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The Riley take on Budget 2012

23 March 2012 No Comment

I would have thought it unlikely that we would see the term “Granny tax” trending on Twitter but that’s what George managed to achieve yesterday.┬áNick Clegg had claimed in the pre-briefings that this year’s budget was the “Robin Hood” budget, taxing the rich to pay the poor. But George Osborne wasn’t quite listening properly when he said that and has proceeded to tax the old to pay just about everyone else! OK, so that’s a bit of a sweeping generalisation but it will be one of the lasting impressions left by the Budget of 2012. Robert Peston says, “It’s easier to tax pensioners than rock stars” and Nick Robinson commented that “Tony Blair once compared angry pensioners to “rottweilers on speed“. He learnt the lesson that in a battle between the old and any politician there is only ever one winner.”

The other is that feeling that in common with many budget speeches this was one in which what was said at the despatch box was very different to what had been written in the technical releases – so the impact of what George said lasted all of five minutes.┬á┬á

Here’s a summary of the main changes announced;

Corporation Tax

  • The main rate of corporation tax is to be reduced by an unexpected 1% to 24% from 1 April 2012 and by 1% annually for the next two years to end up at 22%, the small companies rate remains at 20%, no benefit for SME’s with annual profits below the ┬ú300,000 limit.
  • No changes were announced to any of the thresholds for profits at which the different rates kick in.
  • R&D tax relief for SMEs has been increased to 225% from 1 April 2012 and an “above the line credit” will be introduced for large businesses from April 2013, with a minimum rate of 9.1% before tax and payable credit for companies making losses.
  • Don’t forget (as if you could) that the Patent Box rules are phased in from April 2013 to produce a 10% future corporation tax rate on profits from qualifying patents.
  • The 100% capital allowances on plant and machinery have been extended to some Scottish & Welsh and London Enterprise Zones from 1 April 2012 (but not in all Enterprise Zones including Newquay).
  • Significant oil and gas tax changes were announced relating to new fields and decommissioning to secure additional investment in the UK. Perhaps this reflects the “raid” George made in 2011 when he was even shorter of cash – cynical? Moi?
  • Apparently the film tax credit approach has been so successful that it is to be mirrored for video games, animation and high-end TV production from April 2013. The aim being to make the UK the world leader in these fields.
  • It may have slipped your notice but it appeared earlier in this section that the cut in corporation tax could also benefit the nations’ favourite workers, the “greedy bankers” as the tabloids would characterise them. But “never fear, George is here” – he had thought that one through and the bank Levy will be increased to 0.105% from 1 January 2013 to counteract the benefit of the additional corporation tax rate reduction.
  • The government announced a consultation on the potential role for social housing Real Estate Investment Trusts (REITs) to support investment in this sector.
  • The Government confirmed that Finance Bill 2012 will┬ácontain the final draft of the new Controlled Foreign Company (CFC) rules. This marks┬áthe conclusion of a Government programme, which started┬áin 2007, to modernise the rules for the taxation of foreign┬áprofits and make the UK more attractive to international┬ábusiness. It’s all about challenging “the artificial diversion” of┬áprofits from┬áthe UK and includes such gems as┬áÔÇÿall out unless inÔÇÖ and the┬áeye-catching Partial┬áFinance Company Exemption (PFCE). Please can someone phone Bernice about these as the rest of us won’t talk to her about it and she gets grumpy if she can’t talk CFC at least once a day.┬áThe new rules will apply for accounting periods beginning┬áon or after 1 January 2013.
The majority of the changes are wholly beneficial for business and should be welcomed. The government are obviously adopting a clear policy of backing industries where UK business has already developed a competitive advantage. Many of these policies should encourage further investment. However, in amongst all the comment the clear view appears to be that most businesses, SME’s in particular would rather have seen a 1% cut in the Employers NIC burden to encourage employment than a 1% cut in corporation tax particularly as only the large company rate has been reduced.

Capital allowances

  • No further detail was announced in Budget 2012 on the┬ánew rules relating to fixtures. We are still expecting the new┬álegislation to be published in Finance Bill 2012 which will┬átighten the rules on claiming capital allowances on fixtures┬áin a second hand property, effective from April 2012. The┬áchanges principally introduce a time limit for identifying┬áqualifying expenditure and a prescribed method of valuing┬áthat expenditure.
  • The 100% first year allowances for low emission cars┬áwill be extended for 2 years beyond the current expiry┬ádate of 31 March 2013. Don’t worry though, it’s not a simple give-away as the qualifying┬áthreshold will be reduced to 95g/km (down from┬á110g/km) from April 2013 to match EU emissions┬átargets for 2015. So┬ábusinesses can claim heightened allowances on any┬ásuch purchases until at least March 2015, but it┬áwill be more difficult to meet the requirements to be┬ágranted the accelerated relief.
  • The emissions threshold on “big” cars on which a business can only claim reduced┬áwriting down allowances (8% rather than 18%) will be┬áreduced to 130 g/km (down from 160 g/km) from April┬á2013 to match EU emissions targets for 2020. The┬áassociated lease restriction will also mirror this new┬áreduced threshold. So for business buying expensive, polluting cars, this will mean reduced capital┬áallowances for cars which┬áfall above this new threshold.
  • For those of you about to commence the building works on a┬ágas,┬ábiogas and hydrogen refuelling stations (and I know a number of you are), you’ll be pleased to know that the availability of 100% first year allowances for these will be┬áextended for two years beyond the current expiry date┬áof 31 March 2015.

Other business tax issues

  • The company car benefit in kind charge on which tax and┬áClass 1A NICs is based is calculated on a┬ápercentage based on the level of CO2 emissions, multiplied┬áby the list price of the car. Currently these┬árange from 5% to 35%. The Budget announced increases in┬áthe percentage, an increase in the cap from 35% to 37% in 2015/16,┬áand also a withdrawal of the diesel supplement from 2016/17.

    Perhaps this is the time to review your company car policy to take these changes into consideration and check whether cash alternatives or other measures should now be introduced for company car drivers.

  • Employees who are provided with free fuel for private┬ámotoring by their employers suffer a benefit in kind charge┬áon which tax and Class 1A NICs charges are based.┬áThis┬ácharge currently ranges┬ábetween ┬ú940 and ┬ú6,580. For 2012/13 this will increase to┬ábetween ┬ú1,010 and ┬ú7,070. For┬á2013/14┬áGeorge intends┬áto increase the fuel benefit charge again but he won’t┬áconfirm the level of increase until autumn 2012 just to keep your interest levels up. I can tell it’s not really working is it?
  • Now I know you’ve all been waiting for me to mention the QROPS – you know, the┬áQualifying┬áRecognised Overseas Pension Schemes rules so here we go.┬áTax-free transfers of UK pensions to overseas pensions┬áhave been permitted under the QROPS rules since 2006,┬ábut HMRC has been getting ever stroppier about abuses,┬ágenerally involving pension funds being released early and┬ánot used for retirement purposes. So they have now tightened up the rules on transfers with more rigorous reporting and transfer┬áprocedures. These include the terrifying requirement that the┬átransferring member signs an HMRC form to acknowledge┬áthat there may be dire tax consequences if the rules are┬ánot followed!
  • HMRC are aware that some employers have been making┬ápension contributions into their employeesÔÇÖ family┬ámembersÔÇÖ pensions as part of their remuneration package┬áto obtain tax and NICs advantages typically using┬áa Self Invested Personal Pension.┬á┬á- surely not? Anyway, George is going to stop that party with┬álegislation┬áin Finance Bill 2013.
  • Following the Office of Tax Simplification (OTS) review of small┬ábusiness taxation, the government will consult on┬áintroducing a voluntary cash basis for accounting for unincorporated┬ábusinesses up to the VAT registration threshold (currently┬á┬ú77,000), with a view to introducing legislation in Finance┬áBill 2013. The proposals include a simplified expenses┬ásystem for business use of cars, motorcycles and home. In our opinion anyone running a business should be aware of what they owe and are owed, how else can they run their business? However, there could potentially be a tax advantage to adopting the proposed new system but we’ll have to see what the OTS produce. Is it my imagination that the OTS sounds remarkably like “otiose” – definition:┬á”serving no useful purpose”?

Income tax

  • As announced last year, the personal allowance is to increase to ┬ú8,105 from 6 April 2012 but this is being funded by a corresponding reduction in the higher rate threshold.
  • The new announcement was that from 6 April 2013, the personal allowance will increase by ┬ú1,100 to ┬ú9,205 but only a quarter of this additional benefit is being passed on to higher rate taxpayers. This means that although 800,000 earners drop out of the tax system at the bottom, 300,000 are also pushed into the 40% band by the reduction in that threshold – you know the rules, “he giveth with one hand and with the other he takes away”.
  • And so to the “Granny tax” – from 2013/14 the higher income tax personal allowances┬áfor the over 65’s are to be restricted. For 2012/13┬áthe allowance of ┬ú10,550 is restricted to those born after┬á5 April 1938 and before 6 April 1948. The allowance of┬á┬ú10,660 for 2012/13 is restricted to those born before 6┬áApril 1938.┬áFrom 2013/14 it is proposed that these allowances will not┬ábe increased and that people born after 5 April 1948 will┬áonly be entitled to the normal personal allowance of┬á┬ú9,205. George is obviously┬átrying to support the goal┬áof a single personal allowance for all taxpayers┬áregardless of age and spread tax relief equally across┬áworking age people and pensioners.
  • No changes were announced to basic (20%) or higher (40%) rates of tax, or to the tapering of personal allowances on earnings over ┬ú100,000.
  • However, the 50% rate has been reduced to 45% from 6 April 2013 as it has “damaged the economy and raised next to nothing”. The price George paid for this with his coalition “partners” is shown in the additional personal allowance and the stamp duty changes below. These changes mean that the new effective top rate for tax on dividends will be 30.6%.
  • Surprisingly for many commentators, no changes were announced to pension contributions tax relief.
  • You’ll all be pleased to know that from April 2014, HMRC aim to provide a new Personal Tax┬áStatement, which will be available to all individuals who┬áfile their Self Assessment return online. It will detail how much tax and┬áNational Insurance taxpayers have paid, the average rate┬áof tax paid and, joy of joys, explain how those deductions contribute┬áto public expenditure. In our opinion this will just wind up the majority of tax payers who open the envelope, rail against the levels of wasteful expenditure and then throw it in the bin.
  • A summary of the responses to consultation and draft legislation for the Statutory Residence Test to be published shortly. I’m sure they said that last year too?
  • Now here’s a strange one. George proposes to put a cap on the total ┬áamount of income tax reliefs that an individual may claim┬áfrom 6 April 2013. It is proposed that a limit will be set at┬á25% of income on all uncapped income tax reliefs for┬áanyone seeking to claim more than ┬ú50,000 of reliefs. Apparently, the cap is designed to prevent individuals with potentially┬álarge income tax liabilities from utilising the array of┬áincome tax reliefs currently available to substantially┬áreduce or eliminate their income tax bill. We’re not really sure how this will work yet but draft legislation will be available for consultation later in┬áthe year, with a view to the measures being introduced┬áfrom 6 April 2013. The proposals should not apply to reliefs┬áthat are already capped such as pension contributions, EIS┬áor VCT.
One of the reasons for the very low collections of tax at 50% has been the ability of many business owners to defer payments to themselves to future tax years. No doubt there will be further deferral where possible until after 6 April 2013. It appears quite clear that the 45% rate will be removed as soon as they have an opportunity to do so.
While there is obviously relatively good news for those at the lower end of the tax ladder but those around the higher rate threshold will be remembering why the press has dubbed them the “squeezed middle”. And those earning ┬ú100,000 will be wondering how their marginal rate of tax is still remaining at 62%. Meanwhile, older members of society are already questioning what the hell is going on in a sector that has traditionally been protected from George’s beady eye.

National insurance

  • No changes announced to main rates.
  • Detailed consultation on integrating the operation of NIC and income tax to be launched in April 2012. We all thought they were going to do this last year but no, far better to have an even longer consultation. Why not just get it over and done with and just merge the two taxes. After all, unless the NIC is hypothecated for pension purposes, (yeah, right!) what’s the point?

Capital gains tax

  • No change to headline 18% or 28% rate
  • Entrepreneurs’ Relief remains at 10% on lifetime qualifying gains of ┬ú10m.
  • The Enterprise Management Initiative individual grant limit is to be increased to ┬ú250,000 of options and the qualifying conditions have been relaxed.
  • Entrepreneurs’ Relief will be extended to gains on shares acquired through an EMI option in 2013.┬áThis effectively means that gains on options will be taxed at the lowest rate of 10% after the one year holding requirement has been met – there is no proposal to relax this time limit.
  • CGT will apply to gains on UK residential property held by overseas companies from April 2013.
The extension of Entrepreneurs’ Relief to EMI shareholdings is very welcome given the still very real difference between income tax rates at 45% and CGT with Entrepeneurs Relief at 10%. And the general extension of the EMI thresholds and some criteria will be useful if it’s not curtailed by often complex qualifying criteria.
The planned extension of CGT to property gains will require many to re-evaluate ownership structures and plan accordingly.

Stamp Duty Land Tax

  • No changes announced to the pre-existing rates and thresholds.
  • The avoidance of SDLT through what’s known as “Sub-sales planning techniques” to be blocked from 21 March 2012 and further avoidance schemes may also be blocked from that date.
  • 7% SDLT will apply from 22 March 2012 to residential properties costing over ┬ú2m.
  • 15% SDLT will apply from 21 March 2012 to residential properties costing over ┬ú2m that are held within a company, with consultation to introduce an additional annual charge from April 2013.
  • Clear warning not to plan around the new rules or face the consequences.
This is the major tax increase for “rich” property buyers and, potentially owners, and will require reviews of the ownership structures of all significant holdings of UK residential property. It was not unexpected, should prove easier to collect than 50% income tax, and yet again the new rates have been designed to deter planning. Whether this (coupled with the reduction of the top tax rate) will raise the much vaunted five times the amount that the 50% band raised is obviously open to speculation. Apparently these changes will spur behaviour changes amongst the “rich” – I think that this is highly unlikely.

Inheritance tax

  • No change announced to headline 40% rate.
  • Threshold remains at ┬ú325,000 (frozen until 5/4/15).

Indirect tax

  • All VAT rates are unchanged but the registration threshold has been increased to ┬ú77k from 1 April 2012.
  • A measure will be introduced to ensure that all sales of┬áhot food (with the exception of freshly baked bread) are┬ástandard-rated. This is acceptance by HMRC that their interpretation of the current rules has been wrong and will encourage claims by businesses under the old rules.
  • Other VAT anomalies will be reviewed so that the same rate applies to all similar goods and services. These include sports drinks, hairdressers “rent a chair” schemes and self-storage.
  • The rates of Machine Games Duty have been announced,┬áand these will be┬á5% for machines where the stake is no more than 10p┬áand the maximum prize is ┬ú8; and┬á20% for all other machines. These┬árates are higher than was expected and many say they will┬áhave an adverse effect on the Industry as a┬áwhole. Many pubs will become partially exempt and┬ápotentially have to restrict their VAT recovery under┬áthe partial exemption rules.
  • Further reviews of loopholes will be undertaken.

Other tax announcements

  • The Government announced in Budget 2011 that it is┬ácommitted to keeping the legislation for Personal Service Companies (PSCs) or┬áIR35 as we know it. In Budget 2012 George announced that a┬árange of measures will be introduced to tackle IR35┬árelated tax avoidance, including the strengthening of┬áspecialist compliance teams (more IR35 attack dogs) and the simplification (unlikely!) of the┬áadministration of IR35.┬áIt has also signalled that in Finance Bill 2013 measures will┬ábe introduced requiring office holders or ÔÇÿcontrolling┬ápersonsÔÇÖ who are integral to the running of an organisation┬áto have PAYE and NICs deducted at source by the┬áorganisation which engages them.┬áThis measure follows recent high profile examples from right under their own noses in the┬ápublic sector – unbelievable that these had been “approved” too! Potentially, the largest┬áimpact could be for employers who currently have┬áexecutive or non-executive directors on the board who┬áoperate via a PSC. This will further complicate┬ácompliance, as at present an employer may have a PAYE┬áand/or NIC liability if a PSC is registered offshore, or if┬áit is the individual and not the PSC that is registered┬áwith Companies House as a board member. Following┬áthe introduction of this measure the employer may have┬áa PAYE/NIC liability regardless of how the board member is “engaged”.
  • George has taken just about as much flack as he could take on the withdrawal of child benefit and has decided that enough is enough. He’ decided to remove the previous “cliff edge” proposal and introduce a much more gentle slope to oblivion instead.┬á
    Under the new proposals, from 7 January 2013 any┬áindividual whose income exceeds ┬ú50,000 and who is in┬áreceipt of child benefit will be subject to an additional tax┬ácharge. The charge will also apply to any taxpayer whose┬áincome exceeds ┬ú50,000 and whose partner is in receipt of┬áchild benefit. And if both partners have an income that┬áexceeds ┬ú50,000 the charge will apply to the partner with┬áthe higher income.┬áThe charge will be 1% of the amount of child benefit for┬áevery ┬ú100 of income that exceeds ┬ú50,000 so that the┬ácharge will equal the full amount of the child benefit┬áwhere a taxpayerÔÇÖs income exceeds ┬ú60,000. While this is better than the previous proposal, it’s pretty obvious that the aforementioned Office of Tax Simplification didn’t have a lot to do with it! Perhaps they were “at lunch”┬áon that day…
  • There are various anti-avoidance measures relating to both Life Insurance policies and excluded property trusts. They’ve had a go at both these before and failed. This is their attempt to deliver the final death knell and I’m sure we all wish them well with that.
  • Surely you are all the beneficial owners of┬áundeclared funds in Swiss bank accounts? If that’s true,┬áyou will be subject to┬áa one off levy on your Swiss funds. This levy will be┬ábetween 19% and 34% of the funds held.┬áAdditionally, undeclared accounts will also be subject to a┬ánew withholding tax from 1 January 2013. The rates of the┬ánew withholding tax are 48% on investment income, 40%┬áon dividends and 27% on capital gains.
  • A General Anti-Abuse Rule will be consulted on, introduced, and legislated in FA2013 as expected.┬áA GAAR could make it easier for HMRC to more┬áeffectively deal with the most aggressive of tax┬áavoidance schemes. This is in line with the approach that HMRC are taking and illustrates the difficulty of defining the gap between their┬áperceptions of tax evasion, tax avoidance and aggressive┬áplanning. George did get pretty exercised during his speech on the whole “abuse thing” and called it “morally repugnant” while warning of dire consequences for those undertaking it. We think he’s been reading too many┬áDaily Mash articles ourselves.

How widely drawn will the GAAR will be? Well, we will have to wait and see but if it’s too far reaching, it’s┬ádifficult to see how it can be sensibly introduced┬áwithout some form of clearance mechanism to give┬ácertainty for taxpayers. Other GAAR’s overseas are regularly ruled to be┬áineffective by the court system, often because they are too widely┬ádrawn. George says that the proposal is not aimed at legitimate tax planning such as disposing of┬áassets in an efficient way for capital gains tax. Our expectation would be that if there is a legitimate explanation, or valid commercial reason for a tax relief being┬áutilised, we would not expect this to be targeted by the GAAR but we wait, with bated breath, for the details of the proposal. No really, we do!

And finally

It was revealed on Tuesday that the average purchase on civil servants’ credit cards is ┬ú184. In two thirds of the audited transactions, no one could find a receipt or invoice to support the claim. Since all businesses have to keep their supporting receipts for seven years, I’m not quite sure why civil servants are allowed to file theirs in the bin. This is of course the trouble with transparency: behaviour only improves after it has been scrutinised and found wanting, and sometimes not even then!

As always, please give us a call to discuss anything arising from the text above or indeed other coverage of the budget. We, especially Bernice (01752 203651) and Nicola (01752 203600) have been trolling through the legislation and guidance as it’s being released and would welcome any excuse to talk to a real person.

Jon

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