‘Income shifting’ rules postponed
Firstly, in a very welcome move, the chancellor has postponed the introduction of the controversial ‘income shifting’ rules. These proposals would increase the overall income tax bill for many family companies and partnerships where a profit share or dividend is paid to a family member, and would involve business owners and their accountants in nightmarish annual calculations to determine whether their family arrangements fell foul of the rules.

The proposals have been roundly condemned as unworkable by trade organisations, professional bodies and tax advisers and it is to be hoped that the government will take on board the many representations that have been made, and seriously reconsider these plans.

10% tax rate stays
Secondly, the chancellor had already announced that he had backed down from his original proposal to tax all capital gains at 18%. Owners of small businesses will still be able to dispose of their businesses and pay tax at only 10% on gains of up to £1m.

This ‘lifetime allowance’ will apply to sales of business assets that have been owned for at least a year, including shares in trading companies where the shareholder is a director or employee who owns at least 5% of the ordinary share capital and controls at least 5% of the voting rights.

This will alleviate the very real concerns of many small business owners that a tax increase of up to 80% on the sale of their business would seriously reduce the funds that would be available when they retired.

More good news
Thirdly, many businesses will benefit from other measures originally announced in October and confirmed in the budget. Major changes to the capital allowances rules from April 2008 will enable businesses to claim immediate 100% relief on the cost of plant and equipment, up to an annual limit of £50,000.

This means, for example, that if a small business buys equipment costing £50,000, it will be able to claim an immediate £50,000 deduction, which is considerably better than the First Year Allowance of £25,000 that it would be able to claim at present.

Another small but useful measure has just been announced in relation to brought forward residues of expenditure on plant and equipment. Where brought forward balances are £1,000 or less, it will be possible to write off the whole amount instead of claiming ever-reducing annual writing down allowances of only 20%. This will accelerate tax relief and simplify tax computations.

Larger businesses will benefit from the reduction in the main rate of corporation tax from 30% to 28% from April 1, 2008. Although the small companies’ rate will increase from 20% to 21%, the basic rate of income tax on the salaries or profit shares of business owners will be reduced from 22% to 20%.

Expenditure on business premises
From April 2008 there will be a new category of assets for capital allowances purposes - 'integral features'. As the name suggests, these consist of items that become integrated into a building, such as electrical and lighting systems, cold water systems, air conditioning systems, water heating systems and lifts. Businesses will be able to claim an annual writing down allowance of 10% on these items.

This will have a mixed effect. At present, an annual writing down allowance of 25% can be claimed on some of these items, so there will be some deferral of tax relief in future. On the other hand, no tax relief is currently available on other items, so in those cases there will be an improvement.

The important point going forward will be to ensure that details of the costs of all such items are identified, so that the maximum amount of tax relief can be claimed.

Think green
The government is committed to reducing CO2 emissions and increasing energy efficiency, and taxation measures are increasingly being used to help to achieve these goals. Although high CO2 emissions will result in higher taxes, individuals and businesses that reduce CO2 emissions will be rewarded with lower taxes, so this is one area where businesses have a real say in how much tax they pay.

Motoring is high on the CO2 emissions agenda, and the chancellor announced details of the CO2 emission-related road tax that will apply to new cars from 2010.

There will be no charge for low-emission cars, but a charge of £950 will apply to those with the highest emissions. Clearly, there will be an opportunity to save tax by making careful choices.

In the meantime, CO2 emissions already form the basis for the following tax costs or deductions: 1) Capital allowances for business cars – 100% relief is available for cars in the lowest emission category; 2) Car and fuel benefit in kind scale charges for employees; 3) VAT fuel scale charges; 4) Annual road tax.

The potential savings for employers and employees, in corporation tax, income tax, national insurance, VAT and road tax can amount to thousands of pounds per car over a typical three-year period, simply by choosing a low-emission car, and this must now be an important factor in purchasing decisions.

The emission-based trend is set to continue in the future, with the London congestion charge moving to this basis in October 2008. The chancellor also announced that he would be looking into a national road pricing system, which may well also be emission-based.

And finally…
Budgets always contain some bad news, and the chancellor has once again added an extra 2p per litre to fuel duty. All businesses are suffering from the effects of record oil prices, and it is disappointing that the chancellor did not recognise this, and do more than just postpone an increase until October 2008.

The worrying trend is set to continue, with an extra 0.5p per litre increase in real terms planned for 2010.

Increases in other taxes such as Landfill Tax, Aggregates Levy and Climate Change Levy will also inevitably filter through into increased costs for most businesses.

The respite given to small businesses this year may only be brief, as future government borrowing requirements suggest that more tax increases, rather than reductions, lie ahead.

In addition, any individuals or businesses that submit incorrect tax returns for income tax, capital gains tax, corporation tax, PAYE or VAT purposes after March 31, 2009 will face increased tax-related penalties, so it will become more important to 'get it right first time'.