Autumn Statement - Tax Commentary from the Profession

ANTI-AVOIDANCE

The Chancellor has today confirmed that the government will introduce a new penalty equal to 60% of the tax due in cases that fall under the General Anti-Abuse Rules (GAAR), which came into force in July 2013.

It was no secret that the government wanted to introduce a penalty aimed predominantly at serial abusers of tax avoidance schemes which consistently fail before the Courts. The penalty will be a way to claw back some of the money spent pursuing the serial avoiders. It has also been announced that there will be small changes made to the GAAR’s procedure to improve its ability to tackle marketed avoidance schemes. This again highlights HMRC’s determination to crackdown on those who had previously taken the system for granted.

Richard Morley, partner, Tax Dispute Resolution at BDO

 

Tax avoidance

As expected the Chancellor is expecting the Treasury coffers to be swelled by more anti-avoidance measures. This, alongside public spending cuts, has been the mainstay of his monetary policy; the problem now is that HMRC (Her Majesty’s Revenue and Customs) has just about exhausted the well of easy to reach targets. This past year saw a fall in Corporation Tax collected through anti-avoidance measures; this would imply that they are moving in to areas where collection is more difficult and time consuming

The new penalties announced under the General Anti-Abuse Rule is a further announcement of tax creep, which is unwelcome.

Chas Roy-Chowdhury, ACCA head of taxation

 

Corporate tax avoids limelight

The Autumn Statement is billed as a spending review and the Chancellor didn’t disappoint. The vast majority of his speech was devoted to how he was going to spend the taxes collected.

Corporation tax was barely mentioned, although various ‘anti abuse’ measures were briefly highlighted. These included measures to stop the intangible assets regime being used inappropriately by corporate partners in partnerships and certain technical issues surrounding capital allowances to the leasing industry. An ‘improved’ penalty regime for transactions caught by the General Anti-Abuse Rule was suggested.

It had been preannounced that Northern Ireland will aim to set its devolved corporation tax rate of 12.5%, similar to that in the Republic. The Chancellor encouraged other devolved legislatures to make use of their powers. This will mean operations of a company within the UK could be subject to different tax regimes. This is unlikely to result in tax simplification for UK businesses.

Laurence Field, head of corporate business, Crowe Clark Whitehill

 

Tax evasion crackdown continues as HMRC prepares for deluge of data

The Government’s commitment to invest another £800m to combat tax evasion reflects the continuing movement to raise significant amounts of money from what is perceived to be the low hanging fruit of tax evasion. Mr Osborne expects to raise £8bn from this investment which seems ambitious, yet with the advent of the Common Reporting Standard this may yet prove to be a realistic target.

The introduction of new penalties to support GAAR together with action against disguised remuneration schemes represents another plank in the strategy to discourage tax avoiders.

Osborne referred to the government making higher investments of £450m in the Government Digital service. As part of this HMRC will continue to develop its IT capabilities in readiness for the deluge of information that it is expecting to receive as a result of UK FATCA and the Common Reporting Standard, to which 96 jurisdictions have now signed up. Anyone with undeclared overseas tax liabilities should take immediate advice from a tax investigations specialist.

Sean Wakeman, partner and head of tax investigations, Crowe Clark Whitehill

 

Comments on tax administration

Tax Avoidance. With a 60% penalty on all cases successfully challenged under the GAAR,  there will also be administrative changes designed to make it easier to tackle "marketed avoidance". The penalty certainly represents a significant disincentive but its interesting to note that we have yet to have a referral under this regime.As expected there are also other tough new measures for those who persistently enter into tax avoidance schemes that are defeated by HMRC, including  special reporting requirements and a surcharge on those whose latest return is inaccurate due to use of a defeated scheme, with the names of avoiders to be published .

Evasion. "An additional £800m is made available - against the backdrop of 18% budget cuts - to tackle evasion and other non-compliance which is expected to produce yield of £7.2bn over 5 years. We await details of how exactly this money will be allocated.

Large Business Compliance. "It would appear that the proposal to introduce a voluntary Code of Practice for large business has been altered - while the key elements of the publication of a tax strategy and "special measures" for the few aggressive businesses remain, the Code is now a framework for cooperative compliance."

Simon Wilks, PwC partner

 

Anti-avoidance

There were few new announcements on anti-avoidance, although there will be a new penalty for those whose tax avoidance schemes are nullified by the general anti-abuse rule.  The previously announced new criminal offences for offshore evasion and corporate failure will be introduced in Finance Act 2016.

Bill Dodwell, Head of Tax Policy at Deloitte

 

Anti-avoidance

The comments on the GAAR are concerning as whilst there is no detail of the changes it is likely that any penalties will be high. As the GAAR seeks to stop tax avoidance that would otherwise comply with the tax code and the application of the GAAR is far from clear a taxpayer may suffer disproportionate penalties for a genuine misunderstanding.

Huw Witty, Head of Tax, Gordon Dadds

 

Tougher penalities

Today's Autumn Statement introduces the tougher penalties and criminal offences which were expected in the Budget earlier this year.  These are all clear signs of the tougher attitude towards evasion and set HMRC up to come down hard on tax avoidance and evasion when more information is made available through the Common Reporting Standards in 2017.  A similar forward-looking measure is the consultation on a new requirement to correct offshore tax non-compliance in the past - this will pick up after the Liechtenstein Disclosure Facility closes at the end of this year and is likely to carry stiffer penalties and no protection from prosecution. 

Finally, it is worth noting that many of the individuals referred to as 'Serial Avoiders' (people who have used a number of tax avoidance schemes) will be financially unsophisticated people who were aggressively mis-sold marketed tax avoidance schemes.  Tarring them as 'Serial Avoiders' and publishing their names is not a helpful way of resolving their problems, when a significant number of them have been misinformed by professional intermediaries whose advice they trusted."

Tessa Lorimer Withers LLP

 

 

CAPITAL GAINS TAX

Capital gains Tax (CGT) on residential property will be accelerated considerably putting cash in the Government’s pocket many months earlier. It moves the payment of CGT closer to that of Stamp Duty Land Tax (SDLT). It will be interesting to see if the lawyers or estate agents involved in the transaction will be responsible for collecting the tax and withholding it from the sale proceeds.

Collection of Capital Gains Tax (CGT) on residential properties needs thinking about. People pay tax at different rates and may have used their annual exemption elsewhere”, said Genevieve Moore, Partner, at London Chartered Accountants Blick Rothenberg LLP.
I would suspect that lawyers may be responsible for with-holding a flat rate, say 28% of the gain or disposal and the tax payer would then need to complete a tax return in order to claim any refund of tax they may be due. This would put onus on the tax payer to reclaim rather than on HMRC to chase the tax due.
Remember though, for the majority of the population selling their only home the sale will be exempt from CGT and so no tax will be due.

Genevieve Moore, Partner, at London Chartered Accountants Blick Rothenberg LLP

 

The Chancellor has discovered the concept of cash-flow

The Chancellor has today changed the date on which property owners must pay their tax. This measure reduces the payment window for Capital Gains Tax (CGT) due on residential property from 10-22 months to 30 days after the transaction and will be effective from April 2019.

HMRC is demonstrating strong commercial sense. The sooner they can collect CGT, the sooner they can put the money to use. The tax will hit HMRC’s bank accounts up to 21 months earlier than at present. Today’s change only applies to CGT on the sale of a property, so it is narrow in scope. However, with over 1.2m sales of residential property in 2014/15, the Chancellor is mining a rich seam of potential tax receipts, albeit many of those sales will be tax free.  A property sale is particularly suited to collecting tax within 30 days, although there will inevitably be complications in practice. Having hit on the idea of advancing tax payment dates, one can only think future Budgets will extend the principle more widely. The Chancellor has discovered the concept of cash-flow.

David Kilshaw tax partner at EY

 

CHARITIES

In addition to his more high profile charity announcements, the Chancellor made a lower key but nevertheless welcome change. The change removes charities from punitive tax rules designed to prevent individuals and trustees from extracting money from private companies by way of loan.

Currently, if a company with five or fewer shareholders lends money to its shareholders, which may include a charity, a tax charge can be triggered. The Chancellor has recognised that this can frustrate charitable intentions and so has introduced a tax relief.

Although largely a technical change, in the season of giving, charities will welcome this relaxation in the rules which tax advisers have been asking for since 2013.  The devil will of course be in the detail and we will need to look carefully at the new rules to be sure that no charities remain trapped in a net that was never designed to catch them.

David Kilshaw tax partner at EY

 

CORPORATION TAX

Corporate Tax devolution to Northern Ireland

The devolution of corporation tax to the Northern Ireland Executive – to be set at 12.5% - is welcome news, it will give Northern Irish businesses a boost in their competition with businesses over the border in the Republic of Ireland.

Chas Roy-Chowdhury, ACCA head of taxation

 

EMPLOYMENT TAXATION

The Statement has confirmed that the government will, following consultation, legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company.

"While the change will take effect from 6 April 2016, there is still no confirmation made about how it will be implemented and managed. Contractors, employment intermediaries and end clients continue to be none the wiser about the impact of the legislation come the 6th of April.

All umbrella company contractors will be affected by this legislation and PSC contractors, where they fall under the intermediaries legislation, will be also be affected. However, with this legislation still being reviewed confusion for PSCs remains."

Chris Futcher, CEO of Pulse Accounting

 

IR35 lives another day…

Contractors fearing recent press reports of a fundamental shift in the approach to tackle disguised employment that could have inadvertently hit their businesses, found their fears to be unfounded. Although the Chancellor reconfirmed the somewhat harsh denial of tax relief on travel and subsistence costs from next April, the ‘sky blue book’ of the Autumn Statement was silent on IR35. However, this is more of a short reprieve as the results of the consultation over the summer are considered and we may yet face stark changes in the forthcoming Budget.

Chris Sanger, Head of tax policy at EY

 

Apprenticeship levy

It is great to see the government's commitment to investing in apprenticeships, which have a vital role in improving the skills base of the UK economy and addressing the productivity gap. We are surprised that it is coming in as quickly as April 2017 – more information will be vital for those businesses most impacted.

Despite the benefits, the cost impact for large businesses can't be ignored. For many large businesses the 0.5% payroll levy will be far higher than the costs of the number of apprenticeships they currently offer. Unless larger businesses can reap the benefits of apprenticeships in other parts of their supply chain, this will simply be a payroll tax for them. When taken together with the National Living Wage and increase in auto enrolment costs, these businesses face a significant increase in their employment costs over the next few years.

Small businesses will be the main winners from the apprenticeship levy as, in practice, businesses with broadly less than 100 employees will largely be exempt from the cost of the levy.

John Harding, employment tax partner at PwC

 

New Apprenticeship Levy

The new 0.5% levy is ripe for future tax hikes we need to be cautious around any ‘mission creep’ on the levy. It might be increased in future years and all the funding received from it should be ring-fenced and any surpluses solely used for future apprenticeships.

Chas Roy-Chowdhury, ACCA head of taxation

 

Levy exemption for small businesses

This is an Autumn Statement with few tax announcements – although it raises taxation over the life of the parliament by nearly £21 billion.  The major burden falls on larger business in the form of the apprenticeship levy.  This is expected to raise £2.7 billion from 2017, increasing annually thereafter.  Small business is effectively exempted from the levy thanks to a £15,000 rebate.  The levy increase is substantially more than the cuts in corporation tax announced at the Summer Budget.

Bill Dodwell, Head of Tax Policy at Deloitte

 

Encouraging for the smallest businesses, but questions remain

We did not hear the expected response to HMRC’s discussion document on the IR35 small business tax. The Government has rightly decided to take more time to reflect on any reform to this unwieldy and burdensome tax. We are reassured that the Government has listened to IPSE, other business groups’ and our members' serious concerns on this and we will continue to work with Government to ensure a fair tax system for freelance businesses.

On tax relief for work-related travel and subsistence, we have always been clear that changes to tax relief for travel and subsistence should not penalise freelance businesses. Today’s announcement suggests that these firms will still be able to claim, as can every other business, but this is very much dependent on the outcome of the Government’s IR35 review.

Chris Bryce, IPSE Chief Executive

 

ENVIRONMENTAL TAXES

It was no surprise to see a real focus on value for money in relation to energy and climate change today.  

At first sight, the big winners in the Autumn Statement appear to be the UK’s energy intensive industries, such as steel and chemicals, which will receive exemptions from the impact of environmental levies. However, this will come too late for some in the steel sector who have recently announced the closure of UK facilities, and all may not be as it seems.  This exemption is to replace the existing cash compensation schemes and will save the Government £410m per year.  

The detail behind the Autumn Statement suggests that Government will take offsetting action to mitigate the impact on household energy bills.  It’s not clear whether the energy intensive industries will indeed be better off or who will end up footing the bill for the Government saving.

Given the challenges that the Department of Energy and Climate Change (DECC) is facing in delivering its energy policy objectives, in particular its commitment to invest in renewable heat, the proposed 22% cut to DECC's own budget combined with proposed reform to the Renewable Heat Incentive, will increase this challenge further.

The Government faces a tough challenge to meet its energy and environmental targets without blowing the budget.

Jayne Harrold, indirect tax senior manager at PwC

 

INDIVIDUAL SAVINGS ACCOUNTS

ISAs seem to be the Chancellor’s favourite investment vehicle. Having already announced changes to ISAs in his Budget in March and in the Summer Budget, he has gone for a hat trick by announcing further changes in the Autumn Statement as well.

The Chancellor is extending the list of qualifying investments for the new Innovative Finance ISA from Autumn 2016 to include debt securities offered via crowdfunding platforms. He is also planning to extend the ISA rules so that you can continue to benefit even after your death!  From 2016, ISAs savings of a deceased person will benefit from tax advantages during the administration of their estate.

With still more extensions to the ISA regime, ISAs could soon become the ‘only show in town’ for those with modest amounts to save and invest.

David Kilshaw, Tax Partner at EY

 

 

INVESTIGATIONS

Strict liability: an unjust solution. It is disappointing that the Chancellor has confirmed the so-called ‘strict liability’ offence will be introduced in 2016. It cannot be right that a person is automatically guilty of a criminal offence even if he genuinely didn’t realise that that was underpaid just because undeclared bank interest arose overseas rather than in the UK.”

Further inquiries into offshore avoidance. Intriguingly, the Chancellor announced a consultation on an additional requirement for individuals to correct any past offshore non-compliance with new penalties for failure to do so. No details were given, but it seems odd on the face of it, as individuals in this position are already required to repair the problem, unless they wish to commit fraud.

Perhaps this is the forerunner to this being open ended so, even if the error arose many years ago and can no longer be assessed by HMRC, there will be a requirement to volunteer the tax. That makes sense but it also means individuals will be volunteering to put themselves forward as criminals under the strict liability rules, so any such disclosure will need to be very carefully managed by an expert specialist.”    

Increased penalties: a worrying double negative. As expected, the Chancellor confirmed several measures from his summer Budget including increased penalties for offshore matters – linked to the value of the assets held not just the tax arising – along with penalties for those who enable others to commit offshore evasion. This is not surprising or controversial.

More worrying is the confirmation of the proposed criminal offence for the double negative of failing to prevent the facilitation of tax evasion by others. If the proposals go ahead without significant modification they have the potential to make commercial business decisions unworkable by unrealistically requiring businesses to monitor internal procedures and standards at other, unconnected businesses that work has been referred to. This appears to be going forward despite the Ministry of Justice announcing just a few weeks ago that work on ‘failing to prevent’ economic crime was being stopped as there is little evidence of such wrongdoing going unpunished.

John Cassidy, tax investigations partner, Crowe Clark Whitehill

 

PENSIONS

Auto enrolment contribution increases

The Government has confirmed that it will delay the next two scheduled increases in automatic enrolment minimum contribution rates by 6 months each, to align these changes with the start of the tax year.

“This is good news for employers, especially at a time when they are facing increasing employment costs. Aligning the dates with the tax year will make it much easier for the payroll function. This underlines the fact that auto enrolment is very much a payroll tax that companies face.”

John Harding, employment tax partner at PwC

 

The calm before the pensions storm

The Chancellor’s announced rate of £155.65 for the new flat-rate state pension is not a huge surprise. For someone working full time today, it’s roughly 60% of the Living Wage. So for the lowest earners, the step down in income at retirement will not be too bad by international standards, but for most people it will probably leave a sizeable gap to what they would call a comfortable retirement income. And, it will be some time before auto-enrolment savings are big enough to plug that gap.”

In private pensions, no news is sort-of good news for the Life & Pensions industry. For the first time in this Parliament, Osborne has not announced radical change to the private pensions system, giving the Treasury more time to digest the Green Paper consultation from the summer’s emergency Budget.

Meanwhile, the industry is still dealing with the consequences of earlier interventions. The new Pensions Freedoms continue to reshape the retirement industry, and the implementation of the tax relief taper next April is likely to create a lot of volatility in pension premium income as high-earners with variable pay try to guess what their annual limit will be by the end of the tax year. Asset managers may benefit from money that might have gone into pensions going into ISAs – a foreshadowing of what might happen when the Treasury reports back on the Green Paper?

Jason Whyte, Director in EY’s Insurance practice

 

Pensions

In a swift throwaway remark in his speech, the Chancellor stated that the rises in contributions required under automatic enrolment which were scheduled for October 2017 and October 2018 would be aligned with the tax years.  The statements issued after his speech confirm that the increases will be delayed by 6 months to April 2018 and April 2019 thus giving some savings for employers in the early years of automatic enrolment.”

Higher Rate Tax Relief

Government had already stated that their full response to the consultation announced in the July 2015 budget which closed on 30 September would be delayed until the March 2016 budget.  There were concerns however that some action would be taken to shorten the period that this relief remains but no action has been taken.  The period from now to the end of this tax year remains one in which higher rate tax payers should consider taking  advantage of this opportunity to maximise their pension savings while the tax relief remains in place as this may be the last tax year this will apply.   Although the annual allowance is £40,000 there is the ability to carry forward unused allowance from the previous 3 years although pension input periods and the change to end all pension input periods on 8 July 2015 complicate the calculations.  You should note that you cannot receive tax relief on more than 100% of earnings.

Salary Sacrifice

A salary sacrifice arrangement is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee's entitlement to cash pay. The sacrifice of cash entitlement is usually made in return for some form of non-cash benefit.   The result is generally a saving of tax and National Insurance contributions  by the employee and National Insurance contributions by the employer.  This may apply to employee contributions to pension arrangements, car schemes, childcare vouchers and bike to work schemes and other benefit arrangements.   The Government confirmed that they remain concerned at the growth in such arrangements and  they will be monitoring this  and their impact on tax receipts so the time for employers to take advantage of them is now.

Death Benefits

Generally funds in pension arrangements fall outside of the estate for inheritance tax purposes.   There has been some concern, particularly following the introduction of pension freedoms, that the law had not been changed to confirm that drawdown funds were not subject to inheritance tax.  The Government have now stated that legislation will be introduced, intended to be in the Finance Bill 2016, to ensure that where a pension fund member has designated funds for drawdown but not drawn all the funds at the time of death, there will be no charge  to inheritance tax.  Unusually this change is to be backdated so that it will apply to any deaths on or after 6 April 2011.

Second Properties

Many see investment in buy to let properties as an alternative way of providing for their retirement.  However the Government is concerned that this demand tends to drive up property prices putting property out of reach of local people.  To discourage this activity, the Government are introducing additional stamp duty land tax on such purchases (if value is over £40,000).  The higher rate will be at least 3% above the standard rates and will be introduced from April 2016.   Anyone thinking of purchasing a second property should consider this in their planning.

Secondary Annuity Market

As previously announced, the Government will remove any barriers to creating a secondary market for annuities, allowing individuals to sell their income stream, and have now committed to providing more details in their consultation response in December.  The legislation to enable this, however, will not come until the Finance Bill 2017.

Robert Young, Consulting Actuary, Gordon Dadds

 

Pensions

The Chancellor reasserted the Government’s commitment to the pensions triple lock which is to be kept ‘affordable’ through five yearly reviews of the state pension age, to take account of projected increases in life expectancy.

The basic state pension is to increase by £3.35 per week to £119.30 per week, the largest increase for 15 years, while the rate for the new single-tier state pension is to be set at £155.65 per week.

The Government has come under fire for not communicating sufficiently clearly about who will be entitled to the new single tier state pension, when it is introduced from April 2016, and is taking steps to address this issue, starting with the provision of some key facts on its website.

Following the Summer Budget, HM Treasury rushed out a consultation paper ‘Strengthening the incentive to save’, asking for views on the current model of pensions taxation. This included consideration of the removal of tax relief from pension contributions and exempting retirement income from taxation instead: an approach not supported by ICAS and most pensions industry commentators.

There was silence in today’s Autumn Statement about the consultation results with the announcement of any changes to the current model of pensions taxation expected in the 2016 Budget.

It is also worth noting that increases in auto-enrolled pension contributions are to be aligned with the tax year. While this is a welcome simplification for employers, for some employees this could mean that lower contributions may now be made into their pension pots for a number of months. However, the implementation of the National Living Wage from April 2016 will provide an immediate and ongoing boost to the pension pots of those currently on the minimum wage and being auto-enrolled into a pension scheme.

Christine Scott, Assistant Director, Charities and Pensions, ICAS

 

PROPERTY TAXATION

The Chancellor continues to raid the pockets of buy-to-let owners, now with an increase in Stamp Duty Land Tax (“SDLT”) on acquisition. Whether the additional costs of acquisition will be passed on to future tenants in an attempt to achieve the targeted return on investment remains to be seen.

Genevieve Moore, tax partner, at London Chartered Accountants Blick Rothenberg LLP

It is going to be challenging to police the SLDT surcharge for second homes – a purchaser could easily declare the new home as their main residence immediately.

Frank Nash, partner, at Blick Rothenberg LLP

Buy-to-Let purchases from April 2016 will suffer an additional 3% SDLT. This is likely to cause initial spike in house prices as investors rush to buy, but the long term impacts are not known. It could result in even larger rent costs as landlords seek to recover the new tax.

Robert Pullen, tax manager, at Blick Rothenberg LLP

 

Residential property tax

Two new measures were introduced which will affect UK property ownership.

Firstly, those purchasing a buy-to-let residential property or a second home may need to pay an additional 3% Stamp Duty Land Tax (SDLT) from 1 April 2016. The additional rate will apply to purchases of additional residential properties costing over £40,000, but excluding caravans, mobile homes and houseboats. This will give a maximum SDLT rate of 15% for properties costing more than £1,500,000. This change, coupled with the restriction of interest relief from April 2017, will reduce returns from buy-to let investments and may reduce investment in this sector after April 2016. The increased rate will also apply to second homes; there is no indication as yet how this will be policed. It will not apply in Scotland which has a separate Land and Buildings Transactions Tax.

There will be a consultation next year on proposed changes to reduce the SDLT filing and payment window from 30 days to 14 days. This move could be expected to increase the administrative pressure on those buying UK property from 2017/18, when any new rules would come in.

Secondly, from April 2019 a payment on account of the capital gains tax due when a residential property is sold will be required within 30 days of the date of completion. This is something of a surprise given that the UK self-assessment system requires an annual tax return, but it does follow similar rules recently introduced for non-UK residents who sell such properties. It may also be linked to the approach to digital tax accounts which it seems will require more ongoing tax information to be made available to HMRC. This is estimated to bring in nearly £1bn in 2019/20 although this is merely bringing forward later tax receipts.

In practice, it may be difficult to calculate an appropriate amount to pay on account, for example, in cases where the gain is partly covered by private residence relief, or where losses are made which can be set against the gains. We await the promised draft legislation in 2016 for further details.

Patricia Mock, tax director, Deloitte

 

Residential sales

From April 2019 capital gains tax due on residential property sales will be payable 30 days after the sale. This is another example of one of the Treasury’s favourite policies – bringing forward the date when tax must be paid. The Chancellor did however confirm this won’t affect the UK’s best-loved tax relief – the principal private residence exemption.

Bill Dodwell, Head of Tax Policy at Deloitte

 

A hat-trick of measures

A 3% increase in stamp duty on second homes and investment properties from April 2016, an acceleration of capital gains tax payments on residential properties to 30 days after sale, and a housing benefit cap potentially hitting rents will make property investment a less attractive option.

Despite the Chancellor’s ambition to rebalance the UK economy there were no measures aimed at boosting the UK’s mid-sized businesses – a segment of the economy that creates one in four private sector jobs, delivers £1tn in revenue and is geographically spread across the country. 

David Brookes, Tax Partner at BDO LLP

 

Properties

The property market is certainly in the firing line. Additional charges in SDLT in addition to restrictions on finance charges paid by landlords are bound to have a substantial impact on the property investment market.

Roger Harding, Tax Director, Gordon Dadds

 

Double whammy

As if George Osborne’s announcement in the Summer Budget of the phasing out of higher-rate tax relief on landlords’ interest payments wasn’t enough, today’s Autumn Statement introduces a further fiscal double whammy for landlords which could have major consequences for the residential property market.

firstly, higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of additional rental property (above £40,000) from 1 April 2016 aimed specifically at buy-to-let properties and second homes. The higher rates will be three percentage points above current SDLT rates and the exclusion of companies from the charge indicates that the Government sees the freeing up of residential property currently in private hands as key to its housing policy.

So, there will pain on the way into the buy-to-let market through SDLT and a second announcement in the Statement revealed an unwelcome Capital Gains Tax (CGT) surprise on exit. From April 2019, a payment on account of any CGT on the disposal of residential property will be due just 30 days after completion. This compares to the current rules where the settlement of the tax due can be anything up to 21 months after disposal depending when in the fiscal year the sale occurs.

Clearly landlords who have maximised their borrowings with a view to enjoying capital growth may now seek to restrict their financial exposure by disposing of parts of their property portfolios. Where such properties are standing at a gain, disposal before the CGT acceleration is due will clearly be advisable.

Mike Chapman, Senior Manager, Corporate Tax at Knill James Chartered Accountants:

 

 

RESEARCH AND DEVELOPMENT

Innovation Pound

Today’s announcement threatens to strangle the significant role R&D can play in helping cutting-edge businesses improve productivity and gain competitive advantage - both here in the UK and across the globe.

Under the current R&D grant system estimates show private rates of return for R&D investment of around 30%* - a key driver for building a strong foundation for economic security. The positive impact of the current R&D funding shouldn’t be ignored when it clearly provides a valuable opportunity for businesses to bolster their financial position and, in turn, aid the UK’s long-term economic success.

Introduction of R&D Loans

Many businesses lack the upfront capital to invest as much as they would like into R&D, meaning they can’t fully benefit from the innovation pound. Swapping R&D grants for interest-paying loans will only escalate this issue, strangling innovation by placing a huge amount of risk to the user, particularly those businesses that need vital support in the early stages of their R&D programmes.

The introduction of R&D loans throws up all sorts of ramifications and, as always, the devil will be in the detail. The questions that urgently need to be addressed are whether the new R&D reform will make it even harder, more complex and more time consuming for SMEs to manage. For example:

• If you get a loan how will it be tracked correctly in accounting terms with regards to R&D tax relief?
• At what date will it then be reimbursed back to Innovate UK?
• What are the criteria for reimbursement? Who will track this? How?
• With regards to R&D tax relief, how will this impact be taken in to consideration if the loan money is transient?
• At the moment if SMEs receive grants, it removes the special SME rate to the less favourable large company rate.  Will this still be the case?
   

Skills Migration

The attraction and retention of talent is critical to fostering innovation and building a competitive and modern economy. However, today’s announcement will clearly impact jobs through the migration of critical skills and investment to other parts of the world that lead on innovation and have more favourable R&D initiatives. For example, in France there is a system of repayable loans for R&D, where companies only pay back if the project is successful - something the Chancellor failed to reference!

R&D is like a well-balanced ecosystem, and any changes can be like throwing a stone in a lake. We fear these changes risk damaging the tangible reward that has so successfully driven UK innovation.

 Dr Caroline Elston-Giroud, European Grants manager, Alma Consulting Group, specialist R&D tax and innovation funding team.

 

PENSIONS

The Chancellor’s announced rate of £155.65 for the new flat-rate state pension is not a huge surprise. For someone working full time today, it’s roughly 60% of the Living Wage. So for the lowest earners, the step down in income at retirement will not be too bad by international standards, but for most people it will probably leave a sizeable gap to what they would call a comfortable retirement income. And, it will be some time before auto-enrolment savings are big enough to plug that gap.

In private pensions, no news is sort-of good news for the Life & Pensions industry. For the first time in this Parliament, Osborne has not announced radical change to the private pensions system, giving the Treasury more time to digest the Green Paper consultation from the summer’s emergency Budget.

Meanwhile, the industry is still dealing with the consequences of earlier interventions. The new Pensions Freedoms continue to reshape the retirement industry, and the implementation of the tax relief taper next April is likely to create a lot of volatility in pension premium income as high-earners with variable pay try to guess what their annual limit will be by the end of the tax year. Asset managers may benefit from money that might have gone into pensions going into ISAs – a foreshadowing of what might happen when the Treasury reports back on the Green Paper?

Jason Whyte, Director in EY’s Insurance practice

 

STAMP DUTY

The Chancellor has announced an unexpected tax rise for buy-to-let and second home buyers – an additional 3% stamp duty on new purchases to raise £3.8bn over the next five years. Corporate and fund investors are likely to be exempt from the new increase. It follows on from the recent restriction on mortgage interest tax relief for buy-to-let landlords.

Taken together, these recent measures seem to show the Chancellor encouraging a shift in the residential rental sector away from amateur landlords.

The government does not intend to make residential property less attractive for institutional investors and will consult on exemptions. Investors will be keen for clarification given the short amount of time until the 1^st April 2016 implementation. It remains to be seen how ‘second homes’ will be defined, particularly with regards to overseas buyers.

Stamp duty is a tax on capital; buy-to-let and second home owners will now need more funds to enter the market as a bigger chunk of their deposit will be spent on stamp duty.

Paul Emery, real estate tax partner and head of stamp taxes at PwC
 

Stamp Duty Land Tax

On the surface the premium charged to overseas investors is good for UK residents looking to buy their own home, but we must remember that there are many Britons living outside of the UK and make sure that they do not pay the premium.

Chas Roy-Chowdhury, ACCA head of taxation

 

SDLT

The second major tax increase is an additional 3% stamp duty land tax charge on the acquisition of buy-to-let residential property and second homes.  This starts on 1 April 2016 and is thought to bring in £625 million in its first year – nearly £4bn in this Parliament.

Bill Dodwell, Head of Tax Policy at Deloitte

 

SDLT

“The property market takes its semi-annual hit this time with an additional rate of stamp duty on buy to let and second homes. This may effect overseas investment into London and so have a negative effect on available housing stock or increase rents as landlords seek to pass the extra taxes on to tenants.

Huw Witty, Head of Tax, Gordon Dadds

 

SDLT and second homes

I foresee complications in the implementation of this tax, as it will be far from straightforward to police.  For instance, where owners of two properties sell their primary property and buy a new one, will that new property automatically qualify as the primary one? And if people buy a second property to let, will they need to clearly indicate which is their primary property? These questions will hopefully be answered in the consultation on the rule.

Judith Ingham, Withers LLP

 

SPORTING TESTIMONIALS

Following the consultation earlier this year the tax treatment of income from sporting testimonials will be changed. From 6 April, 2017, all income from sporting testimonials and benefit matches for employed sportspeople will be liable to income tax. However, an exemption of up to £50,000 will be introduced for income from sporting testimonials that are not contractual or customary.

In its response to the consultation, ICAS supported the introduction of an exempt amount, as a sensible option to help protect lower paid sportspeople and those whose careers have been ended by injury. It should also help to provide some certainty on the tax treatment of testimonial income below the £50,000 limit as long as it does not arise from a sportsperson’s contract and meets any other conditions which will be set out in the forthcoming legislation.

The new treatment and exemption will apply where the sporting testimonial is granted or awarded on or after 25 November, 2015 and only to events that take place after 5 April, 2017.

Susan Cattell, Head of Taxation (England and Wales), ICAS

 

TAX ADMINISTRATION

The principle behind taxpayer Self-Assessment introduced in 1997 now looks as if it is to be reversed with additional investment and reorganisation of HMRC.

Frank Nash, Partner, at London Chartered Accountants Blick Rothenberg LLP

 

HMRC’s investment of £800m to tackle tax evasion is expected to give a 10 fold return in yield. Alongside the reduction in presence and headcount, there is a question as to whether this can be achieved.

Gary Gardner, partner at London Chartered Accountants Blick Rothenberg LLP

 

Pay up and pay up faster…

The Chancellor wants us all to pay and to pay up faster, as his Autumn Statement accelerated when tax is paid.

“First we have Capital Gains Tax for residential property (effectively buy-to-lets and second homes), who now have to pay almost 21 months earlier and now the government is looking at shortening the window for paying stamp duty from 30 days to 14. Following on from the Summer Budget’s advance of corporation tax, the Chancellor seems to have found a seam of gold that he wants to continue to develop.

So what taxes will be next?  With the Chancellor announcing the digitisation of HMRC, we can expect him to keep mining for some time.

Chris Sanger, Head of tax policy at EY

 

Scrapping tax returns

As was announced in the March 2015 Budget, the government wants to scrap annual tax returns.  The idea was for individuals and businesses to gain a real-time view of their tax affairs with the flip side being HMRC would be in a greater position to ensure that correct amounts of tax were being paid, and on time.

Today, the Chancellor announced a £1.3bn investment strategy in digital technology to ensure HMRC is set up to have access to digital accounts for all individuals and small businesses by 2016/17, and by 2020 for most other businesses, including the self-employed and landlords.

The government will consult on exempt taxpayers but perhaps more importantly, has indicated the scope of the consultation will incorporate a review around the payment dates for taxes.  This suggests that in due course we will see the abolition of the current self-assessment payments on account by instalments to one single payment.

Free apps and software will be available to link up and access your account securely with HMRC systems.  Turning words into action, this further supports the HMRC message, that there is nowhere left to hide, and soon this will quite literally be the case as it will have a handle on all tax affairs.

Richard Morley, partner, Tax Dispute Resolution

 

Digital compliance

Moving the world of tax compliance into the digital age is a really positive step. Helping people pay tax quickly and more easily will save time and money for taxpayers and HMRC. The announcement that the platform will be used to accelerate capital gains tax payments on second homes suggests this is ultimately about collecting revenue faster. But if digital tax accounts ultimately make it easier to pay tax, this should also reduce penalties for taxpayers. The tax system needs to be simplified and this is a helpful step forward.

Kevin Nicholson, head of tax at PwC
 

PAYE coding

Taxpayers who have suffered from incorrect coding notices and endless time on hold to HMRC will be watching this transformation to digital tax accounts with great optimism, as well as a little fear. An easier to use, digital platform for self assessment should be a great benefit. It will be important to make sure that sufficient HMRC capacity in the 'old way of doing things' is maintained for those taxpayers who, for numerous reasons, are not comfortable or are unable to use a digital system.

Iain McCluskey, tax director at PwC

 

Paper tax returns

This is not simplicity, call it what it is, accelerating payment. Radical reform is needed to support our small businesses who simply want to get out there and get on.

Chas Roy-Chowdhury, ACCA head of taxation

 

Digital accounts

There will be consultations on the new digital tax accounts, which are likely to require earlier reporting and payment of tax in years to come by the self-employed and those with investment income.

Bill Dodwell, Head of Tax Policy at Deloitte

 

Direction of travel with taxation

The measures announced would on first appearances seem to be a mixed bag: it’s difficult to discern a clear direction of travel and ICAS continues to call for a tax road map which outlines the overall tax strategy over the course of this parliament.

Charlotte Barbour, Director of Taxation, ICAS

 

HMRC savings and reorganisation

We understand the desire to streamline and create a more efficient tax service; our concerns centre on service levels whilst the change is undertaken, and concerns also remain regarding those who are digitally excluded. ICAS does not support mandatory ‘online everything’ in the tax system.

Charlotte Barbour, Director of Taxation, ICAS

 

Tax and devolution

The Autumn Statement includes a range of devolution proposals including the powers to set corporation tax rates in the Northern Ireland Assembly and income tax powers for the Welsh Assembly.

The devolution of powers should be dependent on the agreement of the underlying fiscal framework. Without the fiscal framework, devolving tax powers is like trying to hang out the washing with no washing line.

It is vital that any devolution settlements are clear and transparent to both experts and the public so that politicians can be made accountable for their decisions. The devolution of powers should be dependent on the agreement of the underlying fiscal framework. Without the fiscal framework, devolving tax powers is like trying to hang out the washing with no washing line.

Anne-Marie Roberts, Head of Taxation, Scottish and Indirect Taxes, ICAS

 

VAT

VAT and the public sector

The Chancellor announced a policy to integrate and devolve health and social care, and indicated that Government will not direct how this aim is delivered. Changes to the delivery of public services across the UK will mean that organisations with different VAT status work together – and may result in services being transferred from the NHS or local government to charities and third sector bodies. Public sector organisations are split into three types for VAT in the UK:

• Local authorities and similar organisations (including the BBC) - these organisations can recover all VAT incurred on activities related to the non-business functions of the organisation.
• Government departments and the NHS, and associated organisations - these organisations can recover input VAT in certain circumstances but they cannot recover VAT on non-business activities.
• Other public sector organisations – these are organisations that do not have any specific provisions that allow them to recover VAT on their activities which are for the public good. These organisations use the standard income method to split their activities between business and non-business, and operate an appropriate partial exemption method to determine what input tax can be recovered. Charities fall into this category.

ICAS has noted that the differences in VAT recovery act as a disincentive to implement new and innovative service delivery models across the public sector. The Treasury should address the VAT issues that these changes will create upfront so that public funds are spent on delivering public services.

Anne-Marie Roberts, Head of Taxation, Scottish and Indirect Taxes, ICAS