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TW Ed's summary of the 2013 Budget announcements

Introduction

I won’t lie, I have acquired a feeling vaguely akin to being in the ‘dry’ tent at a soiree. Of course that’s a marquee but let’s stick to just one French word per sentence. (As if that were possible in English).

The music and laughter is emanating from another tent, a little further along: the topics of home buying and house building run a real risk of getting the party into full swing. As a confirmed tax practitioner and not an economist, (we have not been formally introduced),  I cannot comment on whether or not the new incentives will serve to boost infrastructure investment and then growth, although they certainly look good from where I’m standing, as does the chance that pension schemes may be able to invest in more mainstream residential property. Am I alone in sensing that our host keeps dropping the new buzzword “fracking” every time the party starts to falter? Will it pale? Time will tell.

To matters more my speed, with a virgin VAT in hand: (References are to Appendix A of Overview of Tax Legislation and Rates, or OOTLAR).

Childcare

The party crashed a day early through my tent with the new proposals for childcare tax relief making headline news yesterday. And it’s largely good news: 20% Basic Rate tax relief on the first £6,000’ worth of childcare costs, per child. And they have said that they want to be as helpful as possible, as regards transferability.  (Tax-Free Childcare Q&A)

It all sounds good – particularly as each parent can earn up to £149,999 and still be eligible – but it seems the current childcare voucher regime (Employer Supported Childcare) will be closed to new entrants when the new scheme starts and the new scheme will be generally unavailable to families where one parent stays at home. (Although I do see the logic if it’s intended primarily to lower the threshold for those wanting to return to work). And to ensure that it doesn’t simply result in even higher childcare costs, the government is trying to increase the supply of childcare as well. But the new scheme doesn’t come in until Autumn 2015, and applies at first only to children under 5. I wonder if it is pure coincidence that we shall have a new government before this expensive new scheme actually starts to bite?

As regards today’s announcements, the idea of transferring ‘old’ Child Trust Funds to Junior ISAs appears a welcome practical solution. (2.12)

Seed Enterprise Investment Scheme (A8), (A11)

It seems that those who said that 2013/14 gains would be exempted were right all along – or at least half right: it will still be possible to treat a 2013/14 investment as completely ‘exempting’ a 2012/13 gain but also now, it will be possible to reinvest a 2013/14 gain against half of a matched 2013/14 investment into SEIS. The Budget Notes are unclear as to whether only 50% of the 2013/14 gain can be eligible for reinvestment relief, or it requires merely that the reinvestment be doubled in order to exempt the gain in full. But it does seem that it will again be possible to make an investment in 2014/15 and use that at least partly to ‘frank’ a 2013/14 gain.

I note also that HM Treasury has finally softened as regards the legislation forbidding the claimant company ever to have been ‘controlled’ by another company – such as a company formation agent, which is frequently a company in its own right. Incorporation by a company formation agent which is itself a limited company will not now adversely affect a claimant company’s independence so long as subscriber shares alone have been issued and the claimant company has not commenced to trade, or begun preparation for, its trade or business, before that control moves to individuals. But this easement applies only from April 2013, leaving me to wonder how rigorously HMRC will police the pre-2013 scenario.

Enterprise Management Incentive (EMI) Schemes (1.9)

HMRC has also finally responded to the criticism about EMI Schemes and the minimum holding period required for Entrepreneurs’ Relief by allowing the option holding period to count, rather than just the period for which the shares are held. We are now much closer to the position under Taper Relief, which bodes well for future takeup.

London Anniversary Games – Exemption for Non-Resident Sportspeople (A17)

The Agassi case means that HMRC is entitled to tax a proportion of all earnings rather than simply prize/attendance money specifically earned in the UK. But every time there is a headline international event, the government introduces an exemption – such as for the Olympic and Commonwealth Games.

I think it is unfair to keep introducing this exemption just to attract headline events, while non-resident participants in other annual events such as Wimbledon continue to be taxed. The rule is either correct and should be applied universally, or it is wrong and should be changed. The fact that the government keeps announcing these exemptions does rather suggest the latter.

Employers’ National Insurance Allowance (1.19)

From April 2014, all businesses and charities will automatically be given a £2,000 allowance against Employers' National Insurance Contributions

This seems to be aimed at meeting the cost of hiring additional staff and offsets the cost of an additional salary of roughly £22,000. It will be interesting to see if it has the desired effect – although it appears eminently more straight forward than the ill-starred Regional NIC Holiday. Or it could just be to pre-empt complaints about the real cost of RTI to business...

Simpler Income Tax for Smaller Businesses (A44)

Interestingly, the details at section 1.20 of the OOTLAR – to limit the exit routes from the regime and how to treat goods taken for own use – were not mentioned in the explanatory TIIN - or at least the TIIN I was reading. Hopefully, further clarification will be forthcoming shortly. Although the TIIN did confirm that the flat rate expenses for cars will now be optional under the cash basis.

While I think it’s fair to acknowledge the government’s good intentions in creating this simpler regime, it may in many cases mean further complication as it may now require (at least) two sets of tax computations, one on the accruals basis and the other on the new simple basis.

Research and Development – Above The Line Credits (A54)

These were originally meant to run at 9.1%, and the Budget announcement that it will be given instead at 10% should be welcome – a further boost to what appears to be significantly more generous than the extant ‘large company’ regime. There was also mention of further assistance to the visual effects industry at 2.22.

Anti-Avoidance Measures

Our host Mr. Osborne announced that there would be a significant number of anti avoidance / evasion measures in the Budget. Some are as follows:

Partnerships (2.42)

The Budget announced that the government intends to target employment relationships ‘disguised’ behind Limited Liability Partnerships, and would counter the manipulation of profits through the use of corporate partners – or trusts and other vehicles. One can only hope that caution be exercised so as not to affect ‘genuine’ corporate partner arrangements - whatever 'genuine' might mean in this context.

Close Company Loans to Participators (A118)

The Budget set out a series of measures to combat perceived abuse such that:

• Loans via intermediaries such as partnerships / LLPs are nevertheless caught
• “Extractions of Value” rather than ‘simple’ loans will also fall within the scope of the s455 charge
• “Bed and Breakfasting” of loans may be ignored and only ‘genuine’ loan repayments result in a repayment of the s455 tax charge.

Naming and Shaming Promoters of High-Risk Schemes (2.43)

It looks like the government would like to ‘name and shame’ promoters of high-risk schemes. It sounds a bit like an ASBO for the tax profession. I wonder if it will likewise carry the same “badge of honour” status in some circles. More seriously, I think HMRC / the government will need to be very careful about how it determines what is a high-risk scheme.

More generally, given that some sections of government appear to make no distinction between tax avoidance and tax evasion, it may be that some measures go too far. HM Revenue & Customs has previously made great play over taxpayer confidentiality, but is more than happy to publicise details of deliberate defaulters, etc., when it is satisfied that taxpayers haven’t played by the rules - its rules. It is difficult satisfactorily to reconcile those attitudes – undertones of “You’re either with us, or you’re against us” in a world where actually, it’s what is correct that should count most. And what is correct is not always certain: just because HMRC turns out sometimes to be right, doesn’t mean that the taxpayer didn’t have a valid argument - should a taxpayer be penalised just for sticking to his/her guns? Who says what is avoidance, and what is a valid legal argument that needs to be considered at tribunal?

Notification Requirement for Avoidance Scheme Users (2.45)

There is a proposal to require taxpayers to change their own tax returns when a related case fails – or stand by their return. I am unsure why there should be a separate treatment for avoidance cases (see “You’re either with us, or you’re against us” above) since it would ordinarily be for HM Inspector to amend, in an enquiry. It would be cause for concern if HMRC intends to argue that different schemes using (say) different DOTAS references are in fact “all the same” – there might again be issues around confidentiality. The details of the proposal are awaited with interest.

Data Gathering from Card Payment Processors (A128)

This will allow HMRC to require card processing companies, etc., to provide bulk reports to HMRC as a matter of course, allowing HMRC to summarise total receipts to businesses. It's worth bearing in mind the vast array of intelligence and data gathering powers / sources now available to HMRC, all wrapped up in its Connect database. If applied merely to combat tax evasion then so be it. But it will not be long before HMRC knows more about you, than you.

And this intelligence sits somewhat at odds with a recent case about a self-assessing taxpayer who for several years made income tax returns detailing turnover and profits but who neglected to pay over any VAT, despite advising HMRC of turnover well above the registration limit for those several years. It did not end well for the taxpayer. But how could HMRC not have made the link in a reasonable time frame - long before it needed to go to court? I do not know the full details of the case but I do think it raises a question or two.

In summary then, not the busiest Budget from a purely tax perspective but plenty to talk about. I am off to recharge my glass - hold the tonic, thanks very much.