22 March 2012
With a number of major changes already announced (and with any further possible contention given a last minute public airing!), George Osborne’s promised “far reaching reforms” in the 2012 Budget were actually low on final surprise.
In truth, any shock elements may have gone against the general themes of stability, fairness and certainty. The Budget 2012 was packed full of the usual statistics, rhetoric and promises, with a clear focus on supporting future growth and promoting a fairer tax system.
In a purported fiscally neutral Budget, the Chancellor confirmed positive (yet subdued) growth forecast figures and underlined both the progress and commitment towards reducing the government deficit. The longer-term fiscal challenges associated with an ageing population were met with a confirmation that retirement age is to be increased in line with longevity.
Reforms to support future economic growth were underpinned by significant investment stimulus, with both public and private sector initiatives. There were significant public commitments to infrastructure, notably road and rail networks, aerospace, housing construction and broadband. Driving private sector investment through a combination of incentives for overseas investors, UK pension funds and smaller businesses were also confirmed. For businesses/private investors, a combination of improved access to finance and sponsored tax breaks were detailed.
On the tax side, the quest was made clear – a simple, competitive, fair tax system that rewards work. There was help for low-earners and the underlining of a desire to combat “morally repugnant” tax avoidance. Many of the measures announced are either delayed, or phased over a period of time. The pre-announcement of a reduction in the top rate of Income Tax to 45% from 6 April 2013 offers some immediate and obvious opportunities for those who can control their income levels.
Impact on individuals
The Chancellor made no changes to Capital Gains Tax rates, nor did the widely feared reduction in higher rate tax relief for pension contributions materialise. There are
substantial changes however to both personal allowances and higher Income Tax rates from April 2013, and a variety of other measures of interest.
Income tax rates – the additional rate of tax levied on income over £150,000 will fall by 5% from 6 April 2013. The rate drops from 50% to 45% for non-dividend income and from 42.5% to 37.5% for dividend income.
Whilst this is welcome news, the change is still more than a year away. Individuals subject to these rates will no doubt be looking to delay taking income until on or
after 6 April 2013 where at all possible, and there will be consequent impacts on the timing and amount of tax received by the Government.
Personal allowances – the standard personal allowance increases to £8,105 on 6 April 2012 as expected and will increase further to £9,205 on 6 April 2013. The reduction in the basic rate tax band from 6 April 2013 is designed to ensure that lower rate tax-payers benefit the most.
The higher age related allowances will be frozen at the rates for the year ended 5 April 2013, and from 6 April 2013 will be restricted to those born before 6 April 1948.
Taxpayers born on or after 6 April 1948 will not be eligible for age related allowances on reaching 65.
Child benefit – From 7 January 2013 individuals with income of over £50,000 face a new tax charge on Child Benefit receipts. The Child Benefit will be paid to claimants as usual, but the new tax will be collected through self assessment or PAYE deductions. The tax will be equal to 1% of Child Benefit received for every £100 of income over £50,000. If income is over £60,000, the new tax charge will take the entirety of the Child Benefit received.
Inheritance tax (“IHT”) – For deaths on or after 6 April 2012 a reduced IHT rate of 36% applies if 10% of an Estate is left to charity. The rules are complex.
There is also to be consultation on increasing the exemption for a UK domiciled spouse to transfer assets to a non UK domiciled spouse (currently £55,000), allowing a non UK domiciled individual with a UK domiciled spouse to elect to be treated as UK domiciled for IHT purposes, and to simplify the regime for periodic and exit charges for trusts.
Stamp Duty Land Tax (“SDLT”) – A new top rate of SDLT is introduced on residential property purchases by individuals on or after 22 March 2012. Purchasers paying more than £2 million face a charge of 7%. Transitional provisions may allow the present rate of 5% to apply to contracts entered into before 22 March 2012, which are completed on or after 22 March 2012.
Certain companies, partnerships with a corporate member and other entities may pay 15% SDLT on residential property purchase transactions on or after 21 March 2012.
Enterprise Investment Scheme (“EIS”) – From 6 April 2012 individuals can invest up to £1 million per year into companies qualifying under the EIS, which is designed to generate and encourage new sources of finance for small businesses.
The rise to £1 million doubles the current investment limit and this, together with the potential for 30% Income Tax relief, deferral of capital gains, and Inheritance Tax relief for investors shows the Government’s continued commitment to this scheme.
Investee companies seeking capital under either the EIS or from Venture Capital Trusts will also benefit from improvements to and relaxation of a number of qualifying criteria.
Seed EIS – The Seed EIS is introduced from 6 April 2012 as previously announced, to assist smaller early stage companies in raising finance. Individuals can invest up to £100,000 in such companies per year. The Government offers 50% Income Tax relief for individual investors owning less than 30% of a Seed EIS company.
Capital gains made by the investor between 6 April 2012 and 5 April 2013 on other assets which are invested into Seed EIS shares by 5 April 2013 can escape Capital Gains Tax altogether.
Enterprise Management Incentives – The value of shares held in these tax-advantaged share option schemes for employees of qualifying businesses is currently limited to £120,000. This will be raised to £250,000 for share options granted after a date yet to be announced. The Government’s intention is to implement this change as soon as possible.
Statutory residence test – HMRC confirm that the introduction of a statutory test to determine whether an individual is resident or non resident in the UK for tax purposes will be delayed until 6 April 2013. This is to allow more time to consider complex issues in this area.
Non UK domiciled individuals – From 6 April 2012 non UK domiciled individuals electing for the remittance basis of taxation will pay a tax charge of £50,000 p.a. for the privilege if they have been resident in the UK for at least 12 of the previous 14 tax years. Individuals who have been resident for 7 out of the previous 9 years and do not fall into the above regime will continue to be charged £30,000 p.a.
Non UK domiciled individuals are to be encouraged to support UK trading, property letting or development companies by allowing foreign income and gains to be remitted to the UK for investment with no UK tax charge on the remittance.
Impact on Businesses
There are a number of measures designed to help the smallest businesses and to encourage people to startup new business. Disappointingly, very little was announced to benefit the majority of owner managed businesses. Whilst larger companies with profits in excess of £1.5 million will benefit from a further reduction in Corporation Tax rates, no corresponding reduction has been made for smaller companies.
Most of the changes for businesses in the Budget 2012 had already been announced, either in the Draft Finance Bill, previous Budgets, or by being leaked to the
press over the last few weeks. The headline changes to effect business are:
- Main rate of Corporation Tax down to 24%
- Small company Corporation Tax rate frozen at 20%
- Reduced capital allowances and annual investment allowance from April 2012
- New cash accounting tax system proposed for micro businesses
- Proposed tax relief on disincorporation
- Increase in R&D relief to 225% for small companies
- 10% tax rate for patent box income
Some of the main changes are outlined in further detail below:
Tax Breaks for Big Business – The Chancellor has announced a further 1% cut in the main rate of Corporation Tax. This is in addition to the cuts in the headline rate previously announced, creating a Corporation Tax rate of 24% for large companies from 1 April 2012. The Chancellor has also outlined his intention for the rate to fall further to 23% from April 2013 and 22% from April 2014, with the ultimate target of the Government to have a headline 20% tax rate at the end of the parliament. They see this as vital to attracting global corporations to the UK who focus on the headline rate of Corporation Tax when considering where to locate new business activities.
As mentioned in previous budgets, the Chancellor also confirmed that a full reform to the Controlled Foreign Companies rules will be introduced from 1 January 2013 that provides a more relaxed territorial tax system to better reflect the way that businesses operate in a global economy.
Research & Development and Patent Income – From 1 April 2012, the enhanced reliefs available to businesses that undertake qualifying research and development will be further increased. The relief available to small and medium sized businesses will increase to 125% resulting in a total deduction of 225%. The rate of cash tax credits will be reduced from 12.5% to 11%, a necessary reduction in order stay within state aid limits following the increased relief. However, they will no longer be restricted to the PAYE/NIC liability of a company.
The criteria to be able to make a claim will also be reduced and it will no longer be necessary for companies to spend a minimum of £10,000 on R&D in order to qualify for the relief. Additionally, rules around externally provided workers are being relaxed.
A new ‘above the line’ credit will is to be introduced for companies that qualify for R&D reliefs under the large company scheme. A number of measures have been announced to simplify the taxation system for the countries smallest businesses.
A new Patent Box regime will be effective from 1 April 2013 introducing a 10% corporate tax rate for income profits attributable to patents.
Small businesses – A new cash accounting basis will be available to small unincorporated businesses from April 2013 with turnover of up to £77,000. The new regime will be voluntary, so businesses will be able to choose the most appropriate method for them. The current tax system means that there can be substantial tax cost on disincorporation; a tax relief has been proposed to enable companies with low turnovers to disincorporate without incurring a significant tax cost, allowing businesses to trade in a structure that makes the most commercial sense.
A new enterprise loan system will give young people aged between 18 and 24 the chance to borrow between £5,000 and £10,000 to start up their own business.
The above measures are in addition to the ongoing Employers National Insurance Holiday that provides an exemption of up to £50,000 of National Insurance Contributions to new businesses in their first year.
Capital Allowances – The annual investment allowance giving a 100% immediate relief will apply to £25,000, rather than £100,000 as at present. The writing down allowance rate will fall to 18% from 20% of the balance of pooled expenditure. Long life assets writing down allowance reduces from 10% to 8% per annum. Short life asset elections will be extended to an eight year period. At present if a company elects for short life asset treatment and still owns the asset after four years the remaining expenditure transfers to the general pool. A later sale or scrapping does not trigger tax relief for the remaining net cost.
The list of energy-saving and environmentally beneficial technologies and products qualifying for enhanced capital allowances of 100% is to be updated from April 2012. A scheme to provide 100% allowances for businesses that locate in one of the country’s 22 enterprise zones has also been announced.
What to do now – Business owners should review the Budget 2012 announcements and plan accordingly.
- Businesses looking to make capital investments should get in touch so that we can assess whether accelerating the addition to be made before 1 April 2012 will provide a tax benefit given the loss of allowances after this date.
- Companies paying tax at the main rate of corporation tax should assess whether to accelerate costs so that they are incurred before 1 April 2012 to reduce their tax liability at the current 26% rate.
- People looking to set up new businesses should seek advice as to whether they will qualify for any of the government initiatives.
- Businesses undertaking research and development who have not previously claimed for enhanced relief should seek advice as to whether expenditure incurred from 1 April 2012 will now qualify for enhanced relief. Many companies may be incurring qualifying R&D expenditure without realising. We therefore recommend that you speak with us to discuss any expenditure that you incur in relation to any research or development work that you undertake.
- Businesses that believe they may benefit from the new patent box income tax rate should contact us so that we can assess whether you will qualify.
Clampdown on Tax Avoidance
The Government has continued their focus on and introduced various new measures to what the Treasury considers unacceptable tax avoidance.
Stamp Duty Land Tax (“SDLT”) – SDLT received particular attention. This avoidance has been front page news in recent weeks and so it was no surprise that the Chancellor announced several measures to raise SDLT revenues;
- A punitive 15% rate of SDLT is introduced to deter overseas companies from acquiring UK residential property;
- An annual tax charge is to be applied on properties already within an overseas corporate structure;
- Legislation to counter widespread use of certain existing schemes which seek to eliminate SDLT;
- The intention to retrospectively counteract newly developed SDLT avoidance schemes; and
- The introduction of a new 7% SDLT banding for properties purchased for more than £2 million.
General Anti Avoidance Rule (“GAAR”) – The Government again confirmed is support for the introduction of a GAAR and it seems almost certain that a GAAR will be introduced, with the legislation now expected in Finance Bill 2013. It is hoped that the GAAR will be focused on highly contrived, artificial arrangements and reduce rather than increase uncertainty and complexity in the UK tax system.
Legislative policy – Successive UK Governments have been careful not to infringe the principle that changes to taxation should only be prospective and so whilst the announcement regarding retrospective legislation is at face value of concern, it is not considered to have wider implications for tax planning outside of the specific area targeted.
Beyond SDLT there were a small number of highly targeted anti-avoidance measures aimed at the more speculative tax schemes marketed in the last 12 months.
More to come……..
The Budget 2012 included details of many proposals to introduce future tax legislation, which will first go through a consultation process. Some of the key ones are:
Cap on Income Tax reliefs – it is proposed that legislation will be included in Finance Bill 2013 to apply a cap on Income Tax reliefs claimed by individuals from 6 April 2013. This cap is only to apply to reliefs which are currently uncapped and is only relevant where an individual is seeking to claim more than £50,000 in reliefs. If an individual is seeking more than £50,000 in reliefs, the cap for reliefs will be set at 25% of income or £50,000, whichever is greater.
This new cap on Income Tax reliefs should not affect already capped Income Tax reliefs, such as pension contributions, EISs and VCTs. Where there could be an impact is that this new limit effectively places a cap on trading and property loss reliefs.
Residential property – Capital Gains Tax charge – As well as the Stamp Duty Land Tax changes that apply to offshore companies and certain other entities acquiring or owning UK residential property above £2 million, the Government will also consult on introducing a Capital Gains Tax charge in Finance Bill 2013 on the disposal of UK residential property owned by offshore companies.
Pensions – the state pension is to be reformed into a single tier pension for future pensioners. The Finance Bill 2013 will also include legislation that prevents a tax advantage from being obtained where employers make pension contributions to employees family members’ pensions as part of an employee’s remuneration package.
There is also to be a strengthening of the reporting requirements and powers of exclusion relating to Qualifying Recognised Overseas Pension Schemes (“QROPS”). The QROPS regime allows a transfer, free of UK tax, of pension savings from a UK registered scheme to a QROPS for individuals who choose to leave the UK and wish to export their pension with them. The changes to the QROPS rules are to prevent abuse that the Government believes exists.
Employee share schemes – As well as the changes announced to Enterprise Management Incentives, the Government has also confirmed that it will consult on recommendations of the Office of Tax Simplification (“OTS”) to simplify and improve other employee share schemes. The recommendations of the OTS include reducing compliance requirements of already existing tax advantaged share schemes and reviewing whether it may be possible to merge different schemes.
The Government is keen to promote employee share ownership and so further progress on this is expected ahead of Finance Bill 2013.
For more information and advice on the impact of Budget 2012 and on tax planning in general, please contact us on 01788 539000.
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