Pre-Budget Report

The Chancellor presented his Pre-Budget Report in December 2006 and gave advance warning of some changes to come.

Individual Savings Accounts (ISAs)

The government is now making the ISA a permanent feature of the savings landscape. Changes include:

• the overall annual investment limit will be at least £7,000
• the mini/maxi distinction within the ISA will be removed
• individuals with funds saved in the cash component of ISAs from previous years will be able to transfer those funds into the stocks and shares component without affecting their annual investment limit
• Personal Equity Plans will be brought within the ISA ‘wrapper’.

Alternatively Secured Pensions (ASPs)

The pensions tax rules require an individual to secure an income before they reach the age of 75. Most people will have an annuity or scheme pension but an ASP was provided as an alternative. ASPs were designed for those who have a principled religious objection to annuitisation.

To restrict the use of ASPs to their original limited purpose the government is:

• introducing a minimum income requirement of 65% of the annual amount of a comparable annuity
• setting a higher maximum income withdrawal of 90% of the annual amount of a comparable annuity
• imposing an unauthorised payments charge where ASP funds remaining on the death of a member are transferred to pension funds of other members in the scheme.

There is currently an inheritance tax charge on left over ASP funds on the death of the scheme member and the government is considering how this will work and interact correctly with the new unauthorised payment provisions.

Managed Service Companies (MSCs)

In 2000 the government introduced rules to tackle the provision of services through Personal Service Companies (PSCs). PSCs were designed to ‘disguise employment’ by placing an intermediary, usually a company, between the payer and worker. This minimised the amount of tax and national insurance contributions (NIC) due by paying that worker predominantly with dividends.

MSCs attempt to avoid the PSC rules. The types of MSCs vary but are often referred to as ‘composite companies’ or ‘managed PSCs’. HMRC have encountered difficulty in applying the PSC rules to MSCs because of the large number of workers involved and the labour-intensive nature of the work. Even when the rules have been successfully applied, an MSC can often escape payment of outstanding tax and NIC as they have no assets and can be wound up.

The government has therefore decided to remove MSCs from the PSC rules and introduce new rules from April 2007. The intention of the new rules is to:

• ensure that those working in MSCs pay tax and NIC at the same level as other employees
  alter the travel and subsistence rules for workers of MSCs to ensure they are consistent with those for other employees
• allow the recovery of outstanding tax and NIC from ‘appropriate third parties’.

The proposals are a recognition by HMRC that they do not have the resources to enforce the PSC rules across the country. It will be interesting to see if the government takes further steps to tackle the tax and NIC savings that can be made by using dividends.

Other changes

Other changes announced include:

• flight costs increase - Air Passenger Duty rates have been increased from 1 February 2007
• capital losses - specific rules were introduced last year to target ‘contrived’ capital losses created by companies. These rules have been extended to individuals.

Please contact us if you would like any more details on these changes.