2 Agenda Business taxes: Iain Wright, Claritas Personal taxes: Steve Holden, HCB Solicitors
3 The economy No triple dip recession 0.6% growth in 2013, 1.8% forecast for 2014 Poorer than expected but better than France or Germany Exports to Brazil, India and China up by 2/3 rds Government departments underspent by £11bn £3bn boost to infrastructure expenditure from 2015 Fiscally neutral Budget Now the most competitive tax system in the G20
4 Corporate tax rates 2012201320142015 Main CT rate24%23%21%20% Marginal rate25%23.75%21.25%N/A Small companies rate 20% Capital allowances18% Annual Investment Allowance £25,000£250,000 £25,000 Trend towards lower corporation tax rates continues UK will have 3 rd lowest corporation tax rate in the G20 in 2015- behind Russia and Turkey Recent rate reductions have been at cost of reduced capital allowances- temporary increase in Annual investment Allowance partially addresses this
5 Support for innovation- Patent Box 10% tax rate on profits generated from patents Rate applies to sales of products incorporating patents and products or services produced or provided using patented technology Phased in over 4 years from 1 April 2013 But only ‘super margins’ qualify for reduced tax rate Must have exclusive right to use patent in a territory Must have contributed to development of patent
6 Patent Box example Wonder Loos Ltd sells 2 types of loo, the Bog Standard and the Wonder Loo, which incorporates several patented new features. 70% of sales are of Wonder Loos Wonder Loos (£000) Bog Standard (£000) Total (£000) Sales7,0003,00010,000 Cost of sales(5,000)(2,400)(7,400) Administrative costs(700)(300)(1,000 Profit before tax1,3003001,600 Deduct 10% margin on routine costs(570)N/A Profit eligible for patent box730 Patent Box tax relief(413) Residual profits8873001,187 Tax at 23%20469273 Effective tax rate15.7%23%17.1%
7 Support for innovation- R&D Tax Relief Existing R&D tax relief: 225% deduction for SMEs- HMRC contribute up to 51.75% towards qualifying expenditure Cash payment of 24.75% of qualifying expenditure for loss making companies 130% deduction for large companies HMRC contribute 29.9% towards qualifying expenditure Relief given through reduction in tax charge, so reflected in tax line in profit and loss account What is R&D? Any activity which seeks to achieve a technological or scientific advance through overcoming technological or scientific uncertainty Men in white lab coats are not necessary! What costs qualify? Labour Materials and consumables, including power Subcontractor costs
8 R&D Tax Relief- Reform “Above the Line” Credit Payable credit introduced for R&D expenditure incurred by large companies. Optional until 2016, mandatory thereafter Also applies to subcontracted and subsidised R&D carried out by SMEs Credit at 10% replaces 130% super deduction Credit can be paid (net of tax) if no corporation tax liability The example assumes an SME incurs £1m qualifying R&D No R&D £000 Current £000 ATL £000 Sales10,000 Above the line R&D Tax Credit100 Costs(7,000) Profit before tax3,000 3,100 Tax at 23%(690)(621)(713) Profit after tax2,3102,3792,387
9 Support for innovation- Creative industries Enhanced deduction similar to R&D tax relief for production of: “High end” TV dramas and documentaries Animation Video games Must be certified as “Culturally British” Enhanced deduction equal to 100% of qualifying expenditure Loss making companies can claim relief equal to 25% of expenditure incurred Government consulting on options for supporting visual effects industry
10 Capital gains tax Exemption for gains reinvested in Seed EIS companies extended by another year CGT relief from 2014 on sale of controlling interest to employee ownership structure
12 International corporate tax avoidance OECD focus on: Transfer pricing (UK) Base erosion and profit shifting (Germany) E-commerce (France & USA) Arbitrage between tax systems Tax havens- why is Mauritius the largest investor into India and why do Barbados, BVI and Bermuda invest more overseas than Germany? Tax treaties Moving towards a common tax base: EU/ G20 or more widely? International tax competition
13 UK corporate tax avoidance Exclusion from Government contracts for tax avoiders Self certification of tax compliance history Notification of any tax return amendments as a result of GAAR Notification of participation in schemes which were or should have been subject to Disclosure of Tax Avoidance Scheme (“DOTAS”) rules Disclosure of tax related offences and civil fraud penalties Disclosure goes back 6 years, but only to April 2013- Previous proposal was for 10 year look back Government departments can use discretion if circumstances permit Contracts can be drafted to enable cancellation if tax status changes subsequently Only applies to contracts worth more than £5m Financial services “mis-selling” provisions to be applied to promoters of tax avoidance schemes?
14 Partnerships- prospective changes Government will consult on: Removing presumption of self employment for members of LLPs Could cause partners to be subject to employers’ NIC Manipulation of profits within partnerships May block or reduce benefits of hybrid partnership/ company structures Changes likely from 2014
15 Disincorporation relief Incorporation of partnership or sole trader can be tax free Disincorporation cannot be- Company makes gain on transferring assets Shareholders receive a taxable distribution Initial suggestion was that companies with turnovers under £2m would be able to disincorporate Rules restrict benefit to companies with gains on goodwill and property of less than £100,000 Relief is of marginal benefit
16 Employers’ NIC £2,000 reduction in annual employers’ NIC bill for all businesses and charities Takes effect from 1 April 2014 Benefit to be claimed through RTI process Government to consult on implementation
17 Rewarding employees- EMI Benefits Income tax on current market value, taxed when exercised. Uplift from current market value to sale value subject to CGT Corporation tax deduction on difference between market value on exercise and exercise price Restrictions Max EMI option value is £250,000/ employee Maximum company size is £30m assets and 250 employees “Low risk” businesses don’t qualify Changes in Budget Entrepreneurs' relief available on shares acquired through EMI regardless of size of shareholding. No need to hold shares for 12 months provided that options have been held for 12 months- exercise immediately pre-sale will qualify for entrepreneurs’ relief Negative combined tax rate of 13% for company and employee!
18 Employee shareholder status Employees giving up certain employment rights can be rewarded with shares Shares worth up to £50,000 at time of gift will be CGT exempt At least £2,000 shares must be awarded in return for accepting status Employees will be deemed to have paid £2,000 for the shares, eliminating income tax and NIC on share awards up to that value The problem The employee will be taxed on the value of shares (over £2,000) received at income tax rates National Insurance and PAYE could also apply if shares are readily convertible into cash
19 Employee benefits Childcare Childcare vouchers to be replaced by Government contribution of 20% to the cost of childcare Worth up to £1,200 per child Applies to all families unless both parents earn more than £150,000 Applies from Autumn 2015 Company cars From 2015, new company car bands for: Cars emitting 0-50g CO2/km- 5% 51-75g- 9% Other bands increase by 2% up to maximum of 37%
20 Personal tax rates 6 April 2012 6 April 2013 6 April 2014 Basic personal allowance £8,105£9,440£10,000 Basic rate threshold £34,370£32,011£31,865 Higher rate threshold £150,000 Basic rate 20% Higher rate 40% Additional rate 50%45% Progress towards £10,000 personal allowance continues Personal income tax allowance to increase to £9,440 from 6 th April 2013 Further rise to £10,000 announced to come in from 6 th April 2014
21 Other personal tax changes Child benefit tax: affects taxpayers in receipt of Child Benefit with incomes of between £50,000 and £60,000; charge equals 1% of Child Benefit for every £100 above £50,000; e.g. Child Benefit for two children is £1,752, so £17.52 will be paid in tax for each £100 above £50,000 earned. Childcare: New tax free childcare system announced; 20% of first £6,000 per child, worth up to £1,200. Cap on Income Tax reliefs: cap on unlimited Income Tax reliefs deductible from income; set at £50,000 or 25% of income; Transfer of assets abroad changes to be enacted in Finance Bill 2013; retrospective to April 2012.
22 Pension tax relief For tax year 2014 -15 onwards: The annual allowance for pensions tax relieved savings will be reduced from £50,000 to £40,000; The standard lifetime allowance for pensions tax relieved savings will be reduced from £1.5 million to £1.25 million; Capped drawdown increased from 100 per cent to 120 per cent. Fixed protection? a transitional 'fixed protection' regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance Individuals (who apply) will have a LTA of the greater of £1.5m and the standard LTA (£1.25m from April 2014), provided that: If they are in a defined contribution scheme, they make no further contributions and nor are any contributions paid on their behalf; If they are in a defined benefit scheme, they stop accruing benefits above a “relevant percentage”. This is broadly defined as either the annual rate specified in scheme rules for the revaluation of accrued rights, or CPI (if no rate is specified)
23 Statutory residence test Statutory residence test - the basic rule You will be resident in the UK for a tax year if: you meet the automatic residence test, or the sufficient ties test. You will meet the automatic residence test in a tax year if: you meet any of the automatic UK tests, and you do not meet any of the automatic overseas tests. Automatic overseas tests; 16 days, 46 days and 91 days; Automatic UK tests; 183 days, a home and full time work; Sufficient ties test; family, accommodation and time; Deceased persons;
24 Capital gains tax and Inheritance tax Capital gains tax (CGT): The capital gains tax annual exempt amount will increase by 1 per cent in 2014-15 to £11,000 and by 1 per cent in 2015-16 to £11,100; Extension of CGT to certain non-natural persons disposing of UK residential property valued at over £2 million at a rate of 28% where liable to the Annual Residential Property Tax (ARPT); Inheritance tax (IHT): The IHT nil-rate band was frozen at Budget 2010 at its current level of £325,000 until April 2015. For 2015-16, the band will be increased by 1% rounded up to £329,000; For non-domiciled spouses from 6 April 2013, the allowance of £55,000 is being increased to £325,000 and will follow any future increases in the nil rate band; Legislation will be introduced in Finance Bill 2013 to amend the inheritance tax provisions which allow a deduction from the value of an estate for liabilities owed by the deceased on death.
25 Tax avoidance GAAR Designed to tackle abusive anti-avoidance schemes: Are there arrangements which give rise to a tax advantage? Does the tax advantage relate to one of the taxes to which the GAAR applies? Is it reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements? Are the arrangements abusive? Stages: 1 - notification 2 - response 3 - advisory panel 4 - opinion 5 - decision NOTE THAT THE ADVISORY PANEL IS NOT BINDING ON HMRC!
26 Tax avoidance DOTAS Revisions to DOTAS were consulted on over summer 2012 as part of the 'Lifting the Lid on Tax Avoidance Schemes' consultation; Finance Bill 2013 will contain two powers for secondary legislation which will be consulted on in early 2013 alongside other changes; The Government intends to implement all the secondary legislation on a common date, later in 2013; Naming and shaming of high risk promoters of tax avoidance schemes; Offshore employment intermediaries (EBTs) to be legislated for in Finance Bill 2014;
27 And in other news…. Annual Residential Property Tax (ARPT): UK dwellings valued at over £2m; and it's owned, completely or partly, by a company, a partnership where one of the partners is a company or a 'collective investment vehicle’. SDLT schemes and reliefs 15% by corporate bodies and non-natural persons on residential property. Offshore arrangements: Agreement with Isle of Man, Guernsey and Jersey to disclose details of account holders, to be coupled with a disclosure facility. Property ValueAnnual Tax £2m to £5m£15,000 £5m to £10m£35,000 £10m to £20m£70,000 £20m and over£140,000
28 And in other news…. Flat Rate Pension: Set at £144; and Abolition of contracting out to end; but Salary Sacrifice contributions still possible? Social Care Costs/; Cap for care set at £72,000; and The means testing disregard raised to £118,000. Dishonest tax agents From 1 April 2013, HMRC will have powers to address dishonest conduct by tax agents, and issue civil penalties of up to £50,000.