Budget 2014 Summary

Following Wednesday’s Budget, here is a summary based on the Chancellor’s announcements and press releases available. Quite a lot of the changes which are to come into effect in the future were announced last year and were covered in our previous summaries and so we have tried to focus primarily on this week’s new announcements. 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 TAX

Income Tax Personal Allowances

As previously announced, the annual personal allowance for those born after 5 April 1948 will be increasing to £10,000 on 6 April 2014. From 6 April 2015, the personal allowance will increase to £10,500. For those born before 5 April 1948, the personal allowances will remain frozen at the prior year rate of £10,500 and £10,660 for those born before 5 April 1938.

From 6 April 2015, the basic rate tax band will be reduced from £31,865 to £31,785.

As previously announced, starting in the 2015/16 tax year, a spouse or civil partner can apply to transfer £1,050 of their personal allowance to their spouse or civil partner. To be eligible, neither party can be a higher rate tax payer.

RS Commentary

The government has decided to increase the standard personal allowance to £10,500 which is now in line with the frozen personal allowance for those born after 5 April 1938 but before 5 April 1948. Therefore, from 6 April 2015 there will be two personal allowance rates depending on your age rather than the three in previous years. The personal allowance will ultimately catch up with the frozen personal allowance rate for those born before 5 April 1938 until there is just one personal allowance rate for all no matter what age you are. Although personal allowances for pensioners have been frozen during the last few years, there may be opportunity for couples to take advantage of the new personal allowance transfer to gain some extra tax savings.

Starting rate of tax for savings

The starting rate of tax for savings income (such as bank or building society interest) was previously 10% on the first £2,880 of income. The government has now announced that from 6 April 2015 the 10% rate will be abolished and there will be no tax on the first £5,000 of income from savings.

RS Commentary

In practice, this could mean if a saver’s total income will be below the total of their tax free personal allowance plus the £5,000 starting rate limit for savings then they may not be liable to tax at all, and should register to have gross interest applied to their bank accounts via form R85. However, the way that this new measure will work will depend on individual circumstances.

Payments for Private Use of a Company Car or Van

With effect from 6 April 2014, if a taxable benefit in kind is to be reduced by payments required by the employer as a contribution for private use of a car or van, such payments must be paid within the year in which private use was undertaken.

RS Commentary

This is a tightening of the rules which will probably put the onus on the employee to ensure that they do not delay in making a contribution to the employer for private use (unless the employer is helpful enough to prompt him/her).

NATIONAL INSURANCE

From April 2016, Class 2 NICs for the self-employed will be collected via self-assessment.

A new class of voluntary NICs, Class 3A NICs, will enable those who reach State Pension age before 6 April 2016 to top up their Additional State Pension record. The scheme will be open from October 2015 for 18 months.

RS Commentary

The change for Class 2 NICs may be a very small step towards overall harmonisation of tax and NIC. It should simplify administration by collecting all tax and NIC from the self employed under a single taxpayer record, and may ensure that the registration of self employed businesses becomes more “joined up”.

TAX EFFICIENT INVESTMENTS

Seed Enterprise Investment Scheme (SEIS)

This relief is now going to be made permanent as well as the associated capital gains tax reinvestment relief providing relief on half the qualifying gains that individuals reinvest in SEIS qualifying companies in 2014-15 or subsequent years.

RS Commentary

This was perhaps unexpected but may help to increase the uptake of this potentially valuable relief. With effective planning, it could also benefit people who have potential capital gains, particularly if they were considering making an SEIS investment anyway.

ISA’s/NISA’s

ISA’s are being reformed into a simpler product and from 1 July 2014 will be known as NISA’s. The 2014/15 overall subscription limit for a NISA will be £15,000 in any combination of cash or stocks and shares that the saver wishes. However, only one cash NISA and one stocks and shares NISA can be paid into each year.

Please be aware that any subscription made to an ISA after 6 April 2014 will count towards the £15,000 NISA subscription limit for 2014/15. All existing ISA’s will become NISA’s so account holders will benefit from the new flexibility.

From 1 July 2014, savers ages between 16 and 18 will be able to subscribe into the £15,000 cash ISA but not the stocks and shares ISA. In addition the amount that can be paid into a Junior ISA for 2014/15 will be increased to £4,000 from 1 July 2014.

RS Commentary

The New ISA allows more flexibility of choice when subscribing in a cash NISA or stocks and shares NISA. There were previously restrictions on the amount that could be subscribed in each type of ISA so the NISA will be attractive to those who wish to invest a full £15,000 of pure cash.

PENSIONS

The Government has confirmed that they are giving pension income flexibility to individuals above the minimum pension age (normally 55 and over) who have pension savings in a registered pension scheme including drawdown pensions. The proposals are allowing for individuals over 60 with pension savings of £30,000 or less to take out all of their savings as a lump sum without having to buy an annuity.

RS Commentary

This is a welcome change from the existing rules and will give pensioners on small pensions greater choice of how to spend the pension savings. The pension regime is complex and we await the legislation for the finer detail.

BUSINESS AND CORPORATE RELATED TAXES

Annual Investment Allowance

One of the biggest news items in the Budget for businesses was the Government is increasing the annual investment allowances from £250,000 to £500,000 from 1 April 2014 for companies, and 6 April 2014 for unincorporated businesses, and extending the increase to 31 December 2015 from 31 December 2014. For non March year ends the allowance will need to be time apportioned between the old and new limits. For 31 March year ends the full £500,000 will be available.

RS Commentary

This is really good news for businesses that are likely to have the option of that level of expenditure. As the increase is extended until end of 31 December 2015 businesses have plenty of time to plan their spending on qualifying assets.

Research & Development Tax Relief

There have been yet more favourable changes to this attractive relief.

There will be an increased rate of the payable credit from 11% to 14.5% for loss making companies under the SME R&D tax credit scheme. This will take effect from 1 April 2014.

RS Commentary

Given the trend in recent Budgets whereby the loss enhancement available has been increased but then the available tax credit percentage has been correspondingly reduced, this “stand alone” 3.5% increase in tax credit was unexpected and should hopefully result in a real cash boost, particularly for start-ups that undertake qualifying R&D.

Corporate Tax rates coming down

The main rate of corporation tax will be reduced to 21% from April 2014 and 20% from April 2015. The small profits rate of corporation tax will remain at 20% from April 2014. Associated companies rules will replaced with simpler rules based on 51% group membership in April 2015, when the main rate and small profits rate of corporation tax are unified at 20%.

RS Commentary

It is not long now before all companies are on the same footing and commonly owned companies that make significant profits will not be exposed to higher marginal rates of tax.

Company ownership and loss buying

Easing of the rules restricting the availability of relief for corporation tax trading losses when companies change ownership on or after 1 April 2014. Research and Development (Capital) Allowances (RDAs) will be excluded from these anti-loss buying rules.

RS Commentary

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. We will need to review the detailed legislation though to fully understand how this will apply in practice

Stamp taxes on shares: growth markets

Stamp duty and SDRT on shares in companies quoted on recognised growth markets is abolished from 28 April 2014.

RS Commentary

We think that the reasoning behind this measure was to give some impetus to investment in smaller companies such as those not quoted on the full Stock Exchange. However, we think that the impact that the measure will have on investment will depend on the relative size of the investment, as the current rate of tax on shares is not normally prohibitive.

DIRECT RECOVERY OF GENERAL TAX DEBTS

Measures will be included in Finance Act 2015 to empower HMRC to recover tax debts of £1,000 or more directly from the bank accounts of taxpayers who have the financial ability to pay and who have been contacted multiple times by HMRC in respect of the outstanding amounts. The power will be subject to rigorous safeguards.

RS Commentary

On the face of it, and subject to the “rigorous safeguards”, this does not seem so unreasonable provided that the tax debt concerned is an undisputed amount. This is in contrast to the proposals relating to tax avoidance schemes covered in the next section.

RECOVERY OF TAX FROM AVOIDANCE SCHEMES

Further announcements were made in Budget 2014 which will widen HMRC’s powers to collect tax in advance, despite the dispute not having been resolved. Under the new proposals, taxpayers may now have to pay tax up front on arrangements which have been previously disclosed under the “DOTAS” provisions, or where HMRC issues a counteraction notice under the recently introduced “GAAR”. The main condition will be that the matter must be under appeal or an enquiry notice is in place, and HMRC can do this after Royal Assent. The tax would need to be paid within 90 days of the notice being issued. Payment can be delayed a further 30 days where the taxpayer requests HMRC to reconsider the amount of the payment notice. Penalties will be due for late payment.

RS Commentary

This new measure is actually the third strand of developments over the past year since Budget 2013 and we can talk through the history with you if you think you are affected.

The concern is that HMRC can say you’ve got to pay the money now and then go to court, and it is not simply to do with schemes that are doomed to fail either where someone is merely seeking a cashflow advantage. It appears that HMRC could issue notices on schemes similar to ones where HMRC has lost.

In our view, the fact that there has been disclosure under DOTAS indicates an intention to be open and transparent with HMRC and so it seems very unreasonable to now introduce a retrospective change of law leading to an accelerated payment of tax. It is also inconsistent with the concept of Self Assessment, which HMRC created, and they are now moving the goalposts. Along with the major accountancy and tax institutes, and members of the profession, we have recently responded with our objections and will also be lobbying our local MP. We will keep a close eye on how matters progress.