23 March 2011

Budget 2011 — personal tax highlights


‘The Government recognises that non-domiciled individuals make a valuable contribution to the UK economy and the current tax rules can discourage them from investing their foreign income and gains in the UK’. In the Budget today the Government came good on its promises to introduce a fairer, more stable and more competitive tax system in United Kingdom. As suggested in the Tax Policy Making: A new approach document published in June last year, a majority of the measures announced today will first be subject to detailed consultation before being introduced in the Finance Bill 2012 at the earliest.

Today’s announcements contain much welcome news for individual taxpayers and we have examined the highlights below.

Non-domiciled taxpayers

There has been a much vaunted ‘review of the taxation of non-domicilaries’ in the offing since the Conservatives and Liberal Democrats published their “Programme for Government” in May 2010. Speculation has been rife, with predictions ranging from a full scale abolition of the remittance basis for non-doms to the introduction of a ‘deemed domicile’ rule for income tax and capital gains tax purposes.

With the detail yet to be announced, the truth appears to be somewhat more positive than commentators had feared with the Chancellor explicitly acknowledging the wider economic contributions made by non-doms.

The remittance basis of taxation

From 6 April 2012, those non-doms who have been resident in the UK for 12 or more years will continue to be able to enjoy the benefit of the remittance basis of taxation, but at the higher cost of £50,000 a year in addition to tax due on income or gains arising in or remitted to the UK. The lower £30,000 charge will be retained for those non-doms who have been resident in the UK for more than 7 years but fewer than 12 years.

Potentially of more significance, however, is the Chancellor’s announcement that, also from 6 April 2012, non-doms will be able to remit foreign income or gains to the UK for ‘commercial investment in UK businesses’ with no charge to UK tax. We will be in suspense for some time yet as to the scope of this rule change – there is to be consultation in June 2011, with the legislation forming part of Finance Bill 2012. However, such a financial incentive demonstrates a commitment to encouraging inward investment by non-doms and would seem to indicate that the Government has no current intention to introduce a more wide ranging reform of the way in which non-doms are taxed in the UK. Finally, the Government has confirmed that there will be no other substantive changes for the remainder of this Parliament.

Statutory residence test

There is currently no statutory test for UK tax residence. Whether or not an individual is tax resident in the UK is ascertained by applying a combination of the rules contained in statute, case law and HMRC’s interpretation. Changes in Finance Act 2008, the Gaines-Cooper case and HMRC6 have left the law uncertain – particularly for those seeking to leave the UK. This lack of certainty, perpetuating what the 1936 Committee on Codification of Income Tax Law referred to as a state of affairs that was ‘intolerable that should not be allowed to continue’, has placed the UK at a competitive disadvantage when competing to attract wealthy individuals to the UK and investment in business here, by depriving them of certainty regarding how they will be taxed.

After a period of consultation, a statutory definition will be introduced from 6 April 2012.

However, while the certainty this will bring is welcome, some caution should be exercised. A statutory test will clarify the status of many individuals, but the current rules will continue to apply for the time being. Consequently, those who have specific requirements, for example individuals who intend to be non-UK resident for five tax years, will need to be mindful that goal posts may move during their period of non-residence and so further advice must be sought before their return. Further, when the new rules are introduced they may require individuals who are currently treated as non-resident to significantly change their lifestyles to maintain that treatment in future years.

Overall however, increased certainty in this area, coupled with the other changes announced, can only increase confidence in the stability of the UK regime and encourage wealthy individuals who have been deterred from coming to the UK in recent years to reconsider their position.

50% income tax rate

While no immediate or future reduction of the 50% tax rate was announced today, the Chancellor made it clear that he regarded the 50% top rate of income tax as a temporary rather than a permanent measure, giving a signal for a reduction in the rate later in this Parliament.

Tackling tax avoidance

The Government today announced the launch of a new HMRC anti-avoidance strategy. The background to the strategy is that the latest estimate of the ‘tax gap’ is £42 billion for 2008-09, of which 17.5% is stated to derive from avoidance by ‘using the tax law to get an advantage that Parliament never intended’.

Particularly within HMRC’s sights are tackling disguised remuneration, SDLT planning and transactions involving companies and capital gains.
Moving forward, the new anti-avoidance strategy will comprise three core elements, namely:

(i) preventing avoidance at the outset where possible;

(ii) detecting it early where it persists; and

(iii) countering it effectively through legislative change or challenge.

While redolent of treating the tax system like a medical patient requiring a cure, the manner in which this is to be achieved is instructive. Certainly, there seems to be a commitment to tackling avoidance in a structured rather than a piecemeal manner (although inevitably there remains the possibility that last minute, possibly retrospective legislative change will occur).

Prevention

Prevention of tax avoidance is primarily to be achieved by a robust, principles-based tax system. To the extent further perceived risk remains, however, there will be policy reviews of high risk areas. The first two areas to be subject to such review are schemes focussing on income tax losses, and the commercial use of unauthorised unit trusts for avoidance.

Detection

Meanwhile, the robust, principles-based system is to progress through ongoing consultation on a General Anti-Avoidance Rule (‘GAAR’) and giving consideration to extending the hallmarks under which schemes are made subject to the Disclosure of Tax Avoidance Schemes rules.

The concept of a GAAR is riven with difficulties, not least of which is ensuring that it is cast wide enough to catch those transactions it is intended to catch, but not so wide that the law of unintended consequences applies. One option would be to incorporate a clearance procedure into the GAAR, although this would require significant HMRC resources if it is to work effectively. No doubt this is currently being considered in some detail within the consultative framework, and we look forward to hearing the results of this work.

Counteraction

Counteraction is to be addressed primarily by a combination of legislative change and an operational strategy which will include identifying taxpayer groups perceived as being of concern, including wealthy individuals and large businesses. The third element of the counteraction part of the strategy is litigation, no doubt designed to make clear that while the desire is not to litigate HMRC will not run shy of such measures where appropriate.

It would appear that selected groups of taxpayers can look forward to further attention from HMRC, which places emphasis on ensuring proper compliance with self assessment, and may also discourage such groups from, for example, undertaking planning using schemes which are subject to the DOTAS rules.

Unscheduled changes

It remains the case that despite a pro-active approach to tackling avoidance, and thereby seeking to enhance fairness and certainty, last minute changes to block abuses will not disappear. In recognition of this, an amended Protocol sets out the criteria that Ministers undertake to use in deciding whether an announcement of immediate legislative change is needed and justified, and the procedure that must be followed in such cases. It is to be hoped that the Protocol will operate to minimise uncertainty and instability caused by excess piecemeal retrospective legislative changes.

On balance, this set of proposals appears to set out a sensible approach to tackling anti-avoidance. However, there is a concern that by focussing on taxpayers obtaining advantages that Parliament never intended, accepted tax planning techniques may be harshly targeted, and this in itself will be unhelpful and will introduce uncertainty. Much will depend on those further areas which HMRC decides to focus on, and it remains to be seen whether this will restrict what is considered acceptable tax planning and mitigation, rather than focussing on abusive planning.

Inheritance tax

To encourage charitable giving, for deaths on or after 6 April 2012, a reduced rate of IHT will apply where 10 per cent or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the current 40 per cent rate will be reduced to 36 per cent.

Charities

Gift Aid

In an important step in reducing compliance costs for charities, the Government will consult on the proposal that it should no longer be a requirement to obtain signed gift aid declarations on the first £5,000 of small donations (£10 or less) per year in order for those donations to qualify for the tax relief, instead gift aid will be automatically applied.

Works of Art

Also announced was an expected consultation on proposals to encourage gifts of works of art and items of historical value, which is very good news for philanthropists.

Donor benefits

The Chancellor has also announced a rise from next month in the level of donor benefit which is acceptable within the Gift Aid scheme, from £500 to £2,500. This is clearly aimed to help foster a culture of giving by lifting some of the existing restrictions on charities showing their thanks and appreciation to donors.

Detailed changes

Entrepreneurs’ Relief

The lifetime limit on Entrepreneurs’ Relief which was increased from £2 million to £5 million in the June 2010 Budget will be increased further to £10 million with effect from 6 April 2011.

Tax simplification

It was announced that 43 tax reliefs whose “rationale are no longer valid” will be abolished in light of the report by the Office for Tax Simplification published earlier this month. This is not intended as a revenue raising measure and should be of limited consequence. However, the effect that this will have on the Black Beer and Angostura Bitters industry will remain to be seen.

Income tax and National Insurance

As widely leaked in advance of the Budget, the Government will consult on options for integrating the operation of income tax and national insurance contributions. As an objective this could be compared with tying the Gordian knot and it will be a challenge for the Government to find a way to achieve this while maintaining its overriding objectives of fairness and simplicity. Positively they have confirmed that there will be no extension of the scope of national insurance either to the over 65s or to other forms of income as part of this review.

Tax thresholds

Again as widely trailed before the Budget, income tax thresholds will rise, with the personal allowance increasing to £7,475 for under 65s in April 2011, moving closer to the Government’s target of £10,000.
The capital gains tax annual exempt amount for individuals will increase to £10,600 next year.

Enterprise Investment Scheme and Venture Capital Trusts

The rate of income tax relief given under in the EIS will increase from 20 per cent to 30 per cent of the amount subscribed for shares from 6 April 2011. The amount that can be invested under the scheme will increase from £500,000 to £1 million from 6 April 2012.

Legislation is also to be included in Finance Bill 2012 to expand the range of companies and investments that will qualify for EIS and VCT reliefs.

Corporation tax

The rate of corporation tax will be reduced to 26 per cent for the Financial Year commencing 1 April 2011, not 27 per cent as previously announced (the small profits rate of corporation tax from April 2011 will be 20 per cent). It will reduce further to 25 per cent for the Financial Year commencing 1 April 2012.

SDLT

As already ‘spotlighted’ by HMRC, a number of SDLT anti-avoidance rules will be introduced to counter known planning that seeks to avoid a charge to SDLT through sub-sale, alternative finance and exchange arrangements.

IR35

In response to the Office of Tax Simplification’s Report, it was announced that IR35 (the bête noir of small businessmen nationwide) will be retained, but simplified. Entrepreneurs will hope that the stated aims of increasing clarity and certainty will help remove them from the mire of red tape and bureaucracy in which they currently find themselves.

Click here to visit our Budget 2011 web feature.

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