Budget Alert
2016
Budget alert
2016
Introduction
In choosing 16 March to deliver this year’s Budget, the Chancellor
missed the Ides of March by one day which may have been
precipitous given the speculation running up to the day of the
speech. In practice this was something of a mixed Budget with big
businesses paying for the cuts for small ones. With developments
including the outcome of the review of business rates, the
impact of the Budget on small businesses was relatively clear.
The outlook for big businesses is less easily determined. The
further one percentage point cut in corporation tax will help, as
will deferral of the announced advance in payment dates, but the
seven other changes to corporation tax will raise over £9bn over
the five-year Budget period.
Turning to the detail, the key announcement for business was the
introduction of the Business Tax Roadmap (BTR) setting out the
Government’s plans for business taxes to 2020 and beyond. With
90% of respondents to our 2016 Tax Director Survey indicating
that a Tax Roadmap was important for business, this is a welcome
development. More than three quarters said it would provide the
certainty they need for long-term planning which could well be a
key differentiator for the UK as a place to do business.
At 35 pages the BTR is perhaps not the clear route guidance that
was hoped for and was not as extensive as had been previously
indicated but, at the same time, business will be surprised by the
promise of a 17% mainstream corporation tax rate by 2020.
As anticipated, the Chancellor provided clarification of the next
steps on the implementation of OECD’s Base Erosion and Profit
Shifting (BEPS) recommendations including almost £4bn raised
from a restriction on deductibility for corporate interest which
is to be brought in earlier than many hoped. The perceived
tax advantage arising from the use of mismatches involving
permanent establishments will also be eliminated as an add on to
the OECD recommendations on hybrids.
Other key announcements for business include changes to the
treatment of tax losses – increasing the flexibility for losses to
be used within groups or against other income. However, losses
will only offset up to 50% of profits in excess of £5mn something
the Chancellor had previously targeted only on banks, arguing
that such extreme measures were warranted as the banks had
received public support in the financial crisis. Now all types of
company may have to borrow to fund their greater tax payments –
at higher interest rates than the Government would have had to
pay. And for the banks the restriction was made even tighter. On
the plus side, some of the stringent restrictions on losses carried
forward will be relaxed for new losses.
While there were fewer headlines for individuals, the introduction
of the Lifetime ISA is likely to be a popular measure. However,
in the long run it raises some big questions around practical
implementation so providing guidance to both the industry and to
savers will be key.
More broadly, with the personal tax allowance to rise to £11,500
and the higher rate threshold increasing to £45,000 from
April 2017, the spending power of middle earners could be
boosted by up to £900. The Budget also included a cut in the
main rate of capital gains tax from 28% to 20% and for basic rate
taxpayers from 18% to 10% with investors in stocks and shares
being the principal winners from this measure. Investors in
residential property are once again left out in the cold, with the
higher 28% rate continuing to apply to disposals of second homes
and buy-to-let properties.
Changes to entrepreneurs’ relief will be another boost for
investors with an extension to the availability of relief on
associated disposals and changes to the treatment of joint
ventures and partnerships. There will be also be an extension
of entrepreneurs’ relief for long term investment in unlisted
companies (up to a maximum of £10mn). It can, however, be
notoriously difficult to extract value from private companies and
this may dampen the impact of the measure.
So on balance, despite lecturing on sugar intake, the chancellor
didn’t adopt the ‘less is more’ approach to this Budget. In reality,
with some fifty changes announced and more heralded in the
Business Tax Roadmap, it may be some time before the real
impact is truly felt.
We begin with EY ITEM Club’s economic report, analysing the
implications of the Chancellor’s proposals.
1
Budget 2016
EY ITEM Club
Chancellors of the Exchequer are expected to pull rabbits out
of a hat, but this time the hat had been progressively shrunken
by downward revisions to economic data and forecasts and, last
but not least, OBR projections of future productivity growth.
The cumulative effect of these adverse changes was to reduce
the level of real GDP by 1.5% (3% in cash terms) by the end of
2020 and revenues by more than £16bn in the crucial year of
2019/20, compared to the OBR November forecast.
Remarkably, George Osborne was nevertheless able to conjure
up several significant tax cuts and spending commitments, while
sticking to his target for a budget surplus by 2019/20. Indeed,
the borrowing figure for the current tax year, which many of us
expected to be revised up, was in fact revised down from £73.5 to
£72.2bn. This year’s improvement is due to the OBR’s optimism
that the disappointing performance of the first ten months will
be reversed in February and March. The surplus in 2019/20
is achieved through a variety of offsetting tax increases and
spending cuts, as well as a wholesale reallocation of spending and
receipts and spending to and from earlier years.
Once again, the Budget delivered bad news for big businesses,
which was somewhat clouded by a surprise cut in the corporation
tax rate to 17% by 2020. Soft drinks companies will face a new
sugar levy and large firms in general will face higher tax bills
courtesy of restrictions on tax relief on interest payments and
other reforms to the corporation tax system. The news was
better for small firms, with a rise in the threshold for small
business rate relief and the removal of commercial stamp duty
on property purchases up to £150,000. However, to the extent
these reductions are ultimately reflected in property values, the
ultimate beneficiaries will be landlords not small companies and
their employees.
For individuals, the personal tax free allowance will be raised to
£11,500 and the higher rate tax threshold increased to £45,000
from April next year, moving both closer to the Government’s endof-parliament goals. The Chancellor is also introducing a Lifetime
ISA for under-40s, enabling them to save £4,000 a year. For each
£4 saved, the government will give them £1. But with the bottom
50% of households by income holding only 9% of household
wealth, this is a giveaway that is likely to favour those who would
have saved anyway.
2
These giveaways are funded in large part by a £650mn cut in
overseas aid; a £3.5bn departmental efficiency review that will
report in 2018; an increase in pension contributions by public
sector employers and the stricter eligibility criteria for disability
benefits announced earlier in the week. Departmental spending
plans are higher over the next two years, but then move sharply
lower than envisaged in November for 2019/20 and 2020/21,
effectively wiping out the bounce that was expected then. The
swing from giveaway to takeaway is also seen on the revenue side,
with the decision to delay for two years the July 2015 Budget
measure that makes large companies advance their tax payments
by three months. There are some question marks around the
OBR’s forecasts here, which envisage a major improvement in
the fiscal position in 2019/20 which is not related to the policy
measures. The net effect is a planned fiscal tightening of 1.5%
of GDP in 2019/20, larger than in any year since 2010/11.
This contraction has no apparent impact on economic growth,
which looks very unusual.
This Budget clearly exposes the flaws in the new fiscal mandate,
showing that to achieve the budget surplus by the fixed date of
2019/20, there has to be a raft of measures to tighten policy
in that target year. And in the meantime, the Chancellor has
already missed two of his supplementary targets. Low growth and
inflation this year means that debt will increase relative to GDP,
while the continued strength of spending on the disabled means
that he is still breaching his welfare cap.
Budget 2016
Employment tax
10% Government top-up for
apprenticeship levy payers
Reform to the intermediaries’ legislation
for public sector engagements
From April 2017, employers in England will receive
a 10% top-up to their monthly levy contributions via
their digital account available to them to spend on
apprenticeship training.
From 6 April 2017, where a worker provides their services
to a public sector body via a personal service limited
company (PSC), the responsibility for paying the correct
employment taxes will move to the public sector body or
agency paying the company.
As announced in the Autumn Statement, the apprenticeship
levy, which will be introduced on 6 April 2017, will be a charge
on employers to fund apprenticeships. The Chancellor confirmed
the levy will be set at a rate of 0.5% of an employer’s ‘paybill’
and that each employer will receive an allowance of £15,000
to offset against their levy payment. In addition, employers in
England will receive a 10% top-up to their monthly levy via their
digital accounts.
Based on our understanding of the current levy rules,
employers committed to training can ‘get out more than they
put in’. It will become clearer what value the 10% top-up can
add once further details of the operating model are set out in
April 2016.
Employment allowance
Employers who hire an illegal worker face civil penalties
from the Home Office from 2018 and the Government will
also remove a year’s employment allowance from those
charged with this penalty.
In addition to the civil penalties the employer will lose a year’s
employment allowance, an amount of up to £2,000.
Employers have further incentive to ensure that prospective
employees have the right to work in the UK or they will be
charged civil penalties and lose the allowance.
Abolition of Class 2 national insurance
contributions
Class 2 national insurance contributions (NICs) will be
abolished from 2018.
The self-employed pay Class 2 NICs which provides for
qualification towards certain contributory benefits. The
Government will publish its response to the consultation on
benefit entitlement for the self-employed following the abolition
of Class 2 NICs.
We still await the details of the position of voluntary Class 2
NICs which assists persons working abroad and outside of the
UK contribution scheme to continue to accrue qualification to
certain contributory benefits.
Currently, where a worker provides services to a public sector
body through their PSC, that individual is responsible for deciding
whether the intermediary legislation (commonly referred to as
IR35) applies. These proposed changes move that responsibility
to the public sector employer, agency or other third parties who
pays the PSC.
Where the intermediary legislation applies, the public sector
body or third party will be liable for any PAYE and NICs that are
due. HMRC will introduce clear tests to help employers decide
whether or not deductions are due and support these tests with
an online tool.
It remains to be seen how simple these tests will be and
how effective the online tool is. Employers who engage
intermediaries should check whether they fall within the
definition of a public sector body. Agencies supplying workers
via intermediaries should also check whether their clients are
caught by this definition.
Clearly, if these changes meet their objectives, there is the
potential for them to be extended into the private sector at a
later date.
Further employee share schemes
simplification: EMIs
Rights issues in respect of shares acquired under an
Enterprise Management Incentive (EMI) will be treated in
the same way for share identification purposes as other
rights issues.
When the Finance Act 2013 extended the time limit for employees
to exercise EMI options after a disqualifying event (from 40 days
to 90 days), it did not update a corresponding time limit for capital
gains tax (CGT). Together with other simplifications in relation to
employee share scheme legislation, a draft clause correcting this
was published on 9 December 2015. Following representations,
the Government has concluded that, since the ending of taper
relief, there is no longer any reason why the date of acquisition
of shares on a rights issue should vary depending on whether the
original shares were acquired by the exercise of an EMI option
or not. This amendment will take effect for rights issues and
disqualifying events occurring on or after 6 April 2016.
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Budget 2016
This change will affect the acquisition date of shares acquired
by an individual who has exercised an EMI share option and
who continues to hold them until the company has declared a
rights issue, to which that individual then subscribes. This may
result in either a lower or higher chargeable gain depending
on the performance of the underlying shares over the
relevant period.
Taxation of termination payments
From 2018, the Government will tighten the scope of the
income tax exemption for termination payments to prevent
perceived manipulation. Additionally, employer Class 1
NICs will also be payable on taxable termination payments
above £30,000.
There is currently no employees’ and employers’ Class 1 NIC
payable on certain termination payments such as redundancy/loss
of office. The Government has announced that from April 2018
employers’ NICs would be charged on the amount in excess of
£30,000. In addition, the Government will undertake a technical
consultation on the changes which are set to include:
►►
Clarifying that all payments in lieu of notice (regardless of
whether they are contractual or not) will be subject to income
tax and NICs in the same way as other payments of earnings.
►►
Tightening the rules to ensure that certain contractual
payments cannot be paid as damages: instead such
payments will be treated as earnings.
►►
Removing the exemption for foreign service.
Employers are unlikely to welcome the additional NIC cost
imposed on them and may, as a consequence, reduce the
gross value of any termination payment made to those
receiving a payment in excess of £30,000. We await the
technical and legislative details to see how HMRC intend to
legislate for the other changes announced.
Tackling disguised remuneration
avoidance schemes
The Chancellor has announced that the Government will
bring forward a two stage package of measures to tackle
the use of disguised remuneration avoidance schemes.
Overall, the Government perceives there to be a wide
base of scheme users, including both employees and
self-employed individuals, the latter who fall outside the
existing avoidance legislation.
4
Employment tax
The first part of the package, effective from 16 March and to be
included in Finance Bill 2016 removes relief in the existing Part
7A ITEPA 2003 legislation where consideration is given for a
relevant step and there is now a connection with a tax avoidance
arrangement. In addition, a further measure will be included
in Finance Bill 2016 to restrict transitional relief on Employee
Benefit Trust (EBT) investment returns after 30 November 2016.
This relief was intended to work alongside the EBT Settlement
Opportunity (which closed on 31 July 2015) and allowed those
who settled to obtain relief from a charge under the existing Part
7A legislation.
The remainder of the package will follow in future Finance Bills
allowing time for consultation. This will include a new Part 7A
charge on loans paid through disguised remuneration schemes
which have not been taxed and are still outstanding on 5
April 2019. In addition, legislation will be introduced to tackle
avoidance schemes involving self-employment.
Today’s announcement by the Chancellor follows an earlier
announcement regarding disguised remuneration avoidance
schemes in the 2015 Autumn Statement. The Government
recognises that there are different types of disguised
remuneration schemes, but most seek to reward employees
through the use of interest-free loans made by a third party and
are designed so that they are unlikely to be repaid.
The proposals will cover loan arrangements through EBTs made
before 2011 and broader loan or debt arrangements, which came
into effect after 9 December 2010, when the Part 7A ‘disguised
remuneration’ legislation came into effect.
The use of a targeted anti-avoidance rule with immediate
effect underlines the Government’s commitment to tackle
specific perceived tax avoidance schemes. These measures
are aimed at tackling historical and continued use of disguised
remuneration schemes and similar arrangements including
those involving self-employment. Estimated revenue generation
is £1.235bn in 2019/20.
Summary of changes announced
affecting the taxation of expenses
and benefits
The Government has announced an extension to the
employer-arranged pension advice exemption and the
introduction of a package of measures to simplify the
administration of tax on employee benefits and expenses.
Alongside these new measures, the Government has
clarified its intention as to how salary sacrifice schemes
can be used to deliver tax and NIC benefits effectively, and
Budget 2016
that, following consultation, the travel and subsistence
rules will not be changed at this time.
The introduction of previously announced measures
relating to trivial benefits and the relief for travel and
subsistence for employment intermediaries have also
been confirmed.
The tax and NICs relief available for employer-arranged pensions
advice will increase from £150 to £500. The new exemption will
ensure that the first £500 of any advice received is eligible for the
relief. It will be available from April 2017.
Across the next two Finance Bills, the Government will further
simplify the tax administration of employee benefits and
expenses by:
►►
Extending the voluntary payrolling framework to allow
employers to account for tax on non-cash vouchers and
credit tokens in real time from April 2017.
►►
Consulting on proposals to simplify the process for applying
for and agreeing PAYE Settlement Agreements (PSAs).
►►
Consulting on proposals to align the dates by which an
employee has to make a payment to their employer in return
for a benefit-in-kind they receive to ‘make good’.
►►
Legislating to ensure that if there is a specific statutory
provision for calculating the tax charge on a benefit-in-kind
this must be used, overriding the ‘fair bargain’ concept,
unless the employer is in the hire car industry providing cars
to its staff at rates available to the public.
The Government has stated that it is considering limiting the
range of benefits that attract income tax and NICs advantages
when provided as part of salary sacrifice schemes. However,
the Government has confirmed that its intention is that pension
saving, childcare, and health-related benefits such as Cycle to
Work should continue to benefit from income tax and NICs relief
when provided through salary sacrifice arrangements.
In September 2015 the Government published a discussion
document aimed at modernising the tax rules for travel and
subsistence (T&S). Responses have been analysed and the
Government has concluded that, although complex in parts,
the current T&S rules are generally well understood and work
effectively for the majority of employees. It has, therefore,
decided not to make further changes to the T&S rules at this time.
As previously announced, with effect from 6 April 2016, a
statutory exemption from income tax for qualifying trivial
benefits-in-kind costing £50 or less will be introduced.
The exemption will remove the charge to income tax or Class 1A
NICs. A corresponding disregard for Class 1 NICs will take effect
later in the year.
Employment tax
As announced in the March Budget in 2015, legislation will be
introduced in Finance Bill 2016 to restrict tax relief for home
to work travel and subsistence expenses for workers engaged
through an employment intermediary. This will bring the rules in
line with those that apply to employees.
The measures announced are focused on supporting wellness,
simplicity and fairness. The extension to the employer pension
advice exemption supports comments made by the Chancellor
in his Budget speech regarding the difficulties of determining
what pension provision is right for the individual.
The extension of the voluntary payrolling, consultation on PSA
applications and aligning the dates for ‘making good’ payments
should provide employers with greater certainty and a
simpler method of arranging the settlement of tax on benefits
to HMRC.
The legislation to override the ‘fair bargain’ concept is designed
to be a clarification of existing Government policy. Until this is
published, it is difficult to agree or disagree with this, though
it opens questions such as whether loans to employees at
commercial rates will continue to be tax free.
The statement on salary sacrifice supports all three areas of
focus and will give welcome clarity to employers and benefit
providers that wellness-related benefits will continue to be
supported through salary sacrifice.
Following two years of representations, it appears that from
a simplicity and fairness perspective, the Government has
concluded that changing the rules for T&S would do more harm
than good.
Phased rollout of tax-free childcare
As previously announced, the Government is introducing
tax-free childcare from early 2017 to help working parents
with childcare costs. To enable the transition to the new
scheme, the existing employer-supported childcare will
remain open to new entrants until April 2018.
The Government’s long-term objective is to support working
families via a new simple online system, which will provide many
UK families with up to £2,000 of childcare support per child per
year. The planned rollout would involve the new scheme being
open to all eligible parents by the end of 2017, with the existing
employer-supported childcare remaining open to new entrants
until April 2018 to support the transition.
The proposed approach is to be welcomed if indeed it does
support the transition between the two schemes.
5
Budget 2016
Other measures
Testimonials
As announced in the 2015 Autumn Statement, from April 2017,
all income received from sporting testimonials and benefit
matches for employed sportspersons will be subject to income
tax, unless the testimonial is not customary or contractual, in
which case an exemption of £100,000 is available. The amount of
the exemption is an increase on the £50,000 originally proposed.
Cars, vans and fuel
►►
From April 2017, fuel and van benefit charges will be
increased by RPI, as in prior years.
►►
The charge for zero-emission vans will be 20% of the main
rate in 2016/17, although this will increase on a tapered basis
until April 2022.
►►
Company car tax will continue to be based on the CO2
emissions of cars and the 3% differential between diesel cars
and petrol cars will be retained until April 2021.
►►
As announced in the March 2015 Budget, the percentage of
list price subject to tax will increase by 3% for cars emitting
more than 75g CO2/km, to a maximum of 37% in 2019/20.
There will also be a 3% differential between the 0-50 and
51-75g CO2/km band, and the 51-75 and 76-94g CO2/km
bands.
Consultations to be released
The Government has indicated that they will consult on the
following areas:
►►
Implementation of extending shared parental leave and pay
to working grandparents.
►►
Reforming the lower CO2 bands for ultra-low
emission vehicles.
6
Employment tax
Budget 2016
Personal tax
Income tax allowances and higher rate
threshold
The headline rates and allowances have largely changed in
line with expectations.
For 2016/17, the personal allowance will be £11,000 as
previously announced in the 2015 Summer Budget. The personal
allowance will increase by a further £300 over previously
announced levels to £11,500 in 2017/18.
The basic rate limit for 2016/17 will be £32,000 as previously
announced. For 2017/18, the basic rate limit will be increased
to £33,500. These combined changes will increase the higher
rate threshold above which individuals pay income tax at 40% to
£45,000 for 2017/18. The NIC Upper Earnings Limit will also
increase to remain aligned with the higher rate threshold.
The Chancellor has reiterated that the changes are part of a goal
to increase the personal allowance to £12,500 and to increase
the higher rate threshold to £50,000 by the end of the decade.
From 6 April 2017, a new £1,000 allowance for property income
and a £1,000 allowance for trading income will be introduced.
Individuals will be able to either deduct the allowance from their
relevant gross income when calculating their taxable profit or
deduct their expenses as usual. Individuals with property income
or trading income below £1,000 will no longer need to deduct or
pay tax on that income.
The previously announced personal savings allowance will also be
introduced from 6 April 2016, as will the changes to the taxation
of dividends.
The further increase in the personal allowance and basic
rate limits and the introduction of specific allowances will be
welcomed by taxpayers.
ISAs
Introduction of a new Lifetime ISA and increase to the
annual ISA limit.
The Chancellor announced a new Lifetime ISA to be introduced
from 6 April 2017. This will be available to individuals between
the ages of 18 and 40. Contributions made before an individual’s
fiftieth birthday of up to £4,000 a year will receive an additional
25% bonus from the Government. The total amount can be
withdrawn tax free if it is used towards a deposit on a first home
or withdrawn once the individual reaches 60 years.
There are certain restrictions where the funds are used to
purchase a property and rules around how this interacts with the
Help to Buy: ISA. In addition, partial withdrawals can be made in
certain situations.
The total amount that individuals can save each year into all ISAs
(which will include amounts contributed into the new Lifetime
ISA) will also be increased from £15,240 to £20,000 from
6 April 2017.
The increase to the annual ISA limit and the new Lifetime ISA
will be welcomed by taxpayers.
Capital gains tax: Reduction in rates
The capital gains tax (CGT) rates on most types of disposals
will be reduced from 6 April 2016.
The Chancellor confirmed that from 6 April 2016, CGT rates on
most disposals will be reduced from 18% to 10% for basic rate
tax payers and from 28% to 20% for higher rate and additional
rate tax payers. The new rates will apply to individuals, trusts and
personal representatives of death estates.
The new CGT rates will not apply to chargeable gains:
►►
Arising from the disposal of a ‘residential property interest’
(still taxable at 18% and 28%). A residential property interest
is an interest in land that includes or included a dwelling
during the seller’s period of ownership, or which subsists
under a contract for an off-plan purchase.
►►
Arising from the receipt of carried interest (still taxable at
18% and 28%).
►►
Within the ATED regime (taxable at 28%).
►►
Qualifying for entrepreneurs’ relief (taxable at 10%).
The announcement of a reduction in the rate of CGT is a
welcome surprise, although the carve out for ‘residential
property interests’ creates additional complications to the
CGT regime.
Capital gains tax: Entrepreneurs’ relief
extension to long-term investors
A new external investors’ relief will make the 10%
entrepreneurs’ relief (ER) rate of CGT available to longterm external investors in an unlisted trading company.
The existing qualifying criteria for ER requires that an individual
be an employee or officer of the company and own at least 5% of
the ordinary share capital for 12 months prior to a disposal.
This announcement extends ER to gains on the disposal of shares
in an unlisted trading company on or after 17 March 2016
provided the following criteria are met:
►►
Shares were acquired as newly issued shares by the person
making the disposal on subscription for new consideration.
7
Budget 2016
2015
►►
T
 hey are in an unlisted trading company or unlisted holding
company of trading group.
►►
The shares were issued by the company on or after
17 March 2016.
►►
T
 he shares have been held continuously for a period of
three years (starting from 6 April 2016) ending on the date
of disposal.
Personal tax
These are welcome changes which remove some of the
perceived unfairness of the changes introduced in the
2015 Budget.
Capital gains tax: Entrepreneurs’ relief
on associated disposals
The rate of CGT charged on the qualifying gain will be 10% with
the total amount eligible for investors’ relief subject to a separate
lifetime limit of £10mn per individual. This will also apply to
beneficiaries of trusts.
The availability of ER for associated disposals has been
extended to include a disposal of a privately-held asset
when there is an accompanying disposal of business assets
is to a family member.
Anti-avoidance rules will be included in the Finance Bill to ensure
that shares are subscribed for genuine commercial purposes and
not for tax avoidance purposes.
Furthermore, the relief can now also be claimed in some
cases where the disposal does not meet the current 5%
shareholding requirement.
This welcome extension is intended to provide a financial
incentive for individuals to invest in unlisted trading companies.
This will allow non-employees to benefit from ER on holdings in
unlisted trading companies.
Finance Act 2015 introduced rules which had the effect of not
allowing ER on ‘associated disposals’ of assets used by a business
in some circumstances when the business was sold to members of
the individual’s family even where for normal succession planning.
There will be some changes made to definitions to improve
the position.
Capital gains tax: Entrepreneurs’ relief
definition of trading company
The definition of a trading company/group has been
updated for entrepreneurs’ relief purposes where the
shares are held in a company which invests in a joint
venture company or partnership. This measure will be
backdated to take effect from 18 March 2015. HMRC is
also planning to consider the definition of trading company
generally for the purposes of ER.
Under the current legislation, for ER purposes, the activities of
a joint venture company are not treated as being carried on by a
company which holds shares in it and all activities of a corporate
partner in a firm are treated as not being trading activities.
The new measure means that a company which holds shares in a
joint venture company will be treated as carrying on a proportion
of the activities of that company corresponding to the proportion
of their shareholding in the joint venture company. Similarly the
activities of a corporate partner will be taken into account based
on their true nature.
These new definitions will extend the availability of ER where
the person has at least a 5% indirect interest in the shares and
effectively controls 5% voting rights of the joint venture company
(i.e., looking through the holding company) or where the person is
entitled to at least 5% of the assets and profits of the partnership
and also controls 5% of the voting rights of the corporate partner.
8
In situations where the individual is disposing of their whole stake
in the business and has previously held a larger stake, ER can
now be claimed on this disposal although the material disposal of
business assets is not 5% or more of the individual’s holding.
These amendments will be backdated to take effect for associated
disposals made on or after 18 March 2015.
This useful measure may assist with family succession planning
and reward business proprietors who are retiring or reducing
their involvement in the business and passing it to other
family members.
Capital gains tax: Entrepreneurs’ relief
on goodwill on incorporation
There will be an amendment to the rules regarding the
transfer of an individual’s business to a close company
where they or a member of their family will become or
remain a shareholder in the acquiring company.
The current legislation prevents ER from applying to gains on
goodwill in most circumstances where it is transferred to a close
company. Amendments to the legislation will be introduced
to allow ER to be claimed in respect of gains on goodwill
where the goodwill is transferred to a close company and the
transferor holds less than 5% of the shares and voting rights in
that company.
Personal tax
Budget 2016
Relief will also be due where the individual holds more than 5%
of the shares or voting power if the transfer of the business
is part of arrangements for the company to be sold to a new
independent owner.
These measures will be backdated to apply to disposals on or after
3 December 2014.
This measure aligns the treatment for goodwill to other
business assets and is intended to mitigate the impact of
changes introduced in Finance Act 2015 which caught genuine
commercial arrangements.
Venture capital scheme rules
Energy generation activities
As announced in the 2015 Autumn Statement, from 6 April
2016, the Government will exclude the use of venture capital
schemes for investments in the remaining energy generation
activities (which were not previously excluded under the relevant
rules). This applies to the Enterprise Investment Scheme, the
Seed Enterprise Investment Scheme and Venture Capital Trusts.
These exclusions will also apply to Social Investment Tax Relief
from 6 April 2016 (when the scheme is enlarged following EU
State Aid clearance).
This brings to an end qualifying investments into venture
capital scheme companies whose main trading activity consists
of the generation of energy.
Changes to property taxation
In the 2015 Summer Budget the Chancellor announced
certain changes that impact individuals who let residential
properties or rooms in their own home. Certain
clarifications have been made to these rules.
Restricting finance cost relief
As previously announced, individuals who receive rental income
on residential properties (whether in the UK or overseas) and
incur finance costs, such as mortgage interest, will no longer be
able to deduct the full finance costs from their property income
to calculate taxable profits. Instead they will be able to take only
a basic rate deduction from their income tax liability and the
restriction will be phased in over four years starting in 2017/18.
The Government has announced that Finance Bill 2016 will
ensure that the beneficiaries of deceased persons’ estates are
entitled to the basic rate tax reduction.
Wear and tear allowance
From April 2016, the Government will abolish the wear and tear
allowance; as a result, landlords of residential property will only
be able to deduct costs they actually incur on domestic items such
as furniture, furnishings, appliances and kitchenware. Following
consultation on the draft clauses, a number of technical changes
have been made.
Capital gains tax for non-UK residents disposing of UK
residential property
As announced in the 2015 Autumn Statement, the Government
will amend the CGT computations required by non-residents
on the disposal of UK residential property, removing a double
tax charge that occurs in some circumstances (where a non-UK
company disposing of UK residential property has also been
subject to UK tax under the annual tax on enveloped dwellings
provisions) from 6 April 2015 (and in some circumstances from
25 November 2015).
Inheritance tax
Various changes were made to estate duty and inheritance
tax (IHT)
The Government have announced changes to the taxation
of certain objects (which are considered to be of national
importance) which have legacy exemption from estate duty (the
forerunner to the current inheritance tax). The existing rules set
out that IHT deferral is available in respect of these objects where
certain conditions are met. However, if any of the conditions are
breached or the assets are sold, IHT becomes payable.
From March 2016 legislation will be introduced so that:
1. On a sale of the objects, HMRC will have a choice of
either charging the current rate of applicable IHT or the
amount which was due under Estate Duty (currently IHT
is chargeable).
2. A charge is created on objects which have been lost
(when circumstances are considered not to be outside the
owner’s control).
3. Public museums and galleries, that previously benefited from
the advantageous tax provisions, are brought back into the
scope of the existing legislation.
As previously announced those who downsize or sell their home
after 8 July 2015 will effectively be able to ‘bank’ the additional
nil rate band for use against the remaining value of their estate
where they pass a smaller home or equivalent value assets to
direct descendants.
9
Budget 2016
Property held through offshore
structures
In the 2015 Budget, the Government announced proposals to
ensure that from 6 April 2017 all UK residential property held
indirectly through a non-UK structure or non-UK trust would be
chargeable to UK IHT. The Government has confirmed that it will
consult on these changes, with the legislation being introduced in
Finance Bill 2017.
Savings income tax
Deduction of income tax on additional interest receipts to
be removed.
The previously announced removal of the requirement for banks
and building societies to deduct tax from interest they pay on
deposits by individuals, partnerships and trusts from 6 April
2016 has been extended. From 6 April 2017 interest from openended investment companies, authorised unit trusts, investment
trust companies and peer to peer loans may also be paid without
deduction of income tax.
The extension of the rules will be welcomed and will lessen the
administrative burden on the managers of these investments.
Update to the new deemed
domicile rules
The Government has introduced a rebasing provision for
non-UK assets held by individuals who become deemed
domiciled in April 2017 under the new 15/20 year rule.
From 2017/18 non-UK domiciled individuals will become deemed
domiciled in the UK for all tax purposes after they have been UK
resident for 15 of the previous 20 tax years, or where they are
UK resident and were born in the UK domicile of origin. Non-UK
domiciled individuals who are deemed domiciled will no longer
be able to claim the remittance basis in respect of their non-UK
income or gains.
The announcement by the Government appears to indicate
the rules apply to individuals becoming deemed domiciled in
2017/18 only. However, it seems likely the intention is to allow
all individuals who become deemed domiciled on or after 6 April
2017 to benefit from these rebasing provisions.
The rebasing provisions mean that only the growth in the value
of the non-UK assets from 6 April 2017 will be subject to UK
taxation on the arising basis when the asset is sold. It is not
currently clear whether the remaining gains will be taxable on the
remittance basis.
10
Personal tax
This is a welcome change to the rules. However, it potentially
creates further complexities in relation to the remittance basis
mixed fund rules. Further guidance is needed to understand the
full implications of remitting a rebased gain.
For those who expect to become domiciled under the 15 out of
20 rule, there will also be some transitional provisions in respect
of offshore funds. We will need to wait for the publication of the
Finance Bill to understand how this will operate.
It is good to see rebasing being introduced, but non-doms will
need clarity on the details of the provisions quickly so they
know whether to take appropriate action before the rules
change in April 2017.
Employee shareholder status (ESS):
Individual lifetime limit announced
An individual lifetime limit of £100,000 has been
introduced to capital gains eligible for CGT exemption
through the Employee Shareholder Status.
ESS enables shares to be issued to employees in exchange for
giving up certain of their statutory employment rights. Any
gain realised on the disposal of the ESS shares by the employee
shareholder will be free of CGT.
The new exemption limit of £100,000 of gains will apply to
arrangements entered into after 16 March 2016. Any gains on
ESS shares that were issued in respect of agreements made
before midnight on 16 March 2016 will not count towards
the limit.
Whilst not a surprising development, the introduction of this
lifetime limit will be likely to significantly impact the number of
ESS plans being implemented since the £100,000 limit coupled
with the reduction in the CGT rates will erode much of the
benefit of the scheme.
Loans to participators
The corporation tax rate which applies to loans to
participators will rise in line with higher rate tax
on dividends.
From 6 April 2016, the tax rate applying to close companies
making loans to participators will rise from 25% to 32.5%, in line
with the higher rate applying to dividend income.
The rate will apply to any loans made or benefits conferred on or
after 6 April 2016. Where an accounting period straddles 6 April
2016, different rates will apply to loans made before, and those
made on or after 6 April 2016.
Budget 2016
As mentioned in the Autumn Statement, a new exemption from
the loan to participator rules applies to certain loans made by
close companies to charitable trusts as long as the proceeds are
used wholly for charitable purposes. This provision applies to
loans or advances made on or after 25 November 2015.
The loans to participator rules ensure that HMRC collects
an amount of tax equal to that due on a dividend of the
same amount. The increase in the loans to participator tax
rate addresses what would otherwise have been a mismatch
between these two rates.
Pensions
Despite the Government’s consultation on the reform
of the pension tax relief system, no major changes to
the pension tax regime have been announced today,
However, several smaller changes will take effect.
Previous announcements regarding changes to the Annual
Allowance and Lifetime Allowance will take effect from
6 April 2016.
The Government has published a summary of the responses
received to its consultation on potential reform to pension tax
relief. This shows that there were contrasting views as to the
necessity of, and manner in which, changes could be made, to
the current system to aid simplicity and encourage saving for
retirement amongst taxpayers.
Several amendments to the pension flexibility legislation,
introduced in April 2015, will be introduced as part of the Finance
Act 2016 to ensure the legislation is working as intended.
Further changes are to be included in the Finance Act 2016,
some of which have been announced previously:
►►
T
 he reduction in the lifetime allowance from £1.25mn to
£1mn from 6 April 2016 was confirmed.
►►
A reduction in the number of calculations required to
determine whether a dependant’s scheme pension exceeds
the authorised limit.
►►
Legislation to allow the pension tax rate on bridging pension
to be aligned with the Department for Work and Pensions
legislation.
►►
Ensuring that no inheritance tax charge arises where an
individual has remaining pension funds in a drawdown
account upon death. This measure will be backdated to cover
deaths on or after 6 April 2011.
The Government will also ensure that the pension industry
launches a Pension Dashboard by 2019, which will be a digital
landing page enabling individuals to view all of their pension
savings in one place. The Government will also consult on allowing
Personal tax
individuals to withdraw up to £500 tax free from a defined
contribution pension scheme before the age of 55 to fund the
cost of financial advice.
The Government will continue to review its informal consultation
with stakeholders on the use of unfunded employer financed
retirement benefit schemes to obtain a tax received advantage in
relation to remuneration.
Rather than making major changes, the main focus of these
announcements appears to be legislating so that the pension
flexibility rules introduced in April 2015 are applied in the way
in which they were intended and that the rules are applied
fairly across different groups. There will be no immediate
fundamental changes to tax relief on pensions, other than the
pre-announced changes to the Annual Allowance and Lifetime
Allowance from 6 April 2016. The introduction of the Pensions
Dashboard by 2019 indicates that the Government is taking
steps to help individuals better understand their pension funds
and aligns with their increased focus on digital tools.
Asset managers’ performance based
rewards
Carried interest will be taxable as income where it
derives from an investment scheme making ‘short
term’ investments.
As announced in the 2015 Summer Budget, new rules will
treat carried interest arising from certain investment schemes
as disguised investment management fee (DIMF) income from
6 April 2016. The final provisions are not yet available, but draft
legislation was released as part of Finance Bill 2016.
Under the proposed legislation, where the average period
investments are held by funds exceeds four years, the carry
received by the investment manager will be subject to capital
gains tax. Where the average investment period is less than three
years, the whole amount will be subject to income tax. Where
the average falls between three and four years, there will be a
graduated system for determining the amounts subject to income
and capital gains tax.
The average holding period for investments will be calculated
on a weighted average, based on holding period and value
invested as a proportion of the fund, subject to certain special
additional rules.
Amounts treated as income under these rules will not qualify for
the remittance basis.
There is a conditional exemption from these rules where carry
arises within the first four years of the scheme, but it is expected
that the average holding period, of the scheme will exceed
four years.
11
Budget 2016
While the introduction of the income based carry rules was
expected, they represent a continued tightening on the
taxation of private equity principals
Life insurance policies
Consultations announced on changes to the taxation of
part surrenders, part assignments and personal portfolio
bond change of asset categories.
A consultation has been announced aiming to change the
current tax rules for part surrenders and part assignments of
life insurance policies, so that excessive tax charges arising on
these products are prevented. Currently part surrenders and part
assignments can crystallise gains in excess of the real economic
gain within the life insurance policies. The Government intends for
these changes to be included in Finance Bill 2017.
A consultation is also planned regarding personal portfolio bonds
and changes to the categories of assets that policyholders can
choose to invest in without giving rise to an annual tax charge.
A change to the taxation of life insurance policies so that the
taxation of part surrenders and part assignments is closer
aligned to the economic reality would be welcome.
Distributions and transactions in
securities
The Government has announced that updated draft
legislation and the consultation document relating to
the taxation of company distributions and transactions
in securities anti-avoidance provisions are expected in
Finance Bill 2016.
Simplification of partnership taxation
The Government has confirmed it will consult on
the simplification of the taxation of partnerships as
recommended by the Office of Tax Simplification. It is not
clear which areas of partnership taxation this consultation
will cover and we therefore await further detail.
12
Personal tax
Budget 2016
Indirect tax
VAT: Changes to registration and
deregistration thresholds
VAT: Fulfilment house due diligence
scheme
The VAT registration and deregistration thresholds for UK
businesses have been increased.
The Government has published a consultation document
on a new due diligence scheme for UK fulfilment houses
handling goods imported from outside the European Union.
From 1 April 2016, the VAT registration and deregistration
thresholds will increase by £1,000 to £83,000 and £81,000
respectively.
The increase in the thresholds is generally in line with inflation.
VAT: Tackling online fraud in goods
The Government will legislate to provide HMRC with
strengthened powers to ensure overseas traders register
for VAT, appoint a VAT representative or, where necessary,
to seek a security. HMRC will also be given new powers to
hold an online marketplace jointly and severally liable for
any unpaid VAT where an overseas business sells goods in
the UK via the online marketplace’s website.
There are two aspects to this measure. The first part makes
changes to existing VAT rules which allow HMRC to compulsorily
register an overseas trader or direct an overseas business to
appoint a VAT representative to account for VAT on its behalf,
and gives HMRC greater flexibility to collect a VAT security.
The second part is the introduction of a new provision which
will enable HMRC to hold an online marketplace jointly and
severally liable for the unpaid VAT of a non-compliant overseas
business that sells goods in the UK via that online marketplace.
Neither of these changes will apply automatically to businesses
and HMRC will only use them in the highest risk cases to tackle
non‑compliance.
The measures will take effect from the date that Finance Bill 2016
receives Royal Assent.
Under the new measures, online marketplaces will need to
meet their own VAT compliance obligations and also make sure
that users of their services are VAT compliant. Where HMRC
identifies an overseas online supplier that is non-compliant,
online marketplaces will be required to take appropriate action,
where failure to do so would result in them being held liable for
the tax due. This measure is intended to protect the UK market
from unfair overseas online competition.
The consultation document outlines the ‘fit and proper’ standards
that fulfilment houses will need to meet in order to operate.
Fulfilment houses, a term often used to describe outsourced
warehousing functions, will have an obligation to register under
a new online scheme and maintain accurate records once
registration opens in 2018. Under the scheme, fulfilment houses
will need to provide evidence of the due diligence they have
undertaken to ensure their overseas clients are VAT compliant.
The closing date for comments on the consultation is 30 June 2016.
Many overseas suppliers that trade online make use of UK
based fulfilment houses to store and distribute their orders.
The due diligence scheme should make it more difficult for
non-compliant suppliers to trade in the UK and level the
playing field for businesses that operate in the UK legitimately.
Fulfilment houses and their customers will be keen to ensure
the new scheme does not create an additional administrative or
financial burden and may wish to respond to the consultation.
VAT: Consultation on penalty for
participation in VAT fraud
The Government will consult on a new penalty for
businesses participating in VAT fraud.
The Government plans to consult on a new penalty for businesses
participating in VAT fraud in spring 2016, with the intention to
legislate for the penalty in Finance Bill 2017.
In addition, the Government will continue to engage with
the OECD and other international bodies in order to explore
international solutions to VAT fraud, including looking at
alternative mechanisms for the collection of VAT.
These are further measures which highlight the Government’s
concerted effort to tackle VAT fraud.
VAT: Telecommunications reverse
charge
A UK domestic reverse charge was introduced for
wholesale supplies of telecommunications services on
1 February 2016.
13
Indirect tax
Budget 2016
As an anti-fraud measure, the Government announced at
short notice that a UK domestic reverse charge would apply
to wholesale supplies of telecommunications with effect from
1 February 2016.
There will be no requirement for suppliers to complete a reverse
charge sales list, but invoices must show the customer’s obligation
to account for the reverse charge.
measure is intended to be used in helping schools to provide
sport and healthier lifestyle activities.
The proposal will be welcomed by health campaigners who have
lobbied for a levy on sugary drinks. However, the soft drinks
industry will question why it has been pinpointed on this issue
when sugar is an ingredient in many other products.
HMRC recognises that the timetable for implementation may
cause problems for affected businesses and has indicated that
it will operate a ‘light touch’ approach to penalties for the first
six months.
Insurance premium tax
Suppliers of telecommunications services may need to contact
their customers to determine how the services are being used
in order to be certain whether they are supplied on a wholesale
basis. HMRC has indicated that supplies of telecommunications
services to corporate groups, which recharge them internally,
will not be treated as supplied on a wholesale basis.
This small increase in the standard rate of IPT follows the previous
increase in November 2015 from 6% to 9.5%. The additional tax
collected, estimated at £200mn per annum, will be invested in
flood defence and resilience measures. Today’s change means
that the rate will have increased by two-thirds over an 11 month
period. Taken together, these increases are expected to raise IPT
revenue from £3bn (2015) to £5bn (2017).
VAT: Other announcements
For the second time in a year, insurers will need to deal with
the impact of an IPT rate rise. They may bear the cost of this
additional tax or more likely will pass it on to their consumers.
This additional commercial pressure comes at a time when the
Financial Conduct Authority is already encouraging consumers
to shop around. There had also been fears that another rate
increase would increase the risk of individuals and businesses
going uninsured. Given the 0.5% rise, this seems less likely now.
Insurers will also need to pay particular attention to transitional
rules and premium payment dates to ensure that the correct
amount of IPT is collected and remitted.
The Government has also announced that it will:
►►
Broaden the eligibility criteria for the VAT refund scheme for
museums and galleries.
►►
Legislate to enable named non-departmental and similar
bodies to claim a refund of the VAT incurred on outsourced/
shared services used to support their non-business activities.
This is to ensure irrecoverable VAT does not deter public
bodies from sharing back-office services.
►►
Legislate to ensure charities subject to the jurisdiction of the
High Court of the Isle of Man are capable of qualifying for UK
VAT charity reliefs.
The standard rate of insurance premium tax (IPT) will
increase from 9.5% to 10% with effect from 1 October 2016.
Horserace betting levy
The horserace betting levy will be replaced by April 2017.
Soft drinks industry levy
The Government will introduce a new soft drinks industry
levy targeted at producers and importers of soft drinks that
contain added sugar.
Following various consultations, the Government has set out a
timetable to replace the horserace betting levy with a new charge
(previously referred to as the horserace betting right) by April
2017. Unlike the existing levy, the new charge will cover offshore
remote betting operators.
The levy will be introduced in 2018 following consultation
with the industry. The aim of the levy is to encourage
companies to reformulate products to reduce the amount
of added sugar in the drinks they produce.
Under the new rules, offshore sportsbooks, which have
proliferated in recent years, will be required to pay the levy
which is used to help fund British horseracing.
The levy will take the form of a tax on the volume of sugary drinks
that companies import or produce. Drinks that have more than 5g
of sugar per 100ml will be taxed under two bands, a higher rate
band for products with 8g per 100ml or more and a lower rate
band for those above 5g per 100ml.
Gambling duties
It is anticipated that the levy will equate to 18p per litre for
drinks in the lower band and 24p per litre for the higher band.
Overall the levy is expected to raise £520mn in the first year.
This number is expected to fall over time as the sugar content
of soft drinks is reformulated and in the hope that consumers
change their consumption behaviour. The revenue raised by the
14
The remote gaming duty (RGD) treatment of ‘freeplays’ will
change and gaming duty bands will be increased.
The Government has announced that, from 1 August 2017, free
or discounted gambling (‘freeplays’) will be brought within the
scope of RGD. This brings the RGD treatment into line with the
general betting duty (GBD) treatment of freeplays.
The Government will also increase gaming duty bands in line with
RPI for accounting periods starting on or after 1 April 2016.
Indirect tax
Budget 2016
As the new rules result in non-revenue generating transactions
being subject to RGD, there will be disappointment that it is not
the GBD treatment of freeplays which has changed. Affected
businesses may decide to restructure promotions to reduce the
cost – offering enhanced odds, rather than freeplays.
Carbon taxes
The carbon tax regime for businesses will be significantly
simplified with effect from 1 April 2019, notably the
Carbon Reduction Commitment (CRC) will be abolished.
The CRC energy efficiency scheme allowance prices will increase
in line with RPI for compliance years 2016/17, 2017/18
and 2018/19 before being abolished at the end of 2018/19.
Businesses will be required to surrender any allowances by
October 2019. This follows the consultation on business energy
tax reform where respondents had complained of the cost and
compliance burden on CRC.
this year will be of significant interest to all stakeholders in
waste management industries.
Aggregates levy
The aggregates levy rate will remain at £2 per tonne for
2016/17.
The aggregates levy rate will remain constant at £2 per tonne, as
it has for a number of years.
The Government will also consult on a new exemption for
by-product aggregate that is an unavoidable consequence of
laying pipework for the provision of utilities, with the intention of
introducing this into legislation in 2017.
The construction, utilities and telecommunication industries
should welcome the opportunity for the new exemption to
reduce cost and to engage in the consultation process.
The main rates of climate change levy (CCL) will increase in line
with RPI for 2017 to 2019. There will also be an increased rate
for 2019 which is intended to account for lost revenue arising
from the abolition of the CRC. However, in order to ensure
that the impact is not felt by energy intensive industries, CCL
discounts available under Climate Change Agreements (CCA) will
increase for electricity from 90% to 93% and for gas from 65% to
78% with effect from 1 April 2019. The Government will retain
existing eligibility criteria for the CCA scheme until at least 2023.
Air passenger duty
The carbon price support (CPS) CCL rate will remain frozen at
£18/tCO2 until 2020 as announced in the 2014 Budget but will
increase in line with RPI from 2020/21. The long term trajectory
for the CPS will be discussed at the Autumn Statement 2016.
This increase will not be welcomed by the aviation industry
which has lobbied extensively for elimination or reduction of
what is one of the highest ticket taxes in the world. In addition,
these rates are likely to only apply to England and Wales from
2018 if the expected devolution of APD to Scotland goes ahead
along with the proposed 50% cut in rates.
After a period of increased administrative burdens, multiple
taxes and uncertainty, the movement towards a streamlined
and more certain taxing regime should be welcomed.
Landfill tax
Measures announced in the Autumn Statement 2015
in relation to the Landfill Community Fund (LCF) will be
revisited as part of new guidance published by ENTRUST.
ENTRUST (the regulator of the LCF) will issue new guidance
on landfill operators’ contributions to the fund from April
2016 following changes that were announced in the Autumn
Statement 2015.
In addition, the standard and lower rates of landfill tax (LFT) will
increase in line with RPI, rounded to the nearest 5 pence, from
1 April 2017 and 1 April 2018.
A consultation will be launched by the Government later this year
to provide clarity and certainty as to the definition of a ‘taxable
disposal’ for the purposes of LFT.
This maintains the Government’s commitment to ensuring that
LFT rates are not eroded in real terms. The consultation later
Air passenger duty (APD) rates will increase for Band B
flights on or after 1 April 2017.
With effect from 1 April 2017, the rates of APD for flights of less
than 2,000 miles from London (Band A) will remain frozen at the
current level, but all the APD rates will be increased in line with
RPI for flights of more than 2,000 miles from London (Band B).
Alcohol duties
Duty rates on beer, spirits and most ciders will be frozen this
year, whilst duty rates on most wines and higher strength
sparkling cider will increase by RPI from 21 March 2016.
In addition, the Government is publishing a new alcohol strategy,
setting out its ambition to modernise alcohol taxes to tackle fraud
and reduce burdens on alcohol businesses. Consultations on
reform of procedures for the collection of alcohol duty, and on the
feasibility and impacts of specific anti-fraud measures will follow
in 2016.
The Government continues its approach of supporting pubs
and the Scotch whisky industry. The previous commitment to
tackle alcohol fraud has been maintained and the Government
intends to continue its efforts to modernise the way in which
alcohol taxes are collected. Further consultation will allow
the industry to voice its concerns on the practicalities of
procedures adopted.
15
Budget 2016
Indirect tax
Tobacco duties
Vehicle excise duties
As previously announced, duty rates on all tobacco
products will increase by 2% above RPI. Duty on handrolling tobacco will also increase by an additional 3% above
this rate, to 5% above RPI. These changes will come into
effect from 6pm on 16 March 2016.
A number of vehicle excise duty (VED) announcements
have been made, including a freeze for Heavy Goods
Vehicle (HGV) and Road User Levy rates.
The Government will also introduce a minimum excise tax on
cigarettes and consult on the tax treatment of heated tobacco
(excluding e-cigarettes) later this year.
Following the publication of the refreshed anti-illicit tobacco
strategy last year, HMRC will consult on strengthening sanctions
to tackle tobacco fraud. As previously announced, legislation
will be introduced in Finance Bill 2016 to introduce an approval
scheme for users and dealers in raw tobacco. This will require
those carrying out a ‘controlled activity’ in relation to raw tobacco
to be approved by HMRC.
The Government also intends to invest £31mn from 2016/17 to
2019/20 in a new group of Border Force officers and intelligence
officials who will specialise in seizures of illicit tobacco being
smuggled into the UK and prevent over £100mn of tobacco
tax evasion.
As part of HMRC’s concerted efforts against indirect tax fraud,
an approval scheme for users and dealers in raw tobacco is to
be introduced in Finance Bill 2016. Businesses wishing to deal
in raw tobacco will require approval from HMRC and the new
requirements are likely to lead to an increase in compliance
obligations. Businesses affected by the new regime will need to
prepare early to ensure that the required criteria are met.
Fuel duties
Despite previous expectations, the main rate of fuel duty
for petrol and diesel will remain frozen at 57.95 pence per
litre in 2016/2017.
Although the Government had been expected to increase the
main rate of fuel duty, rates will remain frozen in 2016/17. As
announced at Budget 2014, the Government will legislate for a
reduced duty rate of 7.90 pence per litre for aqua-methanol from
1 October 2016. The impact of this incentive will be kept under
review alongside other fuel duty differentials for alternatives to
petrol and diesel.
Although an increase in fuel duty rates had been anticipated, the
Government has resisted calls to increase them. The Chancellor
expects the move to save the average driver £75 a year
compared to pre-2010 fuel duty escalator plans. This is likely to
be welcome news to businesses and individuals alike.
16
From 1 April 2016, VED rates for cars, vans, motorcycles and
motorcycle trade licences will increase by RPI. HGV and Road User
Levy rates, including all other rates linked to the basic goods rate,
will be frozen.
The Government will also legislate to place the classic vehicle
VED exemption on a permanent basis from 1 April 2017, so that
from 1 April each year vehicles constructed more than 40 years
before 1 January of that year will automatically be exempt from
paying VED.
The freeze to HGV and Road User Levy rates will be welcomed
by hauliers and by businesses engaged in the movement of
physical goods. The extension of the VED exemption into a
piece of permanent legislation demonstrates the Government’s
continued support for the classic vehicle industry within the UK.
Modernising customs and excise
legislation
As previously announced, a number of changes have been
proposed to the UK’s customs and excise legislation which
are intended to clarify the powers HMRC has to seize and
detain goods.
The Government intends to legislate to clarify the powers HMRC
has when stopping or searching a vehicle suspected of containing
goods liable to forfeiture.
Following earlier consultation, the Government will legislate to
amend the Customs and Excise Management Act 1979 to clarify
existing provisions concerning the seizure and detention of goods.
As previously announced, the Government will also legislate to
amend the Customs and Excise Management Act 1979 to clarify
the prosecuting authorities in Scotland and Northern Ireland for
offences under the customs and excise acts. This will ensure that
time limits for starting proceedings apply only to the correctly
identified prosecuting authorities.
HMRC’s focus on clarifying the existing legislation is expected
to lead to a more consistent approach in the seizure and
detention of goods.
Budget 2016
Business Tax
Business Tax Roadmap
The much-anticipated Business Tax Roadmap is intended to
make Britain’s business tax system fit for the future and set
out plans for major business taxes to 2020 and beyond.
In drawing together plans for the taxation of multinationals,
setting out plans for tax and business rates and highlighting
measures to simplify and modernise the UK tax regime, the
Government plans to deliver a low tax regime that will attract
multinational businesses, while making sure that they pay taxes
in the UK. At the same time, the Government is looking to level
the playing field, which it feels has been tilted against smaller
UK firms.
The Roadmap covers several key areas of tax policy and reflects
work done at the OECD level on tax to be paid by multinationals.
The measures cover:
►►
Reductions in tax rates; including cutting corporation tax to
17% in 2020, supporting investment in the North Sea, and
reducing the business rates burden.
►►
Addressing tax avoidance and aggressive tax planning;
including limiting the level of deductions for interest expense
(OECD BEPS Action 4) and taking forward arrangements
to address the use of hybrid mismatch arrangements
(OECD BEPS Action 2). These changes will be introduced
from 1 April and 1 January 2017 respectively. Today’s
proposals contain new points of detail while leaving some
areas outstanding and more discussions can be expected
in finalising the arrangements. In addition, the Roadmap
includes new measures to impose UK withholding tax on
royalty payments, some of which are effective from 17 March
2016, and measures to ensure that non-resident developers
of UK property will always pay UK tax on the trading profits
from that development. This last measure will come into
effect from Report Stage of Finance Bill 2016.
►►
Simplifying and modernising the UK tax regime; perhaps
most notably including new rules for corporation tax on the
use of losses, allowing greater flexibility in the way losses
incurred from 1 April 2017 can be used but with the tradeoff that the use of losses will be restricted to 50% of taxable
profits (but only in respect of profits in excess of £5mn).
The Roadmap also retains, and indeed tightens, the sector
specific restrictions for banks and does so from 1 April 2016.
Other measures include upcoming consultations on to the
Substantial Shareholding Exemption and on the Double
Taxation Treaty Passport scheme along with the reform of
stamp duty land tax on non-residential property transactions
and the simplification of the business energy tax regime.
These key areas of policy are considered in more detail below. The
Roadmap also contains a useful timetable for reform, showing
the route up to the intended position in 2020. However, the
roadmap does not contain any significant proposals on improving
the operation of CRM model or refreshing the tax party making
framework, both of which were expected.
The message from business before the Budget was that the
Roadmap should be less about tax rates and more about
structuring the tax system so businesses can operate more
effectively. It will need the provision of some of the detail
to flesh out the Roadmap to see whether it can deliver on
its promises.
Changes to corporation tax rates and
payment dates
The main rate of corporation tax will be cut further to 17%
from 1 April 2020, and the acceleration in payment dates
planned to take effect from 1 April 2017 for very large
companies will be delayed by two years.
The main rate of corporation tax will be reduced further in
2020. This follows a progressive reduction in corporation tax
rates from its current rate of 20%, to 19% from 1 April 2017,
with a further reduction to 18% planned from 1 April 2020. This
further reduction will now be to 17%. Separately, the Government
had been intending to amend the instalment payment regime
from 1 April 2017 for companies with annual taxable profits of
over £20mn so that such companies will be required to make
payments four months earlier than under the current system
(where instalment payments are made quarterly from month
seven in the accounting period to which the liability relates). This
change will now only come into effect from 1 April 2019.
The Government has for a number of years had an ongoing
policy of reducing corporation tax rates and, as emphasised in
the Business Tax Road Map, this further reduction is intended
to help support investment in the UK and deliver further on
the Government’s pledge for the UK to have the lowest rate
in the G20. The acceleration of payment dates for very large
companies will have a significant cashflow impact, so its
deferral is welcome news.
Interest restrictions
The UK’s interest relief rules are set to change with effect
from April 2017 with the introduction of a fixed ratio rule.
This will limit net interest deductions to a maximum of
30% of earnings before interest, taxation, depreciation and
amortisation (EBITDA), likely to be based on taxable rather
than accounting earnings. A group ratio rule will allow
greater interest deductions for groups with a third party
17
Business tax
Budget 2016
net debt to group EBITDA ratio that exceeds the 30% limit.
There will be a group threshold of £2mn of net UK interest
expense before the rules apply. There will also be rules to
ensure that the restriction does not impede private finance
for certain public infrastructure in the UK as well as rules
to address volatility in earnings and interest.
The new interest restrictions implement the OECD’s
recommendations under the base erosion and profit shifting
project. HM Treasury issued a consultation in October 2015 and
we expect it will publish a consultation on the detailed proposals
later this year. At the Budget, it was announced that the existing
worldwide debt cap would be repealed. However, under the new
rules, a group’s net UK interest deductions will be restricted to the
global net third party expense of the group. This restriction goes
beyond the OECD’s recommendations.
The start date of 1 April 2017 announced at the Budget gives
groups little time to restructure their operations, especially
given that detailed rules have yet to be published. The breadth
of the exemption for certain industries such as infrastructure
and the extent to which disallowed interest and unused interest
capacity can be utilised are also critical unanswered questions.
The treatment of banks and insurance companies was held over
from the OECD’s final report on interest restrictions and the
Government has said it will continue to engage with the OECD
on the design of rules to prevent excessive interest deductions
by financial institutions.
The latest draft of the European Union’s Anti-Tax avoidance
Directive, released this week and to be discussed at a meeting
of the European Council Working Party on Tax Questions on
Friday, also includes interest restriction rules based on a 30%
fixed ratio cap. At this stage, however, it does not include the
OECD’s permitted exclusion for public benefit projects and has
a de minimis threshold of only €1mn, although the details may
change before the directive is finalised.
New rules on use of corporation
tax losses
New flexibility on use of losses is to be provided from
1 April 2017 but it will come with a price of restricting
the amount of taxable profit that can be offset by losses
carried forward.
The Business Tax Roadmap promises that, for corporation tax
losses incurred on or after 1 April 2017 companies will be free
to use carried forward losses against profits from other income
streams or from other companies within a group. However, from
1 April 2017, only 50% of taxable profit will be able to be offset
through losses carried forward. This restriction will only apply to
18
profits in excess of £5mn. So a company with profits of £6mn
will be restricted to offsetting losses against 50% of its profits
over £5mn – in this case allowing it to offset losses against
£5.5mn of profit with the remaining £0.5mn carried forward to
be available to be utilised against future periods. Where a number
of companies are in a single group, the £5mn allowance will apply
per group, rather than per company. The group will then have
discretion as to how it applies the allowance.
The changes do not apply to oil and gas companies within the ring
fence corporation tax regime. However, the existing restriction
for banks’ historical losses is retained and in fact tightened. The
amount of profit that banks can offset with pre-April 2015 carried
forward losses is reduced to 25% from 1 April 2016. Losses
incurred post April 2015 will be treated in the same way as losses
in other non-banking companies.
The Government appears to be particularly concerned by
companies which make profits in one year but pay no tax due
to losses brought forward. Although the proposals are in line
with other international regimes, they do put additional strain
on groups’ cash flow and put pressure on the recognition of
deferred tax assets in respect of carried forward tax losses for
reporting purposes. Both outcomes reduce the attractiveness
of the UK tax regime. In this regard the £5mn allowance is
important in limiting the companies affected.
Patent box
The Government confirmed that it will move forward with
the modification of the existing patent box regime such
that it complies with the OECD proposals to deal with
preferential intellectual property regimes. In particular,
the benefits of the patent box should be dependent on the
extent to which research and development expenditure
is incurred by the company claiming the patent box as
opposed to outsourced to related parties or acquired
intellectual property. These rules will be included in Finance
Bill 2016 and will come into effect on 1 July 2016.
Draft Finance Bill 2016 clauses with respect to the patent box
were released in December 2015. This draft legislation has now
been subject to a formal consultation process and the finalised
legislation to be included in the Finance Bill is expected to reflect
the outcomes of this consultation process.
There is limited detail on the changes to be made to the
draft legislation previously seen. However, it is expected that
significant changes will be included in the draft legislation
expected on 24 March 2016.
Budget 2016
Royalty payments and deduction of
income tax at source
A package of measures is being introduced with regard
to royalty payments and the deduction of income tax
at source.
For royalty payments made on or after 17 March 2016, a new
anti-avoidance rule will be introduced in respect of connected
party arrangements which seek to avoid the deduction of
income tax by targeting the provisions of a double taxation
agreement. In such a case, the benefits of the relevant double tax
arrangements/international agreements will be denied.
The draft legislation sets a low hurdle for the application of the
rule by only requiring it to be reasonable to conclude that a tax
advantage was a main purpose of the arrangement.
The definition of a royalty for the purposes of the rules on the
deduction of income tax at source will be broadened to ensure
that income tax is deducted from all royalty payments to nonresident persons where the royalty has a UK source (seemingly
irrespective of whether or not the payment would otherwise be an
annual payment). The relevant legislation will be introduced at a
later stage of the Finance Bill 2016 process.
Finally, the rules to determine whether a royalty has a UK source
will be extended to include scenarios where a royalty is connected
with a UK permanent establishment (or an avoided UK permanent
establishment).
These updates were relatively unexpected, with no real detail
having been previously announced.
These measures appear to be designed to bring the UK rules
on the taxation of royalties more into line with international
practices. The rule should limit the scope for the artificial
erosion of the UK tax base via royalty payments, in particular
where royalties are paid to low substance entities.
Business tax
The current OECD transfer pricing guidelines have yet to be
updated to reflect the recommendations of the BEPS project.
However, the Government has endorsed these recommendations
and committed to including them in the UK transfer pricing rules.
The Government is also consulting on whether to introduce
secondary adjustment rules into transfer pricing legislation. These
rules are intended to address the underlying cash benefit from
incorrect transfer pricing and encourage broader compliance with
the transfer pricing legislation.
A secondary adjustment, as defined in the OECD transfer pricing
guidelines, is an adjustment that arises from imposing tax on
a secondary transaction. Secondary adjustments recognise
the fact that funds which would have been retained by one
of the parties if the provision had been made at arm’s length
have not been actually retained by it. This is done by deeming
a secondary transaction (e.g., a loan or a distribution) to have
been undertaken.
Secondary adjustments are imposed by other countries, such
as France and the US, to encourage restoration of funds to their
proper place or failing this, allow adjustment of the tax effects of
the distortion which might otherwise arise.
It appears that the enforcement of secondary adjustments
by other major treaty partners may have compelled the
Government to re-examine its earlier position not to include
them in law. Secondary adjustments can be problematic as,
for instance, some territories do not believe they can be
considered under the Mutual Agreement Procedures and, as
such, double taxation may arise as a result.
Anti-hybrid rules scope expanded
Updates to the UK transfer
pricing rules
The Government had already committed to including antihybrid rules in Finance Bill 2016 reflecting the conclusions
of the OECD’s base erosion and profit shifting (BEPs) final
report on neutralising the effect of hybrid mismatches.
It was announced in the Budget that the scope of these
rules will be expanded to also nullify advantages where a
mismatch arises through the use of exempt branches.
The Government intends to incorporate the latest OECD
transfer pricing guidelines into the UK transfer pricing
rules. The latest guidelines will include changes made
as a result of the base erosion and profit shifting (BEPS)
project. In addition, the Government plans to consult on
whether to introduce secondary adjustment rules into the
UK’s transfer pricing legislation.
Draft legislation was published in December 2015 as part of draft
Finance Bill 2016 to implement the OECD’s recommendations for
the neutralisation of hybrid mismatches. These rules come into
effect from 1 January 2017. Hybrid mismatches occur when a
payment is deductible in one territory but not taxed in any other,
or when a payment is deductible in more than one territory. The
rules nullify any benefits either by denying a tax deduction or by
increasing taxable income.
Changes to incorporate the latest version of the OECD transfer
pricing guidelines will be included in Finance Bill 2016.
The scope of these rules will now be expanded to deal with
mismatches arising through the use of exempt branches.
19
Budget 2016
For example, the proposals would deny a deduction where a UK
company pays interest to a branch in another territory where the
interest is not taxed in the branch because it is not treated as a
taxable presence there and not taxed in the head office territory
due to an exemption for branches. This rule will also have effect
from 1 January 2017.
We note that the European Union is also considering including
rules neutralising hybrids between Member States in its AntiTax Avoidance Directive which is currently in draft. The latest
draft directive takes a different tack, but only where the hybrid
mismatch is not already solved by other means such as a result
of the implementation by one of the relevant territories of the
OECD’s recommendations.
Possible improvements to the UK
corporation tax regime
The Government is to review the substantial shareholdings
exemption (SSE) and Double Taxation Treaty Passport
(DTTP) scheme – two features introduced to simplify and
make the UK corporation tax system more attractive.
There is, as yet, not much by way of detail provided in the
Business Tax Roadmap as to the scope of either of the two
consultations, which are timetabled for later this year. In respect
of SSE, the Government says that it will consult on the extent to
which the ‘SSE is still delivering on its original policy objective’
and whether there could be changes to ‘increase its simplicity,
coherence and international competitiveness’. However, this
development comes against a background of discussions between
HM Treasury and HMRC and global investment funds and it is
to be hoped that the consultation includes discussion as to the
extension of the exemption to the disposal of shares in investment
companies, including those that invest in real estate.
The DTTP does not provide any tax exemption itself but does
reduce the administrative burden of companies relying on the
benefit of a double tax treaty. The Roadmap does suggest that
the scheme could be extended to other types of foreign investor,
including sovereign wealth funds, pension funds and partnerships.
Both these measures are part of the Government’s wish
to establish a tax regime that will attract the multinational
businesses it wants to see in the UK. In this context, the
Roadmap makes specific reference to the investment
management sector and it will be interesting to how wide the
scope of the consultations is, once they are issued.
20
Business tax
Introduction of new legislation to tax
profits from trading in and developing
UK land
Changes have been announced to ensure that non-UK
residents pay corporation tax on their trading profits from
dealing in or the development of UK land. The changes
take effect from Report Stage of Finance Bill 2016 but
anti-avoidance measures will take effect from Budget Day
to prevent rebasing of land values through transactions
with related parties before that date.
The target of these rules is property development structures
which seek to exploit current tax rules such that non-UK resident
developers of UK land pay much less tax than UK resident
property developers. New legislation will provide that profits of
a trade carried on by a company will be subject to corporation
tax where the trade comprises dealing in or developing UK
land regardless of the company’s tax residence or where the
trade is carried on. The basic charge will be supplemented by
a ‘targeted anti avoidance provision’ to prevent avoidance of
this new charge through artificial arrangements, a provision
targeted at arrangements designed to reduce the charge through
fragmentation of trading activities and a charge on the sale
of shares in the property owning company. Changes have also
been made with effect from Budget Day to the double taxation
agreements the UK has with the Isle of Man, Guernsey and
Jersey to ensure the UK has taxing rights over UK land under
those treaties.
Given these comprehensive changes to the taxation of offshore
property development structures, groups affected should
plan on the basis that trading profits from existing and future
property dealing and/or development will be within the scope of
UK corporation tax.
Reduction in business rates
The Government has announced changes to the business
rates thresholds designed to reduce business rates from
1 April 2017 for half of all UK properties and a cut for
all business rate payers from 2020 by switching from
RPI to CPI as the measure for the annual indexation of
business rates.
Small business rate relief will be permanently doubled from 50%
to 100% for businesses with a property with a rateable value of
£12,000 and below, with a tapered relief for property with a
rateable value between £12,000 and £15,000. Furthermore,
the threshold for the standard business rates multiplier will also
be increased to a rateable value of £51,000. These changes are
Budget 2016
designed to help small businesses. All businesses will benefit from
the switch to CPI as the measure for the annual indexation of
business rates from April 2020.
The Government has also announced its intention to revalue
properties more frequently and to digitise billing and collection.
Business will welcome these changes, especially those
benefiting from the permanent increase in small business
rate relief. However, landlords will again be disappointed
that no increase in relief from empty property rates has
been announced.
Capital allowances: Cars
The 100% first year capital allowance for low emission cars
has been extended to April 2021 and changes have been
made to the main pool emission thresholds.
The 100% capital allowance available for businesses purchasing
low emission cars was due to expire in April 2018. This has now
been to extended for a further three years to April 2021. The
carbon dioxide emissions threshold will be reduced from 75g per
kilometre to 50g per kilometre. From April 2018, the threshold
for main pool rate treatment will also change from 130g/
kilometre to 110g/kilometre. These thresholds will be reviewed
again at Budget 2019.
The main impact of this change is likely to be a reduction
in the number of cars that will qualify for the main rate of
allowance and an increase in the number that will attract
plant and machinery allowances at the reduced special rate
(currently 8%).
Enterprise zone enhanced capital
allowances
The period of availability of 100% enhanced capital
allowances (ECA’s) in enterprise zones will be fixed at
eight years from date of introduction.
ECAs in enterprise zones were introduced in 2012 for a five year
period to 31 March 2017. This was extended for a further three
years to 2020, giving eight years of ECA. All enterprise zones
will now be entitled to eight years of ECA from the date of their
announcement. In addition, the Northern Ireland Executive has
set the boundaries of a new pilot enterprise zone near Coleraine
and the Government will create a new MarineHub enterprise zone
in Cornwall. Subject to the necessary business case approvals and
local agreements, the Government will also create new enterprise
zones in Brierley Hill in Dudley, Loughborough, Leicester and
Port Talbot as well as extending the Sheffield City Region
enterprise zone.
Business tax
The Government continues to extend the use of ECAs to
incentivise investment in new enterprise zones. However,
the relief is limited to 100% first year allowances on plant
and machinery assets. This still leaves the cost of land and
buildings as non-deductible for tax purposes making the relief
significantly less attractive than previous enterprise zone
allowances.
Capital allowances: Business Premises
Renovation Allowance
The Business Premises Renovation Allowance (BPRA)
scheme will not be extended and the capital allowance
incentive will expire on 31 March 2017.
BPRA was initially introduced in 2007 for a period of five years
and was extended for a further five years in 2012. The BPRA
scheme provides a tax incentive for companies to bring unused
business premises in ‘disadvantaged areas’ back into qualifying
use. BPRA provides companies with a 100% capital allowance for
qualifying expenditure in the year it was incurred.
Whilst many companies investing in ‘disadvantaged areas’
will be disappointed to see the abolition of a generous tax
relief, it is appreciated that the relief was not widely used.
There was a perception that, in some cases, the incentive
was being exploited which led to the introduction of antiavoidance measures. Companies should ensure that tax relief is
obtained, wherever possible, through other parts of the capital
allowances regime.
Abolition of the renewals allowance
The renewals allowance, which allows businesses and
traders to take a full tax deduction for the cost of replacing
‘tools’, will be withdrawn.
The renewals allowance allowed a tax deduction for both income
and corporation tax purposes for the cost of replacement ‘tools’
which would otherwise have been considered capital for tax
purposes. The accepted definition of tools included ‘implements,
utensils and articles’ and examples included glasses, cutlery
and small equipment such as spanners. The relief was used by
residential landlords and businesses. From April 2016, taxpayers
will no longer be able to claim a full deduction and, instead, relief
will be available through capital allowances or the new relief for
domestic items for landlords.
The renewals deduction is considered outdated (it predates
capital allowances) and the definition of tools has often been
the subject of debate. Businesses will now need to consider if
expenditure is capital for tax purposes and whether it qualifies
21
Business tax
Budget 2016
for main pool plant and machinery allowances. Where plant and
machinery allowances are available there may be advantages
in treating the assets as short life assets. Residential landlords
can continue to deduct the actual cost of replacing domestic
items such as furniture and appliances.
Oil and gas taxation
Trading income in non-monetary form
With effect from 1 January 2016:
New legislation to be included in Finance Bill 2016 but
effective from 16 March 2016 will ensure that trading
and property income received in non-monetary form are
subject to corporation tax or income tax.
New sections will be inserted into the Income Tax (Trading and
Other Income) Act 2005 and Corporation Tax Act 2009 to make
clear that income received as both money and money’s worth is
subject to tax. Accounting standards may result in certain nonmonetary receipts not being included in a company’s profits and
hence there was previously an argument that they should not
be added to taxable profits in tax computations either. The new
sections put this question beyond doubt.
The new rule does not represent a change in HMRC’s view of
the correct tax treatment of non-monetary income. However,
it makes clear that where income is received in kind, this must
be included in tax computations even if it is not included in
the accounts.
Securitisation vehicles
The Finance Act 2016 will include powers for HM Treasury
to make regulations to ensure that residual payments
made by securitisation vehicles can be paid free of
withholding tax.
Residual payments arise because securitisation vehicles typically
contain more assets than are likely to be required to repay the
investors, meet transaction costs and retain a profit. There can
be uncertainty as to whether the residual payments should be
classified as annual payments and, therefore, whether they should
be subject to withholding tax. This uncertainty will be eliminated
by removing the obligation to withhold income tax in respect of
such payments.
The change has come about as a result of a working group that
has been considering whether the securitisation rules need to
be modernised. It is a welcome change to eliminate uncertainty
that previously required securitisation vehicles to apply for
clearance from HMRC for confirmation that their residual
payments were not annual payments.
22
The Budget delivered by the Chancellor today included a
number of oil and gas measures:
Rate changes
►►
The rate of supplementary charge is reduced from 20% to 10%
►►
The rate of petroleum revenue tax is permanently reduced to 0%
Investment and cluster allowance
Relevant income for the purpose of activating these allowances is
to include tariff income. In addition there is to be a change in the
legislation to ensure costs on the acquisition of an asset do not
qualify for these allowances.
Decommissioning tax relief
HMRC has clarified the existing law as it applies to companies that
retain decommissioning liabilities.
Loss restrictions
The UK is to introduce restrictions on the quantum of profits
against which brought forward trading losses can be offset.
These rules will not apply to companies within the North Sea ring
fence corporation tax regime. They will, however, apply to oilfield
service companies.
Tax deductibility of interest expense
The UK is to introduce restrictions on the tax deductibility of
interest expense, by reference to 30% of UK taxable earnings
or based on the net interest to earnings ratio for the worldwide
group, if applicable. There is no specific carve-out for oil and gas
but there is to be a specific consultation on the application of
these new rules to the oil and gas sector.
The announcement of a 10% cut in corporate taxes, and the
effective abolition of petroleum revenue tax for the UK oil and
gas sector will fall short of industry expectations. Since 2011,
there has been a compelling case to lower the tax burden to
recognise the maturity of the basin, the high cost base, and the
falling production efficiency of older assets which support vital
offshore infrastructure. The case for a significant change to the
oil and gas regime has also been exacerbated by the collapse in
the oil price.
The changes, while welcome, are a missed opportunity,
as abolishing supplementary charge completely would
have simplified the regime by sweeping away the
complexity of investment allowance and its interaction with
decommissioning losses.
Business tax
Budget 2016
The industry will be very relieved that the proposed restriction
on trading losses will not apply to oil and gas companies,
and appreciative of the announcement clarifying tax relief
on retained decommissioning activities. For oilfield service
companies, and other companies within the wider supply chain,
the restriction in the quantum of carried forward losses that
can be offset to 50% of the current years taxable profits will be
a further blow to a sector under significant pressure following
the impact of the low oil price. In addition, the proposed
restriction on interest deductibility, though not unexpected, will
be unwelcome and there is ongoing uncertainty as to how these
rules will apply to upstream oil and gas companies.
New rates of stamp duty land tax
(SDLT) for non-residential property
transactions
With effect from 17 March 2016, SDLT will be charged
on purchases of non-residential (including mixed-use)
properties at new progressive rates up to 5%. In addition,
for new leases of non-residential (including mixed use)
property granted on or after that date, a new 2% rate of
charge in respect of the net present value (NPV) of the
rents will apply where the NPV is above £5mn.
SDLT on purchases of non-residential (including mixed use)
properties has previously been determined under the so called
‘slab system’ so that the tax rate for the highest band into which
the purchase price falls is applied to the entire amount of the
purchase price. It has been announced that, with effect from
17 March 2016, a progressive tax structure will be introduced for
purchases of non-residential property at the following rates:
►►
£0 to £150,000
0%
►►
Over £150,000 and up to £250,000
2%
►►
Over £250,000
5%
In relation to the grant of a new lease of non-residential property
(including mixed use), SDLT is charged at the rate of 1% on the
net present value (NPV) of the aggregate rents payable over the
term of the lease, after deducting £150,000 (in addition to the
charge on any premium for the grant of the lease). It has been
announced that with effect from 17 March 2016 a new 2% rate of
charge will apply where the NPV of the rents is above £5mn. This
will apply on a progressive basis (i.e., the portion of the NPV over
£150,000 up to £5mn will be taxed at the rate of 1%, with the
balance over £5mn taxed at the new 2% rate).
These changes are subject to transitional measures.
This is a significant change and will result in substantial
additional SDLT liabilities for high value non-residential
property transactions. The move from the ‘slab system’ to a
progressive tax structure is however to be welcomed and will
remove the ‘cliff edge’ effect of the ‘slab system’ which meant
that, for example, a property acquired for £500,000 would be
taxed at 3% but payment of an additional £1 (ie £500,001)
resulted in the entire consideration being taxed at 4%.
Higher rates of stamp duty land tax
(SDLT) on purchases of additional
residential properties
As previously announced in the 2015 Autumn Statement, and
following a period of consultation, it has been confirmed that
higher rates of SDLT will be introduced from 1 April 2016 on
purchases of additional residential properties, such as second
homes and buy to let properties. The higher rates will be 3%
above the current rates of SDLT.
The higher rates will be 3% above the current rates of SDLT and
will be as follows:
►►
£0 to £125,000 3%
►►
Over £125,000 and up to £250,000 5%
►►
Over £250,000 and up to £925,000 8%
►►
Over £925,000 and up to £1,500,000 13%
►►
Over £1,500,000
15%
The higher rates will not apply to certain transactions such
as purchases under £40,000, individuals replacing a main
residence (subject to meeting certain conditions) and purchases
of residential property in Scotland (although similar measures are
being introduced by the Scottish Government).
Although the higher rates are aimed primarily at buy-to-let
investors and owners of second homes, they will also apply to first
purchases by non-natural persons, such as companies and funds.
The Government has decided against introducing an exemption
for large scale investors. However, it is understood that the
existing provision under which the non-residential SDLT rates will
apply to purchases of six or more dwellings in a single transaction
will continue to apply.
Transitional measures will apply in certain situations for purchases
that complete on or after 1 April 2016 where, broadly, the
transaction is effected pursuant to a contract entered into before
26 November 2015.
These changes, together with the direct tax changes to the
taxation of buy-to-let properties, may significantly affect the
buy-to-let market. The changes will also impact on residential
property developers (unless acquiring six or more properties
in a single transaction) as there is no exemption for property
development businesses.
23
Budget 2016
Business tax
Stamp Taxes: Other Budget 2016
announcements
Strengthening sanctions for tax
avoidance
The Government also confirmed in the Budget a number
of previous announcements in respect of changes to
the stamp tax treatment of ‘deep in the money options’
(DITMOs), the introduction of stamp duty land tax (SDLT)
seeding relief for property authorised investment funds
(PAIFs) and co-ownership authorised contractual schemes
(CoACSs). Similarly the extension of certain reliefs from the
annual tax on enveloped dwellings (ATED) and the higher
15% rate of SDLT for certain purchases of residential
property were also confirmed.
A range of measures aimed at further deterring tax
avoidance will be introduced in the Finance Bill 2016
These changes are in line with previous announcements except
for the measures relating to DITMOs which were previously
announced to take effect from Budget Day but now take effect
from 23 March 2016.
Large Business: measures to ensure
tax compliance
HMRC has confirmed that the Summer Budget 2015
proposals for a requirement for large companies to publish
their tax strategy and a ‘special measures’ regime are to be
legislated for in Finance Bill 2016.
At Summer Budget 2015 HMRC announced a range of proposals
intended to improve tax compliance by large businesses. The
main elements of the proposals were a requirement for large
companies to publish their tax strategy, a voluntary Code of
Practice and a ‘special measures’ regime aimed at a small
number of businesses that persistently engaged in aggressive
tax avoidance. The proposals were the subject of a formal
consultation process, with responses published on 9 December
2015. In light of these, the proposal for a Code of Practice has
been changed to a Framework for Cooperative Compliance which
includes mutual obligations rather than the one-sided obligations
as originally drafted. Draft legislation was also published in
December 2015 and representations have made on this.
The Budget contains no new information about how the
proposals will be implemented, so the publication of the
Finance Bill will need to be awaited to see the extent to
which comments on the draft legislation have been taken into
account. We also await the updated Framework for Cooperative
Compliance; EY has made representations on this revised
approach and supports a framework based on a ‘Service Level
Agreement’ model.
24
Following a consultation process, proposals originally announced
last year will now be legislated for in Finance Bill 2016. These
include measures targeting ‘serial avoiders’ and a broadening of
the Promoters of Tax Avoidance Schemes (POTAS) provisions. The
serial avoiders proposals are aimed at taxpayers who persistently
enter into tax avoidance schemes that are found to be ineffective.
The scope of the POTAS regime is to be widened by bringing in
promoters whose schemes are regularly defeated. Additionally it
has been confirmed that a new penalty of 60% is to be introduced
for all cases that are successfully tackled by the general antiabuse rule.
Whilst the objectives of the proposals are clear some of the
detail is not. In particular, the element of retrospection inherent
in some of the POTAS proposals and the definition of a ‘defeat’
that can trigger the application of both the serial avoiders and
POTAS provisions as set out in the draft legislation require
clarification. Representations on these points have been made
to HMRC and it is hoped that these will be reflected in the
legislation published in Finance Bill 2016.
EY contacts
London
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