The Budget 2005

• Introduction

• Personal tax

• Employment issues

• Corporate & Business Tax

• Capital taxes and Trusts

• Stamp duty land tax

• VAT, Excise & other duties

Employment Issues

National Insurance Contributions (NICs)

There is no change in the rates of NIC.

Action point
Although employees’ NICs only become payable once earnings exceed £94 per week in 2005/06, it is still the case that earnings between £82 and £94 per week protect an entitlement to basic state retirement benefits without incurring a liability to NICs. Consider whether you are making full use of this rule. A PAYE scheme would be needed to establish the employees’ entitlement to benefits.

Childcare costs

Currently employees are exempt from both tax and NICs on childcare provided in an employer-operated nursery. In addition childcare vouchers and other childcare paid for by the employer (such as a place in a commercial nursery) are specifically exempt from NICs but not tax. There are no financial limits on the exemptions currently available.

A new regime takes effect from 6 April 2005 and the main changes are outlined below.

• The employer-operated exemption is extended to include employees of other organisations if they work at the same location as the employer’s staff. As before there is no financial limit on the relief.

• The exemption for childcare vouchers is extended to cover tax as well as NICs. However the exemption is limited to £50 per week and any excess is liable to both tax and NICs.

• Any formal registered childcare or approved home childcare contracted for by the employer such as a local nursery, out-of school club or childminder will be exempt from both tax and NICs but as with vouchers the exemption is limited to £50 per week.

• Where schemes operate they should be open to all employees.

Comment
Some employers may decide to operate a childcare ‘salary sacrifice’ scheme whereby the employee formally agrees to give up part of their salary in exchange for childcare vouchers or other employer-provided childcare. An employee could save up to £850 per year if they are a basic rate taxpayer, rising to over £1,000 for a higher rate taxpayer. In addition the employer could save over £300 in NICs per employee.

However the following should not be overlooked:

• salary sacrifice schemes must be put in place carefully to ensure they work

• salary sacrifice would probably not be appropriate for employees in receipt of Working Tax Credit including the childcare element because part of the entitlement to these credits is based on childcare costs paid personally rather than by the employer

• employees currently receiving vouchers substantially in excess of the £50 limit may be worse off under the new rules because the NICs exemption will be capped at £50 per week.

Company car tax

Currently a company car is taxed according to the level of CO2 emissions. The benefit on fuel provided for private use is also related to the same scale.

• The starting point for the scale decreases to 140 grams per kilometre for 2005/06 and will remain unchanged until at least 5 April 2008.

• The fuel benefit calculation remains unchanged for 2005/06.

• As previously announced the waiver of the 3% supplement for Euro IV diesel cars ceases from 6 April 2006 for cars registered on or after 1 January 2006.

• The range of discounts for alternative fuels is to be simplified.

Comment
Drivers who are provided with fuel for private use need to check if this really is a benefit. The other changes will prevent the rules becoming unwieldy.

Company vans

As previously announced the rules are changing on 6 April 2005 so that there will only be a taxable benefit where an employee has unrestricted private use of a company van. The taxable benefit remains at its previous level of £500 (or £350 for older vans). If the employer specifically prohibits private use, other than ‘ordinary commuting’ (primarily home to work travel) and other ‘insignificant’ private use, there will be no charge at all.

Comment
The charge for unrestricted private use will increase significantly to £3,000 in April 2007. A separate charge of £500 on private fuel provided by the employer (currently included in the scale charge) will also be introduced at the same time.

Action point
Employers need to reconsider their policies on the use of company vans and, if possible, introduce a restriction on private use to ensure that the tax charge (and the corresponding Class 1A NIC charge) is removed.

Computer and bicycle exemptions

The loan of a bicycle to an employee is tax-free as is the loan of computer equipment where the exemption applies to the first £500 of annual benefit. If at the end of the loan period the employee purchases the computer or decides to buy the bicycle, there will not be a tax charge provided the employee pays the employer the market value for the computer or the bicycle.

Comment
A sensible simplification which should make the rules understandable.

Payments to employees attending college

Where an employee attends a full-time course at a recognised educational establishment for at least 20 weeks a year and their employer helps to meet the costs of accommodation, subsistence and travel, these are currently tax exempt up to a total of £7,000 per academic year. This figure will increase to £15,000 for the academic year which begins in September 2005. The payment will also be exempt from Class 1 NIC.

Comment
The relaxation of the tax rules is part of the overall drive to ensure that the skill and knowledge base in the UK is improved.

Outplacement counselling

When an employee loses their job their old employer may agree to meet some or all of the costs of outplacement counselling and retraining where appropriate. The current tax exemption which only applies to full-time employees is being extended to cover provision of these facilities to part-time employees. It will also apply in all cases to retraining courses lasting up to two years and the condition that the course has to be substantially full-time is removed.

Comment
Redundancy is often a traumatic experience and the opportunity to receive counselling and retraining is usually welcomed. The extension of the tax exemption in this way is both logical and desirable.

Employment-related securities

The new disclosure rules have focused Inland Revenue attention on schemes using ‘employment-related securities’ to avoid income tax and NICs. The government’s intention is that ‘all of the value received by way of remuneration in the form of shares and other securities is taxed at the time it is accessed by the employee’. The legislation is being amended to stop particular schemes with effect from 2 December 2004.

Comment
It is large bonuses in the financial sector that seem to be the focus of the recent changes. However concerns have been raised that further uncertainties have been introduced into an already complex area of the law.

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Disclaimer - for information of users
This summary is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.