This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

The Budget 2015
18 March 2015

The Budget 2015

In his sixth budget, 50 days before the general election, George Osborne's focus was unsurprisingly on economic stability, continuing to reduce the deficit and moving towards a Britain built on savings and investment. His was a slightly mixed message: that Britain has become a place of prosperity, opportunity and growth, but that it still faces clear economic risk, which requires his steady hand.

As expected, there were political arrows aimed at the other parties, with a number of strikes on Ed Miliband personally, and point-scoring over North Sea oil, pensions, white vans and the Scottish question. There were, however, some surprise giveaways with the new "help to buy" ISA for first-time home owners, cuts to national insurance and fuel duty, and the increase in the personal allowance and higher rate threshold for income tax.

Many of the tax changes announced in the Autumn Statement were simply confirmed. And, as ever, the Government has no time for those who do not pay their fair share of tax, with a renewed attack on tax evaders and contrived tax avoidance.

In this Briefing we highlight some of the main points we think will be of interest. Please contact any member of our tax team if you have any queries.

Capital Gains Tax for non-UK residents

The Government's much trumpeted proposals for CGT for non-UK residents disposing of UK residential property has been confirmed in this year's Budget. The charge (20% for companies, 18% or 28% for individuals and 28% for trusts) will apply to sales and gifts of UK residential property, although it will only apply to gains arising from 6th April 2015. To calculate the post-April 2015 gain, the property can either be revalued at that date or the entire gain from acquisition to disposal can be time-apportioned. There will be an exemption for residential properties held by institutions and widely held companies and funds.

Interestingly, the HMRC FAQs (also published today) state that even where there is no gain, there will still be a duty to report the disposal to HMRC. The same reporting process will apply regardless of whether there is a chargeable gain, a gain covered by a relief such as the main residence exemption, or a loss.

Crucially, the CGT main residence exemption is being restricted for non-UK residents: broadly, a non-resident must spend at least 90 midnights in his UK home in a tax year for it to be treated as his main residence in that year. This 90 midnights rule will also apply in reverse to UK residents seeking to claim the exemption on an overseas property. Somewhat confusingly, the 28% ATED-related CGT charge which currently applies to certain companies owning residential property will remain, and will take priority where both charges apply.

The new CGT regime for non-UK residents, coupled with the ATED-related CGT rules, means that almost all UK residential properties held by non-residents will now be within CGT. It is unfortunate that the ATED-related CGT charge remains as this will introduce a degree of complexity in the operation of the new charge. While ATED-related CGT takes priority over the new CGT charge, it is possible that some properties may fall within the two regimes at different times, requiring apportionments to be made. Questions remain about how the tax will be enforced where a non-resident sells his only UK property and receives the sale proceeds outside the UK. The requirement to be present in the property for 90 midnights to claim main residence exemption may also pose evidential problems for regular partygoers. There is also some concern that, should the regime prove lucrative, the Government may extend it to commercial property at some point in the future.

Deeds of variation under threat?

It is currently possible for adult beneficiaries of an estate to sign a deed of variation to vary the terms of the deceased's will. In many cases the variation is not done for tax reasons – although there may sometimes be an attendant tax advantage. In other cases deeds of variation are entered into by beneficiaries within two years of the deceased's death principally to minimise the estate's exposure to UK inheritance tax. The Government has today announced that it will be reviewing inheritance tax avoidance through the use of deeds of variation. The Chancellor indicated that the review will take place in the Autumn.

For many years there have been whispers that the inheritance tax advantages of deeds of variation would be restricted. It is perhaps unsurprising that this has come to pass today, given the publicity surrounding the Labour leader's use of a deed of variation to vary his father's will earlier in the year. How aggressive the review of deeds of variation will be, and whether or not the "tax read back" provisions will still apply where tax avoidance is not one of the reasons for entering into the deed of variation, is yet to be seen. Of course, depending on the outcome of the general election, there is also the possibility that the review never takes place. In any event, it is clear that carefully drafted tax-efficient wills are now required since post-death deeds of variation may no longer be available to rectify the tax inefficiencies of a poorly-drafted will.

Measures to counter tax avoidance and tax evasion

Tax evasion

The Chancellor has announced new measures to tackle tax evasion that are estimated to raise £3.1bn. Some are highly technical but the key message is that if you have money or assets which may not have been declared (for example, you might have inherited them), then now is the time to declare them. The Liechtenstein Disclosure Facility (LDF) and the Crown Dependencies equivalent (CDDF) will now end earlier than expected at the end of this year, with a much less generous "last chance" facility in 2016 up to mid-2017. Penalties here will be capped at 30% but the risk of prosecution will remain. Financial institutions in the Crown Dependencies will be required to alert their UK resident customers of this.

HMRC expect that the OECD’s Common Reporting Standards (the global sharing of information by tax authorities to which 160 countries have already committed) will mean there is no longer a hiding place for illicit wealth. Coming forward now with any concerns will avoid the levels of culpability described above.

Tax avoidance

New provisions will seek to discourage people entering into tax avoidance schemes, although in reality it appears the proposals will do a better job of catching those who have already entered them. These may include extra sanctions for those who have persistently entered into avoidance schemes which subsequently fail, denial of access to other tax reliefs and a higher standard of reporting or disclosure. There will also be a new penalty for those who fall foul of the general anti avoidance rule (introduced in July 2013), as well as sanctions proposed for promoters of tax avoidance schemes.

This is all part of a continued drive to eradicate the “too good to be true” contrived tax schemes, which together with yet more accelerated payment notices are causing a great deal of distress. For those still tempted to enter into such schemes, see our previous Tax Aware briefings on those tax reliefs HMRC want you to use. These are the safe harbours of tax planning and you should see if you are maximising your entitlement.

VAT input tax deductions relating to foreign branches

The Government has announced an amendment to the VAT Regulations to bring UK law into line with the decision of the CJEU in the Credit Lyonnais case of 2013. The effect will be to exclude the value of turnover from transactions generated in foreign (non-EU) branches for UK VAT purposes. The VAT allowed for recovery by the affected business will therefore be reduced. Until now, the inclusion of this turnover by a UK business in its VAT calculations has increased its input tax recovery (because the turnover is effectively counted as taxable). The new provisions will come into effect on 1 August 2015, albeit with some transitional relief.

This will primarily affect banks and insurers with branches both within and outside the UK. Financial services, are in principle, exempt from VAT so that VAT incurred on the costs associated with their provision is not recoverable. Such services provided from branches outside the UK (and outside the EU) are treated as taxable rather than exempt so that when, in its partial exemption calculations, a UK business counts them as its own, it increases the amount of UK VAT it can recover. The CJEU held that such branch supplies should not be counted in this way and UK law is now being brought into line with this. The estimated average annual impact is around £90m in favour of the Exchequer. There will, of course, be one-off compliance costs for affected businesses which will need to re-visit and amend their agreed methods of calculating their entitlement to VAT recovery.

Capital Gains Tax – Entrepreneurs' Relief

The Government has today announced that, with immediate effect, individuals who hold 5% or more in a company which in turn holds an interest in a trading company will cease to benefit from entrepreneurs' relief on the disposal of their shares unless the company in which the individual holds the shares also has a significant trade of its own. A linked announcement extends a similar restriction to individuals and members of partnerships who sell personally-owned assets used in a business (whether in a company or a partnership) but do not at the same time sell their interest in that business. This means that instead of paying the reduced 10% capital gains tax rate on the gain made on the disposal, the individual will pay the standard rate of either 18% or 28%.

The Government seems to have reversed its original, properly thought through position. The policy had been to allow those who collectively owned 10% in the underlying trading company to benefit from entrepreneurs' relief provided other strict conditions were also satisfied, even though each individual effectively owned less than 5% of the underlying trading company. The reason for the change may perhaps be an increase in contrived structures designed to benefit from the original legitimate purpose of the policy. It was also previously recognised that individuals may need to dispose of assets which are used in the business but may want to retain the business without necessarily suffering a higher rate of tax on the disposal of the assets. That benefit has now also gone. Whilst these measures simplify the law, they remove real benefits for owner managers. Any perceived abuse would ideally have been countered by the existing general anti avoidance rule, which is already on the statute books.

Capital Gains Tax on wasting assets

A capital gains tax (CGT) exemption currently applies on the disposal of certain wasting assets, including plant and machinery used in a business. At present, it is possible for the owner of certain plant and machinery to benefit from the exemption, even if the asset in question is not actually used in the owner's own business. However, the Government has now announced that it will limit the scope of the exemption so that it will only be available if the asset in question has been used in the owner's own business. For corporation tax purposes, the limit will apply to gains arising on or after 1 April 2015, and for CGT purposes, it will apply to gains arising on or after 6 April 2015.

The Government's announcement comes in the wake of a recent Court of Appeal case in which it was decided that the CGT wasting asset exemption could apply to an asset which was lent to a third party for use in that third party's business, even if it was never used in the business of the asset owner. This raised the opportunity of taxpayers organising matters in such a way as to achieve a CGT saving in appropriate cases. It is therefore unsurprising that the Government has now acted to limit the circumstances in which the exemption can apply.

Preventing corporate tax loss refreshing

The UK corporation tax loss relief rules allow losses to be surrendered around a group of companies on a current year basis. However, excess losses, whether trading losses, finance losses or excess expenses of management, are carried forward and “trapped” in the company which incurred them. If that company is unlikely to ever make a profit, those losses are effectively useless. It has therefore been possible to create a new revenue stream into that company such that it generates a profit against which the carried forward loss can be set. At the same time, the new revenue stream may have resulted in a brand new tax deduction elsewhere in the group. In effect, the original loss is refreshed and used elsewhere. The new rules will apply with immediate effect if such arrangements were entered into with a tax motive. This applies equally to arrangements already in place. Arrangements where a business or assets are brought into the company with carried forward losses, and where the company makes profits in the future, are not affected.

In some respects this change could be seen as harsh as it denies relief for genuine economic losses incurred by a group. On the other hand, group relief is only on a current year basis and these arrangements have sought to circumvent that policy decision.

Business Rates Reform

As trailed in the Autumn Statement in December 2014, the Government has now published its "terms of reference and discussion paper" regarding a review of business rates. Specifically, the review is intended to look at whether "the business rates system remains fit for purpose for the 21st century in light of trends in the use of non-domestic property and in view of recent reforms to the business tax system".

Retailers and other business occupiers will welcome the review on the basis that the current system, coupled with outdated valuations, is not fit for purpose. For example, the fact that the amount payable broadly remains the same regardless of wider market conditions, or of the relative increase or decrease in value of individual properties since the last revaluation, is rather outmoded. High street retailers have also long argued that internet based competitors have a significant advantage over them, so this discussion paper may form the starting point for developing a fairer tax on property. However, there is one major caveat: the Government is quite explicit that any changes will need to be "revenue neutral" – and since the main complaint is that rates are too high, it is not immediately clear how far any review can go. Critics may therefore argue that real reform is unlikely to happen in practice unless the "revenue neutral" aim is interpreted in a more relaxed manner.

Diverted Profits Tax

As was announced in the Autumn Statement 2014, a new “diverted profits tax” will come into force from April 2015 to tax the profits of businesses that have substantial economic activities in the UK but pay little or no tax here on those profits. The Government claims that the taxable profits of such businesses are reduced, aggressively according to the Government, because they pay significant royalties and licence fees, or they buy in financial services and goods from related companies in low-tax countries, thereby diverting profits away from the UK. These diverted profits will be taxed at 25%, which is higher than the mainstream corporation tax rate of 20%, from April 2015.

The new tax is aimed at those who use the Double Irish, the Double Dutch Sandwich and similar structures, and we await the revisions to the draft legislation when the Finance Bill is published next week. It will also be necessary for taxpayers in other sectors (for example, property) to decide whether the new tax may also, and perhaps inadvertently, affect their structures. The original concerns raised also remain - there must be a question mark over the legality of the tax as the 25% rate is above the mainstream corporation tax rate and therefore discriminatory. There is also EU law to consider, plus whatever separate measures the OECD proposes to prevent tax avoidance by multinationals.

Stamp Duty Land Tax

The Government is pressing ahead with its announcement in the 2014 Autumn Statement to introduce a seeding relief for Property Authorised Investment Funds (PAIFs) and Co-ownership Authorised Contractual Scheme (CoACSs). The relief will ensure that no SDLT arises on transferring land into such a structure. The Government has now stated that it will also make amendments to the SDLT treatment of CoACSs investing in property, so that sales of units do not give rise to an SDLT charge (i.e. sales of units will be treated in a similar manner to sales of units in a unit trust). However, this is "subject to the resolution of potential avoidance issues".

The SDLT seeding relief removes one of the obstacles preventing a UK property held in an offshore structure from moving to a UK based structure. It is therefore likely to encourage more portfolios to come back onshore.