Lizzie Hill, Tax Partner at Deloitte in Cambridge, considers what tax measures the Chancellor is expected to focus upon in the Budget on 19 March, and what we already know is in Finance Bill 2014:
Deloitte previews Budget 2014
“Former Chancellor Lord Lawson of Blaby has often said that Budget secrecy is essential for delivering tax reform. However, the politics of coalition have often meant that tax policy debates have played out in public. Judged by Lord Lawson’s standard either we are facing significant tax reform – or the coalition considers it has delivered its main tax policy objectives and further reform must await the 2015 general election.
“The new approach to tax policy making means that much more notice is given of potential tax and national insurance changes – so many new measures are in the pipeline. Some of those have already been legislated; others await fleshing out and consultation.
“However, speaking in Hong Kong in February the Chancellor said “I want to deliver a Budget that supports a Britain that invests and that exports.” Could we see new tax announcements to reflect that ambition?”
What could the Chancellor announce?
Business – infrastructure relief
The UK has a pressing need to invest in infrastructure – but some infrastructure costs are not eligible for any form of tax relief. Introducing an allowance for capital costs would be a welcome reform and would help support vital capital investment.
We do not expect any significant announcements on business rates – although actually setting up the wider review hinted at by the Prime Minister and Chancellor would be welcome. Business rates raise £27 billion – some 4.5% of total tax receipts.
Individuals – non-resident capital gains tax
At the Autumn Statement, the Chancellor announced that measures would take effect from April 2015 to levy capital gains tax on non-resident individuals disposing of UK residential property. This follows the earlier introduction of a charge on non-UK resident companies, or certain other non-natural persons, disposing of UK residential property worth more than £2m. The change will affect disposals of all UK residential property by non-UK resident individuals and disposals of enveloped properties where the property is worth less than £2m (since gains on disposal of enveloped properties worth more than £2m are already subject to CGT). It is not clear whether this includes disposals by trustees or personal representatives, though this may be the case. These changes will apply from 6 April 2015.
Designing the proposals is not easy and we expect details and a consultation to be released at the Budget.
Individuals – increasing thresholds and allowances?
The personal allowance rises to £10,000 from 6 April 2014, achieving the coalition’s target a year early. The allowance is set to increase by the CPI from 2015/16 onwards. It seems highly unlikely that an increased personal allowance will be announced in this year’s Budget for 2015/16, even though some parties consider this a political objective.
At the same time, there has been rapid growth in the number of higher rate taxpayers, as the threshold has been reduced, or increased by less than inflation.
Hill adds: “Increasing the higher rate threshold above the level previously announced could halt the rapid increase in the numbers of those paying higher rate tax (expected to be 20% of taxpayers by 2016/17). However this would come at a cost – simply indexing the threshold by CPI would cost £3.4 billion over the next four years.”
The Office of Tax Simplification has been carrying out reviews into various aspects of taxation, including employee benefits and expenses as well as partnerships. The Chancellor is expected to respond in the Budget to the OTS’ reports.
Consultations - the final legislation?
Social investment tax relief
The Chancellor has previously announced a new relief for individuals investing in social enterprises and will announce the rate of the relief at the Budget – expected to be between 30-50%.
Equity and certain debt investments into social organisations will qualify for a 30% tax credit. This will apply to investments up to a maximum of £1m. The launch of a new social investment tax relief will also allow companies that work for the social good to raise money without issuing shares. The new relief will be modelled on the Enterprise Investment Scheme (EIS), though there will be some differences between the reliefs. The challenge will be the complicated nature of the relief and this may cause some social enterprises to be put off taking advantage of the relief.
The reduction in the lifetime allowance to £1.25m has already been announced. The legislation covering Individual Protection 2014 has been under consultation and the proposed final version is expected in the Finance Bill.
Principal private residence changes
The Autumn Statement included details of the proposed reduction in the PPR relief from CGT on disposal of an individual’s main residence. Where a house has been a main residence at some time during the period of ownership, the proportion of the gain relating to that period is exempt from CGT on sale. Whether or not the house is occupied as a residence in the final three years, the gain relating to that period is also exempt from CGT. This three year period is to be reduced to 18 months from 6 April 2014. It is hoped that the slow housing market currently experienced in some areas does not mean unforeseen tax charges in some cases, although some ‘protected groups’ (i.e. disabled people and those moving to a care home) will be exempt from the change.
Tax payments following litigation of tax avoidance schemes
Participants in tax avoidance schemes which have been successfully litigated against by HMRC in representative cases will face new penalties should they choose to pursue and lose their own court cases. As a further deterrent, participants in tax avoidance schemes which have been overturned in the courts will be issued with notices to pay the tax, penalties and interest due to remove the cash flow advantage of holding these funds pending the final outcome of litigation. A similar notice to pay may be given against taxpayers who have entered into tax schemes disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) rules or schemes where HMRC contend that the General Anti-Abuse Rule (GAAR) should apply.
Substantial changes will be made to the taxation of partnerships and partners from 6 April 2014. The final proposals are expected in the Finance Bill 2014.
The new rules will impact partnerships which use a corporate partner to hold working capital (such as partnerships which have received external investment) and also partnerships with salaried partners.
Inheritance tax and trusts (IHT)
The Government previously consulted on changing how IHT charges which are payable by relevant property trusts (such as discretionary trusts and most trusts established since 22 March 2006) should be calculated by applying a flat 6% rate of IHT to the value of trust property in excess of the available nil rate band every ten years, with a pro-rata charge applying where property is distributed from trusts.
These changes could have a significant impact on the IHT payable by existing trusts and no grandfathering provisions were proposed in the previous consultation. At the Autumn Statement it was announced that the majority of the changes would be deferred until April 2015, pending further consultation. The latest round of consultation is expected to be announced in Budget 2014.
Oil and gas offshore chartering and rig leasing
The Government announced at the Autumn Statement that it will consult with industry on legislation to cap the amount allowed as a deduction from profits for companies operating in the UK Continental Shelf. The stated policy objective is “to prevent companies who lease rigs and equipment to oil and gas operators from using associate companies in tax havens to minimise their UK tax bill”.
Legislation will also be introduced to provide a new form of ring fence applicable to the ‘composite activity’, which is the subject of this measure. Whilst profits within this ring fence will only be taxed at standard corporate tax rates (and not the higher rates which apply to oil producers), those profits will no longer be able to be reduced by other tax reliefs derived from activity outside the UK Continental Shelf.
Rates and allowances taking effect from April 2014:
The Coalition Government’s latest cut in the main rate of corporation tax takes effect from 1 April 2014, when the rate drops from 23% to 21%. The rate will drop further to 20% from 1 April 2015. The main rate of corporation tax applies to companies (or groups of companies) with profits above £1.5 million. The small profits rate remains unchanged at 20%.
Rates and allowances
The personal allowance for 2014/15 will be £10,000 (up from £9,440). This means a tax saving for basic rate taxpayers of £112 and for higher rate taxpayers of £195.
The higher rate threshold will increase by 1%, from £41,450 to £41,865 – unlike in some previous years when the threshold has been reduced to focus the benefit towards basic rate taxpayers. However, increasing the threshold by less than inflation is likely to mean that more people will be drawn into the higher rate net. Those with incomes over £100,000 see the benefit of the allowance withdrawn.
Transferable personal allowances
Transferable personal allowances will be introduced from 6 April 2015, when it will be possible for up to £1,000 of an individual’s personal allowance to be transferred to his or her spouse or civil partner, provided neither spouse or civil partner is a higher or additional rate taxpayer.
A new system for offering tax relief on childcare will take effect in 2015.
Removal of employer NIC for under 25-year-old employees
This new exemption to encourage employers to engage those under 25 is due to commence in April 2015.
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