A Budget for aspiration?
The Chancellor's Budget last month contained a number of opportunities for taxpayers - but with some caveats
The Chancellor, George Osborne, delivered his budget on 20 March 2013, describing it as “a Budget for an aspiration nation”. As ever, there were some headline-grabbers, including the introduction of a new “Help to Buy” scheme as an attempt to boost the UK’s struggling housing market, as well as the commitment to reduce the rate of corporation tax to 20% with effect from 2015-16. However, the Budget content was largely of little surprise, and the headline-grabbers were fewer and further between than some commentators would have liked.
A few of the key measures which offer good opportunities for taxpayers are highlighted and summarised in this article. Some are perhaps not as helpful as they appear at first blush, and potential pitfalls and points to note have been considered below.
Corporation tax rate cut – good news?
On the face of it, a reduction in the rate of corporation tax to 20% from April 2015 is good news. It harmonises the main and small companies rates so companies (and their advisers) will no longer require to carry out complicated marginal relief calculations. Furthermore, the rate will be one of the lowest in the G20, and compares favourably to other countries such as the US (40%), Germany (29%), France (33%) and even Luxembourg (21%). Will this have the desired effect and result in businesses flocking to the UK to take advantage of this low rate?
Companies that carry out all of their activities in the UK will undoubtedly benefit from the lower rate and will welcome the announcement. However, for many companies, carrying out all of their operations in the UK with no offshore parent or subsidiary companies is not an option. For these companies, the new rate may be a mixed blessing. If a company is a UK holding company, it will want to be able to offset the withholding tax its subsidiaries deduct from, say, interest and royalties, against its UK tax bill. Such companies can only set withholding tax credits against the amount of their UK tax, so if their UK tax rate falls, it doesn’t necessarily mean that the group will pay less tax overall.
There may also be adverse consequences for offshore parent companies, as many jurisdictions have controlled foreign company regimes, which essentially stop their local businesses from migrating offshore to low-tax jurisdictions. Japan, for example, has an anti-tax-haven regime which effectively considers countries with a corporation tax rate of 20% or lower as low-tax jurisdictions. Unless Japanese legislation changes by 1 April 2015, a 1% cut in UK corporation tax (from 21% in 2014-15 to 20% in 2015-16) could result in an extra 5.5% tax bill in Japan where a Japanese holding company owns UK subsidiaries.
In short, if a company is a UK company with no offshore parent or subsidiaries, the 20% corporation tax rate is a good thing, but if not, care needs to be taken in structuring the group to ensure that in trying to take advantage of a lower rate of corporation tax, the group as a whole does not end up paying more tax.
Procurement and tax
Any company bidding for Government contracts needs to be aware that new rules will apply from 1 April 2013. In February, the Cabinet Office issued revised guidelines on tax and procurement. Thankfully, the Budget represents a substantial climbdown by HMRC, which has rightly recognised that the measure did more than necessary to achieve the policy aim. The measure will now only apply to planning featuring in returns filed after 1 October 2012, and not any legacy positions.
Although we still do not have the final Procurement Policy Information Note, the details released at the Budget by HMRC show that the final rules will be much more proportionate and easier for bidders to manage. Key changes to the original proposals are a significant reduction in the retrospective application of the rules, the removal of targeted anti-abuse rules from the scope, and more clarity on the entities affected.
The aim of the new measure is to encourage compliance with the Government’s view of tax law. Bidders will be required to self-certify whether they have had any “occasions of non-compliance” since 1 April 2013, in respect of tax returns filed after 1 October 2012. An occasion of non-compliance arises where additional tax has been paid as a result of an HMRC challenge under certain anti-avoidance rules. The previous proposal required bidders to disclose any non-compliance in the previous 10 years, which would have imposed an almost impossible due diligence burden.
Local authorities, universities and the Scottish Government now need to decide whether to implement these watered down proposals.
Bidders will need to ensure that there is close working between bid, legal and tax teams in order to ensure that any future tax settlements for relevant periods, and any future tax planning proposals, take into account the potential impact on bid opportunities.
Investment reliefs: AIM shares and SEIS
Stamp duty will be abolished for the purchase of shares on the AIM or ISDX growth markets from April 2014. This is an added boost both for companies listed on these markets trying to attract investment and for investors alike. It is particularly good news, on the back of the Government outlining its intention to allow shares listed on the AIM or ISDX markets to be used when investing in individual savings accounts (ISAs).
The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 to attract investment into small startup companies by offering favourable tax advantages to investors. One of the key tax reliefs allowed SEIS investors to shelter capital gains of up to £100,000 by reinvesting the gain into an SEIS qualifying company. When SEIS was introduced, this relief applied only to gains made in the 2012-13 tax year. The Budget announced that this relief has been extended to gains made in 2013-14 and reinvested in SEIS companies in 2013-14 or 2014-15, albeit that the amount of capital gains tax relief will be reduced to 50% of the reinvested gain.
The original legislation had an unintended consequence that investors could be denied SEIS relief if the investment company had been formed by a company formation agent or was an “off-the-shelf” company. The Budget confirmed that this would be corrected for shares issued from 6 April 2013. It is unfortunate, however, that this was not backdated to 6 April 2012, given that a claim for SEIS relief can be made by investors until the fifth anniversary of 31 January following the end of the relevant tax year, and therefore backdating the correction could still benefit investors who invested into otherwise qualifying SEIS companies in tax year 2012-13.
Employee shareholders – “foolish” or “stupid”? The Government confirmed in the Budget the tax treatment that will apply to shares under its controversial “employee shareholder” proposal. Embarrassingly for George Osborne, the proposal itself was voted against in the House of Lords, with former Conservative cabinet ministers describing it as “foolish” or “stupid”. Despite the defeat, it is expected that it will be pushed through in the House of Commons.
“Employee shareholder” status is proposed as a third form of employment status, alongside “employee” and “worker”, essentially taking effect as a new form of equity-linked employment contract. In exchange for giving up certain employment rights, employees will become stakeholders in the business they work for by being given shares in the employer company (or parent company in the employer’s group) worth between £2,000 and £50,000. The gain (if any) on the sale of those shares will be exempt from capital gains tax.
The income tax treatment was announced in the Budget. The first £2,000 of employee shareholder shares will be exempt from income tax and national insurance. To the extent that these shares are worth more than £2,000 on acquisition, the employee will either have to pay market value or suffer an income tax and national insurance charge on the value received in excess of £2,000.
It was also announced that implementation of the proposal has been delayed from 6 April until 1 September 2013. Companies will now be able to assess fully whether or not employee shareholder status is right for their business. Employers may see the proposal as an opportunity to offer shares to employees in a tax-efficient manner without the administration which sometimes accompanies traditional all-employee share plans. For small and medium-sized companies, this may be particularly attractive. However, the one major difficulty such companies face is that the Budget announcement provides no further guidance on valuation, and this could limit the takeup of the new status by SME companies.
Christine Yuill is a senior associate with Pinsent Masons LLP