UK: UK Budget 2012 - The Implications For Travel, Hospitality & Leisure

Last Updated: 29 March 2012
Article by Deloitte Tax Group

1.1 Introduction

As part of George Osborne's Budget speech, the Chancellor announced that the Office of Budget Responsibility (OBR) Report included a slight increase in the UK growth forecasts at 0.8% for 2012 (up from 0.7% from the November 2011 Report) but the growth forecast for the Eurozone has been revised down from 0.5% to -0.3%. This suggests that there may be a continued downturn in UK visitor numbers but that there may be better prospects for UK holidaymakers and business travellers than expected at the time of the last Report from the OBR.

Although there was little in terms of any new announcements on infrastructure investment, the Budget demonstrated the importance that the Government attaches to infrastructure and highlighted recent announcements on issues like private financing of roads, airport capacity in the South East and pension fund investment in infrastructure.

The Chancellor made a number of announcements in the Budget Report which will impact the Travel, Hospitality & Leisure (THL) industry, and in particular there were some key industry specific measures in relation to the betting and gaming subsector. The new Machine Games Duty rates will impact many THL groups outside the betting and gaming subsector, particularly pub chains.

Overall, the announcements appear to be positive for THL and the majority of these announcements should benefit the industry. The reduction in the Corporation tax rate to 24% from 1 April 2012 down to 22% by 1 April 2014 is good news for UK tax paying businesses. The increase in the personal allowance for those earning less than £42,475 should result in those paying basic rate tax having extra disposable income of £220 per annum by 2013-2014.

For detailed coverage and comment on the Budget visit Deloitte's dedicated website at www.ukbudget.com

1.2 Corporation Tax

1.2.1 Corporation tax rates

Legislation will be introduced in the Finance Bill 2012 to reduce the main rate of corporation tax to 24% from 1 April 2012. There will be further 1% reductions in the main corporation tax rate in each of the next two years to bring the rate down to 22% by 1 April 2014. This is a further reduction to that proposed in the March 2011 Budget which announced that the main rate of corporation tax would be reduced to 25% from 1 April 2012 down to 23% by 1 April 2014.

Notably the reduction will mean that profits arising during the London Olympic period will be subject to a lower rate of tax than previously anticipated. Further, the reduction should increase the attractiveness of the UK as a place for business for all industries, including THL.

It will also have an effect on the accounting for deferred tax assets and liabilities. In particular for UK GAAP and IFRS purposes, substantive enactment of the 24% rate is expected during the week commencing 26 March 2012 when the resolution having statutory effect is passed. The 23% and 22% rates are expected to be substantively enacted in June/July 2012 and 2013 respectively when the final reading in the House of Commons of each Finance Bill takes place.

1.2.2 Capital allowances

The Chancellor announced a number of measures in relation to capital allowances.

Cars

Budget 2012 announced changes to the capital allowance regime for business cars to strengthen the environmental incentive for businesses to purchase fuel efficient cars. A 100% first-year allowance is currently available for low emission cars with CO2 emissions of 110g/km or less. Cars with emissions between 111g/km and 160g/km are eligible for capital allowances at the main rate (20%), and higher emission cars attract writing-down allowances at the special rate (10%).

The first-year allowance for low emission cars has been extended for two years beyond the current expiry date, to 31 March 2015. However, the 110g/km threshold will be reduced to 95g/km from 1 April 2013 to match EU emission targets.

In addition, the 160g/km threshold for a main rate car will be reduced to 130g/km from the same date, and the associated lease rental restriction will also be revalorised in line with this change.

This measure is consistent with the Government's environmental agenda and the UK's carbon reduction targets, and is therefore not surprising. However, when viewed in conjunction with the reduction in the capital allowances rates to 18% and 8%, this change will represent a significant reduction in tax relief for business cars.

Enhanced capital allowances for energy saving technologies

The list of assets qualifying for the accelerated 100% first-year allowance for energy saving or environmentally beneficial (water efficient) plant & machinery will once again be updated to include a further technology: heat pump driven air curtains.

The criteria for eleven technologies will be revised and three technologies (combustion trim controls, energy saving controls for desiccant air dryers and sequence controls) will be removed from the scheme.

Tax credit for energy saving technologies

Loss-making companies investing in assets qualifying for the accelerated 100% first-year allowance for energy saving or environmentally beneficial (water efficient) plant & machinery can currently claim tax credits in exchange for surrendering the associated loss. This tax credit was due to expire on 31 March 2013 but will now be extended for a further five years.

This is good news for loss-making companies who have been incentivised by this tax credit to continue to invest in energy efficient technologies, and is consistent with the Government's green agenda.

1.2.3 Research & Development tax relief

From April 2013 the Government will introduce an 'above the line' R&D credit. This will have a minimum before tax benefit rate of 9.1% and enable loss making companies to claim cash research and development tax credits. A consultation will be announced shortly after the Budget dealing with the design of the credit and the rates of relief. Our expectation, consistent with the Autumn statement, is that this is a change which is targeted primarily at large companies and that the rate of R&D relief for SMES will not be affected.

1.3 Employment Taxes

1.3.1 Low paid workers

Employers in the THL sector (which often have a high proportion of lower paid workers) will benefit from the announcement that the Government has accepted the Low-Pay Commission's recommendation for below inflation increases to the adult National Minimum Wage rate to £6.19 per hour.

Meanwhile employees paying basic rate tax will themselves benefit from the increase in the income tax personal allowance by £630 in cash terms to £8,105 in 2012/13. From April 2013, the income tax personal allowance will increase further by £1,100 in cash terms to £9,205.

1.3.2 Company Cars

The Government has continued the trend of using the tax system to 'green' the UK's business fleet. The Chancellor has listened to lobbying, removing the 3% diesel supplement from April 2016.

The car fuel benefit charge will increase from £18,800 to £20,200 from April 2012. This, along with an increase in the percentage that will be applied to car fuel benefit charge, continues to make free fuel an unattractive benefit.

1.3.3 Employee share ownership

The Chancellor announced that an internal review will be conducted to examine the role of employee ownership in supporting growth and to examine options to remove barriers, including tax barriers, to its wider take-up. Given the significant number of owner managed businesses in the Hospitality subsector in particular, it will be interesting to see the outcome of this.

1.3.4 Commonwealth Games

There will be an exemption from UK taxation for money earned by non-resident participators taking part in the Champions League Final 2013. A similar exemption will now also apply to the Commonwealth Games 2014.

1.4 VAT and Indirect Taxes

1.4.1 Hot food

HMRC are seeking to tax all supplies of hot food (regardless of whether the product is intended to be consumed whilst hot). The one exception to this will be freshly baked bread which is cooling. This is intended to capture freshly-baked pastry products, roast chickens etc which might have been zero-rated in the past on the basis that the product was not intended to be consumed whilst hot.

1.4.2 'Premises'

HMRC have also sought to clarify the definition of 'premises' for the purposes of determining whether a sale is taken away or eaten in. The proposal is that in addition to the supplier's core premises, any areas adjacent to those premises or in areas shared with other retailers which are intended for the purposes of consuming food (e.g. food courts) will also constitute premises for these purposes. Previously the premises were, in broad terms, limited to the area actually controlled by the supplier.

1.4.3 Holiday Caravans

HMRC are seeking to tax the sale of holiday caravans (mainly static caravans) to ensure that the sale of all holiday caravans is standard rated, whilst zero rating will continue to apply to residential caravans.

HMRC have published the three proposed VAT changes set out above as part of a consultation document, inviting comment from businesses by 4 May 2012. Following this consultation, legislation will be implemented during the summer to take effect from 1 October 2012.

1.4.4 Air Passenger Duty

The Chancellor confirmed the new rates of Air Passenger Duty (APD) from 1 April 2012 and announced that there will be no above RPI increase in APD from 1 April 2013.

1.5 Alcohol and Tobacco Duties

1.5.1 Alcohol duties

As previously announced, alcohol duty rates will increase by 2% above the RPI with effect from 26 March 2012. There are repeals of excise exemptions in relation to certain specific products.

1.5.2 Tobacco duties

From 6pm on 21 March 2012, the duty rates on tobacco products increased by 5% above RPI.

1.6 Anti-Avoidance Provisions

1.6.1 General Anti-Avoidance Rule

A consultation will be undertaken in Summer 2012 on the introduction of a general antiavoidance rule (GAAR) from 2013 onwards to counter artificial and abusive tax avoidance schemes. Our view is that a narrowly-focussed GAAR, which targets transactions with the sole purpose of avoiding tax should cut down artificial, aggressive schemes without adversely affecting business. A wider GAAR would add uncertainty and would not be helpful, either for HMRC or for business.

1.7 Betting & Gaming

1.7.1 Machine Gaming Duty

As previously announced, Machine Games Duty (MGD) will replace both VAT and the existing Amusement Machine Licence Duty (AMLD) with effect from 1 February 2013. However, the Chancellor has confirmed the rates that will be applied, with the standard rate of MGD to be 20% and the lower rate 5%. Both of these rates are higher than some businesses had campaigned for. The lower rate will only apply to machines with maximum stakes of 10 pence and maximum cash prizes of £8.

HM Treasury had previously stated that it expects that there will be 'winners and losers' across affected sectors, although it intends the overall tax position from this change to be revenue neutral. It has confirmed that it expects that the changes will reduce the tax burden for Adult Gaming Centres, Family Entertainment Centres, clubs and the majority of pubs. Bingo clubs are likely to have a slight increase in costs and Casinos and Bookmakers are likely to lose.

It is therefore important for all businesses in the sector to confirm whether they are likely to 'win or lose' and consider whether they can mitigate the position. As well as MGD replacing VAT and AMLD, for most businesses there will be additional VAT costs because VAT exempt income means that the VAT incurred on goods and services related to exempt income can no longer be recovered. This increases the cost of the purchase or hire of machines for gaming machine businesses as well as increasing capital costs such as refurbishments or construction of premises.

1.7.2 On-line gambling

The changes to online gambling will mean that all online gambling by UK gamblers will be taxed in the UK from December 2014 at a rate of 15%. The current tax treatment is driven by whether the bookmaker / casino / bingo or 'website' is in the UK which has led to most online gambling operators being established offshore with the Chancellor estimating that only 10% of online gambling by UK participants is currently taxed in the UK. Having already consulted on whether to introduce a tax on this basis and, given that other regulated gambling markets within the EU tax gambling in this way, this proposed change is not a surprise.

A further detailed consultation will take place shortly and both the proposed rate and the start date will be kept under review. Whilst on-line gambling businesses will be disappointed to hear the news, the effective date is later than some had feared. The most important consideration will be whether the rate does stay at the proposed 15%. The Treasury estimates that in the first full year of operation (2015/16) the net benefit to the Exchequer from the new tax will be £240m. Industry will be concerned that too high a rate may lead to a 'grey market' for less scrupulous operators.

1.7.3 Gaming duty bands and Amusement Machine Licence Duty (AMLD) rates

Gaming duty bands and AMLD rates will be revised in line with inflation. Gaming duty bands will increase in line with RPI for accounting periods starting on or after 1 April 2012. All AMLD rates will increase in line with RPI from 4pm on 23 March 2012.

1.7.4 Combined Bingo

Subject to an informal consultation, the Government will extend the use of modified accounting procedures to combined bingo involving non-UK participants. Any changes will be legislated for in Finance Bill 2013.

1.7.5 Video gaming and animation

The Government has announced a new credit to apply for companies engaged in the production of TV programming, video gaming and animation. It is expected that this new credit will apply similar principles to those underpinning the UK's current film tax credit regime. In particular, it will be interesting to see whether this relief will extend to animated gambling sites who use the same studio and kits as gaming companies.

1.8 Consultations and previously announced measures

A number of other announcements were made regarding consultations that could impact the THL industry, including:

  • Statutory residence test: Following consultation and further announcements, a summary of responses and draft legislation is now expected to be published shortly.
  • Gains on assets held by foreign companies: There will be a consultation on proposed amendments to section 13 of the Taxation of Chargeable Gains Act 1992.
  • Income tax rules on interest: There will be a consultation on changes to the income tax rules on the taxation of interest and interest-like returns, and the rules on the deduction of tax at source from such amounts.
  • Disclosure of tax avoidance schemes: Further consultation on extending the criteria for disclosure to capture avoidance schemes that do not currently have to be notified.
  • PAYE penalties: There will be a consultation on a new model for PAYE late payment and late filing penalties, in advance of the introduction of Real Time Information in October 2013.
  • Lease premium relief: Informal consultation on the amending a complex element of lease premium relief, concerning the deemed tax treatment of long leases as shorter leases.

A number of previously announced measures relevant to the THL sector are set out below:

  • Reduction of plant and machinery capital allowance rates from 20% to 18% per annum for main pool expenditure, and from 10% to 8% per annum for special rate pool expenditure for expenditure incurred from 1 April 2012.
  • Denial of capital allowances to a purchaser of second-hand fixtures where the seller was entitled to claim capital allowances and no election is signed under CAA 2001 s198.
  • Sports ground safety: Following the review of reliefs undertaken by the Office of Tax Simplification, the Government will proceed with the abolition of the safety at sports grounds capital allowances relief for expenditure incurred from 1 April 2013.
  • New controlled foreign company (CFC) regime: The new CFC rules are intended to be more closely targeted at profits that are artificially diverted from the UK and a 'gateway' test has been developed which seeks to identify such profits.
  • APD: legislation will be introduced in Finance Bill 2012 to devolve power to the Northern Ireland Assembly allowing it to set APD rates on direct long haul flights departing from Northern Ireland.
  • Patent Box: the new Patent Box regime will, from April 2013, tax income from patents and certain other qualifying intellectual property rights at an effective tax rate of 10%.

Draft legislation is expected to be published in Finance Bill 2013 on 29 March.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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