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Mike...
The good news is that I shouldn’t have to do a tax return for my mother in a few years’ time. The bad news is that she’ll be paying for a third of her granddaughter’s and grandson’s personal allowance increase...
My mother doesn’t have to complete a tax return because of some massive investment portfolio or trading income.
Her affairs are complex because she has three different pensions and enough investment income to take her into that no-woman’s land where she gets some age allowance but not all of it, because her income is a little over the total income limit.
The three different pensions have been enough to cause chaos in the past, but the NI and PAYE Service (NPS) does finally seem to have made problems in that area less common.
What it can’t do is predict precisely how much her total income is going to be, so that her code can give her the correctly tapered personal allowance.
This is going to be ‘simplified’, announced the chancellor. Great! What is he going to do, remove the income limit? No, remove the age allowance.
Squeezed middle
From April 2013, you will need to have been born before 6 April 1948 to get the age allowance at all, and before 6 April 1938 to get what used to be the 75 and over rate.
These two allowances will be frozen at the 2012/13 levels of £10,500 and £10,660 respectively, until the personal allowance rises to these levels.
The Red Book seems to indicate that this will happen by 2016/17, at which point some £1.25 billion will have been clawed back from the elderly, conveniently paying over a third of the cost of the £1,100 personal allowance increase to £9,250 from 6 April 2013.
The increase in the personal allowance is good news for my children, both of whom are basic rate taxpayers.
It’s not that much use to me, as a higher rate taxpayer, because the basic rate limit is being reduced. This is always an area where slippery wording is used, but this year it seems to be slipping in a rather different direction.
According to the Chancellor, as a 40% taxpayer I am to get ‘a quarter of the benefit’ of the increase. In the detailed note this is clarified further: ‘one quarter of the benefit from the personal allowance that a typical basic rate taxpayer will receive’.
What that means in cash terms is that the basic rate limit is reduced by £2,125 to £32,245. However, the upper earnings limit for NI contributions also comes down by the same amount, so the net effect is that £2,125 is charged at 42% rather than 32%, costing me £212.
The increase in the allowance will save me £440, so I actually seem to have kept about half the value of the increase; more in cash terms than a basic rate taxpayer.
Possibly what it meant was ‘in real terms’, but if I’m going to work that out (or wait for the HMRC press office to get back to me)...
Highest rate
The prize for most leaked announcement probably goes to the reduction in the 50% rate to 45%. From the pre-Budget press coverage, some might have thought that this was going to happen from 6 April 2012.
It is in fact going to come in from April 2013, just like the other changes. Indeed, where this government deserves great credit is that it has stuck to its promise that it will have a proper process of consultation on significant tax changes, leading to draft legislation issued four months before the Budget.
So the top rate of tax from April 2013 will be 45%, right? Wrong. There will still be an effective 60% charge on income between £100,000 and £118,200, as the personal allowance is withdrawn at a rate of £1 for every £2 of income.
Exactly the same taper is seen as a candidate for simplification when applied to age allowance, so why not simplify it at the top of the income scale too?
Rather than withdrawing personal allowances (or the nil-rate band of income tax as it should properly be described), start the 45% rate at a point which raises about the same amount in total; say about £85,000.
The cost of the reduction to 45% (and, incidentally, there is no indication that the 45% rate is not to be a permanent part of the income tax system) is calculated at £100m in a full year.
Quite how that can be determined when we have really only had one full year of receipts from the 50% rate is hard to see, but no matter.
Far more than that is going to be raised in taxes on properties worth £2 m or more and SDLT anti-avoidance.
The biggest of these fundraisers is a new rate of SDLT at 7% on the transfer of residential properties for a consideration of £2 million or more.
By 2016/17 this is estimated to realise an extra £300m. Since there are also estimated to be 3,000 transactions a year which will be affected, the implication is that they will each pay £100,000 more in SDLT.
Quite correctly, the tax impact note points out that the result will not be an increase in the cost of buying such properties; instead the value of the property will fall as the tax cost is capitalised into it.
Strangely, the same logic was not applied to the SDLT holiday for properties under £250,000 which is just ending, and which probably had no effect other than artificially increasing the value of such properties temporarily, making it all the more likely that the unlucky purchasers will lose money when they come to sell.
There will be a charge on the ‘enveloping’ of residential properties costing more than £2m into companies and similar vehicles.
The SDLT charge will be a whopping 15% in such cases, with the threat of a further annual charge after consultations.
Schemes based on sub-sales will also be outlawed for properties of whatever value, and it appears that there will be a capital gains tax charge on non-residents holding properties through a company, but without any further details being given.
43% charge
Back to the squeezed middle; as you will gather, my children are now both at work, so child benefit is a dim and distant memory. As indeed it will become for many higher rate taxpayers, but not without a great deal of added complexity.
Nothing has been done to deal with the anomaly that a one-earner couple on £70,000 will lose child benefit, but a two-earner couple both earning £35,000 will not (and will have significantly higher take-home pay).
However, possibly because of the ongoing reductions in the higher rate limit, the trigger for losing the benefit has been decoupled from liability to higher-rate tax, and will now apply on an income in excess of £50,000. Even then it will not be a ‘cliff-edge’.
Instead, the taxpayer will still get the full child benefit, but an extra tax charge will be levied to take a proportion of it back, with the full amount being recovered at an income of £60,000.
Since child benefit for two children is £1,752 a year, that means an additional tax charge of 17.52%.
So there you have it. A perfectly straightforward progression of tax rates for employees of 0%, 32%, 42%, 59.52%, 42%, 62%, 42% and 47%. What could be simpler?
Richard...
Is it me, or do I keep seeing a lot of articles about Sara Blakely lately? Who she? If you need to ask, you’re probably not likely to be one of her customers.
She is the inventor of Spanx – the ‘shapewear’ product or ‘girdle for the 21st century’ as I understand it may also be known. Now apparently available for both men and women, the product has made her the world’s youngest female self-made billionaire.
I’d love to be able to tell you more, but access to the official website was denied by the Taxation office's internet filter because of its ‘content categorisation: intimate apparel/swimsuit’.
It’s obviously important that we focus on tax, so we’ll all have to wait until we get home until we can learn more – and perhaps place an order.
What, you may be thinking, has this to do with the Budget 2012? Well it occurred to me that Nick Clegg’s ‘squeezed middle’ looked like they were going to be feeling the squeeze a little more.
Not only do they probably not receive the full benefit of the increase in personal allowances – because most of this will be clawed back if they are liable to income tax at 40% – but they probably aren’t earning enough to benefit from the reduction in the 50% band.
Being mainly employees, other tax reliefs will most likely also pass them by and they are probably thinking that they have been shoehorned into the tax equivalent of Spanx.
I started to wonder whether there was anything in the Budget that might help them loosen the fiscal stays so to speak when I noticed paragraph 2.207 (‘Personal service companies and IR35’) in the Red Book.
This didn’t merit a mention in the Budget speech, but it says that ‘the government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:
- strengthening up specialist compliance teams to tackle avoidance of employment income;
- simplifying the way IR35 is administered; and
- subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. (Finance Bill 2013)’.
Well, good luck on the first two, but I found the last bullet point intriguing; particularly the ‘subject to consultation’ part.
Didn’t we used to have a name for people who are ‘office holders/controlling persons who are integral to the running of an organisation’? That’s right; they’re what we used to call ‘employees’.
Following on from my Something fishy article, I have never had a satisfactory explanation of why HMRC felt that Ed Lester’s use of a limited company to shelter his earnings actually worked and wasn’t just a sham.
KPMG clearly didn’t think that it did, but on the basis that they believe that legislation is required, HM Treasury’s finest minds must believe that it is effective.
And if it works for someone like Ed Lester, then surely it must work for lesser mortals like (thinks), yours truly!
Let’s face it, I can even send Rufus the taxation hound in to do some of my work in my place. I’ll bet Ed hasn’t got a power of substitution (which HMRC seem to think is important) to send someone (human or canine) in to run the Student Loans Company for a day.
So, middle income earners and their advisers should note that they apparently have at least a one-year window of opportunity to take advantage of this and have their earnings paid into a limited company for 2012/13.
You can’t improve on an HM Treasury-approved tax planning method so I think we should just say ‘Stanx!’ and have a word with the HR department right away.
And breathe out...
So, having apparently encouraged people to set up their own companies (although strangely under the ‘anti-avoidance’ heading) what else is new that might be of interest to the business man or woman; Spanx-clad or otherwise?
There are some measures that will allow a litle breathing room for businesses and investors in them.
For corporates, an additional 1% reduction in the main rate of corporation tax is likely to be welcomed, so that the main rate from April 2012 will now be 24%, with further 1% falls in the following two years.
At 22%, the main rate will then be not too far from the current small profits rate of 20%; will we see the rates aligned?
A new company might like to consider branching out into the ‘production of culturally British video games, television animation programmes and high-end television productions’ as corporation tax reliefs for such activities will, subject to state aid approval, be introduced in Finance Bill 2013.
Despite (or perhaps because of) recent news that research and development tax reliefs are being under-utilised, the Budget has confirmed that an ‘above the line’ R&D tax credit will be also introduced for larger companies in Finance Bill 2013.
Although, it is said that R&D incentives for small/medium-sized enterprises will not be reduced as a result.
The ‘patent box’ measures – allowing a company to pay tax at 10% on a proportion of its profits attributable to patents – will be included in Finance Bill 2012 and will come into effect from April 2013.
The proportions will rise from 60% in the first year, to 100% from April 2017.
Now running a business through a limited company, our entrepreneur will need to be aware of the new VAT registration limit from 1 April 2012 of £77,000.
And if it passes through the forthcoming consultation stage and into law in Finance Bill 2013, this limit will also apply to the voluntary cash accounting basis; but this will only apply to unincorporated businesses.
No use to our new shareholder/director. Or is it? Another simplification measure to be consulted on is a new ‘disincorporation relief’, which will hopefully make ending a company as easy as starting one.
Investments
As flagged up last year, the 2012 Budget confirmed that changes are to be made to the enterprise investment scheme and venture capital trusts.
From 6 April 2012, the EIS will be amended to:
- relax the rules defining when a person is connected to a company through an interest in its capital;
- widen the definition of shares which qualify for relief; and,
- remove the £500 minimum investment limit.
From 1 April 2012, the £1m limit on investment by a VCT in a single company (except for companies in a partnership or a joint venture) will be removed and there will also be changes in the thresholds applying to companies seeking to raise money under these schemes.
Subject to state aid approval, from 6 April 2012:
- the employee limit will be increased to fewer than 250 employees (was 50);
- the size threshold will be increased to gross assets of no more than £15m before investment and £16m after (was £7m and £8m respectively); and
- the maximum annual amount that can be invested in an individual company will be increased to £5m (was £500,000).
The total amount of investment which a company may receive in a 12-month period from any state-aided risk capital measure, including EIS and VCT will be limited to £5m and the maximum annual EIS investment by an individual will rise to £1m.
In addition to seeking outside investment, companies often seek to incentivise and retain key employees by offering share options under the enterprise management incentive scheme.
The limit on the value of shares over which options may be held by an employee is to be raised from £120,000 to £250,000.
Finally, our entrepreneur may be tempted to pass his investments and assets on to the next generation using a trust.
Calculating the periodic charges can be complicated and Budget 2012 tells us that there will be consultation on simplifying the calculation of these periodic and exit charges, with legislation likely in Finance Bill 2013.
So some relaxation and easing for corporates, but something of a squeeze for the middle managers working for them, it seems.
Allison...
‘Morally repugnant’ is how George Osborne described his reaction to tax evasion and aggressive avoidance.
It will not come as a surprise that the government has decided to accept the recommendation of the Aaronson report, published last November, and introduce a general anti-abuse rule (GAAR) targeted at artificial and abusive tax avoidance schemes.
Consultation will be carried out over the summer on the draft legislation and guidance, which will be designed to be practical both for taxpayers and for HMRC, with a view to introducing legislation in Finance Bill 2013. The rule will cover stamp duty land tax as well as direct and indirect taxes.
Concerned that the rule could introduce uncertainty, Chris Sanger of Ernst & Young said, ‘The future consultation will need to clearly set out the government’s proposed approach and avoid introducing significant uncertainty into the tax regime.
‘Businesses will be closely watching any draft legislation to see whether the proposals have the potential to develop and expand in scope, beyond Aaronson’s original intent.’
With regard to potential uncertainty, Mary Monfries of PwC said, ‘It was encouraging that the Chancellor recognised ‘the potential for collateral damage to business and mainstream transactions when he indicated the target is the most extreme tax avoidance.
‘If this could be achieved, the benefits would in fact outweigh the cost of the uncertainty that it introduces.’
Inevitably, the Budget contained more legislation targeted at specific matters which have caught the Treasury’s eye. All of the measures, unless mentioned otherwise, have effect from 21 March 2012.
Capital allowances
Moves against anti-avoidance in the field of capital allowances included action in relation to transactions that involve plant or machinery where there is an avoidance purpose to the transactions or where the transactions are part of an avoidance scheme or arrangement.
In such circumstances the effect of the anti-avoidance rules will be:
- to deny first-year allowances or annual investment allowance for expenditure on plant or machinery; and
- to restrict the amount of allowances the ‘buyer’ of the plant and machinery can claim so that the tax advantage which was sought is cancelled out.
The legislative changes will have effect in relation to expenditure incurred on or after 1 April 2012 or 6 April 2012 depending on whether the business is within the charge to corporation or income tax.
The Treasury has also taken action against schemes involving businesses which are, or become, lessees of plant or machinery under long funding leases and enter into arrangements in an attempt to reduce artificially their capital allowance disposal value at the end of the lease.
Such lessees can claim capital allowances and are required to bring in a disposal value at the end of the lease according to a specified formula. Arrangements have come to light whereby payments connected to the lease for the benefit of the lessee have not been brought into account in that formula.
Under a new rule, businesses engaging in transactions of this type will have to bring all relevant expenditure and receipts into account in arriving at disposal value.
More specifically, the definition of ‘R’ (relevant rebates) in the formula in CAA 2001, s 70E(2A) will be amended.
For disposal events occurring on or after 21 March 2012, ‘R’ will include all payments in connection with the lease, or any arrangement connected to the lease, that have not otherwise been brought into account for tax purposes and which are payable for the benefit, directly or indirectly, of the lessee or a connected person.
The payments will be brought into account in computing disposal value on a long funding lease disposal event regardless of when payable. Where a transaction does not take place at arm’s length, the appropriate arm’s length amount will be substituted.
Corporate settlor-interested trusts
Avoidance schemes involving corporate settlors and settlor-interested trusts are another area to attract specific legislation.
These schemes use the corporate settlor of an interest in possession trust and dividends paid by a subsidiary of that company to try to avoid income tax at higher or additional rates which would otherwise be due.
In essence, the schemes attempt to divert the liability to income tax away from the beneficial owners of the income, who are its ultimate recipients and would, in the absence of the schemes, have to pay higher or additional rates on it.
Legislation will be introduced to amend ITTOIA 2005, s 627 and s 645. This will make clear that the rule in s 624(1) will not apply to income arising under a settlement and originating from any settlor who was not an individual.
Sale of lessor companies
A measure will be included in Finance Bill 2012 to create a new ‘trigger’ event in the sale of lessor company legislation, which will bring the deferred tax profits of a lessor company into charge immediately before a lessor company comes within the charge to tonnage tax.
Further changes will prevent the losses of an accounting period following a change of ownership from being carried back against profits specifically brought into charge as a consequence of the sale of lessor company legislation.
Life insurance policies
Another measure concerns individuals who own life insurance policies, capital redemption policies and life annuity contracts.
It amends the rules for calculating the amount of gains from the relevant policies and contracts by putting beyond doubt that the gains liable to income tax are not reduced by the fact that there are untaxed gains earlier in the life of the policy or contract, or by the use of certain cluster policy arrangements.
Legislation will ensure that when calculating the amount of a chargeable event gain under a policy or contract, a deduction for earlier gains will only be allowed to the extent that those earlier gains are attributable to a person chargeable to tax on gains under the chargeable event gain regime.
Furthermore, interdependent policies will be treated as a single policy with the current rules applying to that single policy as usual.
Ordinary cluster policy arrangements under which the individual policies are completely independent of each other will not be affected.
Site restoration
Aimed at tax avoidance arrangements intended to exploit the rules providing relief for site restoration payments, legislation will introduce a new rule where a person makes a payment, directly or indirectly, to a connected person that will ensure that a deduction is given for the period of account in which the work to which the payment relates is completed.
Another rule will be introduced to deny any deduction for a payment where it arises from arrangements to which a person is party and the main purpose, or one of the main purposes, of the arrangements is obtaining a deduction for a site restoration payment.
More consultation
In September 2011, the government blocked a tax avoidance scheme involving manufactured overseas dividends and also said it would consult on simplifying the manufactured payments tax rules.
It will shortly publish a consultation giving further opportunities for interested parties to contribute to development of the policy.
In addition, there will be another consultation on reforms to the tax rules for unauthorised unit trusts which will set out detailed proposals for change.
And finally…
The chancellor referred to ‘tax reliefs that promote investment, support charitable giving and reflect genuine business losses’, saying that, from next year, these would be capped at £50,000 and that taxpayers who wished to claim more than £50,000 of these reliefs in any one year would have a cap set at 25% of their income.
The Charity Tax Group was concerned that ‘these changes will prove to be a disincentive for charitable giving’, adding that an effort would need to be made ‘to support philanthropists’, as many charities depend on large donations.
Consultation on this measure, which at the moment is hazy to say the least, will be carried out in the summer.
