Autumn Statement 2014 Tax highlights

Transcription

1 Autumn Statement 2014 Tax highlights Given the Government s commitment to consultation, the Chancellor s Autumn Statement contained relatively few surprises. However, those that it did contain may have far-reaching effects. The UK s continued commitment to low taxes, but with those low taxes being paid, meant that further tax avoidance measures were expected. The consultation on steps to implement the OECD s Base Erosion and Profit Shifting (BEPS) proposals to address hybrid mismatches and the commitment to introduce legislation to implement countryby-country reporting are consistent with the UK s commitment to the BEPS project. The proposal for a new diverted profits tax at 25% from April 2015 applying to profits generated by multinationals from economic activity in the UK but artificially shifted out of the UK - is a leading step by the UK. Depending on how it is introduced, it may provide a template that other jurisdictions will follow. We will have to wait until 10 December for the details of the proposal. The restriction, from April 2015, on the use of carried-forward losses by UK banks had not been trailed beforehand. This measure, together with a proposal to delay relief on bad debts, is expected to generate almost 4bn more in tax over the next five years. The proportionate restriction of losses is a novel step for the UK and reflects the idea that the banks received public support in the past and should now support the recovery. The changes to stamp duty land tax on residential property are a reforming measure rather than anti-avoidance and indeed represent a net tax cut. However, when taken together with the proposals previously announced, to introduce a capital gains tax charge on non-residents disposing of residential property, it remains to be seen what the impact will be on the UK housing market. Similarly, the effect on attracting talent to the UK of the changes to the remittance based charge for non-uk domiciled individuals (both in terms of amount and in terms of the application of the charge) is uncertain. The tax announcements in the Autumn Statement were also intended to support aspiration. The ability to pass on pension assets on death without a punitive charge was confirmed along with further relaxations and a new exception for ISA savings. The Autumn Statement seeks to encourage the aspiration to work by exempting apprenticeships for the under 25s from national insurance.

2 There were no specific tax measures to promote growth in the English regions but there is a commitment to a northern powerhouse through investment in infrastructure and research. The Government is committed to ensuring the people of England, Scotland, Wales and Northern Ireland have a bigger say over their affairs and devolution of taxraising powers plays a part in this. Consistent with the Government s desire to encourage innovation, the Autumn Statement included an increase in the rate of R&D credits. The Government had already confirmed, on 2 December, its continued commitment to a patent box regime, albeit one that will be amended in line with the UK/Germany proposal of 11 November 2014 to take account of concerns expressed by the OECD's Forum on Harmful Tax Practices and the EU Code of Conduct group. Corporate taxes Base erosion and profit shifting As announced at the Conservative party conference a diverted profits tax is to be introduced to address certain base erosion and profit shifting. This will apply where a company conducts significant activity in the UK but shifts profit overseas through aggressive arrangements. The new tax is intended to apply from 1 April 2015 at a penalty rate of 25% on profits diverted. No further details were provided, although draft legislation is expected on 10 December. Legislation is also expected to be introduced to implement the OECD recommendations on country-by-country reporting. A consultation document was issued in relation to the implementation of OECD recommendations for addressing hybrid mismatch arrangements. The proposals largely follow the OECD recommendations and consider further those areas where it was identified by the OECD that further work is required eg, regulatory capital. The new rules are proposed to apply to payments made from 1 January 2017 but no grandfathering provisions are proposed. The consultation document welcomes the OECD suggestion that the tie-breaker provision in treaties should be on the basis of competent authority agreement rather than effective management as is found in most UK treaties. If implemented, this is likely to result in considerable uncertainty and an increased compliance burden. Devolution It was announced that corporation tax rate-setting powers will be devolved to Northern Ireland, provided the Northern Ireland Executive is able to manage the financial implications. The Government has confirmed that it recognises the arguments in favour of devolving such powers, notably the fact that Northern Ireland shares a land border with the relatively low corporation tax environment of Ireland. Subject to satisfactory progress being made on a number of issues in current cross-party talks, the Government intends to introduce the relevant legislation during the life of the current Parliament. Banks Effective from 1 April 2015, the utilisation by banks of losses brought forward at that date will be restricted to 50% of profits. Separate restrictions will apply to trading and non-trading profits and targeted anti-avoidance provisions will aim to counter arrangements designed to circumvent the restrictions. A restriction on bad debt relief was also announced, which may include a delay in the timing of relief, but no further detail was provided. A new targeted exemption from withholding tax was also announced in relation to interest on private placements. Innovation No new announcement was made in relation to the patent box, though an update had already been published on 2 December on the likely changes that will be required to the regime following the review of preferential intellectual property tax regimes under the OECD BEPS project. An increase was announced to the rate of the above the line R&D credit from 10% to 11%, and an increase in the rate of the SME scheme from 225% to 230%, both with effect from 1 April 2015, though qualifying expenditure for R&D tax credits will be restricted to exclude the costs of materials incorporated in products that are sold. Also the application process for smaller companies investing in R&D will be streamlined. Late interest rules and loan relationships The rules requiring interest payable on loans to be relieved on a paid basis will be repealed with effect from 3 December, as will parallel rules applying to deeply discounted securities. The scope of these rules are currently very limited, applying generally 2

3 only to interest payable to connected tax haven companies. However, HMRC had become aware that some companies were taking advantage of these rules to enable losses effectively incurred in an earlier period to be surrendered by way of group relief. This change was proposed as part of the Government s response to the consultation on modernisation of the taxation of corporate debt and derivative contracts, announced at Budget Other draft legislation for Finance Bill 2015 arising from the wider consultation will be published separately for comment on 10 December 2014, including a regime-wide anti-avoidance rule for loan relationships. Creative reliefs Further extensions are being proposed to the various creative reliefs that have been implemented in recent years, including a new relief for the production of children s television programmes from 1 April 2015, a consultation on the introduction of an orchestra corporation tax relief in 2016, and possible amendments to high-end TV relief to bring it more in line with film tax relief. Oil and gas It was announced that the rate of supplementary charge will be reduced from 32% to 30% with effect from 1 January The introduction of the previously announced ultra high pressure high temperature cluster allowance was also confirmed, which will give an exemption from supplementary charge equal to 62.5% of qualifying capital expenditure. Finally, the limit on claims for ring fence expenditure supplement is extended from six periods to ten periods though the additional four claims will apply only to losses incurred after five December A fuller response to the representations received as part of the Oil and Gas Fiscal Review is intended to be published on 4 December 2014, and a further programme of evidence gathering and discussion is expected. Following three successive increases in taxation between 2002 and 2011 we hope the announced reduction marks a move towards a lower-tax regime that is better tailored to maximising the wider economic contribution from the UK Continental Shelf. Personal taxes Personal allowance and higher rate thresholds For 2015/16 the personal allowance will increase by a further 100 over previously announced levels to 10,600. For the first time in recent years, the full increase in personal allowance will be passed on to higher rate taxpayers, with an increase in the higher rate threshold from 41,860 in 2014/15 to 42,385 in 2015/16. National Insurance upper earnings and upper profits limits will also increase to stay in line with the higher rate threshold. The Chancellor has stated that the changes are part of a goal to increase the personal allowance to 12,500 (in line with the national minimum wage) and to increase the higher rate threshold to 50,000 by the end of the decade. All other rates and thresholds will remain the same. Personal allowance for non-residents At Budget 2014, the Government launched a consultation on the potential restriction of the income tax personal allowance for non-residents. This has now been put on hold pending a more detailed consultation with stakeholders, and changes are unlikely to come into effect before April Remittance basis charge It was announced that, with effect from 6 April 2015, the remittance basis charge for non-uk domiciled individuals claiming the remittance basis will increase from 50,000 to 60,000 for those who have been resident for 12 out of the last 14 years. In addition, for those who have been UK resident for 17 out of the last 20 years, a new higher charge of 90,000 will apply. The 30,000 charge for those who have been resident for seven out of the previous nine tax years will remain unchanged. The Government will also consult on whether to make the election apply for a minimum of three years. Long term residents of the UK may wish to consider whether a claim for the remittance basis will still be economical in the light of the increased charges. Pensions There were a number of announcements in relation to the new pension flexibility regime effective from 6 April 2015 including confirmation of the abolition of the 55% special charge on death. As previously 3

4 announced, the Government will continue to allow transfers from funded defined benefit schemes to defined contribution schemes in the context of the new pensions environment. Social investment tax relief and venture capital trusts scheme (VCTs) The investment limit for social investment tax relief (SITR) will increase to 5mn per annum per organisation and up to a total maximum of 15mn per organisation. The relief will also be extended to small-scale community farms and horticultural activities. The changes will come into effect on or after 6 April 2015, subject to EU State Aid clearance. Special purpose vehicles for subcontracted and spot-purchase social impact bonds should also be eligible for SITR through secondary legislation due in autumn The Government will be consulting in early 2015 on the possible introduction of a social venture capital trust. Where community energy generation undertaken by qualifying organisations becomes eligible for SITR, it will cease to be eligible for the enterprise investment scheme (EIS), the seed enterprise investment scheme (SEIS) and VCTs. All other companies benefiting substantially from subsidies for the generation of renewable energy will be excluded from also benefiting from the EIS, the SEIS and VCTs with effect from 6 April The Government will also introduce a new digital process for investors and companies qualifying for the tax-advantaged venture capital schemes (EIS, SEIS and SITR) in Inheritance tax The introduction of a single settlement nil-rate band for new trusts will not now go ahead. Instead, the Government will introduce new rules to target avoidance through the use of multiple trusts, as well as making changes to the way in which inheritance tax charges are calculated in trusts. As announced at Budget 2014, for deaths on or after 19 March 2014, the existing inheritance tax exemption for members of the armed forces whose death is caused or hastened by injury while on active service will be extended to members of the emergency services. The Chancellor has now announced that the exemption will also extend to humanitarian aid workers responding to emergency circumstances. Entrepreneurs Relief (ER) and reinvestment relief Where gains on assets which are eligible for ER are deferred through reinvestment into investments which qualify for the EIS or SITR, the gains will remain eligible for ER when eventually realised. This will benefit qualifying gains on disposals that would be eligible for ER but are deferred into EIS or SITR on or after 3 December Anti-avoidance The Government intends to legislate to eliminate the tax advantage provided by special purpose share schemes, also known as B share schemes and from 6 April 2015 returns to shareholders will be treated in the same way as dividend income, where an individual shareholder is offered this choice. Additional anti-avoidance measures were announced to deny the benefits of ER on certain business incorporations involving the transfer of goodwill and certain other intangibles, and also to restrict the availability of relief under Part 8 CTA 2009 on the acquisition. An announcement was also made that measures will be introduced to counter arrangements that seek to exploit miscellaneous loss relief. Other measures The ISA limit will increase to 15,240 from 15,000 with effect from 6 April 2014 and from the same date individuals will inherit their spouse s ISA tax advantages on death. The Government will consult on whether to allow crowd-funded debtbased securities into ISAs and on how this could be implemented. The Chancellor has confirmed that additional safeguards will be introduced for those affected by the direct recovery of debt rules which, in certain circumstances, will allow HMRC to collect debts directly from individuals bank and building society accounts. Following a consultation, the Government has confirmed that no changes will be made to the tax charge on loans from close companies. 4

5 Employment Taxes National insurance measures The Government will abolish employer national insurance contributions (NICs) for apprentices under the age of 25 up to the upper earnings limit which is 42,285 a year ( 813 per week) in 2015/16. This will come into effect from 6 April 2016 and follows similar abolition for any employees under the age of 21 which will be effective from 6 April In addition, the Government will extend the annual 2,000 employment allowance for employers NICs to care and support workers with effect from 6 April Employee ownership Following consultation launched after Budget 2014, the Government has decided not to proceed with changes that would have introduced a concept of a marketable security in relation to the taxation of employee shares. In addition, and again following relevant consultation, the Government has decided not to proceed with a new employee shareholding vehicle. Employee benefits and expenses The Government will now proceed with plans to simplify the administration of employee benefits and expenses which follows a number of related consultations issued over the summer. From 6 April 2015, a statutory exemption will be introduced for trivial benefits in kind costing less than 50 and from 6 April 2016 the 8,500 benefits in kind threshold for lower paid employment (and form P9D) will also be abolished. A statutory framework for voluntary payrolling will be introduced together with the exemption of certain reimbursed expenses. As expected, the Government intends to deny tax and NIC relief on reimbursed business expenses paid in conjunction with a salary sacrifice scheme, and it appears that this will be implemented with effect from 6 April The wider review of the rules for tax relief on travel and subsistence payments announced at Budget 2014 will continue, and the Construction Industry Scheme will see a number of improvements to reduce the administrative burden. Anti-avoidance A review has been announced of the increasing use of overarching contracts of employment used by intermediaries such as umbrella companies, to counter the perceived use of such arrangements to enable workers to obtain tax relief for home to work travel which would not otherwise be available. A discussion paper will be issued in due course to consider possible future legislation after Budget The Government intends to introduce provisions to stop investment fund managers from disguising guaranteed fee income as capital gains in order to avoid income tax. Minor amendments will be made to the employment intermediaries legislation to correct the penalty regime for late filing or non-submission of quarterly returns, effective from 6 April Stamp taxes Reform of stamp duty land tax (SDLT) The most significant stamp tax announcement is the proposed replacement of the current slab system for the transfer of residential property with a progressive rate SDLT regime, to apply from midnight on 3 December The following rates will apply: Purchase price band Up to 125,000 Rate within band nil Over 125,000, up to 250,000 2% Over 250,000, up to 925,000 5% Over 925,000, up to 1,500,000 10% Over 1,500,000 12% For any properties where exchange has taken place but completion not occurred before 4 December 2014, the taxpayer will be able to choose which system of SDLT to apply. The new rules will apply to transactions in Scotland until the Scottish land and buildings transfer tax (LBTT) comes into force on 1 April This move by the Government to a progressive rate of tax is likely to have a significant smoothing effect on existing price distortions in the housing market around the existing thresholds, though purchasers of homes at the higher end of the market are likely to be subject to significantly increased SDLT liabilities. It is also interesting that the proposed rates mean that the introduction of LBTT on 1 April 2015 is likely to result in a significant number of purchasers 5

6 of Scottish homes paying more LBTT than they would under the new SDLT system. Annual tax on enveloped dwellings (ATED) ATED was introduced in April 2013 and is an annual tax on UK residential property owned by nonnatural persons (mainly companies), subject to numerous reliefs. The charge has been increasing annually in line with inflation, but the Chancellor has announced that, from 1 April 2015, for properties valued above 2mn, the charge will increase by a further 50% on top of this inflationary rise. This will mean an increase from 15,400 in 2014/15 to 23,350 in 2015/16 for properties valued between 2mn and 5mn, and an increase from 143,750 to 218,200 for properties valued above 20mn. The Government will also be introducing changes to the filing obligations and information requirements for properties which are eligible for a relief with effect from April Stamp duty on takeovers Amendments will be made to the Companies Act 2006 in early 2015 to prevent stamp duty being avoided in a takeover situation. Where a company is acquiring shares of another company this is frequently done under a court sanctioned Scheme of Arrangement. This typically involves a reduction/cancellation of the shares in the target which results in no stamp duty or stamp duty reserve tax arising. The proposed changes would require a company in such a situation to use alternative provisions of the Companies Act which would result in a stamp duty liability of 0.5%. By not announcing an effective commencement date the proposals may create uncertainty for shareholders as a Scheme of Arrangement can be a lengthy process and there is a risk of legislation change between shareholder documents being produced and the Scheme of Arrangement becoming effective. Other announcements The Government has announced that it intends, subject to the resolution of potential avoidance issues, to introduce a seeding relief for property authorised investment funds and co-ownership authorised contractual schemes (CoACSs). There will also be changes to the stamp duty land tax (SDLT) treatment of CoACSs investing in property so that SDLT does not arise on the redemption, issue or transfer of units in the CoACS. The legislation is expected in Finance Bill Also announced is a limited extension to multiple dwelling relief, and a change to the definition of financial institution to include all persons authorised to provide home purchase plans, both of which would be effective from Royal Assent of Finance Bill Other property taxes Business rates A number of announcements were made in connection with business rates, including extending the doubling of small business rate relief to April 2016, extending the 2% cap on the RPI increase in the business rates multiplier to April 2016, and an increase in the business rates discount for shops, pubs, cafes and restaurants with a rateable value of 50,000 or below from 1,000 to 1,500 in 2015/16. The Government also announced it will carry out a fiscally neutral review of the future structure of business rates with the aim of reporting back by Budget Indirect taxes VAT As previously announced, from 1 April 2015, businesses will be required to account for VAT on the full consideration actually received when prompt payment discounts are offered. For business-to-consumer supplies of telecoms and broadcasting services, these rules came into force on 1 May From April 2015, UK search and rescue and air ambulance charities and hospice charities will be eligible to claim refunds of VAT they have paid on purchases of goods and services for their nonbusiness activities. Air passenger duty (APD) From 1 May 2015, children under 12 will be exempt from the reduced rate of APD (applicable to the lowest class of travel). From 1 March 2016, this exemption will be extended to children under 16. Following a review of how to improve tax transparency in ticket prices, the Government will consult on an amendment to the Air Services 6

7 (Pricing) Regulations to require the separate display of APD. Landfill tax From 1 April 2015, the Government will introduce a loss on ignition testing regime on fines produced from the processing of waste at mechanical treatment plants. Only qualifying fines below a 10% threshold will be considered eligible for the lower rate of landfill tax, however, there will be a twelvemonth transitional period during which the threshold will be 15%. Other indirect taxes In relation to aggregates levy, the Government will introduce an 80% levy credit for aggregate commercially exploited in Northern Ireland between 1 April 2004 and 30 November 2010 following its importation from another EU Member State. The Government will also consult on the introduction of a levy on tobacco manufacturers and importers. Tax administration and other antiavoidance measures Accelerated payment regime The accelerated payment regime is to be extended with effect from Royal Assent of Finance Bill 2015 to cover circumstances where a company with whom HMRC is in dispute has surrendered the advantage to another group company. The accelerated payment regime allows HMRC to demand upfront payment of disputed tax resulting from certain tax advantages which HMRC is contesting. However, where the advantage in question leads to a loss which the company surrenders to another group company as group relief, the current rules may not allow HMRC to demand full upfront payment of the disputed tax. This will be addressed by allowing HMRC to refuse a group relief surrender of the disputed amount. Closure rules The Government is to consult on a proposal to introduce a new power enabling HMRC to close one or more aspects of a tax enquiry while leaving other aspects open. Under the self-assessment regime for individuals, partnerships and companies, HMRC has powers to enquire into a tax return and, on completion of those enquiries, issue a closure notice. Where a number of aspects of a return are under enquiry, it is not currently possible for HMRC to close each aspect separately, which can delay resolution until all matters under enquiry are concluded. The proposed change should enable earlier resolution of disputed matters and provide additional opportunities for a taxpayer to apply to the Tribunal for closure of such matters. Civil penalties for offshore tax evasion Following on from the consultation document Tackling offshore tax evasion: Strengthening civil deterrents it has been announced that, with effect from April 2016, the offshore penalties regime will be extended to inheritance tax as well as income tax and capital gains tax, and that offshore penalties will be applied where the proceeds of domestic offences are hidden offshore. Further, the list of territories affected by offshore penalties will be updated to reflect developments in information exchange agreements. A new aggravated penalty of up to 50% will also be introduced with effect from Royal Assent, where the taxpayer moves assets offshore to take advantage of opaque jurisdictions. HMRC also announced it will review its current guidelines for offering financial incentives for information in relation to offshore tax evaders. Office of Tax Simplification (OTS) review of competitiveness of UK tax system The Government announced it would accept or further consider 51 of the 58 recommendations made by the OTS in its recent report on improving the competitiveness of UK tax administration. The OTS stated in its report that some of the recommendations being made were more fundamental policy recommendations rather than relating solely to tax administration. However, the announcement gives no detail as to which recommendations are being rejected. 7

8 EY ITEM Club comments While the focus on the run up to the Chancellor s Autumn Statement was on the weak spot on wages and tax revenues, his speech deftly moved the focus to the sweet spot on spending. In the short term, departmental underspending and changes to the national accounts allowed him to preserve the downward momentum in borrowing. This fell from 97.5bn in 2013/14 to the forecast 91.3bn this year. This forecast is nevertheless significantly higher than the 86.4bn envisaged by the OBR at Budget time. This reflects a revenue shortfall of 7.8bn, partly offset by a shortfall in spending of 2bn and a fiscal tightening of 0.9bn, mainly due to changes to stamp duty and business rates. The weak revenue picture continues into the next financial year, when receipts are projected 14.3bn below the Budget forecast. Average earnings are expected to pick up after that, increasing by 3.1% in 2016 and 3.9% in Nevertheless the weakness of average earnings this year depresses receipts from income tax and NICs over the whole period of the forecast. The OBR economic forecast was probably constructed before the latest worries about the global economy emerged. It shows world trade growing by a respectable 3.8% this year, rising to 5.1% in Growth in the Euro area is inevitably very slow, just 0.8% this year and 1.3% next year, slightly below the OBR Budget forecast. This is reflected in the outlook for exports which grow by 2.4% next year after falling by 1.6% this year. The volume of imports continues to outpace exports next year, but fortunately lower oil and other commodity prices help to ease the strain on the balance of payments. Next year s GDP growth rate falls back to 2.4%, in line with the October EY ITEM forecast. This growth is dependent upon domestic demand, but in present circumstances this seems to be the only kind of growth on the horizon. In the longer term, lower inflation and long term interest rates bring the OBR borrowing forecast below the levels anticipated at the time of the Budget. In particular, debt interest is a handy 16bn below the Budget forecast by The OBR has made an allowance for a gilt premium, due to the ability of the debt management office to sell government securities at lower rates of interest. These lower interest rates reduce government spending by 7.0bn by 2018/19. Low inflation also reduces interest payments on index linked securities. It also reduces pension and other welfare and payments. This reduces government spending by another 9.1bn by 2018/19. The bottom line is a budget surplus of 4bn in , in line with the 5bn envisaged at Budget time. Adding yet another year of austerity, the surplus increases to 23bn in 2019/20. The Chancellor claimed that the fall in debt interest payments vindicated his tight fiscal stance. However, this is arguably a windfall due to the weakness of the global economy, where, as the Prime Minister told us, the red warning lights are flashing. It was not envisaged at the time of the Budget, when the Chancellor s policies if anything looked tighter. This Summer s revisions to the national accounts, which boosted the level of output and made the recovery look so much stronger, also had the arithmetic effect of bringing down deficits and debt as a share of GDP. So moving the audience's focus skilfully again from its disappointing decline in pounds and pence, the Chancellor was able to say that borrowing had halved from 10.2% of GDP in 2009/10 in the depths of the recession under Labour to just 5% this year. 8

9 EY Assurance Tax Transactions Advisory Further information For further information, please contact one of the following or your usual EY contact: Claire Hooper Chris Sanger About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk 9