A Budget for winners?

09.07.15

Post-election Budgets are strange beasts. They are now a regular sight on the tax and spending landscape and inevitably follow a pre-election Budget which contains elements of electioneering - as well as the necessary foundations for which to raise tax in the forthcoming year. There has already been another doorstop of a Finance Act in 2015, and this Budget will not reduce the legislative burden.

This Budget could be described as a ‘Budget for winners’ - winners of the General Election that is, though George Osborne would no doubt be delighted if those benefiting from it could be regarded as ‘winners’, as well as being “hard-working families” and other icons of the Conservative Party.

Following the UK election result, this was billed as the first true Conservative Budget in 20 years, and showing what the Conservatives would have done if they had not been hamstrung by the coalition. It is also entitled the ‘Summer Budget’, which as a title has a pleasing air of Pimm’s on sunny lawns, although the content is as solidly technical as ever.

Other odd features abound – notably, it is traditional for a new government to get bad news (particularly tax increases and spending cuts) out of the way early, in the hope that the voters will have forgiven or forgotten by the time of the next election. There was not much by the way of obvious tax increases (although there were some – the Summer Budget does involve an overall tax increase, involving what some might describe as stealth taxes), but there were plenty of well telegraphed spending cuts, particularly from the welfare budget. Added to that was a new concentration on a national living wage, which appears to be aimed at replacing the national minimum wage – neither of which, unlike welfare payments, are generally payable by the state, at least in the form of benefits.

Post-election Budgets tend also to be stall-setting, laying out longer term plans for the whole parliament. To this can be added the even longer term commitment to reducing or removing the annual fiscal deficit as a basis for what might be done, with a terrifying Greek drama playing out in the background. There were plenty of references to the need to get the fiscal house in order, albeit in an ever-expanding timescale.

In Scotland, we have the added peculiarity that among the most fundamental tax measures, income tax rates beyond this year will be wholly or largely in the hands of the Scottish Parliament for Scottish taxpayers, making at least some announcements of less direct importance than previously.

The increase in the income tax basic personal allowance to £11,000 in 2016-17 is a UK measure which will apply in Scotland. But the increase in the higher rate threshold to £43,000 for the same year is a measure which could (assuming the Scotland Bill currently going through the UK Parliament were to come into force in time) be varied by the Scottish Parliament.

The divide is also seen in the rather empty promise to enact a ‘tax lock’, setting ceilings for the main rates of income tax, VAT and National Insurance. It is currently intended that the first will be devolved, so if the tax door in Westminster is locked, at least one window will be left open at Holyrood.

Still in the personal field, the changes in the taxation of dividends were not anticipated – these create a tax-free allowance of £5,000 for dividends, with rates then ranging from 7.5% to 38.1% depending on your normal rate of income tax. Dividends are classified as savings income, so these changes will affect Scottish taxpayers along with those in the rest of the UK. The possible complications in the interaction with Scottish rates of income tax are formidable.

Among the most widely leaked of changes in this Budget (making it hard to remember that it used to be a resigning matter if Budget details appeared in advance) was that made to inheritance tax (IHT). This was touted as giving families the ability to pass on a house worth up to £1 million to their offspring – a significant increase from the total of £650,000 currently available to married couples and civil partners (£325,000 each). The change has duly appeared, but it is hedged with significant restrictions and it is to be phased in gradually over four years starting in 2017-18 – and equally gradually withdrawn for those with total estates (not just houses) valued at more than £2 million. Even this brief explanation clearly indicates that this will be complex and arbitrary – and that the new regime is clearly aimed at areas where the rise in house values has far outstripped that of other assets. While this obviously includes London and the south-east of London, there will be areas in Scotland where this is of considerable significance. There is a notable sting in the tail, in that the basic nil rate band for inheritance tax is now to be frozen at £325,000 until April 2021.

Another at least partially anticipated change was to the treatment of those perennial villains, non-doms. From April 2017, those resident for at least 15 of the past 20 years will be treated as UK domiciled (for all tax purposes, including inheritance tax); and some children born in the UK will be restricted in their ability to claim non-dom status.

Also anticipated were further moves on that tempting target, pension relief. The lifetime allowance will be reduced to £1 million from April 2016 (with yet another round of protection for those above the reduced limit); and the annual allowance will be tapered from its current level of £40,000 for those with income above £150,000 to a minimum of £10,000.

If the IHT change was expected in its basic form, the same could not be said of further reductions in corporation tax rates – to 19% in 2017 and 18% in 2020. This tax is not one scheduled for devolution – and despite the changes in dividend tax mentioned above, it will make operating in corporate form even more attractive for businesses. A further change in business tax that will be much welcomed is an increase in the Annual Investment Allowance, allowing a tax deduction of up to £200,000 for investment in plant and machinery. This allowance has been up and down like a yoyo in recent years and it is be hoped that there is some element of continuity – it is described as “permanent”, but this seems supremely optimistic.

We are also promised by April 2016 a “business tax roadmap” covering the rest of this Parliament. And to add to our tax road atlas, we are also to get a second roadmap, showing how tax administration for individuals and small businesses will be transformed. In a splendid example of corporate-speak, we are told that: “Over the summer, HMRC will begin discussing the policy choices underpinning this roadmap with key stakeholders and delivery partners…”. We can hardly wait.

The corporate villain equivalents of non-doms are of course the banks, who are to be subject to an 8% surcharge on profits (ignoring carried forward losses); but in the other direction, the separate bank levy is to be gradually reduced until 2021, by which time it is intended to affect only the UK tax base of the banks affected.

On indirect taxes, there was a significant increase in insurance premium tax, from 6% to 9.5%. It is not clear whether insurance is regarded as a sin, but other sin taxes (tobacco, alcohol, even fuel) escape further increases this time round. However, sinning with sins is to receive further attention, with stated crackdowns on illicit tobacco and alcohol.

There were further announcements on tackling evasion, fraud and other non-compliance. There are specific mentions for large businesses, small and mid-sized businesses, wealthy individuals, affluent individuals, public bodies (which may come as a surprise), trusts, financial intermediaries, pension schemes and non-domiciled individuals.

Apart from what was announced, there were things conspicuous by their absence – there had been predictions that the 45% rate of tax might be abolished; that capital gains tax (as one of the few “unlocked” main taxes) might be increased; and that more extensive changes might be announced to oil and gas taxation. None of these came to pass. Nevertheless, it remains clear, particularly for those of us in Scotland with a new system gradually overlapping but not replacing the old, that tax life will get ever more complicated.

The following paragraphs deal with some of the main tax changes announced or confirmed in the Budget.

INCOME TAX AND NATIONAL INSURANCE

Allowances and thresholds

The proposed income tax allowances and thresholds for the current and announced and the next two years are as follows:

 

2015/16     

2016/17     

2017/18

Personal Allowance    

£10,600     

£11,000     

£11,200

Basic Rate Band     

£31,785     

£32,000     

£32,400

Higher Rate Threshold   

£42,385     

£43,000     

£43,600

This represents modest increases for 2016/17 and 2017/18 over the amounts previously announced in the March Finance Bill, introduced by the then coalition government. The personal allowance in these two years will increase by £200 more than planned and the basic rate band by a further £100. It is perhaps worth noting that the higher rate threshold for 2017/18 will still be less than it was when Mr Osborne became Chancellor in 2010.

The government has a stated objective to raise the personal allowance to £12,500, and the higher rate threshold to £50,000, by the end of this parliamentary term in 2020.

National insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold. The employer’s Employment Allowance (a rebate from employer’s NIC contributions) will increase from £2,000 to £3,000 from April 2016.

For details of rates on dividends, see below under Savings.

Other income tax matters

Non domiciles

These are dealt with below, under inheritance tax, as there is an attempt to bring the rules into line for all relevant taxes.

Contractors

HM Treasury is convinced that the contractor industry really is up to something; the Summer Budget document sets out that some £400 million per year is lost through non-compliance with, and ineffectiveness of, the IR35 rules. IR35 is intended to catch workers who, rather than paying income tax on earnings, set up a private company through which they supply services to client, but continue to act as though they were employees of the client.

Without IR35, such arrangements allow profits to be taxed at a flat rate of 20% corporation tax (soon to be reduced yet further). Contractors then typically take a small salary (up to the personal allowance, so tax-free) which they top up with dividend payments (effectively tax-free too, if within the basic rate limit and then subject to the lower dividend rates of income tax). Funds not paid as dividends can be retained in the company and sheltered at the lower rate of tax. Contractors would also benefit from lower NIC payments, and potentially the NIC employment allowance, allowing them to reduce their employer’s NICs by up to £2,000 a year (soon to increase to £3,000).

Neither is it too surprising then that the government has launched a four-pronged assault on these arrangements.

Prong 1: The general assault. The Summer Budget announced that a general consultation will be published on the operation of IR35 with a view to improving its effectiveness and increasing compliance in cases where arrangements are technically caught by the rules.

Prong 2: Restriction on travel reliefs. The government has announced a consultation in to the restriction of travel reliefs for contractors using IR35 arrangements. The gist of the consultation is that ordinary employees do not receive a tax deduction in respect of ordinary commuting costs – the costs of getting from home to their normal place of work. Contractors can – as they can effectively claim relief against any travel expenses. Under the new proposals, payments to contractors in respect of travel will not be relievable where they are supervised or managed by a person within their client organisations.

Prong 3: Higher taxes on dividends. The increased tax on dividends (see below) means that contractors paying themselves a salary up to the personal allowance, and then topping up with dividends will have to pay higher income tax. For example, under the current rules a contractor receiving dividends of £32,010 will pay no further income tax on them. Under the dividend rates, the first £5,000 will be tax-free, but the remaining £27,010 would be taxed at 7.5% - i.e., £2,025.75.

Prong 4: Single person companies (where the sole director is the sole employee) will be ineligible for the NIC Employer’s Allowance of £2,000 from April 2016. Personal service companies that pay a relatively modest salary could wind up facing an increased NIC bill as a consequence.

Sporting testimonials: ‘affection’, ‘regard’, tax?

The government will consult on proposals for reforming the rules on the tax treatment of payments made to players from sporting testimonials, particularly rugby, soccer and cricket matches. There is currently no specific income tax legislation that covers sporting testimonials, but HMRC has published guidance on the tax treatment of income received from sporting testimonials. A 1927 case (a little before the Premier League came about) established the principle that where a testimonial match is organised to demonstrate “affection” and “regard” for the personal qualities of a player, the proceeds are not from the employment of that player, and therefore are not earnings in terms of applicable tax treatment. The 1927 case pre-dates other legislative developments, and thus HMRC now considers that where a testimonial or benefit is organised independently of the employer, income tax and/or NICs may be applicable.

While a statutory exemption of income tax and NICs is not intended, the government is interested in views on (a) introducing a partial exemption or de minimis amount which is not subject to income tax of NICs, (b) the frequency of any exemption, (c) whether an upper limit for an exemption should be imposed. The consultation will conclude ahead of the 2015 Autumn Statement.

PENSIONS

TEE (Hee Hee) or should that be EET?

We were primed to expect changes to pension tax relief for high earners (more about that below, including a bit of a twist) but what was of greater interest was the proposed consultation around how pensions should be taxed and the extent to which this could usher in a new workplace ISA as an alternate retirement-savings vehicle.

At the moment, in order to incentivise long-term saving, the government provides tax incentives for both individuals and employers to save into pensions. The principle of the current system is that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out to the individual. The current structure of the system can therefore broadly be characterised as ‘Exempt-Exempt-Taxed’ or ‘EET’:

  • Exempt. Pension contributions by individuals and employers are exempt from income tax, and employer contributions are also exempt from National Insurance contributions (NICs).
  • Exempt. No personal tax is charged on investment growth.
  • Taxed. Pensions in payment are taxed as income, but individuals are able to take up to 25% of their pension fund as a tax-free lump sum on retirement.

While the EET system is simple in principle, the government believes there is evidence that some pension savers are unaware or not motivated by the tax benefits associated with paying into a pension. In particular, research suggests that for lower income groups tax relief is not an important determinant in people’s decision to save, and others are unaware that they will be required to pay tax on their pension when they come to retire.

The government is therefore suggesting a fundamental reform of the pension taxation system so that pension contributions are taxed upfront - a ‘Taxed-Exempt-Exempt’ or ‘TEE’ system - like ISAs, and then topped up by the government. This would allow individuals to better understand the benefits of contributing to their pension as the Government’s contribution might be more transparent and they would no longer need to consider the future tax implications of their pension choices or work out how much their pension pot is worth given their expected tax rate in retirement.

If a TEE pension taxation system became law this would have huge implications for how people save for retirement and would, for example, spell the end of salary sacrifice (which relies upon contributions being made out of gross pay). Given how quickly the new pension freedom rules were received and established, it will be interesting to see if the same happens with TEE.

Changes to pension tax relief

In a widely expected move, George Osborne confirmed that from April 2016 onwards, those earning £150,000 will have their annual allowance tapered away down to a minimum of £10,000.

There are currently annual and lifetime limits on how much tax relief you can get on your pension contributions. In the current tax year (2015/16), you can get tax relief on pension contributions of up to 100% of your earnings or the £40,000 annual allowance, whichever is lower. The lifetime allowance is currently £1.25m but this is dropping to £1m in April 2016.

What is changing is that for every for £2 of income above £150,000, the £40,000 annual allowance will reduce by £1. So someone earning exactly £150,000 will be able to contribute the full £40,000, but someone earning £210,000 or more will be able to contribute to their pension a maximum of £10,000.

However, the sting in the tail is that when assessing eligibility for the tax relief, ‘adjusted income’ will capture salary and both employer and employee pension contributions, meaning that individuals earning less than £150,000 could also be affected. Only individuals earning less than £110,000 excluding pension contributions would not be affected by a lower annual allowance. Monitoring these new rules will prove challenging.

Secondary market in annuities

This has been delayed until 2017, to allow development of a “robust package to support consumers” in making decisions.

SAVINGS

Dividends

The income tax treatment of dividends is changing from April 2016. Dividend tax credits are being removed, so all dividends will be treated as received gross. There is to be a £5000 dividend allowance for all taxpayers. For amounts of dividends above this allowance, basic rate taxpayers will have a rate of 7.5%, higher rate taxpayers a rate of 32.5 % and additional rate taxpayers a rate at the mystifying level of 38.1%. This will mean that recipients of very large amounts of dividends will pay additional tax as compared to the present position, partly removing the incentive to incorporate and receive income through dividends rather than salary. This also has an interesting Scottish slant, in that currently the Scottish rates of income tax for Scottish taxpayers are not intended to affect dividends.

EIS, SEIS and VCT Changes

The March Budget proposed changes to the Enterprise and Seed Enterprise Investment Schemes (EIS/SEIS) and to Venture Capital Trust (VCT). The Summer Budget has announced further changes to the regime and confirmed that draft legislation will be included in the summer Finance Bill 2015.

Income tax relief on investment and capital gains tax relief on share sales after three years make qualifying companies very attractive to investors. As the proposed changes introduce limits more generous than those allowed under the state aid rules, they are still subject to EU state aid approval.

The proposed changes include:

  • Requiring that SEIS/EIS/VCT investments are intended to grow and develop the businesses into which they are invested. Investments will be blocked from being used to acquire existing businesses.
  • Establishing a Stakeholder Forum for HMRC, HMT investors and advisors to discuss the operation and application of SEIS, EIS and VCT reliefs.
  • Removing the requirement that 70% of SEIS funds be used before EIS fund raising can commence.
  • Capping the total amount of ‘risk finance investment’ (i.e. any investments receiving SEIS, EIS or VCT reliefs) per company at £15 million.
  • A higher cap of £20 million for investment into ‘knowledge intensive’ companies (some question why this company type against others that contribute equally to the economy).
  • Requiring that investors are independent from the company when they make a risk finance investment. Existing shareholdings are allowed provided that they are risk finance investments or are founder shares/shares purchased in a shelf company.
  • Blocking investments in to companies that have been trading for more than 12 years.

Until state aid approval is granted, HMRC will only give advance assurance to companies that meet the existing state aid requirements: i.e. those that are under seven years old and have received risk financing under £10 million. Compliance certificates will still be issued for those exceeding these limits, but there is a risk reliefs may be clawed back should state aid approval be withheld.

The proposed changes are to be welcomed. The benefit to small companies in qualifying for EIS, SEIS and VCT treatment can be priceless. With expert advice these rules can be successfully navigated.

FUNDS

The first 2015 Budget announced a tax crackdown on payments to fund managers in the form of disguised fee income. Notably, this did not include carried interest payments to fund managers remunerated through a separate executives’ partnership which is itself an investor in the main fund.

This has now been noticed. The Summer Budget incorporates additional changes intended to ensure that the economic returns paid to investment managers as carried interest are fully chargeable to CGT at 28%. Deductible costs will be restricted to the amounts actually contributed by the managers for their share in the carried interest vehicle (usually a fairly nominal sum in most highly geared private equity funds), rather than a share of the costs of the underlying investment assets, as would be allowed under the ordinary partnership rules.

A credit for employment-related income tax charges will be available to set off against the CGT charge.

A consultation has also been released to look at the broader tax treatment of performance related rewards, and whether they should be subject to CGT or income tax.

INHERITANCE TAX

Extended main residence nil rate band

There has rarely been a tax change with as much advance warning as that affecting inheritance tax on residences, allowing parents (or some of them) to pass on their houses to their offspring, up to a value of an iconic £1 million. In the end, what emerged from the Budget was even more complex than predicted, will take a number of years to come fully into effect, and has some significant stings in its tail.

Under the current inheritance tax regime, assets passing between married couples and civil partners following the first death are free from inheritance tax. In addition, each individual has a nil rate band (currently £325,000) up to which no tax is charged. Married couples and civil partners can transfer the unused nil rate band or part of it to be used when the second partner dies, meaning many married couples and civil partners have a tax-free amount of £650,000 upon the second death.

Under the new proposals there will be a further £175,000 main residence nil rate band available to each individual. The additional band will apply when the main residence is passed to the deceased's direct descendants (so possibly beyond children, and including step, adopted and foster descendants), and it can be added to the existing £325,000 nil rate band. The additional amount will start at £100,000 in 2017-18, rising to £125,000 in 2018-19, £150,000 in 2019-20 before arriving at the £175,000 target in 2020-21. So by that year, the total tax-free allowance for the second to die of married couples or civil partners will be £1 million.

On the face of it this sounds like a very positive change and welcome news to many, particularly where rising house prices have meant that more have been brought into the inheritance tax net. However, as often is the case, the key will be in the detail of the changes announced, as this could be seen as another layer of complexity added onto an already ridiculously complicated set of rules.

This places a premium on the ‘family home’, although provision is to be made to allow for downsizing, under which a former home will be replaced by other assets without the additional allowance being lost. It is possible that the law will set down a minimum period of ownership for the home and this must be looked at closely.

However, there are many to whom this new law will not apply, for example individuals who are cohabiting by choice and do not wish to get married. In these situations, an individual can benefit from a nil rate band of up to £500,000, including the allowance for the main residence, to leave his or her house to children or grandchildren. However, unlike a married couple or civil partners, neither the unused allowance nor the standard nil rate band can be transferred to someone else on the individual's death. The new band will also not apply to those who do not have direct descendants.

Furthermore, the additional nil rate band will be withdrawn at the rate of £1 for every £2 for total estates valued at more than £2 million.

Other IHT changes

The existing freeze on the nil rate band at £325,000 will now be maintained until (at least) April 2021.

It is interesting to note the overall effect of these changes predicted by the government. The arrival of what has been described as the £1 million nil rate band might have been thought to equate to the virtual abolition of the tax. However, on the government’s predictions, not only will the total inheritance tax take continue to rise each year, but so will the number of estates on which tax is charged.

Minor changes are also made to the rules on multiple trusts created on the same day, which have been the subject of extended consultation over recent years.

Non domiciles

Two consultations have been announced on non-doms. The first is on ‘deemed domicile’ status for tax purposes. This will look at making non-doms subject to income, capital gains and inheritance tax on their worldwide, income, gains and personal assets after they have been resident in the UK for 15 out of 20 years – tightening an existing IHT rule but extending it also to other taxes. Similarly, the consultation will consider if it is also necessary for UK domiciles who leave the country to take up permanent residence overseas to remain domiciled for a further five years. This consultation is intended to lead to legislation in the 2016 Finance Bill to come into force from 6 April 2017.

The second consultation is on the proposal to bring the ownership of residential property through sophisticated structures by non-domiciled people seeking to avoid IHT back into charge, in a similar way to direct ownership. The annual tax on enveloped dwellings (ATED) was introduced to discourage this. However, HMRC’s research suggests that the IHT saving often outweighs the ATED charge and reliefs often apply anyway. This consultation is intended to lead to legislation in the 2017 Finance Bill to come into force from 6 April 2017.

Furthermore, it is intended to remove the claim to non-domicile status for individuals who are born in the UK to UK domiciled parents, who then leave but later return to take up residence in the UK.

CORPORATION TAX

For corporation tax watchers this was a low key Budget and one that allowed some time for Budget bingo. Despite this indulgence there were significant changes which may not warrant headlines and are unlikely to register with hard working families. However financial directors and company owners should be sitting up and paying attention.

Reduced rate of Corporation Tax

How low can you go? Well it would seem 20% corporation tax is not low enough. A very welcome announcement was that corporation tax will fall to 19% in 2017 and 18% in 2020. This allows the UK to claim the title of the lowest rate of corporation tax in the G20, at least until someone else drops theirs lower! The Chancellor is hedging his bets that while it is five years before this rate materialises, it is incentive enough to encourage companies to incorporate in the UK and to stop corporates leaving from the UK.

Changes to Corporation Tax payment time scales

The acceleration of the payment of corporation tax puts money under the Chancellor’s control earlier. Large companies paying their corporation tax by quarterly instalments do not pay any tax for the current accounting period until month seven. By making comparisons to the timetable to pay of other G7 countries, and indeed individuals who pay their proportion of their income tax in month three, the Chancellor justifies the changes as necessary to correct an inequitable position. From April 2017 companies with profits exceeding £20 million will make corporation tax payments in months three, six, nine and 12 of the accounting period. Better in the Chancellor’s hands, swelling the corporation tax take figures and available to put to use than at the disposal of big business. The counter argument is of course that the change could cause cash flow issues for these companies and deprives them of funds available for investment in the meantime. This argument is unlikely to find many sympathetic ears. The sums expected to be raised by this change are very large, although this will be largely a cash flow gain for the government.

Controlled foreign companies

The controlled foreign company (CFC) regime identifies profits of a non-UK resident company that should be subject to UK corporation tax by attributing those profits to a UK resident. The rules counter the effect of profits ‘diverted’ from the UK. A CFC is resident outside the UK for tax purposes and controlled by a person resident in the UK, e.g. UK multinationals with overseas subsidiaries. From 8 July, UK losses and expenses cannot be set off against the CFC charge. This deterrent measure is targeting the Starbucks and Amazons of the world whose names and tax reputations have been tarnished. While there is no immediate impact on the individual taxpayer it does allow the government to claim credit for cracking down on these so called ‘tax avoiders’ and of course, increase the amount of corporation tax collected.

Restriction on goodwill amortisation

From 8 July the government has restricted the availability of corporation tax relief on goodwill amortisation. Relief was available on the value of the purchased goodwill and intangible assets where a business and its assets were acquired. This relief is not available where shares are acquired. The relief has been removed in relation to the goodwill and customer-generated intangible assets. The debit arising on a realisation is now treated as non-trading debit, and therefore not included as a trading loss. Again we see such changes justified on the basis that the current position is inequitable, a distortion of the market and that the UK position is softer than other major economy regimes. More pennies in the purse without asking individual taxpayers to stump up! Those who have acquired business and assets and should have continued to benefit from the ongoing write off will notice this to a significant extent.

Oil and gas

In an announcement expanding on developments from the March Budget, there is to be an expansion in the North Sea investment and cluster area allowances, to assist in maximising recovery of oil assets. But this is a minor change, when further substantive relaxations would have been welcomed.

BANKS

The banks have been an easy target for the Chancellor previously. Past budgets have left the bankers reeling, but they have received little sympathy. A second budget this year must have got them worried. The relief of hearing about a gradual reduction on the bank levy to 0.1% by January 2021 and restricting the scope of the levy for UK headquartered banks to only their UK balance sheets was short-lived.

The Chancellor swiftly announced the introduction of an 8% surcharge on banking sector profits which take effect for profits arising after 1 January 2016 for those banking companies and buildings societies within the charge to UK corporation tax. Certain reliefs are added back, including group relief for the period for non-banking companies and any pre-1 January relief. Those banks and building societies paying corporation tax by instalments will pay the surcharge at the same time. You can further understand the Chancellor’s incentive to accelerate instalment payments!

The banks are subject to further restrictions. Expenses incurred in making compensation payments to customers in respect of ‘relevant issues’ will, understandably, no longer be able to be deducted in the calculation of corporation tax by retail or investment banks. Relevant issues are described as those issues relating to the bank’s conduct of its banking business, which is not an isolated issue and is of a significant size. It is fair to say that the Chancellor has in his sights issues of the magnitude of mis-selling. Considering that consumers are still reeling from such and banks are having to make hefty provisions in their forecasts, it seems only fair that when paying out these amounts the banks do not benefit from a set-off against taxable profit. Clearly banks remain an easy fiscal target.

These changes may not feature on any ‘how the budget affects you’ list but they do have an impact. By grabbing the reduction in corporation tax headline, the Chancellor has diverted attention away from the tightening of the belt and further raid on the banks. Time will tell if these subtleties will be revisited as a way to further increase revenue. It is not unforeseeable that the banking surcharge will increase or that companies liable to pay corporation tax earlier will have profits lower than £20 million.

PROPERTY TAXES

Stamp duty, SDLT and LBTT

The UK Government has confirmed the introduction of an SDLT seeding relief for Property Authorised Investment Funds (PAIFs) and Co-ownership Authorised Contractual Schemes (CoACSs) about which there has been consultation over recent months. There will also be changes to the SDLT treatment of CoACSs investing in property, so that SDLT does not arise on the transactions in units, subject to the resolution of potential avoidance issues. These changes have been widely welcomed by the industry.

Meanwhile, the Scottish Government has announced that it will consult on the introduction of a relief from Land and Buildings Transaction Tax (LBTT) for the conversion of authorised unit trusts to open ended investment companies (OEICs). There is currently an SDLT relief for this, but no equivalent LBTT relief, but it is expected that this could be introduced by autumn 2015. It would be helpful if the Scottish Government consultation extended to include an LBTT seeding relief for PAIFs and CoACSs.

One interesting aspect of the Summer Budget announcements was the move to bring houses owned by non-domiciled individuals through offshore companies into the UK inheritance tax net (see above, under Inheritance Tax). This seems to belatedly recognise that the main reason that non-domiciled individuals hold property through companies is to avoid UK IHT, and not to avoid SDLT or LBTT. The Annual Tax on Enveloped Dwellings (ATED), which was introduced to try and stop enveloping of residential properties, has not really resulted in properties being taken out of companies – instead the yield from ATED was considerably greater than expected, despite significant increases in the rates. It will be interesting to see whether the removal of the IHT advantage leads to houses being ‘de-enveloped’ so as to avoid the ATED charge.

Buy-to-let landlords

The unfortunate buy-to-let landlord faces a number of changes, intended to remove what have been described as unfair tax advantages as compared with the position of individuals buying houses. Currently buy-to-let landlords can claim tax relief for mortgage or loan interest at their marginal rate of tax, whereas private individuals get no tax relief for mortgage interest at all. A complete removal of tax relief for interest had been feared, but in fact the proposal is to restrict tax relief on interest payments to the basic rate only, and this will be phased in from 2017. In addition there will be reform of the wear and tear allowance so that instead of being a flat rate deduction, it can only be claimed where expenditure has actually been incurred.

Rent-a-room relief

This useful relief (which also greatly simplifies administration in many cases) rises from £4,250 to £7,500 from April 2016.

CHARITIES AND THE THIRD SECTOR

Unintended consequences – IPT

It would appear that charities will suffer from an unintended consequence tax hit. Perhaps surprisingly, this tax increase on many charities was part of a section in the Chancellor’s speech which considered the Bank Levy. As noted below, it was announced that as of November 2015 Insurance Premium Tax will jump from 6% to 9.5%. As well as the general insurances (public liability etc.) which many charities, third sector, community and not for profit organisations will have in place, many of these organisations (as part of their governance and risk systems) will also have taken out a ‘trustee indemnity insurance’ policy. As a sector the increase could lead to hundreds of thousands of pounds of additional insurance premium tax being paid.

‘Trustee indemnity insurance’ and ‘unintended consequence’ have been linked before. When the Charities and Trustee Investment (Scotland) Act 2005 was enacted, an unintended consequence was that charities would be committing a breach of trustee remuneration rules if that put in place a policy for trustee indemnity insurance. That unintended consequence in the legislation was later amended.

In a previous Budget, a change aimed at reducing tax relief on wealthier individuals making contributions to pensions inadvertently also struck at generous individuals seeking to make donations to charities. The tax relief restriction announced in that Budget speech would have limited amounts that could be given to charity tax efficiently. After that Budget and lobbying from charities groups, that apparent unintended consequence was addressed by removing charitable donations from the tax relief restrictions.  

It may be that charities and third sector groups will seek to lobby to mitigate or reverse the increase in Insurance Premium Tax where the insured is a charity or third sector organisation.

Research & Development Expenditure Credit: universities and charities

In a clarificatory move, there will be legislation to confirm that universities and charities cannot claim Research & Development Expenditure Credit. University spins-out and subsidiaries will still be able to make such claims.

Charity running costs and charitable purposes: National Living Wage

While the National Living Wage (NLW) may increase costs for charities with employees, there will be an increase in the National Insurance Employment Allowance from £2,000 to £3,000 a year, which may be particularly helpful for smaller charities. Charity running cost was a topic recently highlighted by the Office of the Scottish Charity Regulator (please click here to read more)

Of course, while charities may see increases in employment-related costs, many charities will support the concept of the NLW as part of their own charitable purposes, albeit there will be calls in the sector for the level of the NLW to be higher.

Social Investment

While the Budget was quiet on this topic, on Budget day it still seems right to note that we have the first summer of social investment in Scotland with Social Investment Scotland’s, Social Investment Tax Relief Community Capital Fund being open. For a little more on social enterprise and social investment (including the Community Capital Fund) read and follow links on this blog

INSURANCE PREMIUM TAX

With significant changes to the already maze like world of tax credits, hardworking families may have missed the changes to insurance premium tax. It should not come as a surprise to anyone that this increase from November 2015, to 9.5%, from 6% on insurance premiums, has not been welcomed by the Association of British Insurers. It will be even less welcome when individual taxpayers see a hike in insurance premiums.

VEHICLE EXCISE DUTY (VED)

Two reforms have been announced.

Firstly, VED will be revised for new cars from 2017 onwards. In the year of purchase, VED on a new car will be calculated on a fine grained emissions basis, similar to the current system. Only zero emissions vehicles will pay nothing (compared to any car with emissions under 99g/km under the current system). After the first year of ownership, zero emissions vehicles will continue to be exempt while all new other cars will pay the standard rate of £140. For the first five years of ownership an additional premium rate of £310 will apply to all standard rated cars costing over £40,000 when new.

Existing cars will continue to be taxed on the current emissions basis

Secondly, a proportion of VED receipts (currently paid in to the consolidated fund) will be hypothecated towards improving England’s road stock. Scotland and Wales will be consulted further about hypothecated receipts.

Avoidance, evasion, aggressive tax planning and imbalances in the tax system

A new term has been added to the lexicon of tax avoidance – “imbalances in the tax system”. It is not at all clear precisely what this means, but the Chancellor intends to raise £5 billion “from tackling tax evasion, avoidance, planning and imbalances in the tax system”. A number of measures have been announced.

The government confirms the introduction of legislation to modernise and strengthen HMRC’s powers to recover tax and tax credit debts directly from debtors’ bank and building society accounts, including funds held in cash ISAs.

Financial intermediaries and tax advisors will be required to notify their clients about the automatic tax information agreements which the UK has entered into with a number of overseas jurisdictions.

Considerable additional resources will be provided to HMRC to combat avoidance. Particular areas of focus include:

  • Non-compliance by small and mid-sized businesses, public bodies and affluent individuals, which is expected to raise additional tax receipts of over £2 billion by 2020-21. With supreme and certain optimism, it is stated that an “investment” of £300 million over five years “will result in additional tax receipts of over £2 billion by 2020-21.
  • Large business compliance work to further extend efforts to tackle evasion, avoidance and aggressive tax planning by large businesses.
  • A consultation on new measures to increase compliance and tax transparency in relation to large business tax strategies, including a ‘special measures’ regime to tackle businesses that persistently adopt highly aggressive behaviours; and a voluntary Code of Practice defining the standards HMRC expects large businesses to meet in their relationship with HMRC.
  • Identifying and tackling tax avoidance amongst wealthy individuals.
  • Combatting serious non-compliance by trusts, pension schemes and non-domiciled individuals.

SIMPLIFICATION

It is good to see that the Office of Tax Simplification (OTS) has been put onto a permanent statutory footing. The OTS has made a significant contribution to the simplification of the UK tax system and will be commissioned to look at closer alignment of income tax and NICs, as well as the taxation of small companies. A range of changes already proposed by the OTS are to be brought in from next year, including simplifying the benefits and expenses codes and the taxation of termination payments as well as reviewing the rules on travel and subsistence expenses.

DEVOLUTION

The existing timetables for the devolution of taxes were broadly unaffected by the Summer Budget.

Scotland

LBTT (which replaced SDLT) and Scottish Landfill Tax were devolved to Scotland from 1 April 2015 and the Scottish Rate of Income Tax (SRIT) will start to be charged from 1 April 2016. The SRIT will apply to the non-savings non-dividend income of Scottish taxpayers (broadly employment, self-employment and pension income, and income from property). The basic, higher and additional rate of income tax will be reduced by 10 percentage points to 10%, 30% and 35% and the Scottish Rate will be added to those rates. The SRIT will be set for the first time in October 2015 when the Scottish Budget is introduced to the Scottish Parliament.

It seems unlikely that the SRIT will be higher than 10%, given the Tax Lock which is to apply to UK income tax rates, and of course the changes to the taxation of dividends will not be subject to the SRIT.

Looking further ahead, under the Smith Commission proposals the Scottish Parliament is to be given complete control over the income tax rates and bands applying to the non-savings, non-dividend income of Scottish taxpayers, air passenger duty and aggregates levy are to be devolved, and half of the VAT revenues relating to Scotland are to be assigned to the Scottish Parliament. These changes are expected to take effect from April 2018, though the dates have not yet been announced.

Wales

A consultation is ongoing about the proposed introduction of the Land Transaction Tax which will replace SDLT on transactions involving land in Wales.

Northern Ireland

Control over the rate of corporation tax on some types of income and profits is to be devolved to Northern Ireland, recognising the impact of the 12.5% rate of corporation tax in the Republic of Ireland. The announcement in the Summer Budget of reductions in the UK corporation tax rate to 19% from 2017 and 18% from 2020 may make this seem less significant

Key Contacts

Alan Barr

Isobel d'Inverno