UK: If It Counts, It’s Covered - Deloitte’s Full Pre-Budget Report Commentary

Last Updated: 10 December 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

Immediate reactions

Sally Grimwood

Key measures of interest to everyone

There will be yet another 0.5% increase in both employer and employee national insurance from 2011/12. From that date the employers' NIC rate will be 13.8% (it's 12.8% now). The Treasury expect that it will raise £2.4 billion per annum from companies and £2 billion per annum from individuals.

It will cost someone earning £20k or under nothing, because of a simultaneous rise in the NIC starting rate designed to mitigate the increase for low earners. For an employee earning £50,000 a year, the change will mean an increase in National Insurance of £23.65 per month. For their employer, it will mean an increase of £429.55 per annum.

As expected based on this morning's papers, from today there will be a special 50% levy on all bonuses in excess of £25,000 paid to bankers. (Good news for other high earners – there's a tight definition of 'banks' and 'banking business' which will protect other industries.)

The interesting twist is that the levy will be collected from the banks themselves rather than the employees, and won't be deductible for corporation tax purposes. This creates an effective tax rate on the bonuses of 69.7% for the banks. The Chancellor estimates that this will raise £550 million in 2009/10. Although the Chancellor has reserved the right to extend the scheme beyond the current year, his expectation is that it will be a one-off – presumably because he expects a more restrictive approach to bonuses to be enshrined in the forthcoming Financial Services Bill.

The key measures for corporates

  • Hot news for small and medium enterprises involved in R&D activities – from today they can claim R&D relief at 175% even if they don't own the underlying Intellectual Property created. This is a really big deal for the right companies, especially as they can still sell the R&D losses.
  • Marginally less hot news is the new patent box regime, designed to keep IP ownership onshore. Income from patents will be taxed at just 10%, which will cost the Treasury £1.3 billion per annum. Although a good idea, the slightly disappointing aspect is that it will only apply from 2013, is restricted to patents granted after Finance Bill 2011, and doesn't seem to extend to other forms of IP such as copyright and trademarks.
  • As expected the consultation on Controlled Foreign Companies has been deferred into the New Year.
  • And on the subject of consultations, as widely expected there's going to be consultation on foreign branches. The point here is that there is a difference in treatment if foreign branch profits are taxed when dividends from foreign subsidiaries are exempt. The reaction from different industry sectors will be varied. Some groups use foreign branches in riskier ventures as a way of ensuring some relief for any start up losses and therefore there may be winners and losers if a branch exemption system were introduced. HMRC will need to manage these conflicting interests in the consultation process.
  • Draft anti-avoidance legislation has now been produced for transfers of capital allowances (further to the 21 July 2009 change of law – see below). There is also specific anti-avoidance targeted at particular planning structures which may be less likely to be stumbled into by the unwary (broadly targeting a lessor migrating into the UK, where lease rental income has been substantially dealt with offshore intending to create UK deductions post migration; and conversely a lessor who has claimed capital allowances migrating from the UK so that lease rental income is not subject to UK tax).
  • There are two changes that have a broader application:
    • Capital allowance buying: now referred to as the buying of a "relevant excess of allowances" (previously "latent allowances") the rules became effective in July 2009. Subject to a "main purpose" test, where there is a change of ownership of a company with "excess allowances" then the way in which those allowances may be used will be streamed in the acquiring group.
    • On a more positive note, there is a relaxation on the punitive rules that have applied since 2006 on the sale of lessor companies (which is a test by reference to GAAP lessor accounting and can apply to entirely commercially motivated arrangements) where the lessor has a deferred tax liability. From today, leasing companies may elect for no charge to apply, in return for ringfencing the profits arising in the leasing business.

The key measures for entrepreneurial businesses

  • Leaving aside the NIC increases, there are some pleasing measures for entrepreneurial businesses on the whole. For starters, the small companies rate will be held at its current level of 21% for 2010 (the increase to 22% has been deferred).
  • The Chancellor confirmed the Business Payment Support Scheme will be extended once again. The extension is much welcomed. We can help clients to apply for deferrals under the BPSS, and also help them improve their cashflow so that they can pay their tax when the deferral ends.

The key measures for VAT and Indirect

  • As pre-announced, the VAT rate will return to 17.5% from 1 January 2010. Rumours that it would go higher proved to be unfounded. Retailers will be delighted.

The key measures for individuals

  • Pensions forestalling: the special rules introduced at Budget 2009 to prevent people earning more than £150,000 from making large additional contributions to their pensions before 6 April 2011, have been extended to those with incomes of £130,000 or over, with effect from today. Further, the restriction of higher rate tax relief being introduced from 6 April 2011, which affects individuals with a 'gross income' of £150,000 or over who save in a registered pension scheme, has also been extended. 'Gross income' already included the value of the individual's pension contributions, but now also includes any pension benefit funded by the employer on their behalf.
  • The inheritance tax threshold will be frozen at the current level of £325,000 for chargeable transfers of value made on or after 6 April 2010 (it was to have been increased to £350,000).

National Insurance costs up again!

Matt Ellis, tax partner

It was bad news for all employers and employees today as the Chancellor pledged to increase National Insurance Contributions by a further 0.5 % from April 2011. This means that all employees earning over broadly £40,000 face an uncapped 2% NIC charge on all their earnings. Employers, who were already bracing themselves for the headline employer rate moving from 12.8% to 13.3% in 2011, will be disappointed by the further increase to 13.8%.

Matt Ellis, Employment Taxes Partner at Deloitte, said, "When the original 1% uncapped liability for National Insurance was introduced we always speculated that it would provide an easy platform for Government to raise revenue without increasing the headline rate of income tax. And that's what we've seen today. Undoubtedly, many employers will try to mitigate the impact of this rate increase by using salary sacrifice arrangements, to ensure that the overall pay and benefits package is more tax efficient."

Patent Box

Colin Hailey, tax associate partner

The patent box is intended to provide an effective 10% rate of corporation tax on income from patents.

After consultation with business the measure will be introduced into Finance Bill 2011, and will apply to income from patents granted after the legislation is passed. The reduced rate will apply from April 2013. This measure has some significant implications:

This regime has been announced with the UK life sciences industry in mind in particular. During the debate within the Office for Life Sciences (in which Deloitte was involved) it was clear that this would not be a regime that was applied to intellectual property in the wider sense, but only to patent income. However, patent IP is also a feature of technology and manufacturing sectors, and the potential application of a patent box could be very wide.

The combination of the R&D tax credit system (giving enhanced tax deductions for R&D expenditure) plus this regime regarding the reduced rate of tax on patent income means the life science industry in the UK is in a highly favoured tax position compared to some other industries. However, it is intended to allow the UK to maintain international competitiveness as many Western European countries have their own regimes already in place.

Many large groups have established tax efficient intellectual property holding structures outside the UK and will therefore need to reorganise in order to benefit from this measure. In particular, many will not wish to make changes until the outcome of the debate on reform of the controlled foreign company regime in the UK is concluded.

Loss making UK biotech groups will need to understand how the effective 10% rate is to be achieved in order to determine the value of this measure to them. The Belgian regime which is most comparable to this proposed UK regime provides a deemed deduction against patent income which cannot be carried forwards and so is of limited benefit to many loss making companies.

More pension pain

Adam Waller, tax partner

The pensions anti-forestalling legislation, that acts to limit high rate pension relief from 2011 onwards, will now apply to those with 'relevant incomes' of £130,000 or more (previously £150,000).

Pension contributions will retain full tax relief up to the higher of:

  • Normal ongoing pension contributions (NORPS); or
  • The lower of £30k and average contributions over the past three years if contributions are less regular than quarterly; or
  • £20k

The anti-forestalling measures prevent taxpayers establishing a history of NORPs after April 2009.

The existing rules are complex, to say the least. The new rules merely add to this complexity. The increased administration burden for companies is high, particularly given the need for companies to understand aspects of their employees' personal financial affairs. It is doubtful that the level of tax at stake justify the added complexity.

Further, the restriction of higher rate tax relief itself from 2011, which affects individuals with a 'gross income' of £150,000 or over who save in a registered pension scheme, has also been extended. 'Gross income' already included the value of the individual's pension contributions, but now also includes any pension benefit funded by the employer on their behalf. Calculating the value of employers' contributions to a defined benefits scheme is not an easy task (although the restrictions are relaxed for those earning below £130k which is welcome).

Coming on top of the wholesale reform of pensions which took effect in April 2006, and the changes introduced last year, our pension legislation must be the most complex and hardest to explain in the world. The consultation document on the legislation to take effect from April 2011 is over 120 pages (although in pension terms this might be regarded as a brief document).

Levy on bankers' bonuses

Stephen Woodhouse, tax partner

Summary Action to respond to concerns over the expected level of bonuses paid to bankers had been widely expected in today's PBR announcements. The Chancellor met this by announcing a 50% levy on bonuses of more than £25,000 paid to bankers on or prior to 5th April 2010.

Key Features

The key features of the Bank Payroll Tax (BPT) include:

  • The tax is levied on banks rather than the employees receiving bonuses. The payment of the BPT will not attract corporation tax relief.
  • It applies to payments made to employees of UK resident banks or building societies, members of a banking group or UK branches of overseas banks or companies within a banking group. There is a concern that the detailed coverage of the legislation might extend further.
  • People who are regarded as employees include people resident or working in the UK and for a bank or building society whose duties relate to regulated activities or the lending of money.
  • The BPT applies to discretionary payments in excess of £25,000 payable from 9th December to 5th April 2010 or contractual payments within those dates under commitments entered into on or after 9th December.
  • BPT also applies to intermediaries of either the Bank or the employee or to personal services provided by an individual and as such extends beyond employees.
  • There are further detailed anti-avoidance provisions. These include rules to ensure that the BPT applies to loans made during the period of the BPT where one of the purposes of the loan is the reduction or elimination of BPT or any other tax or national insurance contributions.
  • Where a loan is subject to the legislation, the amount charged to BPT will be the amount of the loan rather than the normal interest equivalent amount charged on loans from employment. It appears likely that this will apply to most loans from an employee benefit trust.
  • The rules also apply to arrangements for the making of future payments (or provision of money's worth or other benefits or any reward equating in substance to remuneration).
  • Where arrangements are made for future payments (such as post 5th April 2010), BPT will apply by reference to the date when the arrangements are made on the amount which it is reasonably assumed will be paid or benefit which it is reasonable to assume will be provided.
  • There are limited exclusions for share benefits delivered through HMRC approved plans but the legislation will apply to other forms of long term equity awards.
  • The tax will be payable on 31 August 2010.

Impact of the BPT

The Chancellor stated that he did not wish to impose a windfall tax on the Banks but rather to give them a choice between building their capital or paying bonuses but being subject to the newly announced levy. This is stated to be for the period to 5th April 2010 only but with the provision to extend it for further periods.

The BPT will have a substantial effect on the payments of bonuses within Banks in the current tax year. It also appears to apply disproportionately to deferred bonus amounts paid in accordance with the principles supported by the FSA and related reports. For instance, a deferred bonus awarded in the current tax year in the form of deferred equity payable over three years could give rise to the PBT on the full projected value of that bonus whereas three series of annual payments should only be subject to the value of the award for the current year (subject to any possible extension of the tax to later years).

Where bonuses are paid which fall within the new rules, the total tax cost (ignoring any potential corporate tax relief) would be 103.8% of the amount of the bonus received (in excess of £25,000).

Bonus Amount paid (in excess of £25,000) £100,000

Tax Cost

BPT £50,000

Employee Tax and NICs £41,000

Employer NICs £12,800

Total tax cost (ignoring any CT relief) £103,800

This will represent a substantial cost for Banks operating in the UK. It can be expected that where bonus awards have not been made for the current year, such awards are likely to be deferred until future years (but with care being required to avoid there being any arrangements for future payments) and that this will extend to longer term awards such as restricted stock or other equity benefits.

In the longer term, this may increase pressure for banking operations to be located outside the UK or for other steps to be taken to mitigate the impact of the new rules.

Businesses

Increase to National Insurance Contributions rates and thresholds

The measure

The Chancellor announced an increase of 0.5% in the NIC rates payable by employees, employers and the selfemployed in addition to the 0.5% increase already stated in the 2008 PBR. There will also be an increase to the primary threshold and lower profits limit of 570 above those already planned in the 2008 PBR. This is to compensate lower earners for the proposed increase to the rates of Class 1 and Class 4 NIC.

Therefore, the main rate of Class 1 primary NIC will be 12%, with a rate of 2% payable on earnings above the upper earnings limit. The main rate of Class 1 secondary NIC will increase to 13.8% (rather than the 13.3% previously announced) on earnings above the secondary threshold. The increase will also apply to Class 1A and Class 1B NIC rates. From April 2011, the main rate of Class 4 NIC will increase to 9%, with a rate of 2% payable on profits above the upper profits limit.

Who will be affected?

All employees, employers and self-employed individuals who are liable to pay NIC.

When?

The increases will be effective from April 2011.

There will be no changes to the thresholds and rates of NIC payable by employees, employers and the selfemployed for the 2010/11 tax year, with the exception of minor increases to the Lower Earnings Limit and the Class 2 rate for volunteer development workers.

Our view The increase to the rate of NIC in addition to the rate increase announced in the 2008 PBR will raise about 7 billion in 2011-12 and annually thereafter and is not unexpected given the level of national debt. However, given it comes at a time when the Government is trying to promote employment, this additional employment cost will not be appreciated. However, we welcome the measure to increase the primary threshold and lower profits limit to assist lower earners.

Levy on Bankers' Bonuses

The measure

Bank Payroll Tax (BPT) is a 50% levy on bonuses of more than £25,000 paid to bankers on or prior to 5th April 2010. The tax is levied on banks rather than the employees receiving bonuses. It will not attract corporation tax relief.

Where bonuses are paid which fall within the new rules, the total tax cost would be 103.8% of the amount of the bonus received (in excess of £25,000), as set out below:

Bonus Amount paid (in excess of £25,000) £100,000

Tax Cost

BPT £50,000

Employee Tax and National Insurance Contributions £41,000

Employer National Insurance Contributions £12,800

Total tax cost £103,800

Detailed anti-avoidance provisions include rules to ensure that the BPT applies to loans made during the period of the BPT where one of the purposes of the loan is the reduction or elimination of BPT or any other tax or national insurance contributions. Where a loan is subject to the legislation, the amount charged to BPT will be the amount of the loan rather than the normal interest equivalent amount charged on loans from employment. It appears likely that this will apply to most loans from an employee benefit trust.

There are limited exclusions for share benefits delivered through HMRC approved plans but the legislation will apply to other forms of long term equity awards.

Who will be affected?

Banks, or their intermediaries, making bonus payments in excess of £25,000 to employees of UK resident banks or building societies, members of a banking group, UK branches of overseas banks, or companies within a banking group.

'Employees' include people resident or working in the UK for a bank or building society whose duties relate to regulated activities or the lending of money.

BPT also applies to intermediaries of either the bank or the employee or to personal services provided by an individual and, as such, extends beyond the banks.

When?

The BPT applies to discretionary payments payable from 9 December 2009 to 5 April 2010 or contractual payments within those dates under commitments entered into on or after 9th December 2009. The tax will be payable on 31 August 2010.

The rules also apply to arrangements for the making of future payments (or provision of money's worth or other benefits or any reward equating in substance to remuneration). Where arrangements are made for future payments (such as post 5 April 2010), BPT will apply by reference to the date when the arrangements are made on the amount which it is reasonably assumed will be paid or benefit which it is reasonable to assume will be provided.

Our view Action to respond to concerns over the expected level of bonuses paid to bankers had been widely expected in today's PBR announcements; this measure was introduced as preferable to a windfall tax on the banks, instead, giving them a choice between building their capital or paying bonuses (subject to the newly announced levy).

The BPT will have a substantial effect on the payments of bonuses within banks in the current tax year. As a 103.8% effective tax rate on bonuses, this will represent a significant cost for banks operating in the UK.

There are also several concerns about how the BPT will operate. At present, it appears to apply disproportionately to deferred bonus amounts paid in accordance with the principles supported by the FSA and related reports. For instance, a deferred bonus awarded in the current tax year in the form of deferred equity payable over three years could give rise to BPT on the full projected value of that bonus whereas three series of annual payments should only be subject to the value of the award for the current year (subject to any possible extension of the tax to later years).

There is also a concern that the detailed coverage of the legislation might extend further than currently envisaged, and that although it is currently limited to the period to 5 April 2010, there would be the option to extend it for further periods.

In the short term, banks will plan to mitigate the impact of the new rules. It can be expected that where bonus awards have not been made for the current year, such awards are likely to be deferred until future years (but with care being required to avoid there being any arrangements for future payments) and that this will extend to longer term awards such as restricted stock or other equity benefits.

In the longer term, there will be pressure on the Government to reverse this measure, and banks will reconsider whether their banking operations should be located outside the UK.

Patent box

The measure

The patent box is intended to provide an effective 10% rate of corporation tax on income from patents.

Who will be affected?

Companies with income from patents.

When?

After consultation with business the measure will be introduced into Finance Bill 2011, and will apply to income from patents granted after the legislation is passed. The reduced rate will apply from April 2013.

Our view The combination of the R&D tax credit system (giving enhanced tax deductions for R&D expenditure) plus this regime regarding the reduced rate of tax on patent income means the life science industry in the UK is in a highly favoured tax position compared to some other industries. However, it is intended to allow the UK to maintain international competitiveness as many Western European countries have their own regimes already in place.

Many large groups have established tax efficient intellectual property holding structures outside the UK and will therefore need to reorganise in order to benefit from this measure. In particular, many will not wish to make changes until the outcome of the debate on reform of the controlled foreign company regime in the UK is concluded.

Loss making UK biotech groups will need to understand how the effective 10% rate is to be achieved in order to determine the value of this measure to them. The Belgian regime which is most comparable to this proposed UK regime provides a deemed deduction against patent income which cannot be carried forwards and so is of limited benefit to many loss making companies.

VAT rate to return to 17.5% on 1 January 2010 as planned

The measure

In his Pre-Budget report, the Chancellor confirmed that, as planned, the VAT rate will return to 17.5% with effect from 1 January 2010.

Who will be affected?

All VAT registered businesses will be affected by this. They now have certainty about the changes that they need to make to implement the January rate change.

When?

As previously announced, the rate change will take effect from 1 January 2010.

Our view The confirmation provides welcome confirmation that rumours about an even higher VAT rate were unfounded, for now at least.

Following the success of our 'rate change' helpline last year, Deloitte will be launching a new helpline soon, to provide help to businesses in the run up to and immediate aftermath of the rate change.

To read this document in its entirety please. click here

(http://www.ukbudget.co.uk/PreBudget2009/attachments/UK_PBR2009_full_measures.pdf)

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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