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On March 16, 2016, George Osborne, the Chancellor of the Exchequer in the UK Government, announced a Budget which he claims will help bring about a budget surplus, while also cutting the tax burden for individuals and businesses, and boosting the UK's overall tax competitiveness. This special feature highlights some of Osborne's key announcements, and asks whether he is capable of achieving his difficult fiscal balancing act.
In something of an unexpected measure, the corporation tax main rate will be reduced by an additional 1 percent for the financial year beginning April 1, 2020. Legislation in Finance Bill 2016 will set the rate at 17 percent, replacing the 18 percent rate set for Financial Year 2020.
Budget 2016 also reduces the rate of the "supplementary charge" paid by oil and gas extraction firms operating in the British sector of the North Sea from 20 percent to 10 percent.
Furthermore, the period in which businesses investing in new plant and machinery in enhanced capital allowance sites in Enterprise Zones can qualify for 100 percent capital allowances will be extended to eight years.
However, Budget 2016 reforms the rules governing certain corporate losses carried forward from earlier periods. As a result, companies will have their use of carried forward losses restricted so that they cannot reduce their profits arising on or after April 1, 2017 by more than 50 percent. This restriction will apply to a company or group's profits above GBP5m. Profits and losses subject to the oil and gas ring-fence regime will be excluded from the loss reform.
Nevertheless, according to the Government, the corporate loss reforms will also give all companies more flexibility by relaxing the way in which they can use losses arising on or after April 1, 2017 when they are carried forward. These losses will be useable against profits from different types of income and other group companies.
Separate rules will apply to banks, with the proportion of a banking company's annual taxable profit that can be offset by carried-forward losses restricted to 25 percent effective April 1, 2016.
Following publication of draft legislation on December 9, 2015, the government will legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary.
Following the publication of the draft legislation, amendments have been made to allow grouped companies to second workers within the group, and to prevent the organized misuse of Personal Service Companies in order to avoid the restrictions.
In one of the most popular measures in the Budget as far as small businesses are concerned, Osborne announced a major reduction in business rates, the UK's local business tax.
As a consequence, from April 2017, small businesses that occupy property with a rateable value of GBP12,000 or less will pay no business rates. Currently, this 100 percent relief is available to businesses that occupies a property (e.g. a shop or office) with a value of GBP6,000 or less. There will be a tapered rate of relief on properties worth up to GBP15,000.
According to the Government, this reform of business rates will take 600,000 businesses out of the business rates net altogether.
Personal Income Tax
Budget 2016 leaves current rates of personal income tax untouched, although the income tax personal allowance will increase to GBP11,500 (USD16,640) in 2017/2018. The basic rate limit (the point above which taxpayers pay 40 percent tax) will also increase to GBP33,500 in 2017/2018. Taken together, these changes will increase the 40 percent higher rate threshold to GBP45,000 in 2017/2018.
Another significant announcement on the personal tax front was the new tax-free Personal Savings Allowance (PSA) for individuals. This will apply a 0 percent rate for up to GBP1,000 of savings income, such as interest, paid to an individual (or GBP500 for individuals with any 40 percent higher rate income).
Alongside the introduction of the PSA, banks, building societies and National Savings and Investments will cease to deduct tax from the account interest they pay to customers. These changes will have effect in relation to savings income paid or credited on or after April 6, 2016.
However, the PSA will not be available to taxpayers paying the 45 percent top rate of tax, which applies on income in excess of GBP150,000.
Capital Gains Tax
Budget 2016 reduces the rate of capital gains tax charged on most gains accruing to basic rate taxpayers from 18 percent to 10 percent. For higher rate taxpayers, or those whose gains exceed the unused part of their basic rate tax band, the rate of CGT charged on most gains will be reduced from 28 percent to 20 percent.
The 28 percent and 18 percent rates will continue to apply for gains accruing on the disposal of interests in residential properties that do not qualify for Private Residence Relief, and the receipt of carried interest. The rate of CGT charged on Annual Tax on Enveloped Dwellings related chargeable gains will continue to be 28 percent. These changes will have effect from April 6, 2016.
Budget 2016 confirms a proposal announced in the December 2015 Autumn Statement to introduce a higher rate of Stamp Duty Land Tax on for purchases of additional residential properties. The higher rates will be 3 percent above the existing SDLT rates and will apply to purchases of additional properties from April 1, 2016.
Insurance Premium Tax
Much to the chagrin of the insurance industry, Budget 2016 includes a further rise in insurance premium tax, to 10 percent effective October 1, 2016. The resulting revenues will fund improvements to flood defenses.
Another surprise was announcement of a so-called "sugar tax." The tax will be levied on drinks companies, and will be assessed on the volume of the sugar-sweetened drinks they produce or import. There will be two bands: a lower band for total sugar content above five grams per 100 milliliters; and a higher band for drinks with more than eight grams per 100 milliliters. Pure fruit juices and milk-based drinks will be excluded, and the smallest producers will be kept out of the scope of the levy.
The amount of excise duty paid by motorists at the pumps will be frozen for a sixth year in a row.
The UK will legislate in response to the OECD Report on hybrid mismatches to deal with tax mismatches involving permanent establishments. The legislation tackles aggressive tax planning, typically involving multinational groups, where either one party gets a tax deduction for a payment while the other party does not pay tax on the receipt, or where there is more than one deduction for the same expense. The legislation will have effect from January 1, 2017.
In addition, Finance Bill 2016 widens the circumstances in which withholding tax must be deducted from payments of royalties to persons not resident in the UK and to counter the use of contrived arrangements involving double taxation treaties to obtain relief from withholding taxes on royalties. The changes preventing the use of contrived arrangements have effect for payments made on or after March 17, 2016.
The Government will also introduce new rules to limit the tax relief that companies can claim for their interest expenses to 30 percent of a group's earnings.
Budget 2016 also confirms earlier proposals to amend the Transactions in Securities rules and introduce a Targeted Anti-Avoidance Rule in order to prevent opportunities for income to be converted to capital in order to gain a tax advantage.
As part of the UK's ongoing efforts to crack down on offshore tax avoidance, Budget 2016 included new proposals to ensure that all profits from dealing in and developing UK land are taxed fully in the UK, whether or not the business is resident in the UK and regardless of whether there is a UK permanent establishment. The measure will take effect from the date of the introduction of the new legislation.
Balancing The Books
Osborne said that in 2016, the budget deficit will have been cut by almost two-thirds from its peak of just over 10 percent of gross domestic product in 2009/10 in the immediate aftermath of the banking industry crash. According to Osborne, under the plans laid out in the 2016 Budget, the deficit will be eliminated by the financial year 2019/20.
However, as finance ministers often find to their cost, the best laid plans often go astray, and several economists and analysts have warned that the Chancellor's fiscal predictions are based on some optimistic economic assumptions.
"The further predictions are into the future, the less accurate they become," observed James Sproule, Chief Economist at the Institute of Directors, who expressed caution at the forecast of the independent budget watchdog, the Office for Budget Responsibility, that GDP will be around 2 per cent for the next five years.
"This relies on some fairly benign trends holding for the best part of a decade, such as strong real-terms wage growth, robust job creation and continuation of extremely low interest rates and debt servicing costs. As we have seen in the last few months, facts change quickly in the hyper-global economy, and if the Chancellor is hoping the next few years will be as predictable as the OBR forecast, he could be in for a shock, with deficit eradication targets slipping further into the future," Sproule warned.
While Budget 2016 seems something of a mixed bag, the reaction from the business community seems to have been more positive than negative.
Confederation of British Industry Director-General, Carolyn Fairbairn, said: "After a year of surprises, this was a stable Budget for business facing global stormy waters. The Chancellor has listened to our concerns about the mounting burden on firms and chosen to back business to grow the economy out of the deficit."
"Businesses will welcome the Chancellor's permanent reforms to business rates – taking more small firms out of the regime and changing the uprating mechanism from RPI to CPI, which the CBI has long been calling for."
"The reduction in the headline corporation tax rate sends out a strong signal that the UK is open for global business investment, and reforms to interest deductibility are in rightly in line with the international consensus."
However, she said that changes to the tax treatment of losses "will make it harder for larger scale-up firms and companies that have been through tough times to play their part in the recovery."
Kicking The Can Down The Road?
Just as some are questioning Osborne's claim that the budget will be in surplus by 2020, others are wondering just where all the money is coming from to pay for the latest round of tax cuts when the Chancellor has announced fairly modest spending cuts this time around (GBP0.50 for every GBP100 of departmental spending, is one way the Government has expressed the scale of its proposed expenditure cuts).
It has been posited that the Chancellor is holding back somewhat until the result of the "Brexit" referendum is known, after which he will announce bolder measures designed to help him reach his fiscal targets.
"It could be argued Osborne's opening gambit, while nodding towards the strong recent growth for the UK, massively underplayed the huge future uncertainties that the UK faces, both nationally, globally and economically," said Jonathan Riley, Head of Tax at Grant Thornton UK.
"The conundrum is where is all this money coming from the fund these [tax cuts]?" Riley continued. "Business rate reductions, cut in capital gains tax, further reduction in corporation tax etc – none of which come cheap. Overall this Budget should be well received by the majority of individuals and businesses alike. However, one could perhaps be bold enough to suggest that Osborne has merely deferred the announcement of any painful cuts to post the EU referendum."
"Perhaps the Autumn Statement is what we should be holding tight for and when we might really be given the detail of the long-term environment in which we should plan," Riley concluded.
In other words, in the months and years ahead, we could be treated to some more surprises from a Chancellor who has grown quite fond of pulling rabbits from the Budget hat. The trouble is, with the UK facing perhaps its most uncertain period economically, with its future membership of the EU in doubt, and its place in an uncertain global economy unclear, we can't be sure if these surprises will be nice or nasty.
Tags: tax | business | Tax | interest | legislation | individuals | budget | Invest | corporation tax | withholding tax | oil and gas | small business | royalties | Finance | Travel | Work | banking | insurance | excise duty | tax avoidance | Capital Gains
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