Darling emphasises environment in maiden Budget

Billed as a 'responsible' and 'green' Budget, the environment found its way to the top of the agenda in Chancellor Alistair Darling's debut Budget speech.

Darling used his first Budget statement to introduce a series of measures aimed at reducing the UK's carbon emissions, including a new zero rate of car tax to be levied in the first year for new, low polluting vehicles - a measure that was part of a wider reform of vehicle excise duty.

Despite attempts to prove his 'green' credentials, the Chancellor declared that a 2p increase on fuel duty will be postponed from April to October this year to help the country through the current 'credit crunch'. The Chancellor told MPs that the credit crunch posed a 'major risk to the world's economy'. As a consequence, Darling has revised the economic growth predictions that were made in his Pre-Budget Report last October.

Growth forecasts have been cut for 2008 to 1.75%-2.25%, a substantial reduction on the original 2.5%-3%. Darling has also advised that public borrowing will increase to £43 billion next year, rather than fall to the £36 billion he had anticipated.

Darling's brief reign as Chancellor has already been dogged by controversy. He confirmed the much-criticised changes to capital gains tax and the taxation of non-domiciliaries. CBI Director-General Richard Lambert, said: 'The Government has much to do if it is to win back its enterprise credentials, but the measures announced today are a credible first step on the road.'

Capital gains tax (CGT)

The Chancellor confirmed the new standard rate of 18%, coupled with the withdrawal of indexation allowance and taper relief for individuals and trustees with effect from 6 April 2008. Other reliefs, such as those relating to principal private residences, losses brought forward, Enterprise Investment Scheme and Venture Capital Trusts, and business asset rollover relief, will continue to be available. Assets acquired before 31 March 1982 will be deemed to have had a cost equivalent to their market value at that date.

In certain circumstances the CGT base cost of an asset is tied to its value ascertained for inheritance tax (IHT) purposes. A correction made necessary by the IHT changes noted below means this rule will not apply where the value does not have to be ascertained for IHT purposes on the death of an individual.

The Annual Exempt Amount (AEA) will be increased for 2008/09 to £9,600 for individuals and £4,800 for some trustees.

CGT: Entrepreneurs' Relief
Following strong opposition from the business community to the proposed CGT changes, the Chancellor has introduced an Entrepreneurs' Relief which gives an effective 10% rate for the first £1million of lifetime capital gains on the disposal of trading businesses and on certain disposals of shares in trading companies. The relief actually works by reducing the gain by 4/9, leaving the residual 5/9 gain to be taxed at 18% (5/9 x 18% = 10%). The effective rate will be reduced by the application of the AEA.

The £1million may be made up of any number of disposals after 5 April 2008 and, unlike the former retirement relief (on which the rules are based), there is no minimum age qualification. There is, however, a one year qualifying period and other conditions to be met. Trustees will also be able to claim, jointly with a 'qualifying beneficiary'.

Capital gains made by companies are dealt with separately under the corporation tax regime, and these arrangements have not changed.

Inheritance tax (IHT)
As previously announced, the IHT standard threshold has been set at £312,000 for 2008/09. This defines the upper limit of what is commonly known as the IHT nil-rate band.

In the October Pre-Budget Report, the Chancellor announced a new concession for married couples and civil partners. With effect from second deaths on or after 9 October 2007 the unused percentage of the nil-rate band from the first death estate can be carried forward and added to the nil-rate band available to the second. The combined threshold for couples is therefore set at a maximum of £624,000 for 2008/09.

This new arrangement applies no matter how long ago the first death occurred. For example:

On the first death none of the original nil-rate band was used because the entire estate was left to a surviving spouse. Then if the nil-rate band when the surviving spouse dies is £350,000 that would be increased by 100% to £700,000

If on the first death the chargeable estate was £107,500 when the nil-rate band was £215,000 (1997/98), then 50% of the original nil-rate band would be unused. If the nil-rate band when the surviving spouse dies is £350,000, then that would be increased by 50% to £525,000.

Pension savings
The Finance Bill 2008 will propose legislation to ensure that tax-relieved pension savings diverted into inheritance using scheme pensions and lifetime annuities are subject to unauthorised payment tax charges and, where appropriate, IHT. In addition, IHT protection to savings in overseas pension schemes will be restored.

Corporation Tax

Financial Year to 31 March 2009 31 March 2008
Taxable profits
First £300,000 21% 20%
Next £1,200,000 29.75% 32.5%
Over £1,500,000 28% 30%


The small companies' rate of corporation tax will increase from 21% to 22% in 2009/10.

Capital Allowances
Previous proposals, amended after due consultation, were confirmed for 2008/09 as follows:

Annual Investment Allowance (AIA)
Tax relief on the first £50,000 of investment in plant and machinery, except for cars, will be at 100%. This will apply to any size of business, but there will be provisions to prevent multiple claiming. Businesses will be able to allocate their AIA in any way they wish; so it will be quite acceptable for them to allocate their allowance against expenditure otherwise qualifying for a low rate of allowance.

Writing Down Allowance (WDA)
Any additional expenditure over the AIA level will enter either the 10% pool or the 20% pool, attracting WDA at the appropriate rate. The 10% pool will contain longlife assets, thermal insulation added to existing commercial buildings, and 'integral features' of buildings (including replacement expenditure). The 20% pool will apply to most other plant and equipment, including cars costing £12,000 or less. Cars costing more than £12,000 will continue to qualify for a 25% WDA subject to a maximum of £3,000.

A WDA of up to £1,000 can be claimed where the unrelieved expenditure in either the 10% or 20% pool is £1,000 or less.

Enhanced Capital Allowances (ECA)
In addition to AIA, 100% first year allowances are available on energy saving or environmentally beneficial equipment. Where companies (only) have unrelieved losses attributable to ECAs, they may choose to surrender such losses for a cash payment. The company will receive a tax credit of 19%, subject to a maximum of the greater of £250,000 or the company's PAYE and NI liabilities for the period for which the loss is surrendered. This credit will be clawed back where the asset is sold within four years after the end of the period for which the credit was paid. Electric and low CO2 emission (up to 110 g/km) cars and natural gas/ hydrogen/ biogas refuelling equipment also qualify for 100% first year allowances, but will not qualify for the payable tax credit.

Buildings
WDAs on industrial and agricultural buildings are gradually being phased out, with final withdrawal by the end of 2010/11. The WDAs (on building cost) for 2008/09 are reduced from 4% to 3% (subject to transitional arrangements). A maximum 100% initial allowance is available for the conversion of parts of business premises into flats. There are also 100% business premises renovation allowances and Enterprise Zone allowances (EZA). EZAs are to be withdrawn from the end of 2010/11.

Research and development (R&D) tax credits
The enhanced deduction available to small and medium enterprises (SMEs) in respect of qualifying R&D expenditure is to increase from 150% to 175%. For large companies the enhanced deduction is to increase from 125% to 130%. These changes will take effect from a date to be appointed once EC state aid approval has been received. As from the same date, the SME tax relief will no longer be available to those companies whose most recent accounts were not produced on a going concern basis. In addition, the SME relief is to be capped at €7.5 million per R&D project.

Associated companies
The tax bands are reduced where a company has one or more associated companies. As from 1 April 2008, a company will no longer be associated with companies controlled by the business partners of the person controlling that company. The exception to this is where at any time the shareholder or director of the company and the business partner have made arrangements to secure a tax advantage for the company.

Enterprise Investment Scheme (EIS)
From 6 April 2008, subject to EC state aid approval, the limit on which an investor can claim EIS income tax relief will be increased from £400,000 to £500,000.

Enterprise Management Incentives (EMI)
Currently, employees cannot hold qualifying EMI options (taking into account Company Share Option Plan options also granted to them) with a total market value at the date of grant of more than £100,000. For EMI options granted on or after 6 April 2008, this limit will be increased to £120,000. Options granted after the date of Royal Assent will not be qualifying EMI options if the company has 250 or more employees and/or it is involved in shipbuilding or coal and steel production.

Anti-avoidance
A number of measures will be introduced to tackle anti-avoidance. These will affect:

Individuals carrying on a trade in a non-active capacity and sideways loss relief
Plant or machinery lease schemes
'Disguised interest' schemes
Controlled foreign companies
The transfer of intangible assets between related parties where one party is subject to insolvency proceedings
Capital allowance buying and acceleration.