2008 Budget - Car taxes overshadow employment taxes

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20 March 2008

The Chancellor presented his 2008 Budget to Parliament on Wednesday, 12 March 2008. It included very little of direct relevance to Payroll - all of the significant changes to income tax rates and NICs thresholds were announced in the 2007 Budget, a year in advance, or in the Pre-Budget Report in November 2007.

For completeness, the following coverage of the Budget includes all of the earlier announcements and analyses their impact on employers and, in particular, on employees. Tables showing all of the rates and thresholds for the 2008/09 tax year are provided in this week's Frequently Asked Questions section.

Income tax allowances

With two exceptions, all personal and other tax allowances increase from 6 April 2008 by 3.95%, the retail price inflation rate at September 2007. The personal allowance for 2008/09 is £5,435, giving an emergency tax code of 543L.

The exceptions are the personal age allowances for those age 65 and above, where the increase is about 19%, specifically £1,180 above inflation. By 2011, the Government's intention is for the age 75 allowance to be £10,000.

Income tax rates and thresholds

The following income tax rate changes are effective from 6 April 2008:

• the annual tax threshold, the earnings level above which tax is due by a taxpayer with tax code 543L, is £5,435, the equivalent of approximately £105 per week
  
  
• the 10% starting rate is removed, insofar as it applies to employment income
  
  
• the 22% basic rate of tax is reduced to 20% and it applies to the first £36,000 of taxable earnings
  
  
• the 40% higher rate of tax applies to taxable earnings that exceed £36,000.

The £36,000 upper basic rate threshold will come into use from the first payday after 17 May 2008, i.e. tax week 7 for weekly-paid employees, and tax month 2 for monthly-paid employees. Except for employees with non-cumulative tax codes, the threshold applies retrospectively from 6 April 2008.

The effects of these changes on employees is that

• those earning up to around £15,000 will pay more tax, with some or all of their taxable earnings being taxed at 20% instead of 10%
  
  
• those earning over £15,000 will pay less tax, with some or all of their taxable earnings being taxed at 20% instead of 22%.

The overall impact on employees' take-home pay of both the tax and the NICs changes for 2008/09 is illustrated below in the Table accompanying the following section.

NICs rates and thresholds

The rates at which Class 1 NICs are calculated are unchanged for 2008/09.

The NICs lower earnings limit (LEL) and earnings threshold (ET) increase in line with retail price inflation, to £90 and £105 per week (£390 and £453 per month) respectively. However, the upper earnings limit (UEL) increases by £75 per week above indexation, from £670 to £770 per week (£34,840 to £40,040 per year), as the first stage towards aligning it, from April 2009, with the level at which the higher rate of tax becomes payable.

From April 2009, the aligned upper tax and NICs threshold will be increased by £800 a year above indexation.

Also from April 2009, a new NICs threshold, the Upper Accrual Point, will be introduced and will replace the UEL as the upper threshold for contracted-out earnings. It will be fixed at £40,040, the same as the annual UEL for 2008/09 but it will not change each year.

The effect of the 15% increase in the UEL for 2008/09 is that employees earning above £35,000 will pay more NICs, with their earnings up to £40,040 being subject to NICs at 11% instead of 1%. There is a small consistent saving in employer NICs of about £27 for the year throughout the range of salaries

The overall impact on employees' net pay of both the income tax and NICs changes for 2008/09 is illustrated in the following Table. It assumes an employee with

• tax code 522L for 2007/08 and 543L for 2008/09,
• NICs Table Letter A, and
• the same salary in both tax years.

The two "Employee Overall %" columns indicate, as a result of the combined effect of the increase or decrease in the tax and NICs due, the percentage by which an employee's

1. total amount of tax and NICs increases or decreases
2. net pay increases or decreases.

For example, an employee with a salary of £8,000 will, in 2008/09, pay 49.8% more in tax but 7.6% less in NICs than in 2007/08. The overall effect is that the combined amount of tax and NICs will increase by 22.7% and the employee's net pay will reduce by 2%.

• The individual employee limit on grants of EMI qualifying options is increased from £100,000 to £120,000. This change will apply to options granted on or after 6 April 2008.
  
  
• A new test is added that limits EMI to companies with fewer than 250 full-time employees. If a company has part-time employees, the full-time equivalent number of these can be calculated by adding to the number of full-time employees a just and reasonable fraction for each part time employee.
  
  
• This list of excluded trades is extended to include shipbuilding, coal and steel production.

The qualifying company changes will have effect in respect of EMI share options to be granted on or after the date Finance Bill 2008 receives Royal Assent. The changes will not have effect in respect of qualifying EMI share options already granted under the existing rules.

Cars and vans

Company car benefit charge

The car benefit charge for a particular company car is calculated by applying a percentage, in most cases between 15% and 35%, to the car's list price. The percentage is related to the car's CO₂ emission rating. For the 2007/08 tax year, the lowest 15% charge applies to cars with an emission rating of 140 g/km. (Emission ratings of 141 to 144 g/km are rounded down to 140.) The highest 35% charge applies to cars with emission ratings of 240 g/km or above.

From 6 April 2008, the range of emission ratings reduces to between 135 and 235 g/km. The range will reduce further to between 130 and 230 g/km from 2010.

Each time the range of ratings reduces by 5 g/km, the reportable value of a particular car for tax purposes increases by 1% from its value for the previous tax year. For example, the cash equivalent of a petrol car that is available for the whole of 2007/08 and that has a list price of £15,000 and an emission rating of 140 g/km is £2,250, i.e. 15% of £15,000. The cash equivalent for the same car for the whole of 2008/09 will be £2,400, i.e. 16% of £15,000.

Company car fuel benefit charge

A car fuel benefit charge applies to a company car when fuel is provided for the employee's personal use. The charge is calculated by applying the same percentage that is used to calculate the car benefit charge to a fixed statutory value, known as a "multiplier", for the particular tax year. The multiplier for 2007/08 is £14,400.

The multiplier for the 2008/09 tax year increases to £16,900 and, from April 2009, it will be increased each year in line with price inflation.

The effect of the increase for 2008/09 will be to increase the car fuel benefit charge for a particular car by 17.36% from its level for 2007/08. For example, using the same car that is used in the car benefit charge example above, the cash equivalent of the fuel benefit for 2007/08 would be £2,160 (i.e. 15% of £14,400). For the same car, the cash equivalent for 2008/09 will increase to £2,704 (i.e. 16% of £16,900). However, this is a 25% increase, caused by the "stealth" effect of applying the increases in the car benefit charge and the fuel benefit charge to each other.

Van car benefit charge

Section 239 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) provides that, where a benefit charge applies to the provision of a company car or van, any payments made by the employee or reimbursed to the employee in connection with the vehicle do not give rise to any tax liability. Section 239 also makes it clear that those exemptions from any tax liability do not apply to the provision of car fuel for private use - there is a separate car fuel benefit charge.

However, despite the introduction from April 2008 of a van fuel benefit charge, Section 239 fails to indicate that the exemptions from any tax liability do not also apply to the provision of van fuel for private use. This omission is to be corrected in the Finance Bill 2008.

A similar error also exists in section 269 or ITEPA, where the use of a non-cash voucher or credit token to obtain goods or services in connection with a car or van for which there is a car benefit charge is excluded from a tax charge. However, the section goes on to remove the provision of fuel for private use from that exclusion in the case of a car but not of a van. This omission is also be corrected in the Finance Bill 2008.

VAT fuel scale charges

VAT fuel scale charges to taxing private use of road fuel are adjusted to reflect changes in fuel prices and the table of CO₂ bands is amended to maintain alignment with those used for direct tax purposes. Businesses which recover input tax on fuel used for private motoring will use the new scale charges from the start of their next prescribed accounting period beginning on or after 1 May 2008.

Vehicle Excise Duty

Between 2009 and 2011, Vehicle Excise Duty (VED) will be restructured to promote the use of less polluting cars. The changes are

• introducing six new VED bands from 2009/10 for vehicles registered on or after 1 March 2001 - including a new top band (band M) for cars with a CO₂ emission rating of more than 255g/km
  
  
• reducing the standard rate, in 2009/10, for all new and existing cars with an emission rating of 150g/km or less, and an increase in the rate for high emission cars to £425
  
  
• from 2010/11, extending the zero rate of VED during first year of ownership to all new cars with an emission rating of 130g/km or less
  
  
• in 2010/11, holding the first-year rate for all new cars with emission ratings between 131 and 160g/km equal to the standard rate
  
  
• in 2010/11, introducing a first-year rate of £950 for cars with an emission rating of 255g/km or more
  
  
• providing discounts of £15 or £20 for alternatively fuelled cars in 2009/10, £10 in 2010/11, and aligning the alternative fuel and standard rates of VED in 2011.

A VED incentive will be introduced from 1 January 2009 to encourage early take-up of Euro V technology diesel vans ahead of mandatory introduction in 2011. The incentive will remain for the lifetime of the vans.

Capital allowances

From April 2009, the existing capital allowance treatment for business cars will be replaced with an approach that is based on CO₂ emission bands. Expenditure on cars with CO₂ emissions above 160g/km will attract 10% Writing Down Allowance (WDA) and expenditure on cars with CO₂ emissions of 160g/km or below will attract 20% WDA.

Mileage allowance payments

In May 2007, HMRC consulted on proposals to change the rates and thresholds for mileage allowance payments for business travel in employees' own vehicles. There has been no feedback from that consultation and, in the 2008 Budget documents, it is confirmed that no changes are being made to the rates and thresholds for mileage allowance payments (MAPs) for 2008/09. It was, however, announced that consideration is being given to align the tax and NICs treatment of MAPs when a decision is made on taxing benefits through the payroll from 2011.

Childcare vouchers

No reference is made to the taxation of childcare in any of the 2008 Budget documents, so no change is being made for 2008/09 to the £55 per week exemption for the provision of childcare vouchers or employer-contracted childcare.

Tax avoidance schemes

Scheme reference numbers

A promoter of a tax avoidance scheme is required to disclose details of the scheme to HMRC. HMRC then issues a scheme reference number (SRN) and the promoter is then required to pass on that SRN to clients who use the scheme. The client, in turn, must notify HMRC that the scheme is being used within defined time limits.

Two problems have arisen with these rules in practice. First, a promoter of a scheme does not have to disclose it to HMRC if there is more than one promoter and another promoter has disclosed it. It is possible, therefore, for a "co-promoter" not to be issued with an SRN, with the result that that promoter's clients do not inform HMRC that they are using the scheme. Second, a promoter is only required to give a client the SRN when the client implements the scheme. In practice, promoters often pass the SRN on earlier, as soon as they make the scheme available to clients, also creating the situation where the client fails to inform HMRC.

To ensure that all clients using a disclosed scheme inform HMRC, the provisions of the Finance Act 2004 will be amended so that either

• a promoter has to notify HMRC of any co-promoters at the time of disclosure and provide the co-promoters with a copy of the disclosure, following which HMRC will also notify the SRN to the co-promoters, or
  
  
• a promoter will notify the SRN to any other co-promoters, along with a copy of the disclosure.

In addition, HMRC will introduce a form for promoters to use when passing the SRN to clients which will provide instructions on what they must do with it. The legislation will also be changed so that

• a client receiving an SRN will be required to pass it on to any other person who is party to the same scheme and is likely to obtain a tax advantage from using it, and
  
  
• HMRC may withdraw an SRN, thereby removing the obligation for the SRN to be passed on to other parties or reported to HMRC.

Counteractive measures

A number of measures are to be included in the Finance Bill 2008 to counteract non-payroll related avoidance schemes involving "disguised interest" arrangements, "sideways loss relief" and the transfer of the right to receive rentals under a lease of plant or machinery.

Retrospective measures will be included in the Finance Bill 2008 to clarify that a provision Double Taxation Treaties do not exempt UK residents from UK tax on any profits of a foreign partnership to which they are entitled, and that a provision of Treaties known as the "Business Profits Article" cannot be read as preventing income of a UK resident being chargeable to UK tax.

New provisions are also to be introduced to repeal or simplify former tax avoidance measures that were flawed, excessively complex or that are now unnecessary.

Income shifting

Proposals to restrict the transfer of income to someone else who pays tax at a lower rate will not be introduced from April 2008. There will be further consultation with a view to introducing legislation from April 2009.

HMRC's review of powers, deterrents and safeguards

A new penalty regime for direct taxes, including income tax and NICs, was introduced by the Finance Act 2007. The provisions, which relate to inaccurate tax returns and failure to notify HMRC of an under-assessment of tax, apply for return periods beginning on or after 1 April 2008 where the return is due to be filed on or after 1 April 2009. The penalty is determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer.

Further measures are to be included in Finance Bill 2008 to

• extend the same penalty regime to all other taxes administered by HMRC, including the recovery of student loans by employers
  
  
• introduce new powers to inspect records, penalties for non-compliance and a criminal offence of concealing or destroying records requested by a tribunal
  
  
• facilitate the payment of taxes and duties by credit card, offset tax repayments against tax debts, and align powers to enforce civil debts.

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