UK: Deloitte’s Budget 2013 Coverage - If It Counts, It’s Covered

Last Updated: 21 March 2013
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017


Bill Dodwell, Head of Tax Policy as Deloitte, comments on the Budget

Is Budget 2013 a social media story? Chancellor George Osborne arrived on Twitter with his first tweet and photograph at 8.08am on Budget Day. His second tweet explained that he wouldn't be tweeting during the speech itself, which no doubt was a good plan. Tweets about the UK Budget averaged 6,000 per hour on Budget Day – but hit 60,000 during the hour Mr Osborne spoke.

Deloitte's analysis of the words and phrases used in the speech revealed four key themes including two tax topics: corporation tax and National Insurance; housing and active monetary policy.

Corporate Tax road ‑ map

Corporation tax is about completion of the Coalition Government's Corporate Tax road‑map. The main rate of corporation tax will be cut to 20% from 1 April 2015; this, together with the 21% rate from 2014, will be included in Finance Bill 2013 and enacted by the end of July. There's an important simplification dividend as well, since it will no longer be necessary to calculate the number of associated companies and perform marginal rate calculations. Above‑the‑line R&D tax credits go ahead at 10%, as does the 10% Patent Box and the various creative industries tax reliefs. EU approval is still awaited for video games relief as the Commission perhaps struggles to identify a 'culturally British' video game. There's a bit of anti‑avoidance in relation to corporate tax loss selling. The change targets the sale of companies with excess capital allowances and other unclaimed potential losses. Consultation on the draft law is promised, even though it will apply from Budget Day.

Employee tax changes

National Insurance is all about a new £2,000 relief which will be offered to all employers from April 2014. 98% of the benefit will go to small employers and 450,000 employers will escape employer NIC completely. In 2016, the end of the second state pension and the start of the uprated single state pension will liberate £2.2 billion of NI rebates, which will support the introduction of the new social care support package and the new childcare tax relief.

Tax avoidance

No Budget would be complete without an anti‑avoidance and tax evasion package. The focus this year is on the introduction of automatic information exchange, where the Crown Dependencies and Overseas Territories will provide the UK with details on income earned by UK residents. There will also be targeted avoidance to counter some partnership arrangements, which have been used to save employer NIC through disguised employment and also to shift losses artificially to individuals. A consultation will consider the issues before changes take effect from April 2014.

Finally, the shape of the important Procurement measures has been announced. The Government has decided that these will not look back before 1 October 2012 which means that suppliers do need to comply fully with current and future tax obligations – but don't need to worry about the past.


Personal tax matters

The Chancellor stated several times his aim for this to be a Budget for people who "aspire to work hard and get on." Several measures are being introduced to support this aim:

  • The introduction of a £10,000 personal allowance from 6 April 2014, reducing tax bills for 24 million taxpayers by £200 and taking 2 million people out of the tax system altogether. The Government had previously announced an ambition to introduce a £10,000 personal allowance by the end of the current Parliament in 2015, so it is good to see this accelerated by 12 months.
  • The tax free limit that employers can provide tax free loans to Loans for employees has been doubled from £5,000 to £10,000. The limit had been £5,000 for many years so this is good news for employees who receive tax free loans from their employers for things like season tickets. For those increasingly travelling significant distances to their place of work and paying more than£5,000 for their season tickets, this will be a welcome change.
  • The Capital Gains Tax re‑investment relief under the Seed Enterprise Investment Scheme ("SEIS") which was introduced from 6 April 2012 was due to end on 5 April 2013. It has now extended such that 50% the amount invested in SEIS qualifying businesses can be used to offset gains arising in 2013/14. This isn't quite the tax holiday that it was portrayed to be in the Chancellor's speech today as the existing CGT relief actually provides for 100% of the amount invested to qualify for the re‑investment relief.
  • A new capital gains tax exemption is to be introduced from 6 April 2014 on a qualifying disposal of a controlling interest in employee owned structures.

Not surprisingly to help fund these changes a new package of measures is to be introduced to combat aggressive avoidance and abusive tax planning. The UK has agreed measures with the Isle of Man, Guernsey and Jersey Governments to clamp down on those who hold undeclared money offshore.

The package consists of:

  • An agreement to automatically exchange financial information on UK taxpayers with accounts in the Isle of Man, Guernsey and Jersey.
  • A disclosure facility to allow people to disclose their previous tax affairs in advance of the information being automatically exchanged. This will most likely operate along the same lines as the Liechtenstein Disclosure Facility which has been in operation since 2009.

Also on tax avoidance, we can expect to see organisations promoting aggressive tax planning schemes and arrangements named and shamed in future!

With regard to Inheritance Tax, there will be a consultation on simplifying the calculation of the 10 year and exit charges on trusts. The simplified measures are expected to take effect from 6 April 2014. The calculation of these charges is notoriously complex and this measure will be keenly received by trustees and those advising them.

The IHT nil rate band is to be frozen at £325,000. The IHT exemption for transfers from UK domiciled spouses to non‑UK domiciled spouses is to be increased to £325,000 (it is currently £55,000). A new measure to enable a non‑domiciled spouse or civil partner to elect to be treated as a UK domiciled spouse or civil partner will be introduced in the 2013 Finance Bill.

With regard to measures previously announced, it is confirmed that the new "Annual Residential Property Tax" ("ARPT") on the ownership of properties worth more than 2million owned via "Non‑Natural Persons" (essentially companies) will proceed as planned from 1 April 2013. Interestingly the "ARPT" seems to have been renamed the "Annual Tax in Enveloped Dwellings" "ATED" which I suppose rolls off the tongue rather more easily!

On face of it a good budget for earners. And a cheaper pint of beer or two to celebrate!

Partnerships: in HMRC's sights

As a choice of business vehicle, partnerships offer a level of flexibility which continues to encourage their increasing use across a range of sectors beyond their traditional use by professions and small businesses. The other sectors include including hedge funds, film partnerships, the property sector and the corporate business world generally. The perception at HMRC is that, in some cases, this flexibility has been taken too far and "the misuse of partnership rules has become a feature of many avoidance schemes". The Chancellor has therefore announced an intention to consult, this spring, on new legislation designed to target the use of partnerships to artificially reduce tax liabilities. Two specific areas of review have been highlighted:

One concern is that employer NIC revenues are being lost as a result of the granting of LLP member status to individuals who would otherwise be employees.

HMRC intend to address this by removing the current presumption that LLP members are self‑employed. No further detail has been announced but we would anticipate that this could be accompanied with a substance test for determining whether an individual is to be treated as a partner or an employee.

Any such substance test is likely to mirror the case law tests already applied to general partnerships and those applied for employment law purposes. These focus on "hallmarks of equity ownership" such as voting rights, capital contribution, exposure to losses and remuneration which varies in direct correlation to the results of the business.

Many LLPs would say that the commercial advantage of extending their pool of members has been the improved performance which has come from increased enfranchisement and this only comes with some degree of genuine equity participation. Therefore many will consider such a substance test to be reasonable and, indeed, anticipated. It is to be hoped that the test will be framed in such a way as to avoid uncertainty around the 'middle ground' and without discouraging such enfranchisement (particularly in light of the benefits, acknowledged in other announcements, of encouraging wider equity participation for those who work within a business).

We will need to wait for the publication of the consultation document for detail as to what HMRC may have in mind. However there are two areas which we understand them to be considering.

The first is the use of corporate partners alongside individual partners.

Increased use of corporate partners is in part explained by commercial and regulatory complexities but often also by a desire by business to take advantage of the UK's low rates of corporation tax (scheduled to decrease even further following today's announcements). There is a wide spectrum of ways in which corporate partners can be used. However, it would seem that, at one end of the spectrum, there are arrangements which HMRC consider to be designed to artificially manipulate the rate differential between (low) corporation tax rates and (high) income tax rates.

The second area of likely focus, the subject of recent press attention, is the use of partnerships to allow wealthy individual investor‑partners to benefit from tax incentives such as Business Premises Renovation Allowances (BPRA). While some of these partnerships will be genuine commercial property development ventures, HMRC perceives that some may be largely tax‑motivated. We may well see extension of the loss restriction rules applicable to "trades" to businesses (of all sorts) to catch these arrangements.

The good news is the announcement of a consultation period which will minimise the risk of inadvertent adverse side effects for genuinely commercial business.

Small businesses may also benefit from a review of partnership tax rules by the Office of Tax Simplification also announced today.

R&D Tax Relief crosses the line!

Beginning next month, companies claiming R&D tax relief under the 'large company scheme' will be entitled to payable cash credits equal to 10% of qualifying expenditure. The new measure will be particularly beneficial to companies without tax liabilities who under the old super‑deduction scheme could only carry forward their increased tax losses and who saw no immediate cash benefit. The new R&D expenditure credit will also allow companies to account for the relief in their operating profits, better incentivising investment in R&D. The chancellor has today announced an increase in the rate from 9.1% to 10% making the scheme even more beneficial.

The new R&D expenditure credit scheme for large companies will provide support to a wide range of industries and is predicted to provide additional relief of £1.1bn to innovative companies over the next 5 years. This together with the patent box relief which comes into effect from April this year and other measures such as the £2.1bn relief for the aerospace industry announced this week provides a strong package of support for innovation in the UK and a boost to global competitiveness.

Deloitte welcomes the increase in benefit. Our view put forward in the consultation process was that a headline rate exceeding a threshold of 10% will have a positive impact on the behaviour of R&D budget holders due to the psychological impact of a double digit relief rate.

The new R&D Expenditure Credit is being introduced alongside the existing super‑deduction scheme. Companies have a three year period in which to elect into the new credit scheme following which the old super‑deduction scheme will disappear from April 2016.

The policy goals of the R&D relief are for it to be accounted for "Above the Line" allowing companies to treat the credit like a grant and net it against the expenditure in their accounts thus providing increased visibility of the relief to R&D decision makers and making the relief more effective in maintaining and growing investment in R&D in the UK. The impact of the change will be the establishment of a closer connection between the relief and a companys R&D and technology teams.

One consequence of the increase in the benefit rate to 10% is that it will give a higher rate of post‑tax relief compared to the existing super‑deduction scheme from the outset (7.7% versus 6.9%) and this differential will increase as the tax rate continues to fall such that for the year ended March 2016, the post‑tax rate of relief for the new credit will be 8% compared to 6% for the super‑deduction scheme. This will increase the incentive for companies to elect out of the existing scheme and into ATL before it becomes mandatory in April 2016.

Although it has taken a long time to get to this point (following three rounds of consultation which began in 2010), the draft scheme design does reflect the degree to which HM Treasury has engaged with and responded to a number of concerns raised by industry.

For example, in the most recent round of consultation, companies in the defence sector pointed out that, unlike the existing super‑deduction scheme, the Ministry of Defence (MoD) would look to claw back the new credit in the pricing of non‑competitive R&D contracts. In response, the government has stated that this issue will be addressed by the Single‑Source Regulations Office – an independent body to be set up in 2014/15 and tasked with amending and overseeing single‑source pricing regulations. Until then those companies affected may decide to continue claiming under the existing scheme.

Other issues were raised in relation to the proposed PAYE/NIC cap to be imposed on the payable credit available to companies without tax liabilities. Although seen as necessary to protect against abuse of the scheme, there is a concern that legitimate claims by companies which incur a high proportion of externally provided workers (such as in the software industry) or consumable items (typically manufacturers) could have their claims unfairly restricted. In addition the cap as it is currently drafted could penalise groups who have a single group employment company. We expect the definition of the cap to be revised in the Finance Bill next week to include PAYE/NIC in respect of connected party externally provided workers and we are hopeful that the level of the cap will be raised.

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