In his first and last post-Brexit Autumn Statement, the Chancellor was keen to point out that the UK is predicted to be the fastest growing major economy in the G7 this year, with growth of 2.1% for 2016, in stark contrast to earlier gloomy pre-and post-Brexit predictions. He also spoke of record employment and major deficit reduction. With those boasts out of the way, he acknowledged the economic uncertainty that lies ahead, with growth expected to be significantly below, or at, 2% in each of the next five years. The Chancellor has announced heavy Government investment in research, development, innovation and technology, backed by an upgrade to the country's digital infrastructure to ensure the UK can deliver improved productivity as we move towards a post-Brexit world.
In tax terms, there were few new or exciting announcements. The widely-predicted salary sacrifice changes have been announced. The alignment of Employer and Employee National Insurance may be just the first step in major changes to National Insurance. Tenants may welcome regulation of letting agents' excessive fees, but this may be short-lived if those fees are simply passed on to landlords, resulting in increased rents. Savers, though, will be pleased to see the increase in the annual ISA allowance to £20,000 from 2017 and a new NSI bond. The Business Taxes Roadmap remains on course and will cut corporation tax to 17% by 2020. Just when we thought he'd resigned after announcing this was his last Autumn Statement, the Chancellor confirmed that future Budgets will be moved to the Autumn, with a Spring Statement.
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 tax and benefits in kind
National Insurance Contributions (NICs)
From April 2017, the threshold at which employers start paying National Insurance Contributions (or NICs) is to be reduced to align the threshold with that for employees. This means that both employees and employers will start paying NICs on weekly earnings above £157.
This change will have no impact on employees but, whilst it will simplify the administration of accounting for National Insurance through the PAYE system, there will now be an additional cost for employers.
From April 2018, termination payments over £30,000 which are subject to income tax, will now also be subject to employer National Insurance Contributions (they will remain exempt from employee NICs). The first £30,000 of a termination payment continues to be exempt from income tax and NICs.
First announced earlier this year, the purpose of this change is to stop the abuse of categorising contractual payments as termination payments to avoid paying National Insurance Contributions.
Salary Sacrifice and Benefits in kind
From April 2017, the tax advantages of salary sacrifice schemes, other than in relation to pensions, childcare, Cycle to Work and ultra-low emission cars, will be removed. Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021. A consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits will also be published as part of the 2017 budget next March.
This will mean that employees swapping salary for benefits will pay the same tax as the vast majority of employees who buy them out of their post-tax income.
Abolition of Employee Shareholder Status (ESS)
The income tax and capital gains tax exemptions on ESS shares will no longer be available with effect from 1 December 2016 on any ESS shares acquired after that date (or 2 December if the independent advice had been received before 1.30pm on 23 November).
This means that (i) for income tax purposes employees will no longer receive a £2,000 tax deduction on the initial taxable value of their ESS shares; (ii) the £100,000 tax-free amount will be removed so that all proceeds received on the sale of ESS shares will be subject to capital gains tax; and (iii) if a company buys back ESS shares from an ex-employee, this will be treated as an income distribution and not a capital receipt.
Although the status of becoming an employee shareholder can continue for now, the Government has stated that it will be closed at the next legislative opportunity.
The Government's decision to abolish the ESS tax benefits is surprising, particularly given the lifetime cap imposed in the March 2016 Budget and through informal messaging from the Treasury since then that it would continue. However, the Government's concern is that ESS is primarily being used for tax planning instead of supporting a more flexible workforce, for which it was originally intended. Based on statements made today however, those currently holding ESS shares should not be affected by this change.
The Government announced the removal of an inconsistency between rural relief and small business rate relief, by doubling the rural rate relief to 100% from 1 April 2017.
The proposed consultation on bringing non-resident companies with UK source income into the scope of corporation tax is potentially significant for non-resident landlords investing in UK real estate. Currently, offshore corporate landlords are usually subject to income tax at 20% - the proposals would bring such landlords within the scope of corporation tax. It is proposed that the consultation will be launched at Budget 2017 next March.
There was little of interest on the property tax side in the Autumn Statement. There was no tinkering with the rates of SDLT - as had been urged in some quarters - and the gradual reduction in corporation tax (going down to 17% by 2020) was simply a re-announcement of existing plans.
The proposal to bring non-resident landlords within the scope of UK corporation tax would mean that the increasingly lower rates of corporation tax on rental profits would apply to offshore landlords, but there would be various other consequences which would need to be considered carefully. For example, how would the current non-resident landlord's scheme (which allows a landlord to pay income tax under the self-assessment regime) be affected? Will the changes impact on the law relating to UK source interest (for example, in relation to shareholder loans between non-resident parties) and when will UK withholding tax arise on such interest payments? Certainly the new rules on the deductibility of corporate interest would appear to apply to an offshore landlord caught by the new rules.
From 6 April 2017, non-domiciled individuals who have been resident in the UK for 15 of the past 20 years, or who were born in the UK with a UK domicile of origin and are now UK resident, will be deemed domiciled for all tax purposes. Their worldwide estate will be subject to inheritance tax and they will no longer be able to claim the remittance basis. Income and capital gains, arising in offshore trusts set up before the individuals become deemed domiciled, will not be taxed provided the income and capital gains are retained in the trusts.
As previously announced, all UK residential properties that are indirectly owned by non-domiciled individuals through an offshore company (or company and trust) structure will be subject to inheritance tax.
The Government has confirmed that the rules for Business Investment Relief will be changed to encourage remittance basis taxpayers to bring offshore income and gains into the UK to invest in British businesses. Details of the changes are yet to be announced following the recent consultation in August 2016.
Non-doms still have no certainty as to how the new rules will look. No more details have been provided in this Autumn Statement further to what was already announced in HMRC's second consultation document published in August this year. Non-domiciled individuals who will be affected by these changes from April 2017 should seek advice to review their affairs urgently as the window to reorganise is closing
Corporation Tax – more than meets the eye?
The Chancellor, having emphasised in the Autumn Statement how much businesses value stability, unsurprisingly confirmed that the rate of corporate tax would, as previously announced, fall from 20% to 17% by 2020. He also confirmed that, with some wider but unspecified carve outs for finance costs on borrowing to "invest in public benefit infrastructure", the restrictions on tax relief for large groups would come in as expected from April 2017. In addition, he announced that steps would be taken "to address unintended consequences and simplify the administration of the new rules" intended to restrict the level of corporate profits that could be sheltered by carried forward losses – a sort of Alternative Minimum Tax for UK corporates – which, as anticipated, take effect from April 2017.
More welcome was the improvement to the substantial shareholding exemption, removing the "investing requirement" – which currently requires the investing company to carry on a trade, or be a member of a trading group, before and after the disposal – and to "provide a more comprehensive exemption for companies owned by qualifying institutional investors". We expect this to encompass joint owners or those holding via various common fund structures.
Although only a promised consultation, the Government is considering bringing all non-resident companies receiving UK source income into the corporation tax regime rather than, as is currently the case, corporation tax only applying to non-resident companies trading through a UK permanent establishment or receiving certain kinds of UK land-related development profits. The explanation given is to ensure all companies are subject to the corporation tax rules, including the limitation of corporate interest expense deductibility and loss relief rules. This might be aimed particularly at highly geared non-resident property investment companies, although it might also be aimed at digital businesses - we will have to await the consultation document.
Given increased levels of Government borrowing, many businesses will be relieved that the corporation tax rate cuts will be introduced as scheduled and that the restrictions on loss relief and finance costs, if anything, are being fine-tuned rather than tightened up. However, the Office of Tax Simplification study on corporation tax computations, and the promised consultation on bringing non-resident companies within the corporation tax regime, may both suggest a desire to increase the overall corporation tax take by discreetly widening the corporate tax base.
The March 2016 Budget announced a series of changes to tackle the use of disguised remuneration arrangements under which employees and employers could avoid paying income tax and National Insurance Contributions. The Autumn Statement has now extended these changes to apply to the self-employed and to deny tax relief for employer's contributions made to a disguised remuneration scheme, unless the relevant tax and National Insurance Contributions are paid within a specific time frame (yet to be confirmed).
Whilst many remuneration arrangements that were designed to avoid paying income tax were effectively closed down by the disguised remuneration legislation first introduced in 2010, HMRC has continued to unearth other schemes that that are still not caught. This change continues the Government's stance on tax avoidance and reduces the appeal of disguised remuneration schemes for employers by denying any tax relief until the appropriate tax has been paid.
Insurance Premium Tax
The standard rate of Insurance Premium Tax (IPT) rises from 10% to 12%.
The higher rate of 20% (on, for example, certain motor insurance) and exemptions (including life insurance and permanent health insurance) each remain unchanged.
Avoidance and Evasion
Following a consultation earlier this year, the regime for disclosure of so called avoidance schemes is to be strengthened in next year's Finance Bill. Changes will include shifting the duty to disclose from users to promoters (unless they enjoy legal privilege). The focus may shift from a purpose-based approach (the purpose being to secure a tax advantage) to a main benefit approach (the benefit being having secured a tax advantage).
New and more effective penalties for participation in VAT fraud will also be introduced.
There is to be a consultation on the relaxation of membership eligibility criteria following a decision of the European Court that its effective limitation to companies is too restrictive and should be extended to include other forms of business undertakings.
Flat Rate Scheme
The eligibility ceiling of £150,000 turnover per annum remains unchanged. The rate varies according to business category but an increased top rate of 16.5% will be introduced.
Taxpayers may be misled into thinking that an arrangement is automatically tax avoidance simply because it is notifiable, which is not the case. Indeed , in the context of VAT, moving from a purpose test to a benefit test creates an even bigger gap between what is notifiable and what might be unlawful tax avoidance (and so vulnerable to being struck down) because the applicable "Halifax" test is essentially purpose-based.
Avoidance, Evasion and Compliance
The Government has made three key announcements in this important area.
Firstly, to provide a strong deterrent to those "enabling" tax avoidance, the Government is to introduce a new penalty for any person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC. The draft legislation is to be published shortly and will reflect the extensive consultation it has undertaken. The Government has also announced that it will remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for any person or business that uses such arrangements.
Secondly, the Government will introduce a new legal requirement to correct a past failure to pay UK tax on offshore interests within a defined period of time, with new sanctions for those who fail to do so – details on the time period and the sanctions are still awaited.
Finally, the Government will consult on a new legal requirement for intermediaries arranging complex structures for UK tax resident clients holding money offshore to notify HMRC of the structures and the related client lists.
Whilst these measures will be welcome by many, solicitors are professionally and legally obliged to keep the affairs of their clients confidential and to ensure that their staff do likewise. Furthermore, legal professional privilege also applies to documents and information provided to lawyers. The law recognises the client's fundamental human right to be candid with his legal adviser, without fear of later disclosure to his prejudice. This is an absolute right and cannot be overridden by any other interest. It is anticipated that the legislative measures announced will take into accounts solicitors' duty to keep the affairs of their clients confidential as well as legal professional privilege.