Welcome to the 16th March Budget edition of Tax Tips & News.
In this analysis we have mainly concentrated on the tax measures that will directly affect individuals, employers and small businesses. We are committed to ensuring all our clients don’t pay a penny more in tax than is necessary.
This Budget was all about ‘putting the next generation first’. The Chancellor said there are tough challenges ahead – financial markets are turbulent, productivity growth across the west is too low, and the outlook for the global economy is weak. However, the Government remains committed to its long term stability plan and will continue to put the next generation first – focusing on sound public finances to deliver security; lower taxes on business and enterprise to create jobs; reform to improve schools; investment to build homes and infrastructure; and help for working people who want to save for the future.
Last year, GDP grew by 2.2%. The Office for Budget Responsibility (OBR) now forecasts GDP will grow by 2% this year, then 2.2% in 2017, and then 2.1% in each of the three years after that. Although the forecasts have been revised down, the Chancellor said that because the country’s problems have been confronted and difficult decisions taken in a long-term economic plan, the British economy is now set to grow faster than any other major advanced economy in the world.
With regards to public spending, the Chancellor said that the share of national income taken by the state will fall from its current level of 40% to 36.9% by the end of the decade, at which time the country will theoretically be spending no more than it raises in taxes. These figures mean that the Chancellor needs to be cutting public spending by an extra £35bn a year by 2019/20. There are no details yet on how this is going to be achieved, – the Treasury is to study the options.
The Chancellor focused heavily on tax avoidance and evasion. Changes in this area, which are expected to raise an additional £12bn over this Parliament, include: – shutting down disguised remuneration schemes;
– ensuring that UK tax will be paid on UK property development;
– changing the treatment of freeplays for remote gaming providers;
– limiting capital gains tax treatment on performance rewards; and
– capping exempt gains in the employee shareholder status.
In addition, public sector organisations will have a new duty to ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies. Further, loans to participators will be taxed at 32.5% to prevent tax avoidance; and the rules governing the use of termination payments are to be tightened. Termination payments over £30,000 are already subject to income tax. From 2018, they will also attract employer national insurance.
Last year’s Budget delivered various measures designed to improve productivity, such as the apprenticeship levy and the national living wage. This theme was continued in this year’s Budget Statement and, again intertwining well with the ‘putting the next generation first’ theme, the Chancellor set out five key areas for change, including plans for fundamental reform of the business tax system, devolution of power to local councils; new commitments to future national infrastructure projects; improvements to education; and incentives to help people save.
The controversial ‘sin tax’ – the sugar levy – will be introduced in 2018. The levy will be assessed by reference to the sugar contents in soft drinks. The expected £520m revenue raised from this tax will be used to extend the school day with sporting activities for children.
Faced with concerns that people are not saving for the future, the Chancellor announced that annual ISA limit will be rising from just over £15,000 to £20,000 from April next year. In addition, a new lifetime ISA will be introduced from April 2017.
This newsletter provides a summary of the key tax points from the 2016 Budget Statement based on the documents released on 16 March 2016. It is possible that changes will be made between now and the publication of the Finance Bill, which is expected on 24 March 2016. We will keep you informed of any significant developments.
Personal allowance and basic rate limit for 2017-18
The personal allowance for 2017-18 will be increased to £11,500, and the basic rate limit will be increased to £33,500. The higher rate threshold will be £45,000 in 2017-18.
Personal savings allowance
The previously announced tax-free personal savings allowance (PSA) will take effect from 6 April 2016, for savings income paid to individuals. This means that basic rate taxpayers will be able to receive up to £1,000 a year of savings income, and higher rate taxpayers up to £500 a year, tax-free. The PSA will not be available to additional rate taxpayers. Also from this date, banks, building societies and NS&I will cease to deduct tax from account interest they pay to customers.
Starting rate of savings tax
The band of savings income that is subject to the 0% starting rate will be kept at its current level of £5,000 for 2016-17.
Capital gains tax
Changes to capital gains tax rates
Legislation will be included in Finance Bill 2016 to reduce the rate of capital gains tax from 18% to 10% where the person is a basic rate taxpayer and from 28% to 20% where the person is a higher rate taxpayer or a trustee or personal representative, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest.
Provisions will also make clear that a residential property interest includes an interest in land that has at any time in the person’s ownership consisted of or included a dwelling and an interest in land subsisting under a contract for an off-plan purchase. Rules will set out how gains should be calculated in the case of mixed use properties.
This change will have effect for relevant gains accruing on or after 6 April 2016.
Disposals of UK residential property by non-residents
The capital gains tax (CGT) provisions for disposals of UK residential property by non-residents (NRCGT) are being amended. Broadly, the computations required in relation to a disposal will be corrected and HMRC will be given news powers to prescribe circumstances in which an NRCGT return is not required. In addition, CGT is to be added to the list of taxes that the government may collect on a provisional basis between Budget day (or a day after the Budget), and the coming into operation of the subsequent Finance Act.
Amendments to the computations to put beyond doubt that a double charge does not arise will apply retrospectively to disposals made on or after 6 April 2015 and, in relation to an omission in how to compute the balancing gain, to disposals made on or after 25 November 2015.
The extension of HMRC powers provisions, and the inclusion of CGT on the government’s provisional basis collection list, will apply from Royal Assent to Finance Act 2016.
Changes to rules to extend availability of Entrepreneurs’ Relief on associated disposals
Entrepreneurs’ Relief will be allowed on an ‘associated disposal’ of a privately-held asset when the accompanying disposal of business assets is to a family member. Relief can also be claimed in some cases where the disposal of business assets does not meet the present 5% minimum size condition.
Finance Act 2015 introduced new rules to combat abuse of ER. Whilst preventing the abuse, those rules also resulted in relief not being due on ‘associated disposals’ when a business was sold to members of the claimant’s family under normal succession arrangements. It was announced at Autumn Statement 2015 that changes to mitigate the impact of the Finance Act 2015 rules on associated disposals in these circumstances were being considered. Legislation will be included in Finance Bill 2016 and the changes will be backdated to 18 March 2015, the date on which the Finance Act 2015 measures became effective.
This will be welcomed by owners of businesses who are retiring or reducing their participation in their business and passing it to other family members.
Entrepreneurs’ relief: extension to long-term investors
The Chancellor announced that Entrepreneurs’ relief (ER) will be extended to external investors in unlisted trading companies.
The extension to ER, introducing investors’ relief, will apply to gains accruing on the disposal of certain qualifying shares by individuals (other than employees and officers of the company). In order to qualify for relief, a share must: – be newly issued, having been acquired by the person making the disposal on subscription for new consideration;
– be in an unlisted trading company, or unlisted holding company of trading group;
– have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016;
– have been held continually for a period of three years before disposal.
The rate of capital gains tax charged on the qualifying gain will be 10%, with the total amount of gains eligible for investors’ relief subject to a lifetime cap of £10 million per individual. Rules will ensure that this limit applies to beneficiaries of trusts.
As the relief is designed to attract new capital into companies, avoidance rules set out in the Finance Bill 2016 legislation will ensure that shares must be subscribed for by individuals for genuine commercial purposes and not for tax avoidance purposes.
This change extends ER to external investors and is intended to provide a financial incentive for individuals to invest in unlisted trading companies over the long term.
Lifetime limit on employee shareholder status exemption
The Chancellor announced that for Employee Shareholder shares issued as consideration for entering into Employee Shareholder Agreements from midnight at the end of 16 March 2016 there will be a lifetime limit of £100,000 capital gains tax (CGT) exempt gains. Any past or future gains, realised or unrealised, on Employee Shareholder shares that were issued in respect of Employee Shareholder agreements made before midnight at the end of 16 March 2016 will not count towards the limit.
When Employee Shareholder shares issued as consideration for entering into Employee Shareholder Agreements from midnight at the end of 16 March 2016 are disposed of, gains made in excess of the lifetime limit will be chargeable to CGT.
For transfers of Employee Shareholder shares between spouses or civil partners, the transfer will be treated as being for consideration which gives rise to a gain equal to the transferor’s unused lifetime limit, subject to the over-riding condition that the consideration does not exceed the market value of the shares transferred. This amount will fix the acquisition cost in the hands of the spouse.
Reforms to the taxation of non-domiciles
The existing inheritance tax (IHT) deemed domicile provisions for individuals are to be aligned with the proposed changes for income tax and capital gains tax. This will mean that an individual will become deemed domiciled for IHT purposes if they have been resident in at least fifteen of the previous twenty tax years (the ‘long-term residence rule’).
In addition, individuals born in the UK with a UK domicile of origin at birth who subsequently acquire a domicile of choice elsewhere will be deemed domiciled for IHT purposes whilst they are resident in the UK, provided they were resident in at least one of the previous two tax years (‘returning UK domiciles’).
Overseas property settled into trust by returning UK domiciles while they were domiciled elsewhere will also be subject to IHT once the individual has been resident in the UK in at least one of the previous two tax years. However, once the individual leaves the UK and ceases to meet the residence conditions, that trust property will be excluded for IHT purposes. These changes will apply from 6 April 2017.
Treatment of pension scheme drawdown funds on death
The scope of the current inheritance tax (IHT) exemption is to be extended, so that the failure to draw down all of the designated funds before a pension scheme member’s death will not trigger an IHT charge. This minor change will ensure that the exemption applies as originally intended, and will therefore be backdated and apply to deaths on or after 6 April 2011.
Compensation and ex-gratia payments for victims of persecution during the World War 2 era
The practice currently afforded by extra statutory concession (ESC) F20, which gives an inheritance tax (IHT) exemption in respect of certain compensation and ex-gratia payments for World War 2 claims, is to be put on a statutory footing. In addition, the scope of the existing concession will be extended to include a one-off compensation payment of £2,500 made under a recently created scheme known as the Child Survivor Fund, and will allow the Treasury to add any further schemes to the current list by way of regulations.
The current ESC had effect until 1 January 2015, but the legislation to be included in Finance Bill 2016 will be backdated to that date.
Cut in corporation tax rate
The rate of corporation tax will be reduced to 17% with effect from 1 April 2020 instead of the 18% rate previously announced.
Following the OECD/G20 Base Erosion and Profit Shifting project and subsequent HMRC consultation in 2015, rules will be introduced to address hybrid mismatch arrangements. The rules will take effect from 1 January 2017 and will prevent multinational enterprises avoiding tax through the use of certain cross-border business structures or finance transactions.
Insurance linked securities
Finance Bill 2016 give the Government powers to make statutory instruments to deal with the treatment of insurance linked securities issued in the UK. Insurance linked securities are a means of transferring insurance risk to capital market investors. The legislation will allow regulations to determine the vehicles to which the rules will apply, the treatment of such vehicles, the conditions that must be satisfied to achieve that treatment, reporting requirements, the tax treatment of payments to investors in such vehicles and anti-avoidance provisions.
Rate of tax for the loans to participators charge
With effect from 6 April 2016, the rate of tax charged on loans to participators and other arrangements will be increased to the dividend income upper rate of tax of 32.5% from the existing rate of 25%.
Securitisation and annual payments
Existing regulation making powers concerning the taxation of securitisation companies will be changed to permit changes to existing regulations concerning the treatment of ‘residual payments’ made by securitisation companies. The changes will clarify that ‘residual payments’ will not be treated as annual payments which means that they can be paid without a withholding tax deduction.
The measure will be enacted in Finance Bill 2016 effective from the date of Royal Assent and the securitisation regulations will be changed following public consultation.
Updating the transfer pricing guidelines
Transfer pricing legislation will be updated to provide that the definition of ‘transfer pricing guidelines’ incorporates the revisions to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD in October 2015. These revisions were agreed as part of the OECD Base Erosion and Profit Shifting project. This measure will be achieved by updating the link between the UK transfer pricing rules and the OECD Guidelines which means that applying the UK rules will be done by reference to the revised OECD Guidelines. It will be enacted in Finance Bill 2016 effective for accounting periods beginning on or after 1 April 2016.
Extension of enhanced capital allowances for Enterprise Zones
The government is to ensure that all Enterprise Zones can offer Enhanced Capital Allowances (ECAs) for eight years from the establishment of relevant sites. ECAs in the form of a 100% first-year allowance for expenditure incurred by companies on qualifying plant or machinery in various assisted areas in Enterprise Zones (subject to certain conditions) were originally introduced for a five year period from 1 April 2012 to 31 March 2017. This was extended for a further three years to 2020, giving eight years of ECAs. From Royal Assent of Finance Bill 2016 the government propose that all Enterprise Zones will be entitled to eight years of ECAs from the date of their announcement.
The government is also to create a new Cornwall MarineHub Enterprise Zone, extend the Sheffield City Region Enterprise Zone (subject to necessary approvals and agreements) and create new Enterprise Zones at Brierley Hill and Loughborough and Leicester (subject to business case).
Business Tax Roadmap
The Business Tax Roadmap is a comprehensive document summarising the changes made to business taxation since 2010, and setting out various measures to take effect in the coming years as the government seeks to stimulate growth, respond to the OECD’s BEPS project and modernise the tax system. The roadmap can be found here.
Trading income received in non-monetary form
Legislation will be enacted to ensure that trading and property income received in non-monetary form is fully brought into account in calculating taxable profits for income tax and corporation tax purposes. The legislation will have effect in relation to trading and property business transactions occurring on or after 16 March 2016. State aid modernisation
In response to European Commission moves to modernise state aids, HMRC are to be given additional powers to collect information on state aids and to share this with the European Commission. The new powers will be provided for by legislation to be introduced in Finance Bill 2016 and will take effect from 1 July 2016.
Vaccine research relief
Vaccine research relief is to be removed in respect of expenditure incurred on or after 1 April 2017.
Representatives for overseas businesses and joint and several liability for online marketplaces
There are two aspects to this measure designed to protect the UK market from unfair online competition. Both come into effect from Royal Assent to the Finance Bill 2016.
Firstly, HMRC’s power to direct an overseas business to appoint a VAT representative with joint and several liability is to be made more effective and HMRC is to be given greater flexibility when it comes to seeking security.
Secondly, HMRC will be allowed to hold an online marketplace jointly and severally liable for any unpaid VAT of an overseas business that sells goods in the UK on that marketplace. The notice so doing will specify a period of time (usually 30 days) during which the marketplace can avoid the liability by either securing the compliance of the overseas business or removing it from its online marketplace.
HMRC are to use these changed powers at their discretion on the highest risk cases. They will contact the overseas business directly in the first instance to gain compliance. If that fails then they will look to compulsorily register the overseas business for VAT in the UK, direct the appointment of a UK-established VAT representative or require an appropriate form of security. If compliance is still not forthcoming HMRC will then use its new power to put the relevant online marketplace on notice of joint and several liability.
HMRC will endeavour to give prior warning of any potential joint and several liability notice but where significant VAT revenue is identified no prior warning may be given. HMRC have advised that they will seek to collect the debt from a UK representative with joint and several liability first.
Revalorisation of registration and deregistration thresholds
From 1 April 2016, VAT thresholds are to be increased in line with inflation making the registration limit £83,000 (previously £82,000) and the deregistration limit £81,000 (previously £80,000). The limit applying to EU acquisitions also rises from £82,000 to £83,000.
Air passenger duty: rates
The rates of air passenger duty in relation to carriage of chargeable passengers on or after 1 April 2017 have been increased in line with the RPI. The increase in rates from 1 April 2016 which was announced in Budget2015 is confirmed.
Climate change levy: main and reduced rates
The climate change levy rates for supplies on and after 1 April 2017 and 1 April 2018 are increased in line with RPI. The rates from 1 April 2019 are to be increased to cover the lost revenue from the closure of the carbon reduction commitment.