Budget March 2008

Mr Darling’s first budget, delivered on 12 March 2008, was entitled “Stability and opportunity: building a strong, sustainable future”. There were few surprises, with many of the main measures already having been announced.  There was little aimed at farming specifically, but there are a number of changes that will however affect farmers, as explained in this report.

From April the 10 percent income tax band will be abolished and the basic rate cut from 22p to 20p as announced in Gordon Brown’s last budget.

This move appears good news for high earners, but it will mean that lower income earners end up paying more tax.  Some of the gains for high earners may be wiped out due to National Insurance Contributions increases.

*  In the budget the basic personal allowance was set at £5,435.  This has now gone up by £600 to £6,035 and will be backdated until 6 April.  Taxpayers can expect a £60 lump sum in their September pay packets followed by a £10 monthly increase until the end of the tax year.

For class 4 self employed people, the upper earnings limit and upper profits limit for NIC will increase above inflation.  Looking forward to 6 April 2009 these limits will be aligned with the higher rate tax threshold for income tax.

From the 6 April 2008 a flat rate of capital gains tax of 18 percent applies to all disposals except those that qualify for the new entrepreneur’s relief.  This relief will allow the first £1 million arising on certain disposals in 2008/09, or later years, to be charged CGT at an effective rate of 10 percent.  This will have the effect of saving a maximum of £80,000 in tax once the new 18 percent rate of CGT has been introduced. The indexation allowance and taper relief have both been abolished.  The annual exemptions for individuals still apply:

With effect from 12 March 2007 tax relief on new agricultural buildings has been abolished.  Writing down allowances on existing agricultural buildings as was expected have been scaled back to three percent from April, two percent from April 2009, one percent from April 2009 and zero from April 2011. This will have particular relevance to those farmers building slurry storage facilities to meet EU legislation. It appears that from 2011, no tax relief will be available on agricultural buildings where the current rate is four percent per year straight line.

Legislation will again be included in Finance Bill 2008 to introduce a new AIA for the first £50,000 of a business’s expenditure on most plant and machinery each year. This forms part of the business tax reform package announced at Budget 2007.  This will enable farmers for example to purchase a tractor, or equivalent plant and machinery (which can include integral fixtures and fittings), at £50,000 and this would have a 100 percent first year capital allowance against income tax. This will be on a “use it” or “lose it” basis.  Expenditure above £50,000 will either fall into the machinery pool (writing down allowance 20 percent) or into the integral fixtures and fittings pool (writing down allowance 10 percent).  Certain exceptions will continue to have effect for the purposes of the AIA. The main exception is expenditure on cars.

As previously announced, the new classification of “integral features” to be allocated to the new 10 percent special rate pool will be included in Finance Bill 2008 with effect from 6 April 2008. The assets are contained in a short list and are:

Inheritance tax is charged on the estate at death, on gifts within seven years of death and on chargeable lifetime transfers of value.  For 2008/09 the first £312,000 of cumulative chargeable transfers are exempt.  Over this nil-rate band the rate is 20 percent for lifetime transfers or 40 percent on death. 100 percent Agricultural Property Relief will continue to exempt many farming estate transfers?

The rates below apply to acquisitions of chargeable interests in land including leases.  In disadvantaged areas residential sales of land and buildings up to £150,000 are exempt.

Again as was announced in the 2007 budget the main rate of corporation tax will reduce from 30 percent to 28 percent with effect from 1 April 2008. The small companies’ rate increases from 20 percent to 21 percent from April 2008 and to 22 percent from April 2009.  This planned increase hits companies with profits up to £300,000 whilst larger companies benefit from the headline rate reducing to 28 percent. Increases in the small companies’ rate together with a decrease in the personal tax basic rate is intended to ensure ‘fairness across the tax system’ removing the encouragement for small businesses to incorporate. For the vast majority of farming businesses there is no incentive to form a company.

The VAT registration and deregistration turnover thresholds have been increased, with effect from 1 April 2008.

Duty rates will be increased and some rates will be simplified with effect from April 2008. The three existing duty rates for heavy oil (diesel) will be reduced to one (heavy oil). After 1 October 2008, this rate will increase by 2 pence per litre and subsequently will rise in April 2009 by 1.84 pence per litre and after April 2010 by 0.5 pence per litre above indexation in that year. The changes also see an introduction of a rebated rate for biodiesel and bioblend with effect from April 2008.

The expected 2 pence per litre increase in the duty rate for petrol and most forecourt diesel will be delayed until 1 October 2008.

From 2010, the current duty differential of 20 pence per litre for biofuels for road use will cease and thereafter will be charged at the same rate as main road fuels. This will raise £550m in 2010-11.

The chancellor announced a reform of car taxation in an attempt to encourage consumers and business’ to use cleaner and more efficient vehicles.  From April 2009 there will be a reform of vehicle excise duty based on carbon dioxide emissions. One notable highlight is that from April 2010 buyers of more heavily polluting vehicles will have to pay an additional ‘showroom’ tax upon purchase of £950.  These changes can be expected to have real impact on farmers who need to use such vehicles for business purposes.  By contrast, there will be a first year zero rate for new cars that emit 130g CO2 per km or less.

Examples of class G vehicles include:  Land Rover Discovery, Mitsubishi Shogun and Toyota Land Cruiser.

Landfill tax rate increases had already been announced in the 2007 Budget, however, it was announced that the lower rate applying to inactive waste, will be frozen at £2.50 per tonne from 2009-10.   

The child element of Child Tax Credit (CTC) increases in line with average earnings. The family element (normal and baby addition) remains frozen at £545 per year. The income threshold for CTC only rises to £15,575 per year. The income threshold for CTC family element is  £58,175 per year. The disregard in Tax Credits for increases in income between one tax year and the next remains at £25,000.

The threshold to qualify for Working Tax Credit has risen by £1,200 to £6,420.

Whilst there were few surprises in this Mr Darling’s first budget there are numerous changes which will have an impact on farming businesses.