Trawling for revenue
Concluding part of the roundup of this year's Budget and Finance Act, looking at the changes affecting businesses, and land taxation
BUISNESS AND EMPLOYMENT TAXES
In an unexpected move, the corporation tax rate was reduced by 2% instead of the expected 1%. So from 1 April 2011, the corporation tax rate falls to 26% (see Finance Act (“FA”) 2011, ss 4 and 5).
It is then to fall a further 1% each year, so that by 2014 it will be reduced to 23%. For smaller companies the rate reduces to 20% from 1 April 2011 (FA 2011, s 6).
The effect of the reduction will be offset for banks by a corresponding increase in the bank levy (s 73 and sched 19); and the large increase in the tax on ring-fenced oil and gas profits has an even more detrimental effect on the companies involved (ss 5 and 7).
There is a slight relaxation in the rules on associated companies for the purposes of the small companies rate, which generally reduce the threshold of profits to which the reduced rate applies if a person and his associates control more than one company. Associates will generally be ignored where there is no substantial commercial interdependence between the relevant companies (s 55).
Announcements on new Controlled Foreign Company (CFC) rules from 2012 should allow groups based in the UK to compete more successfully with those based overseas, and early indications are that these announcements have been well received.
Further legislation on CFCs is included in FA 2011, s 47 and sched 12.
A number of changes in the capital allowances regime have been confirmed, and some new ones introduced.
The basic writing-down allowance for plant and machinery is reduced from 20% to 18% from April 2012; and that on special rate expenditure from 10% to 8% (FA 2011, s 10).
At the same time, that recently introduced and more recently extended simplification in the form of the annual investment allowance is to be massively reduced, from £100,000 to £25,000 (s 11).
A short life asset election will be permitted where businesses expect to dispose of or sell an asset within eight years, doubling the current period of four years (s 12).
There is a certain air of desperation in the addition of certain hand-dryers (!) to the list of energy saving items qualifying for enhanced capital allowances, although more may be expected from revised rules for metering and targeting equipment.
Research and development tax credits
The rate of the additional deduction for expenditure on research and development for companies that are small or medium sized enterprises (SMEs) rises from 75% to 100% from 1 April 2011, giving a total potential deduction of 200% (FA 2011, s 43). A further increase to a total of 225% is planned for April 2012; and the rules will generally be simplified and extended, all subject to approval for state aid purposes.
Reflecting the higher cost of motoring, approved mileage allowance payment rates (under which employers can pay employees for business mileage in the employee’s own car) rises from 40p to 45p for the first 10,000 miles.
The rate of the fuel benefit charge rises by some 4.5% from 6 April 2011.
Tax relief is restricted for higher earners who join employer-supported childcare schemes from 6 April 2011 (FA 2011, s 35 and sched 3). In addition, a change is made so that schemes are not disqualified from possible relief because they are not offered to those employees who would otherwise fall below the national minimum wage (s 36).
On the administrative side, HMRC are given powers to seek security where PAYE and/or NICs are thought to be seriously at risk (s 85).
Following on from announcements in 2010, the Government has confirmed the introduction of a new income tax charge on so-called “disguised remuneration”. The new rules are contained in FA 2011 s 26 and sched 2, inserting a new part 7A into the Income Tax (Employment and Pensions) Act 2003. They will apply to arrangements commonly involving trusts or other vehicles which are funded by employers, and make loans or “earmark” or provide other benefits to employees or directors. The new tax charge will apply to loans or benefits provided after 6 April 2011, though there are anti-forestalling rules which will also catch loans or benefits made available between 9 December 2010 (when the intention to legislate was announced) and 6 April 2011. A flavour of the very wide scope of the rules can be found in the following test of whether the charge is to apply:
“(1) Chapter 2 applies if–
“(a) a person (‘A’) is an employee, or a former or prospective employee, of another person (‘B’),
“(b) there is an arrangement (‘the relevant arrangement’) to which A is a party or which otherwise (wholly or partly) covers or relates to A,
“(c) it is reasonable to suppose that, in essence– (i) the relevant arrangement, or (ii) the relevant arrangement so far as it covers or relates to A, is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A’s employment, or former or prospective employment, with B,
“(d) a relevant step is taken by a relevant third person, and
“(e) it is reasonable to suppose that, in essence– (i) the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or (ii) there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.”
As can be seen, the use of words and phrases such as “arrangement”, “reasonable to suppose” and “in essence” goes to the heart of ascertaining the purposes of such arrangements, but on an objective basis. It is unsurprising that HMRC has attempted to crack down on arrangements touted as being available to avoid normal employment taxes, but as often the new rules may catch rather less objectionable employment incentive arrangements. Care will be required with any arrangements which attempt even to defer the “normal” operation of PAYE.
Income tax will be payable on the full benefit of the loan or assets made available to the employee or his family members, and employers will be required to collect the income tax through the PAYE system.
The Government has confirmed that the legislation affects employer-financed retirement benefit schemes (EFRBS), in order to protect revenues and in keeping with the restriction of pensions tax relief through the reduced annual and lifetime allowances for tax privileged pensions savings from April 2011 (see part 1 of this article).
Value added tax
The VAT registration threshold rises from £70,000 to £73,000; the deregistration threshold also rises, from £68,000 to £71,000.
Legislation was introduced (FA 2011, s 77) to reduce the low level consignment value relief from £18 to £15. This is the threshold below which goods can be imported from outwith the EU without payment of VAT. VAT avoidance is common by this route and the Government is going to explore options to remove this relief or to limit it further in future years.
There are to be further extensions of the requirements to deal with VAT compliance online, including registration and deregistration.
In a widely trailed move, the creation of 21 new enterprise zones in England has been confirmed, at locations announced in two batches. Businesses in these zones will benefit from:
- relief from business rates of up to 100% for up to five years;
- the possibility of enhanced capital allowances for businesses in assisted areas where there is a strong focus on high-value manufacturing;
- superfast broadband.
The Government will consult with the devolved administrations in Scotland, Wales and Northern Ireland on the possibility of establishing enterprise zones in these areas.
Business property renovation allowances
This scheme, which gives 100% tax relief for the capital costs of bringing empty properties in enterprise zones back into use, was due to run out in 2012, but the Chancellor has announced that allowances will be extended for a further five years.
Stamp duty land tax
A new bulk purchase relief for residential property has been enacted, which will be available for purchases with an effective date on or after Royal Assent to FA 2011 (19 July 2011). The rate of SDLT payable by a purchaser of more than one residential property from the same seller was previously arrived at by reference to the aggregate consideration for all the properties, under the so-called linked transaction rules.
The bulk purchase relief means that the rate of SDLT will be arrived at by reference to the mean consideration, i.e. by the aggregate consideration attributable to the dwellings, divided by the number of dwellings (s 83 and sched 22, inserting a new sched 6B into FA 2003). The relief has to be claimed; and the minimum percentage chargeable on dwellings if it is claimed is 1%. (This means that if a number of dwellings are purchased which would all fall within the 0% threshold if purchased separately, the relief is of more limited use than might be expected.)There are also anti-avoidance provisions which endure for three years after the effective date of the relevant transactions.
This measure is intended to stimulate the housing market by removing one of the disincentives to investment in residential property.
Three anti-avoidance measures take effect for transactions on or after 24 March 2011 to counter reasonably well known avoidance schemes. The changes clarify the relationship between the rules for “sub-sales” and alternative finance, narrow the definition of “financial institution” for the purposes of alternative finance, and counter the effect of an engineered reduction in market value when properties are exchanged (FA 2011, s 82 and sched 21).
Furnished holiday lettings
After consultation, special rules on furnished holiday lettings (“FHL”) are to be retained. But from April 2011, loss relief may only be claimed against profits from the same letting business, with UK businesses to be treated separately from other FHL businesses within the European Economic Area. From April 2012, properties must be available for letting for at least 210 days in the year and actually let for 105 days, although there are provisions to allow the reliefs to be claimed automatically for two years following actual qualification. (See FA 2011, s 52 and sched 14.)
The bonfire of reliefs as part of the Tax Simplification Project continues. Apart from the abolition of relief on NSB ordinary account interest and the 10% supplement on payroll giving (see part 1 of this article), more extensive removals of rather specialised reliefs are planned. These will only take place after consultation, but might have rather more impact than (for example) the abolition of stamp duty relief on certain assignments or assignations by seamen. They include the exemption for certain grants for giving up agricultural land, special rules on mineral royalties, the tax-free benefit of late night taxis, that ancient exam favourite of tax-free luncheon vouchers, and rather more valuable specialist capital allowances for flat conversions and safety at sports grounds. This is all evidence of a willingness to address at least some of the complications of the tax system; but more fundamental reform such as the integration of income tax and national insurance seems destined for the long grass.
The UK tax system seems certain to remain complex in the extreme. Of course it may not be the only tax system with which readers and their clients will have to cope. The Scotland Bill includes some of the recommendations of the Calman Commission, in the tax context primarily on income tax and stamp duty land tax. The latter is open to complete root and branch reform, and a Scottish land transaction tax may be wholly different from the present system. Consultations continue and any new system is unlikely to see the light of day before 2014-15.
While this will clearly affect Scottish land, a relatively easily identifiable subject of tax, the position will be less clear for Scottish taxpayers affected by the proposed variable rate of income tax. It may also be a little unclear exactly who are the Scottish taxpayers affected, although again there is time to tease out the details of that constituency.
From having no statutory definition of individual tax residency, those advising Scottish taxpayers may soon have to consider at least two such definitions – which are by no means certain to adopt the same principles in connecting an individual to a tax system. And, of course, it is possible that the range of Scottish speciality taxes will be further extended.
In any event, Governments on both sides of the border will continue to need revenue, perhaps to a level not seen since involvement in larger wars than the current norm. While a single Budget and Finance Act may indeed represent a return to tax normality, there are good and varied reasons why further tax changes are likely to continue to come.
Alan R Barr, Brodies LLP and the University of Edinburgh. For part 1 see Journal, August, 20
New consultation paper
HMRC have published a consultation paper focusing on measures to reduce cash flow benefits for tax avoidance scheme users, a rolling review of high risk areas including income tax losses and unauthorised unit trusts, and continued work on a General Anti-Avoidance Rule. In addition, no fewer than 18 specific measures were listed in the Budget report to counter avoidance in specific areas. These include further rules on the sales of leasing companies, degrouping charges (although simplifications are also introduced), grouping mismatches, loan relationships and derivatives, and capital allowances more generally. FA 2011, ss 28-34 (and associated schedules) carry some of these into effect.