2020 Innovation. Budget 2015 Webinar. March 2015

Transcription

1 2020 Innovation Budget 2015 Webinar March 2015 Martyn Ingles FCA CTA Ingles Tax and Training Ltd No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the author or 2020 Innovation Training Limited 2020 Budget Webinar March 2015 Page 1

2 Budget 2015 Webinar March 2015 Contents BUDGET 2015 AND DRAFT FINANCE BILL 2015 CLAUSES PERSONAL TAX CHANGES Income tax personal allowances and basic rate band Transferable tax allowances for married couples No Employer NICs for the Under 21s and Apprentices Benefits in kind rules to apply to all employees (apart from low paid vicars) Reimbursed expenses abolition of P11d dispensations Exemption for Trivial Benefits in kind Payrolling of Benefits in kind Car benefit scale charges Car Fuel Benefit Charge Company Vans Umbrella companies home to work travel Armed Forces Early Departure Scheme Fixed rate deduction for use of home as office extended to partners Farmers Averaging to be extended to 5 years Class 2 NICs to be Abolished Intermediaries and Gift Aid Venture Capital Schemes: changes to scheme rules Venture Capital Schemes excluded activities include renewable energy Social Investment Tax relief (SITR) - Enlarging the scheme Increase in Remittance Basis User Charge SAVINGS AND PENSION CHANGES ISA and Junior ISA Changes 2015/ New Help to Buy ISA Transfer of ISAs on death of spouse New 1,000 (or 500) Personal Savings Allowance from Bad Debt Relief for Losses on Peer to Peer loans Cashing in Your Pension Annuity Inherited Pension Annuities Pension Lifetime Allowance to be Reduced to 1million CAPITAL TAX CHANGES CGT Charge on Non-UK Residents Disposing of UK Residential Property CGT Private residence relief 90 day test Entrepreneurs relief restricted on incorporation Entrepreneurs relief restriction on Associated Disposals Entrepreneurs relief: contrived structures Entrepreneurs relief on reinvested gains CGT: Wasting Assets used in a trade IHT Charges on Relevant Property Trusts IHT Interest in Possession Trusts and Successions IHT Will Trusts dissolved within 3 months of death IHT Exemption for medals and other awards IHT Exemption for emergency services personnel and aid workers Review of the use of Deeds of Variation in Estate Planning Budget Webinar March 2015 Page 2

3 4. CORPORATE AND BUSINESS TAX CHANGES Corporation Tax Rates What About the Annual Investment Allowance? Enhanced Capital allowances Changes to R & D tax relief Restricting Corporation Tax Relief for Goodwill on Incorporation Film and TV Production tax relief extended to children s programmes Flood defence contributions Changes to Loan Relationships and Derivatives Proposed new 25% Diverted Profits Tax Group relief changes link companies Group relief Accelerated Payment Notices VAT AND INDIRECT TAX CHANGES VAT Registration Limit increases to 82, Recovery of VAT by Search and Rescue Charities Recovery of VAT by Hospices Tax Relief On Small Donations To Charity Increased To 8, Stamp Duty Land Tax Reforms Stamp Duty Land Tax Multiple Dwellings Relief ATED increased rates and administrative changes CGT: Annual Tax on Enveloped Dwellings (ATED) TAX ADMINISTRATION AND ANTI-AVOIDANCE The End Of Self-Assesment Tax Returns? Direct Recovery of Debts Further DOTAS Powers Promoters of tax avoidance schemes Increased Penalties For Offshore Tax Avoidance Country by Country Reporting Employment Intermediaries - Penalties Anti-avoidance Disguised Investment Management Fees Anti-avoidance Arrangements allowing a choice of income or capital return Corporation Tax loss refresh prevention Capital Allowances anti-avoidance Miscellaneous loss relief anti-avoidance Anti-avoidance Deductible VAT relating to Foreign Branches APPENDIX 1: Income tax allowances and reliefs Income tax rates APPENDIX National Insurance Contributions APPENDIX Tax Credits Budget Webinar March 2015 Page 3

4 BUDGET 2015 AND DRAFT FINANCE BILL 2015 CLAUSES 1. PERSONAL TAX CHANGES 1.1 Income tax personal allowances and basic rate band At Budget 2013, the Government announced that for 2015/16, people born after 5 April 1948 will be entitled to a personal allowance of 10,600. From 2015/16, the default will be an annual increase by the Consumer Prices Index (CPI) for all tax allowances and income limits. The Government also announced that the basic rate limit will be 31,785 in 2015/16. A full list of tax and National Insurance rates and allowances for 2015/16 is set out in the appendix to these notes. The government will increase the Income Tax personal allowance to 10,800 in 2016/17 and 11,000 in 2017/18. In 2016/17 the basic rate limit will be 31,900 meaning that the higher rate threshold above which individuals pay income tax at 40% will be increased to 42,700. In the higher rate threshold will be 43,300. The National Insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold. (Finance Bill 2015). The basic, higher and additional rates of Income Tax for 2015/16 will remain at their 2014/15 levels. 1.2 Transferable tax allowances for married couples New rules commence in 2015/16 which allow a spouse or civil partner to transfer 10% ( 1,060) of their personal allowance to their spouse or civil partner. This option will be available where neither spouse or civil partner is a higher or additional rate taxpayer. From 2016/17, the transferable amount will reflect increases to the personal allowance. Assuming the basic rate of income tax is 20 per cent, the recipient s tax liability will be reduced by up to 312 for the tax year. 1.3 No Employer NICs for the Under 21s and Apprentices As previously announced from April 2015 employers NIC for those under the age of 21 will be abolished. This exemption will not apply to those earning more than the Upper Earnings Limit (UEL), Employers NIC will be charged as normal beyond this limit. In addition, to encourage apprenticeships there will be no employers NIC payable in respect of wages paid to apprentices under the age of 25 from 6 April Benefits in kind rules to apply to all employees (apart from low paid vicars) Legislation in the draft Finance Bill proposes to repeal Chapter 11 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) so that employees (other than a lower paid minister of religion) earning at a rate of less than 8,500 a year will, from 6 April 2016, pay income tax on their benefits in kind (BiKs) in the same way as other employees earning at a rate of 8,500 or more. This change follows consultation on work by the Office of Tax Simplification and will result in the removal of Form P9d as in future benefits for all employees will reported on form P11d irrespective of their level of earnings Budget Webinar March 2015 Page 4

5 As a result of the abolition of the 8,500 threshold, new exemptions are introduced for employed carers on board and / or lodging being provided in the home of the person that they are caring for. This exemption is covered in a separate clause. 1.5 Reimbursed expenses abolition of P11d dispensations Currently unless an employer holds a dispensation from HMRC, the value of deductible expenses and benefits which are paid or reimbursed by an employer have to be reported on form P11D. Employees can then claim for tax relief on that expense and/or benefit, typically reducing the taxable benefit to NIL. This leads to unnecessary administrative burdens for employers and employees, and processing costs for HMRC where there is no tax to collect. In response to recommendations from the Office of Tax Simplification as part of their general review of employee benefits and expenses, Ministers have agreed to introduce an exemption with effect from 6 April 2016 for paid or reimbursed deductible expenses and benefits. The effect of this legislation will be that there is no longer any reporting requirement on employers, and employees will automatically receive the tax relief they are entitled to. In addition, there will be no need for dispensations once the exemption becomes effective. New legislation in the draft Finance Bill introduces the necessary changes for income tax. Changes will be made to National Insurance contributions (NICs) legislation to mirror aspects of this change for payments that are subject to Class 1 NICs where necessary. For benefits which fall within a liability for Class 1A NICs, current Class 1A NICs legislation automatically mirrors the tax position. 1.6 Exemption for Trivial Benefits in kind A new draft clause in Finance Bill 2015 has been introduced to provide an exemption from income tax for qualifying trivial benefits in kind (BiKs) where the cost of providing the BiK does not exceed 50. This is part of a number of measures announced by the Chancellor at Budget 2014 aimed at simplifying the administration of employee BiKs and expenses. The trivial BiKs exemption replaces a concessionary practice, whereby an employer is required to agree with HMRC whether a BiK can be treated as trivial and therefore not chargeable to income tax or liable for National Insurance contributions (NICs). A corresponding disregard will be introduced to remove any liability for Class 1 NICs for any qualifying non-cash vouchers provided under the exemption. Following technical consultation, an annual cap of 300 will also be introduced for office holders of close companies and employees who are family members of those office holders. 1.7 Payrolling of Benefits in kind This clause introduces new powers for the Commissioners to make regulations to authorise employers to deduct or (repay) income tax through PAYE on the benefits that they provide to their employees ( payrolling ). This dispensation to allow employers to payroll their employee s benefits and expenses voluntarily replaces an existing informal practice, where some employers operate payrolling but still have to comply with tax rules that require them to complete a form P11D (return of employee benefits and expenses) at the end of each tax year for each employee. The regulations will disapply that obligation for employers who payroll the benefits, thus reducing their administrative burdens Budget Webinar March 2015 Page 5

6 1.8 Car benefit scale charges The benefit in kind scale charges applying to company cars with various emissions ratings will be further increased by Finance Bill 2015, broadly in line with previous indications and are set out in appendix 3. The scale charges for cars without an emissions rating will increase for those registered before 1 January 1998 in both 2017 and 2018, By 2% in each case. These changes had not previously been announced. The maximum percentage for diesel cars registered after 1 January 1998 will be capped at 37%. 1.9 Car Fuel Benefit Charge Employees and directors with company cars and who also have some or all of their private fuel paid for by their employers are subject to the fuel benefit charge on an all or nothing basis. The benefit charge is determined by multiplying a notional list price by the appropriate percentage for the car, based on its CO2 emissions. The car fuel notional list price will increase from 21,700 to 22,100 with effect from 6 April 2015, notwithstanding the actual fall in fuel prices in the current tax year, so this is another attempt to stop employers providing any private use fuel. For a company car emitting between 121 to 125g CO2 per km the scale charge would be 20% of 22,100 and this would result in taxable fuel benefit of 4,420 and 1,768 income tax for a 40% taxpayer. At 11p per mile the employee would need to drive 16,073 private miles to make having private fuel paid for worthwhile Company Vans The zero emissions exemption for benefit in kind vans is due to end on 5 April 2015 (this change was announced in Budget 2014). We now know the proposals for taxing zero emissions vans for the period 2015 to 2020, which will be as follows: TAX YEAR 2015/ / / / / /21 Percentage of standard van benefit charge 20% 40% 60% 80% 90% 100% The standard taxable van benefit increases from 3,090 to 3,150 for 2015/16. Thus the taxable benefit for a zero emission company van will be 630 for 2015/16. Note that this charge does not apply to all company van drivers, only those who use the van for private journeys. There will be an additional taxable benefit of 594 where private fuel is provided by their employer Umbrella companies home to work travel The Government will consult further on detailed proposals to restrict tax relief for travel and subsistence for workers engaged through an employment intermediary, such as an umbrella company or a personal service company, and under the supervision, direction and control of the end user Budget Webinar March 2015 Page 6

7 This follows a discussion paper published shortly after Autumn Statement 2014 on employment intermediaries and travel and subsistence relief. The changes will take effect from 6 April 2016 and will be legislated for in a future Finance Bill. The government wants employment intermediaries to provide workers with greater transparency on how they are employed and what they are being paid. The Department of Business, Innovation and Skills will consult on these proposals on transparency later in Armed Forces Early Departure Scheme As announced at Autumn Statement 2014, the Government will legislate to ensure that lump sum payments made under the new Armed Forces Early Departure Payments Scheme are exempt from Income Tax and disregarded from Class 1 National Insurance contributions. This change will take effect from 1 April 2015, when the new scheme is introduced. (Finance Bill 2015) 1.13 Fixed rate deduction for use of home as office extended to partners Simplified expenses was one of the measures introduced in 2013 as a consequence of a report by the OTS and a formal consultation. It was always intended that the provisions would apply equally to most partnerships and individuals and the purpose of these amendments is to clarify two of the provisions and thus ensure they are in line with the policy objectives. Subsections (1) and (5) of section 94H ITTOIA 2005 are to be amended to ensure that when considering a home used for the purposes of a trade then the provision applies to a partner s home in the same way as it does to an individual s home. Qualifying work is redefined to ensure that where work is undertaken by more than one individual in the home then any hour spent wholly and exclusively for the purposes of the trade is counted only once Farmers Averaging to be extended to 5 years The government will extend the period over which self-employed farmers can average their profits for Income Tax purposes from 2 years to 5 years. The government will engage with stakeholders later in the year on the detailed design and implementation of the extension. This measure will come into effect from April 2016 and will be legislated for in a future Finance Bill Class 2 NICs to be Abolished As part of the planned reforms to tax administration, the Government will abolish Class 2 NICs in the next Parliament and will reform Class 4 to introduce a new contributory benefit test. The government will consult on the detail and timing of these reforms later in Intermediaries and Gift Aid Changes in the draft Finance Bill will enable regulations to be made which make it easier for donors to give to charity through an intermediary, such as an independent fund raiser. The regulations should ease the administrative burden on intermediaries by relieving them of the need to receive a Gift Aid declaration for each individual charity a donor gives to through them. The measure should similarly ease the process for donors giving to multiple charities via a single intermediary Budget Webinar March 2015 Page 7

8 1.17 Venture Capital Schemes: changes to scheme rules The government will, subject to and with effect from the date of State Aid clearance: require that all investments are made with the intention to grow and develop a business require that all investors are independent from the company at the time of the first share issue introduce new qualifying criteria to limit relief to companies where the first commercial sale took place within the previous 12 years; this rule will apply except where the total investment represents more than 50% of turnover averaged over the preceding 5 years cap the total investment a company may receive under the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) at 15 million, or 20 million for companies that meet certain conditions demonstrating that they are knowledge intensive increase the employee limit for knowledge intensive companies to 499 employees The government will, with effect from 6 April 2015, remove the requirement that 70% of Seed Enterprise Investment Scheme (SEIS) money must be spent before EIS of VCT funding can be raised (Finance Bill 2015) 1.18 Venture Capital Schemes excluded activities include renewable energy As announced in the December 2014 Autumn Statement a new measure in the draft Finance Bill excludes all types of renewable energy generation activities subsidised by the Government from the scope of the venture capital schemes the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). It makes provision for activities involving the generation of energy for which a Feed-in Tariff is receivable to be eligible or social investment tax relief (SITR), and provides a power to use secondary legislation to amend the activities that are not eligible for SITR. The legislation provides for different provisions to take effect at different times Social Investment Tax relief (SITR) - Enlarging the scheme The Government will seek EU approval to increase the investment limit to 5 million per annum per organisation up to a maximum of 15 million per organisation and to extend the relief to small-scale community farms and horticultural activities. The changes will come into effect on or after 6 April 2015, subject to State aid clearance. The Government will make special purpose vehicles for subcontracted and spot-purchase social impact bonds eligible for SITR, through secondary legislation in autumn The Government will set the rate of Income Tax relief for investment in Social Venture Capital Trusts (Social VCT) at 30%, subject to State Aid clearance. Investors will pay no tax on dividends received from a Social VCT or capital gains tax on disposals of shares in Social VCTs. Social VCTs will have the same excluded activities as the SITR. The Government will legislate for Social VCTs in a future Finance Bill. The Government will change the regulatory status of SITR funds so that they can be promoted on the same basis as EIS funds. (Future Finance Bill) 1.20 Increase in Remittance Basis User Charge The remittance basis is an alternative basis of taxation which applies to foreign income and capital gains. It is available to UK resident individuals who are not domiciled in the UK. Such individuals have the option of electing to be taxed on the remittance basis Budget Webinar March 2015 Page 8

9 Those who do so are liable to UK tax on all their income and capital gains which arise in the UK, but only liable to UK tax on their foreign income and capital gains to the extent that they are remitted to the UK. The remittance basis rules were revised in Finance Act 2008 to introduce an annual remittance basis charge of 30,000 for those who met what is now the 7-year residence test. Finance Act 2012 introduced a higher annual charge of 50,000 payable by individuals who met the 12-year residence test. The objective of the remittance basis charge is to ensure that non-domiciled but UK-resident individuals pay a fair tax contribution. The Government proposes to increase the charge for individuals who meet the 12-year residence test to 60,000 and introduce a new higher charge of 90,000 for individuals who meet the new 17-year residence test. In summary: UK resident 2014/ /16 in at least seven of the nine tax years immediately preceding the tax year in at least 12 of the 14 tax years immediately preceding the tax year in at least 17 of the 20 tax years immediately prior to the tax year 30,000 30,000 50,000 60,000 N/A 90,000 There will also be a consultation on requiring an election for the remittance basis, to be made for a three year minimum period Budget Webinar March 2015 Page 9

10 2. SAVINGS AND PENSION CHANGES 2.1 ISA and Junior ISA Changes 2015/16 The annual limit for savings in an ISA increases by 240 to 15,240 for 2015/16, remember that the 50% restriction on cash was removed with effect from 1 July For Junior ISAs the limit will increase by 80 to 4,080 the same as the Child Trust Fund subscription limit. A further change announced in Budget 2015 is that the 2015/16 tax year individuals will be able to take money out of their ISA and put it back in within the same year, without losing their ISA tax benefits as long as the repayment is made in the same financial year as the withdrawal. 2.2 New Help to Buy ISA These new accounts to help first time buyers save for a deposit to buy their first home will be available from Autumn First time buyers over 16 will be able to open these special ISAs, make an initial deposit of up to 1,000 and then save up to 200 a month, and the Government will boost it by 25%. That s a 50 bonus for every 200 saved, up to 3,000 in total topping up their 12,000 savings to 15, Transfer of ISAs on death of spouse For deaths on or after 3 December 2014 a surviving spouse or civil partner will be able to make a one-off contribution to an Individual Savings Account (ISA) of the value of their deceased spouse or partner s ISA in the estate. The legislation will take effect in 2015/16. There is also a proposal to extend the tax exemption on the ISA to the period of administration. 2.4 New 1,000 (or 500) Personal Savings Allowance from 2016 From April 2016, a tax-free allowance of 1,000 (or 500 for higher rate taxpayers) will be introduced for the interest that people earn on their savings. If they are a basic rate taxpayer and have a total income up to 42,700 a year, they will be eligible for the 1,000 tax-free savings allowance. With a current savings rate of say 2% this means that basic rate taxpayer would need to have over 50,000 on deposit before tax is due on the interest. If they are a higher rate taxpayer and earn between 42,701 and 150,000, they ll be eligible for a 500 tax-free savings allowance, but those with income in excess of 150,000 a year will be taxed in full on their interest income. It is proposed that from April 2016 banks and deposit takers will pay interest gross on deposits and only where their total interest exceeds 1,000 or 500 a year will the interest need to be reported on their tax return. 2.5 Bad Debt Relief for Losses on Peer to Peer loans As previously announced at Autumn Statement 2014, the Government will introduce a new tax relief to allow individuals lending through Peer to Peer (P2P) to offset any losses from loans which go bad against other P2P income. It will be effective from April 2016 and 2020 Budget Webinar March 2015 Page 10

11 through self-assessment will allow individuals to make a claim for relief on losses incurred from April (Future Finance Bill) The Government are also considering including certain P2P loans within the list of qualifying ISA investments. 2.6 Cashing in Your Pension Annuity The Government will bring in new legislation from 6 April 2016 to allow people who are already receiving income from an annuity to agree with their annuity provider to assign their annuity income to a third party in exchange for a lump sum or an alternative retirement product. Currently such action would give rise to a 55% charge, but this is to be abolished. This change will allow those who are already in receipt of a pension annuity to access the new flexible pension rules. 2.7 Inherited Pension Annuities From April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free where no payments have been made to the beneficiary before 6 April The tax rules will also be changed to allow joint life annuities to be paid to any beneficiary. Where the individual was over 75, the beneficiary will pay the marginal rate of Income Tax. (Finance Bill 2015) 2.8 Pension Lifetime Allowance to be Reduced to 1million From 6 April 2016 the pension fund lifetime allowance will be reduced from 1.25million to 1million. Transitional protection for pension rights already over 1million will be introduced alongside this reduction to ensure the change is not retrospective. The lifetime allowance will then be indexed annually in line with CPI from 6 April Budget Webinar March 2015 Page 11

12 3. CAPITAL TAX CHANGES 3.1 CGT Charge on Non-UK Residents Disposing of UK Residential Property Following consultation in summer 2014 the Government has confirmed that from 6 April 2015 non-uk resident individuals, trusts, personal representatives and narrowly controlled (close) companies will be subject to Capital Gains Tax (CGT) on gains accruing on the disposal of UK residential property on or after that date. Non-resident individuals will be subject to tax at the same rates as UK taxpayers (28% or 18% on gains above the annual exempt amount). Non-resident companies will be subject to tax at the same rates as UK corporates (20%) and will have access to an indexation allowance. Full details were set out in the response document Implementing a capital gains tax charge on non-residents summary of responses, published on 27 November In order to calculate the amount chargeable the gain will be computed on a time apportioned basis with only the post 6 April 2015 portion being chargeable. It will also be possible to rebase the value of the property to its value at 6 April The new legislation will be included in Finance Bill CGT Private residence relief 90 day test In order to limit the availability of private residence relief on the disposal of residential property by non-residents, from 6 April 2015 an individual will only be able to claim private residence relief on a property situated in a territory in which they are not resident if they have spent at least 90 days in the property during the tax year concerned. Note that this change will affect UK residents who claim PPR against a foreign property, as well as non-residents disposing of UK residential property. 3.3 Entrepreneurs relief restricted on incorporation Entrepreneurs relief will no longer be available on disposals of goodwill to a company related to the person(s) making the disposal. This, together with the denial of corporation tax relief for amortisation of the goodwill makes incorporation a much less attractive option for businesses and removes a major incentive to incorporate. The change applies to disposals on or after 3 December Example 1 Mr Jones Pre 3 December 2014 incorporation: Mr Jones set up his business in He made 100,000 profits each year and had his goodwill is valued at 1m. On 30 November 2014, he transferred that goodwill without seeking rollover relief for 1m to Jones Ltd, a company he owns. He paid 100,000 capital gains tax after entrepreneurs' relief on 31 January He can draw 1m tax free from Jones Ltd as the company makes profits in future years Budget Webinar March 2015 Page 12

13 If Jones Ltd continued to make 100,000 profits a year, but amortised the goodwill at 10%, the company would make nil taxable profits. That saves 20,000 corporation tax and could allow Mr Jones to draw the full 100,000. Over ten years the tax would be the 100,000 capital gains tax paid on 1m profits and there is 900,000 net cash in the hands of Mr Jones. Mr Jones Post 3 December 2014 incorporation: Suppose Mr Jones carried out the same plan on 6 December The capital gains tax on 31 January 2016 will be 280,000 on the 1m gain without entrepreneurs' relief. Jones Ltd, not able to claim tax relief on amortising the purchased goodwill, will pay 20,000 corporation tax each year so Mr Jones can draw 80,000. After ten years, the aggregate tax will be 480,000 ( 280,000 capital gains tax plus 200,000 corporation tax). Mr Jones now has 520,000 net cash after ten years (his 800,000 draw less the 280,000 CGT). The company still owes him 200,000, which would take 30 more months to repay so he eventually has 720,000 cash but the company has paid a further 50,000 corporation tax. Over the 12.5 years the total tax paid is 530,000. Also, he would not be able to fund most of his 280,000 capital gains tax by the cash releasable before 31 January Alternative CGT reliefs on incorporation It is still possible to use s162 TCGA 1992 rollover relief (or s165 gift relief) to avoid an immediate capital gain on incorporation. The consideration for a s162 based incorporation has to involve shares issued, so there cannot be a simple cash-free drawing as with an amount outstanding on the sale of the goodwill. Relief under s162 TCGA is automatic if the conditions for the relief are satisfied and an election under s162a is required to disapply the application. The relief requires all of the assets (with the exception of cash) to be transferred to the company with the consideration being wholly or partly in shares. For investment businesses, such as those with property rental portfolios, the position on incorporation generally remains unaltered by the autumn statement changes. They would previously have had a 28% capital gains tax charge on incorporation of the investment properties unless s 162 rollover relief was obtained and the usual absence of goodwill with such businesses normally renders the intangible assets rules irrelevant. It is not possible to prevent a tax charge on incorporation by selling for nil consideration (assuming s 165 did not operate). This is because s17 TCGA 1992 imposes a market value on the sale of chargeable assets where there is not a bargain at arm's length. Another strategy would be to allocate more of the value of the business to properties that are transferred as a part of an incorporation rather than to goodwill. The latter will require expert valuation support and the stamp duty land tax position would need to be considered because market value applies the deemed consideration for SDLT purposes on incorporation Budget Webinar March 2015 Page 13

14 3.4 Entrepreneurs relief restriction on Associated Disposals It was announced in the Budget that from 18 March 2015 CGT entrepreneurs relief will be restricted on certain associated disposals. The 10% CGT rate will no longer be available on the disposal of personal assets used in a business carried on by a company or a partnership unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company or a 5% share in the partnership assets. Example 2 (based on previous HMRC guidance) Mr and Mrs Bloggs own 100 per cent of the shares in Bloggs Trading Ltd. It carries on a manufacturing and retail trade. But the premises from which the company trades are owned personally by them, not by the company. They decide to retire and in 2015 they close the business but sell their shares in the company to a competitor who wants to acquire the intellectual property. Having stood empty for a while it is not until later in 2015 that they sell the premises to a local developer to convert into apartments. Gains arise upon both transactions. As long as all the necessary conditions for Entrepreneurs Relief are met by both Mr and Mrs Bloggs in respect of the disposal of their shares their gains on the disposal of the premises will also attract relief as that disposal is an associated disposal. If Mr Bloggs qualified for Entrepreneurs Relief in respect of his disposal of shares, but Mrs Bloggs did not, only Mr Bloggs s gain on disposal of the premises would qualify as an associated disposal. Thus, provided they each disposed of at least a 5% shareholding in the company they would both qualify for entrepreneurs relief in respect of the disposal of the premises. There is a further complication where rent is charged to the company for the use of the premises. Since 6 April 2008 where market rent is charged to the company then there would be no entrepreneurs relief in respect of that period. Where less than full market rent is charged the quantum of the relief is computed on a just and reasonable basis, 3.5 Entrepreneurs relief: contrived structures It was also announced in Budget 2015 that CGT entrepreneurs relief (ER) will be denied on the disposal of shares in a company that is not a trading company in its own right. 3.6 Entrepreneurs relief on reinvested gains The mechanism of entrepreneurs relief (ER) was amended in As a result of those changes it was no longer possible for an individual to claim ER on a gain and also to defer the accrual of the same gain if they reinvested the proceeds of their disposal in enterprise investment scheme (EIS) shares. Nor could ER be claimed when the gain was eventually treated as accruing (for instance when the EIS shares were sold). When social investment tax relief (SITR) was introduced in 2013 the same constraint applied. This has tended to deter investment in EIS shares or in social enterprises in some circumstances. By allowing potential investors to benefit both from the deferral of gains and from ER on those same gains this measure will encourage more investment in business via EIS and 2020 Budget Webinar March 2015 Page 14

15 SITR. It thereby supports the growth of social enterprises, start-up companies and small and medium-sized businesses carried on by companies. The proposed change is that from 3 December 2014 ER may be claimed on deferred gains when they are charged to tax, subject to the conditions for relief which applied when they were first deferred. Example 3 On Mr Smith sold his trading business for 1 million resulting in a capital gain of 400,000 On He invests 400,000 in a qualifying EIS company and claims to defer the gain On He sells the EIS shares for 500,000 The deferred gain crystallises on and ER can be claimed against the deferred gain = 40,000 CGT Assuming he is an unconnected investor the gain on the EIS shares themselves would be exempt as they have been held for 3 years. 3.7 CGT: Wasting Assets used in a trade It was announced in the Budget that the Government will clarify that the CGT exemption for wasting assets only applies if the person selling the asset has used it in their own business. This follows on from the 2014 Court of Appeal case involving the Executors of Lord Howard where the painting was not owned by the business running Castle Howard. These changes have effect from 1 April 2015 for Corporation Tax on chargeable gains, and 6 April 2015 for CGT. (Finance Bill 2015) 3.8 IHT Charges on Relevant Property Trusts The value of property held in most forms of trust is subject to IHT at 6% every ten years on the amount above the nil rate band (currently 325,000); and a proportionate exit charge when the value of the property leaves the trust between ten-year anniversaries. There have been a series of consultations into simplifying the calculation of these charges and the new regime is now being legislated. Where more than one trust is settled on the same day by the same person, they are related settlements and the value comprised in them is aggregated when determining the rate at which tax is charged. Historically that rule could be avoided by creating multiple settlements on different days. The purpose of these proposed amendments is to prevent the leakage of IHT through the use of multiple trusts. The proposed changes also simplify some of the rules for calculating the rate of tax for the purposes of the ten year anniversary and exit charges. Note that the proposal to limit trusts created by the same settlor to a single nil rate band (currently 325,000) and require the settlor to nominate what proportion would be available to each trust has been dropped. The changes will have effect in relation to chargeable events on or after 6 April Budget Webinar March 2015 Page 15

16 3.9 IHT Interest in Possession Trusts and Successions It is proposed to amend the Inheritance tax (IHT) legislation relating to settlements created by individuals before March 2006 giving themselves an interest in possession or to their spouse, widow, civil partner or surviving civil partner. Where interest in possession appears in s80 of IHTA, it is replaced with a qualifying interest in possession which means that where one party to a couple succeeds to a life interest to which their spouse or civil partner was previously entitled to during the latter s lifetime, section 80 will apply at that time (because neither spouse would then have a qualifying interest in possession). The amendment will mean that settled property is relevant property once spouse2 takes their life interest IHT Will Trusts dissolved within 3 months of death It is proposed to amend the inheritance tax (IHT) legislation relating to property that is settled by will. It will provide that where property is left in trust in which no interest in possession subsists and an appointment is made within 3 months of the date of death of that property to the spouse or civil partner of the testator, that appointment can be read back into the will and the IHT spouse exemption under section 18 IHTA (transfers between spouses or civil partners) will apply. The amendment applies to cases where the testator s death occurs on or after 10 December IHT Exemption for medals and other awards A clause in the draft Finance Bill extends the existing IHT exemption for medals and other decorations that are awarded for valour or gallantry. From 3 December 2014 it will apply to all decorations and medals awarded to the armed services or emergency services personnel, and to awards made by the Crown for achievements and service in public life IHT Exemption for emergency services personnel and aid workers Legislation will also be introduced to extend the existing IHT exemption for members of the armed forces whose death is caused or hastened by injury while on active service to members of the emergency services or humanitarian aid workers responding to emergency circumstances. It will have effect for deaths on or after 19 March Review of the use of Deeds of Variation in Estate Planning It was announced in the Budget that the Government will review the use of deeds of variation for tax purposes. This follows various reports in the Press that the Leader of the Labour Party had used this standard estate planning device to mitigate inheritance tax on the transfer of assets on the death of his father Budget Webinar March 2015 Page 16

17 4. CORPORATE AND BUSINESS TAX CHANGES 4.1 Corporation Tax Rates As previously announced there will be a single 20% rate of corporation tax regardless of the level of the company s profits from 1 April 2015 onwards. Although a 20% rate will generally apply to corporate profits from 1 April 2015 a new diverted profits tax charge at 25% will apply to profits that are artificially shifted from the UK to an entity in a low tax country. Legislation will also be introduced that gives the UK the power to implement the OECD model for country-by-country reporting. The new rules will require multinational enterprises to provide high level information to HMRC on their global allocation of profits and taxes paid, as well as indicators of economic activity in a country. This is part of a number of measures to counter tax avoidance by multi-national companies. It will be interesting to see if the new measures will bring in additional tax revenue from such companies. 4.2 What About the Annual Investment Allowance? In Budget 2014 the Chancellor announced that the allowance would be increased to 500,000 per annum for expenditure incurred between 1 April 2014 and 31 December 2015 (from 6 April 2014 for unincorporated businesses). This generous allowance was due to fall to just 25,000 from 1 January 2016 and the Chancellor acknowledged in Budget 2015 that such a level would be too low. However, he went on to say that the new limit will not be announced until later this year in the Autumn Statement, much to the annoyance of business owners who like to have a bit more notice so that they can plan their capital expenditure! 4.3 Enhanced Capital allowances The 100% ECA (enhanced capital allowances) applying to zero emissions goods vehicles, low emission cars and refuelling equipment are all due to end on 31 March 2015 for corporate taxes and 5 April 2015 for income taxes. Finance Bill 2015 will extend the period for both to 31 March and 5 April 2018 respectively, with some small additional limitations. 4.4 Changes to R & D tax relief The rates of tax relief on research and development expenditure by companies will both increase from 1 April The new rates will be: Small and medium sized companies (SMEs) total rate of relief increases from 225% to 230%. Large companies above the line (ATL) relief increases from 10% to 11%. Note that this relief also applies to SMEs on subcontracted and grant aided R & D projects. Furthermore, the draft Finance Bill restricts the expenditure in respect of consumable items that qualifies for research and development ( R&D ) tax credits. As laid out in guidelines 2020 Budget Webinar March 2015 Page 17

18 issued by the Department for Business, Innovation and Skills ( BIS ), production costs are not expenditure on R&D. In practice, where R&D activity takes place in conjunction with commercial production the attribution of the cost of consumable items, as previously defined, can be uncertain. This has led to claims for relief for costs in respect of materials and other items used in the production of goods effectively indistinguishable from normal commercial products. The proposed new measure makes the relief more targeted on innovative research and development activities, rather than activities related to production. This restriction will apply to expenditure incurred on or after 1 April Following a consultation on improving access to R&D tax credits for smaller companies, the Government will introduce voluntary advanced assurances lasting 3 years for smaller businesses making a first claim from autumn 2015 and reduce the time taken to process a claim from The government will produce new standalone guidance aimed specifically at smaller companies, backed by a 2-year publicity strategy to raise awareness of R&D tax credits. HMRC will publish a document in the summer setting out a roadmap for further improvements to the scheme over the next 2 years. 4.5 Restricting Corporation Tax Relief for Goodwill on Incorporation As announced at Autumn Statement 2014, the Government will restrict the Corporation Tax relief a company may obtain for the acquisition of the reputation and customer relationships associated with a business ( goodwill ), including customer information, when the business is acquired from a related individual or partnership. This will affect acquisitions on or after 3 December (Finance Bill 2015) 4.6 Film and TV Production tax relief extended to children s programmes The Government will increase the rate of film tax relief to 25% for all qualifying expenditure, subject to state aid clearance, from 1 April TV production tax relief was introduced by Finance Act Part 15A provides the rules for claiming tax credits on qualifying expenditure for high-end television or animation productions. This tax relief allows qualifying companies engaged in the production of animation, high-end television, and now children s television, intended for release to the general public to claim an additional deduction in computing their taxable profits and where that additional deduction results in a loss, to surrender that loss for a payable tax credit. 4.7 Flood defence contributions Contributions by companies, sole traders and partnerships to partnership funding schemes for flood defences will be an allowable deduction in arriving at the trading profits of the business for both income tax and corporation tax purposes. The relief will apply to contributions made on or after 1 January 2015, and will apply both to monetary contributions and the cost of the contribution of services such as labour costs. 4.8 Changes to Loan Relationships and Derivatives A proposed new Clause and Schedule are designed to implement a package of proposals to modernise the corporation tax rules governing the taxation of corporate debt ('loan relationships') and derivative contracts. The main areas of change are: clarifying the relationship between tax and accounting; 2020 Budget Webinar March 2015 Page 18

19 basing taxable loan relationship profits on accounting profit and loss entries; a new corporate rescue rule to provide tax relief where loans are released or modified in cases of debtor companies in financial distress; new regime-wide anti-avoidance rules for both loan relationships and derivative contracts. The background to these changes is that the regimes for both loan relationships and derivative contracts have developed significantly over time, evolving in response to emerging avoidance risks and to changes in commercial and accounting practice. Accountancy standards, on which the tax rules are based, have not remained static. Standard setters for both UK GAAP and International Financial Reporting Standards (IFRS) have made significant changes to the accounting treatment of financial instruments. New UK GAAP and IFRS standards have recently been issued (including IFRS 9 in 2014) which will be adopted over coming years, and which should cement the accounting treatment of financial instruments for some time to come. Another reason for the change is that historically the complexity in the loan relationships and derivative contracts regimes has provided opportunities for attempts to avoid tax. Reactive measures to counter this avoidance have contributed to further complexity and to some loss of structural clarity in the regime, tending to leave further potential loopholes. This growing complexity has increased compliance costs for some businesses and has made it difficult in some cases for compliant groups and companies to be certain about tax treatments. The changes will generally take effect for accounting periods commencing on or after 1 January However, the corporate rescue rule will apply from 1 January 2015, and the new regime anti-avoidance rules will apply from 1 April Proposed new 25% Diverted Profits Tax A tax (to be known as diverted profits tax) is to be charged on taxable diverted profits arising to a company. Taxable diverted profits arise to a company only in the following circumstances: avoidance of a UK taxable presence Involvement of entities or transactions lacking economic substance The diverted profits tax will have effect for accounting periods starting on or after 1 April There are transitional arrangements for accounting periods that start before but end on or after 1 April The subsection provides for the parts of the accounting period that fall before 1 April 2015 and the parts that fall on or after that date to be treated as separate accounting periods and for the profits of the whole accounting period to be apportioned between them on a just and reasonable basis. A charge to diverted profits tax is imposed for an accounting period by a designated HMRC officer issuing to the company a charging notice. The amount of tax charged by a notice is the sum of: a) 25% of the amount of taxable diverted profits specified in the notice, and b) the interest (if any) on the amount determined The draft legislation provides for an exemption from diverted profits tax in relation to section 2 (avoidance of taxable UK presence) for an accounting period if the total sales revenues 2020 Budget Webinar March 2015 Page 19

20 from all supplies of goods and services made by it or connected companies to customers in the UK in the accounting period, does not exceed 10,000, Group relief changes link companies A draft clause in Finance Bill 2015 removes the requirements relating to the location of the link company in a consortium claim to group relief. For group relief to flow between a company owned by a consortium and a company in the same group as a member of the consortium, the current rules require that the link company be in the UK or the EEA, and where in the EEA but not the UK all intermediate companies between the claimant and surrendering companies must also be in the EEA. This creates a difference of treatment between UK link companies and those in the EEA or in other jurisdictions. This measure seeks to remove that difference in treatment and simplify claims to group relief between a consortium and a group owning a share in that consortium by omitting the additional conditions where the link company is based in a jurisdiction other than the UK. The changes will apply to accounting periods commencing on or after 10 December Group relief Accelerated Payment Notices The Accelerated Payment Legislation was introduced in Part 4 of FA It permits HMRC to issue an Accelerated Payment Notice (APN) or Partner Payment Notice (PPN) requiring payment up front of the tax in dispute in certain specified circumstances. Where a company has losses or certain other amounts that derive from arrangements that meet the criteria, an APN would not require it to pay over any amounts at that point because it may have no actual tax to pay when the dispute is resolved. However, it could surrender some or all of those amounts as group relief so that the cash timing benefit passes to other companies in the group. This change therefore prevents those amounts being surrendered and claimed while the dispute is in progress, so that the relevant cash amount can be held by the Exchequer during the dispute. Where a company is a member of a partnership that generates a loss through arrangements that meet the criteria, the issue of a PPN will prevent that company surrendering its share of those losses to another company in its group. This has no effect on other members of the partnership who may be claiming or using the losses in different ways. The final amount of any loss that can be surrendered will be determined through the partnership return, and any revision will then flow through to the partners in the normal way. When that happens HMRC will revise any PPN accordingly Budget Webinar March 2015 Page 20