Budget Alert - 2014
Published 19 March 2014
Welcome to DAC Beachcroft's Budget 2014 Alert.
Our analysis as to how today's budget affects the business community is below. We think the three changes which will make the most amount of splash are the helpful relaxation and extension of the ISA rules, the temporary doubling of the annual investment allowance and what according to George Osborne is "the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921".
If you would like to discuss any issues arising from today's Budget, please click here for contact details of our team.
Income tax rates
The personal allowance will increase, rising from £9,440 in tax year 2013-14 to £10,000 in tax year 2014-15, reaching the government's previously stated objective. The government has announced that the personal allowance will increase to £10,500 in 2015-16. As usual, this increase is, in part, paid for by lowering the tax threshold for higher rate taxpayers, though the drop is not as significant as previous years. The 2013-14 and 2014-15 rates are shown below.
|Personal allowance||First £9,440||First £10,000|
|20%||Next £32,010||Next £31,865|
|40%||Next £117,990||Next £118,135|
The personal allowance is still withdrawn by £1 for every £2 of net income beyond £100,000. Net income between £100,000 and £120,000 (in 2014/15) is therefore effectively taxed at 60%. An individual's net income is still reduced by pension payments and charitable donations.
Drop in corporation tax rates
Corporation tax rates for larger companies continue to reduce as the government looks to gradually harmonise the corporation tax rate for all companies at 20% by 2015. The rate for large companies reduces from 23% to 21% in 2014-15. The rates are:
|First £300,000 of profits||20%||20%|
|Profits between £300,000 and £1,500,000||23.75%||21.25%|
The rates above are generally shared between all associated companies. If three companies are associated, for example, the marginal boundaries reduce to £100,000 and £500,000 for each.
Starting tax rate for savers
The starting rate of tax on savings has been reduced from 10% to 0% from 6 April 2015, and the sum this rate can apply to has increased to £5,000. For this rate to apply an individual must have less than £5,000 taxable non-savings income.
Intensified assault on companies owning dwellings
In 2012 and 2013 a package of measures was introduced targeting companies which buy or own UK dwellings worth over £2m.
- A company buying such a property has a 15% SDLT charge on its purchase;
- A company has a CGT charge at 28% on any gain it makes on such a property - this applies to non-resident companies as well as resident companies, even though non-residents are not normally liable to UK CGT;
- The company suffers the annual tax on enveloped dwellings ("ATED"), a lump sum annual charge for each dwelling worth more than £2m.
The aim is to hit companies owning properties for their owners' occupation, and there are exemptions for bona fide investment or development concerns, so long as no shareholder or anyone connected with a shareholder is allowed to occupy the property.
This is now extended to much lower value properties, those worth more than £500,000.
- Where the effective date of the purchase of such a dwelling is on or after 20 March 2014, the company will have the 15% SDLT charge on its purchase;
- On disposals after 5 April 2015 (in the case of properties worth more than £1m and up to £2m) the company will be liable on any gain at the 28% rate, and in the case of properties worth between £500,000 and £1m this is so for disposals after 5 April 2016. It is only the gain accruing after 5 April 2015 or 2016 that is caught (though on earlier disposals the company may be liable to corporation tax or CGT anyway under other rules);
- ATED of £7,000 per year per dwelling will be levied on companies owning properties worth more than £1m and up to £2m for years commencing 1 April 2015. For dwellings worth over £500,000 and up to £1m the charge is £3,500 and applies for years commencing 1 April 2016.
The same exemptions for bona fide investment or development concerns apply.
CGT for non-residents
Non-UK residents are not normally liable to UK capital gains tax. Since 2012 a non-UK-resident company has been liable to CGT on gains on high value UK dwellings (over £2m) in certain circumstances. From April 2015 all non-UK residents (whether individuals or companies) will be liable to CGT on gains on UK dwellings of any type, except that an individual will not be liable if it is his or her principal private residence, in accordance with the usual rule. The non-UK-resident will be treated as having acquired the dwelling at its market value on in April 2012/2015 as appropriate.
CGT: Principal private residence exemption - the last three years rule
There has been a useful rule that if a dwelling ever has been an owner's principal private residence then the last three years of his ownership are exempt from CGT in any event, even if the property is at that time empty or let. The three years is being shortened to eighteen months with effect from April 2014.
The Government stated aims on pensions for Budget 2014 include:
- To give greater freedom over how individuals access their pension savings, including by abolishment of the requirement to buy an annuity in order to help retired savers achieve a better return. The Budget announces announced a number of changes to offer people more options on how and when they access their defined contribution pension;
- Further reduction of public finance expenditure - total public expenditure will be reduced by around a further £2 billion each year from 2016-17, which includes action to ensure that employers are meeting the cost of public service pension schemes, which will result in a permanent reduction to Annually Managed Expenditure (AME) of £725 million in 2015-16, rising to around £1 billion a year from 2016-17 onwards;
- Dealing with the issue of funding pensions and healthcare for an ageing population which will create significant cost Dressures for the UK, which will necessitate reforms to the State Pension Age. The Government plans to consult on increasing the minimum pension age so that it remains ten years below state pension age, for which legislation will be in a future pensions bill.
Specific pension-related changes announced in Budget 2014 include:
Increased Pension Flexibility
The government will allow those with a defined contribution (money purchase) pension to drawdown from it after age 55 from April 2015, with drawdown of pension income under these more flexible arrangements taxed at marginal income tax rates rather than the current rate of 55% for full withdrawals.
The tax-free pension lump sum will continue to be available
Whilst those who prefer the security of an annuity will still be able to purchase one, those who want greater control over their finances in the short term will be able to extract all their pension savings in a lump sum. And those who do not want to purchase an annuity or withdraw their money in one go will be able to keep their pension invested and access it over time.
Pensions flexibility: Financial guidance
The Government will ensure that, from April 2015, all individuals with defined contribution pension pots are offered free and impartial face to - face guidance at the point of retirement and will make available up to £20 million in the next 2 years to develop this initiative.
Pensions flexibility: Capped drawdown
From 27 March 2014, the Government will implement a transitional measure to allow people with defined contribution pensions more flexibility to access their savings, subject to their pension scheme rules.
Currently the limit on the amount of drawdown pension that a drawdown pensioner may withdraw from their capped drawdown pension arrangement during a drawdown pension year is 120% of a value called the ’basis amount’ or ‘equivalent annuity’. The minimum income requirement for entering flexible drawdown will be reduced from £20,000 to £12,000 and the capped drawdown ratio will be increased to 150% of an equivalent annuity.
Pensions flexibility: Small pension pots
In addition, from 27 March 2014 the Government will increase the amount in small individual pension pots that can be taken as a lump sum, regardless of total pension wealth, from £2,000 to £10,000, with the maximum number of small pots that can be taken increasing from two to three.
Pensions flexibility: Trivial commutation (small pension wealth)
From 27 March 2014, the Government will also allow individuals with defined contribution pension wealth more flexibility by increasing the (overall) permitted limit for payment of lump sums under trivial commutation rules, to £30,000, subject to their pension scheme rules. The current commutation limit is £18,000.
The Government will legislate to give HMRC broader powers to prevent pension liberation with greater control over the registration and de-registration of pension schemes. The changes will begin to take effect from 20 March 2014.
The Government will introduce individual protection 2014 (IP14) as a consequence of the reduction in the lifetime allowance to £1.25 million from 6 April 2014. Individuals with IP14 will have a lifetime allowance of the value of their pension savings on 5 April 2014 subject to an overall maximum of £1.5 million.
Dependants’ pension scheme
The Government will consult on options to simplify the dependants’ pension scheme rules to ensure the rules apply fairly, and reduce administrative burdens. Any legislative changes will be included in a future Finance Bill. The Government wants to ensure the current tax rules that apply to certain pensions on death continue to be appropriate under the new system. In particular, it believes that a flat 55% charge will be too high in many cases, and will engage with stakeholders to review these rules.
Pensions tax: Abolish the age 75 rule
In 2011, the requirement to annuitise by age 75 was removed and “flexible drawdown” was introduced. The Government will now explore with interested parties whether the tax rules that prevent individuals aged 75 and over from claiming tax relief on their pension contributions should be amended or abolished.
Voluntary National Insurance contributions (VNICs) Class 3a
The Budget confirmed further details about the new class of VNICs, which will enable those who reach State Pension Age before the 6 April 2016 to top up their Additional State Pension record. The scheme will be open from October 2015 for 18 months and be available to everyone reaching State Pension age before 6 April 2016. The pricing will be set at an actuarially fair rate and the maximum additional amount available will be £25 a week. This scheme may help pensioners with savings who want to boost their State Pension income in a way that protects them from price inflation and provides them with an income for life. It could particularly benefit those with gaps in their Additional State Pension record, such as the self-employed and women who have taken time out from work to raise children.
Qualifying non-UK pension schemes (QNUPS)
The Government will consult on ways to give equivalent treatment to QNUPS and to UK registered pension schemes in order to remove opportunities to avoid Inheritance Tax.
Public Sector Pensions
Public Sector Pension schemes are currently carrying out valuations to determine schemes liabilities as at 1 April 2012 as against the notional value of their assets at that date, and the future costs of providing benefits up to 31 March 2019. Final results and contribution rates will be published in the months after Budget.
The Government will introduce new employer contribution rates for the Principal Civil Service Pension Scheme, the NHS Pension Scheme (England & Wales), the Police Pension Scheme (England & Wales) applying from 1 April 2015, and for the Teachers' Pension Scheme applying from 1 September 2015.
The Chief Secretary to the Treasury has asked the Cabinet Office to set out "an ambitious new efficiency programme" to deliver savings from 2016-17 and across the next Parliament, in time for Autumn Statement 2014. Near final results produced by scheme advisers from the Government Actuary’s Department suggest employer contribution rates from 2015-16 may increase by 2.3% in the Teachers' Pension Scheme, 2.2% in the PCSPS, and 0.3% in the NHS Pension Scheme and decrease by 3.2% in the Police Pension Scheme.
New ISA rules and limits
The budget has announced significant helpful changes to the ISA regime.
The regime has been simplified and improved. The discrepancy between investments in stocks and shares and investments in cash has been removed, meaning you may now invest your full ISA limit in either cash, stocks and shares or some combination of the two. Previously, only 50% of the maximum investment could be in cash.
The qualifying investment limit has also been significantly increased. In the current tax year the limit is £11,520, of which up to £5,760 could be in cash. The limit will be increased to £15,000 from 1 July 2014.
Those with existing ISA stock portfolios will be allowed to transfer these into cash if they so wish.
In addition, the limit for a child's junior ISA will be increased to £4,000 with effect from 1 July 2014.
Relentless offensive against tax avoidance
HMRC's assault on tax avoidance schemes continues. Some promoters who have been guilty of defaults will be designated "monitored promoters" – HMRC call them "high-risk promoters". Their names may be published, they may have to notify their customers of the risks attached to their schemes and HMRC will have enhanced powers to obtain information from them.
More importantly, where a taxpayer has implemented a tax avoidance scheme which has been (or should have been) disclosed under the disclosure legislation or is caught by the General Anti-Abuse Rule, HMRC will be able to require him to deposit the tax up front, pending resolution of the matter. Furthermore, if another person has fought a case to the tax tribunal and lost and is not appealing, then, if HMRC consider that the scheme implemented by the taxpayer is sufficiently similar, HMRC will be able to give notice to the taxpayer inviting him to give in. If he does not give in he must, outrageously, also pay a penalty for not having given in. He has a limited right of appeal against this penalty, and presumably will obtain a refund of it if he eventually fights his case and wins, but this is an astonishing expansion of HMRC's powers.
These changes do not apply to VAT. They come into force when Royal Assent is given to the Finance Act (some time in July), but HMRC will then be able to apply them to past schemes and past tribunal decisions.
Annual Investment Allowance
To encourage capital investment with effect from April 2014, the Annual Investment Allowance will increase from £250,000 to £500,000. This means that businesses will be able to get tax relief from income tax/corporation tax in the year of expenditure on £500,000 worth of plant and machinery rather than having to spread the relief over a number of years via the normal capital allowance process. Where businesses are associated the £500,000 is shared between them. On 1 January 2016 the figure drops to £25,000, but we wouldn't be surprised if next year there was a further extension in the run-up to the election.
Historically these were very important and encouraged the creation of Canary Wharf. Further Enterprise Zones were introduced in 2012 with an expected lifespan of 5 years. It has been announced that this will be extended to 2020. The main advantage of being in an Enterprise Zone nowadays is that all expenditure on plant and machinery qualifies for 100% relief from income tax/corporation tax in the year of expenditure (even if it is above the Annual Investment Allowance).
Seed Enterprise Investment Scheme
The Seed Enterprise Investment scheme was introduced with effect from 6 April 2012 to encourage investment in small, recent start-up companies (being an enhanced version of the long-established EIS). When originally introduced the measure was intended to last a short time, but it has now been confirmed it is to be permanent.
The scheme works by allowing a tax reduction of 50% of the invested sum to the investor on a subscription up to a maximum of £100,000. There are numerous conditions which have to be met such as the shares cannot be sold within 3 years of subscription.
In addition, any gain on sale of these shares after 3 years will be free of CGT so long as no condition is breached in that time.
R&D tax credits
There is a generous but massively underclaimed tax relief for research and development undertaken by companies with the better relief being available to small & medium sized enterprises. SMEs are more generously defined for R&D purposes than for other tax purposes with an SME here being a company / organisation with fewer than 500 employees and either a maximum annual turnover of €100m or with a balance sheet of less than €86million.
At present, a company which is an SME can either claim an enhanced corporation tax deduction of 225% of qualifying R&D expenditure or, if it is loss making, receive an actual cash payment from HMRC of 11% of such expenditure. With effect from 1 April 2014, rather generously this 11% figure is increasing to 14.5%.
Transfer pricing - compensating adjustments
As announced last October, the Finance Bill will include provisions to prevent businesses obtaining a contrived advantage from the compensating adjustment rules. For example, if a partnership of UK resident partners lends a large amount (larger than commercially justifiable) to an associated UK resident company, some of the interest on that loan can be disallowed as far as the company's corporation tax is concerned, but the partners will obtain a compensating adjustment in that part of the interest they receive will be exempt from income tax, thus giving rise to an advantage overall. With effect from 25 October 2013 individuals are not able to claim a compensating adjustment in relation to interest in this sort of case or in relation to fees paid to service companies.
Sales of tax loss companies
Where a company with tax losses is sold there are restrictions on the circumstances in which the company in its new ownership can make use of those losses. In the case of an investment company one of the rules is there must not be a significant increase in its capital. This rule is being eased a bit: an increase will not be significant unless it both exceeds £1m and 25% of the company's capital.
Loan relationships – the de-grouping charge
When a company in a group transfers debt, either as an asset or a liability, to another company in the group, that is normally tax neutral for corporation tax, but if the recipient company leaves the group within six years it can suffer a de-grouping charge in certain circumstances. These rules are being tightened so that they will always catch debits as well as credits. This change applies where a company leaves a group after 31 March 2014.
VAT - prompt payment discount
For forty years there has been something of a loophole in VAT law, in that if a business offers a discount for prompt payment it only had to pay output VAT on the discounted charge even if the customer did not pay promptly and was not given the discount. This rule is being removed with effect from 1 April 2015 "unless, for revenue protection purposes, it is necessary to bring forward the implementation date for specified supplies". For certain telecommunication and broadcasting services it applies with effect from 1 May 2014.
Employee Shareholder Shares
These have been available since Autumn 2013 and are starting to become more and more popular mainly because of the significant tax advantages they can provide. In exchange for giving up certain employment rights (and therefore cutting some red tape) an employee is given these shares which must have a value of at least £2,000. Income tax is only due to the extent these shares have a value of more than £2,000. However the real tax advantage is that on the sale so long as the shares were originally worth between £2,000 and £50,000 there is no tax on sale. Not all employment rights can be given up as some are protected under European law.
Partnerships (including Limited Liability Partnerships)
LLPs are an interesting hybrid between companies and partnerships having (as the name suggests) limited liability buffering their members from claims against the LLP but being transparent for tax purposes. Historically HMRC have assumed that any member of (i.e. partner in) an LLP was automatically self-employed, which gives rise to considerable savings of Employer's NIC. The overwhelming majority of large professional firms (lawyers, accountants and the like) are set up as LLPs. With effect from 6 April unless one of three conditions is satisfied any member of an LLP will be treated for tax and NIC purposes as if they were an employee. In practice, we expect the two most popular conditions to be either that the member in question is part of management or that he or she has a significant capital stake in the LLP. A three month "grace period" has been introduced, partly as we understand because there has been such a rush on members borrowing money from banks that the banks need time to process the loans.
At the same time, HMRC are looking to clamp down on so called mixed partnerships, that is with both individual and company partners (whether they are LLPs or otherwise). Bearing in mind the members of a partnership must pay income tax on their share of the profits even if the profits are retained in the partnership, this acts as a barrier to investment. This has been one of the key reasons to include a company as a partner to reduce the cost of re-investment by circling the profits to that company and then back to the partnership. With effect from April 2014, HMRC will be looking to re-allocate the profits to the relevant individual partner for tax purposes.
Continuing HMRC's stamp duty generosity as previously announced, with effect from 28 April 2014 there will be no Stamp Duty or Stamp Duty Reserve Tax payable on the transfer of shares on AIM and other small markets such as ISDX.