ACCA’s Simon Wood and Barinder Chadha offer a rundown of the principal changes to the UK tax regime made by the 2013 Budget and Finance Bill
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The chancellor delivered his Budget on 20 March 2013 and the Finance Bill 2013 was published on 28 March. Many of the provisions in the Finance Bill had been previously published in the draft bill following the 2012 Budget and Autumn Statement, with the 2013 Budget announcements now being included.
The bill contains some interesting new measures and will be subject to the usual parliamentary processes, before receiving the royal assent in late July. The bill is far too voluminous to cover in one article but here we take a look of some of the highlights.
Tax rates and allowances
The headline changes to tax rates and allowances are:
- Corporation tax. The main rate of corporation tax has been reduced to 21 percent from 1 April 2014, and to 20 percent from 1 April 2015 - the joint lowest in the G20. This will bring the rate into line with the small companies rate and lead to a single rate of corporation tax.
- Personal allowance. There has been an increase in the personal allowance to GBP9,440 from 6 April 2013 with a firm commitment to increase this to GBP10,000 from 6 April 2014. Other key changes to personal tax include the following:
- Higher rate threshold. The higher rate threshold - ie, the point at which tax becomes payable at the higher rate - is reduced from GBP34,370 of taxable income for 2012/13 to GBP32,010 for 2013/14. The threshold reduction will bring more people into higher rate tax and is to compensate for taxpayers at the lower end of the income scale being taken out of income tax altogether by the increase in the personal allowance.
- Additional rate tax. The additional rate of tax for those with annual taxable incomes greater than GBP150,000 has been reduced from 50 percent to 45 percent with effect from 6 April 2013. For a wealthy taxpayer with an income of GBP1m a year, this would equate to an annual tax saving of almost GBP50,000.
Tax abuse has been big news recently, with a number of high-profile individuals and multinational companies becoming the target of the press for perceived abusive tax arrangements. A general anti-abuse rule (GAAR) has been mooted for some time and the Finance Bill 2013 finally introduces this.
The new rule aims to catch artificial and contrived tax avoidance schemes with no commercial purpose other than to avoid tax. An independent advisory panel of 11 people will review and rule on any schemes thought to be caught by the new rule.
While the GAAR may prove beneficial in cracking down on contrived schemes, it is unlikely to have much of an effect on tax planning by large multinationals.
In addition, the bill includes an anti-avoidance measure aimed at directors of close companies receiving loans through an intermediary such as a limited liability partnership or trust, which would otherwise be liable to a tax of 25 percent on the loan under s455 of the Corporation Tax Act 2010.
Statutory non-residence test
Residence, ordinary residence and domicile have always been important in establishing an individual's UK tax position. However, since the introduction of income tax more than 200 years ago, there has been no legislation to determine an individual's residence. Instead, taxpayers have had to rely on case law, HMRC guidance and usual practice.
Recent case law has led to confusion in this area, most notably the 2011 case of Gaines-Cooper vs HMRC. The Finance Bill 2013 therefore introduces a statutory residence test composed of three key elements:
- an automatic residence test;
- an automatic overseas test;
- a 'sufficient ties' test.
It will be necessary to work systematically through the tests to determine whether an individual should be treated as not resident in the UK. The result will largely be dependent on:
- number of days spent in the UK;
- whether accommodation is held in the UK or overseas;
- whether they work in the UK or overseas;
- family ties.
Although the rules are quite complex and time consuming to explain and evaluate, they should help bring some certainty to the issue of determining an individual's residence status.
Cap on unlimited tax reliefs
The bill introduces legislation to cap unlimited income tax reliefs to the greater of GBP50,000 or 25 percent of income, with effect from 6 April 2013. The main reliefs affected by the cap will be:
- trade loss relief against general income (including relief in early years);
- share loss relief;
- interest on certain loans - for example, to buy shares in an unquoted trading company or a partnership.
Charitable donations, such as gift aid or relief for gifts of shares or property to a charity will not be affected.
There are a number of updates and extensions to capital allowances such as low-emission vehicles, energy-saving and renewable technologies and the inclusion of railways and ships for the annual investment allowance. However, the most significant change is to the annual investment allowance limit. Introduced in April 2011, the allowance has been tweaked a number of times, and the amount has been substantially increased to GBP250,000 from 1 January 2013 to 31 December 2014 (it was previously GBP25,000). Care needs to be taken with the timing of expenditure as the complicated transitional rules can give some unexpected results.
In an effort to reduce the administrative burden of accounting for business, the government has introduced a cash accounting basis for small unincorporated businesses.
What this means is that small unincorporated businesses trading below the VAT registration threshold will be able to account for income and expenses under a simplified cash-based regime. The intention is to link the cash accounting regime to the VAT registration threshold and the 'three-line account' limit for income tax self-assessment returns.
The scheme is available to individuals and partnerships provided they do not exceed the threshold and are not on the excluded list. There are a number of exclusions, most notably limited liability partnerships.
In essence, under the cash basis, a business's taxable profits will be the total amount of receipts less the total payments on allowable expenditure, subject to adjustments required or authorised by law in calculating profits for income tax purposes. The regime includes a series of flat-rate allowances for car expenses, use of home and interest payments.
From April 2014 all businesses and charities will be eligible for a new GBP2,000 employment allowance to set off against their employers' (secondary) national insurance contributions (NICs). Up to 1.25 million employers will be affected, with 50,000 having their NICs fully covered by the allowance. The relief means a business can employ one person on a salary of up to GBP22,400 a year without incurring liability to NICs.
Employee shareholder status
Following the Nuttall Review and other government initiatives, encouraging employee share ownership is seen as a key business model. The introduction of 'employee shareholder' employment status will reduce or eliminate the income tax and NICs due by deeming employees to have paid GBP2,000 for their shares. The new measure will also exempt any capital gains on the disposal of up to GBP50,000 of the shares acquired by an employee shareholder under an employee shareholder agreement.
There are further proposals and the government is setting aside GBP50m annually from 2014/15 to fund other recommendations made by Nuttall.
An interest-free or low-cost loan provided by an employer to an employee and notional loans arising from the provision of employment-related securities are not currently taxed as employment earnings if they do not exceed GBP5,000. As long as the total outstanding balances on all such loans do not exceed the threshold at any time in a tax year, there is no tax charge. From 6 April 2014, the employment-related loans threshold will be doubled to GBP10,000.
Pensions annual and lifetime allowance
There are no limits on how much can be saved in a registered pension scheme, but there is a limit on the tax relief. The annual allowance, which is the total amount of an individual's tax-relieved annual pension savings, including employer contributions, currently stands at GBP50,000. From 2014/15 onwards, this will be reduced to GBP40,000. The lifetime allowance is the overall limit on the total amount of tax-relieved pension savings that an individual can make in their lifetime. This has been set at GBP1.5m from 2012/13 onwards but will be reduced to GBP1.25m from 2014/15 onwards.
Annual residential property tax
The annual residential property tax (ARPT) is a tax payable by a company, a partnership or collective investment vehicle on a high-value residential property. However, a company that owns property only in its capacity as a trustee of a settlement is not included in ARPT although the beneficiary might be. ARPT will start on April 2013 and will be payable each year. ARPT would apply to a property if that property is:
- a dwelling;
- in the UK;
- was valued at GBP2m or more on 1 April 2012, or at acquisition if later;
- is owned, completely or partly, by a company, a partnership where one of the partners is a company, or a 'collective investment vehicle'.
The amount of ARPT is worked out using a banding system based on the value of the property:
- property value between GBP2m and GBP5m - annual tax charge of GBP15,000;
- property value between GBP5m and GBP10m - annual tax charge of GBP55,000;
- property value between GBP10m and GBP20m - annual tax charge of GBP70,000;
- property value of GBP20m or over - annual tax charge of GBP140,000.
Capital gains tax on high-value residential property
Capital gains tax (CGT) will apply to the disposal of high-value (over GBP2m) UK residential property by a non-natural person from 6 April 2013. The rate of CGT on these disposals will be 28 percent. Where the residential property was purchased before 6 April 2013 but disposed of after that date, the charge will apply only to that part of the gain that is accrued on or after 6 April 2013. The balance of any gain will continue to be treated as at present.
R&D tax credit reform
The Budget introduced a 10 percent above-the-line tax credit for research and development expenditure incurred by large companies. A small or medium company has fewer than 500 employees and either turnover under €100m or a balance sheet total under €86m, otherwise it is treated as a large company. The new tax credit is optional and companies may continue to use the existing large company regime until 31 March 2016. From 1 April 2016, the new credit becomes mandatory.
The more favourable existing R&D tax regime remains in force for small and medium-sized companies.
Simon Wood and Barinder Chadha FCCA are technical advisers at ACCA UK