An "invisible hand" to support business
activity, hard work and entrepreneurship?
The Chancellor sees hard work as the growth strategy for the United Kingdom and its people to lead the country out of financial uncertainties. With that in mind, George Osborne has set his 2012 Budget against the tests of a good tax system outlined by Adam Smith: it must be simple, predictable, fair and support work.
With Adam Smith's mantra to the fore, the Chancellor claimed his Budget "unashamedly backs business. And it is on the side of aspiration: those who want to do better for themselves and for their families." The purported motive behind a cut in the 50p rate is to "improve the competitiveness of the UK, encourage entrepreneurship and support growth". Similarly, a drive to cut corporation tax by 2014 to 22% aims to act as "an advertisement for investment and jobs in Britain" and to make the UK more attractive as a destination to locate business activity.
However, with a "fiscally neutral" Budget, tax breaks come at a price: stamp duty land tax ("SDLT") on residences worth more than £2m at a rate of 7% (for individuals) or 15% (for companies and other vehicles); a "crackdown" on tax avoidance; and there will be income tax relief caps. The latter could impact on philanthropic activities as tax relief on charitable donations may be restricted.
General anti-abuse rule ("GAAR")
It comes as no surprise that the Government has accepted the recommendation of Graham Aaronson QC that a GAAR is introduced into the UK tax system. The aim of a GAAR is to allow tax avoidance to be tackled without making the UK unattractive to business. The proposal is for an anti-abuse rule as opposed to an, arguably, wider anti-avoidance rule. A consultation is expected to begin in summer 2012, with legislation to follow in Finance Bill 2013. In addition to the proposal made by Graham Aaronson QC, it is now proposed that the GAAR will extend to SDLT.
This is a further indication of the Chancellor's determination to block tax avoidance, which was recently illustrated by the introduction of retrospective anti-avoidance legislation and with further threats of that today.
45% top income tax rate from April 2013
The additional rate will reduce from 50% to 45% with effect from 6 April 2013 for individuals and trusts. The basic and higher income tax rates are unchanged.
To balance that, income tax personal allowances for those aged under 65 will increase to £8,105 from 6 April 2012 and to £9,205 from 6 April 2013.
Cap on income tax reliefs
From 6 April 2013 a cap will be introduced on all uncapped income tax reliefs. A maximum cap of the higher of £50,000 or 25% of an individual's income will apply to reliefs that are currently unlimited. The new measure will not apply to reliefs already subject to their own limits such as relief for contributions to a registered pension scheme.
Charities - two steps forward, one step back?
Budget 2011 introduced a new incentive for charitable giving through an Inheritance Tax ("IHT") relief for those who, broadly, give 10% of their estate on death to charity. While the new IHT relief was welcomed, there was concern about the impact on lifetime charitable giving through the Gift Aid scheme.
As mentioned above, today's Budget announced a restriction on "uncapped income tax reliefs". Presently when higher rate and additional rate tax payers give to charity, they can receive tax relief on the basis of the donation. There is concern that such a cap could reduce charitable giving, particularly by the largest donors. However, the Government intends to consult with philanthropists and charities to ensure that the measure will not impact significantly on charities which depend on large donations.
The Chancellor did not announce the expected restriction for higher and additional rate tax relief on pension contributions. With the top income tax rate reducing to 45% from April 2013, the next 12 months will likely see increased pension contributions from high earners.
The Chancellor today announced the detail of his plan to withdraw Child Benefit from higher income households. The value of Child Benefit will be lost entirely where the recipient or their spouse, civil partner or 'live in' partner has income of £60,000 or more. It will be withdrawn proportionately to the extent that the person with the highest income has income between £50,000 and £60,000. Technically, Child Benefit will remain payable in full (unless the recipient elects out) but its value will be offset by a new income tax charge in relevant cases.
Corporation tax rate
It was announced today that the expected 1% reduction in the main rate of corporation tax to take effect from 1 April 2012 will be increased to 2% giving a main corporation tax rate of 24%. This will fall a further 1% each year to 22% from 1 April 2014.
The Government confirmed a special 10% rate of corporation tax is to apply to income derived from patents. This new rate will come into effect in stages from 1 April 2013. Initially only 60% of patent box profits will qualify for the lower tax rate, although annual increases will see this proportion rise to 100% from 1 April 2017. The 10% rate will apply to licensing income and sales income from products incorporating patents.
Corporation tax groups
Effective from today, legislation will be introduced to ensure that a company can issue loan notes convertible to ordinary shares in an unconnected company listed on a recognised stock exchange without jeopardising its status as a member of a corporation tax group. Such loans are attractive to investors given the current low interest rates so the change will be beneficial for any group companies wishing to take advantage of the ability to issue such loan notes.
Stamp Duty Land Tax ("SDLT")
Residential property in excess of £2m
For residential properties in excess of £2m the SDLT rate will increase from 5% to 7% for contracts entered into after today. If instead the residential property in excess of £2m is purchased by companies or similar vehicles, the SDLT rate will be levied at a record high of 15%.
The Government is also consulting on the introduction of a chargeable gains tax charge on residential property owned by non-resident companies and other 'non-natural' persons, with the intention of this measure coming into effect in April 2013.
We know property solicitors up and down the country will be busy until midnight tonight!
Enterprise Management Incentives ("EMI")
EMI, currently the most tax favoured and therefore the gold standard employee share option scheme, is set to become even more valuable. The Chancellor's announcement today to increase the individual limit of the value of shares under EMI options from £120,000 to £250,000 must be welcomed. The Government is intending to implement this measure as soon as possible, but this is subject to State Aid approval.
This announcement will be of particular relevance to employees who hold the current maximum number of EMI options.
While there is no relaxation of the definition of a "qualifying company" for EMI purposes, the Government has said it will consult on ways to extend access to EMI for academics who are employed by a qualifying company. Watch this space.
EMI and entrepreneurs' relief
In a welcome move today, the Government announced an intention for gains made on shares acquired through exercising EMI options on or after 6 April 2012 to be eligible for capital gains tax entrepreneurs' relief ("ER"), and therefore suffer tax at the rate of 10% rather than 28%. It remains to be seen how this relief will be given in practice, but it would seem reasonable to suppose that the requirement to hold 5% of the ordinary share capital and votes will be relaxed for those making gains made on shares acquired by exercising EMI options.
Review of tax advantaged employee share schemes
The Government intends to consult shortly on how to take forward a number of recommendations of the Office of Tax Simplification following its review of tax advantaged share schemes.
Enterprise Investment Schemes ("EIS")
and Venture Capital Trusts ("VCT")
The Budget today confirmed the amendments previously announced to the EIS and VCT regimes subject to some minor changes. In addition to the increase in the individual investment limit for EIS from 6 April 2012 the £500 minimum investment will cease to apply. Subject to State Aid approval, the size limits for both EIS and VCT qualifying companies will be increased and the maximum annual amount which can be raised by a company under EIS and VCT will be increased from £2m to £5m (not the £10m which was initially proposed).
Seed EIS ("SEIS")
Some changes have also been made to SEIS, a relief similar to EIS but providing for a 50% tax reduction in respect of investments of up to £100,000 in qualifying companies. Among other changes, SEIS will now be available to companies with subsidiaries and companies which were incorporated more than two years prior to the issue of the SEIS shares, providing the relevant trade is less than two years old. In addition, in determining whether the company meets the £200,000 gross asset limit and 25 employee limit it will no longer be necessary to take into account the assets or employees of corporate investors. The changes are to be welcomed and should allow a greater number of companies to qualify for SEIS, which will be available for shares issued on or after 6 April 2012.
The Government plans to consult on legislation to increase the IHT exempt amount that a UK domiciled individual can transfer to their non-UK domiciled spouse or civil partner free of tax (the limit is presently £55,000). The Government also plans to consult on allowing non-domiciled individuals to elect to be domiciled in the UK for IHT purposes! - further details to follow in the Finance Bill 2013.
In response to concerns that certain self-storage companies have been exploiting the VAT exemption for supplies of land, legislation will be introduced with effect from 1 October 2012 to exclude supplies of self-storage from the scope of the exemption. All supplies of self-storage will thereafter be subject to VAT at the standard rate, placing self-storage on the same VAT footing as other supplies of storage. The new legislation is supplemented by anti-avoidance provisions, effective from today, which seek to prevent affected businesses from implementing tax planning to mitigate the effect of the new rules.
Approved alterations to listed buildings
Most services and materials supplied in connection with improvements or alterations to a listed building in residential or charitable use currently qualify for zero-rating, providing listed building consent is required for the works in question. Zero-rating also applies to the first sale or long lease of such a building by a developer who has carried out a "substantial reconstruction" of the building.
From 1 October 2012, zero-rating for improvement and alteration work will be withdrawn, while only those buildings which have been substantially reconstructed from a shell will qualify for the relief for sales and long leases. Anti-avoidance provisions, effective from today, will limit the steps affected businesses can take to mitigate the effect of the new rules. However, saving provisions will also be introduced to allow certain transactions entered into before today to continue to benefit from the existing reliefs until 20 March 2013.
While boosting enterprise was an aim of today, the Chancellor also wants to talk tough on tax avoidance. George Osborne made it clear that aggressive tax avoidance and non-domiciliaries should not have a good name. Perhaps this is why he introduced media tax incentives to avoid national treasures Wallace and Gromit going offshore to avoid UK tax. Of course, many would say that politicians (and their Budgets) are every bit as mouldable as our plasticine favourites.
If you think you may be affected by any of the above or if you have any other questions, please contact:
Head of Tax
0141 271 5778
Director of Tax
0141 271 5773
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.