Budget alert. Introduction

Transcription

1 Budget Alert 2015

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3 Budget alert 2015 Introduction As the first coalition Government since 1945, it is not surprising that the Chancellor took a cautious path in the last Budget of this Parliament, announcing just 26 tax measures. Choosing a fine balance between rounding up the commitments made at the start of this Parliament and saving some key measures for the election manifesto, the Chancellor still managed to deliver a few measures designed to please potential voters. Mixed bag for business In confirming the introduction of the diverted profits tax from 1 April 2015, the Chancellor has been unflinching in his timetable, if adjusting somewhat his approach. We can expect greater clarity as to the detail when the Finance Bill is published on 24 March, but any hope of further debate will be short lived as the Bill will pass from the House of Commons on the very next day. With 10 of the Chancellor s tax announcements badged as fairness, evasion and avoidance, including the increase in the bank levy and the removal of tax relief for compensation payments which together are forecast to raise over 1bn per annum, there were few tax measures to overtly help businesses. The oil industry will welcome the help with the cut in both the supplementary charge and the petroleum revenue tax, as well as the investment allowance. Other companies will need to be satisfied with the one percentage point cut in corporation tax to 20% already announced. The Chancellor has offered a fundamental review of business rates in time for Budget 2016 and the revaluation in Whilst this offers the opportunity for this tax to be reformed, the constraint that the outcome of the review must be revenue neutral will be disappointing, particularly at a time when other countries are reassessing where the tax burden arises. By extending, amending and creating new enterprise zones across the UK, and funding key emerging industries in the regions, the Chancellor has acknowledged the importance of helping entrepreneurial, high growth firms shape the future of regional growth and the wider UK economy. With encouragement for hubs of excellence in specific industries and segments, the Chancellor will be hoping that this will create the next wave of globally competitive companies, as well as attract vital jobs and wealth to the UK regions via inward investment to help rebalance the economy. But it s really about the low earners As expected, the Budget was much more focused on the individual, with its flagship measure being the increase in the personal allowance by more than that announced in the Autumn Statement 10,800 for 2016/17 and 11,000 for 2017/18. The Chancellor didn t take the opportunity to align the threshold for employee national insurance contributions with the personal allowance which means that even those with the lowest earnings still pay 12% on earnings over 8,060. Together with the increases to the minimum wage, taking the lower paid out of the charge to income tax was clearly targeted at addressing concerns over the distributional impact of the Budget. Indeed, the Chancellor started his speech by proudly stating that the share of income tax paid by the top 1% of taxpayers is projected to rise from 25% in 2010 to over 27% this year that is higher than any one of the thirteen years of the last Government. and the savers Another give-away was the new personal savings allowance of 1,000 for basic rate taxpayers and 500 for higher rate tax payers. Although a measure not for next week but for inclusion in the Finance Bill after the election, the new allowance would represent a 200 annual tax saving for basic and higher rate savers alike but only for those with sufficient savings income likely to be mainly pensioners and the moderately well-off. and all those struggling with tax returns. The Chancellor made much of his plans to introduce new digital tax accounts, announced earlier in the day, and a road map setting out the administrative changes is promised. This will deliver the pre-population of tax returns, with the idea that, for many, personal tax compliance will now be more about checking for completeness and accuracy than gathering and entering data. In essence, it s all about the voters In aggregate, our summary of the Chancellor s message was don t panic and the Budget was mostly harmless other than for banks. The net impact of the whole budget was a 140m cut neutral in the scheme of things. This was clearly a Budget for an electorate. We begin with EY ITEM Club s economic report, analysing the implications of the Chancellor s proposals. The ITEM Club is sponsored by EY. 1

4 EY ITEM Club This was looking like the Chancellor s lucky day, with the high commodity prices and weak Eurozone that had stymied previous Budget days turning round just in time for the election. However, the OBR economic forecast interpreted this turnaround very cautiously; seriously limiting the benefits to the Exchequer. The OBR s 0.1% upward revision to 2015 growth looks very cagey against this background. The collapse in the oil price has caused a substantial upward revision to its forecast for household income growth, yet the forecast for consumer spending growth has been revised down, leaving the saving rate stranded well above 7%. Housing transactions and investment have also been revised down, weakening the growth of the associated tax revenues. Other forecasters are becoming more optimistic about the prognosis for the Eurozone, particularly since the ECB launched its QE programme. The European stock markets share this optimism. Yet the OBR s Eurozone forecast remains unchanged for this year and sees small downward revisions in the next two years. It is forecasting UK GDP growth of 2.5% for 2015 and 2.3% for We would be surprised if these were not beaten by some distance. The OBR s medium-term GDP forecasts are conditioned by its relatively pessimistic view of the UK s productive potential, and with 2014 turning out weaker than expected, leave the level of GDP below the Autumn Statement forecast over the whole of the forecast period. This means that the main revenue effect of the fall in oil prices is to reduce North Sea tax revenues, by 2bn a year over the medium term, without much of an offset by other tax revenues. The main improvement came on the expenditure side, through the effect of lower inflation and interest rates on debt interest payments. It could be argued that it is helpful to have the official forecaster taking a downbeat view of future prospects, making it unlikely that the economy will fall short. But it means that the coalition s projections look more austere than they are likely to turn out to be. With the politics of the coalition constraining the scope for a preelection give away, the Chancellor used the improvement in the public finances to reduce borrowing. Debt starts to fall as a share of GDP in 2015/16, helped by sales of Lloyds bank shares and other banking assets, which raise 25bn in 2015/16, rising to 30bn in 2016/17. This fall begins a year earlier than forecast by the OBR in December, but in line with the objective the Chancellor set out in his June 2010 Budget. Personal income tax allowances are also progressively increased, in line with coalition aspirations, with an objective of 12,500 set for 2019/20. However, the big change relative to December is that austerity is anticipated to come to an end a year earlier, in 2018/19. It is still going to be tough. Spending falls by 9.7bn in 2018/19 compared to the December OBR forecast, largely due to the effect of lower inflation and interest rates on debt interest. But then in 2019/20 spending is expected to shoot to 13.1bn above the previous forecast, just in time for the 2020 election. This extra money will come straight through into departmental spending outside the ring fence protecting areas like health and education. It allows the Chancellor to side-step the OBR s observation at the time of the Autumn Statement that this would fall back to the level of the 1930s. At 36% of GDP, total public spending will be back to the ratio seen in the year 2000 under Gordon Brown. George Osborne did deliver a pre-election forecast after all, but for 2020 not

5 Employment tax Abolition of Class 2 national insurance contributions It is the intention to abolish Class 2 national insurance contributions (NICs) and consult on reforming Class 4 NICs to include a contributory benefit test. The self-employed pay Class 2 NICs which provides for qualification towards certain contributory benefits. Following abolition of Class 2 NIC, a reform of Class 4 NIC, which is a noncontributory payment, is to be considered. This would introduce a new contributory benefit test to replace that lost by the abolition of Class 2 NIC. The Government will consult on the detail and timing of these reforms later in We await the details especially the position of voluntary Class 2 NIC which assists persons outside of the UK contribution scheme to continue to accrue qualification to certain contributory benefits. Changes to car and van benefits Company car and van benefits are to be increased from 2019/20, together with short-term increases in the company car and van fuel benefits charge. Legislation will be introduced in a future Finance Bill to increase the appropriate percentage (AP) of the list price of company cars by 3% for cars emitting more than 75g CO2/km to a maximum of 37%. The AP for the 0-50, and 51-75g CO2/km bands will also increase by 3% maintaining the current 3% differential between these two bands. These changes will take effect from 2019/20. Contrary to indications at Budget 2014 the differential between the AP for the 0-50g, and 51-75g CO2/km bands has not reduced to 2%. The van benefit charge will increase in line with inflation from 6 April 2016 based on the September 2015 RPI. Regulations will also be introduced to increase the fuel benefit charge (FBC) multipliers for both company cars and vans in line with RPI with effect from 6 April These changes will be effected by way of secondary legislation later this year and in time for PAYE code changes in January Travel and subsistence relief for workers engaged through intermediaries Removal of relief for travel and subsistence expenses for workers engaged through employment intermediaries. The Government confirmed that, following the discussion paper published shortly after the Autumn Statement 2014, it will issue a consultation aimed at restricting the tax relief on expenses, such as in respect of home-to-work travel, afforded to workers engaged through intermediaries and under the supervision, direction and control of the end-user. The approach being taken will align with that taken towards Agency workers in Finance Act The Government has indicated that the planned measures will raise revenue overall, and level the playing field between employment businesses that seek to lower their costs by using these arrangements and those that do not. The consultation paper will be released during summer Intermediary sector worker understanding Workers in the intermediary sector are to be provided with greater transparency on how they are employed and what they are to be paid. The Government stated that concerns have been raised regarding how employees are engaged and paid by employment intermediaries. It believes that this is due to a lack of transparency from the employment intermediaries and has confirmed that the Department of Business Innovation and Skills (BIS) will issue a consultation proposal on how to improve worker understanding later this year. The concerns raised about how workers are engaged and the apparent lack of understanding of some workers as to what they are to be paid have been well documented. The move to issue a consultation that could lead to greater transparency is, therefore, welcome. Reiterating comments made at Budget 2014, the Government remains committed to reviewing incentives for ultra-low emission vehicles in light of market developments at Budget This will influence broader decisions on company car taxation from 2020/21 onwards. 3

6 Employment tax Updates to new measures already announced The taxation of how close company directors can utilise the trivial benefit exemption and legislation for the exemption of qualifying expenses payments have been updated during recent consultations. Finance Bill 2015 will introduce legislation effective from 6 April 2015 providing a statutory exemption for trivial benefits, provided to employees, costing 50 or less. Following consultation, an annual cap of 300 will be introduced for office holders of close companies, and employees who are family of those office holders. This will be mirrored in NIC legislation. Finance Bill 2015 will also introduce legislation effective from 6 April 2016 providing a statutory exemption for expenses and benefits provided to employees where they would have been exempt from tax had the employees incurred and met the costs themselves. This exemption will not be available where expenses are paid as part of a salary sacrifice arrangement and, following consultation, the legislation has been revised to ensure that the exemption cannot be used in conjunction with other arrangements that seek to replace salary with expenses. Measures previously announced but unchanged From 6 April 2015: 1. Zero emission vans will start attracting a tax charge initially starting at 20% of the van benefit charge increasing on an annual basis until the tax year 2020/21 where a single benefit charge will apply to all vans. From 6 April 2016: 1. The Government will abolish the 8,500 threshold below which employees do not pay income tax on certain benefit and expenses. Exemptions will be introduced for carers and ministers of religion. 2. In addition to the above, the Government will introduce a statutory framework for collecting income tax from certain benefits in kind and expenses in real time, through voluntary payrolling. 3. Employers will also no longer be required to pay Class 1 Secondary NICs on earnings paid up to the Upper Earning Limit to any apprentice under the age of 25. The change to the proposed trivial benefit exemption will prevent potential tax avoidance where businesses would be likely to have greater control over what trivial benefits are provided and could have provided these on a regular basis to supplement other employment income. For the change to the qualifying expenses exemption, this reinforces the Government s approach of minimising the use of salary sacrifice or other arrangements replacing salary with expenses. 4

7 Personal tax Rates and allowances The headline rates and allowances have largely changed in line with expectations. The personal allowance has been increased to 10,800 from 6 April 2016 and 11,000 from 6 April The personal allowance from 6 April 2015 is 10,600 as announced in the Autumn Statement. The higher personal allowance for those born before 6 April 1938, will be removed with effect from 6 April 2016 so that everyone, regardless of their age, is entitled to the same personal allowance. The basic rate limit for 2016/17 will be increased to 31,900 and 32,300 for 2017/18. The basic rate limit for 2015/16 will be 31,785 as announced in the Autumn Statement. These combined changes will increase the higher rate threshold above which individuals pay income tax at 40% to 42,700 for 2016/17 and 43,300 for 2017/18. The further increase in the personal allowance and basic rate limits will be welcomed by taxpayers. Entrepreneurs relief, joint ventures and partnerships The availability of entrepreneurs relief (ER) has been restricted to deny relief on a disposal of shares in a company that is not trading in its own right. The changes will have immediate effect. ER reduces the rate of capital gains tax on the disposal of assets from 18%/28% to 10% on gains up to a lifetime limit of 10 million. In order to qualify for ER on shares, an individual is required to hold at least 5% of the ordinary shares and voting rights of the shares in a trading company or the holding company of a trading group. To date, the ER rules around joint ventures were such as to enable individuals with only a small indirect stake in the trading company to benefit from ER by holding shares in a management feeder or pooling company. The Government has tightened the definition of trading company and holding company of a trading group for ER purposes. This means that, with immediate effect, ER will only be available to an individual if they hold 5% of the ordinary share capital and 5% of the votes in an investee company which has a significant trade of its own or is the holding company of a trading group. As such, individuals who hold shares in a company which itself holds shares in a joint venture company will lose the benefit of ER if they dispose of their shares, unless the company is a trading company in its own right. It is not expected that relief will be denied where shares are held through a holding company of a trading group. This change was not unexpected and is part of the Government s wider approach to perceived tax avoidance. On the basis that the changes will have immediate effect, there appears to be little opportunity for individuals and businesses using joint ventures to restructure in advance of the relief being denied. Entrepreneurs relief on associated disposals The Government has today announced that there will be a further condition to be met in order to obtain ER on gains accruing on the disposal of personal assets that are used in a qualifying business. An individual will only be able to claim ER on these gains where they also dispose of at least 5% of their interest in the business. This is with reference to their shareholding in the company or assets in the relevant partnership, where the business is carried on through a partnership. These new rules will apply for disposals on and after 18 March The previous rules also included the requirement that the individual withdraws from the business at the time the assets were disposed of, however, there was no specified minimum requirement for the level of that withdrawal. This is another measure which is intended to target perceived tax avoidance and so is not unexpected. Entrepreneurs relief on goodwill The Government has today announced that following consultation, proposals to be introduced in Finance Bill 2015 regarding ER on goodwill will be revised to allow ER to be claimed by partners in a firm who do not hold or acquire any stake in a successor company which is related to them when they transfer the business to the successor company. These changes affect transfers on or after 3 December The original proposals introduced in Autumn Statement 2014 are intended to prevent individuals from claiming ER on disposals of the reputation and customer relationships associated with a business ( goodwill ) when they transfer the business to a related close company. Whilst the original measures were introduced to remove a perceived unfair advantage available to proprietors of businesses who sell their business to a close company to which they are related in order to extract funds from the business at a special, low, rate of CGT rather than the normal rates of income tax and national insurance contributions, this is a welcome amendment to the legislation where an individual does not hold an interest in the successor company when they incorporate their business. 5

8 Personal tax Entrepreneurs relief and academics The Government has today announced that there will be a consultation on the CGT treatment of gains made by academics on the disposal of shares in spin-out companies. No timing was provided as to when any changes would be implemented. Disguised fee income It has been confirmed that carried interest and returns exclusively from investments by partners are not targeted but we await draft legislation and guidance. The Chancellor announced in the 2014 Autumn Statement that new legislation would be introduced to ensure that amounts received by individuals in respect of the performance of investment management services would be taxable as trading income other than in two narrowly defined circumstances (returns from carried interest and co-investment). The draft legislation is intended to catch profit share received by investment managers (typically via the general partner) that is subject to tax as investment income or capital gains tax, rather than trading income. However, due to the narrow way in which the carried interest and co-investment carve-outs were drafted, there was significant concern that they would inadvertently catch genuine, commercially negotiated performance fee and co-investment arrangements. The indication is that the legislation will be revised to better reflect industry practice on performance related returns and confirms again that the legislation is not intended to apply to sums linked to performance or returns which are exclusively from investments by partners. These comments are welcome but it remains to be seen whether the definitions of carried interest and co-investment in the revised legislation will be sufficiently broad and flexible to take account of evolving industry practice. Revised legislation is expected to be included in the draft Finance Bill to be released on 24 March 2015 and the legislation will take effect in respect of sums arising on or after 6 April Capital gains tax on wasting assets The Government has announced that the CGT exemption for certain wasting assets used in a business will only apply if the person selling the asset has used it as plant in their own business. A wasting asset (an asset with a useful economic life not exceeding 50 years including plant and machinery) is currently exempt from CGT where it is used in a business and capital allowances have not been claimed. The new rules will apply from 1 April 2015 for corporate tax purposes and 6 April 2015 for CGT purposes. The change is designed to prevent assets from being exempt if they are loaned to a third party business. The measure is being introduced in response to the March 2014 case of HMRC v The Executors of Lord Howard of Henderskelfe (decd), where a taxpayer successfully argued that the exemption applied to a sale of a painting as he had lent the painting to a connected business which used it in its trade. Changes to venture capital schemes for entities benefitting from energy subsidies As announced at Autumn Statement 2014, some companies that benefit from subsidies for the generation of renewable energy will be excluded from venture capital schemes. Companies (with the exception of qualifying community energy organisations) using anaerobic digestion or creating hydroelectric power that substantially benefit from Government subsidies for the generation of renewable energy will be excluded from qualifying for the EIS, SEIS and VCTs. These exclusions will come into effect from 6 April When the enlargement of Social Investment Tax Relief (SITR) receives State Aid clearance, community energy companies whose trade consists wholly or substantially of the subsidised generation of energy from renewable sources will cease to be eligible for investment under EIS, SEIS and VCT schemes. At the same time, qualifying activities under SITR will be amended to allow for qualifying community energy organisation activities for which a feed in tariff subsidy is receivable. This change will take effect six months after the confirmation of State Aid approval for the expansion of SITR. These changes were announced in the Autumn Statement 2014 but, following consultation, the legislation will be changed to ensure that companies receiving foreign subsidies similar to contracts for difference will also be excluded from the schemes from 6 April

9 Personal tax Changes to the venture capital schemes rules Following consultation, the Government will introduce changes to the company eligibility criteria for SEIS, EIS and VCT companies as well as a cap on total investments to be received under the venture capital schemes. The measures are being introduced in line with the new EU State Aid rules and will be introduced in Finance Bill The new legislation will introduce the following measures: The companies will be required to be less than 12 years old when receiving their first EIS or VCT investments, unless the investment will lead to a substantial change in the company s activity; The total investment received under the tax-advantaged venture capital schemes will be capped at 15mn ( 20mn for knowledge intensive companies); The employee limit for knowledge intensive companies will be increased to 499 employees from the current limit of 249 employees. There currently is no statutory definition of a knowledge intensive company and we expect that the Government will introduce this in Finance Bill The Government will also remove the requirement that 70% of the funds raised under SEIS must have been spent before EIS and VCT funding can be raised. This represents additional complexity to an already labyrinthine area. However, the new limits and levels of investment for knowledge intensive companies will be beneficial for encouraging investments in companies which qualify. Other measures Charities A technical update will be introduced to treat the Commonwealth War Graves Commission and the Imperial War Graves Endowment Fund as charities for tax purposes. Inheritance tax: Extension of death in service exemption As announced at Autumn Statement 2014, the Government will 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 and humanitarian aid workers responding to emergency circumstances. The Government has clarified that the legislation provides an exemption for serving and former police officers and service personnel targeted because of their status. The revised legislation will have effect for deaths on or after 19 March 2014 and will be enacted in Finance Bill Stamp duty land tax sundry changes to the annual tax on enveloped dwellings A simplified return will be introduced where an exemption from the annual tax on enveloped dwellings (ATED) applies. A change will be made to correct a valuation anomaly and the connected persons aggregation rules will be amended to cater for the lower 500,000 band. A new relief declaration return will be introduced where an exemption from ATED applies. This return will no longer require details of the individual properties or their valuation. This will apply to the chargeable period 1 April 2015 to 31 March 2016 and thereafter. The legislation will be amended to ensure that sufficient time is given for valuations to be obtained prior to having to submit ATED returns so that the legislation works as intended. This change will apply for chargeable periods beginning on or after 1 April Aggregation rules apply where two or more chargeable interests are held in the same dwelling by connected persons. Where the connected person is an individual, and the property is valued at less than 2mn, the connected company interest must be valued at more than 250,000 for the aggregation rule to apply. This change will apply for chargeable periods beginning on or after 1 April The introduction of a simplified return will be welcomed as the current regime placed a heavy and unnecessary administrative burden on certain exempt businesses. The change to the aggregation rules merely cater for the fact that the ATED starting band has been lowered to 500,000. Future changes Personal savings allowance A new personal savings allowance will be introduced from 6 April This will apply for the first 1,000 of a basic rate taxpayer s savings income, and the first 500 of a higher rate taxpayer s savings income each year. The personal savings allowance will not be available for additional rate taxpayers. The personal savings allowance will be in addition to the tax advantages already available to savers from ISAs. Peer to peer lending From 6 April 2016, measures will be introduced to allow individuals to offset bad debts from peer to peer lending against interest income received from such loans in calculating their tax liability. 7

10 Personal tax Gift Aid small donations From 6 April 2016, the maximum annual donation amount which can be claimed through the Gift Aid Small Donations Scheme will increase from 5,000 to 8,000. The scheme allows charities and taxpayers to claim Gift Aid on donations under 20 even if no Gift Aid declaration is made. Making ISAs more flexible Regulations will be introduced in autumn 2015, following consultation on technical detail, to enable ISA savers to withdraw and replace money from their cash ISA without it counting towards their annual ISA subscription limit for that year. ISAs and Child Trust Funds Regulations will also be introduced to extend the list of qualifying investments for ISAs and Child Trust Funds with affect from 1 July These will include listed bonds issued by Co-operative Societies and Community Benefit Societies, and SME securities traded on a recognised stock exchange. Social venture capital trusts (social VCT) The Government proposes to introduce social VCTs, operating in a similar way to existing VCTs, and will set the rate of income tax relief for investment in social VCTs 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. Farmers averaging Previously farmers have been allowed to average their taxable profits over two years for income tax purposes. The Government today announced that from 6 April 2016 farmers will be able to average profits over five years rather than two. Details of how it will work will be consulted on. This will be welcomed by farmers. Inheritance tax (IHT) Administration HMRC will publish draft regulations to facilitate the use of electronic communications as part of the introduction of the new IHT digital service announced in Autumn Statement Deeds of Variation The Government will review the use of deeds of variation for tax purposes. IHT charges and trusts New rules which apply where property has been added to more than one trust on the same day have now been postponed to a future Finance Bill and will not be introduced in Finance Bill 2015 as expected. This is to prevent the use of multiple trusts, often known as pilot trusts as an IHT planning strategy. This planning was often used for will trusts and there will now be a period of grace so the rules do not apply to transfers on deaths before 6 April The provisions will apply to trusts created before 10 December 2014 where value is added after this date other than on death. Following consultation, draft legislation published at the time of the Autumn Statement will be revised to remove small additions to settlements (amounts of less than 5,000), made on the same day from the scope of the new provisions. The removal of additions below 5,000 from these anti-avoidance rules is a sensible measure which will prevent many trusts being accidentally dragged into the aggregating rules by small additions designed to pay trustee or investment management fees. Postponing the introduction of these new rules will allow time for more consultation on this complex legislation. Nevertheless, those with Pilot Trusts may wish to speak to their advisor now to begin considering how these changes might affect them and whether any amendments should be made to existing wills. Replacing tax returns The Government announced the extension of digital tax accounts with a view to them replacing tax returns for most individuals and for small businesses by The HMRC document, Making tax easier, published today states that more than one million small businesses currently use digital accounts for managing their tax affairs. By early 2016 HMRC intend that five million small business and 10 million individuals will have their own digital tax account, and that this will be extended to all taxpayers by the end of the next Parliament. The document suggests that when information is provided to HMRC by different sources, this information will be stored in one place and will be easily accessible and viewable by the taxpayer. We therefore expect, for example, that where P60s and P11Ds are provided to HMRC by a taxpayer s employer, that information will be stored on the individual s digital account meaning that they need not submit that information again for determining their tax liability. Taxpayers with more complex affairs will be able to use the digital tax accounts to submit information not already picked up to ensure their tax position is complete and correct. For example, we might expect this to be required where an individual has foreign sources of income or capital gains which would not otherwise be reported to HMRC. Agents will also be able to access their clients digital tax accounts. The HMRC document makes no mention of whether there will be changes to deadlines for ensuring a taxpayer s position is complete and correct or the due dates for payment of tax and it is not clear whether taxpayers will be able to opt out of using a digital account or file a tax return instead. We welcome the intention to update and streamline HMRC s technology and the taxpayer experience and we look forward to the roadmap for doing this as well as the formal consultation that the document indicates will be published later this year. Further changes to the pension tax regime The Government has announced further changes to the taxation of pensions, to take effect from 6 April

11 Personal tax From 6 April 2016 the lifetime allowance for pension savings will reduce from 1.25mn to 1mn. There will be new fixed and individual protection regimes introduced to protect individuals with existing pension savings likely to be affected by the reduction. The lifetime allowance will be indexed with effect from 6 April 2018 and will increase annually thereafter in line with the Consumer Prices Index. There will not be any reduction in the annual allowance for pension savings due to possible adverse effects on public sector workers. Legislation will be introduced with effect from April 2016 to allow individuals with purchased annuities to assign their annuity income to a third party. A consultation has opened to consider how the proposed secondary annuities market may work in practice. The proposals would not give the annuity holder the right to sell the annuity back to their original provider and the Government is not looking to allow the original provider to purchase and then discontinue the annuity. The Government recognises that there are complexities in determining a fair price for annuities. It is also recognised in the consultation that reselling annuities will only make sense for a small minority of annuity holders. The current proposals would enable an annuitant either to take the proceeds immediately, subject to tax at their marginal income tax rate, or allow the proceeds to be put back into a pension wrapper with tax incurred only when they are drawn down. The proposals would not apply to annuities within occupational pension schemes. Further work is also needed on dealing with annuities where other parties already have an interest in the contract such as current and former spouses. Tax relief on pension contributions will be restricted via the reduction in the lifetime allowance, leaving the annual allowance unchanged. The intention is that this will affect mainly higher and additional rate tax payers, protecting relief for individuals on lower incomes. In Budget 2014 the Government made clear its intention to increase flexibility in retirement. The measure announced today extends flexibility to individuals with purchased annuities, who are currently unable to access the pension flexibilities announced last year. Measures unchanged following consultation Certain measures that have previously been announced or consulted upon will be introduced in Finance Bill 2015 without any significant changes, with effect from 6 April Those of most interest to individuals are mentioned below. Changes to the remittance basis The remittance basis charge for non-uk domiciles who have been resident for at least 12 of the last 14 years will increase from 50,000 to 60,000. In addition a new charge of 90,000 will be introduced for those who have been resident for at least 17 of the last 20 years. The 30,000 charge for those who have been resident for seven of the last nine tax years will remain unchanged. The Government is consulting on proposals to restrict an individual s ability to elect in and out of the remittance basis annually. Proposals include the introduction of an election for a minimum period of three years. CGT for non-residents owning UK residential property CGT will be extended to gains realised on UK residential property realised by non-uk resident individuals, trustees and certain companies. CGT will apply at 18% and 28% for individuals, 28% for trustees and 20% for non-uk resident companies. Various rebasing options are available to ensure that tax is only chargeable on the increase in value from 5 April The Government has released a series of FAQs on the alreadyannounced CGT for non-uk resident owners of UK residential property, which largely confirm the announcement made in the Autumn Statement. The introduction of CGT for non-residents along with previously introduced and announced changes to SDLT and ATED charges will impact the decision for potential buyers of UK residential property as to whether the property is held in their own name or through a non-uk company. We consider this may, in some circumstances, encourage people to hold residential property through non-uk resident companies rather than in their own names, an action which the Government have previously stated they are seeking to discourage. Changes to principal private residence relief There will be changes to the availability of principal private residence (PPR) relief. PPR relief will be restricted where the property is located in a jurisdiction in which the taxpayer is not resident, unless the taxpayer meets the 90-day test for the tax year - broadly, they and/or their spouse spend at least 90 midnights in the property, or other properties in which they have an interest, in that jurisdiction. Increased ATED charges The ATED charges for 2015/16 are to be significantly increased. The lower threshold for ATED is also being reduced, as expected, to 1mn from 1 April The 2015/16 charges range from 7,000 (for properties valued over 1mn but below 2mn) to 218,200 (for properties valued over 20mn). CGT and allowing entrepreneurs relief on deferred gains Also as previously announced, where gains on assets which are eligible for ER are deferred 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 on or after 3 December 2014 that would be eligible for ER but are deferred into EIS or SITR. 9

12 Indirect tax VAT: Changes to registration and deregistration thresholds The VAT registration and deregistration thresholds for UK businesses have been increased. From 1 April 2015, the VAT registration and deregistration thresholds will increase by 1,000 to 82,000 and 80,000 respectively. The increase in the thresholds is generally in line with inflation. VAT: Recovery of VAT relating to non-uk branches Legislation will be introduced to limit a partly exempt business ability to recover VAT on costs which support their global networks. This is likely to have a negative impact on many institutions VAT recovery position, resulting in an increase in their operating costs. Most affected will be businesses in the financial services sector. Under current rules, UK businesses which incur costs which are used to support their branch networks are entitled to a level of VAT recovery. For partly exempt businesses, this is important as their supplies of VAT exempt services to third parties do not typically carry this right. This practice has, therefore, been helpful for businesses which provide services to their overseas offices or which act as a centre of excellence for certain functions. It also allows UK branches of overseas institutions to recover VAT on costs incurred in supporting their non-uk head office. This recovery right has been removed for businesses which determine their VAT recovery using either the partial exemption standard method or special method. The new rules will take effect for tax years beginning on or after 1 August Under the amended legislation governing the standard method of calculation, the turnover of an overseas branch must be excluded from the UK business recovery calculation. In addition to this, businesses will not be able to undertake a use-based calculation to recover VAT on branch support costs. Under the current regulations, businesses are entitled to identify and recover VAT on a use basis. For example, a UK bank which provides services to its US branch should be able to carve out and recover VAT on associated costs. Going forward, it will be unable to do so and these costs will only be recoverable by reference to (primarily exempt) supplies made to third parties. The amended legislation will also impact businesses which operate a partial exemption special method. This is a bespoke recovery calculation typically used by larger institutions for which the use of a simplified calculation is inappropriate. In addition to the specific exclusion of overseas branch turnover from calculations, HMRC s explanatory notes suggest that businesses operating a partial exemption special method will also not be permitted to undertake a use-based calculation. These changes have been introduced following the Court of Justice of the European Union s judgment in the case of Le Credit Lyonnais (C-388/11). This confirmed that the inclusion of the value of supplies made by overseas branches should be excluded from the business partial exemption calculations. HMRC s explanatory notes also state that the new rules are designed to simplify tax accounting and to prevent businesses from artificially increasing VAT recovery rates by allocating costs to their branch support activities. Denial of this recovery right could have a significant impact on large and complex financial services institutions. It is commonplace for businesses in this sector to include within their partial exemption special method a specific sector which deals with VAT incurred to support its global operations. Under special methods, which must be agreed with HMRC, banks and insurers will often identify these central function costs and recover the applicable proportion. By centralising in-house functions in the UK, banks and insurers have historically been able to benefit both from economies of scale and UK expertise. Any new limitation on VAT recovery rights in relation to these activities could, at its worst, increase the cost of providing services by 20%. Conversely, where a business has blocked in full its recovery on EU branch support, the new rules may allow it to recover costs at its current UK-centric rate. In any event, businesses will need to critically assess their cost base and current VAT recovery calculation to determine the potential impact. VAT: Refunds for non-departmental public bodies Named non-departmental public bodies will be entitled to a refund of the VAT incurred on outsourced/shared services used to support their non-business activities from 1 April The outsourcing/sharing of services by public bodies has historically resulted in irrecoverable VAT making the in-house delivery model almost always more cost-effective. Going forward, to ensure irrecoverable VAT does not deter public bodies from sharing back-office services, eligible public bodies will be able to reclaim the VAT incurred on outsourced/shared services. This opens the way for eligible public bodies to explore innovative ways for reducing the cost of delivery, by sharing back office functions, or indeed outsourcing to third parties who can drive greater economies of scale. 10

13 Indirect tax VAT: Refunds to various bodies From 1 April 2015, UK legislation will be amended to allow VAT refunds for search and rescue, air ambulance charities and the organisation replacing the Highways Agency. Similar changes allowing VAT refunds for hospices and blood bike charities will also be introduced. Finance Bill 2015 will introduce provisions allowing the following bodies to obtain VAT refunds on purchases used in carrying out non-business activities. These will take effect from 1 April Palliative care charities (e.g. hospices the definition of which is yet to be fully defined in legislation). Medical courier charities (e.g., blood bikes) providing a free out-of-hours service to the NHS transporting urgently needed items. Search and rescue charities and air ambulance charities. Highways England, the new transport agency replacing the Highways Agency. These changes will reduce the VAT cost for the above bodies. Alcohol duties The Government has announced that alcohol duty rates on alcoholic beverages will be reduced from 23 March 2015 or frozen. There will be a duty rate reduction on general beer, spirits, wine (exceeding 22% abv) and lower strength cider by 2%. Low strength beer will be reduced by 6% and high strength beer will be reduced by 0.75%. High strength still cider will be reduced by 1.3%. Rates on wine below 22% abv and high strength sparkling cider will be frozen. The Government continues its approach of supporting pubs but has also committed to supporting the domestic market for the Scotch whisky industry. This should be a welcome announcement to industry and consumers alike. Alcohol duties: Registration of wholesalers As announced in Autumn Statement 2013, from 1 October 2015 businesses that are wholesalers of alcohol will be required to register with HMRC. The aim is to create a register of approved alcohol wholesalers in order to reduce illicit trade and alcohol fraud in the wholesale and retail sectors. In order to be registered by HMRC, applicants will be required to demonstrate compliance with new record keeping obligations and demonstrate appropriate due diligence processes when undertaking purchases from alcohol suppliers. Wholesalers and retailers of alcohol will be obliged to purchase alcohol only from registered wholesalers from 1 April From 1 January 2016, new penalties will be introduced of up to 10,000 for the most serious contraventions. Furthermore, any new businesses intending to start trading must submit an application at least 45 working days before they intend to commence operations. HMRC will undertake a 15 month programme of assurance activity from 1 January 2016 to assess whether businesses meet the new fit and proper criteria. As part of a concerted HMRC programme against indirect tax fraud, the introduction of the alcohol wholesaler registration scheme is a significant development of which businesses will not only need to be aware but also will need to act upon. The potential penalties could be significant and so businesses will need to prepare early to ensure that the required criteria are met and that applications are submitted within the relevant timeframes. Tobacco duties The Government previously announced in the 2014 Budget that duty rates will increase by 2% above RPI. The Government will introduce measures to tackle the illicit tobacco trade and a consultation for the introduction of a tobacco levy. Legislation is being introduced to further restrict the clearance of tobacco products immediately before an increase in the rate of duty (known as forestalling ). Existing restrictions on the clearance of cigarettes (i.e., the point at which excise duty becomes due) in the run up to the Budget have been in place for some time. The purpose of these restrictions is to prevent tax avoidance through clearing large quantities of goods immediately before an increase in excise duty rates. Although restrictions have succeeded in controlling the amount of forestalling, a number of businesses have cleared a significant amount of product in March, ensuring that as much stock as possible is cleared at the lower, pre-budget rate of duty. 11

14 Indirect tax Additional measures are, therefore, being introduced that will become effective before Budget The new measures will allow HMRC to impose restrictions on businesses that clear tobacco products in the three month period prior to a Budget. These restrictions can vary on an annual basis and will be announced in a public notice. Additionally, a new financial penalty based on twice the lost duty if tobacco products are cleared in excess of allocations, will be introduced. The introduction of additional restrictions on the release of tobacco products in the run up to the Budget means that businesses will need to be aware of the limits that will be imposed by HMRC on how much product they will be able to clear prior to the Budget each year. Gambling duties and horserace betting right Gaming duty bands have been increased and horserace betting levy is to be replaced by a horserace betting right. The Government will increase gaming duty bands in line with RPI for accounting periods starting on or after 1 April Other gambling duties will remain unchanged. In addition, the Government is to replace the horserace betting levy with a new horserace betting right. The new authorisation scheme will apply to all bookmakers in any location who take bets from UK customers on UK racing. The new charge will be administered directly by the racing industry. The horserace betting right is being introduced following a series of consultations with the racing industry. Aggregates levy Aggregates levy rate will remain at 2 per tonne for 2015/16. The aggregates levy rate which has remained constant for some years will stay at 2 per tonne. In addition, 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. A continued rate freeze is welcome. Climate change levy (CCL) and the carbon price floor The CCL main rates (for the sale of taxable commodities) will increase in line with RPI. The CCL rates for carbon price support (CPS) for 2017/18 will remain at 18/ tco2, in line with the 18/tCO2 cap on the CPS rate from 2016/17 to 2019/20. From 1 April 2015, fossil fuels that are used to generate good quality electricity in a combined heat and power plant that is self-supplied or supplied under exemption from the requirement to hold a supplier licence, will be excluded from CPS rates. These measures were previously announced in the 2014 Budget and Autumn Statement 2014 respectively. Companies that have invested in good quality combined heat and power plants should welcome this announcement. Landfill tax (LFT) The standard and lower rates of LFT will increase in line with RPI, rounded to the nearest 5 pence, from 1 April Changes will also be made to the Landfill Communities Fund (LCF), the savings from which will be used to provide a one-off 4.2mn increase in Environment Agency funding to address waste crime. The Government is also consulting on a package of measures to reform the LCF. This reconfirms the Government s commitment to ensuring that the rates are not eroded in real terms, although it is unclear as to whether this will change in the medium to long-term. Air passenger duty (APD) As previously announced, an exemption from APD will be introduced for children aged under 12 travelling in the economy class cabin with effect from 1 May 2015 and for children under 16 with effect from 1 March The Government announced in the Autumn Statement that it would reduce the rates of APD payable for children with the aim of making air travel more affordable for families. The measure announced today confirms the exemption from the reduced rates of APD for children travelling in the lowest class of travel on the plane. 12