2007 BUDGET SUMMARY

• Personal tax

• Corporate & Business Tax

• Employment issues

• Capital taxes

• VAT

• Environmental Measures

• Other Matters

Employment Issues

National Insurance Contributions (NICs)

There is no change in the rates of NIC but there are significant proposed changes to the limits between which NICs are payable. For 2007/08 the lower and upper earnings limits (UEL) increase by inflation so that employees will pay 11% NIC on earnings between £100 and £670 per week. Employees continue to pay contributions of 1% on earnings above the UEL. For 2008/09 the UEL will be increased by £75 per week above indexation.

The upper profits limit for Class 4 national insurance for the self-employed will also be increased in 2008/09 by £75 per week above indexation.

In the following year the upper earnings limits will be aligned with the point at which the higher rate of income tax becomes payable.

Comment
The government claims the increases in national insurance are aimed at simplifying the tax system but it comes at quite a cost to employees and the self-employed.

Managed service companies (MSCs)

In 2000 the government introduced rules to tackle the provision of services through many personal service companies (PSCs). These rules have been referred to by the name of the press release of that time, IR35.

Many PSCs were designed to ‘disguise employment’ by interposing a company between the payer and worker. If the IR35 rules apply most of the income received by the company is deemed to be paid to the worker as employment income and PAYE and NICs are due accordingly.

MSCs attempt to avoid the IR35 rules. The types of MSCs vary but are often referred to as ‘composite companies’ or ‘managed PSCs’. HMRC have encountered increasing difficulty in applying the IR35 rules to MSCs because of the large number of workers involved and the labour intensive nature of the work. Even when the IR35 rules have been successfully applied, an MSC can often escape payment of outstanding PAYE and NIC as they have no assets and can be wound up.

The government has confirmed that new rules will apply to MSCs. The intention of the new rules is to:

• ensure that those working in MSCs pay PAYE and NIC at the same level as other employees

• alter the travel and subsistence rules for workers of MSCs to ensure they are consistent with those for other employees

• allow the recovery of outstanding PAYE and NIC from ‘specified persons’ if the amounts cannot be recovered from the company.

MSCs will be required to account for PAYE on all payments received by individuals on or after 6 April 2007. NICs will be due shortly after the Finance Bill receives Royal Assent.

The ‘specified persons’ who may be called upon to pay PAYE and NIC will primarily be the MSC’s director and the person who provided the company to the individual. The provision is likely to have effect for debts incurred from August 2007. In certain cases the debt can also be transferred to persons who encourage or are actively involved in individuals’ provision of their services through MSCs. This provision will take effect for debts incurred on or after 6 January 2008.

Comment
The new rules for MSCs do not affect anyone working through their own PSC. Some people working via an MSC may be better off if they can set up their own PSC (provided the company will not be caught by IR35). The type of work the individual performs for their clients will need to be considered in detail to determine whether the setting up of an individual PSC is appropriate.

Company cars and the fuel scale charge

Where a car is provided for an employee’s private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions. The percentages range from 15% to 35% for most cars. There are currently discounts available for environmentally friendly cars and from 6 April 2008 there will be a 2% discount for cars that have been manufactured to run on E85 fuel.

If free fuel is provided for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit which is applied to £14,400. For 2007/08 the figure will remain at £14,400.

Comment
E85 is the term for motor fuel blends of 85% ethanol and 15% petrol and is referred to as bioethanol E85 in the UK. Currently it seems you can only buy E85 fuel from a few Morrisons supermarket forecourts. Hopefully supplies will be improved before the introduction of the new 2% discount.

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The Budget proposals may be subject to amendment in the Finance Act. You are therefore advised to contact us before taking any action as a result of the contents of this summary.