A year on from the UK election, a Conservative absolute majority, and even with fixed term Parliaments the next election a distant threat, this should have been able to be billed as a 'Goldilocks' Budget - neither too hot, nor too cold - just right for a confident governing party in a reviving country. But in fact that never seemed likely, and the torrent of leaks, trial runs and kites flown in the weeks running up to the Budget itself have all pointed to the constraints in which the Chancellor finds himself.

So much has been trailed in relation to this year's Budget that the Chancellor came to the Despatch Box metaphorically resembling a stripper who was already down to the bare essentials _ what more could he possibly reveal? But now that this appalling, disturbing image is firmly implanted in your minds, he was in fact able to reveal a great deal more than might have been expected. Thus we already knew about infrastructure investments in the North of England and London; that all English schools were to become academies; that there was to be no (further) fundamental reform of the private pension system; and much else besides. We were certainly aware of the 'direction of travel' in relation to many tax rules _ for example, the plan to get to £50,000 of income before the higher rates of income tax start to bite.

But that did not preclude a range of new measures. On the tax front, the reductions in the rates of capital gains tax rates were surprising; and the even more surprising sugar tax on the soft drinks industry fizzed with expectations for better health (and more revenue, as well as being yet another example of a hypothecated tax, the proceeds being used in this case to support sport in primary schools).

The reductions in capital gains tax rates and the extended difference between the highest rate of CGT from 6 April (20%, with extended amounts available for some at 10%) and income tax (45%) will mean that the distinction between income and capital profits (at least for individuals) becomes all the more important. And as we expand below, rates of income tax will shortly pass entirely into the control of the Scottish Parliament, but capital gains tax (and the law on which constitutes income or capital) will not. Tensions are inevitable.

There was another important reminder of the constantly evolving differences between taxes in Scotland and the rest of the UK, in that new rates and structures were announced for stamp duty land tax on commercial property _ changing a tax which no longer applies in Scotland in ways which it would now be impossible for the Scottish Parliament to replicate (even if they chose to do so) by the start of the new tax year.

This problem, if that is what it is, is scheduled to get worse, because by this time next year it is expected that the Scottish Parliament will have control of rates and thresholds for income tax other than on savings and dividend income. Mr Osborne did announce changes in the personal allowance and basic rate threshold, but these will only take effect from April 2017, which at least gives the Scottish Parliament a chance to factor these proposals into its own proposals for Scottish rates of income tax.

The personal allowance (which will not as such be within the powers of the Scottish Parliament to alter, although they could set a zero rate of income tax) is to rise further from its scheduled level for 2017-18 (to £11,500). Similarly, the basic rate threshold is to rise in that year so that the higher rate will only become payable on income above £45,000, bringing closer Mr Osborne's stated target of £50,000. This threshold will be in the control of the Scottish Parliament; and thus this proposal may not come into effect at all for non-savings income. But the threshold for savings income will remain a UK tax matter and the arithmetical horrors of different thresholds being set by the two parliaments for different types of income remain to be fully explored.

But there is in any event a fundamental problem with the timetable for changes of this sort. Under the UK system, measures are put into immediate effect by Provisional Collection of Taxes resolutions, which can readily be done with enough speed to be in effect for the April following a Budget even in mid-March. Scottish tax changes have to go through the full Scottish Parliamentary process, and with the best will in the world it would be virtually impossible to get Scottish changes announced now in force by 1 (or 6) April 2016. Potentially an (ongoing) problem for the future.

But the changes (which are at the higher end increases) in SDLT on commercial property may have let the commercial property genie out of the bottle for its Scottish equivalent, LBTT. It seems unlikely that the rates for commercial transactions will remain lower in Scotland than in the rest of the UK (in some transactions); and the paucity of direct votes in property investors may in fact encourage rather greater increases north of the border.

Other direct mentions of Scottish matters were restricted in the speech, but included a swipe of the "where would you be now?" variety at the prospects of Scottish independence in the current economic climate, especially given the direction of the oil price. There was however a more positive reaction to that situation, with significant cuts in oil and gas taxation (described as including the effective abolition of petroleum revenue tax), backdated to 1 January 2016. There was a mention of backing for the new V&A outpost in Dundee, as well as intriguing reference to "opening negotiations on a city deal with Edinburgh", whatever that may be. Those of us living in that city have our breaths suitably bated.

In another openly political gesture, from the fines that keep on giving, deriving from the sins in relation to LIBOR, new community facilities are to be provided for local people in Helensburgh and the Royal Navy personnel nearby at Faslane. (LIBOR fines also find their way to (at least) children's hospital services and an Air Ambulance Service for Northern Ireland.)

Corporation tax rates continue their downward march, this time down to 17% by 1 April 2020. This additional further reduction was another rabbit from the Budget hat. But while that may have brought stifled gasps of surprised delight, there was not the same degree of surprise in relation to further crack-downs on avoidance and evasion, as well as further evidence of the growing confusion between the two. One or two changes were specifically targeted at the multinational avoidance which creates such distressing headlines.

All too typically, having locked the door on rises in the main rates of income tax, National Insurance and value added tax (by faintly ludicrous legislation specifying maximum main rates for each tax), there were prodigious numbers of smaller changes, tinkering at the all too fuzzy edges of our complex tax system.

But more fundamental changes were made to ISA reliefs, and while there was no further pension revolution, no Budget would be complete without some further changes to that system.

Land and buildings remain an attractive target from which to raise tax, and this continued in this Budget, both in terms of direct transaction taxes and restrictions on reliefs.


Allowances and thresholds

The proposed income tax allowances and thresholds for the next two years (with this year's for comparison) are as follows:

2015 / 16 2016 / 17 2017 / 18
Personal Allowance £10,600 £11,000 £11,500
Basic Rate Band £31,785 £32,000 £33,500
Higher Rate threshold £42,385 £43,000 £45,000

The Chancellor set the level of both the personal allowance and the basic rate band in his summer (post-election) Budget but he has chosen to increase these further. The personal allowance will now be £11,500 and the basic rate band will be £33,500, meaning that only incomes greater than £45,000 will incur higher rate tax.

From 6 April 2017, the Scottish Government will have the power to set its own thresholds as well as tax rates for non-savings and dividend income. To enable non-savings income tax rates to be devolved to Scotland, legislation is being introduced to separate that tax rate out from the tax rate for savings and dividends in the primary legislation. This is perhaps controversially (and inaccurately, given the position in Wales) described as part of the ‘English Votes for English Laws’ agenda, as non-Scottish MPS will be more readily given the power to fix UK income tax rates.

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.

It is also worth noting that both the £100,000 threshold at which taxpayers begin to lose their personal allowance and the additional rate threshold of £150,000 remain unchanged and this has been so since 2010 – a good example of fiscal drag where the possibility of raising the main rates has been removed.

Although not announced in this Budget, National Insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold in 2016-17 (and presumably in 2017-18, although this has not yet been confirmed.)

It was confirmed that from April 2018, Class 2 National Insurance contributions will be abolished entirely. In recent years in particular, these have probably been more of a compliance measure, to get the self-employed into the system, rather than a means to raise much by way of actual taxes.

The employer’s Employment Allowance (a rebate from employer’s NIC contributions) will increase from £2,000 to £3,000 from April 2016.



Where employees enjoy an asset provided by an employer, they are subject to tax on the difference between the cost to the employer and the amount paid by the employee. Certain benefits are calculated in a different way and currently the employee can pay a sum equal to the benefit charged and not suffer tax on the use of that asset despite the fact that the cost to the employer may be more. Legislation will be introduced to remove this advantage.

With regard to company car tax rates, a new measure will set the rates for the years to 2019-20, essential increasing them by 3% so that a maximum of 37% of list price will be reached in that year for cars with CO2 emissions. Clarification is also given of the much lower rates which apply to cars which do not have a registered CO2 emissions figure and which cannot produce CO2.

In relation to van benefit charges, the restriction to 20% of the charge on conventionally fuelled vans for zero emissions vans is to be extended to 2017-18. Thereafter, the charge will rise by 20% increments until it equates with the charge on conventional vans by 2022-23.

Changes are to be made to the PAYE regulations to allow on a voluntary basis employers to tax non-cash vouchers and credit tokens through the payroll system – this allows the cash equivalent of the benefit to be taxed directly along with actual payments made to the employee.


The Government is considering limiting the range of benefits which attract income tax and NIC reliefs where provided as part of salary sacrifice. But these changes will not affect pension saving, childcare and health-related benefits.


In 2012, at the Tory Party Conference, George Osborne took everyone by surprise by announcing a new tax-efficient employee share arrangement. Called ‘Employee Shareholder Status’ (or ESS) the premise was simple – in return for an employee surrendering certain statutory employment rights, they could receive tax-efficient shares from their employer. Whilst there was the potential for a modest amount of relief from income tax on acquisition of the shares, the real tax advantage lay in the fact that any gains made on the shares were completely exempt from capital gains tax. In short, zero CGT was payable on the sale of the shares.

And so yesterday, on 16 March 2016, we received another surprise. George Osborne was now capping the amount of tax-free gain that could be made on the shares. Individuals with ESS shares, who make more than £100,000 of gains on their ESS shares in their lifetime, will now be charged to CGT on gains made above that threshold. The cap applied from midnight and affects employee shareholder agreements entered into after that time. This cap will dramatically reduce the use of ESS as, together with the new 20% CGT rate, the capital gain benefits of ESS are now largely redundant.

So why have the tax advantages of ESS been scaled back so dramatically after such a short period of time? The reason is probably political. Despite a slow start, ESS grew in popularity and for those companies that did not qualify for Enterprise Management Incentives (another type of tax efficient employee share plan) ESS became the equity incentive of choice, especially amongst private equity backed companies. Furthermore ESS was being combined with something called ‘growth shares’ which leveraged their potential benefit even more.

Quite simply, a complete exemption from CGT from the sale of employee shares was always too good to be true and it was probably only a matter of time before a damaging newspaper story emerged about executives of dubious character making £1m+ tax-free windfalls. With one eye on the political weather, George Osborne was saving himself the embarrassment of having to explain why one of his pet projects only benefited the already well off.


A small change is made to the share identification rules in relation to shares obtained from Enterprise Management Incentive options.


A package of measures it to be brought forward to tackle the use of disguised remuneration schemes, whether in the form of employee benefit trusts or otherwise. The changes include a new Targeted Anti Avoidance Rule (TAAR), and the withdrawal of tax relief on investment returns within such schemes. The information note issued on this makes it clear that HMRC regard such schemes as never having worked and that they are continuing to pursue these through the courts.


From April 2018, the rules on termination payments will be tightened, so that employer National Insurance contributions will be due on payments above £30,000 if such payments are liable to income tax.


As from 5 April 2017, there will be a new £1,000 allowance for trading income. Individuals with rents or trading turnover below £1,000 will no longer need to declare or pay tax on that income. A similar allowance will apply for property income – see below. Those with income above that will have a choice:

• calculate their taxable profit in the normal way by deducting their expenses; or

• deduct the relevant £1,000 allowance from their gross income.

Like the £5,000 dividends allowance and the £1,000 savings allowance, this will save some from having annual contact with HMRC. It should also benefit those who have little or no expenses to offset their income from property or trading, by allowing them to claim £1,000 and dispense with keeping a record of expenses.

Trading income in non-monetary form

Measures are to be introduced to put beyond doubt that trading (and property) income received in non-monetary form is fully taxable.

Renewals and other capital allowances

The renewals basis is to be repealed, ensuring that businesses will obtain relief on the replacement and alteration of tools under the normal capital allowances regime.

The period in which businesses operating in enhanced capital allowance sites in Enterprise Zones can obtain 100% allowances is to be extended to eight years.

Royalty income

Royalty income will be subject to tax at source where that income is made to a connected person with the purpose to obtain a tax advantage under a double taxation agreement.


It is a truth universally acknowledged that trying to make sense of the employment intermediaries legislation (otherwise known as IR35) is like trying to win at tennis against a wall. Hence (aside from the optimistic few who view them as an insoluble opportunity) they are widely disregarded. One feels some pity for agencies and public sector engagers following today’s budget.

From April 2017, changes to IR35 will require that where an individual provides services to a public sector client via a personal service company (PSC), then the public sector client will be responsible for determining whether IR35 applies and, if it does, deducting the appropriate tax and NICs from any payments made to the PSC. The burden of employers’ NICs on any payments will also be passed to the public sector client. Effectively – though HMRC’s technical note does not actually go this far – the individual service provider will be brought on to payroll.

If the public sector client doesn’t contract directly with the PSC, but engages them via an agency, the duty to determine whether IR35 applies, to deduct tax, and pay employers’ NICs will fall to the agency instead. Where chains of agencies and other intermediaries are involved, the intermediary closest to the PSC will suffer the various obligations. A dual layer of compliance is added in these cases; the public sector client will need to notify the intermediary that they will be receiving the services, and will be responsible for ensuring that the intermediary is correctly meeting the requirements of the revised IR35 rules.

By shifting the onus of compliance on to public sector bodies and relevant intermediaries, these rules spirit away one of the chief attractions of hiring via a PSC: the opportunity not to have to think about IR35 at all. But – fear not! – HMRC will make things easy for beleaguered public sector bodies by offering up a simple (!) online tool that will determine whether an engagement is effectively employment or not. The tool will be intended to give upfront comfort to the relevant bodies by asking a few questions about the engagement in question before issuing a verdict. It is not yet clear what the underlying tests will be, and a consultation will be launched before the changes are enacted in April 2017. Nor is it clear what the legal status of the outputs will be – if a contract is cleared by the tool, to what extent can that be relied upon or overturned?

Sporting testimonials

Following the completion of a consultation into sporting testimonials, employed sports person who receive income from a sporting testimonial will be subject to a one off exemption of up to £100,000 provided that testimonial is not contractual or customary. It should be noted that any unused exemption is not available to carry forward.


Perhaps surprisingly (although the most fundamental changes discussed had been previously rejected), no significant changes were announced in relation to pension saving. Pension contributions will continue to benefit from income tax and NICs relief when provided through a salary sacrifice arrangement. The Chancellor confirmed that there would be no changes to pension savers' existing ability to take a tax free lump sum which is normally 25% of the value of their benefits retained in a registered pension scheme.

In a nod to the more fundamental changes to pensions that were discussed, a new ‘Lifetime ISA’ was announced (see below).

Technical changes will be made to the tax legislation to consolidate the existing 'pension flexibilities' to ensure that these are working as intended. Such changes will include legislating to allow certain money purchase pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000, and to increase the flexibility for serious ill-health lump sums.

There are to be increased incentives to take pensions advice. Employers can finance such advice on a tax-free basis on up to £500 worth of advice; and the same figure is being considered as an allowable amount which members of defined contributions scheme can use to pay for their own financial advice.


In perhaps the most unexpected change introduced in the 2016 Budget, capital gains tax rates will be reduced by 8% to 10% and 20% for basic and higher rate tax payers respectively with the intention of encouraging an investment culture. Given that even with low inflation, CGT is increasingly being paid purely on inflationary rather than ‘real’ gains, this reduction might be thought of as belated recompense for the removal of indexation relief.

However, this will not apply to residential property where this is chargeable to capital gains tax. CGT rates will remain at 18% and 28%.

The same applies to so-called ‘carried interest’ (which might still be regarded as generously treated as compared to the income tax which might otherwise be charged). In addition, CGT treatment will only be available for carried interest where the fund in question undertakes long-term investment activity – that is with an investment horizon of longer than three years.

Entrepreneurs’ relief

A variety of changes have been introduced to improve entrepreneurs’ relief under the Government’s stated objective of encouraging individuals to invest in unlisted trading companies.

The biggest change sees the 10% relief extended to disposals by individuals who are not employed in the business but who subscribe for shares from 17 March 2016 onwards and hold these shares for three or more years. This is a significant extension to a relief that has essentially been directed at the effectively involved owners of businesses. This relief, which will be subject to a lifetime cap of £10m (separate from the normal entrepreneurs’ relief limit of the same amount), will also extend to beneficiaries of trusts.

Two further changes have been introduced to address the impact of anti-abuse legislation introduced last year; consequently both changes are to be backdated to 18 March 2015. The first change is to the definition of a trading company, where the company engages in a joint venture. This change will allow a person selling shares in the company that has invested in the joint venture to claim entrepreneurs’ relief, provided the person effectively has a holding of 5% or more in the joint venture, e.g. where the person has a 20% in a company that has a 40% share in a joint venture, that person is deemed to have an 8% share in the joint venture and will qualify for the relief.

The second change is in respect of associated disposals, where the disposal is to a family member. It provides a limited extension of the relief.


The rules on ISAs have been subject to much recent change. This has not stopped yet. The most important new change is an increase in the basic ISA limit to £20,000 from 2017-18.

The Chancellor also announced a 'Lifetime ISA' for adults under the age of 40 which will be available from April 2017. The contribution limit will be set at £4,000 per year, with a 25% bonus from the Government. Funds, including the government bonus, from the Lifetime ISA can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn (thus as a quasi-pension) from age 60. The popular Help to Buy ISAs can be rolled into these new Lifetime ISAs.

There will be consultations on whether it should be possible to withdraw funds from a Lifetime ISA for other specific life events; and whether it would be appropriate to allow borrowing from them.

EIS and VCT Changes

Only minor changes to EIS and VCT rules this year, clarifying the rules on average turnover periods and the periods for operating costs conditions, as well as clarifying the non-qualifying investments which may be made for a VCT.


After very major changes to inheritance tax in the form of the extended residence nil-rate band and the equally important non-change in the freezing of the basic nil-rate band, there were much more limited changes in this Budget. The Finance Bill will nevertheless have lengthy provisions on the extension of the residence nil-rate band to downsizing situations, under which a former home will be replaced by other assets without the additional allowance being lost.

But there was a surprise change to the taxation of land, buildings, pictures, furniture and the like, which have been conditionally exempted from tax on the grounds of national or historic interest.

Property may have been conditionally exempted from estate duty many years ago (before 1975) and this conditional exemption can continue until a sale of the property. Where conditional exemption is not renewed on the death of the current owner and inheritance tax becomes payable, then the old estate duty charge flies off, and the only charge is to inheritance tax at 40%. The estate duty charge which would have arisen on a sale might be as much as 80% or as low as 4%, depending on the size of the previous deceased’s estate and the rates in place at the date of death. Setting the rate at the 40% inheritance tax rate could mean that the rate was much higher or much lower than the estate duty charge would have been. Where the estate duty rate was high then the reduction in the charge could be up to half.

HMRC are to be given the option to charge either tax, but not both. This means that the position will be the same as on a sale of the property when HMRC already have a right to choose the tax.

This change will not affect many people but the effect could be significant. The budget release suggests that the exchequer impact will be negligible so one surmises that HMRC did not like some specific recent case that occurred.


Wondering where to go for your next UK city break? Look no further than Hull. The Chancellor has confirmed that an additional £13m will be made available for the 2017 City of Culture, including the ongoing refurbishment of Hull New Theatre. This is in addition to support for other specific projects including the Hall for Cornwall in Truro, a new Shakespeare North theatre in Knowsley and an extra £20m for the Cathedral Repairs Fund. Of course, Scottish cities may look at this type of funding and see the social and economic value attached to arts & culture with no better example being Paisley, which is currently bidding to be UK City of Culture 2021.

Some good news this time around for the Arts Council, museums and galleries with the Treasury announcing that increased funding will be available. A new tax relief for developing temporary or touring exhibitions will also be introduced from 1 April 2017 to encourage museums and galleries to develop creative new exhibitions and display their collections across the UK. A consultation is set to take place this summer. This follows a trend in recent years for new cultural tax reliefs such as Theatre Tax Relief and Orchestra Tax Relief.

The Government will also widen the eligibility criteria for the VAT refund scheme for museums and galleries, with new guidance to allow a wider range of free museums to access the support.


A relatively quiet Budget for charities, but one that underlined that for charities tax might not be the key factor (with a Budget or more generally) and that other fiscal benefits and funding options are valuable to the financial health of the sector.

There had been a pre-Budget question over the sector’s business rates discount. The starting point for charities is that they currently receive an 80% mandatory rates relief with a discretionary 20% additional relief granted by the relevant local authority. This is extremely valuable: last year it was worth around £1.7 billion to charities across the UK (£174 million in Scotland as we have discussed before). Charities had been concerned that as part of wider changes to business’ rates relief, the mandatory charities rates relief would be changed or even removed. Silence on this point in the Budget is good news for charities, but an area to monitor.

With charities and not-for-profit organisations becoming more involved with alternative ways to leverage funding, such as social investment, the Government has announced that it will double the funding for the Rough Sleeping Social Impact Bond announced at the Autumn Statement 2015 from £5 million to £10 million, to drive innovative ways of tackling entrenched rough sleeping, including ‘Housing First’ approaches.

George Osborne announced that £45 million of banking fines will go to military charities and other good causes over the next four years, including £5 million for a National Mesothelioma Centre, £4.5 million for a new air ambulance service in Northern Ireland and £3.5 million for Samaritans to support armed services personnel and veterans.


Further reduced rate of corporation tax

Following announcements that the rate of corporation tax would come done to 18% by 1 April 2020, this has now been further reduced, to 17% from that date. This follows a reduction to 19% from 1 April 2017.

Reducing the use of losses

From 1 April 2017 the government will restrict the amount of profit that can be offset through losses carried forward to 50%. However, this restriction will only apply to profits in excess of £5 million. This rule will bring the UK in line with the majority of other G7 countries that already have restrictions of this kind in place, and it is claimed that 99% of all companies will be unaffected.

Deferring advancing payments

The scheme to bring forward the dates by which the most profitable companies pay their tax is to be deferred until 1 April 2019. This will mean that companies with profits exceeding £20 million will make corporation tax payments in months 3, 6, 9 and 12 of the relevant accounting period.

Loans to participators

With income tax rates due to rise from 6 April 2016 to 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers (after the application of a dividend allowance), the tax charged on loans to participators has also been raised from 25% to 32.5% to keep this aligned to the dividend higher rate of tax. This tax is charged on the company, not the participator.

Research and development and vaccine research relief

Changes include one beneficial to SMEs when calculating whether they have breached the £7.5 million cap for any one project; and for the expiry of the apparently little used specific relief available for certain types of vaccine research.

Transfer pricing guidelines

The definition of transfer pricing guidelines will be updated to incorporate changes made in the parent OECD guidelines published in October 2015.


There is a series of other measures designed to ensure that multinational companies pay their ‘fair share’ of taxes. These include legislation in relation to the Base Erosion and Profit Shifting (BEPS) anti-hybrid rules from 1 January 2017, which are targeted at the tax arbitrage that can be derived from hybrid instruments and hybrid entities. This may be of particular relevance to the property industry and is dealt with below under Property Taxes, along with other rules restricting interest relief.

Further enforcement measures in relation to smuggling and the hidden economy more generally, including “…tougher sanctions for traders and evaders who have been penalised for deliberate non-compliance but have failed to change their behaviour”. “Traders” and “evaders” may provide a nice rhyme, but the juxtaposition seems otherwise unfortunate, to say the least.


Registration and deregistration thresholds

These are increased in the normal way – to £83,000 for registration and to £81,000 for deregistration.

Representatives for overseas businesses and online marketplaces

HMRC are to get more effective powers to direct an overseas business to appoint a UK VAT representative with joint and several liability; and to seek a security in such circumstances. A new provision is to be introduced, which will allow HMRC to hold an online marketplace jointly and severally liable for unpaid VAT of an overseas business that sells goods in the UK via that marketplace. HMRC will sue these powers selectively for the highest risk cases to reduce non-compliance.


Following on from the restrictions in the 2015 budget, the Chancellor has introduced further measures to boost the revenue raised from the UK banking sector.

From 1 April 2016, the Government will reduce the amount of profit that banks can offset with pre-2015 losses from 50% to 25%. This is a further move to increase the revenue collected from the banking sector where the banks have utilised the losses on their balance sheet from the financial crisis to reduce their tax liabilities.

This measure is in keeping with the restriction on large companies generally (see above).

There are minor changes made to the rules on excluded entities which define banks in various parts of tax legislation.


In response to the downturn in the oil and gas sector, there have been further changes proposed to oil and gas taxation. It has been announced that Petroleum Revenue Tax will be “effectively abolished”. The actual change is to a zero-rate, which presumably allows for it to be increased more readily if circumstances change. In addition, the rate of Supplementary Charge in respect of adjusted ring fence profits is to be reduced from 20% to 10%. Both these measures are backdated to 1 January 2016.

It remains to be seen how effective these changes will be. There were hopes that the Supplementary Charge would be removed altogether; at this point in the development of the UK Continental Shelf more certainty around future taxation is key. The fear is that the framework remains to increase these taxes easily if and when the oil price rebounds.

There are also minor amendments to the rules in relation to onshore, cluster area and investment allowances; and further work on decommissioning costs, including on whether tax relief could encourage the transfer of late life assets.


Residential property tax changes

In the 2015 Budget, changes were announced that will be introduced from 6 April 2016 to provide landlords relief on the replacement of furnishings rather than claim a percentage of the rent. In addition to this, the 2016 Budget introduces a change to the renewals basis which results in a landlord being granted relief for the cost of implements, utensils and other equipment through capital allowances.

£1,000 allowance

As with trading income (see above) from 5 April 2017, there will be a new £1,000 allowance for property income. Individuals with property rents below £1,000 will no longer need to declare or pay tax on that income. Those with income above that will have a choice:

• calculate their taxable profit in the normal way by deducting their expenses; or

• deduct the relevant £1,000 allowance from the gross income.

Restriction on tax relief for interest paid by companies

As widely predicted, the Chancellor has confirmed that the UK will cap deductions for interest paid at 30% of EBITDA. This was one of the outcomes of the OECD’s base erosion and profit shifting (BEPS) project, designed to counter the shifting of profits to low tax jurisdictions through the use of debt. This is likely to have serious implications for property companies which are often highly geared, although the ratio can be applied on a group wide basis, which goes some way towards recognising this.

Property development in the UK by offshore companies

The Government is concerned that developers are using offshore structures to avoid paying UK corporation tax on profits from property development in the UK. Although corporation tax is payable if development is carried out through a permanent establishment in the UK, a number of different arrangements have been deployed in recent years to trade in the UK without a permanent establishment, and the Government wants to put a stop to these. New legislation is to be introduced as part of the Finance Bill 2016 to tax trading profits derived from land in the UK which will not depend on a permanent establishment in the UK. There will be a Targeted Anti-Avoidance Rule to counteract arrangements put in place between Budget Day and the introduction of these new rules, as well as arrangements entered into later which are designed to ensure that profits are not subject to the new charge.

Hybrid rules

As also expected, the UK is to legislate in relation to the BEPS anti-hybrid rules from 1 January 2017 which are targeted at the tax arbitrage that can be derived from hybrid instruments and hybrid entities. Hybrid instruments include types of funding instruments that are taxed differently in different jurisdictions, for example by being treated as debt in one country and as equity in another. Hybrid entities are treated differently in different jurisdictions, ie as tax transparent in one jurisdiction and opaque in another jurisdiction. These could include US ‘check the box’ entities as well as the Scottish Limited Partnership. The introduction of anti-hybrid rules into UK tax legislation may necessitate a review of existing structures, particularly in relation to inward investment into the UK, and the adoption of a different approach in the future.

SDLT ChangesProgressive rates for non-residential property

When details of the Land and Buildings Transaction Tax were announced, the Scottish Government made much of the replacement of SDLT’s slab system with progressive rates for LBTT. Later that year the Chancellor introduced progressive SDLT rates for residential property, together with a significant increase in the nil rate band. As a result of that, the Scottish Government changed the LBTT rates in January 2015.

SDLT has now caught up with LBTT entirely, although of course it now applies only to UK land out with Scotland; with effect from midnight on Wednesday 16 March 2016, a progressive rate structure is being introduced for SDLT on non-residential property (commercial, agricultural and mixed), with a top rate of 5% which applies to the consideration above £250,000.

The new SDLT rates on non-residential property from 17 March 2016 are as follows:

Transaction Value BandRate
£0 - £150,0000%
£150,001 - £250,0002%

The SDLT rates for purchases of non-residential property have now overtaken the LBTT rates which are as follows:

Purchase PriceLBTT rate
Up to £150,0000%
Above £150,000 to £350,0003%
Above £350,0004.5%

In addition, a new 2% rate for SDLT will apply to leases where the NPV of the rent is above £5 million. The SDLT lease rates from 17 March 2016 are as follows:

Net present value of rentRate
£0 - £150,0000%
£150,001 - £5,000,0001%

This means that the SDLT on a high value lease will be higher than the LBTT, which does not have the 2% rate. The LBTT lease regime is rather different from SDLT, of course, as it is more closely based on the rent actually payable under the lease, whereas SDLT is only paid by reference to the rent in the first five years. This means that LBTT on leases can be higher than the SDLT on a lease with exactly the same rent. The introduction of the higher 2% band certainly redresses that balance.

These new SDLT rates will have effect for transactions completing on and after 17 March 2016. Where contracts have been exchanged but transactions have not completed before 17 March 2016 purchasers will have a choice of whether the old or new structure and rates apply.

In the light of these changes to SDLT, it will be interesting to see whether the new Scottish Government takes any steps to increase the LBTT rates on commercial property after the Scottish elections in May 2016.

SDLT 3% surcharge – no relief for institutional investors

Details of the 3% SDLT surcharge for additional residential properties have been eagerly awaited, but the lack of any relief for purchases of multiple properties by institutional investors was not expected at all and has already been widely condemned. This is in stark contrast to the position in Scotland where the supplement is not payable on the purchase of six or more dwellings in a single transaction. Coupled with the lower LBTT rates for purchases of non-residential property, this should give Scotland a competitive advantage in attracting investment into important sectors such as the Private Rented Sector (PRS), also known as Build to Rent.

Like the LBTT surcharge, the SDLT surcharge applies if at the end of the day of purchase of a residential property, the individual owns two or more dwellings, unless they are replacing their main residence. Purchasers will have 36 months to claim a refund of the higher SDLT rates if they sell a former main residence at a later date. For LBTT there is only 18 months to claim a refund.

Both the SDLT 3% higher rate and the LBTT 3% supplement apply to purchases completing on or after 1 April 2016. Where contracts have been exchanged on or before 25 November 2015 the higher SDLT rates do not apply. There is a similar transitional relief from the LBTT 3% supplement where a contract has been entered into before 28 January 2016.


This was perhaps the biggest surprise in the whole Budget. It will be levied on producers and importers of soft drinks that contain added sugar, as a stick with which to encourage such companies to reduce the sugar added to such drinks. It will be levied at two rates, depending on the proportion of sugar in the overall drink. The carrot comes in the form of reductions in this levy as and when behaviours change. It is expected to raise more than half a billion pounds when it is first introduced in two years, although the yield is later expected to fall.

One wonders if buying a low sugar drink and then adding your own sugar will be treated as tax avoidance – an inserted spoon rather than an inserted step, but perhaps purely for tax purposes.

As with so much else, the levy is then to be hypothecated, primarily to fund school sporting activities. This usage will however depend on Scottish Government decisions, as that is a devolved matter.


Fuel duty was frozen for at least another year, which may be a little surprising given recent falls in petrol prices driven by the fall in the price of oil. A new reduced duty rate was introduced for aqua-methanol, a new fuel.

Measures are to be introduced to make sure that gaming duty from casino operators does not increase simply as a result of inflation.

Tobacco duty was previously scheduled to rise by 2% above inflation and this will continue; hand-rolling tobacco duty attracts a further 3% addition to this.

In other ‘sin’ taxes, beer, cider and spirits duty are frozen, while other alcohol duties (principally on still and sparkling wine) are to rise by the rate of inflation.

The Climate Change Levy is to be increased, to reflect changes in the fuel mix used in electricity generation; and to recover the revenue lost by closing the Carbon Reduction Commitment Energy Efficiency Scheme.


Air passenger duty (which is another tax due to be devolved to, and on current plans reduced by, the Scottish Government) is to increase in line with the Retail Prices Index.


UK Landfill tax rates are increased in line with the Retail Prices Index, a measure already reflected in announcements for the Scottish Landfill Tax.


A more modest increase of only 0.5% to 10% from 1 October 2016 was announced. There were fears that this cash cow might have looked like a further source of more substantial milk, as happened last year.


Rates are to be increased in line with the Retail Prices Index.

The exemption for classic vehicles is to be extended on a rolling basis so that it automatically apples to vehicles more than 40 years old.


From 2018, businesses, including landlords who keep their records digitally and provide HMRC with digital updates will be able to choose to adopt ‘pay-as-you-go’ tax payments, which may suit some. There are also to be improved, 7-day services and reduced call waiting times from HMRC staff.


There are again promises to “…explore options to simplify the tax rules for businesses, landlords and the self-employed….” We will see.


Devolved Taxes looking forward

The introduction of the LBTT 3% Additional Dwelling Supplement required an Act of the Scottish Parliament and the Scottish legislation was passed last Tuesday, 8 March 2016. The Bill was introduced into the Scottish Parliament on 27 January 2016 and had to go through all its parliamentary stages in a very short timescale so that it could be passed and receive Royal Assent before the Scottish Parliament dissolves for the Scottish elections on 23 March 2016. Even if it had not been an election year, it would have been difficult to introduce legislation announced in the Scottish budget in December in sufficient time for it to take effect in April of the following year when tax changes normally take place.

Changes can be made to UK taxation legislation more easily using the Provisional Collection of Tax arrangements, which allow changes to primary legislation to be introduced by resolution with immediate effect, provided appropriate legislation is introduced within a fairly short timescale. It may be that a similar process should be considered in Scotland. The process of introducing and amending Scottish tax legislation is certainly an area which the Finance Committee of the Scottish Parliament have indicated they will be looking at very closely, as it is clearly important for the Scottish Parliament to be able to make changes to tax legislation quickly. This will become all the more important as the rate of tax devolution increases as and when the Scotland Act 2016 is passed.


Alan Barr


Isobel d'Inverno

Director of Corporate Tax