Chancellor Osborne stated in the Autumn Statement that tax reliefs on pension contributions could be subject to further change. While he has not confirmed what, if anything, will change, many reputable sources and commentators are reporting a ‘flat-rate’ savings incentive of between 25% and 33% for everyone, irrespective of what your marginal rate of tax is.
If correct, higher and additional rate tax payers are expected to lose tax benefits of up to £8,000 per annum (the difference between 45% and 25% of the annual allowance being £40,000) plus any potential tax relief on any un-used allowance from the previous 3 tax years – potentially a loss of £36,000 if fully funded and with sufficient income in the additional rate tax band. Although bear in mind that those at the top end of higher rate and those in additional rate will potentially have a lower annual allowance from 2016/17 under the tapered annual allowance rules.
The current annual allowance restricts the amount of tax-relieved pension saving an individual can make each year. For most individuals it is £40,000. It is possible to carry forward unused allowance from the previous three tax years to offset any excess in the current year.
George Osborne has already announced that from tax year 2016/17, people with income plus pension contributions of over £150,000 then their annual allowance will be reduced on a 2:1 basis until their annual allowance is £10,000 per annum – ie for income between £150,000 and £210,000 is reduced on a £2 for £1 basis. For people earning £210,000 or more the annual allowance will be £10,000 per annum.
The restriction affects any individual with “threshold income” – broadly the individual’s total earned and unearned income for the tax year – of more than £110,000. If threshold income exceeds £110,000 the individual must calculate their “adjusted income” for the tax year, which includes the value of pension savings, including employer contributions to defined contribution schemes and its share of the value of defined benefit accrual (calculated in the usual way by multiplying accrued pension in the year (after an allowance for inflation) by 16). If adjusted income exceeds £150,000 the taper will apply.
The Bill contains some detailed anti-avoidance provisions designed to prevent individuals from reducing their threshold income by making pension contributions under salary sacrifice, or flexible remuneration arrangements, made after 8 July 2015.
The annual allowance is measured over pension input periods (PIPs) which do not always match the tax year. So, in order to introduce this measure, transitional arrangements are necessary to align PIPs with the tax year from 6 April 2016.
The Finance Bill sets out these transitional arrangements, under which tax year 2015/16 will be split into two tax years for the purposes of the annual allowance. The “pre-alignment tax year” will run from 6 April 2015 to 8 July 2015 and any open PIPs will be treated as having ended on 8 July 2015. Any pension savings made in PIPs that ended in the pre-alignment tax year will be tested against an annual allowance of £80,000 (plus any available carry forward).
The period from 9 July 2015 to 5 April 2016 is the “post-alignment tax year”. The annual allowance for the post-alignment tax year is £nil, but individuals will be able to carry forward up to £40,000 of unused allowance from the pre-alignment tax year. For example, if an individual had made savings of £20,000 in PIPs ending in the pre-alignment tax year, they could still make further savings of up to £40,000 in the post-alignment tax year. If someone had made savings of £60,000 in the pre-alignment tax year, they would be able to make further savings of up to £20,000 in the post-alignment tax year.
It is highly likely that there will be changes to tax relief on pensions in the Budget and it is important to establish if they could have an impact on you.
With the Autumn Statement now over, we can reflect on the changes. The big news is that, despite a number of commentators suggesting that Entrepreneurs’ Relief could be restricted, no changes were made to this relief (no doubt eliciting a collective sigh of relief from entrepreneurs). Furthermore other predicted changes, such as the limitation of incorporation relief for property rental business, have also not come to fruition. That being said, the Chancellor’s Statement was far from lacking in significant announcements. From the continued targeting of residential landlords, in the increasing of SDLT for second homes, to the “Dawn Primarolo moment” for schemes intended to avoid tax on earned income, or even the major changes to the treatment of umbrella companies, which could ultimately spell their demise, there were plenty of changes that advisors will need to brush up on.
BUSINESS & CORPORATION TAX
Company Distributions: the Chancellor announced that a consultation on the rules concerning company distributions will be published later in the year.
Alongside the consultation, we were advised that targeted anti-avoidance rules will be introduced in Finance Bill 2016 to prevent opportunities for income to be converted to capital in order to gain a tax advantage, as well as changes to the Transactions Securities legislation. It seems that extraction from companies as capital, rather than income, is the target here, particularly when considering the recent changes to Entrepreneur’s Relief (which will prevent taxpayers from claiming this relief on the disposal of only a small part of the business), which are also to be accelerated.
For now, some very favourable tax planning opportunities continue to exist for tax efficient extraction from companies as capital, such as Capital Reduction planning and even Company Purchases of Own Shares. However, it appears that these opportunities may be short-lived – where this type of planning is something that clients may wish to consider, they should be advised to act quickly before these new rules are introduced.
Employment intermediaries – tax relief for travel and subsistence: despite numerous representations against the proposals, the Government has confirmed that it will proceed with legislating to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company. In effect, working through an employment intermediary is likely to become much more costly than simply being self-employed. This change will take effect from 6 April 2016, indicating storms are on the horizon for the umbrella company industry.
Employee share schemes – simplification of the rules: the Government will introduce a number of changes to “simplify” aspects of the tax rules for employee share schemes. Few details have been announced, though readers will be mindful that the Revenue have been known to look to introduce less favourable tax rules under the auspices of “simplification” – such as the proposed “simplification” of inheritance tax on trusts.
We are informed that these changes are intended to provide more consistency, including putting beyond doubt the tax treatment for internationally mobile employees of certain employment-related securities (ERS) and ERS options. The new rules will be introduced under Finance Bill 2016.
Salary Sacrifice: the Government has expressed concern about the growth of salary sacrifice arrangements. Evidence is to be gathered on salary sacrifice arrangements to determine what, if any, measures are to be taken in this area.
Apprenticeship Levy: the Government will introduce the apprenticeship levy in April 2017, to be set at a rate of 0.5% of an employer’s paybill, payable through PAYE. However, each employer will receive an allowance of £15,000 to offset against their levy payment, meaning that the levy will only be paid on any paybill in excess of £3 million.
Corporation tax – restitution interest: the Government has provided that a special 45% rate of corporation tax on income is to be applied to restitution interest, as legislated for in Finance (No. 2) Act 2015.
Deeds of Variation: advisors will be keen to note that following the review announced at March Budget 2015, the Government has confirmed that they will not introduce new restrictions on how deeds of variation can be used. Common sense has prevailed.
Capital Gains Tax – Payment Window: in line with the increased move to “real time” tax compliance as part of HMRC’s digital strategy – to include quarterly online returns – from April 2019 a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief. Draft legislation will be published for consultation in 2016.
Capital Gains Tax (CGT) for non-UK residents: the Government will amend the CGT computations required by non-residents on the disposal of UK residential property by removing with retrospective effect from 6 April 2015 a double charge that occurs in some circumstances and correcting an omission with effect from 25 November 2015. The Government will also give HMRC powers to prescribe circumstances when a CGT return is not required by non-residents and will add CGT to the list of taxes that the Government may collect on a provisional basis.
Secondary Market for Annuities: the Chancellor has confirmed that the Government will “remove the barriers” to creating a secondary market for annuities, allowing individuals to sell their annuity income stream. Advisors will be aware that this is a necessary move, in light of the decreasing regulations over access to pension funds. However, few details have yet been provided – further details on this measure will be provided in December, in the Government’s response to the consultation.
Inheritance tax and undrawn pension funds: the Government will legislate to ensure a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death, to be introduced in the Finance Bill 2016.
ISAs: the Government will maintain the ISA, Junior ISA and Child Trust Fund annual subscription limits at their current level for 2016-17. In addition, the list of qualifying investments for the new Innovative Finance ISA will be extended in autumn 2016 to include debt securities offered via crowdfunding platforms. This represents some forward thinking on behalf of the Revenue, as the popularity of Peer-to-Peer lending platforms as an investment opportunity continues to grow in the marketplace.
Tax-Free Childcare: the Government will lower the upper income limit per parent from £150,000 to £100,000 and increase the minimum income level per parent from the equivalent of 8 hours to 16 hours.
Annual Tax on Enveloped Dwellings (ATED) and 15% rate of Stamp Duty Land Tax: the Government will extend the reliefs available from ATED and the 15% higher rate of SDLT to equity release schemes (home reversion plans), property development activities and properties occupied by employees from 1 April 2016.
Taxation of Sporting Testimonials: following the consultation announced at Summer Budget 2015, the Government has advised that it will legislate to “simplify” the tax treatment of income from sporting testimonials. From 6 April 2017, all income from sporting testimonials and benefit matches for employed sportspersons will be liable to income tax. An exemption of up to £50,000 will be available for employed sportspersons with income from sporting testimonials that are not contractual or customary.
Venture capital schemes – changes to eligible investments: the Chancellor announced a number of changes to eligible investments for venture capital schemes, confirming excluded activities for Venture Capital Trusts, EIS and SEIS Seed EIS.
The Government is to exclude energy generation activities from the schemes, as well as from the enlarged Social Investment Tax Relief. Many of these activities will no longer qualify for relief from 30th November 2015, with the remaining activities being excluded from 6th April 2016.
Companies focusing on energy generation activities have long offered an attractive proposition, providing assured returns over the medium to long term in this area. It appears that the Government do not consider to be “in the spirit” of these tax advantaged schemes. Whilst the move in itself is not surprising, the repercussions among accountants advising clients in this area will be significant, delivering a major blow to the traditional “safe bets” for these types of investments.
Enterprise Zones: the Government will expand the Enterprise Zone programme in England with the announcement of 18 new sites across the country and the extension of 8 sites on the current programme. Enterprise Zones offer a number of advantages, including 100% enhanced capital allowances on qualifying plant & machinery, and significantly reduced business rates. This can offer significant advantages for business, and investors, alongside the disadvantaged areas themselves.
Business Investment Relief: the Government will consult on how to change the Business Investment Relief rules to encourage greater use of the relief to increase investment in UK businesses. This relief offers the opportunities for non-domiciles to bring income to capital into the UK without it being treated as a taxable remittance, where the funds are used for qualifying investment purposes. This can offer some significant advantages to clients, especially where the investment is used for tax advantaged investments, such as EIS or SEIS.
Stamp duty land tax – additional properties: higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes, from 1 April 2016. The higher rates will be 3% above the current SDLT rates.
Alongside the restriction of tax relief for landlords, as introduced in Finance Act (No. 2) 2015, this represents yet another move to try and discourage residential property investment. The impact will likely differ significantly from region to region. In areas of high capital growth, such as London, the additional stamp duty could be mitigated in a matter of months, whereas other areas where second properties tend to be holiday homes, like Cornwall for example, the impact could be significant.
The Government has announced that it will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate.
Stamp Duty Land Tax – changes to the filing and payment process: the Government will consult in 2016 on changes to the SDLT filing and payment process, including a reduction in the filing and payment window from 30 days to 14 days. These changes will come into effect in 2017-18.
Stamp Duty Land Tax – Authorised Property Funds: the Government will introduce a seeding relief for Property Authorised Investment Funds and Co-ownership Authorised Contractual Schemes and will ensure that SDLT does not arise on the transactions in units. These structures may offer another option for tax-advantaged investments in the future – the changes will take effect from the date Finance Bill 2016 receives Royal Assent.
VAT on sanitary products: following the significant media spotlight in this area, while accepting that we are – at present – bound by the EU’s rules in this area – the Government has agreed to set up a new fund that will make available £15 million a year, equivalent to the annual VAT raised on sanitary products, to support women’s charities over the course of this Parliament, or until EU rules are amended to enable the UK to apply a zero rate of VAT for sanitary products.
Company Car Tax diesel supplement: the 3% differential between diesel cars and petrol cars will be retained until April 2021.
Disguised Remuneration: in another Dawn Primarolo moment the Chancellor announced that “disguised remuneration” tax avoidance schemes may be subject to future legislation, which will take effect from 25th November 2015. This represents a “fair warning” by the Chancellor of retrospective legislation in this area. This makes the reliance on schemes intended to avoid tax on earned income much more risky in the future, and highlights the Government’s continued focus in this area.
General Anti-Abuse Rule (GAAR): a new GAAR penalty will be introduced, of 60% of tax due to be charged, in all cases successfully tackled by the GAAR. Perhaps the bigger news is that the Government intends to make changes to the way the GAAR works to improve its ability to tackle marketed avoidance schemes – we await further detail in this area. Although the increased penalties will continue to act as further deterrent, until the GAAR is tested in the Courts we will not know if it is effective legislation or merely a paper tiger.
Serial Avoiders & POTAS: new measures are to be introduced for those who persistently enter into tax avoidance schemes that are defeated by HMRC. These include a special reporting requirement and a surcharge on those whose latest return is inaccurate due to use of a defeated scheme, the names of such avoiders being published and, for those who persistently abuse reliefs, restrictions on them accessing certain tax reliefs for a period. The Government is also widening the Promoters of Tax Avoidance Schemes (POTAS) regime, targeting promoters of “regularly defeated” schemes.
Capital Gains Tax entrepreneurs’ relief – contrived structures: although Entrepreneurs’ Relief itself remains unaffected in the Autumn Statement, the Government has announced that it will consider bringing forward legislation to amend the changes made by Finance Act 2015 to Entrepreneurs’ Relief, in order to support businesses by ensuring that the relief is available on certain genuine commercial transactions.
Stamp Duty & Stamp Duty Reserve Tax – Deep In The Money Options (DITMOs): shares transferred to a clearance service or depositary receipt issuer as a result of the exercise of an option will now be charged the 1.5% higher rate of stamp duty based on either their market value or the option strike price, whichever is higher. This is intended to prevent avoidance using DITMOs, which are options with a strike price significantly below (for call options) or above (for put options) market value. The change will apply to options which are entered into on or after 25 November 2015 and exercised on or after Budget 2016.
Capital Allowances & Leasing: from 25 November 2015, two types of avoidance involving capital allowances and leasing have been legislated against. These changes will prevent companies from artificially lowering the disposal value of plant and machinery for capital allowances purposes, and make any payment received for agreeing to take responsibility for tax deductible lease related payments subject to tax as income.
Related Party Rules – partnerships and transfers of intangible assets: the intangible fixed asset rules are to be amended, with regards to the tax treatment on transfers of assets to partnerships. The intention is to ensure that partnerships cannot be used in arrangements that seek to obtain a tax relief for their corporate members in a way that is contrary to the intention of the regime. This change has immediate effect. A more thorough review of the intangible assets regime is also being considered.
Rules for addressing hybrid mismatch arrangements: new legislation is to be introduced with effect from 1 January 2017 to implement the agreed OECD rules for addressing hybrid mismatch arrangements. The new rules will prevent multinational enterprises avoiding tax through the use of certain cross-border business structures or finance transactions.
Taxation of asset manager’s performance-based rewards: legislation is to be introduced to determine when performance awards received by asset managers will be taxed as income or capital gains – an award will be subject to income tax, unless the underlying fund undertakes long term investment activity.
Tools to encourage voluntary compliance: new measures are to be introduced to improve large business tax compliance, with a consultation over the summer to refine the detail of the measures, to include: a new requirement that large businesses publish their tax strategies; a special measures regime to tackle businesses that persistently engage in aggressive tax planning; and a framework for cooperative compliance.
TAX EVASION & COMPLIANCE
Criminal offence for tax evasion: in a move that will be of great concern, not only for those advising in tax, but in law more generally, a new criminal offence is to be introduced removing the need to prove intent for the most serious cases of failing to declare offshore income and gains.
Criminal offence for corporates failing to prevent tax evasion: a new criminal offence will also be introduced for corporates which fail to prevent their agents from criminally facilitating tax evasion by an individual or entity.
Civil penalties for tax evasion: the Government will increase civil penalties for deliberate offshore tax evasion, including the introduction of a new penalty linked to the value of the asset on which tax was evaded and increased public naming of tax evaders. Penalties are also to be introduced for those who enable offshore tax evasion, including public naming of those who have enabled the evasion.
Requirement to correct past offshore tax non-compliance: the Government will consult on an additional requirement for individuals to correct any past offshore non-compliance with new penalties for failure to do so.
“Simple” Assessment: the Government will publish draft legislation that will enable a new process for paying tax. This will be used for taxpayers in self-assessment who have simple tax affairs where HMRC already holds all the data it needs to calculate the tax liability, and where existing payment processes are not available. Taxpayers will be sent a calculation which will be a legally enforceable demand for payment, and taxpayers will be able to challenge and appeal these calculations. This represents a drastic shift from the typical self-assessment process, and at present we have little information on what will constitute “simple tax affairs”. These new rules will come into effect in the 2016-17 tax year.
Death of the Tax Return & Making Tax Digital: the Government is set to invest £1.3 billion to transform HMRC into one of the most digitally advanced tax administrations in the world. Most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account, giving rise to concern from tax practitioners that the Revenue is seeking to drive out their involvement, with increased risk of non-compliance as a result. This will not apply to individuals in employment, or pensioners, unless they have secondary incomes of more than £10,000 per year. A consultation on the Government’s plans in this area is to follow in 2016.
Regionalisation: HMRC is to consolidate from 170 offices to 13 large, modern regional center, resulting in significant operational changes in the Revenue in the future.
Review of employment status: the Government has responded to the final report of the Office of Tax Simplification review of employment status and is taking forward some of the recommendations.
‘On or Before’ Reporting Obligation Review: the two year temporary relaxation, allowing existing micro-employers using Real-Time PAYE to report all payments they make in a tax month on or before the last payday in the tax month rather than on or before each and every payday, will end as planned on 5 April 2016.
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