2015 Budget Summary

Following Wednesday’s Budget, the following is a summary based on the Chancellor’s announcements and press releases available. We have covered some of the main points that arose from a largely fiscally neutral budget.

We will ultimately have to refer to the detailed legislation, guidance and Finance Bill provisions where applicable, to be able to advise more fully on any specific area.

PERSONAL TAXES

Personal allowances and thresholds

The personal allowance for 2015/16 will remain at £10,600, as announced in the 2014 Autumn Statement, with the higher-rate threshold increasing to £42,385.

The plan set out is for the personal allowance to increase to £10,800 for 2016/17 and to £11,000 for 2017/18 for all taxpayers regardless of age. The benefit of this increase will be passed on to higher rate tax payers with an increase in the higher-rate threshold taking it to £42,700 in 2016/17 and £43,300 in 2017/18.

The national insurance upper earnings and upper profits limits will remain aligned with the higher-rate threshold.

RS comment

The further increases to the personal allowance reflect the ongoing pledge by the coalition to support those on low and middle income. This has seen a rise in the allowance from £6,475 in April 2010 to the above levels.

However, although the increases are welcome news, not all taxpayers benefit. Those earning above £100,000 continue to see their personal allowance abated on a £1 for £2 basis.

A new personal savings allowance

From April 2016, a new personal savings allowance will be introduced, exempting individuals from tax on the first slice of their savings income.

Basic rate taxpayers will be exempt from tax on the first £1,000 of savings income and higher rate taxpayers on the first £500. Additional rate taxpayers will not be entitled to an allowance.

HMRC plans to code out automatically taxable savings income that remains taxable through PAYE from 2017/18, although trials will commence in autumn 2015.

Because so many people will no longer pay tax on their savings, the Budget announced that the automatic deduction of 20% income tax by banks and building societies on non-ISA savings will cease from April 2016.

RS comment

This is a welcome relief for a majority of taxpayers and is expected to abolish tax on savings for 95% of savers. For the minority, the onus will be placed on them to account for tax on savings in full with banks and building societies no longer obligated to deduct tax at source.

The details of automatic coding are not yet available, but it appears that this might accelerate the payment of tax for individuals with taxable savings income. It is hoped that this will not add further levels of complication for those who will need to report the income to HMRC but careful checking will be required to ensure the right and correct amount of tax has been accounted for.

National insurance contributions

As part of the planned reforms to tax administration, the Government will abolish class 2 national insurance contributions (NIC) and reform class 4 NIC to introduce a new contributory benefit test.

Class 2 and class 4 NICs are the contributions payable by self-employed individuals including partners in partnerships. Class 2 is paid at a flat rate, while class 4 is based on that individual’s profits for the tax year.

A consultation is proposed on the abolition of class 2 NIC and the reform of class 4 NIC to introduce a new contributory benefit test. Consultation is expected later this year on both the specifics and timing of the changes.

In terms of class 1, employer’s NIC will be reduced to nil from 6 April 2015 for all workers aged under 21 who earn less than £42,385 a year (or £815 a week). For those earning above this upper secondary threshold, only the excess will be liable to Class 1 contributions. The reduction continues until the last pay day before the employees 21st birthday.

Further, from 1 April 2016 employers secondary contributions will not apply to the wages of apprentices aged under 25 for earnings up to £42,385 a year.

RS comment

The suggestion of abolition of class 2 is welcomed and in our opinion long overdue.

We will need to see further details on the proposed changes to class 4 NIC to ascertain the impact of the proposed contributory benefit test and to ensure that individuals’ entitlements to these benefits are not eroded by the change.

For class 1, this is great news for employers which will see total payroll costs fall but less so for employees who will not see any reduction in the amount of NIC deducted from their wages. In marginal situations, it might tip the balance in favour of recruitment. We expect new software to easily accommodate the changes to Class 1 contributions by employers.

DIGITAL TAX RETURNS

With the aims of modernising and simplifying the UK tax system, the existing tax returns will be replaced by digital tax accounts.

These accounts will allow HMRC to utilise information it will hold to calculate tax liabilities without the need for taxpayers to re-supply that information. It will also supply a gateway for both individual and small businesses to upload details of other income and gains.

The ultimate aim is that these digital tax accounts will replace the need for these individuals and small businesses to file annual tax returns.

Introduction of the digital tax accounts is planned from 2016 which will allow accounting software to feed data straight into digital tax accounts. By 2020 tax returns should be fully replaced by digital tax accounts. Individuals and small businesses will have the option to ‘pay as you go’ to help manage their cash flow. Taxpayers will be able to let agents manage their digital account on their behalf.

Later this year a road map and consultation will take place on a new payment process for tax liabilities which will utilise these digital accounts.

RS comment

The headlines have labelled this as the “death of the dreaded annual tax return”. In some ways it is, but it should be added that the headlines are somewhat exaggerated as the death marks the birth of something new being the digital tax account.

In principle, it is a good move forward in terms of modernisation and the aspect of pre-population with information (such as P60 and P11D information) will be a welcome step forward in straightforward cases. However for some taxpayers it will be seen as digital exclusion – especially those without access to the latest technology.

The onus will still remain with the taxpayer to declare and disclose other sources of income and capital gains, as well as making sure all of the information is accurate and complete. If past performance is an indicator HMRC will need to be absolutely sure that it has provided the correct figures.

The compliance aspect still remains as before but advancement in technology will mean enhanced flow of information. It will be very interesting to see how deadlines for the upload of information by taxpayers and businesses will be imposed and managed.

As part of the reforms it looks clear that payments of tax will be made earlier than the current payment deadlines seemingly moving towards an accelerated regime. This is will create cashflow concerns for taxpayers and businesses although we will have to wait and see the detail.

We are moving into the age of real time information for all.

More flexible ISAs

A further announcement on ISAs was on providing individuals with the ability to withdraw and replace funds from their cash ISA within the year without it counting towards their annual ISA subscription limit.

The change is due to come into effect from autumn 2015 following a technical consultation on the implementation with ISA providers.

RS comment

Flexibility will be welcomed, particularly for those with tighter finances who can access funds, perhaps to help pay for an emergencies or meet other short term obligations, without losing their ISA entitlements.

Help to buy: ISA

The new help to buy ISA for first time buyers provides those who save up to £12,000 toward their first home with a further 25% government bonus. For every £200 a first time buyer saves, the government will provide a £50 bonus, of up to £3,000.

The bonus will be provided at the point the saver uses his savings to purchase his first home.

After an initial deposit of up to £1,000 regular monthly savings of £200 can be added. They will be limited to one per person as opposed to one per house so both individuals in a couple can benefit from the Government bonus. They can be used on house purchases up to £450,000 in London and £250,000 outside.

RS comment

This is an interesting giveaway but it still does not address the fundamental problem with the UK housing market – lack of stock. In addition, the amount contributed by the Government will largely be paid straight back in the form of stamp duty with the balance credited towards other fees on purchase.

Lifetime allowance for pension contributions

The lifetime allowance will reduce from £1.25m to £1m from 6 April 2016 and will be indexed annually in line with the CPI from 6 April 2018. Transitional protection for pension rights that are already over £1m are to be introduced alongside this reduction.
These provisions are expected to be legislated in a future finance bill in the next Parliament.

RS comment

The Chancellor’s reduction in the lifetime allowance for pensions from £1.25m to £1m appear to be yet another attack on the pension savings of those in the private sector whilst exempting public sector pensions, funded out of general taxes.

Deeds of variation

The Government will review the use of deeds of variation for ‘tax purposes’.

The Government has announced a review of the use of deeds of variation to alter the will of deceased individuals after their death, where these are used for inheritance tax purposes.

RS comment

The alteration of wills via deeds of variation is a well-established practice and can serve a number of purposes, one of which might be inheritance tax planning. Few details of the proposed review have been published and there will be concern that this effort to target perceived tax avoidance will result in anomalies and injustices in practice.

Entrepreneurs’ relief changes

Two changes have been made to entrepreneurs’ relief which apply to disposals arising on or after 18 March 2015. The Government will also review the availability of entrepreneurs’ relief to academics who dispose of shares in spin out companies that use intellectual property to which they have contributed.

Associated disposals

Relief is available where an individual disposes of an asset held personally by him and which is used for the purposes of a business which he is involved with. The asset disposal needs to be made as part of a withdrawal of participation form the business.

The change gives certainty on what constitutes a withdrawal from the business so that relief applies to assets where the individual also disposes of 5% of the business (by way of 5% of shares in a limited company or 5% of share of assets in a partnership or LLP).

Companies with interests in joint ventures and partnerships

Entrepreneurs' relief applies where an individual disposes of shares in a trading company or the holding company of a trading group, provided other conditions are met. For the purposes of determining whether a company is a trading company or member of a trading group, it can treat a proportionate share of the business of a joint venture or partnership as if it had carried this on itself.

This attribution of business activities will no longer apply from 18 March 2015. This means that a company would need to have its own trade in order to be treated as a trading company.

RS comment

The change to the associated disposal rules help to provide certainty to the application of the relief in these circumstances.

The change to the trading company definition will prevent shareholders in corporate partners from claiming the relief, unless the corporate partner also carries on the trade.

BUSINESS AND CORPORATE TAXES

Annual Investment Allowance

The current limit for the Annual Investment Allowance of £500,000 was designed to be a temporary maximum (having been introduced from April 2014) with a planned for return to the previous ceiling of £25,000 after 31 December 2015. The Government has said that after the expiry of the temporary increase period, the annual investment allowance will not fall to £25,000 after all, but rather the limit will be announced in the 2015 Autumn Statement.

RS comment

This is very welcome news for businesses that might otherwise be faced with having to accelerate capital expenditure just to obtain a more favourable tax deduction. Even so, for businesses with an accounting period that straddles 31 December 2015 and which have a substantial amount of capital expenditure, careful planning is still required to maximise the tax deduction.

Capital Allowances Anti-avoidance

New rules are to be introduced to tackle tax avoidance arising from transactions between connected parties and sale and leaseback arrangements. The new rules that will apply to transactions occurring after 26 February 2015 will prevent the acquiring party from claiming capital allowances where the connected party (seller) never incurred expenditure in the first place or did not pay full value for it, because for example, the plant and machinery was gifted to it.

RS comment

This measure is not expected to actually raise any net cash for the Exchequer but it is a welcome clarification of the anti-avoidance rules relating to capital allowances.

Business Rates Review

As announced in the Autumn Statement, the Government is to conduct a wide-ranging review of business rates to make the system fairer and remove anomalies between online and traditional property based businesses. Although the review is intended to be tax neutral, the aim is to preserve a property value based tax. The government has asked for suggestions from businesses by 12 June 2015 on how the system might be reformed. Respondents are being asked to specifically consider such matters as:

  • Trends towards new types of properties such as shared workspaces
  • How reliefs should be targeted
  • How the system could be improved to support smaller businesses and foster growth.

RS comment

This is a great opportunity for businesses of all sizes to “have their say” and comment on how the system of business rates could be changed and improved, especially for small businesses.

Diverted Profits Tax

Sometimes called the Google tax, this announcement again builds on comments made in the Autumn Statement. The aim is to tax a fairer proportion of profits made by multinationals by what is effectively an anti-avoidance measure intended to counter the use of aggressive tax planning techniques used by multinationals to divert profits from the UK. From 1 April 2015, where profits are found to have been diverted as a result of the use of aggressive tax planning techniques, a special 25% tax rate will apply to the diverted profits.

RS comment

This measure will force large multinationals to reconsider how they structure their UK operations because of the 5% additional tax rate (on top of the 20% corporation tax rate that applies from 1 April 2015). In the context of the Bath market, this measure is unlikely to be of significant importance, but it does add to the already substantial amount of anti-avoidance legislation on the statute books.

Loss refresh prevention

Continuing the anti-avoidance theme, the Government wants to prevent companies from obtaining a tax advantage by entering into contrived arrangements to convert brought forward reliefs including trading losses, into more versatile “in-year” deductions. This measure has immediate effect and where companies are found to meet certain conditions, new rules deny relief for certain brought forward reliefs.

RS comment

Whilst this may not affect many companies, it could be a very important factor to be aware of and manage in the context of corporate sales or acquisitions etc where a value may be placed on reliefs brought forward from earlier periods.

Creative Sector Tax Reliefs

There are already a suite of tax reliefs available to the creative sector including film production, high end television and animation production, video games, theatre production and now from 1 April 2016, the reliefs will apply to companies that stage live orchestral performances. The relief will operate by giving an additional 100% tax deduction for “qualifying expenditure” and if a loss results, it can be surrendered for a cash refund equal to 25% of the qualifying costs of the concerts.

However, concerts with a competitive element or which the main purpose is advertising, broadcasting or recording will not qualify.

RS comment

Again, this is likely to be a little practical importance because most orchestras in the UK are registered charities (which do not pay tax) rather than companies. However where a company does exist this could be a very attractive relief.

Research & Development (R&D) Tax Credits

It was previously announced in the Autumn Statement that the rate of relief for SMEs claiming under the R&D tax credits scheme would be increased from 225% to 230% for qualifying expenditure, thus now giving a further 130% deduction on top of expenditure charged in the company’s accounts.

Following on from consultation, further changes were announced in the 2015 Budget to introduce voluntary advance assurances lasting 3 years for smaller companies making a first claim from the autumn of 2015. HMRC is to produce a roadmap for further improvements to the scheme over the next 2 years which will be accompanied with a 2 year publicity campaign to raise awareness of the tax benefits of the scheme.

RS comment

R&D exists in a surprising number of businesses and it’s not just about men in white coats! Any action by the Government that raises awareness of this very important scheme or the tax benefits is to be welcomed but businesses may consider that it does not go far enough but it will hopefully sharpen the focus by companies on their eligibility for this very attractive and important tax relief.