“Britain is moving to low and competitive taxes. But we should insist people and businesses pay those taxes, not aggressively avoid them or evade them.” With this statement the Chancellor set the theme for his fourth Budget, limited cuts in taxes, mostly in the future and an ever increasing focus on avoidance and evasion to make sure that the tax gap is narrowed.
In contrast to the 2012 Budget, today’s Budget had (unless you read the Evening Standard) largely been kept under wraps. What was clear was that the Chancellor was going to have relatively little room for manoeuvre, with little funding available for tax cuts and no appetite for raising taxes. The question that remained was whether there would be any limited scope high profile measures that would have a disproportionate effect on high net worth individuals?
In the end the Budget was extremely light on substantive change, perhaps reflecting the deadlock within the Coalition, and with many of the announcements being made today simply confirming policy that has already been subject to extensive consultation.
We have examined the highlights from the Budget below.
Probably the strongest theme in this year’s Budget is the war on avoidance. This is hardly surprising given the ongoing climate of austerity and the downgrading of the UK’s credit rating. Whether the amounts of revenue lost bandied about – ranging from anywhere between £1 and several billion GBP – are even remotely accurate or realistic, what is evident is that many of the legislative measures, both on the domestic and international scale, have this as their focus.
A repeated refrain in the Budget papers is the desire to modify the behaviour of taxpayers, both with regard to evasion and the unacceptable side of avoidance. HMRC will approach this task from a number of different directions.
‘No safe havens’
Published today was a document entitled ‘No safe havens’ that sets out HMRC’s strategy to combat offshore tax evasion. With the announcement today of new ‘FATCA’ style agreements with Jersey, Guernsey and the Isle of Man and the existing agreements with Switzerland and Liechtenstein, the Government is looking to open up access to information held in the offshore financial centres. It is clear that these agreements are only the start of a tri-partite process which:
- gives non-compliant individuals a limited opportunity to bring their affairs up to date (through the Liechtenstein Disclosure Facility, the Swiss Agreement and in future similar disclosure facilities for the Crown Dependencies);
- increases the transparency of offshore jurisdictions to HMRC (through existing tax information exchange agreements, the new agreements announced today and agreements to be concluded with other jurisdictions); and
- increases significantly the penalties for non-compliance.
The message is clear, there is a limited opportunity to come clean, but from 2017, the shutters will come down and the gloves will come off. In the words of Daniel Day Lewis in The Last of the Mohicans HMRC’s mantra is very much “no matter what occurs! I will find you. No matter how long it takes, no matter how far, I will find you”.
Key to HMRC’s policy in this area is also the use of data. Mike Wells head of Risk and Intelligence for HMRC, noted last year that HMRC holds more data than the British Library. With the new Tax Information Exchange Agreements, the amount of available data will also increase. However, with the announcement of increased investment in HMRC in November, both in terms of individuals and infrastructure (including the ‘Connect’ computer system) HMRC will increasingly come to terms with this data and use it to root out evasion.
While these measures are aimed at those individuals not paying the correct amount of tax, all taxpayers will need to get used to the idea of the increased levels of disclosure that will be made in respect of their assets, wherever held. This is very much part of HMRC’s strategy of modifying future behaviour as much as uncovering past misdemeanours.
Levelling the tax playing field
The ‘Levelling the tax playing field’ document sets out HMRC’s strategy and approach to tackling tax compliance generally. This document emphasises the commitment to move beyond evasion and, to directly tackle the market for tax avoidance schemes, again seeking to change behaviour.
HMRC makes clear its strategy, saying “Promoters and avoiders should be clear that we are relentless in pursuing those who bend or break the rules and have the resources to do so”. It will continue the policy of making limited settlement opportunities available for particular schemes, but principally introducing targeted anti-avoidance legislation to counter abusive schemes and assiduously pursuing the users of schemes through the courts.
The Chancellor himself announced that promoters of tax avoidance schemes would be named and shamed, however what effect this will have and whether some promoters will simply regard it as helpful marketing remains to be seen.
HMRC will also have a number of specific tools at its disposal.
General anti-abuse rule (GAAR)
It is hard to know what to say on GAAR that has not already been said (including by us). In the interests of brevity therefore, the key point is that as of Royal Assent, which is expected to be sometime in June/July, the GAAR will come into effect. It is a general anti-abuse rule, which effectively sits above existing anti-avoidance legislation. However, the existing legislation remains relevant, as of course do additional specific anti-avoidance measures, announced and/or introduced today in the Budget. It is widely drafted and has a technically wide ambit, but it is worth remembering that its architect, Graham Aaronson QC, envisaged it as being specifically aimed at ‘egregious’ cases. Provided this remains its target, it will be a positive piece of legislation and give enhanced credibility to the UK business and tax environment. The concern is as ever that it is an exciting new tool that HMRC may wield beyond its intended scope. Additionally, it is to be accompanied by some guidance, which taxpayers will have to rely on. The guidance however is not legislation and this does leave something of a democratic black hole in the heart of GAAR. That said, provided the GAAR Advisory Panel, which will be composed of a varied selection of high profile tax practitioners and campaigners, simply use it simply to combat clearly offensive, aggressive and unacceptable planning, it will be helpful.
The absence of a clearance procedure is a shame, and means that taxpayers and their advisers are going to have to ensure they take a long term view of planning/arrangements, seeking to ensure not only that they are technically effective but seeking to discern whether they may fall foul of what is considered acceptable planning, and therefore subject to GAAR, in the medium to long term. This is a developing challenge, and it is to be hoped that the application of GAAR will be sufficiently clear and focussed to ensure that it does not create uncertainty, which of course will be unhelpful to stimulating business and investment in the UK.
Loan to participators
In more tightening up, loans to participators in close companies are likely to need to be very carefully planned to avoid corporation tax charges by reference to the loan. Essentially, where a company is controlled by five or fewer participators, any loans to those individuals trigger a corporation tax charge for the company if the loan remains outstanding at the end of nine months after the end of the accounting period in which the loan was made. If the loan is then repaid, the tax paid by the company can be reclaimed.
With effect from today, any loans up to £50,000 repaid and taken out again within 30 days will not prevent the company being subject to corporation tax on the value of the loan. Even where this is not in point, where amounts of more than £15,000 are outstanding at the time of the repayment and there are arrangements in place for another loan or similar access of value, relief from corporation tax will be denied.
Adding to this, arrangements seeking to channel value or loans to participators via partnerships, LLPs and trusts are subject to more broad anti-avoidance legislation. When looked at alongside the GAAR, which will come into effect at Royal Assent, it is fair to conclude that companies with outstanding loans to participators will need to review these carefully, and that future loans to participators will have to be carefully planned to avoid corporation tax charges.
Tax and procurement
New rules will apply to ensure that companies tendering for Government contracts are tax compliant. The new rules will provide that from 1 April 2013, any supplier tendering for a Government contract will have to disclose ‘occasions of non-compliance’ that occur after that date or in the previous 6 years.
Inheritance tax (IHT)
Deductions for debt
A specific anti-avoidance rule will be introduced to prevent deductions being claimed for IHT in respect of certain debts. Firstly where debts are not repaid on death, it will have to be demonstrated that there is a commercial reason for retaining the debt, not simply a desire to obtain a tax advantage. Secondly, where debts have been taken out to purchase property that is not subject to IHT (such as excluded property) or is relieved from IHT (such as business property, e.g. shares in trading companies or agricultural land), will not be allowable against other non-relievable or relevant property.
This rule may have significant consequences for many individuals and existing IHT planning arrangements will have to be reviewed to ensure that they are still effective. Full details of how the rules will operate will be available in the Finance Bill which is due to be published on 28 March.
Nil rate band
As suggested in recent months, the inheritance tax nil rate band of £325,000 which had been frozen until 2015, will now be frozen until 2018, with the revenue raised (£170m a year by 2018) helping to pay for social care. This change reinforces the need for spouses to ensure that their wills are properly structured to make maximum use of the nil rate band on the first death.
At the same time it has been confirmed that the proposal to increase the cap on gifts to non-domiciled spouses will increase to £325,000 and be linked to the nil rate band from 6 April 2013.
As previously announced, from 6 April 2013, non-domiciled spouses will be able to elect to be treated as domiciled in the UK for inheritance tax purposes, thus allowing them to access the full spousal exemption. These rules have been extended from the original proposal so that it will be possible to make an election from a date up to seven years before the election is made so that any lifetime gifts brought into charge on death can benefit from the spouse exemption.
As previously announced in the Autumn Statement, pension allowances are being reduced with effect from 6 April 2014. The lifetime allowance, currently £1.5m, is being reduced to £1.25m, whilst the annual allowance is being reduced from £50,000 to £40,000. This imposes further limits on the amount individuals can save towards pensions, both on an annual basis and throughout your lifetime, whilst still being able to benefit from income tax relief. There will be a transitional protection regime (‘fixed protection 2014’) for those who already have pension pots worth in excess of £1.25m or whose pension pots are likely to be worth in excess of this amount when they retire. This will protect existing pension pots from any punitive taxes, provided that no further contributions are made to the pension on or after 6 April 2014. A consultation paper will be released on this in spring 2013 but individuals may like to take advantage of the current £50,000 annual allowance and make more contributions to their pension pot before 6 April 2014.
High value residential property
It was confirmed that the new annual tax on high value residential properties worth in excess of £2m owned by companies and other non natural persons would come into effect on 1 April 2013 as previously announced, thereby quashing any last lingering hopes that more time would be allowed to enable the “de-enveloping” to take place before the legislation came into effect. There do not seem to be any headline changes to the details already announced (for which the draft legislation has been released in January), save that where previously all references were to the Annual Residential Property Tax or ARPT, there are now references to the Annual Tax on Enveloped Dwellings, or ATED.
In any event, the first returns will not be required until 1 October 2013, with payment due by 31 October 2013. The bands of the annual charge remain as previously announced, ranging from £15,000 for properties worth between £2m and £5m to £140,000 for properties worth in excess of £20m.
The extension of capital gains tax to companies holding such property will come into effect on 6 April 2013. For more information see our previous commentary on our dedicated Budget web feature.
SDLT and Anti-Avoidance
The Chancellor will claim that he did warn you. Included in last year’s Budget was a statement that he would not hesitate to impose retrospective legislation in respect of Stamp Duty Land Tax (‘SDLT’) avoidance schemes and that is exactly what he has done today. It has apparently become clear to the Exchequer over the last year that a number of transactions utilising the so-called transfer of rights or sub-sales (whereby an individual contracts to purchase some land but before completion transfers his rights under the contract to a third party to take effect a number of years in the future) have been undertaken so as to avoid SDLT on the purchase price by disregarding the amount paid under the first contract. Accordingly, legislation is being introduced (which takes effect for transactions on or after 21 March 2012) to make it clear that such transactions do not work to avoid SDLT. Instead, all of the contracts in such a situation are to be aggregated together and there will be a single charge to SDLT. Individuals who have participated in such schemes have until 30 September 2013 to submit a return to HMRC or to amend any return previously submitted. Whilst retrospective taxation is not to be encouraged or supported, it has been clear for a while that SDLT avoidance schemes in particular were very poorly viewed by the Government and so such a move is not entirely unexpected.
The introduction of Seed Enterprise Investment Relief (‘SEIS’) as from 6 April 2012 was intended to stimulate investment in higher risk small businesses by offering income and capital gains tax reliefs. One angle includes the relief from capital gains tax on gains realised on the sale of shares in SEIS companies, where those gains are reinvested in SEIS qualifying investments. This was originally applicable for 2012-13, and is now to be extended to give the same relief to gains reinvested in 2013-14.
Other amendments to SEIS to ensure that companies created by corporate service providers do not accidentally fall foul of the SEIS threshold. This should help enhance the ongoing attraction of SEIS investments, and if combined with the investment remittance relief introduced last April, can offer some very significant benefits to remittance basis investors in SEIS companies.
Employee shareholder status: More attractive?
Employee shareholder status was introduced at a conceptual level in October 2012. In brief, it seeks to ensure that employees become equity holders in the company employing them, of up to £50,000 in shares, in return for forfeiting certain employment rights, including some relating to study, flexible working, unfair dismissal and redundancy payments. It is not clear that forsaking employment protection to this extent is really worth it simply to become an employee shareholder, and assumedly to that end, this Budget endeavours to enhance the tax attractions of employee shareholder status. The key measure is to exempt from the charge to capital gains tax and any gains realised by employee shareholders on their employment shares up to £50,000 acquired in their capacity of employee shareholders. The second measure effectively exempts from income tax and NICs the first £2,000 of shares awarded to employee shareholders. Time will tell whether this is enough to compensate for loss of important employment rights/protections.
UK residence rules
Statutory residence test
As previously announced a new statutory residence test will take effect from 6 April 2013. This new test, significantly clarify the rules on when an individual will be treated as resident in the UK. Click here for further details.
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