Submitted by
Sestini & Co | on Sat, 05/25/2013 - 7:19 | In
Uncategorized As the learned tax professional John Whiting is wont to say, with the Budget as with so many things, the devil is always in the detail.
These notes and reflections are based on my initial review of the draft Finance Bill 2013, as posted on the HM Treasury website, http://www.hm-treasury.gov.uk and there will no doubt be a few changes before Finance Act 2013 receives Royal Assent in the summer. Finance Bill 2013 is due to be published on 28 March 2013 and so this note will be updated then for relevant changes to these proposals.
Naturally, specific, formal advice should be sought before taking any action.
The headlines:
A reduction in the corporation tax rate to 20% from April 2015, aligning it with the small companies’ rate and thus doing away with the marginal rate;
A £2,000 ‘employment allowance’ to reduce the burden of employer NIC contributions from April 2014;
A new capital gains tax relief on the sale of a controlling interest in a business from 2014
Income tax and National Insurance relief on shares for employee shareholders from 1 September 2013
An increase in the new research and development (R&D) tax credit to 10% from 1 April 2013The removal of Stamp Duty on shares traded in growth markets such as AIM and ISDX Growth Market from April 2014
Tax rates
The personal tax allowance will rise to £9,440 from 6 April 2013 but will be offset by a reduction in the basic rate band to £32,010. The 40% tax rate will therefore apply to taxable income over £41,450.
From 6 April 2014, the personal allowance will increase to £10,000, a year earlier than originally planned.
The additional rate of tax, which applies to taxable income over £150,000, will reduce from 50% to 45% from 6 April 2013. This will have an equivalent impact on dividend tax rates and trust tax rates.
Cross-border measures:
Statutory residence test
It has been reaffirmed that the new statutory residence test will come into effect from 6 April 2013.
The final text of the legislation will be available on 28th, but it is very unlikely there will be any major changes to the published draft. The test will therefore be a combination of day counting and more subjective tests which look at “connections” with the UK. In certain circumstances, some individuals will need to consider a “45 day rule” or “135 day rule” rather than the more familiar “90 day rule”.
Split year residence
For people arriving in, or leaving the UK, there will be a statutory basis for a split year residence, i.e. residence from the day after departure or the day of arrival rather than determining residence in all cases on a whole tax year basis. This has previously been by concession.
Anti-avoidance
In addition to the much-heralded General Anti-avoidance Rule (GAAR) which will be coming in, although in a slightly more workable form than the original draft, there are specific anti-avoidance measures in Finance Bill 2013.
These include new information-sharing agreements with the Channel Islands and Isle of Man as well as a temporary non-residence rule which taxes certain income paid to an individual who is a short-term non-resident.
On a more positive note, the Transfer of Assets Abroad rules and the equivalent anti-avoidance provisions for capital gains are being revised to bring them in line with EU law, which promotes freedom of establishment, i.e. the right of businesses to set up anywhere across the EU. The change will have effect from 6 April 2012 and should provide comfort to business owners with a genuine need to site their operations in one or more location outside of the UK.
Mixed-domicile marriages
The amount a UK domiciled (or deemed domiciled) individual can transfer to a non-UK domiciled spouse outside of the scope of inheritance tax (IHT) will be increased in line with the nil rate band and non-UK domiciled spouses will be able to opt to be treated as UK domiciled for IHT purposes. The election is irrevocable and can be made as a lifetime election or within two years of death. This is not a decision to be entered into lightly and as with any tax planning, specific advice should be sought.
Annual property tax
Changes are being made to the legislation related to enveloped dwellings (those owned by certain non-natural persons) to provide additional reliefs from the tax. Similarly, there are changes to the 15% SDLT charge and the CGT charge on properties owned by non-residents.
More analysis is required to determine the impact of these changes so this will be the subject of a later note.
Tax reliefs:
SEIS
The capital gains tax relief will be extended for a further two years for, albeit limited to 50% for investments in companies qualifying for the Seed Enterprise Investment Scheme (SEIS). In addition, SEIS treatment will not be denied where the company is established by a company formation agent, as was previously the case.
Pensions
The annual allowance is being reduced from £50,000 to £40,000 from 6 April 2014. As unused annual allowance from previous years can be carried forward into the current tax year, it could be beneficial to review how much unused relief is available now to ensure the maximum tax benefit from making pension contributions can be achieved over time.
Uncapped reliefs
Charitable contributions have been removed from the scope of this limitation, otherwise reliefs not capped elsewhere in the legislation will be limited to the greater of £50,000 or 25% of net taxable income after deducting pensions and charitable contributions.
Whilst the removal of charitable contributions from this limit is welcome, this could have a negative impact on small businesses by limiting the scope for claiming income tax relief on trading losses and thus reducing cash flow.
Inheritance Tax
The nil rate band will remain frozen until 2017/2018 at £325,000. The calculation of the 10-year charge on trusts is to be simplified.
Of wider impact is the announcement that the cap on care home fees is to be reduced, which could provide scope for insurance against care home costs as part of an individual’s lifetime wealth and estate planning.
Help for Businesses:
Putting one’s natural cynicism (and the trading loss issue mentioned above) aside, there does seem to be a wish to benefit British business and the following measures are the key examples:
Tax Simplification for Unincorporated Businesses
The cash basis of accounting will be available for businesses with receipts below the VAT threshold but will be optional. This should simplify accounting for many small businesses (or simply legitimise their current method of accounting) and provide a cash flow benefit by aligning the payment of tax with the receipt of cash rather than the issue of an invoice.
There will also be a simplified method of calculating the impact of goods taken for the proprietor’s own use.
Reduction of the main rate of Corporation Tax
The main rate of corporation tax will be further reduced to 20% from 2015 thus aligning it with the small companies’ rate. The rate will be 21% from 2014.
This does two things for smaller businesses:
- Does away with the complicated, expensive marginal rate of income tax;
- Means that the number of companies in a group no longer impacts on the CT rate that group pays overall.
Businesses can therefore use different companies for different activities where it is relevant to their business needs without having to factor in an adverse impact on their tax liability.
Annual investment allowance
The annual allowance for deduction of capital expenditure will increase from £25,000 to £250,000 from 1 January 2013. This could greatly assist small companies moving into a new phase requiring a tranche of capital investment in new or upgraded premises or new equipment.
Employment taxes relief
A reduction in the employer’s NIC bill of up to £2,000 will be available to all businesses to encourage the taking on of new staff. This could also facilitate additional payments as salary/bonus rather than dividends subject to further analysis of the detail.
Tax relief on childcare
A new scheme will be introduced from Autumn 2015 providing 20% tax relief on childcare costs up to £6,000 per annum, per child up to the age of 12.
Hopefully this will be a great improvement on the current childcare voucher scheme which is complicated to use both for childcare providers and parents, and has limited application as it is only for use by employers. Widening this relief to the self-employed and simplifying the administration could be a great boon for small businesses and their staff.
Disincorporation relief
Companies will no longer be penalised by a corporation tax charge on changing to sole trade status. This, combined with the capital gains tax relief on the sale of a controlling interest in a business should provide greater flexibility and ensure that the decision for a business as to whether or not to incorporate can be business rather than tax-driven.
R&D Tax credits
An above the line tax credit of 10% of qualifying spend on R&D will be available to provide greater flexibility and cashflow. This is in addition to the Patent Box relief and existing R&D reliefs.
Conclusions
Once again, quite a number of the measures being enacted in the upcoming Finance Bill 2013 have already been announced, so there are few surprises.
The acceleration of the increase in the personal allowance should help low-income households and start-up businesses but the benefit is offset by the reduction in the basic rate band – possibly a disincentive for individuals to aspire to work beyond a certain point.
The business measures are on the whole positive, and there does appear to be a real move towards simplification and ensuring that tax doesn’t get in the way of doing business – possibly a testament to the OTS.
Some of the individual measures such as the child care relief would be welcome sooner than currently planned.
I eagerly await the publication of Finance Bill 2013 on 28 March and will be updating this newsletter then.
Thank you for taking the time to read this. Do contact me if you would like to discuss any of the points raised or if you have any other questions about your tax position.
