the person,
4. the amount of the penalty or penalties and the potential lost revenue in relation to the penalty,
5. the periods or times to which the penalty relates, and
6. any such other information as the Commissioners see fit in order to make clear the person’s identity.

The information may be published in any manner that HMRC considers appropriate but, before doing so, HMRC must inform the person of the intention to publish the information and allow opportunity for the person to make representations. (Clause 93 of FB)

Provision of living accommodation
Clause 70 of FB amends section 105 of ITEPA and introduces a new section (105A) to prevent attempts to avoid tax through the payment of a lease premium rather than the full market rent for the use of the accommodation. The clause introduces a rule that means the value of the lease premium will be taken into account when working out the benefit-in-kind charge.

Where the person providing the accommodation pays rent, the charge is based on the actual rent paid (less any amount made good by the employee), where that is more than the annual value of the accommodation. However, in order to try to avoid paying tax, some arrangements are being entered into that involve upfront payments, described as a “lease premium”, and payment of a very small rent.

The clause ensures that where a lease premium is paid for a lease of 10 years or less, the same tax treatment will follow as if the lease premium were actual rent paid. The taxable amount in any tax year will be treated as

• the amount of the lease premium spread over the duration of the lease,
• plus the amount of any rent paid by the person at whose cost the accommodation is provided,
• less any amount made good by the employee.

The new rules will not apply where the lease is in respect of living accommodation which forms part of premises which is used by the person at whose cost the accommodation is provided, mainly for a purpose which is not the provision of living accommodation.

These new provisions only have effect for leases entered into on or after 22 April 2009. The clause does not apply to leases entered into before that date, except where the lease has been extended after that date.

Review of PAYE
Although PAYE has been increasingly computerised, the fundamental process remains as it was when introduced in 1944. The Government is to review the underlying processes to see if they can be improved in order to reduce costs to employers and the public purse, while still providing a high quality PAYE service.

Obtaining contact details for debtors
During 2007 and 2008 HMRC conducted two consultation exercises on “Payments, Repayments and Debts”. The measures introduced by Clause 96 and Schedule 49 of FB provide HMRC with powers to obtain the contact details of debtors from third parties. HMRC uses a range of techniques to trace tax debtors who go missing, including the extensive use of commercial databases. However, some debtors cannot be traced and, in 2007, the Department wrote off £300 million for this reason.

This clause and Schedule allow HMRC to require relevant third parties to disclose address and contact details of missing debtors, where those details are reasonably required to collect what is owed. Relevant third parties are those who HMRC has reason to believe have more recent contact details than it holds. They are explicitly restricted to companies, local authorities and local authority associations and those who HMRC reasonably believes to have, or have had, a business relationship with the debtor. HMRC cannot, for example, approach relatives and former neighbours in order to trace debtors.

Payment of interest on underpaid and overpaid tax
Clauses 100 to 103 and Schedule 53 of FB provide HMRC with a single set of powers for charging interest on underpaid tax and to paying interest on overpaid tax. Introducing a consistent interest payment regime was the subject of a consultation exercise during 2008.

In particular, the consultation resulted in a set of proposals for calculating and applying single rates of interest for underpaid and overpaid tax across almost all taxes, duties and penalties. The clause also provides the power to arrive at the prevailing rates of interest using formulae. The proposal is for HMRC to calculate interest by reference to the Bank of England base rate. Any rate changes would be made 13 working days after the Bank of England’s Monetary Policy Committee make changes to the base rate. This approach has already been used in setting interest rates in respect of underpaid and overpaid income tax since the start of 2009.

Penalties for failure to make returns
Clause 105 and Schedule 55 of FB create a new penalty regime for late filing of tax returns for most direct taxes, including income tax, PAYE, NICs, the Construction Industry Scheme (CIS) and pension schemes. Taxpayers have a right of appeal against all penalties and no penalty can be charged if a taxpayer has a reasonable excuse for their failure. This measure was the subject of initial consultation in June 2008 and further consultation in November 2008. Implementation will be staged over the next few years, and the provisions will be brought into effect by Treasury Orders.

In the case of annual returns, such as the P35 Employer Annual Return and its associated P14 End of Year Summaries, the new penalty regime will be as follows:

1. Initial failure to submit a return: a penalty of £100
2. Continued failure to submit a return: a penalty of £10 per day for up to 90 days
3. Continued failure beyond 6 months: a penalty of the greater of (1) 5% of the liability to tax that would have been shown on the return, and (2) £300
4. Continued failure beyond 12 months:
   • where the failure prevents HMRC from raising an assessment for the tax due
     • and withholding the information is deliberate and concealed: a penalty of the greater of (1) 100% of the liability to tax that would have been shown on the return, and (2) £300
     • and withholding the information is deliberate but not concealed: a penalty of the greater of (1) 70% of the liability to tax that would have been shown on the return, and (2) £300
     • in any other case: a penalty of the greater of (1) 5% of the liability to tax that would have been shown on the return, and (2) £300.

In the case of CIS monthly returns, the new penalty regime will be as follows:

1. Initial failure to submit a return: a penalty of £100
2. Continued failure to submit a return beyond 2 months: a penalty of £200
3. Continued failure beyond 6 months: a penalty of the greater of (1) 5% of the liability to tax that would have been shown on the return, and (2) £300
4. Continued failure beyond 12 months:
   • where the failure prevents HMRC from raising an assessment for the tax due
     • and withholding the information is deliberate and concealed: a penalty of the greater of (1) 100% of the liability to tax that would have been shown on the return, and (2) £3,000
     • and withholding the information is deliberate but not concealed: a penalty of the greater of (1) 70% of the liability to tax that would have been shown on the return, and (2) £1,500
     • in any other case: a penalty of the greater of (1) 5% of the liability to tax that would have been shown on the return, and (2) £300.
   • where the information on the return relates only to subcontractors registered for gross payment:
     • and withholding the information is deliberate and concealed: a penalty of £3,000
     • and withholding the information is deliberate but not concealed: a penalty of £1,500
5. Where a contractor has just entered the CIS regime: fixed penalties in situations 1 and 2 above that do not exceed £3,000.

However, penalties may be reduced if information due on a return is “disclosed”, depending on whether the disclosure is “prompted” or “unprompted”, and on the “quality” of the disclosure. HMRC is required to reduce

• 100% penalties to a lower percentage, but not below
  • 30%, if the disclosure is unprompted and depending on the quality of the disclosure
  • 50%, if the disclosure is prompted and depending on the quality of the disclosure
• 70% penalties to a lower percentage, but not below
  • 20%, if the disclosure is unprompted and depending on the quality of the disclosure
  • 35%, if the disclosure is prompted and depending on the quality of the disclosure

But no penalties may be reduced below £300 or, in the case of the higher CIS penalties, £3,000 or £1,500 as appropriate.

Information is “disclosed” if HMRC is

• told about it, and
• given reasonable help in quantifying any tax unpaid because of being withheld, and
• allowed access to records to check how much tax is unpaid.

Disclosure of relevant information is “unprompted” if it occurs when there is no reason to believe that HMRC has discovered or is about to discover the relevant information. Otherwise, it is “prompted”.

The “quality” of disclosure includes timing, nature and extent.

Penalties for failure to pay tax
Clause 106 and Schedule 56 create a new penalty regime for late payment of most direct taxes, including income tax, PAYE, NICs, the Construction Industry Scheme (CIS) and pension schemes. Taxpayers have a right of appeal against all penalties and no penalty can be charged if a taxpayer has a reasonable excuse for their failure. The Schedule provides that if a taxpayer enters into a time to pay arrangement with HMRC, any late payment penalties that they would become liable to after the agreement is reached will be removed if the taxpayer meets the terms of the agreement. This measure was the subject of initial consultation in June 2008 and further consultation in November 2008. Implementation will be staged over the next few years, and the provisions will be brought into effect by Treasury Orders.

In the case of PAYE tax and CIS tax on account, which are due monthly or quarterly, a penalty will be incurred on the day following the day on which the payment is due under PAYE regulations. There are two new penalty regimes; one applies where no tax has been paid for 6 months or more; the other where the tax due each month or quarter is not paid in full by the due date.

1. Where the payment relates to a period of 6 months or more, the penalty is 5% of the unpaid tax. If the tax is still unpaid
   • 5 months after the penalty date, an additional penalty is incurred of 5% of the unpaid tax
   • 11 months after the penalty date, an additional penalty is incurred of 5% of the unpaid tax.
2. Where the tax due each month or quarter is not paid in full by the due date, the penalty is an amount determined by reference to the number of defaults of payments made of the same tax during the tax year.
   • the first failure to pay the tax due by its due date does not count as a default
   • for the next three defaults, the penalty is 1% of the total of the defaults
   • for the next three defaults, the penalty is 2% of the total of the defaults
   • where tax is unpaid 6 months after the penalty date, the penalty is 5% of the unpaid tax
   • where tax in unpaid 12 months after the penalty date, the additional penalty is 5% of the unpaid tax.

Provision is made to suspend penalties if the employer enters into a “time to pay arrangement” with HMRC before the tax becomes due for payment.

It is understood that the proposal, as included in the consultation documents, to determine the number of defaults in a tax year by means of an additional P35 reporting requirement has been dropped. It is not yet clear what alternative method will be used.

Recovery of debts under PAYE regulations
During 2007 and 2008 HMRC conducted two consultation exercises on “Payments, Repayments and Debts”. Clause 109 and Schedule 58 of FB give HMRC the power to collect small debts through the PAYE system, allowing debtors to spread payments and reducing HMRC’s costs. Small debts account for a large proportion of the volume of tax debts but a small proportion of their value.

HMRC’s aim is to secure immediate payment of debts in full or, where this is not possible, to set up a “time to pay arrangement” to reschedule the debt. If neither of these options is feasible, HMRC would consider collecting smaller debts through PAYE as one of a number of remedies available to it as a creditor. If the debtor did not want to pay in this way, HMRC would expect the debtor to make other arrangements for payment. If no such arrangements were forthcoming, HMRC would have the ability to collect debts in this way at its option, but the amount is limited to £2,000.

The right to object to collecting underpayments of income tax and capital gains tax under self assessment, where the due date had not already passed, would not be disturbed. The right to object to collecting tax credit overpayments in this way would also not be disturbed. A taxpayer would, as now, be able to appeal against their tax code. The existing safeguards, limiting the amount that may be collected in this way through the PAYE system and protecting the level of the taxpayer’s income, would be preserved.

Managed Payment Plans
During 2007 and 2008 HMRC conducted two consultation exercises on “Payments, Repayments and Debts”. Clause 110 provides for HMRC to introduce managed payment plans. Under these voluntary plans, taxpayers may pay income tax or corporation tax due under Self Assessment by instalments balanced equally before and after the normal due dates. While in the plan, taxpayers are protected from the interest and penalty consequences on payments made after the normal due date.

Further information:
HM Treasury Budget documents
HMRC Budget documents
Finance Bill 2009
Finance Bill 2009 Explanatory Notes

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