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Budget 2014- “If you are a maker, doer, saver, this budget is for you”

20 March 2014 No Comment

Just as George launched into a traditional pre-election give-away, the journalist Sunny Hundall tweeted “Osborne: “If you are a maker, doer, saver, this budget is for you” The rest can bugger off? #budget2014” which, as it turns out, is a pretty good cynical summary. And if I can’t be slightly cynical here…

In fact, this budget may be even more focused than the original headline suggests. And while I can’t remember an election pledge of “Generational Jihad”, it’s pretty clear that this Budget was aimed squarely at the elderly. Jonathan Freedland, writing in the Guardian said “older Britons have already been insulated from the worst of the spending cuts and are no longer any likelier to be in poverty than any other age group. Osborne knows about the struggles of today’s young to find decently paid work or own their home. But they vote less – and so matter to him less.” And don’t forget, David Cameron once promised that this would be the “greenest government ever” and he’s always struggled to spell “grey”.George used an improving economic situation to deliver a speech with swagger. He took aim at the Scottish referendum by belittling North Sea Oil reserves but protecting Scotch Whisky, grabbed tabloid front pages by helping “booze and bingo” and “polished his halo” by giving money to scouts, guides, cathedrals, air ambulances and lifeboats.

Miliband’s response was seriously lacking in any coherence I could see and mostly appeared to relate to the budget of 2012. It appears that Labour has no economic plan of its own and because Miliband had no framework to refer to, he could only scream “you smell!” at the government front bench.

If you can’t be bothered to read the detail below, you could always have a look at the summary produced by The Huffington Post. And so to the serious bit…

Business tax

  • The annual investment allowance (AIA) allows most businesses to claim 100% first year tax relief on their plant or machinery expenditure. The current allowance, which permits the first £250,000 of qualifying expenditure to qualify for the relief, was due to reduce to £25,000 from 31 December 2014. This revised measure will instead see the claimable allowance increase to £500,000 from 1 April 2014 (CT) or 6 April 2014 (IT) until 31 December 2015, before reducing to £25,000 from 1 January 2016. If you’re contemplating substantial capital expenditure make sure you get the timing right. A reduction from £500k to £25k at the end of next year is likely to catch out many business who do not accelerate expenditure to take advantage of this opportunity…unless of course the next government reinstates the relief?
  • There has been a change in the treatment of certain mineral extraction expenditure – now costs associated with gaining planning permission will be treated as expenditure on mineral exploration and access and receive tax relief at 25% rather than the previous 10%. Not much use to many of you unless of course you’re opening a Tungsten mine at Hemerdon…wait, some of you are?
  • The business premises renovation allowance (BPRA) was introduced to provide a 100% first year allowance for capital expenditure incurred on the renovation or conversion cost of business premises that have been unused for at least a year in disadvantaged areas of the UK. Now, the rules have been clarified because they were so badly written – “Such measures may impact upon development arrangements established solely to benefit from the generous tax reliefs afforded to their investors, but are unlikely to adversely impact normal business arrangements.”
  • Within those enterprise zones introduced in 2012 which were also announced as enhanced capital allowances (ECA) sites, businesses investing in new plant and machinery are entitled to claim a 100% first year allowance against their qualifying plant and machinery costs. This relief has now been extended for a further three years to 31 March 2020.
  • If you’re thinking of buying “active chilled beams and desiccant air dryers with energy saving controls” for your business, there’s some great news. These items have now been included in the list of items which qualify for Enhanced Capital Allowances (ECA).ECAs are available on energy-saving and environmentally beneficial technologies – at the rate of 100% in the year of investment, rather than at the 18% main rate or the 8% special rate per annum. The qualifying technologies, together with their relevant qualifying criteria, are listed by the Department of Energy and Climate Change (DECC) and the Department for Environment, Food and Rural Affairs (Defra). They make a cracking read if you’re thinking of doing this sort of work.
  • If you run a loss-making SME which is incurring eligible expenditure on research and development (R&D), you have a choice of two alternative tax
    incentives in respect of that expenditure. You could claim an enhanced tax deduction, uplifting the deduction to 225% of eligible expenditure. However, there is no immediate tax benefit to this as it simply increases the size of the loss the company carries forward. Alternatively, provided the company is considered to be a going concern, it may surrender that loss for a cash-back credit currently equal to 11% of the loss surrendered. For qualifying expenditure on or after 1 April 2014 that credit will increase to 14.5% of the loss.
  • The Government has confirmed that it will continue to move ahead with the changes to partnership taxation announced in Budget 2013 which will take effect from 6 April 2014. The proposals are designed to counter the disguising of employment relationships in relation to salaried members of limited liability partnerships (LLPs). They also tackle tax-motivated allocations of business profits or losses of partnerships where the partners include both
    individuals and companies (which would obviously never have happened) and tax-motivated disposals of assets through partnerships. To be honest, this was an area ripe for reform and pregnant with tax avoiding possibilities and is now a key focus for HMRC.
  • HMRC are taking the opportunity to correct a drafting error in the legislation and put beyond doubt that “where a company disposes of a tangible asset, it cannot rollover the resulting gain by reinvesting the proceeds into an intangible fixed asset.”
  • Farmers will be gratified to learn that even though the single payment scheme (SPS) is being replaced in 2014 with a new basic payment scheme (BPS), payment entitlements under the BPS will be included within the list of eligible rollover relief assets for acquisitions and disposals from 20
    December 2013 as the SPS was previously.
  • Great news for “luvvies” is that the Government will introduce a new theatre tax relief at 25% for qualifying touring productions and 20% for other qualifying productions, with effect from 1 September 2014. Also, subject to EC clearance, the video games tax relief will be extended to goods and services provided from within the European Economic Area, and a cap on subcontracting of £1m per game will be applied.
  • There’s a whole section entitled “Modernising the taxation of corporate debt and derivatives” which is so exciting I thought I may leave that to another time…suffice it to say there are some changes which are designed to simplify the existing provisions, which have become increasingly complex, whilst making the rules more robust against aggressive tax avoidance.
  • Anti-avoidance rules were introduced in 2013 to stop companies from being acquired for the purposes of utilising certain unrealised losses in those companies either by setting them off against profits in the same company, or another company, by using the group relief rules. These have now been amended to exclude losses created by R&D allowances from the provisions.
  • George said last year that energy prices required a stable carbon price floor (CPF) to enable businesses to be able to plan and budget properly. A year on and he’s amended it but mainly because prices in Europe have fallen.
That’s the end of the business tax section so as a reward for your persistence, 
here’s a gratuitous picture of George looking evil…

Employment tax

  • For a number of years, successive Governments have sought to encourage the use of energy efficient vehicles by companies, and this trend continues. Company cars with high emission levels can be expensive, but in many cases, alternative ‘greener’ models are available. It is likely we will see an increase in company car fleets especially with the use of alternative car supply arrangements using salary sacrifice arrangements. These can be a cost effective remuneration tool for both employers and employees, rather than an expansion on the traditional business need or ‘perk’ car fleets.
  • The percentage of a car’s list price subject to tax will increase by 2% for cars emitting more than 75 grams of CO2 per km to a maximum of 37%, in 2017/18 and 2018/19 – an increase of 2% over the previous maximum.
  • From 6 April 2015 the benefit in kind tax charge for provision of private fuel in company cars and vans will increase by RPI.
  • I know that you’ve all been waiting with bated breath for mention of the wonderous Office of Tax Simplification or, to simplify things, the OTS. Well, just to prove that they’ve been doing something they’ve announced a consultation. Did I hear a gasp of amazement? Anyway, they’re proposing abolishing the £8.5k exemption for benefits in kind (but mitigating the effects on vulnerable groups), introducing a statutory exemption for trivial benefits,  introducing a system of “voluntary pay rolling” for benefits in kind and replacing the expenses dispensation regime with a reimbursed expenses exemption. Now to me, it would be better if the OTS said “these rules are stupid and we’re replacing them with this” but perhaps that would be taking simplification too far and it’s more important to allow a talking shop to develop. Excuse me while I get of my hobby horse.
  • Slightly more worryingly, the “Government will also review the rules underlying the tax treatment of travel and subsistence expenses, and issue a separate call for evidence on remuneration practices and patterns to inform any future reforms”. Any ideas what that means? Nope, me neither.
  • The OTS had also produced some new draft rules on employee share schemes. These were designed to create greater uniformity across the tax system, but, perhaps surprisingly for something produced by the Office of Tax Simplification, the draft legislation was very complex and they will have another go in 2015. Simple stuff this simplification!
  • In passing, it is worth noting that a whole raft of OTS recommendations is to be introduced from 6 April 2014. These include:
    • changes to approved schemes to introduce online registration, self-certification and eliminate the need for approval
    • an extension to the time limit for the Section 222 charge relating to a failure to collect PAYE accounted for by employers. This will move from the current period of 90 days to 90 days from the end of the relevant tax year in which the chargeable event occurred;
    • the corporation tax relief rules on takeovers are to be relaxed
    • changes are to be made to facilitate the rollover of restricted securities and partly paid shares on company reorganisations
    • additional reliefs are to be introduced in connection with Employee Ownership Trusts, particularly the ability to pay sums of up to £3,600 tax-free to
    employees.
    Most of these changes represent relaxations in tax legislation. However, companies will need to take great care when creating new tax-favoured share schemes since these will no longer be signed off by HMRC.
  • A consultation document will be released in May 2014 on options to improve the operation of the CIS for smaller businesses and to introduce mandatory on-line filing for contractors.
  • HMRC have been focused on “false” or “disguised” self-employment for some time and from 6 April 2014 new rules have been brought in to counter the use of onshore intermediaries (what we would generally call “agencies” in English) to avoid paying PAYE/NIC on income. The Finance Bill changes will strengthen existing legislation relating to employment agencies by removing the obligation for ‘personal service’ and focusing on whether the work is subject to supervision, direction or control as to the manner in which the duties are carried out. The likely consequence is that many more individuals
    who are currently being supplied to end users through intermediaries will be treated as employees. The legislation will published on 27 March 2014. The new rules will also be extended to offshore employment through intermediaries.
  • There are significant changes to the legislation related to the artificial use of dual contracts by non-uk domiciliaries. However, since the Government’s
    estimate is that this measure will have an impact on only 350 non-UK domiciled individuals who are currently seeking to use artificial tax arrangements, I don’t think we’ll bother exploring this further.

More Evil George? Go on…

Personal tax

  • One of the few things to be expected in this budget was the change in personal allowances. The personal allowance will increase from £10,000 for 2014/15 to £10,500 for 2015/16. Basic rate taxpayers will get the full benefit of the increase, but
    higher rate taxpayers will lose some of the benefit as the
    higher rate threshold will be reduced from £31,865 for 2014/15 to £31,785.
    Increases in the personal allowance will benefit basic rate taxpayers by £112 in 2014/15 and a further £100 in 2015/16. Higher rate taxpayers with total annual income of less than £100,000 will benefit by £195 in 2014/15 and £184 in 2015/16. Individuals with total annual income of more than £100,000 will continue to have their personal allowance reduced so will benefit less. And those with incomes over £120,000 (£121,000 in 2015/16) will see no benefit at all.
  • From 6 April 2015, for couples where neither spouse (or civil partner) is a higher rate taxpayer, one spouse or civil partner can claim to reduce his or her personal allowance by up to £1,050 and transfer this to the other person. Clearly, it’s only going to be worthwhile where the transferor is not able to use the allowance against taxable income. The transferee can set the allowance against his or her income and claim a tax reduction of up to £210.
  • From the same date, the 10% starting rate of tax on savings will be abolished and replaced by a nil rate band covering up to £5,000 of savings income. Individuals who are taxed at the savings rate will benefit by up to £712 in 2015/16 but the precise amount of benefit will depend on the level of their taxable savings income and how much of it consists of deposit interest.
  • Fancy a nicer ISA? Seriously, the Government have recognised that ISA’s aren’t really very nice and replaced them with a nicer ISA called a NISA. From 1 July 2014 all ISA’s will become NISA’s and the annual maximum subscription rate will be increased to £15k, an increase of £3,480 from 2013/14. And NISA savers will now be able to invest the entire £15,000 limit in cash, stocks and shares, or any combination of the two. Currently, only 50% of the overall ISA limit can be saved in cash (£5,940 for 2013/14). The current prohibition on transferring investments from a stocks and shares ISA to a cash ISA will be lifted giving individuals new rights to transfer investments between accounts. The classes of assets that ISA funds can invest in will also be broadened under the new NISA regime.
  • The limits for junior ISAs and child trust funds will also be raised from £3,720 to £4,000 from 6 April 2014.
  • It was confirmed that the proposed childcare allowance will increase to £2,000 per child per tax year, accelerated so that all children under 12 will qualify from autumn 2015. Free nursery care for three and four year olds will be available for up to 15 hours a week and will also be extended to cover disadvantaged two-year-olds.
  • In a move straight from “Back to the future”, the Government intends to introduce legislation to charge capital gains tax on future gains (anticipated to be those arising after April 2015) made by non-residents disposing of UK residential property. This probably means that if you’re non-resident, you will need to get a valuation of UK property in April 2015 but as the details are so scarce, we’ve really not got a true picture of what this means yet.
  • The fantastically named “annual tax on enveloped dwellings” (ATED) currently applies to residential properties valued at over £2m held by companies and other “non-natural” persons, which are not covered by the reliefs for investment and property development companies. The starting point for ATED will be reduced to £500,000. There will be two new bands: residential properties worth over £1m and up to £2m will be brought in with effect from 1 April 2015. The charge for these properties in 2015/16 will be £7,000. Properties worth over £500,000 and up to £1m will be brought into the charge with effect from 1 April 2016. The charge for these properties in 2016/17 will be £3,500. These charges will be increased by CPI each year.
    Just to add to the punishment, the special 15% rate of stamp duty land tax (SDLT) currently applies to the acquisition of residential properties worth more than £2m by companies unless covered by the reliefs mentioned before. From 20 March 2014 the threshold for such acquisitions is reduced from £2m to £500,000. Capital gains tax at 28% will similarly be extended to disposals of residential properties liable to ATED: for those worth between £1m and £2m with effect from 6 April 2015; and for those worth between £500,000 and £1m with effect from 6 April 2016.
  • The seed enterprise investment scheme (SEIS) has proved extremely popular, helping start-up companies raise capital. Originally, it was intended to last for just five years, but the SEIS will  now be a permanent fixture in the UK tax regime. Additionally, the 50% capital gains tax exemption, which was due to expire on 5 April 2014, has also been made permanent.
  • Venture capital trusts (VCTs) encourage investment in small to medium sized trading companies by offering individuals 30% income tax relief on sums invested. In order to ensure that this tax incentivised investment is well targeted, there will be two small changes to the VCT scheme.
  • A new tax relief is available for anyone who wishes to help a social enterprise or charity. Up to £1m can be invested by an individual in any tax year, either in shares or as a loan. The rate of income tax relief is at just 30%, compared to 45% for Gift Aid, however, unlike Gift Aid, sums invested can be repaid. There will be a capital gains tax deferral mechanism and a capital gains tax free exit too, and a carry back facility. It is certainly an interesting alternative to Gift Aid for anyone with a philanthropic outlook.

Pension changes

George looked in his hat and found not just one rabbit but a whole bunch of fluffy baby rabbits which all seemed to be wearing a pensions bonnet. Here’s how he looked when he saw them…

  • The drawdown rules limit the amount of pension income that an individual who has yet to buy a pension annuity can take from their pension fund in one pension year. The maximum is currently set at 120% of the amount of annual income the individual could get if the pension fund had been used to buy an annuity. This limit will increase to 150% for pension years after 27 March 2014.
  • Individuals who have sufficient pension savings in one fund to guarantee them total annual pension income (including the state pension) of at least £20,000 are allowed under the ‘flexible draw down’ rules to take capital out of other pension pots at any time (all in one year if wanted). Under the new rules, flexible draw down will be allowed when the individual has a guaranteed annual pension income of £12,000.
  • Individuals with small pensions (currently defined as up to £18,000) can take the whole amount as a lump sum under the trivial commutation rules. This limit rises to £30,000.

The Government has issued a consultation document “Freedom and choice in pensions” on much more radical reform on the taxation of individuals drawing pension benefits from April 2015 which will require a new pensions act to implement.

The current rules are designed to prevent and deter individuals from drawing out all their pension capital in one go or over a short period – so that individuals have spread their pension income across the whole of their retirement. The core of the proposals is give individuals more choice and to offer them a bribe before the next election should that be necessary…which it will be.

The major headline is to remove the current requirement to buy a pension annuity. The Government also wishes to remove the penalty taxes within the current rules that are applied when cash withdrawal limits are exceeded: under the proposals, all funds withdrawn would be taxed at the individual’s marginal rate of tax. The old options will still be available but the key point is that it will be up to the individual to choose when and how much they take from the fund. George expects that this easier access to funds will result in an increased tax-take to the Treasury in the short-term. However, the policy isn’t without risk and because of this the Government will guarantee free face to face financial guidance from pension providers from April 2015. No doubt this will increase the cost of the services already paying extra for auto-enrolment. But then you expected that didn’t you!

In reality, this means individuals can continue to use pensions to defer income and income tax, save those funds in a tax-free environment and then pay the tax at a time when they choose – ideally when their marginal tax rate is lower. This makes pension contributions all the more attractive.

Anti-avoidance

Well, there was plenty of this…

  • “Follower notices” are the latest wheeze to attack individuals and companies which have participated in a disclosed tax scheme which has been found to fail. The Notice to Pay will require the taxpayer to pay the tax in dispute within 90 days, although there is scope for the taxpayer to ask HMRC to reconsider the Follower Notice. The new proposals will remove the ability for affected taxpayers to postpone any disputed tax whilst the matter is under appeal and penalties will apply for late payment.
  • George is making a substantial financial investment in HMRC’s infrastructure and staffing while cutting costs in many other departments. The Government intends to extend HMRC’s debt collection powers including enabling HMRC to recover funds directly from the bank accounts (including ISAs/NISAs) of individuals who owe over £1,000 in tax or tax credit overpayments. HMRC will only be able to take money from individual’s accounts where they have the ability to pay. And that means that they will be left with a balance of £5,000 in the account after the recovery action.
  • New rules have been introduced from 19 March 2014 to prevent companies transferring profits within a group for tax avoidance purposes. The measure will apply to payments made between group companies where one is typically resident in say a tax haven which cause all, or a significant part, of the profits to escape UK tax. This is allegedly not designed to catch genuine commercial arrangements between group companies. Instead, it is targeted at payments which “in substance” represent a distribution of the profits of which have been ‘dressed up’ as an expense of the trade. I wonder how this will affect many of our “tabloid tax targets” such as Amazon, Starbucks and the like…no change?

VAT and Duties

  • The VAT rules are to be amended in situations where a discount is offered for prompt payment that will result in VAT being due on the price that is actually paid. Currently VAT is calculated on the discounted amount, even if the discount offered is not taken up. From 1 April 2014 this will apply only to telecoms and broadcasters but it will be extended from 1 April 2015 to bring in all circumstances where a prompt payment discount is offered.
  • George sneaked a higher rate of machines games duty (MGD) of 25% through without mentioning it in his speech – it will apply to machines where the stake for playing the machines can be more than £5.
  • After considerable lobbying, the rate of bingo duty will be reduced from 20% to 10% for accounting periods beginning on or after 30 June 2014.
  • Air Passenger Duty has been simplified from six bands into two and the rate which applies to private flights will be six times that of standard commercial flights.
  • Various exemptions were announced to the aggregates levy and the climate change levy but to be honest, they were pretty dull.

And finally…..

Grant Schapps (Tory Chairman) tweeted an advert which was derided online and labelled a “PR disaster”: “Bingo! Cutting the bingo tax and beer duty to help hardworking people do more of the things they enjoy.” Simon Blackwell, a co-writer of The Thick of It, said the line would have been rejected as “too far-fetched” if it was suggested as an idea for the BBC Two political satire.

You couldn’t make this stuff up!

As ever, please call Bernice or any other member of the Riley Tax Team if you have any questions or comments. You can get them on 01752 203651 or berniceconstantine@rileycom.co.uk

Jon Stacey

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