News

Author: Marc Bennett

With the end of the tax year approaching, Alistair Darling last week presided over one of the most important Budget statements in living memory.

The UK was in the grip of a credit crunch originating from the 'toxic mortgage' debacle in the US. Here in the UK record amounts of personal debt fuelled by unsustainable growth in house prices and the over-relaxation of consumer credit resulted in a culture of 'spend now and pay later'. This caused the UK economy to dive into potentially the deepest recession for generations. The Treasury's response was a list of measures in the pre-Budget report (PBR) costing the taxpayer £21bn and designed to encourage the taxpayer to 'spend now and pay later'.

Reduction of the VAT rate to 15 per cent

Designed to stimulate the high street, this measure has caused as many headaches as it did headlines. This was the first VAT cut since 1974 most practitioners had no experience of the administration and alterations required to their VAT accounting software as well as their product ticketing if they were to get everything in place by the December 1 deadline. Most practices were already discounting products and therefore a reduction of 2.5 per cent was unlikely to have consumers running in off the streets. Furthermore, practices were now open to calls from patients claiming back a proportion of VAT on their contact lens standing orders, causing more administrative problems when business is tough enough.

The reduction in VAT may require optical practitioners to review the VAT method agreement they have with Customs as the rate change has an impact both on output VAT and input VAT reclaimed on overhead expenditure under the partial exemption laws. The new all-inclusive VAT fraction to calculate the VAT included in a retail price will now be 3/23 until the start of 2010. However, many practitioners will have separate agreements in place that have been agreed with Customs and so should consult their advisers when pricing their goods and accounting for VAT.

From January 2010, the VAT rate will either revert to where it was before (17.5 per cent) or alternatively may be increased towards 20 per cent if the government feels the economy has then been stimulated enough and the brakes need to be applied once more. Practice owners should contact their specialist VAT advisers to seek further clarification on the full impact of VAT changes on their practice as this article cannot go into all the implications in the limited space available.

Income tax and national insurance changes

Hopes for a cut in the basic rate of income tax did not materialise. From April 2011 employees earning in excess of £40,000 will be hit by the higher national insurance charges. The 0.5 per cent increase in national insurance contributions (NICs) will affect both individuals and their employers. In fact employees earning in excess of £40,000 will face a 50 per cent increase in the NICs they currently pay on earnings above this threshold. Changes to the bands of personal allowances will hit practice owners and higher earners earning between £100,000 and £140,000. Incredibly the effective tax rate for income within these two bands will be 60 per cent from April 2010. Furthermore, the top rate of income tax will be increased to 45 per cent a year later for those earning more than £150,000. This means that from April 2011 there will be six different income tax rates to juggle, plus tapering allowances, increasing the complexity of practices operating their own payroll.

The highest earners paying dividends instead of salary to get past the 45 per cent tax band will be caught by increases to the dividend tax rate.

However, it wasn't all doom and gloom and the report did outline a number of measures to assist practices.

• Income shifting rules postponed
  When these proposals originally came out, they sought to attack family run businesses that financially benefited from moving income from one high earning member to another lower paid member in order to benefit from personal allowances and the lower tax rates. These proposals, believed by many tax specialists to be unworkable, have now been shelved 'indefinitely', the main reason being because of the distraction they would have caused during these turbulent economic times. However, it should be noted that the introduction of these rules is still 'being considered' by HMRC and advice should be taken when arranging the split of profits between family members.
• Loss relief
  Practices making a trading loss in these difficult times are now able to carry back losses of up to £50,000 for a further two years, thereby reducing the tax bill for an earlier period of trading and obtaining the practice a much needed tax repayment of approximately £10,000 for most incorporated practices and up to £20,000 for partnerships and unincorporated practices whose profits were previously taxed at up to 40 per cent.
• Corporation tax rate
  Further assistance for practice owners came with the suspension of the increase in the small companies corporation tax rate from 21 per cent to 22 per cent planned for April 2009. The tax rate for limited companies with profits below £300,000 will continue to be 21 per cent, although it had been hoped that this rate would be brought down to the levels of two years ago when the rate was 19 per cent.
• Time to pay tax bills
  Under the heading of 'Business Payment Support Service', a practice having difficulty meeting its tax liabilities will now be given additional time to settle. The payment can be spread over a period of time pre-agreed with the Collector of Taxes and this relief will be made available for corporation tax, VAT and PAYE liabilities.

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