The Chancellor's Budget Report 2009

The 2009 UK Budget delivered on 22 April 2009 was, as expected, a revenue raising Budget with little for UK residents to smile about. A comprehensive analysis of the measures announced is attached.

Download budget report analysis

This can also be accessed electronically through the link to the PwC UK website below. In order to access this you will need to register with PwC plus. This link takes you direct to the registration page. Once registered you will have access to PwC articles and commentary which I am sure will be of interest to you. In terms of the impact on us here in the Channel Islands we have summarised the key messages below.

Register with PwC Plus

Increases in personal tax for wealthy individuals

Bad news for high earners, although hardly a surprise. There will be a new rate of income tax of 50% for individuals with incomes above £150,000. This is a significant change to the announcement made in the Pre-Budget report last November when the Chancellor announced the tax rate would be 45%. The Chancellor has not only increased the rate, he has also accelerated the introduction date from April 2011 to April 2010. The tax rate on dividends will be increased by an additional 10% for individuals who fall within this higher rate income tax band. The Chancellor has also decided to phase out personal allowances for those individuals with incomes above £100,000. A further hit for high earners is that pension tax relief for individuals with income over the £150,000 threshold will be restricted so that the tax relief is gradually tapered to 20%.

This higher income tax rate of 50% will apply to trusts as well as to individuals and correspondingly the dividend rate will increase. This will impact offshore trusts that have UK source income. The new rate further increases the differential between rates of tax on income and capital gains, enhancing the relative attractiveness of structuring returns in the form of gains.

All of these changes take effect from April 2010.

With regard to the taxation of UK resident non domiciled individuals, there are no major changes this year, although there were some further, albeit minor, amendments to the remittance basis.

From a compliance perspective, there will be new obligations regarding personal tax accountability on senior accounting officers of large companies to ensure accounting systems are adequate for tax reporting. There are also proposed changes to the penalty regime for the late filing of tax returns and the late payment of tax.

This is all sure to make the Channel Islands even more appealing to wealthy individuals.

The Foot Review interim report

A progress report from Michael Foot, appointed by the UK Government to review Offshore Financial Centres, was presented. The progress report does not draw any firm conclusions at this point and merely indicates the particular areas he is going to focus on, which includes anti-money laundering, depositor protection and information exchange. The language and tone of the progress report is balanced and there is a recognition of the good work undertaken by the Crown Dependancies and the generally favourable reviews undertaken by IMF and FATF.

Tackling tax avoidance and evasion

UK residents with unpaid tax connected to offshore accounts will have a further opportunity to disclose and put their affairs in order. The New Disclosure Opportunity (NDO) will run from Autumn 2009 to March 2010. By taking up this opportunity, tax payers will be required to pay outstanding duties, interest and penalties. The level of penalty will be announced before the scheme opens.

Serious tax defaulters, those who incur a penalty for evasion in respect of £5,000 or more, will be required to submit returns for up to 5 years showing more detailed business accounts providing details of any balancing adjustments. In certain circumstances, names of serious tax defaulters will be published.

This is the second offshore account disclosure opportunity and it would be somewhat surprising if this were to flush out large numbers of undisclosed accounts.

Banking code of practice

To ensure that businesses and individuals pay the right amount of tax the Government has announced a number of measures that will reduce opportunities for evasion, avoidance or non-compliance. Included within these measures is a previously announced draft code of practice on taxation in the banking sector. This draft code, along with a consultation document, will be issued shortly.

Foreign profits and interest relief

November 2008's Pre-Budget report announced a number of changes to the way that foreign profits are to be treated by companies. All distributions (both UK and foreign) will be taxable unless they fall within one of five specified exemptions. While nothing new has been announced in this area, amendments have been made to reflect some of the feedback received, and further details are expected shortly. Revised dates have now been given for the implementation of these reforms, with the exemption from tax of many dividends paid by non-UK companies from 1 July 2009, and the introduction of the cap on interest relief with effect for accounting periods ending after 31 December 2009.

The draft debt cap rules previously released were extremely complex and of concern to many businesses. The delay in implementation and amendments announced are welcome, but the rules remain complex and will impact many groups with UK companies.

Changes to the Controlled Foreign Companies regime will see the abolition of the exemption for superior and non-local holding companies phased in over two years, however the exemption for local holding companies has been retained following representation from businesses. These are interim measures pending further consultation on wider CFC reforms.

Investment fund update

A notable change to the taxation of distributions from offshore funds is the introduction of a notional 10% tax credit for individuals, however this is restricted to dividends from offshore funds which are largely invested in equities. An interesting addition to this is distributions from offshore funds which are largely invested in interest bearing assets will be reclassified as interest income for individuals, achieving parity of treatment with UK funds.

Following on from HMT's 'Offshore Funds - Further Steps' paper issued in December 2008, the 2009 budget confirms the intention for the new reporting funds regime, including the revised definition of a 'collective investment scheme', to come into effect from 1 December 2009. This is a postponement of two months on the initial proposed implementation date to allow sufficient time for transition. The regime is to be introduced by regulations, intended to be released shortly.

The budget also provides for some welcome certainty on transactions which are considered trading for the purposes of calculating 'reportable income', extending the use of the 'white list' of investment type transactions to offshore funds.

There are new rules for UK investors in fully transparent funds whereby they will be deemed to have a chargeable asset. Where this applies it should simplify the position but the new rules will not apply to offshore partnerships, or to arrangements which do not fall within the new offshore fund definition.

If you would like any further information or clarification on any of the measures announced, please do not hesitate to contact your usual PwC Tax contact or call Wendy Dorman or one of the members of our Budget working party on the numbers to the right.