Rewards for the virtuous
While much of this year's Budget was known in advance, there were a few surprises. We assess the impact on "makers, doers and savers" – and on tax avoiders
The Chancellor hailed his 19 March Budget as a budget for “the makers, the doers and the savers”. While there was good news for particular sectors, the Budget was not the political showdown it could have been this side of a general election. Instead, the Chancellor tinkered around the edges, most of the reforms having been trailed in previous announcements and consultations.
George Osborne had used strong rhetoric to manufacturing industry that he would deliver a “Made in Britain”-friendly budget. While there were some adjustments made to air passenger duty which should reduce the cost of long-haul air travel for businesses (though not for those executives lucky enough to travel by private jet), most of the changes proposed for this sector were pitched at SMEs, with no sign of structural reform to business rates – something that manufacturers, amongst other sectors, had been calling for.
A doubling of the annual investment allowance (AIA) from £250,000 to £500,000 is great news for SMEs and was warmly received. The allowance gives businesses 100% tax relief for expenditure on qualifying assets in the year of expenditure. The increased relief applies from 1 April 2014 for corporation tax purposes (6 April for income tax purposes) and will last up to 31 December 2015, when the AIA will revert to the original £250,000 level. Meanwhile, to encourage spending on research and development, increased cash repayments will be available under the R&D tax credit scheme for SMEs, with the available tax credit being increased from 11% to 14.5%.
SMEs may also benefit from the seed enterprise investment scheme (SEIS), which provides tax relief to investors in early-stage fundraisings. This relief is to be made permanent. The venture capital reliefs (VCT, EIS and SEIS) will however cease to be available in relation to investment in companies which benefit from renewables obligation certificates (ROCs) or renewable heat incentive (RHI) subsidies, in line with the current treatment of feed-in tariff based businesses. A consultation was announced on a possible general restriction on companies which have “low risk” activities and which benefit from Government subsidies.
Those operating in designated enterprise zones will benefit from an extension of the enhanced capital allowances’ availability for another three years to March 2020.
The Government has been heavily criticised for inconsistent policy in this sector, so it is hoped that the announced wholesale review of the tax regime for the UK continental shelf in support of recommendations of the Wood Review will be a game changer and encourage further investment in the sector.
New measures were announced to allow the buyers of pre-trading companies to give value to the company’s shareholders for the tax value of their R&D expenditure. This is a carve-out from anti-avoidance legislation which was brought in under the Finance Act 2013. The measure will be good news for smaller oil and gas exploration companies, allowing the shareholders to sell these companies more easily and as a consequence encourage investment in exploration.
In addition, the announcement of a new ultra-high pressure, high temperature allowance to be consulted on should encourage development of difficult oilfields, while 100% first-year mineral extraction allowances for expenditure on seeking planning permission and permits should be welcome news for shale gas operators. While there has been some softening of the controversial tax changes which were proposed in the Autumn Statement 2013 in relation to bareboat chartering arrangements, many in the industry will be disappointed with their proposed introduction.
The business property renovation allowance regime has now been settled in line with the proposals announced towards the end of last year, with some further changes proposed to include additional items of plant as well as the integral features which had previously been announced. It has also been confirmed that the period in which balancing adjustments can be triggered will be reduced from seven years to five.
The starting rate for savings income will be reduced from 10% to 0%, with a corresponding increase in the band benefiting from the starting rate to £2,880 in 2014-15 and £5,000 for 2015-16, all welcome news (if of limited benefit) for savers who have been hit hard by the economic climate over the past few years.
However, perhaps the biggest surprise of the Budget was the changes announced to pensions, which will have fundamental implications for retirement planning in the future.
A comprehensive review of these sweeping changes is beyond the scope of this article but, in summary, the changes apply to those over 55 who have savings in a defined contribution pension scheme, and will provide much increased flexibility for individuals to access their pension savings.
A new ISA (a “NISA”) will be introduced from 1 July 2014 (all existing ISAs will become NISAs). The new measures include allowing increased flexibility of transfer of funds between cash and shares NISAs, as well as an increase in the annual limit to £15,000.
The proposals put forward by the Office for Tax Simplification to simplify the income tax rules applying to employees who acquire shares in their employer companies are to be consulted on. The simplifications proposed are fundamental changes to the timing of tax charges and would prevent “dry” tax charges arising for individuals (often unexpectedly) on acquisition of unmarketable shares.
The proposals have the potential drastically to change the way in which employees are incentivised in private companies.
The Government has used successive Budgets to clamp down on tax avoidance, and with one eye on the election and tapping into public sentiment on tax avoidance, this year was no different. A raft of new anti-avoidance measures are to be introduced.
The announcement of the extension to the annual tax on enveloped dwellings (a tax introduced in 2013 for non-natural persons owning high value residential property) was a surprise. The tax will no longer relate only to “high value” residential properties, with the former £2 million threshold reducing to £500,000 in stages. Some have argued this is a cosmetic measure to appease the public rather than a measure which is likely to capture significant tax revenue. SDLT at the 15% rate will also apply to the acquisition by non-natural persons of dwellings costing more than £500,000, for contracts with an effective date on or after 20 March 2014. Exemptions continue to apply to rental businesses and developers.
HMRC’s strategy of drafting very wide anti-avoidance legislation, and expecting taxpayers to rely on non-statutory guidance for comfort that the anti-avoidance provisions will not be used without a tax avoidance motive, causes difficulty for innocent taxpayers and their advisers. A further example of this is the new corporate profit-shifting rules announced in the Budget. New anti-avoidance provisions had been introduced in the Autumn Statement, relating to tax avoidance schemes using derivative contracts. However, before they were even legislated, tax avoiders were concocting new ways to get around the rules.
Rather than relying on the recently introduced general anti-avoidance rule (GAAR), HMRC has introduced a new provision which attacks the shifting of profits between companies which results in a tax advantage. The provision appears to be very wide and creates a one-way tax charge. There is no corresponding deduction for the other party. Detailed analysis of the Finance Bill will be required on this measure, but it could present challenges. The legislation is to apply to payments made on or after 19 March 2014, irrespective of when the arrangements were entered into. Guidance reassures that HMRC will not look to invoke the provisions in the absence of an avoidance purpose; however taxpayers should be anxious about the increasing trend towards catch-all anti-avoidance legislation.
Accelerated payment in tax disputes
Perhaps the most controversial changes suggested by HMRC (albeit changes which have been on the agenda for some time) are the proposed accelerated payment provisions for users of pre-existing tax avoidance schemes. The aim here is to remove the timing advantage obtained by those who use avoidance schemes that ultimately fail, by ensuring that the tax at stake is paid to HMRC on all schemes which have been notified under DOTAS, or which have been defeated by a test case, and where there is an open enquiry or open appeal.
HMRC has estimated that the measure will collect £5.1 billion from 33,000 individuals and £2.1 billion from corporates. However, serious questions have been raised as to the legality of the provisions. Many advisers encouraged their clients to disclose arrangements which arguably did not fall within the DOTAS regime, at a point when there seemed to be no downside to doing so. In addition, it is not clear how it will be established whether a “test case” is in point. The requirement to pay up front will also apply to new DOTAS-disclosed schemes or those counteracted via the GAAR.
HMRC has acknowledged in the Budget notices that it anticipates legal challenge in relation to the measure, and there are concerns that the measures may drive tax avoidance underground.
Karen Davidson, legal director, Pinsent Masons LLP
So, a relatively quiet Budget in terms of new announcements, but plenty of drama anticipated in HMRC’s battle on tax avoidance.