Emergency budget 2010: how it affects you

Posted on Analysis Sep 2010 - by Tandoori Magazine

Justin Randall, partner at Jeffreys Henrys LLP, looks at how the new budget will have an impact on the restaurant trade. Justin Randall is a partner at Jeffreys Henrys LLP, a leading firm of chartered accountants in London.

George Osborne, our new chancellor, has introduced his first budget which was, as expected, adorned with large cuts in public spending coupled with heavy tax rises in an effort to combat the deficit.

The chancellor introduced an eye-catching 2.5% increase in VAT and a rise in capital gains tax. However, both large and small company corporation tax are to be reduced, and employers will be spared the increase in national insurance contributions planned by the last government.

But how does the latest budget affect you?
VAT —The standard rate of VAT is set to rise from 17.5% to 20%, taking effect from 4 January 2011. VAT registered restaurants will need to make a decision whether to pass the costs onto the customer by increasing prices, or maintain prices and
cut into profits.

Non-VAT registered restaurants should expect to see the cost of supplies increase by 2.5% after January 4 and consider making big-ticket purchases as soon as possible.

Corporation Tax - Starting from April 1 2011, the headline rate of corporation tax will be reduced by 1% each year until it reaches 24%. The small companies Corporation Tax rate (for companies with profits of less than £300,000) will also be reduced next year from 21% to 20%.

If you are operating a restaurant as a sole trader or partnership and have profits taxed at 40% or above, you might consider trading through a company. This could allow you to take advantage of the lower corporation tax rates and opportunities to reduce national insurance.

National Insurance - The cost of employing staff in certain circumstances will fall. From April 2011, the threshold at which employers start to pay national insurance will rise by £21 per week to £131 per week.

Moreover, restaurants that have set up outside London and the south-east will not have to pay employers national insurance contributions on the first 10 employees, capped at £5,000 per employee. Other rules apply.

Capital Allowances - Capital allowances enable the cost of certain fixed assets to be written off against the taxable profits of a business. From April 1 2012, the main rate will be reduced from 20% to 18% and the special rate from 10% to 8%. The Annual Investment Allowance (AIA) Limit is also reducing from £100,000 to £25,000 from April 1 2012.

Small businesses will not be affected if all of their expenditure on equipment is within the AIA limit, which gives 100% deduction for costs in the year of purchase. Unfortunately, expenditure on cars cannot be covered by the AIA. However, expenditure on new (not second-hand) low emissions cars and vans can be covered by a separate 100% allowance.

Capital Gains Tax (CGT) - As anticipated, the rate of CGT has gone up. From June 23 2010, there are two CGT rates on gains made on the sale of assets. The CGT for basic rate taxpayers remains at 18%, but for higher rate taxpayers it rises to 28%.
However, capital gains reliefs on sales of business-related assets have been extended and it is therefore vitally important that business owners ensure they qualify for the reduced 10% rate.

Income Tax - The personal income tax-free allowance is to rise next April by £1,000 to £7,475 for those aged under 65.
Paying large salaries to the owner/directors of a restaurant is usually costly from a tax point of view. It may well be preferable to extract profits from companies as dividends, interest on money lent by the owner or charge rent on the restaurant premises owned personally.  The points raised are only intended to provide general information and require careful planning. Professional advice should always be sought in specific situations before taking any action.

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