Budget 2016 - A Rabbit Or Two!
Published On: 18 March 2016
With the deferral of the pension changes, the headlines were undoubtedly the introduction of the “Sugar Tax” and the severe cuts in state benefits that had been widely forecasted.
For once, we are pleased to say that for many of our clients, the impact of the measures announced in Budget 2016 are unlikely to be significant and in certain cases favourable. Multi-nationals and soft drinks manufacturers were clearly the focus of most new tax measures whilst some of our clients will benefit from the changes announced to taxation for the Oil and Gas sector.
Probably the main topics affecting our clients were the reduction in Capital Gains Tax (CGT) rates from 6 April this year and the eventual abolition of Class 2 National Insurance Contributions (NIC) for the self-employed with corresponding changes to Class 4 NIC.
From a CGT perspective, the announcements in this area came out of the blue. Over the last few years, Entrepreneurial Relief, where qualifying capital gains attract a 10% tax charge has been a significant target in recent Budgets with a number of restrictions imposed and indeed more were expected. The complete about turn is both surprising and welcome.
Other than that the taxpayers investing in residential property got confirmation that they are definitely not flavour of the month as they received another kick by being one of the few groups who will not benefit from the reduction in CGT rates.
Set out below are our summaries of where new announcements were made or confirmation given of measures previously announced that will come into effect from 6 April 2016 or earlier.
CGT – From 6 April 2016, both the higher rate and lower rate of CGT will be reduced to 20% and 10% respectively. This is a decrease of 8% in both rates.
An individual’s total gains in the year after losses will continue to be added to taxable income and if the gain takes the total above the basic rate threshold then the excess will be liable to CGT at the higher rate of 20%.
Gains from residential property disposals will be taxed in the same way but attract a charge of 18% or 28%.
Trustees and personal representatives will also benefit from the new rates.
Entrepreneurial Relief – is extended to include the acquisition of new shares issued in unlisted trading companies. Previously this relief was usually available to directors or employees who owned 5% or more of a company’s ordinary share capital.
The definition of unlisted will include shares in shares traded on the Alternative Investment Market (AIM) although it will not apply to an acquisition of existing shares. To qualify there must be a new issue of shares and they must be held for a minimum of 3 years.
A trading company will exclude those whose main activities or assets derive from property letting. Other property related activities are also likely to make a company non-qualifying if they are significant.
Interestingly there also seems to have been some back tracking for those individuals who have incorporated their business and transferred the goodwill from the sole trader or partnership to the limited company. In December 2014 these people were labelled serial and aggressive tax avoiders but subject to certain conditions (yet to be seen) goodwill transfers will again qualify for this relief as will possibly any transfers that have taken place since 3 December 2014.
Retrospective favourable tax changes are almost unheard of!
Employment Taxation – Tax exemption for trivial benefits up to £50 per employee is confirmed from 6 April 2016.
Company Tax - Most action was directed at the multi-nationals, with corporation tax rates from 1 April 2016 remaining unchanged. A significant measure that will come into effect from 1 April 2016 which could effect some clients is the tax charge that applies where a director, shareholder or closely connected family member has money owing to the company more than 9 months after the end of the company’s financial year. These are commonly known as directors current account loans. The tax charge on outstanding balances is to increase from 25% to 32.5%. This is payable by the company but will eventually be repaid by HMRC when the loan is repaid by the borrower to the company.
Continuing on this theme directors/shareholders of small private companies who take distributions remain a target for HMRC and further details on potential changes to tax in this area will be announced later this month.
Capital Allowances - For once there was very little in the way of announcements on capital allowances with the only significant change being the extension of 100% allowances for low emission motor vehicles through to 2021. There is a however a reduction in the CO2 emissions that will be permitted for a car to be considered low emission and these tighter restrictions also apply to other CO2 emission values for capital allowances on other motor cars.
Stamp Duty Land Tax - An effective and immediate reduction in Stamp Duty Land Tax for most commercial property transactions will apply from 17 March 2016. However it should be noted that as this tax is devolved to Scotland no benefit will apply to Scottish commercial property transactions and we will need to wait until much later in the year to see if the Scottish Government follows suit.
VAT – The threshold for registration increases to £83,000 and deregistration to £81,000.
Confirmation of the new personal allowances and tax rate thresholds can be found on our website at http://msactax.co.uk/news/budget-2016-at-a-glance/ and further changes involving employment tax issues effective from 6 April 2016 at http://msactax.co.uk/news/budget-2016-employment-tax/.
WHAT'S AROUND THE CORNER?
As is common place now, many changes are announced well in advance of the implementation date. Aside from the changes to personal allowances and tax thresholds covered above what else is either announced or potentially coming our way?
Corporation Tax - Reduced to 17% from 1 April 2020 (original proposal was 18%).
A welcome relaxation on trading losses was announced which will allow companies with unused losses to carry them forward against a wider range of income. Currently they can only be claimed against profits from the same trade it is presently unclear if this will extend to being available to cover capital gains. Restrictions on brought forward losses in excess of £5 million were also announced. Both are effective from 1 April 2017.
Class 2 NIC – Abolished from 6 April 2018. Currently £2.80 per week so not really a major saving and could well be clawed back by a similar increase in Class 4 NIC where details of proposed changes have still to be announced.
Self- Employed – Those working from home with an income of £1,000 or less per annum will not have to report this on a self-assessment tax return. This limit and exemptions will also apply to those who receive property income such as garage or driveway rental. Effective from April 2017.
Employment Taxation - Salary sacrifice arrangements employees have in place for pensions, childcare and cycle to work remain in place, although other salary sacrifice schemes are under scrutiny. This could affect companies who operate a flexible benefit scheme such as those where extra holidays or private medical cover can be obtained if the employee gives up part of his/her salary.
Termination Payments - After some debate the £30,000 tax exemption for qualifying payments is to remain. However, with effect from April 2018, employer NIC will be charged on payments in excess of £30,000. The whole payment will remain exempt from employee NIC.
Lifetime ISA - A very interesting announcement which could well be the start of another change in the funding of retirement. For those young enough to benefit (under 40) from April 2017 they will be able to contribute up to £4,000 per annum which will be topped up by a maximum of 25% by the government. Currently it is proposed that it will not be possible to gain access to these funds until the taxpayer reaches age 60 or is buying a first home.
Watch the details though because it would seem that withdrawals pre-age 60 other than for a first time property acquisition will see the government top up lost and a 5% charge imposed.
The introduction of the lifetime ISA will also see an earlier than planned demise of the Help to Buy ISA which only became available from October last year but which will now close in April 2019.
IR 35 Mark 2? – Despite attempts to restrict the use of “ self-employed” contracts for people working through their own service companies in the public sector the practice has continued and been used by a number of high profile celebrities. From April 2017 tighter legislation and definitions are to be introduced to prevent this type of arrangement. Our major concern here is that if successful these new rules could be rolled out to other taxpayers operating through their personal service companies.
Partnership Taxation - A review and consultation on how partnerships are to be taxed is to be carried out. Although the announcement indicates it is for clarification and simplification we think it won’t stop at that.
Making Tax Digital - Following on from the Chancellor’s bold statement last year that he was scrapping the annual tax return, we now know that for the self-employed and many family companies this was simply a blatant lie! The annual tax return will be replaced by quarterly tax returns which will require the self-employed and other affected businesses to file their income, expenses and tax calculation quarterly. (HMRC want to call it something different but we all know the truth).
Whilst there is to be no back tracking on the submission of quarterly tax returns, it now seems that the proposal for these taxpayers to also pay their tax much earlier than they currently do has now been side-lined and instead an arrangement for those who want to voluntarily pay their tax early will be implemented. It is worth noting that this facility is already available to taxpayers under both self-assessment and corporation tax payments.
So there we have it. Other than increasing the complexity of CGT, there is very little change in the year ahead although that we don’t think that will be the case in future years.