Blue Budget

KEY POINTS

• Annual investment allowance fixed at £200,000.
• The corporation tax rates reduced to 19% in 2017.
• Rent-a-room relief increased to £7,500.
• Wholesale changes to the taxation of dividends.

In his blue suit, the chancellor, George Osborne, presented the first Conservative Budget for almost 20 years.

In November 1996, Kenneth Clarke (remember him; Hush Puppies?) promised another five years of striving. Seem familiar?

Osborne set out his stall: “This will be a Budget for working people. A Budget that sets out a plan for Britain for the next five years to keep moving us from a low wage, high tax, high welfare economy to the higher wage, lower tax, lower welfare country we intend to create. This is the new settlement.”

The chancellor painted a rosy picture of two million more people in employment as a result of his “long-term plan” and set out his ambition for two million more. But “jobs are not created by accident. They are created when businesses have confidence – the confidence to invest, to grow and to hire.”

He explained his plans for deficit reduction and flagged up the publication of the Fiscal Charter – committing the country to the path of Budget responsibility.

After setting out difficult choices on government spending, he confirmed that HMRC would receive £750m of funding to pursue tax fraud, offshore trusts and the hidden economy with the aim of raising an extra £7.2bn tax.

On the other side of the coin, the widely-heralded “tax lock” is formally announced with the proposal to legislate not to increase rates of income tax, VAT and class 1 National Insurance during this parliament.

The question of how this reconciles with the new tax rates on dividend income mentioned below will have to be answered at a later date.

Business tax

A measure likely to be welcomed by many businesses, whether incorporated or not, is that the planned reduction in the annual investment allowance (AIA) from its present £100,000 to £25,000 in December 2015 has been blocked. Instead, the AIA will rise – permanently, we are promised – to £200,000 from 1 January 2016.

Hopefully, this will bring an end to complicated allowance calculations and fluctuating allowance levels.

Another measure affecting most business types is the proposal to increase the National Insurance employment allowance from £2,000 to £3,000 from April 2016.

Corporation tax

There was good and bad news on corporation tax. The good news is that the rate will fall from 20% to 19% from 2017 and 18% in 2020. For companies with annual taxable profits of £20m or more, the bad news is that payment dates will be advanced.

The corporation tax liability will be payable in four quarterly instalments in the third, sixth, ninth and 12th months of the accounting period. This compares with the present four instalments starting six months into the accounting period, thereby advancing payment by three months.

From 8 July, and for purchases made on or after that date, where purchased goodwill and customer-related intangible assets are recognised in company accounts, the company will no longer be entitled to tax relief on the written-off costs against profits.

The justification for this measure is that it brings the tax treatment more into line with that for shares, where the equity in a target company had been purchased rather than goodwill and assets. Instead, when the asset is sold any relief due will be given as a non-trading debit.

For companies subject to transfer pricing rules, an anti-avoidance measure will apply from 8 July to transfers of trading stock or intangible fixed assets. They will ensure that market values are not disapplied by the transfer pricing rules.

The controlled foreign companies (CFC) regime will be tightened. From 8 April 2015, companies will not be able to set UK losses and reliefs against a CFC charge.

Personal matters

As promised in the Conservative manifesto, the government will legislate to set a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee Class 1 National Insurance rates to ensure they cannot rise above their 2015/16 levels. The tax lock will also prevent the National Insurance upper earnings limit rising above the income tax higher rate threshold and the removal of any items from the zero and reduced VAT rates.

Personal taxation sweeteners came in the form of an increase in the personal allowance from £10,600 in 2015/16 to £11,000 in 2016/17, with a pledge to raise it again in 2017/18 to £11,200. The chancellor also kept his promise to increase the higher rate threshold. This will go up from £42,385 to £43,000 in 2016/17 and to £43,600 in 2017/18 although steep increases will be needed to meet the manifesto target of £50,000 by 2020.

Meeting another pledge, this time on inheritance tax, an additional nil-rate band of £100,000 will be introduced from 6 April 2017 to allow the family home to be passed on death to direct descendants. Any unused nil-rate band will be transferred to a surviving spouse or civil partner.

The allowance will be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the additional nil-rate band, are passed on death to direct descendants. There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m at the rate of £1 for every £2 over this threshold.

The inheritance tax nil-rate band will remain frozen at £325,000 until April 2021.

The changes introduce further complexity and, even though there is to be a technical consultation, which it is hoped will iron out some of the difficulties, it might have been simpler just to introduce a £1m exemption.

Property owners

First, the good news. After many years stuck at £4,250, rent-a-room relief will rise to £7,500 from April 2016.

Less welcome for buy-to-let taxpayers was the news that the tax relief landlords are entitled to claim for residential property finance costs, such as mortgage interest, is to be restricted to the basic rate of tax. The chancellor claimed that this was in the interest of fairness and is introducing the change over four years from April 2017.

Interestingly the restriction will be confined to individuals, companies that own properties are not affected.

In addition, the wear and tear allowance is to be reformed. From April 2016, it will be replaced by a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets. The government will publish a technical consultation this summer.

Domicile

There has been some whispering about further changes to the non-domicile regime, and with some justification. Finally, moving the subject off the “too difficult” pile, the chancellor announced that non-domicile status for long-term residents will be abolished.

Anyone who has been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for tax purposes.

As a result, the £90,000 remittance basis charge payable by those who have been resident for 17 out of 20 years will be redundant but the £30,000 and £60,000 charges remain unchanged.

In addition, from April 2017 it will no longer be possible for individuals who have UK domicile status at birth to claim non-domicile status if they leave the UK and acquire a domicile of choice in another country but subsequently return here.

A detailed note explaining these proposals is on GOV.UK at www.lexisurl.com/nondomjul. The government is promising a technical consultation later this year.

Pensions – irresistible

The pensions regime is too tempting to remain untouched, and more changes, as well as a consultation on a wider reform of pensions tax relief, were announced.

The lifetime allowance for pension contributions will be reduced from £1.25m to £1m from 6 April 2016 but it will be indexed annually in line with CPI from 6 April 2018. Transitional protection for pension rights already over £1m will be introduced to ensure the reduction is not retrospective.

In addition, for individuals with income (including the value of any pension contributions) of more than £150,000 and who have an income (excluding pension contributions) in excess of £110,000, the annual allowance will be tapered to £10,000. This will come into effect from April 2016.

And finally

Dividend taxation has come under the eye of the chancellor. Dividend tax credits will be abolished from April 2016 and a new annual dividend tax allowance of £5,000 introduced. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those paying the additional rate.

This wide-ranging measure is likely to affect many more individuals than might at first be imagined.

Taxation editor-in-chief Andrew Hubbard said:

“All of our assumptions about the relative merits of dividends versus salary as a means of extracting profits from the family company will need to be revisited following the increases in dividend tax rates. All around the county, I expect spreadsheets are being devised to work out the effect: there are a few points of detail to be sorted out but my initial thoughts are that the dividends are still going to be more tax-efficient. But owners of family companies are still likely to end up paying more tax next year than they will in 2015/16. This dividend tax could be the next stealth tax –relatively easy to ratchet up each year now it is in place.

“Is the dividend tax a back door equivalent of introducing National Insurance on private company dividends?”

Photo courtesy of Geoff Pugh/REX

Issue: 4508 / Categories: Comment & Analysis , Budget 2015 , Admin , Budget/Finance Act