This Autumn Statement was a Spending Review, focusing on the detail of the Government's long-term economic plan and attempting to mollify the recent tax credit furore by positioning the Conservatives as "the builders". George Osborne made very few substantive tax announcements in his speech and most of the key points covered below followed after the Statement itself.
The Statement was also unusually low on politics, perhaps a reflection of the amount of time until the next General Election. It is expected that the tax credits U-turn and major spending decisions will grab the headlines rather than any of the tax announcements. However, there was a surprise for buy-to-let landlords and second home owners with an increase in SDLT and a proposal to accelerate the capital gains tax payment deadline on the disposal of residential properties (although this latter change will not come in until 2019).
Despite capital gains tax and inheritance tax not being included in David Cameron's "tax lock", there were again no changes to the CGT rate or the Entrepreneurs' Relief rules, or IHT business property relief and agricultural property relief.
In this briefing, we highlight some of the main points of interest. Please contact any member of our tax team if you have any queries.
Employment intermediaries and tax relief for travel and subsistence
After completing the consultation process, the Government has confirmed that it will legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary such as an umbrella company or a personal service company. The legislation will come into effect from 6 April 2016. The proposal set out in the consultation document released in July 2015 stated that the restriction would apply to those who are supplying personal services engaged through an employment intermediary and are subject to the supervision, direction or control of another person. The consultation document also stated that such changes would level the playing field for access to tax relief for travel and subsistence.
These changes are likely to have an adverse impact on companies which supply temporary staff and ignores the harsh reality that those on temporary contracts do not have similar employment and redundancy rights as their counterparts who are in permanent roles. There also appears to be little to no recognition that those on temporary contracts lack job security and inevitably have time between fee paying roles. How adverse the impact will be depends very much on the provisions of the draft legislation which should be available on 9 December 2015.
Taxation of sporting testimonials
The Government is planning to include legislation in the Finance Bill 2016 to simplify the tax treatment of income from sporting testimonials from 6 April 2017. All income from sporting testimonials and benefit matches for employed sportspersons will be liable to income tax. There will also be an exemption of up to £50,000 for employed sportspersons with income from sporting testimonials that are not contractual or customary. This legislation will apply where the sporting testimonial is granted or awarded on or after 25 November 2015, and only to events that take place after 5 April 2017. Legislation will be also be introduced before 6 April 2017 for the National Insurance treatment of this income to follow the income tax treatment.
This is a welcome codification of the law as the practice that had been applied related to a 1927 tax case (Reed v Seymour (11TC625)) when the sporting world was very different. The £50,000 exemption for non-contractual or non-customary payment also recognises the fact that a testimonial match is usually organised to demonstrate affection and regard for the personal qualities of the sportsperson and therefore the proceeds are not from the employment and so are not earnings.
Review of business investment relief for remittance basis users
In April 2012 the Government introduced business investment relief for remittance basis users. The relief enables remittance basis users to remit their offshore income and capital gains to the UK tax-free, provided the remitted funds are used for certain qualifying investments in the UK. The Government's rationale was clear; they wanted to incentivise remittance basis users to bring money to the UK and invest in our economy. The rules regarding the relief are relatively stringent and, as a result, uptake on the relief has been low. Clearly the Government hopes to address this by consulting on changes to the relief to encourage more remittance basis users to rely on it, and to increase investment into the UK economy.
Finally a piece of good news for the remittance basis users. If the Government are seeking to encourage greater use of the relief, it should mean that the current rules will be relaxed. This could enable remittance basis users to bring their offshore income and capital gains to the UK without incurring UK tax.
Venture capital schemes: changes to eligible investments
The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT) schemes provide income tax and capital gains tax breaks for investors who support small and/or start-up companies. The Government has announced that, from 30 November 2015, the list of qualifying activities that these small companies can undertake will be restricted. Reserve energy generating capacity and the generation of renewable energy that also benefits from other Government support will no longer be qualifying activities. From next April, all remaining energy-generating activities that currently qualify under the schemes will cease to be eligible for tax-incentivised support.
This announcement will affect small businesses that currently invest in energy generation and that had hoped to raise further investment through the EIS, SEIS and VCT funding models. There is no suggestion, at this stage, that funds already raised will be affected by the change. The Chancellor explained the decision as a move to redirect new investment into businesses and sectors that are seen as more high-risk and which have a higher potential for dramatic growth. This move also seems to reflect the Government's general move away from supporting renewable energy in favour of gas and nuclear power.
Simplification of employee share scheme rules
The Government has pledged to introduce a number of technical changes to streamline and simplify aspects of the tax rules for tax-advantaged and non-tax-advantaged employee share schemes. The changes are designed to provide more consistency throughout the rules and to put beyond doubt the tax treatment for internationally mobile employees in respect of certain types of employment-related securities and options.
It is not expected that these changes will have a material impact on the current rules. However, the suite of employee shares scheme amendments made in the Finance Acts 2013 and 2014 raised some uncertainties and questions which should be addressed in the Finance Bill 2016.
Post-death deeds of variation to be left alone
Following the review announced at March Budget 2015, the Government will not now introduce new restrictions on how deeds of variation can be used for tax purposes, but will continue to monitor their use.
As part of the Government review of deeds of variation, Mishcon de Reya was invited to attend a meeting with HMRC in September 2015 to discuss on an anonymous basis why deeds of variation were used and whether they were being abused. We also responded to the Government consultation in October 2015 which asked for information about how deeds of variation were used for the redirection of estate assets. We made it clear on both occasions that, in our experience, deeds of variation are useful to give flexibility after death, reflecting changes in family circumstances, increasing the amount of legacies to charity and helping to settle post-death disputes. In our experience, they are not used to support contrived or artificial arrangements to reduce tax liabilities. We are pleased that the Government has listened to these representations and has chosen to leave this flexible and sensible regime alone.
The Government is continuing with its programme encouraging apprenticeships and it expects at least 3 million apprenticeships should have commenced by 2020. In order to ensure that the programme is funded, it will introduce the apprenticeship levy in April 2017 and draft legislation will be included in the Finance Bill 2016. The levy will be set at a rate of 0.5% of an employer’s total salary costs and will be paid and collected through the PAYE. Each employer will receive an allowance of £15,000 to offset against their levy payment which means that the levy will only be paid on salary costs in excess of £3 million.
This is, in effect, an employer NIC charge increase of 0.5% for those who employ a large number of employees. However, given the targeted use of the levy and the availability of apprentices to those employers having to pay the charge, there should be little resistance.
Corporation tax on restitution claims
The Government has introduced a special 45% rate of corporation tax on all restitution interest income. This applies where a restitution award is made - whether as a result of a judgment or by agreement - instead of the normal corporation tax rate of 20%.
The Government's announcement has been driven by the recent Court of Appeal decision in Littlewoods  EWCA Civ 515, which held that the taxpayer was entitled to interest on a compound basis on the overpayment of tax (rather than simple interest). This decision was based on the EU law principle whereby taxpayers are entitled to the repayment of tax that is collected in breach of EU law, in addition to interest which must not deprive the taxpayer of an “adequate indemnity” for the loss arising through the undue payment of tax. Given the large numbers of claims stayed while awaiting the final determination of the Littlewoods litigation (with some estimating this to amount to over £30 billion), it is no surprise that the Government has decided to introduce a special tax on these (and other) restitution interest claims. We understand that there is already a judicial review challenge to the legitimacy of this legislation.
Stamp Duty Land Tax (SDLT) announcements, including increase in rate of SDLT for let properties and second homes
Driven by its housing agenda, the Government is proposing to increase the rate of SDLT on the purchase of "additional" homes (which they define as buy to let properties and second homes) with effect from April 2016. The rate will be increased by "3 percentage points above the current SDLT rates" and "some" of the additional amounts raised will be invested in areas where the impact of second homes is a problem for local residents. Details are currently limited (the Government will consult on the detail), but it is clear that caravans, mobile homes and houseboats will not be included, and the Government is suggesting that certain "corporate or funds owning more than 15 residential properties" may not be captured either.
In another announcement, the Government will consult in 2016 on reducing the payment window for paying SDLT and filing a return from the current 30 days to 14 days.
Finally, HMRC has confirmed after consultation that it will be introducing a seeding relief for Property Authorised Investment Funds (PAIFs) and Co-ownership Authorised Contractual Schemes with effect from Royal Assent of Finance Bill 2016.
The proposed increase in SDLT for additional homes is an unexpected, although not entirely surprising, policy announcement. The Government will need to get its skates on with its consultation if the intention is for the new tax to go live from April 2016. The detail will also be key: given that SDLT on residential property is no longer based on a single fixed percentage of the entire price, the 3% cannot simply be added to a single percentage. It appears that 3% will therefore be added to the rate of tax on each "slice" – significantly increasing the SDLT due. How the new rules interact with, for example, multiple dwellings relief will also be key. Finally, one hopes that appropriate grandfathering provisions will be in place for existing contracts.
Reducing the filing date for land transaction returns from 30 to 14 days will likely be an unhelpful development (and lead to more late returns), for a fairly de minimis cash flow benefit for HMRC.
Changes to payments of capital gains tax on the disposal of residential properties
From April 2019 a payment on account of capital gains tax due on the disposal of a residential property will be required within 30 days of the completion of the disposal. This is a significant departure from the current position where capital gains tax is not due until 31 January in the year after the tax year of disposal. For example, if you disposed of a property on 7 April 2015 you would not need to declare or pay the tax until 31 January 2017. However, under the new proposals, if you disposed of a property on 7 April 2019 you would need to declare and pay the tax by 7 May 2019. The Government has said this will not affect gains that are not liable to capital gains tax due to principal private residence relief and that they will publish draft legislation for consultation in 2016.
Whilst the overall tax liability will not change this will affect cash flow. If you are looking to dispose of a property you may wish to ensure completion is pre-April 2019 to delay the payment of any capital gains tax due on the disposal.
Anti-evasion and anti-avoidance measures
The Government is introducing new measures which will appear in Finance Bill 2016. In addition to increased "naming and shaming" there are to be tough substantive measures including the following new offences:
- a strict liability offence for failing to declare offshore income and gains: in the most serious cases there will be no need to prove intent; and
- an offence for corporates failing to prevent criminal facilitation of tax avoidance by their agents.
- penalties for deliberate evasion to be increased with a new penalty based on the value of implicated assets;
- penalties for enabling evasion; and
- consultation on new penalties for failures to correct historic non-compliance.
In addition, "serial avoiders" who repeatedly seek to avoid tax but fail, and also those promoting avoidance schemes which similarly fail, will be subject to special reporting and disclosure requirements in Finance Bill 2016. Avoiders will increasingly be subject to naming and shaming and will also be denied certain reliefs to which they would otherwise have been entitled.
Finally, in addition to the specific anti-avoidance measures, the effect of the General Anti-Abuse Rule (GAAR) is to be enhanced in Finance Bill 2016, bolstered by a new 60% penalty for schemes defeated by the GAAR.
The relentless campaign to discourage and shut down offshore tax evasion continues. These measures might be eye-catching but, to some extent at least, they overlap and/or duplicate existing measures, adding to the already extensive (and confusing) array of remedies available to HMRC.
As far as the provisions made for "serial avoiders", it seems the old adage that 'if at first you don't succeed try, try again' is not one that should be followed by tax avoiders and their advisers.
Taxation of performance linked rewards paid to asset managers
Following the consultation document issued on 8 July this year, the Government plans to introduce legislation in next year's Finance Bill to determine when performance awards received by asset managers will be taxed as income or capital gains. The starting assumption announced today is that an award will be subject to income tax, and that capital gains tax will only be relevant where the underlying fund undertakes long-term investment activity.
The Government has been uncomfortable with the tax treatment of investment managers for a long time. This change follows on from the restriction on capital gains tax treatment for carried interest announced in the Summer Budget, the "disguised fee income rules" introduced in April this year and the salaried member rules for LLPs.
The real issue is where the Government will draw the line between trading (that gives rise to returns taxed as income) and investment (where returns should achieve gains tax treatment). Two options were consulted on: Option 1 looked to define activities that constitute long-term investment and Option 2 was to base the judgement on an average length of time for which funds held assets or instruments. If Option 2 has found favour with the Chancellor then profits on assets or instruments disposed of before a minimum holding period is achieved will be subject to income tax, though it awaits to be seen whether and how retrospectively the "average length of time" will be calculated and possibly adjusted, if at all, to "save" profits on such early sales. If this approach generates certain returns in the form of income then the position of non-UK domiciled fund managers may be adversely affected. This will be another unwelcome change for asset managers (whether private equity or hedge fund) who are likely to see the tax element of financial awards increase along with compliance costs, and may prompt the market to look again at the best way to incentivise key managers.