UK SUMMER BUDGET 2015 8 July 2015 The Chancellor, George Osborne released his first all-conservative Government Budget since 1997 on Wednesday, 8 July 2015. The Chancellor described this Budget as focusing on economic security, with the stated aim of the UK becoming a higher-wage, lower-tax, lower-welfare economy. He has announced the reducing of the country s deficit each year and to run at a surplus by 2019/20 according to forecasts. In cash terms, the deficit will fall from 69.5bn in 2015/16 to a surplus of 11.6bn in 2020/21! The Budget was clearly a tax raising reform Budget, with an agenda aimed at reforming the UK tax system in the long term. From a tax perspective there was the usual swings and roundabouts. The welcomed announcements included reduced future corporation tax rates to 18% by 2020, further increases in the personal allowances, IHT nil rate extension for main residences, etc. However, these were heavily outweighed by tax increases in the reform of dividend taxation, increases in property rental taxation, insurance premium tax, VED, pension restrictions, etc. It was no surprise there was some bad news to be announced as like all new Governments the bad news comes early in a Parliament! N. Ireland: Whilst the reduced future corporation tax rates are welcomed and indeed probably assist the NI Executive in terms of reducing the cost of introducing a lower NI Corporate tax rate, they arguably are counter intuitive as it may lessen the attractiveness of a potential 12.5% NI CT rate. It has been reported that levels of public spending per head in Northern Ireland remain higher than any other UK country or region. The new dividend tax reform will have significant impact on many N. Ireland small owner managed companies and whilst there are still savings to be made they are much reduced from the current regime. The after-tax income on the extraction of dividend income by business owners will be significantly reduced from April 2016. The new National living wage of 7.20 per hour from April 2016, rising to 9.00 per hour by 2020 will greatly impact many industry sectors including the hospitality and retail sectors. Please note that this is not intended to be a comprehensive summary, but instead is to highlight points which may be of particular reference to you and your business. This summary is in addition to the previous UK Spring Budget announced on 18 March 2015. 1
PERSONAL TAX ISSUES New legislation to be introduced to tax lock Income tax rates and cap same at the 2015/16 levels for the duration of this Parliament. Income tax rates, 20%, 40% and 45%. Personal allowance for 2016/17 will increase to 11,000 and is to increase to 11,200 for 2017/18. Basic rate band taxed at 20% will be 31,785 for 2015/16 increasing to 32,000 for 2016/17 and 32,400 for 2017/18. Higher rate band taxed at 40% will be increased to 43,000 for 2016/17 increasing to 43,600 for 2017/18. This Government moves closer to its pledge to raise the PA to 12,500 and the higher rate threshold to 50k by 2020. Once the personal allowance reaches 12,500 it will be up rated in line with NMW. Additional tax rate will remain at 45% for 2015/16. National insurance upper earnings and upper profits limits will increase in 2016/17 to stay in line with the higher rate threshold of 43,000. Self employed NIC consultation to take place during August 2015 regarding abolishing Class 2 NICs and reforming the Class 4 NICs for the self employed. No tax lock has been announced for Class IV NIC therefore increases could be on the horizon. Dividend tax credits are to be abolished w.e.f April 2016 to be replaced with a Dividend tax Allowance of 5,000 p.a. Anything over this 5,000 amount will be taxed at 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers. Existing effective dividend rates are 0% for basic rate, 25% for higher rate, and 30.56% for additional rate taxpayers on the net dividend income. This is a reform of the taxation of dividend income and will have a significant impact particularly on small owner managed companies. The government estimates that this measure will raise at least 8.5bn over this Parliament. Whilst dividend extraction is still likely to be more attractive than salary, the savings will be much more reduced and after-tax income for business owners significantly reduced. Non-domicile status: o w.e.f April 2017, anyone who has been resident in the UK for more than 15 of the last 20 tax years will be deemed to be domiciled in the UK for tax purposes even if they are foreign domiciled under general law principles. This also applies for IHT purposes. o w.e.f April 2017, individuals born in the UK to parents domiciled here will not be able to claim non-domicile status while they are resident in the UK. o Remittance basis charge following consultation the government will not continue with plans to introduce a minimum 3-yr claim period for the remittance charge basis. Saver s tax reliefs:- See our Spring Budget announcement for details. Help to buy: ISA scheme announced in the Spring Budget, will be delayed until 1 Dec 2015. ISA - Plans to make ISAs more flexible by allowing ISA savers to withdraw and replace money from their cash ISA accounts without it counting towards their annual ISA limit so long as the money is replaced within the same tax year. This policy will be extended also cover cash held in stocks and shares ISAs w.e.f. 6 April 2016. Sporting testimonials a consultation to reform the tax treatment of such payments. Venture capital schemes subject to State Aid approval, a number of changes are to be made to the scheme rules. Bad debt tax relief for Peer to Peer (P2P) loans against other P2P income to be introduced from April 2015. W.e.f April 2017 new withholding tax rules on P2P loans will be introduced. Extending ISA eligibility a new Innovative Finance ISA is to be introduced for loans arranged via a P2P platform w.e.f 6 April 2016. High net worth individuals - The Government are concerned at the possible levels of tax evasion and non compliance among wealthy individuals so plans have been announced to extend the remit of the HMRC High net worth unit. This unit currently looks after individuals 2
worth 20m+ which is now to drop to 10m+. Another consultation is promised, on enhancing the information reported by wealthy individuals and trusts. BUSINESS TAXATION Corporation tax rates for all non-ring fenced profits to reduce from 20% to 19% from 1 April 2017 and 18% from 1 April 2020. Corporation tax payment dates will change to a quarterly in-year payment basis (3 rd, 6 th, 9 th & 12 th months) for companies (groups) with annual taxable profits of 20M or more w.e.f accounting period starting on or after 1 April 2017. Purchase of Goodwill tax relief on the purchase of goodwill or other customer-related intangibles (e.g. customer information, customer relationships and unregistered trade markets) has been abolished w.e.f all acquisitions after Budget Day, 8 July 2015. Capital allowances the permanent Annual Investment Allowance was due to revert to 25,000 on 1 January 2016. The Chancellor has confirmed this will increase to 200,000 from 1 January 2016. The AIA has increased and decreased numerous times since its introduction in 2008. These fluctuations have led to considerable complexity in calculating allowances therefore a stable and permanent level is welcomed. R&D tax credits from 1 August 2015 it will no longer be possible for universities and charities to claim R&D tax credits. This affects their own independent research as well as R&D they carry out as subcontractors. Corporate loan relationship and derivative contracts modernisation of these tax rules with effect for accounting periods commencing on or after 1 January 2016. Controlled Foreign Companies (CFC) loss relief restriction w.e.f 8 July 2015 companies will no longer be able to set off UK losses and reliefs against a CFC charge. Disposal of stock - amendment to legislation regarding trading stock and intangible assets to ensure that disposals other than in the normal course of business (e.g. between related parties) are brought into account for tax purposes at market value. Business tax Roadmap to be published by the government by April 2016 setting out the plans for business taxes over the rest of the Parliament. Consortium relief a relaxation w.e.f for accounting periods beginning on or after 10 December 2014, relief may flow regardless of where the link company is based. The Office of Tax Simplification - It was announced that this OTS office is now a permanent office of HM Treasury and it has been asked to review the closer alignment of income tax and NIC and also to review the taxation of small companies. Large businesses consultation on introducing a voluntary code of practice defining the standards HMRC expects large businesses to meet in their relationship with HMRC. Investment fund managers CGT reform on full amounts received in respect of carried interest w.e.f Budget Day, 8 July 2015. Company distributions a consultation is to take place. Apprenticeships levy a new levy on large UK employers has been announced. No further details have yet been announced. IR35 rules further consultation to consider how to improve the effectiveness of the existing employment intermediaries. The Bank Levy is to be reduced from current 0.21% to 0.10% by 2021. From 2021, the taxable base for the levy will be redefined to exclude non UK balance sheets. A new 8% Bank corporation tax surcharge on Banking profits ( 25m annual allowance to remove small banks from this charge) is to be introduced from January 2016. This surcharge will not be reduced by carry forward losses or group relief from non banking companies. In addition from Budget Day, 8 July 2015, it will no longer be possible for Banks to reduce their taxable profits by compensation payments to customers for misconduct/mis-selling. These costs will now be non tax deductible. 3
EMPLOYMENT ISSUES New legislation to tax lock Employer and Employee NIC rates and cap same at the 2015/16 levels for the duration of this Parliament. National Living Wage new compulsory living wage of 7.20 p/h for over 25s to be introduced from April 2016 with the aim to increase to 9.00 p/h by 2020. Current NMW adult rate is 6.50 p/hr due to increase to 6.70 p/hr from October 2015. Public sector pay rises will be capped at 1% p.a. until 2019. Employment allowance - which reduces employer s NIC:- o to increase from 2,000 to 3,000 w.e.f 6 April 2016. o one person companies where the director is the sole employee will no longer be entitled to the Employment Allowance w.e.f 6 April 2016. Salary sacrifice schemes government to actively monitor salary sacrifice schemes and their impact on tax receipts. Trivial benefits as previously announced a new statutory exemption for trivial benefits in kind costing less than 50 w.e.f April 2016. NMW compliance the government will increase funding for NMW enforcement to help tackle non-compliant employers. Termination payments consultation to take place regarding the tax and NICs treatment of termination payments to make the system simpler and fairer. A discussion paper is to be published shortly outlining the potential framework for new rules for tax relief on travel & subsistence expenses. IR35 rules - A consultation has been issued by HMRC on proposals to restrict home-to-work travel & subsistence payments for directly controlled workers. 3 million new apprenticeships to be created by 2020 funded by the apprenticeship levy. PENSION Pension lifetime allowance from 6 April 2016 the lifetime allowance for pension contributions will be reduced to 1m. Transitional protection for pension rights will be introduced. This allowance will be indexed annually in line with CPI from 6 April 2018. Pension annual allowance relief will be restricted for those with combined income & pension contributions totalling over 150,000 (additional rate taxpayers) by tapering away their Annual Allowance from 40,000 to a minimum of 10,000 w.e.f 6 April 2016. Secondary market for annuities plans for implementation to be delayed until 2017. Consultation to take place into the wider Reform of Pensions tax relief. PROPERTY TAX Wear & Tear Allowance (W&T) following consultation w.e.f. 6 April 2016, W&T allowance will be replaced with a new relief allowing landlords of furnished rental properties to deduct the actual cost of replacing furnishings. Capital allowances will continue to apply for Furnished holiday lets. Restricting finance cost relief - restriction of the income tax relief allowed on finance costs (i.e. mortgage interest and fees on loans/mortgages) available to landlords of residential properties. Relief will only be available at the basic rate of tax (currently 20%). This restriction is to be phased in over 4 years w.e.f 6 April 2017. This change will not impact furnished holiday lets. Deduction from Property Basic Rate Tax Deduction Income 2017/18 Only 75% of finance costs Remaining 25% ** 4
2018/19 Only 50% of finance costs Remaining 50% ** 2019/20 Only 25% of finance costs Remaining 75% ** 2020/21 No tax deduction permitted against rental income Full 100% of finance costs ** ** There is a further test to determine the maximum basic rate tax relief allowed. Increase in Rent-a-Room relief from 4,250 to 7,500 w.e.f. 6 April 2016. CAPITAL TAXES CGT rates remain unchanged 18% for basic taxpayers and 28% higher rate taxpayers. IHT for transfers on death on or after 6 April 2017, the introduction of an additional nil-rate band when a residence is passed on death to a child of the deceased and their lineal descendants of up to 100,000 in 2017/18, 125,000 in 2018/19, 150,000 in 2019/20 & 175,000 in 2020/21. These new rules apply to only one residence. Unused additional nil-rate band can also be transferred to a surviving spouse/civil partner if the surviving spouse/civil partner dies after 6 April 2017 (regardless of when the first spouse/cp died). It only applies on death and not on lifetime transfers. This additional nil-rate band will taper away for estates with a net value over 2m taper rate is at 1 for every 2 over 2m. These new rules will also be available when a person downsizes or sells/ceases to own a qualifying home on or after 8 July 2015 and assets of an equivalent value up to the additional nil-rate band, are passed on death to their direct descendants. IHT no rates changes. The nil rate threshold of 325k is to continue until 2020/21 so by then an individual can have an effective 500,000 nil rate band. IHT a reform of relevant property trusts preventing the avoidance of IHT by the creation of multiple trusts IHT from April 2017, o anyone who has been resident in the UK for more than 15 of the last 20 tax years will be deemed to be domiciled in the UK for tax purposes. This also applies for IT & o CGT purposes as noted above. individuals born in the UK to parents domiciled here will not be able to claim nondomicile status if they return to take up UK residency. IHT of non-domiciles from April 2017, IHT will be payable on all UK residential property (occupied or let) owned by non-domiciles, regardless of their residence status for tax purposes and regardless of whether the property is held directly or indirectly through an offshore structure. IHT an online file and pay submission system is to be introduced. INDIRECT TAX VAT No rate changes - New legislation to tax lock the standard and reduced rates of VAT at the 2015/16 levels for the duration of this Parliament. VAT on services used and enjoyed in the UK provisions to be introduced so that from next year all UK repairs made under UK insurance contracts will be subject to UK VAT. Insurance premium tax standard rate w.e.f 1 November 2015, the standard rate of insurance premium tax (IPT) will be increased to 9.5%. From 1 March 2016, all premiums received by insurers are taxed at 9.5% regardless of when the policy was entered into. OTHER Direct recovery of debts new measures to increase HMRC s powers in the recovery of tax 5
and tax credit debt directly from debtors bank and building society accounts, including cash ISAs. This measure will be subject to robust safeguards including a county court appeal process, face to face visit, etc. Tax Credits a number of changes are on the horizon:- The award will be withdrawn at a rate of 48p (increase from 41p) for every extra 1 earned above the threshold. W.e.f. April 2016. The income threshold will be reduced from 6,420 to 3,850 w.e.f. April 2016. The child element of tax credits/universal credit will no longer be awarded for third and subsequent children born after 6 April 2017. Transitional protection in certain cases. The income rise disregard in tax credits comparing last year s income to in-year income is being reduced from 5,000 to 2,500 from April 2016. Due to a legal challenge, tax free childcare will now be launched from early 2017. The existing scheme, Employer supported childcare will remain open to new entrants until the new scheme is introduced. From April 2017, removing the family element in tax credits when a first child is born. Transitional protection in certain cases. Separately, the family premium in housing benefits will be removed for new claims and new births from April 2016. The Household benefit cap will reduce to 20,000 ( 23k greater London). Most working age benefits will be frozen for 4 years from April 2016. This extends to include child tax credit and working tax credit. Climate change levy (CCL) exemption for renewably sourced electricity will cease from 1 August 2015. Tackling the hidden economy subject to a consultation on the detail - extension of HMRC powers to acquire data from online intermediaries and electronic payment providers to find those operating in the hidden economy. GAAR penalty consultation on the detail of introducing a GAAR penalty, etc. Criminal investigations and non compliance increase in funding and resources by 750m to HMRC to step up investigations into serious and complex crime and also to tackle non compliance and tax evasion of individuals (including non domiciles) and businesses of all sizes. Serial users of failed tax avoidance schemes are to be named and shamed. The Chancellor announced a return on this investment of 7.2bn in extra tax receipts. Reform of VED rates and bands a new banding system is to be introduced for new cars registered on or after 1 April 2017. First year rates will be based on CO 2 emissions and there will be 3 bands: zero emission, standard and premium. For standard cars - a flat rate of 140 (except for zero emission cars). Cars with a list price over 40k will have an additional supplement of 310p.a. for the first 5 years. The new VED system will ensure the cleanest cars are incentivised. There will be no change to VED for existing cars. As a result of the VED a new Road Fund will be created to pay for the road infrastructure. The government will engage with the NI Executive on how this money is allocated in Northern Ireland. Also announced is that new cars will see their first MOT at 4 years old (instead of 3 years old). Fuel Duty to remain frozen this year. Student maintenance grants will be replaced by new maintenance loans. From 2016/17 academic year, cash support for students will increase to 8,200 p.a. Loans will be repaid back when students earn above 21k p.a. FULL RATES AND ALLOWANCES CAN BE FOUND AT www.farrellca.com The above is intended as a general summary to the measures announced in UK Summer Budget 2015. All changes announced are subject to being enacted in the forthcoming Finance Bill. It is possible that the measures described above may be modified during the legislative process and prior to enactment. No action should be taken on the basis of the above without obtaining professional taxation advice. If you have any further questions, please do not hesitate to contact us. Telephone: 028 406 30876 (from ROI 048) 6