2007 Budget

The 2007 Budget and Your Tax

28 March 2007

Reader Writes:

Do you have any views on the budget and what it means to me particularly from a tax point of view?

The budget started the same with the chap holding his brown battered case in the air. The difference is that instead of 300 pages of information inside, it’s now just a 512mb memory stick! There normally aren’t any surprises and this one where the ‘Gord giveth and the Gord taketh away’ was no different.

Beaming through his private healthcare smile it was announced that the basic rate of tax was to be reduced to 20%. No real benefit there as he forgot to shout about the phasing out of the 10% tax band. The changes become broadly neutral for most people but those with earnings of less than £18,000 will be worse off.

In the same vein he announces that corporation tax will be reduced to 28%. Big deal. He announces it’s in line with the bigger world competitors such as the U.S. Who really cares when the average rate of corporation tax in Europe is 27.1% (1) whilst Ireland enjoys a healthy 12.5%. (2) Is the U.K really going to benefit from the above rate drop? In order for a company to have the same distributable income in the U.K as in Ireland they would need a 25% increase in profit! (2). The rate drop is more a token gesture than a competitive measure when compared to Ireland and Eastern Europe and will do little to make large organisations chuckle.

On the other side of the coin he decided to hit small companies with a 15.789% increase in tax – much appreciated! Small companies with profits of up to £300,000 will move from 19% to 22% – clearly he has worked out that they can afford that. Or perhaps the small company is of little interest in a leadership challenge!

Special rates will apply for zero emission houses (whatever that is) but many critics agree that the cost of converting a new home to this will outweigh the benefits. Indeed it is difficult to see what the costs will really be, as the government have forgotten to explain what a zero emission house will be!

The much over hyped Venture capital trust has been battered again. This is a scheme to attract tax relief at 30% on contributions (used to be 40%). They lost further interest in the last bout of changes when the plan had to be held for five years as opposed to three. The 2007 budget has added there must be less than fifty employees in a firm for it to be qualifying to invest into and the company must have raised less than £2 million in this way.

The real risk you have with these schemes is liquidity and the potential to get your money back at the end of the term. Unlike a straight forward open ended scheme (like an ISA), the potential to sell a VCT at the end of the term is greatly reduced. The best place for you to sell your shares back is to the plan manager. He doesn’t have to buy them back and if he doesn’t, you are pretty snookered.

A VCT will have to explain the buy back option in its plan documents and you will find for most it’s classed as ‘best endeavour’. For those of you who don’t know, endeavour means one of two things: Mr Cook’s ship that sank in 1778. It was previously called the Lord Sandwich and helped claim Australia for the British but the British apparently sank it in Newport; In VCT terms endeavour is slightly different – only slightly. It means the manager offers their best endeavour to give you your capital back by buying back your shares. Unlike an investment in an ISA you could be stuck with it or sell it off at quite a discount.

If you have a query on Investment or Tax, or any other financial matter please call 0800 0112825 or email info@wwfp.net

Source:
(1) http://www.nzz.ch/2006/11/01/eng/article7216906.html
(2) http://www.idaireland.com/home/index.aspx?id=659

Information:
http://news.bbc.co.uk/1/hi/business/6214434.stm – cost outweighing benefits
http://www.ukbudget.co.uk/UKBudget2007/PersonalTax/budget07_vcts.cfm?menu=personalMenu re vcts
http://news.bbc.co.uk/1/hi/sci/tech/4994614.stm re endeavour

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