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RICHARD CURTIS looks at plans for small businesses
According to the Chancellor of the Exchequer, ‘Small businesses are the innocent victims of the credit crunch’. He recognises the need to increase the availability of credit for small businesses and presumably in an effort to improve the funds available to companies one of his first announcements was the improvement of the enterprise investment scheme (EIS).
Subject to EU approval, the rate of income tax relief for such an investment will increase from 20% to 30% from 6 April 2011. Further changes will be made to such schemes and venture capital trusts (VCTs) from April 2012:
- an increase in the thresholds for the size of qualifying company for both EIS and VCTs to fewer than 250 employees and to the company having no more than £15 million of gross assets before the investment;
- an increase in the annual amount that can be invested via an EIS or VCT in an individual company to £10 million; and
- an increase in the annual amount that an individual can invest through EIS to £1 million.
Having improved the tax relief available for those putting money into a business it was announced that tax relief at the other end will be improved. The lifetime limit on gains eligible for entrepreneurs’ relief is to be increased from £5 million to £10 million from 6 April 2011. It is said that between 25,000 and 30,000 taxpayers currently claim entrepreneurs’ relief each year and HMRC ‘estimate a small number will benefit’.
Tax rates and allowances
Income tax rates remain the same, although entrepreneurs may be heartened by Mr Osborne’s confirmation that he sees the 50% rate as a temporary measure although ‘now wouldn’t be the time to remove it’.
Those who trade through limited companies may be more pleased that the main rate of corporation tax is to reduce to 26% from April 2011 with further 1% falls until it reaches 23% from April 2014. The small companies rate is 20% from April 2011.
Capital allowances
When assets are pooled for capital allowances purposes this generally means that a balancing allowance is not available when they are disposed of. Subject to certain restrictions, an election may be made to treat an item of plant or machinery as a short-life asset. This is not pooled unless it is held for more than four years. This period is to be increased to eight years from April 2011, so a balancing allowance will allow tax relief to be obtained on the real economic depreciation over its life.
Again, short-life assets held for longer will then go into the main pool. This measure will benefit those businesses spending more than the annual investment allowance limit (currently £100,000pa, but reducing to £25,000pa from April 2012) who receive 100% relief on the initial investment, subject to a balancing change on disposal.
Two other changes are being made regarding allowances.
First, certain energy-efficient hand dryers are to be added to the list of technologies that qualify for 100% allowances as energy-saving technology. This will be done during summer 2011.
Second, and effective from April 2011, tax relief for research and development expenditure by companies that fall within the small and medium-sized enterprise definition is to be increased. Currently, qualifying expenditure benefits from 175% relief. Subject to EU state aid approval, this will be increased to 200% from April 2011 and 225% from April 2012.
The government also plans a consultation on feed-in tariffs and renewable heat incentives with the aim of legislating to clarify the rate at which allowances may be claimed.
Capital gains and IR35
As is well known, gains on qualifying business assets can be rolled over into new ones. Such assets included payments under the EU’s single payments scheme including entitlements under the 2003 EU Directive. That directive was replaced in January 2009. Finance Bill 2012 will revise the list of qualifying assets and restore the availability of relief for these payments whatever directive they are paid under.
Following a review by the Office of Tax Simplification, the Government has decided to retain the IR35 rules because ‘it cannot put substantial tax revenue at risk’. However, it aims to simplify the rules and improve administration by:
- providing greater pre-transaction certainty, including a dedicated helpline staffed by specialists;
- providing greater clarity by publishing guidance on those types of cases HMRC view as outside the scope of IR35;
- restricting reviews to high risk cases carried out only by specialists teams; and
- promoting more effective engagement with interested parties through an IR35 forum to monitor HMRC’s new approach.
VAT
From 1 April 2011, the VAT registration and deregistration thresholds are changing as follows:
- Taxable turnover threshold for registration: increased from £70,000 to £73,000.
- Taxable turnover threshold for deregistration: increased from £68,000 to £71,000.
- The registration and deregistration threshold for relevant acquisitions from other EU member states will also be increased from £70,000 to £73,000.
VAT fuel scale charges will change from 1 May 2011 and the limit for low value consignment relief will be reduced from £18 to £15. This last measure relates to the limit below which goods can be imported VAT free from outside of the EU. The hope is that this will improve the competitive position of the UK’s small and medium-sized businesses.
It has also been confirmed that, from 1 August 2012, VAT registration and deregistration and notification of changes will have to be carried out online and existing businesses (with a VAT exclusive turnover of under £100,000), will have to file online for VAT periods beginning on or after 1 April 2012.
Other measures
The government has announced that 21 new enterprise zones are to be created. Ten have been named: Birmingham and Solihull; Leeds City Region; Sheffield City Region; Liverpool City Region; Greater Manchester; West of England; Tees Valley; North Eastern; the Black Country; and Derby, Derbyshire, Nottingham and Nottinghamshire. There will be an area in London to be determined and ten other areas are to be announced. Advisers with clients in those areas will be interested in the plans announced in the Budget Red Book for the zones and businesses in them, such as:
- a 100% business rate discount worth up to £275,000 over a five-year period for businesses that move into an enterprise zone during the course of this Parliament;
- radically simplified planning approaches;
- superfast broadband;
- the scope for introducing enhanced capital allowances to support zones in assisted areas where there is a strong focus on high value manufacturing; and
- support on inward investment and trade opportunities.
Consultation on a ‘patent box’ that will impose a lower rate of corporation tax on such income will continue and a response following consultation on research and development tax credits will be published in May 2011. Subject to state aid approval and the consultation, legislation will be introduced in Finance Bill 2012 to:
- abolish the rule limiting a company’s payable tax credit to its PAYE and National Insurance contributions;
- abolish the £10,000 minimum expenditure condition; and
- change the rules governing the provision of relief for work done by subcontractors under the large company scheme.
The government plans to retain community investment tax relief, film tax relief and the business premises renovation allowance. It also plans legislation in Finance Bill 2012 to encourage the use of real estate investment trusts.
Finally, ‘HMRC will continue through its business payment support service to provide advice and time to pay to viable businesses experiencing temporary financial difficulty’.
Previously announced measures
As an aide memoir, the Budget notes confirm that the following measures will be included in Finance Bill 2011.
- Changes to the furnished holiday letting rules.
- Higher-rate tax relief for employees in employer-supported childcare schemes will be restricted from 6 April 2011.
- Changes to the controlled foreign companies rules.
Conclusion
So nothing earth-shattering, but measures that the government hopes will encourage entrepreneurship. Perhaps the biggest potential change for businesses is the proposal to integrate income tax and National Insurance. Or is it?
The Red Book actually says (at page 3) that it will ‘consult this year on the options for integrating the operation of [my italics] income tax and National Insurance contributions’. Even so, this would save a substantial amount of administration for businesses and probably be welcomed by most.
ALLISON PLAGER reports on news for personal tax
This Budget was a little unusual in that the Chancellor had left himself little room for manoeuvre in terms of giveaways and nice surprises. Much of what he announced and is contained in the Budget documentation, was already known: the government had given details about much of what would be in the 2011 Finance Bill in December (tax rates and allowances, pensions taxation, and employer-supported childcare, etc).
Then there was the deficit, which loomed over the UK like a black cloud and which the government had pledged to cut. This in itself meant tax cuts were not going to happen for the foreseeable future.
However, George Osborne did have news for individual taxpayers.
Goodbye NI?
It seems that after a century of National Insurance (NI), the charge may be on its way out. The Chancellor said the Treasury is to consult on the options, stages and timing of reforms to integrate the operation of income tax and NI. The idea would be to remove distortions created by the tax system, reduce burdens on business and improve fairness for individuals.
However, Mr Osborne warned that change would be complex and involve a wide range of policy and implementation issues.
The government intends to keep the contributory principle and reflect this in any changes. NI contributions will not be extended to individuals above state pension age or to other forms of income such as pensions, savings and dividends.
Non-doms: the last time
In the June Budget, the government confirmed it would review the taxation of non-domiciled individuals and, as a result, has decided on the following reforms to take effect from April 2012:
- remove the tax charge when non-doms remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses;
- simplify some aspects of the current tax rules for non-doms to remove undue administrative burdens; and
- increase the £30,000 annual charge to £50,000 for non-doms who have been UK resident for 12 or more years and who wish to retain access to the beneficial tax regime. The £30,000 charge will be retained for those who have been resident for at least seven of the past nine years and fewer than 12 years.
A consultation document on the measures will be published in June with the aim of clearly providing certainty for non-doms; the Chancellor said there would be no other substantive changes to the rules for the remainder of the current parliament.
The move to allow remittances to invest in a UK business was welcomed by Alex Henderson of PricewaterhouseCoopers (PwC), who said it ‘removes one of the puzzling features of the regime and will increase investment in the UK’.
The much-wished-for statutory residence test may also finally become a reality. The government will consult on the introduction of a statutory definition of residence, with the intention of implementing the test from April 2012.
Cars: some good news
Employees who use their own cars for business mileage can claim reimbursement from their employers through the approved mileage allowance payments (AMAP) scheme. It is not treated as a tax benefit, and the current rates are 40p/mile for the first 10,000 miles and 25p/mile thereafter. The 40p rate is to be increased to 45p/mile with effect from 6 April 2011, the first change to the rate in 14 years. Individuals whose employers pay less than this amount will be able to claim mileage allowance relief on the residual amount up to 45p.
In a move that will please the voluntary sector, the Chancellor said that, in addition to claiming AMAP rates, an allowance for passenger payments currently in place for employees at 5p a passenger/mile will be extended to volunteers.
Turning to company car tax, vehicles with carbon emissions of between 95g and 219g will suffer from a 1% increase on the scale charge, effective from April 2013. The charge for zero emissions cars is frozen at 0% and the charge for cars with emissions up to 75g will remain at 5%.
With regard to the fuel benefit charge for 2011/12, the cash equivalent of the taxable benefit is determined by multiplying a set figure, currently £18,000, by the appropriate percentage for the car, based on its carbon dioxide emissions. The set figure or multiplier is increased to £18,800 with effect from 6 April 2011.
It is worth mentioning that the Chancellor has accepted the Office for Tax Simplification’s recommendation that tax relief on late night taxis be abolished. However, this may cause some controversy during the consultation period, as it is likely to result in extra costs to businesses which may want to continue to ensure their employees arrive home safely after working late.
PwC’s Mike Nagle explained that because ‘it is unlikely that they will want employees to suffer tax on such journeys, businesses would become liable to pay both grossed up tax and National Insurance on the benefit, as well as the taxi fares themselves. This means a £20 taxi fare could end up costing the business over £45.’
Help for charities
There was some good news for charities: the Chancellor announced that, from April 2013, they would be able to claim gift aid on up to £5,000 of donations of £10 or less without the need for gift aid declarations. To take advantage, charities will need to have been recognised by HMRC for gift aid purposes for at least three years, have been operating gift aid successfully, and have had a good tax compliance record.
Also, from 2012/13, charities will be able to operate gift aid using a new online system. To this end, HMRC will publish four new ‘intelligent’ forms, developed in conjunction with the charity sector, that contain automatic checks designed to improve the accuracy of information and reduce administrative burdens.
In a measure aimed at encouraging taxpayers to donate more to charity, the maximum value of the benefits that individuals and companies may receive as a result of making a donation of more than £10,000 under gift aid is increased from £500 to £2,500. This will be subject to the existing rule that the benefit must not exceed 5% of the gift.
The SA Donate scheme, introduced in 2005, is to be withdrawn from 2011/12 because it is relatively little used and not cost effective. Taxpayers who wish to donate a tax repayment will have to do so by other means. The Chancellor said that the resources saved from the withdrawal of the scheme would be redirected to support the introduction of an online claims system for gift aid.
No one seriously expected the threshold for inheritance tax (IHT) to be increased, so the fact that it was frozen at £325,000 will not have come as a surprise. However, the Chancellor announced that, for deaths occurring on or after 6 April 2012, a reduced rate of IHT would apply where 10% or more of a deceased’s net estate is left to charity.
In those cases, the current 40% rate will be reduced to 36%. Tim Gregory of Saffery Champness speculated that this might ‘lead to a number of changes in the future’, but warned taxpayers that ‘all of the tax saving will go to the charity itself so, while this is welcome news for the charity sector, it does not represent a tax cut for taxpayers’.
Allowances surprise
The government is committed to increasing the personal tax allowance to £10,000 and has already said that it will be increased by £1,000 for 2010/11. For 2012/13, the Chancellor said the allowance would be increased to £8,105 and the basic rate limit reduced to £34,370. The aim, he said, is to ensure that the higher rate threshold (the sum of the personal allowance and basic rate limit) is not affected so that no additional higher rate taxpayers are created.
When it comes to increasing thresholds, we have grown used to them being linked to the retail prices index (RPI). This is to change for National Insurance from 2012/13, when rates will mostly be increased in accordance with the consumer prices index (CPI). The secondary threshold for Class 1 employer contributions will continue to be raised in line with the RPI until 2015/16, however.
Otherwise, it would be over-indexed. The annual levels of the Class 1 upper earnings limit and Class 4 upper profits limit will continue to be aligned with the income tax higher rate threshold.
The Chancellor said the ISA allowance will also be linked to the CPI, as will the capital gains tax annual exempt amount.
Nice one for some
While this can hardly have been called a giveaway Budget (it wasn’t), the Chancellor did come up with one or two special gifts. Charities in particular will benefit from the tweaks to gift aid, and the consultation on combining income tax and National Insurance could provide welcome simplification. Detail about the new junior ISA, for children aged under 18 who do not have a child trust fund account, was provided.
However, anyone hoping the 50% tax rate would be withdrawn will have to wait. The Chancellor said that those earning the most had to share the pain with those at the lower end of the tax scale. He added that he intended to commission a report as to how much tax the 50% rate collected to see if it was worthwhile, perhaps offering a glimpse of hope to those afflicted.
MIKE TRUMAN looks at anti-avoidance provisions
George Osborne proudly announced that his Budget would raise £1 billion a year from tackling tax avoidance. A look at the table at the back of the Red Book makes it clear that three quarters is coming from tackling what in HMRC’s words is ‘disguised remuneration’. HMRC are aware of 5,000 employers and 50,000 employees who will be affected, meaning each employee’s tax bill will be increased by an average of £15,000.
Not surprisingly, the impact assessment notes that, while the range of employers which have implemented these arrangements is broad, ‘employers in… financial services (particularly banking, insurance and asset management)’ are among them.
The proposals were originally announced in the 2010 draft Finance Bill. At the time, I gave them two cheers, only withholding the third cheer because there seemed to be an inordinate amount of detailed legislation to implement a principles-based charge.
The draft legislation issued in December said that a charge would arise when an employee or former employee is party to, or the subject of, an arrangement where ‘it is reasonable to suppose, in essence’ that the arrangement provides rewards, recognition or loans in connection with that employment, and that a ‘relevant step’ is taken by a third party which is connected with that arrangement.
Some exceptions
The Chancellor has now confirmed that the disguised remuneration rules will be introduced from 6 April 2011 as planned, but with some exceptions. The intention is to protect genuine arrangements which cannot be used for tax avoidance purposes. Some of these were addressed in an FAQ published last month, following representations during the consultation period.
Rewards provided by group companies, through share incentives, and where there is a genuine deferral of the remuneration for up to five years, will be exempted ‘so far as this is possible without creating additional avoidance risks’.
The technical note released with the Budget adds protection for investment income or gains, and for existing pension savings (without giving details in either case).
One intriguing comment in the general description of the measure says that ‘genuine commercial arrangements for the provision of designated employee car ownership schemes’ will also be exempted. On first reading I assumed this should refer to employee share ownership schemes, but a little thought reveals the problem with cars.
Typically, a car ownership scheme involves the employer making arrangements for employees to be able to buy a car through a fleet provider, but without having to provide an initial deposit and with a guaranteed resale value after a number of years. Without an exemption, it is possible that this could fall foul of the new disguised remuneration rules, leaving the employee liable to tax in full on the value of the car.
Loopholes blocked
Compared to previous Budgets, the number of specific anti-avoidance provisions was limited. Perhaps this reflects the success of the disclosure regime in limiting the value of avoidance schemes to those who promote them, because they can be closed down quickly. While there was no formal consultation, the impact assessments disclose that in some cases limited confidential discussions were held with ‘external stakeholders’.
When a company that leases plant and machinery changes ownership, there is scope for deferred profits within the company to be offset by losses in the acquiring company. The sale of lessor company legislation aims to stop this, but in December 2009 an opt-out election was added because of the financial crisis. Disclosures have shown that this is being used for avoidance, and the measure will be changed so that when the plant or machinery is sold the full value of the asset will be taken into account.
Stamp duty land tax has been amended over recent years to provide reliefs for alternative finance products, particularly those compliant with Islamic law. For example, rather than offering a mortgage with interest payable, an Islamic bank may buy the property and sell it back to the purchaser at a higher price, but paid in instalments. Without reliefs, this would mean that SDLT was chargeable on both transactions, so the law was amended to charge it only once.
Needless to say, this has been exploited for transactions that are not really alternative finance transactions at all, and the law will be amended to prevent misuse, without affecting genuine transactions.
Finally, there is a classic example of anti-avoidance provisions combining to create an unexpected loophole. TCGA 1992, s 179 is the well known ‘degrouping’ charge on assets transferred within a group up to six years before the company owning them leaves.
There is an exception to the charge it triggers where both transferee and transferor company leave the group together. This led to an avoidance technique of interposing an intermediate company that left the group with the company holding the asset, and therefore brought the transaction within the exemption.
This loophole, in its turn, was supposedly blocked by an anti-avoidance provision, reimposing a degrouping charge.
However, it was not clear whether this charge or the original exception took precedence; a prime example of legislation getting so complex that no one is clear what it means. It seems that the legislation is to be patched yet again.
It might make more sense to consider the extent to which it is still needed, and then to draft a more principles-based provision that imposes a charge when ‘in essence’ an asset is being sold and the gain does not reflect the true base cost.
Tackling tax avoidance
From the very detailed and specific to the broad-brush picture – a separate document Tackling tax avoidance was published with the Budget. This tries to set out a route for dealing with tax avoidance that does not require each individual loophole to be blocked off.
One of the major ways of doing that would be a general anti-avoidance rule (GAAR). Consultation on a GAAR is still ongoing, through the ‘study group’ being led by Graham Aaronson QC, so it only merited a couple of paragraphs.
The group will finish its work by 31 October this year, and if the proposal is to be taken forward it would be subject to further consultation, presumably announced around the time of the draft Finance Bill 2012, in December this year.
In the meantime, other measures are being considered. There is to be a rolling programme of reviews to look at areas of the tax code that have repeatedly been attacked by tax avoidance schemes. The first two areas to be considered are reliefs for income tax losses and the use of unauthorised unit trusts.
While the latter is a fairly obscure area, the former is entirely mainstream, and the document acknowledges the need to ensure that those who are meant to benefit from the relief for losses can continue to do so.
The government intends to publish new proposals in May this year for the listing of high risk avoidance schemes. These share characteristics with the disclosure of tax avoidance schemes rules, in that they try to disrupt the tax avoidance industry rather than tackling the technical aspects of the schemes.
Once a scheme had been listed, there would be ‘a range of options’ to remove the cash flow benefit for taxpayers of participating in the scheme, knowing that if it fails in court some years later they will only have to repay the tax plus interest. Users would either have to pay the tax up front and only recover it if the scheme is proved to be successful, or alternatively pay an extra late payment charge if tax was later found to be due.
There has, of course, been significant criticism of HMRC’s approach to tax avoidance in recent months, particularly in relation to the settlement in the Vodafone case. Much of it has been ill-informed, although HMRC did not help themselves by initially being very bullish about their litigation strategy and then having to admit that there were still grey areas which would be settled by negotiation.
The new document defends the approach of seeking to deal transparently with large businesses through a one-to-one customer relationship manager, which HMRC has now extended to the wealthiest individual taxpayers.
However, it also highlights counteraction of tax avoidance. While this will include initiatives to encourage people to come forward and settle avoidance issues on pre-announced terms, it also includes ‘litigation, where necessary and without hesitation, when other approaches have been explored’. No sign there of HMRC going soft.
The protocol
Finally, when all else fails, ministers have to announce changes to tax law outside the normal schedule of December and March. A final version of the protocol for doing so is included in the document. It says that legislative changes taking immediate effect will be limited to what is needed to address the risk identified to the Exchequer, and will not be retrospective except in ‘wholly exceptional’ circumstances.
Changes will usually be announced by written ministerial statement, made to Parliament before 2pm. Draft clauses, or at least a detailed technical note, will then be published on the HMRC website as soon as possible on the day of the announcement.
The day of the wholly artificial pre-packaged tax avoidance scheme seems to be drawing to a close, with both technical and behavioural attacks being mounted by HMRC.
While some will still complain that this is shooting their fox, and that it is the Treasury’s job to draft legislation that works, many have tired of the game and long for a tax system which allows them to give good, sensible, and commercial, tax planning advice to their clients without being undercut by pre-packaged arrangements.
Whether the profession and HMRC will see eye to eye on the boundary between avoidance and planning is another matter.
