This year's budget, which marks the last ever spring budget following the Chancellor's announcement in 2016 that the budget will move to the autumn, was (as anticipated) light on noteworthy policy announcements and contained few surprises. The Chancellor highlighted record levels of employment and a year of strong growth but, with the formal process of the UK's departure from the European Union imminent, the focus was very much on economic stability rather than on significant reform.
Taxation announcements of note include some concessions to smaller businesses affected by this year's business rates increase, a national insurance increase for the self-employed, and an unexpected U-turn from the Government on the newly introduced dividend allowance. More generally, the Chancellor again focused on the economic future of the younger generation, announcing further funding for technical education, free and grammar schools, and for technology, research and innovation. He also acknowledged the pressures an aging population puts on the country's economy and committed to making available an additional £2bn for local authorities in England to spend on social care over the next three years.
In this briefing, we highlight some of the main taxation points of interest. Please contact any member of our tax team if you have any queries.
SDLT filing window
The Government entered into a consultation on its intention to reduce the time in which a land transaction return and payment must be made for SDLT purposes. The current window is 30 days and, due to some fairly strong objections, it has been announced that any changes will be delayed until "2018-19".
A reduction in the timeframe for submitting SDLT returns will not be welcomed by practitioners. Especially in the case of complex property deals where it will create a number of practical issues. However, there is some respite in terms of when the changes will take effect, and one hopes that HMRC will take into account the representations (including from Mishcon de Reya LLP) which were made as part of the consultation.
Offshore developers of UK land
The Government's new "Trading in and Developing Land in the UK" rules (announced at Budget 2016 and with effect from 5 July 2016) brought many offshore developers of UK land within the scope of UK corporation tax. However, the original rules carved out transfers pursuant to certain contracts which pre-dated the coming into force of the measure. Amendments have now been made to these rules to catch longer term arrangements. In short, Finance Bill 2017 will contain provisions which mean that profits from dealing in or developing land in the UK that are recognised in the accounts on or after 8 March 2017 will be subject to UK corporation tax, even if the contract for disposal was entered into prior to 5 July 2016.
The new rules announced in 2016 slammed the door shut on offshore property developers who, in particular, sought to structure their arrangements so as not to create a permanent establishment in the UK – and thus reduce their UK corporation tax liability. The amendments will mean that those with existing longer term development arrangements with offshore entities, even though pursuant to pre-March 2016 contracts, will need to consider their position carefully.
Reduction to dividend allowance
Currently the first £5,000 of dividends received by an individual are charged at a nil rate. From 6 April 2018, legislation introduced in the Finance Bill 2017 will reduce the amount of dividend income that is tax-free to £2,000.
This measure certainly appears to be punitive for owners of small businesses – the very people the Government insists it wants to help. The Government could also be accused of "chopping and changing" on this issue: the £5,000 allowance was only introduced in 2016.
Promoters of Tax Avoidance Schemes (POTAS) regime
The Government is introducing measures to ensure that those who would otherwise be caught by the POTAS regime cannot reorganise the ownership structure of their businesses to circumvent the rules.
Following a detailed consultation, there is also a separate sanction for those professional advisers that enable a client to use a tax avoidance arrangement that is later defeated by HMRC.
The Chancellor was keen to point out that since 2010, HMRC has secured around £140 billion in additional tax revenue through tackling avoidance, evasion and non-compliance. This has meant that the UK’s tax gap remains one of the lowest in the world. The introduction of the new legislation demonstrates the steps that the Government is taking to increase that amount going forward by taking steps to limit the number of advisers promoting tax avoidance schemes.
Disguised remuneration avoidance schemes
The government will use the Finance Bill 2017 to tackle existing arrangements and prevent future use of disguised remuneration avoidance schemes, ensuring that those individuals who use such schemes pay their fair share of income tax and NICs. This is in addition to introducing legislation, to have effect from 6 April 2017, to tackle existing and future use of similar schemes used by the self-employed.
There will be a new charge on disguised remuneration loans that were made after 5 April 1999 and remain outstanding on 5 April 2019. Legislation will also be introduced to ensure there is no double taxation. Proposals on how the tax and NICs arising from the changes will be collected will be set out in a technical consultation later in 2017.
The treatment of disguised remuneration schemes is likely to be of wider importance depending on how broadly HMRC attempt to interpret what amounts to "disguised remuneration". A major case in this area, which is due before the Supreme Court this year, may well provide clarification.
The Government has announced that it will publish guidelines for employers who make payments to employees for the use of their image rights to improve the clarity of the existing rules.
Image rights, as one form of intellectual property, play a significant role in contractual arrangements entered into with athletes. Contractual arrangements relating to the use of image rights are becoming increasingly common, especially for top footballers. The global screening of the Premier League, as well as the arrival of foreign players from countries which have an accepted image rights taxing model, raise interesting structuring questions relating to the exploitation of a player's image in the UK as well as the rest of the world.
Clarity from HMRC relating to the practical application of these rules will be welcome. However, whether improving clarity will translate to actually changing the rules remains to be seen.
Class 4 National Insurance contributions (NICs)
'Fairness of the tax system' was a key theme of the Budget. As part of this, the Government has pledged to address the gap between employees and the self-employed and the way in which they are taxed, focusing in the short term on the rates of NICs paid by both.
The Government previously announced in the March 2015 Budget that it would abolish Class 2 NICs, which constitute a modest flat-rate charge on the self-employed. The Budget today has confirmed that Class 2 NICs will be abolished from April 2018 for the self-employed. In addition, the Budget has also confirmed that the main rate of Class 4 NICs will increase by 1% (from 9% to 10%) in April 2018, and then again to 11% in April 2019.
The abolition of Class 2 NICs and increase in the rate of Class 4 NICs reflects the fact that, as of April 2016, the self-employed obtained access to the same State Pension as employees and reduces the disparity between the level of NICs paid by employees and the self-employed. The Chancellor illustrated the current disparity as follows: total NICs for an employee on a salary of £32,000 are currently £6,170 (a combination of employee and employer NICs) whilst self-employed workers on an equivalent salary pay just £2,300 in NICs.
The increase in Class 4 NICs contradicts the 2015 manifesto pledge from the Conservatives not to increase VAT, NICs or Income Tax and is therefore likely to be the subject of much discussion. With the spotlight on the growth of the gig economy, today's announcement of the Class 4 NICs rate increase will have an impact on the increasing number of self-employed workers across the UK. In particular, comments have already been made that this increase in Class 4 NICs does not take into account the risks taken by the self-employed.
The Government has responded to the well-publicised impact of the business rates revaluation, which takes effect in England from April 2017. Specifically, a further £435 million will be provided to businesses facing significant increases in their business rates bills including:
- support for small businesses losing Small Business Rate Relief by limiting increases in their bills to the greater of £600 or the real terms transitional relief cap for small businesses each year; and
- providing English local authorities with £300 million of funding to support discretionary relief, allowing them to provide financial support to deserving individual cases in their local area.
The Government will also introduce a £1,000 business rate discount for pubs with a rateable value of below £100,000 (subject to state aid limits for businesses with multiple properties) for one year from 1 April 2017.
As for the longer term position, the intention is for more frequent business rates revaluations of properties (at least every three years). Further details will be provided in the 2017 Autumn Budget, with a consultation ahead of the next revaluation in 2022.
The impact of the business rates revaluation on the High Street has been well documented in both the national and property press, especially given the competitive advantage this seemingly gives to online businesses. It remains to be seen how far the additional reliefs announced today will go to mitigating the impact on affected businesses.
Extension of the Double Taxation Treaty Passport scheme
The Government has announced that it will renew and extend the administrative simplifications of the Double Taxation Treaty Passport scheme to assist foreign lenders and UK borrowers. Put into place for overseas lenders, the scheme simplifies access to reduced withholding tax rates on interest available within the UK’s tax treaties with other territories.
The Double Taxation Treaty Passport scheme was previously restricted to corporate lenders and corporate UK borrowers. From 6 April 2017, this restriction will be removed and will now apply to all types of overseas lenders and UK borrowers. This change will be welcomed by borrowers and lenders alike.
As well as the headline changes, all Budgets trail possible developments in the tax regime in the form of Consultations or calls for evidence. The most significant, principally real estate related, are listed below:
Currently these companies are generally liable to income tax and non-resident capital gains tax when holding UK residential property. The government is consulting on whether non-resident companies should be subject to UK corporation tax in which case it is acknowledged they would be "subject to the rules which apply generally for corporation tax, including the limitation to corporate interest relief deductibility and loss relief rules".
Another general feature of corporation tax, not mentioned, is that gains on all types of property would then be chargeable. Might this be a backdoor way of taxing offshore companies on gains realised on commercial property?
Employer provided accommodation
Special rules currently apply to calculate the value of benefits in kind provided to employees and directors. The proposal to "bring the tax treatment …. up to date" may involve "support [for] taxpayers during the transition".
Rather ominously, this suggests tax increases.
The Government is concerned about overseas online sellers not accounting for VAT on sales to UK customers, particularly via online marketplaces. It is to publish a call for evidence in connection with new ways of collecting the VAT element using "split payment" – in effect the VAT element of the purchase price being separated from the rest of the price "at the point of purchase" by harnessing technology.
This presents an opportunity for technology companies but could adversely impact financiers of online sellers (as only the net of VAT price would be available as security), and sellers who use VAT as working capital (since the VAT would go to a separate account).
HMRC intends to "consider existing tax reliefs aimed at encouraging investment and entrepreneurship to ensure they are effective, well targeted, and provide value for money".
This may suggest revisions to any or all of Entrepreneurs Relief, Enterprise Investment Scheme (EIS), SEIS, Investors Relief and VCTs. However we would expect any changes only to apply from a future date.