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A practical guide to the 2008 Budget

Economy - Features

Thursday, 20 March 2008

SMEs and their owners have not fared well in Alistair Darling’s first Budget, as Jeremy Beard explains.

While some business owners have expressed relief that there were no new nasty surprises, the anticipated changes to the capital gains and capital allowances regimes are likely to increase the tax burden on businesses and their owners.

What can business owners do to mitigate the affects of the Budget?

Much of the pre-Budget hype centred on the issue of capital gains tax (CGT).

It has been well publicised that the withdrawal of Taper Relief and the introduction of a flat capital gains tax rate of 18 per cent means owners of business assets or shares in their trading companies face an 80 per cent increase in their tax bill.

As a result some owners are attempting to dispose of their assets to save tax at 8 per cent on the gain, although this is only recommended if realisation of those assets is a real possibility in the next 12 months in order to pay the tax bill that falls due on 31 January 2009.

Entrepreneurs' Relief

For those business owners with no pending third party sale it may still be possible to engineer a disposal before 6 April by transferring assets or shares to a trust or third person, selling assets to another company or incorporating their own business.

It is, however, not all bad news. In response to extensive lobbying from business groups over the withdrawal of Taper Relief, the Chancellor announced the introduction of Entrepreneurs’ Relief which means individuals pay only 10 per cent tax on capital gains up to a lifetime limit of £1million.

There has also been a change with regards to Enterprise Management Incentives (EMI).

As of 6 April 2008 an individual employee may hold shares with a value up to £120,000, up from £100,000.

It should be noted, however, that from the date the Finance Bill receives Royal Assent EMI companies must have fewer than 250 employees.

Companies should consider, especially for employees that are at the £100k limit, granting further EMI options to utilise this additional £20,000.

Employee shareholders should also consider exercising their options to help meet the 5 per cent ownership requirement of Entrepreneurs’ Relief.

Capital allowances

The other change that attracted headlines was the alteration in the capital allowances regime.

Currently SMEs can claim 40 per cent (50 per cent for small companies) tax relief on all items of equipment, machinery, fixtures as well as some building improvements in the year they are acquired.

This system has been replaced by an Annual Investment Allowance (“AIA”) of £50,000 whereby business owners are entitled to 100 per cent tax relief on the first £50,000 of plant and machinery spend, reverting to 20 per cent per annum on additions in excess of £50,000.

As such, SMEs, especially groups as there is only one AIA for the group, should carefully review their capital expenditure budget and attempt to accelerate spending to take advantage of the first year allowances.

There was also confirmation that the small company tax rate - available on profits up to £300k - will increase by 1 per cent to 21 per cent from 1 April 2008, with the main rate of corporation tax - for companies earning annual profits in excess of £1.5m - decreasing to 28 per cent.

These changes do not alter the fact that it is advisable for SME owners in both these situations to extract a dividend as opposed to awarding a salary bonus.

For extracting company profits between £300k and £1.5m bonus remuneration remains the preferred option.

Green incentives

In the build up to 12 March there was much speculation that the government would unveil a ‘green’ Budget.

While the changes announced were less environment-focused than anticipated there are nonetheless incentives for SMEs to ‘go green’.

Firstly, businesses that acquire new assets with environmentally beneficial technology, i.e. that are energy/water efficient, are able to write off 100 per cent of the cost in the period the asset was acquired.

These designated technologies are to be extended to include 5 more technologies meaning that many more assets will qualify for 100 per cent relief.

Naturally, business owners should check when buying equipment that it is environmentally beneficial and included on the Government’s list.

Furthermore, if you are considering investing in any of the technologies to be added it is worth holding off until summer 2008 when these will be formally included in this scheme.

Integral Fixtures

It is also important for owners to be aware that from 1 April 2008 a separate classification of plant and machinery will be introduced, ‘Integral Fixtures’, which refers to anything incorporated into the building itself, namely lighting, air or water systems.

These assets will attract annual tax relief at 10 per cent and importantly include assets that did not previously qualify for tax relief against profits.

In addition, the incentive for business owners to examine the CO2 emission of company vehicles continues.

Currently businesses that acquire new cars with low emissions can write off 100 per cent of the purchase price in the period the car was acquired.

This relief will be extended to five years as of April 2008, (although the criteria for low emissions will be reduced slightly) meaning that there is a genuine benefit in opting for a greener model.

Jeremy Beard is a partner at haysmacintyre.