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Spring Budget 2016

17 March 2016 No Comment

The fizz just went out of it…

Just 111 days ago, George Osbourne was the darling of the Tory House. Lauded as the architect of the Election victory, clever magician of the national living wage rise and probably favourite to succeed David Cameron when he steps down to spend more time with his pig.

Yesterday however, the chancellor was tasked with coming to the House of Commons to concede that fantastic economy he has presided over for six years, and about which he was boasting only four months ago, is now performing materially less well than he had claimed. Never easy. However, with some artful media management, he made it through the day in one piece – helped by a distractionary but welcome sugary drink tax and the normal give-aways. Whether he survives today so easily is rather more moot. The OBR didn’t help by downgrading their forecasts forcing George to rely on a strange one-off corporation tax income of £10bn in 2020 to keep the only pledge he can still aim for from being broken. Still, what’s £10bn between friends?

The Independent said “You’d rather be the one lavatory attendant on duty at one of southern Mexico’s higher-capacity football stadiums during an amoebic dysentery pandemic, I think, than give the Leader of the Opposition’s Budget response.” Nice. Jezza did his best in a shouty sort of way. He doesn’t really like budgets or, it appears governments. Mostly reading from a pre-prepared speech he had a go at pretty much everything the government had ever done and a few that they probably hadn’t. At least he didn’t reach in his pocket for a copy of Mein Kampf to add to George’s personal library.

And so to the detail:

Corporate taxes

The “Business tax roadmap” (presumably sponsored by Google or Apple?) was the centre-piece of the corporate tax area. This document is designed to set out the changes which will be brought in up until 2020. The measures include:

  • A consultation on the substantial shareholdings exemption which has been around for 14 years now.
  • The Government has decided to put back to 2019, the proposal to have very large companies (whose profits exceed £20m) pay their corporation tax bills earlier.
  • HMRC “has an intention” (we all have intention don’t we? Whether they’re likely to do it is rather less certain) to recruit 800 new staff and open call centres seven days a week. In addition, for new small companies, there is to be a single registration service for Companies House and HMRC.
  • A restriction on the amount of interest companies can deduct for tax purposes will be introduced from 1 April 2017. The UK will be introducing a fixed ratio rule limiting interest tax deductions to 30% of a UK Group’s EBITDA. The proposed rule includes a de-minimis threshold of £2m net UK interest expense. This threshold will eliminate most small groups from compliance with the rules.
  • Tax losses arising after 1 April 2017 will be available for carry forward against profits from the company’s other income streams and profits of other group companies. If you thought that this would be useful, you would be right. That’s why it’s only a consultation documents which is aimed at Finance Bill 2017 – shall we see if they make it through?
  • For profits arising after 1 April 2017, only 50% of group profit can be sheltered by carry forward losses (subject to a £5m profit de minimis). Now this one’s not quite as good but as it’s aimed at a de-minimus of £5m profits, most small companies will not be affected.
  • There was a significant tightening of the rules surrounding royalties, with-holding tax and the snappily titled “hybrid mis-match arrangements” which I think has something to do with last weeks 6 nations match at Twickenham? Actually, it’s all aimed at multi-nationals diverting profits out of the UK.
  • The corporation tax rate continued its downward trend – The current rate of 20% corporation tax applicable to UK companies (large or small) will fall to 19% from 1 April 2017 and was due to be further reduced to 18% from 1 April 2020. The Chancellor has now announced that the rate from 1 April 2020 will instead be 17%. Obviously, if you’re a bank you get an extra kicking and will pay a rate of 25% in 2020…c’est la vie! It also appears that Northern Ireland will be moving to a devolved Corporation Tax rate of 12.5%.
  • What we might call overdrawn directors loan accounts, and George likes to call loans to a participator, will be brought in line with the tax rate for dividends to higher rate taxpayers on or after 6 April 2016 by a rise from 25% to 32.5%. Funds extracted by way of dividends or loans should now lead to similar tax burdens for shareholders who are higher rate taxpayers. Additional rate taxpayers may still have a marginal preference for loans, whereas basic rate taxpayers may prefer dividends. Individual circumstances need to be reviewed.
  • George “helped” the Scottish through a reduction in petroleum revenue tax and an increase in decommissioning relief for North Sea Oil. Obviously he didn’t make much of it at all and most of the crowing was over within half an hour or so…
  • To stop the transfer of UK land profits disappearing overseas without being taxed, George is going to change the basis of taxation of UK land so that profits from disposals of land from a “trade of dealing in or developing UK land” will be chargeable to UK tax irrespective of the residence status of the landowner and regardless of whether or not the activity is conducted through a permanent establishment.
  • The announcement of the 3% additional stamp duty charge on second homes and investment properties made in 2015 has been confirmed. In order to address periods where there might be an overlap or a gap in the ownership of a main residence, a period of 36 months will be permitted to allow a claim for relief from the additional charge to be made. Those that expected an exemption for “large-scale” owners or businesses were disappointed. It applies to everyone.
  • The ‘slab’ system for calculating the charge to SDLT on non-residential property transactions in England and Wales is to be changed to a banding system similar to that which applies for residential property such that tax is payable only on the amount of the purchase consideration falling within each band. The bands will be 0-£150k – 0%, £150,001 to £250k – 2%, anything above £250,001 – 5%. SDLT on lease is charged at slightly lower rates but on the same basis.
  • The renewals basis for the replacement of loose plant by residential landlords is being withdrawn from 1 April 2016 (for corporation tax) or  6 April 2016 (for income tax). This really is just to bring the rules in line with the removal of “wear and tear” allowance announced last year. From April 2016, landlords will be able to claim tax relief for the cost of replacement items but only to the extent that the replacement does not represent an improvement on what is being replaced. Semantically, this is a change of words from “renewal” to “replacement”
  • George announced new qualifying enterprise zones at Coleraine in Northern Ireland, Port Talbot in Wales, Brierley Hill in the West Midlands, Loughborough, Leicester and for a Marine Hub in Cornwall, together with an extension of the existing zone covering the Sheffield City region. These qualifying zones, along with any additional qualifying zones announced in the future, will also benefit from the 100% enhanced capital allowance for a period of eight years from the date they are announced.
  • To be honest, there were a number of pages relating to VCT’s (hardly any change), Insurance linked Securities (didn’t really understand this), Securitisation and annual payments (nothing to get excited about here) and State Aid Modernisation (lost the will to live) – but as they really are tedious, I thought I would save you the trouble.
  • There were three simple changes to deal with accounting anomalies introduced by FRS102 – you know you love it! Mainly aimed at discounts arising from interest-free loan relationships.
  • And that the end of the Corporate/Business taxes area…get up, stretch, make a cup of tea and get ready for the next thrilling instalment…

Personal taxes and allowances

  • George announced that the personal allowance for 2017/18 will be £11,500 (2016/17 – £11,000) and that he’s still aiming for £12,500 by 2020.
  • He has also committed to raising the level at which an individual pays tax at 40% to £50,000 by 2020. Working towards this aim, the basic rate band will be increased to £33,500 for 2017/18 (2016/17 – £32,000). This will result in an individual being able to earn up to £45,000 in 2017/18 before having to pay tax at 40%.
  • There’s no change to the £150k limit for the start of the 45% band.
  • The Chancellor has announced that from 6 April 2016 the 18% and 28% rates of CGT will be reduced to 10% and 20% respectively.
    However, gains on the sale of residential property will specifically be excluded from the new reduced rates. The Government states that its policy objective here is to provide an incentive to invest in companies ahead of property.
  • The new reduced rates of CGT will also not apply to the receipt of “carried interest” which sounds like something you might have needed to get this far through the email but it really is a thing!
  • Legislation will be introduced to extend ER to individuals acquiring newly issued ordinary shares in unlisted trading companies on or after 17 March 2016. The individual will need to hold the shares for a continuous period of three years in order to claim ER. A lifetime limit of £10m of qualifying gains per individual will apply. It is not clear whether there will be a minimum percentage holding requirement as for ER, so the detail in Finance Bill 2016 will be key to the interpretation. Still, it’s a useful extension to the relief.
  • There was also some tidying up done in relation to the goodwill treatment on certain sales, a retrospective change to allow certain transactions to be revisited. Also new definitions are required to deal with the complexity of certain structures which George over-did last time he had a go and some clarification of what was intended by the application of the ER rules to certain succession planning scenarios. All sensible changes to correct clumsy drafting and rushed implementation.
  • There was some good news for Non-Doms, but then you might have expected that?
  • George announced a new flagship “lifetime ISA”. These can be opened by anyone between the ages of 18 and 40, with any savings paid into the ISA by the age of 50 receiving a 25% bonus from the Government. The maximum that can be paid into an account each year is £4,000 (meaning a £1,000 bonus would be received). You can use the money in a lifetime ISA to buy a first home, up to the value of £450,000(!), or to save until reaching the age of 60. If the money is withdrawn and not used for one of these purposes, any bonuses received (including any growth and interest thereon) will have to be repaid to the Government, along with a 5% charge. An existing help to buy ISA can be transferred into a lifetime ISA and the combined annual amount that an individual may invest into all their ISAs (including the new lifetime ISA) will be increased from £15,240 to £20,000 from 6 April.
  • In a move that appears it is likely to benefit those individuals generating small amounts of income trading via auction and trading sites such as ebay or listing their property for short terms lets via internet platforms such as Airbnb, George announced two new reliefs of £1,000 each. Individuals with £1,000 or less of trading or property income will have this income exempted from tax and there will be no need to report this income to HMRC.
  • The announcement in the Autumn Statement 2015 that the transactions in securities legislation would be amended and a new targeted anti-avoidance rule would be introduced with effect from 6 April 2016 has lead to a rush to complete members’ voluntary liquidations by 5 April 2016. It has now been announced that the Government will respond to the consultation later in March, and presumably legislation will be included in Finance Bill 2016, but further details are awaited.

Indirect taxes

  • Insurance Premium Tax is again on the rise and becoming a favourite target for George in recent years. From 1 October 2016, IPT will increase by 0.5% from 9.5% to 10% – an increase of more than 65% in 12 months.
  • Jamie Oliver got his way and George has introduced a new sugar levy with effect from April 2017 to try and address the problem of childhood obesity. The levy will apply to producers and importers of soft drinks which have had sugar added. Producers of fruit
    juices and milk will be excluded from the levy. There will be two rates of the levy: a main rate for producers of drinks with more than 5g of sugar per 100 ml, and a higher rate for drinks with more than 8g per 100 ml. The levy will apply to the producer of the drinks and not to the drinks themselves so as not to breach EU legislation which prohibits member states from implementing additional taxes that are similar to VAT. I’m guessing that they’re expecting the levy to reduce over time. The levy will be hypothecated and will go towards supporting sport in primary schools, running breakfast clubs and allowing secondary schools to open for longer periods of the day.
  • From 1 April 2016, the VAT registration threshold will be increased from £82,000 to £83,000 and the deregistration threshold from £80,000 to £81,000.
  • All schools in England will be required to convert to academies by 2020, or at least have plans in place for such conversion. This has required the introduction of a scheme to allow an academy to recover input VAT which would otherwise have been recovered through the local authority VAT return.
  • Look out for a new VAT penalty for participating in VAT fraud. We’re all guessing but it seems likely that the penalty will look beyond the business and take aim at the individuals involved – time will tell as again, it’s only a consultation. You’ve got to wonder who keeps track of these consultations. Some gravy train that is!

Employment taxes

  • George introduced a major curb on his own tax relief. Employee Shareholder Status (ESS) was introduced in 2013 and provides an exemption from CGT on the disposal of shares where there had been a surrender of certain statutory employment rights. The relief is now limited to £100k.
  • There are further changes to the anti-avoidance rules applying to employee benefit trusts. Many are minor technical changes aimed at preventing the continued use of such arrangements where these ‘sidestep’ the rules. The Government will also broaden HMRC’s powers to impose a PAYE liability on an individual employee if the tax cannot be collected from the employer.
  • Additionally, the Finance Bill will impose a new charge that will tax certain historical loans from EBTs as earnings if they have either not been taxed or not been repaid by 5 April 2019. This seems to be part of HMRC’s long-running campaign to resolve what it views as outstanding cases where taxpayers have not chosen to settle with HMRC. How this will be applied in the context of historical cases where decisions in the courts have not supported HMRC’s view is unclear.
  • Carried Interest forms a major part of the remuneration of asset managers (including those in private equity). In a further exemption to the new CGT rules, where carried interest is subject to capital gains tax it will be taxed with an additional 8% ‘surcharge’, resulting in a rate of 28% (ie the pre-existing rate of tax).
  • In an attempt to align the tax and NIC treatment of qualifying termination payments of over £30k, from 6 April 2018 Class 1A NIC will be charged on the excess over the £30k limit.
  • The “payrolling” of benefits in kind is to be extended to cover non-cash vouchers and credit tokens (which are already subject to class 1 NIC via the payroll). These can now be voluntarily payrolled by registered employers from 6 April 2017 if they wish.
  • Increases have been announced to the company car tax rates for the three years to 2019/20: the appropriate percentage rates will increase by 3% up to a maximum of 37%. The BIK for zero emission vans will not be increased for 2016/17 or 2017/18 as previously announced, but will instead be held at 20% of the standard van benefit charge.
  • Those of you who are expecting their sporting testimonials this year should remember that all income arising in relation to sporting testimonials and benefit matches for an employed sportsperson, will be charged to PAYE and NIC. This is subject to a one-off exemption from 6 April 2017 of £100,000. So if you are the UK toe wrestling champion you know what to do.
  • You may have noticed that my old friends, the OTS haven’t had a mention yet. Well, the Government has asked the Office of Tax
    Simplification (OTS) to review the impacts of moving employee NIC to an annual, cumulative and aggregated basis and moving employer NIC to a payroll basis. That should make for a storming read.

Anti-avoidance

  • Offshore tax evasion got a number of increased penalties with a new criminal offence with low levels of proof of intent, civil penalties and fines. They really don’t want people to play offshore any more!
  • They’re also pretty serious about UK avoidance. Finance Bill 2016 will include legislation enabling HMRC to impose sanctions on those who persistently enter into tax avoidance arrangements that HMRC subsequently defeats. A slew of new penalties and disclosures will arrive from 6 April 2017.
  • And “the hidden economy”? Well, guess what…they’re going to consult on it. Who would have guessed?
And finally…..

The Scottish Government has launched a consultation which proposes to reduce and eventually abolish Air Passenger Duty (APD) in Scotland, should the tax be devolved to the Scottish Parliament. The consultation reveals plans to replace it with a new tax on the carriage of passengers from airports in Scotland, which is likely to be an adapted version of APD. You can’t make these things 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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