TW Ed has to face some uncomfortable truths in the 2016 Budget
I am not particularly impressed by this Budget. Rather, I am particularly unimpressed. Regular sufferers readers may already suspect why.
There are some good parts. And some of the less good parts are, if not welcome, at least understandable. They are overshadowed. Please note that this article will concentrate on the tax aspects of the Budget, as one might expect. Firstly, housekeeping:
(i) Tweaks to the new Personal Savings Allowance legislation are promised. The one that caught my eye was that the definition of the Additional Rate of Income for the purposes of the Allowance will be “clarified”. I am not sure what clarification is required in relation to the starting rate for savings, which is a fixed threshold, and the new Allowance, which is really a band. But the updated legislation itself may reveal more.
(ii) There will also be tweaks to the new Landlord’s Interest Restriction. Beneficiaries of Estates will get the Basic Rate tax credit. There are further adjustments which will become clear once the revised legislation is published – but at least it does seem now that any unutilised tax credit will at least outlive the mortgage loan, if not the property income stream.
- From April 2017, Small Business Rate Relief will be doubled permanently to 100% and will apply to double the current rateable value, up from £6,000 to £12,000. Tapered relief will apply between £12,000 and £15,000. There will also be adjustment at the top end to get some businesses out of the higher rate. There is a lot more going on to modernise business rates, including more frequent reviews, CPI indexation from April 2020, the idea of a form of portfolio relief to replace SBRR and the possible devolution of power to raise rates locally for local projects. It could work out well, so long as it does not go badly.
- From midnight 17 March 2016, Stamp Duty Land Tax for non-residential property will operate on a ‘slice’ rather than a ‘slab’ basis, bringing the regime into line with that for recently-changed residential property. This will be most welcome towards the lower-value end of commercial property acquisitions; the sting in the tail is a hike to 5% for value to the extent that it exceeds £250,000. Leasehold transactions will likewise be amended with a 2% rate applying to rental NPVs exceeding £5million. Those currently mid-contract may opt for either the old or the new regime. Overall, these changes are forecast to cost the taxpayer around £500million a year. Those landlords holding / buying 6 or more residential properties may also start to suspect a trend in this government’s approach to Buy-To-Let.
- From April 2017, Mini-Allowances will be introduced of £1,000 each for property income and trading income, which will help to keep casual income out of Self Assessment (or any other Assessment). For higher incomes, the Allowances are intended to work a little like Rent-a-Room, in that the taxpayer may choose either to deduct the Allowance from gross income, or to forgo and deduct expenses in the normal way. In other words, they are unlikely to feature for ‘serious earners’, so to speak. Arguably a welcome complication, this is likely to help HMRC just as much as it will taxpayers. Even in a supposedly digital age, there must be a cost to setting up and managing an SA taxpayer’s account, so it makes sense to do so only when there’s something in it for the Treasury.
- From April 2020, Corporation Tax is set to fall to 17%. It was set to fall to 18% in the Summer Budget 2015. At this rate, by the time we actually get to 2020, it will probably be 12% or less. Eire will be livid. But the Chancellor’s determination to make the UK irresistible on the world stage is coming at a heavy price for the hundreds of thousands of family companies whose owners rely on dividends. That particular bird will come home to roost in January 2018, when individual taxpayers find out just how much more tax they are paying on their 2016/17 dividends. It will not be pretty.
- Having said that, companies will be able to set losses arising on or after 1 April 2017 against ‘other’ income streams, and will be able to claim group relief in later periods instead of just the overlapping periods of loss, as now. This increased flexibility will be very welcome. No more messing about, worrying whether or not a trade has substantively changed. (Presumably) There will, however, be new relief restrictions to carry-forwards for companies/groups with profits over £5million. Perhaps policymakers do not only love big companies, after all. (Ordinarily, I should agree that it should be “love only”. Ordinarily)
- For capital gains arising on or after 6 April 2016, the current rates of 18% and 28% will fall to 10% and 20% respectively. The higher of the two rates applies to the extent that the capital gain exceeds the Income Tax Higher Rate Threshold, when added to taxable income for the year. These lower rates will not be available in respect of the disposal of any interest in residential property (that does not qualify for Only or Main Residence Relief), or carried interest. “Residential property” includes an interest in land that has, at any time in that person’s ownership, incorporated a dwelling. Once again, residential landlords will be at a relative disadvantage. But then, landlords cannot threaten to leave the UK for somewhere more exotic. (They could, but it would avail them nothing as UK property would generally remain taxable in the UK).Before investors who are not residential landlords start dancing for joy at the Chancellors’ generosity, it is worth considering that the Retail Price Index has risen by around a fifth since the recession started in 2008/9, which in turn means that non-corporates are paying lots of tax on gains that exist only on paper – prices continue to rise, despite economic torpor. (Companies can of course still claim Indexation Allowance to negate inflationary gains). At some point, people are going to realise that their capital gains are not all they’re cracked up to be. And they will not be happy about paying real tax on those notional gains, no matter how generous the rate.
- Entrepreneurs’ Relief
There are also several adjustments to Entrepreneurs’ Relief which address concerns raised following new restrictions introduced in FA 2015. They are therefore deemed to have effect from 18 March 2015:
- Entrepreneurs’ Relief may be claimed on the associated disposal of a privately-held asset where the business disposal is to a family member. The new requirement that the associated disposal must be alongside a material disposal of at least a 5% share will not apply where the claimant disposes of the whole of his interest and he previously held a larger stake.
- Goodwill on Incorporation will be eligible for Entrepreneurs’ Relief where transferred to a limited company controlled by no more than 5 persons, or by its directors – so long as the claimant holds less than 5% of the acquiring company’s shares and voting rights. The claimant may hold more than 5% if the incorporation is a step in the disposal to a new, independent owner.
- There will also be measures to ease some of the problems caused by attacking Joint Ventures, etc.
I am getting a bit confused by the government’s approach to Entrepreneurs’ Relief. Firstly, the notion that a regime cobbled out of the bones of Retirement Relief at the 11th hour, but nevertheless serves to encourage Entrepreneurialism, is something of a stretch. It might depend on how you defined “Entrepreneurialism”.
Then there’s the continual messing around with the legislation – with several pieces this year to retrospectively mend the damage done by poorly targeted amending legislation drafted only last year.
- In fact, government seems to like Entrepreneurs’ Relief all over again, because there’s now an additional Entrepreneurs’ Relief for arm’s length investments by individuals who subscribe for shares in unlisted trading companies with new money, on or after 17 March 2016, and held for at least three years post-06-04/16. There seems also to be an extra £10million limit in point here, and without the additional criteria normally required for Entrepreneurs’ Relief. Shades of Business Asset Taper Relief. (And if I might put in a good word for non-Business Asset Taper Relief, which effectively negated inflationary gains...)
Perhaps I am not the only one who is confused. Certainly, taxpayers have every right to be: some will no doubt have been wrong-footed by the changes and others by the reversal, even though that latter will be welcomed by most.
But likewise the attack on “phoenix companies” late last year in Autumn Statement 2015, such that doing something similar within 2 years of liquidating your last company not only swerves Entrepreneurs’ Relief but actually converts the corresponding distributions to income, probably taxed at roughly 4 times the rate.
So, the government wants to encourage entrepreneurialism so that selling up after just one year is rewarded. But don’t play to your strengths by setting up a new business in a similar field or you will risk getting mugged by the taxman. Silly me, it really is Retirement Relief, after all – unless I want to change from tax to (say) landscape gardening. There is a motive condition, so if it really is applied only when there is blatant phoenix activity, and not when a buyer just wants the trade rather than the company and the only options to the vendor are liquidation or divvying out sale proceeds, then I might be less concerned. But that relies on HMRC remembering what the legislation was originally intended for, some years down the line.
- It is extremely disappointing to find that the government intends through Finance Bill 2016 to calculate Benefits in Kind according to formulaic statutory provisions, even when the actual cost to the employer on “fair bargain” terms is lower. HMRC frequently challenges tax avoidance arrangements on the basis that they are artificial and do not reflect “economic reality”. And yet here we have the government trying to tax employees based not on the actual economic cost of a transaction – even where the corresponding value equates to a bargain on normal commercial terms – but instead on a purely artificial device. If you will, an example of “tax as I say, not as I do”. One might conclude that HMRC displays not just an almost paranoiac fervour when pursuing company car benefit cases to the extreme: it is paranoid. And that good judgment has been a casualty.
- Loans made to close company shareholders (and, potentially, loan creditors) on or after 6 April 2016 will attract a 32.5% tax charge under CTA 2010 s 455 (ICTA 88 s 419 as was) instead of just 25%. “s455 tax” is of course ultimately repayable when the loan is repaid, released or written off. Clearly, someone in government recalls that loans to participators were traditionally taxed as quasi-dividends. The 25% rate harks back to a time before dividends carried a notional tax credit, etc., etc. But in fact the true rate is 20%, since it is 25% of the deemed net dividend (i.e., the loan advanced) and that actually represents the Basic Rate of Income Tax that used to apply. I am looking forward to hearing when someone has to break it to the Chancellor that he can charge only 7.5% of the gross amount, as the new Basic Rate for dividends, instead of 32.5% of the net. (Assuming, of course, that there is anyone left at HMRC/HMT who has been around long enough to remember how s419 tax used to work). One can dream. Or think oneself lucky he’s not charging 32.5% of the gross.
More pragmatically, participators, etc., who are likely to take further loans / advances from their companies may well prefer to take them prior to 6th April 2016. For those who nevertheless draw down after 5 April 2016, it may pay for them to re-acquaint themselves with Clayton’s Case. And, if memory serves, HMRC did threaten to make the deposit non-refundable, in their July 2013 consultation. It beggars belief that HMRC might actually entertain the notion of taxing a loan as if it were income. Perhaps there really is nobody left at HMRC/HMT to explain s419 tax.
- From Royal Assent, HMRC will be given powers to force an overseas (non-EC) business to appoint a UK VAT Representative who will be jointly and severally liable for any UK VAT, on goods sold into the UK, on behalf of the business. Also, powers to hold online marketplaces jointly and severally liable for unpaid UK VAT of businesses that use them to sell goods into the UK. The guidance reassures users that neither measure will apply automatically to a business, but will be reserved for high-risk cases. I am wondering what are not “high-risk cases” for HMRC. I am also wondering how on Earth HMRC is going to be able to force a foreign entity , with no presence in the UK, to appoint a UK representative who is prepared to accept the burden of joint and several liability.
- A new “Lifetime ISA” will be available from April 2017 for adults under the age of 40 (outraged, I am). Eligible individuals will be able to save up to £4,000 per year and the government will top up the ISA at a rate of 25%. However, the fund can be used only:
- To buy a first home so long as the account has been open for at least 12 months, or
- From age 60
Thanks to the valuable subsidy, it will of course make sense for those with substantial disposable funds – those who can afford to lock up deposits for 20 years or more – assuming that the interest rates are reasonably competitive. Whether or not £4,000 a year will be able to keep pace with (the deposit required for) rising house prices is another matter. It certainly smells like a toe in the door for Taxed/Exempt/Exempt pensions – the flavour the government was tentatively endorsing one or more Budgets ago – and I suspect at least one Chancellor is hoping for take-up on a grand scale.
- From 16 March 2016, trading or property income in non-monetary form will be fully taxable. According to HMRC, this is already the case. But there have apparently been challenges to that principle, so the law is being “strengthened”. HMRC has confirmed to me that any changes will not impinge on the “money’s worth” principle as explained in BIM40051. I have, however, had similar assurances before – such as when the renewals basis got waylaid in December 2011.
You may now guess where this is heading.
- The government intends now to repeal the renewals basis outright. The government’s justification is:
“Some businesses have recently sought to obtain relief under the renewals allowance provisions for expenditure on very large and expensive items of equipment. The renewals allowance was never intended to apply to expenditure of that nature and the measure protects that position.”
This is absolute rubbish. This is not the first time that the government has used absolute rubbish to justify policy shift in relation to the renewals basis, such as:
- To remove a concession that was never actually a concession but in law
- To legislate a concession that was actually already in law (insofar as the renewals basis was concerned)
In fact, the only sense I can recall having made on the renewals basis was in the consultation document 4 years ago, which confirmed that the renewals basis would cover all items to be replaced in a residential letting. It has been very much downhill since.
Most readers who have survived this far will be aware of a famous tax case in which the renewals basis was successfully claimed for hundreds of thousands of pounds’ worth of expenditure (in today’s money). The tax case is not recent: it is more than 40 years old. The government, it seems, has forgotten.
But surely HMG cannot have forgotten all of the cases in which the renewals basis has been claimed for substantial expenditure, going back over a hundred years? Or perhaps it is simply that such cases are no longer taught or reviewed. The irony of course is that HMRC has access to many more historic cases than do practitioners, because it has records of many cases that are not published. (And has frequently tried to use them in later tribunal cases as persuasive authority, until it got told off for doing so).
You might think that HMRC had a decent grasp of what was a concession and what was not. This was, after all, the main impetus for proposing to change the rules back in 2011. Unfortunately, this is not necessarily the case, as evidenced by one of our earlier articles - P11D Penalty Grace Period: It's a Legal Right, NOT A Concession.
To me, this is a vitally important alternative to Capital Allowances, and I think we owe it to taxpayers to press, vociferously, for renewals not to be abolished. While the government will distract you with the new “permanent” AIA, please bear in mind that the commitment is that it will last at this level only to the end of the current parliament, according to the government’s Business Tax Road Map. And consider how long it will take to get tax relief at 8% on a reducing balance basis, in the alternative. I suspect that many smart practitioners have refrained from commenting thus far, perhaps foreseeing the possibility that the legislation could simply be revoked. Given the foregoing, it seems reasonable to conclude that I am dumb – and old.