Report The UK tax changes taking effect in April 2016 Also on that date, measures came into force extending the scope of reliefs available from ATED and 15% higher rate of SDLT. They apply to companies, partnerships with company members, and collective investment schemes, which acquire and own residential property in the UK valued over 500,000. Speed read For individual taxpayers this month s main changes are the introduction of the dividend tax and personal savings allowance, together with further restrictions to the sums that can be invested in pensions and a reduction in the capital gains tax rates. On the corporate side we have seen a further restriction to 25% of the amount of profits banking companies can offset through brought forward losses. Meanwhile, employers will now need to determine whether expenses incurred by their employees are covered by a new exemption and the rates for a number of indirect taxes have increased by RPI. Patricia Mock Patricia Mock has many years experience in advising private clients and is a director in the tax policy group at. In addition to advising in all areas of taxation matters affecting wealthy individuals, she also provides technical resource and training to the national private client services group in. Email: pmock@deloitte.co.uk; tel: 020 7007 3595. Mark Groom Mark Groom is an employment tax partner in s compensation and benefits group, with over 20 years experience. He advises clients in all sectors on key employment related issues. Email: mgroom@deloitte.co.uk; tel: 020 7007 2770. Stephen Barnfield Stephen Barnfield is a director at. He works in s tax policy group, in particular on tax administrative law and EU direct tax. Email: sbarnfield@deloitte.co.uk; tel: 020 7007 0614. Donna Huggard Donna Huggard is an indirect tax senior manager at, based in London. She works in s tax policy group. Email: dohuggard@ deloitte.co.uk; tel: 020 7303 7914. The main tax changes that came into effect this month are as follows (please note that references to Finance (No. 2) Bill 2016 are referred to as FB 2016). Air passenger duty (APD) APD rates for flights over 2,000 miles were increased by RPI on 1 April. Annual tax on enveloped dwellings (ATED) On 1 April, the ATED entry threshold was lowered to 500,000. Benefits in kind From 6 April 2016, it is farewell to the 8,500 threshold that separates lower and higher paid employees for the purposes of benefits in kind (FA 2015 s 13). While this is a welcome simplification, some employers and employees may see an increase in tax and NICs liabilities, e.g. employees in cleaning or catering who might benefit from, say, a late night taxi home could lose out. Ministers of religion are excluded. Where a care and support employer provides an employee with board and lodging, that will also be exempt. Importantly, HMRC has confirmed that volunteers will not be impacted for as long as they are not employees. CGT rates The rate at which individuals, trustees and personal representatives pay CGT was reduced from 6 April 2016. The 18% rate for gains falling within a basic rate band was reduced to 10%; and the 28% rate fell to 20%. The existing rates will continue to apply to gains from disposals of residential property and from carried interest investments. The rates for ATED related CGT and non-resident CGT (which are only relevant to residential property) will also remain at 28%. Carried-forward losses From 1 April 2016, Finance Bill 2016 further restricts to 25% the proportion of a banking company s annual taxable profit that can be offset by carried-forward losses arising before 1 April 2015 (FB 2016 cl 53). Climate change levy (CCL) The main rates of CCL increased by RPI on 1 April. Company car taxation The percentage to apply to the list price to calculate the taxable company car benefit has increased by 2% for all cars up to the absolute cap of 37%. The fixed amount to which the percentage is applied to calculate private fuel benefits has increased from 2,100 in 2015/16 to 2,200 in 2016/17. Company distributions FB 2016 contains revised draft legislation (cl 35) for the targeted anti-avoidance rule (TAAR) to apply to certain distributions received by individuals in a winding up. This is to prevent income being converted into capital to obtain a tax advantage. If the TAAR applies, affected individuals will be liable to income tax, instead of CGT, on the gain realised on liquidation of the company. The gain chargeable under the TAAR is capped at the gain realised, based on the uplift compared to the CGT base cost of the individual s interest in the company. Very broadly, the TAAR will apply if the winding up is tax motivated, and if the individual has at least a 5% interest in the company being wound up, the company is (or was) a close company, and the individual 10 15 April 2016
Insight and analysis becomes involved in the same activity within two years of the winding up. These rules apply to distributions on or after 6 April 2016. The transactions in securities legislation is also being amended. Corporate debt and derivative contracts On 1 April, legislation (FB 2016 cl 45 Sch 7) came into force to address three situations where the interactions with accounting rules or other parts of the tax rules may lead to unintended outcomes in the context of interest-free loans and other loans on non-market terms. The three situations are: notional finance costs that can arise on interest free loans and other loans on non-market terms; credits that arise on reversal of debits which were previously denied for tax under the transfer pricing rules; and amounts excluded from taxation under the transfer pricing rules where the loan or derivative is part of a hedging relationship intended to mitigate foreign currency risk. Dispensations On 6 April 2016, existing P11D dispensations became obsolete. Instead, new ITEPA 2003 s 289A provides an exemption for tax business expenses reimbursed on an actual basis, without the need for a dispensation, to the extent they are tax deductible. However, reimbursements by way of allowances/scale rates/per diems can only be paid free of tax/nics if they are exempted by regulations under s 289A(6); or if they are covered by a new approval notice granted by HMRC under s 289B, to support the level of allowance requested. Employers will also need to install checking systems to validate that the expenses claimed are being incurred and qualify for a tax deduction. Dividend allowance In 2016/17 the dividend allowance of 5,000 (again a 0% tax rate) is available for all individual taxpayers (FB 2016 cl 5 Sch 1). As part of these changes, the dividend tax credit ceased to apply from 6 April 2016 and dividend income over the 5,000 dividend allowance will be taxed at a higher rate than before. Comparative rates are set out below: Income band Current rate on gross dividend Effective current rate on net dividend Basic rate 10% 0% 7.5% Higher rate 32.5% 25% 32.5% Additional rate 37.5% 30.6% 38.1% New rate on dividend received (after 5,000 exemption) Whether or not people see a reduction in their tax liability on dividend income will of course depend on the amount of income received and the tax band into which such income falls. Basic rate taxpayers will be worse off if they receive dividend income of more than 5,000 per annum, whereas for higher rate taxpayers the break even point is 21,667. However, these figures can be misleading. The allowances were originally referred to as exemptions; however, it is now clear that although the tax rate on the amounts exempted will be 0%, they will use up the relevant income tax band, potentially pushing any remaining taxable amount into higher rates. Thus, a taxpayer with a salary of, say, 39,000 and dividends of 7,000 in 2016/17 will have a personal allowance of 11,000 and a basic rate band of 32,000. The personal allowance and 28,000 of the basic rate band will be set against the salary of 39,000. The taxpayer might expect that 5,000 of the dividends would be exempt and the balance of 2,000 would be taxed at 7.5%, as they fall into the remaining basic rate band of 4,000. Instead, they will be taxed at the higher rate of 32.5%, as although the 5,000 is taxed at 0% it uses up all the remaining basic rate band of 4,000, so that the 2,000 falls into the higher rate band. Employee shareholder status (ESS) A new lifetime limit has been introduced, meaning that individuals will only receive CGT relief on the first 100,000 of gains arising from the disposal of ESS shares. The measure applies to all ESS shares acquired under employee shareholder agreements entered into on or after 17 March 2016. ESS shares acquired under existing arrangements will not be affected and gains made on existing ESS shares will not count towards the relevant limits (FB 2016 cl 77). Employment intermediaries Since 6 April, tax relief for travel and subsistence expenses is denied where a worker personally provides services to another person, under arrangements involving an employment intermediary (FB 2016 cl 14). Employment intermediaries are persons carrying on a business of supplying labour (whether or not with a view to profit and whether or not in conjunction with any other business). These rules are not intended to apply to business services groups providing broader services to their clients which happen to involve people delivering those services. They will not apply to any worker, if it can be shown that the manner in which the worker provides his/her services is not subject to supervision, direction or control (SDC) by any person. Where the intermediary is a personal service company (PSC), they will only apply to engagements subject to IR35. Entrepreneurs relief A number of other changes have been introduced for entrepreneurs relief (FB 2016 clauses 73 75 Sch 13). These follow earlier changes in FA 2015 to restrict the relief in certain circumstances in relation to associated disposals, certain disposals of goodwill and joint venture companies/ partnerships. The changes were intended to prevent avoidance, but their broad application meant that relief was denied in some commercial circumstances. These changes are backdated to apply from the dates the previous changes took effect, i.e. in order to enable ER to be claimed in certain commercial circumstances where it had previously been denied. Evasion and avoidance: increased sanctions Higher penalties will apply for tax evasion and avoidance (FB 2016 clauses 144 154), including: a new criminal offence for tax evasion, which removes the need to prove that there was an intention to evade tax; new civil penalties for deliberate offshore tax evaders and those who enable offshore tax evasion, including 15 April 2016 11
increased public naming of evaders and enablers; a requirement to correct historic non-compliance in relation to offshore assets within a specified period of time; new measures targeted at individuals who repeatedly enter into tax avoidance schemes that are successfully challenged by HMRC. These include special reporting requirements and penalties for these serial avoiders, as well as publication of their names; and an increased penalty of 60% of the tax due where arrangements are successfully challenged under the general anti-abuse rule. These changes will come into force at future dates to be determined. In addition various increased penalties in respect of offshore matters set out in FA 2015 come into force on 1 or 6 April 2016. Farmers On 6 April, the averaging period for self-employed farmers was extended from two years to five years. Farmers now have the option of averaging over either timeframe (FB 2016 cl 25). Gaming duty Gross gaming yield bands for gaming duty increased by RPI on 1 April. Income tax The income tax personal allowances, basic rate limit and higher rate threshold for the 2016/17 tax year have already been announced and included in F(No. 2)Act 2015 (ss 5 and 6). The amounts are: Tax year Personal allowance Basic rate limit Higher rate threshold 2015/16 10,600 31,785 42,385 2016/17 11,000 32,000 43,000 From 2016/17, the Scottish rate of income tax will be set separately for Scottish taxpayers; however, for 2016/17 the rate will be the same as for those resident elsewhere in the UK. Investors relief A new relief for investors, which bears similarities to entrepreneurs relief (ER), has been introduced (FB 2016 Sch 14 cl 76). The new relief applies to individual non-employee or director investors in unlisted trading companies. The new relief applies a 10% rate of CGT to gains accruing on the disposal of qualifying shares up to a lifetime limit of 10m of qualifying gains. The issuing company must be an unlisted trading company (or the holding company of a trading group). This relief applies in addition to the existing ER limit. The relief is designed to encourage outside investment, so is only available for non-employees and directors. Unlike entrepreneurs relief, there is no requirement that the investor has a shareholding of over 5%. The shares must be newly issued, issued on or after 17 March 2016, and held for at least three years from 6 April 2016 for the relief to be available. Landfill Communities Fund The cap on contributions by site operators into the Landfill Communities Fund was reduced from 5.7% to 4.2% on 1 April. Landfill tax Landfill tax rates increased by RPI on 1 April. Loans to participators The charge to tax on loans to participators in close companies increased from 25% to 32.5% from 6 April 2016 (FB 2016 cl 46). National insurance The upper national insurance threshold is linked to the higher rate threshold but the starting threshold remains at 155 per week ( 8,060 per annum) in 2016/17, as this threshold is linked to the CPI rise to September 2015, which was negative. Therefore many taxpayers, despite moving out of income tax, will continue to pay national insurance contributions. Higher rate taxpayers benefit more than basic rate taxpayers from the increases in personal allowance and basic rate limit, but some of the benefits will be clawed back in the form of extra NICs because of the increase in the upper earnings limit. Basic rate taxpayers will see a saving of 80 in 2016/17 compared to 2015/16, and higher rate taxpayers an overall 141. Those with income of over 100,000 whose personal allowance is tapered away will see extra cost of up to 19. The triple lock means that the main rate of income tax and the rates of VAT and class 1 NICs will not increase for the duration of this parliament. NICs rebate Employers with contracted-out salary related (defined benefit) pension schemes have been enjoying a 3.4% NICs rebate for employers and 1.4% for employees. Pensions Act 2014 s 24 brought the rebate to an end on 5 April 2016, costing private sector employers an estimated 0.6bn in employer NICs, and 0.2bn in employee NICs; and public sector employees a further 1.4bn. The change is part of the introduction of the new state pension from 6 April 2016. NICs and apprentices under 25 A zero rate of employer s class 1 NICs for apprentices under 25 was introduced on 6 April 2016 (SSCBA 1992 s 9B). To qualify, trainees must be taken on under an approved apprenticeship framework. This is separate from the new apprenticeship levy being introduced in 2017, for which draft legislation was published on 4 February. As currently drafted, the levy will apply to everyone with a pay bill, which is defined as anyone that would incur a liability to employer s class 1 NICs ignoring the secondary threshold! The levy is currently proposed to be 0.5% of a person s total pay bill in excess of their allowance (currently proposed to be 3m). Orchestra tax relief The new orchestra tax relief came into force on 1 April (FB 2016 cl 50 Sch 8). This new tax relief for orchestral production allows qualifying companies engaged in the production of concerts to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit. Both the additional deduction and the payable credit are 12 15 April 2016
Insight and analysis calculated on the basis of EEA core expenditure up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company s qualifying expenditure on the production of a qualifying orchestral concert. This expenditure must be on activities directly involved in producing the concert, such as rehearsal costs. Qualifying expenditure does not include indirect costs such as financing, marketing and accountancy and legal fees. At least 25% of the qualifying expenditure must be on goods or services that are provided for from within the EEA. Concerts whose main purpose, or one of whose main purposes, is to advertise goods and services, include a competition or the primary purpose of which is to make a recording will not qualify for relief. Payrolling benefits The Income Tax (PAYE) Regulations, SI 2003/2682, have been amended, with new chapter 3A allowing employers to register for payrolling online, specifying which benefits to payroll and to which employees receiving those benefits payrolling will apply. The deadline for 2016/17 was 5 April 2016, beyond which it will not be possible to register for next tax year, unless the employer is registering to payroll a benefit which it is providing for the first time. Registered employers will be relieved not to have to file P11Ds for formally payrolled benefits, but a summary of payrolled benefits must still be provided to employees by 31 May following each tax year. This is less formal than a P11D and can be provided in any reasonable format. Peer-to-peer (P2P) lending: relief for losses Income tax relief has been introduced for losses made on P2P lending (FB 2016 cl 32). The purpose of the relief is to ensure that people who invest in P2P loans are subject to income tax on the return they actually make (i.e. interest received less the outstanding amount of loans that become irrecoverable). Relief will be available on losses realised from 6 April 2015. Relief for any losses made in 2015/16 will need to be claimed. Relief will be available automatically in some cases through the lending platform from 6 April 2016. In order for relief to be available, the loan must be made based on market rates and conditions on an arm s length basis. Pensions: annual allowance Since 6 April 2016, there are new restrictions for annual pension contributions, which scale available relief from 40,000 to 10,000 for those with income over 150,000 (including income covered by the dividend allowance and personal savings allowance, and including employer pension contributions). Those with income of over 210,000 will receive the minimum allowance of 10,000 (F(No. 2)A 2015 s 23 Sch 4). Pensions: lifetime allowance The lifetime allowance is being further reduced to 1m (FB 2016 cl 19, Sch 4). This means that it has been reduced three times since the ceiling of 1.8m in 2011/12. The limit of 1m applies equally to defined contribution and defined benefit schemes. However for final salary schemes, the overall limit is calculated by multiplying the pension payable by 20, which means that the lifetime allowance of 1m equates to a final salary pension of 50,000, ignoring any lump sum rights. This is more than is likely to be generated from a defined contribution pot of 1m, which would for example generate an annuity of around 27,000 with 5% growth. Personal savings allowance (PSA) From 2016/17, the PSA is available (FB 2016 cl 4 Sch 6). The PSA provides an exemption (a 0% tax rate) of 1,000 of interest received on an individual s savings for basic rate taxpayers, and 500 for higher rate taxpayers, giving an equal saving for both of 200 per annum. Additional rate taxpayers will not receive the allowance. From April 2016, tax is no longer withheld on interest received from certain bank and building society accounts. The PSA will mean that 95% of taxpayers will no longer have a tax liability on this income but those who do will need to understand the changes and budget to pay the tax due in due course. This may mean that they will need to file a self-assessment tax return for 2016/17. R&D expenditure From 1 April, qualifying R&D expenditure that does not fall under the SME regime only qualifies for an R&D expenditure credit (and not a super deduction) (FA 2013 s 35 Sch 15). Scottish rate of income tax Employers must make sure they apply S codes, which indicate those employers who are Scottish taxpayers, if notified by HMRC. Although income tax rates in 2016/17 are the same for Scottish taxpayers and taxpayers in the rest of the UK, the use of S codes is required to ensure the correct allocation of revenues. Simple assessments HMRC will have the power to make an assessment of an individual s income tax or capital gains tax, whether or not they are within the self-assessment system (FB 2016 cl 155 Sch 23). The procedure allows HMRC to withdraw the notice to file a self-assessment return if one has been given and replace this with the simple assessment, which will use information already available to HMRC, such as details of employment income and savings income provided by banks. This simple assessment will replace the self-assessment normally provided by the taxpayer, and the tax under it will be payable by 31 January following the year of assessment, as for self-assessment tax generally. If the individual considers the assessment is incorrect, it will have to be appealed, otherwise it will become binding. There will be a 60 day appeal period. Stamp duty land tax (SDLT) The additional 3% rate of SDLT for those purchasing additional residential properties in England and Wales, such as second homes and buy-to-lets, is due to apply to completions from 1 April 2016, subject to some transitional relief (FB 2016 cl 117). The increased SDLT rate will apply where, at the end of the day on which a property is acquired, the individual concerned owns two or more residential properties and is 15 April 2016 13
not replacing his or her main residence, which has been sold within the last 18 months. Married couples and civil partners (unless they are separated in circumstances likely to be permanent) will be treated as a single unit for this purpose. The 3% additional SDLT rate will also apply where an individual has sold their main residence and it takes them more than 36 months to complete the purchase of a new one, provided of course that the individual has more than one property at the end of the day the new property is acquired. Where property is being purchased jointly, the additional 3% SDLT rate will apply to the entire value of the additional property if any of the joint owners already own a residential property. In Scotland a supplementary transaction tax of 3% (now called the additional dwelling supplement (ADS)) will apply to second homes or buy-to-let properties. Transfer pricing The transfer pricing guidelines were updated on 1 April 2016. The OECD published revisions to the 2010 version of the OECD transfer pricing guidelines on 5 October 2015. Legislation introduced in FB 2016 cl 71 updates references to the new guidelines for corporation tax purposes for accounting periods beginning on or after 1 April 2016 and for income tax purposes for 2016/17 and later years of assessment. Trivial benefits exemption It looks like the new exemption for trivial benefits will finally make it into statute, at ITEPA 2003 s 323A (FB 2016 cl 13). Although it s a small amount, at 50 per benefit per person, the administrative saving this brings to employers is considerable. There are of course conditions, including that: the benefit cannot be cash or a cash voucher (non-cash vouchers are acceptable); it must not be provided pursuant to a relevant salary sacrifice arrangement; and it must not be provided in recognition of or anticipation of an employee s particular services. As a safeguard, s 323B will impose an annual limit of 300 on officers (past or present) of close companies. This limit will also extend to employees of close companies who are members of the family or household of such officers. VAT thresholds From 1 April, the VAT registration threshold and the VAT threshold for intra-community acquisitions increased from 82,000 to 83,000. The VAT deregistration threshold increased from 80,000 to 81,000. Vehicle excise duty (VED) VED rates increased by RPI on 1 April. Wear and tear allowance In April 2016, legislation came into force to repeal the wear and tear allowance provisions and make new provision for a deduction for the replacement of domestic items such as furnishings and appliances in a let dwelling house (FB 2016 cl 70). The changes will apply for expenditure from 6 April 2016 for individuals and 1 April 2016 for companies. Those involved will now need to keep accurate records of such expenditure in order to claim the allowance correctly. For related reading visit Your guide to Finance Bill 2016 (Claire Hooper, 30.3.16) Budget 2016: A to Z guide of the key tax announcements (17.3.16) Review of Finance (No. 2) Act 2015 (Claire Hooper, 18.11.15) Finance Act 2015: overview (Claire Hooper & Chris Sanger, 23.4.15) TJ topics: Brexit Examining the potential impact of a UK exit from the EU on the UK tax system. To view these articles, visit /tj/brexit With the outcome of the referendum currently too close to call, there is a strong chance that Brexit may become a reality. The resulting tax impact may not rank as highly as immigration or trade concerns, but it is an important issue nonetheless. These three must-read articles, written by leading experts, examine the potential impact of a UK exit from the EU on the UK tax system: What Brexit could mean for the UK tax system What will have to change, and what will stay the same? VAT and customs duty considerations The potential changes to bottom line costs; new compliance issues and requiring changes to businesses systems. UK tax policy considerations If Brexit does takes place, will the UK s tax regime face greater competition as a holding company and business jurisdiction, and how should it respond? 14 15 April 2016