UK Chancellor George Osborne has unveiled his 2013 budget, introducing tax measures that he claims put the UK on the path to having the "most competitive business tax system of any major economy in the world." As is often the case with national Budgets though, finance ministers have a tendency to give with one hand, and claw it back with the other.
Setting the Scene
When the Conservative-Liberal Government took over from the Labour Party back in May 2010, it vowed to eradicate the UK’s huge budget deficit – which at that time stood at a massive GBP160bn (USD245bn in today’s money) – and cut the national debt by making swingeing cuts in public spending. At the same time, it promised to deliver the most competitive tax regime in the G8. While it has made some progress towards the latter of these two goals, and continued to do so in Budget 2013, fiscal consolidation hasn’t quite gone to plan: government borrowing remains stubbornly high with the budget deficit expected to hit 6.8% of gross domestic product (GDP) in 2013/14, against a 2010 forecast of 3.5%, while the national debt (currently 85% of GDP) won’t start coming down until 2017. Heaping further pressure on Osborne is the fact that last month the ratings agency Moody’s stripped the UK of its prized triple A credit rating, with Fitch expected to follow suit in April as the Government continues to undershoot its targets.
Given then the fiscal restraints that Osborne is working within, the additional tax relief for businesses operating in Britain announced in Budget 2013 looks remarkably generous.
The stand-out measure was the acceleration of a program of phased corporate tax rate cuts which started with Osborne’s first fiscal policy announcement back in June 2010 in what was seen at the time as an “emergency Budget.” At that time, it was the Government’s intention to reduce corporation tax from 28% to 24% in annual 1% increments. The scope of the rate cut has been expanded in successive Budget since, however, and in Budget 2013, Osborne announced that UK corporation tax would fall to 20% in April 2015.
“Here in Britain we’ve cut corporation tax from the 28% we inherited to 21% next year,” Osborne told the Commons during his statement. “But I want to go further. Today, I want us to send a message to anyone who wants to invest here, to create jobs here, that Britain is open for business. So in April 2015 we will reduce the main rate of corporation tax by another 1%. Britain will have a 20% rate of corporation tax – the lowest business tax of any major economy in the world. That’s a tax cut for jobs and growth. We will have achieved in one Parliament in these difficult times the largest reduction in the burden of corporation tax in our nation’s history.”
Another advantage of this move is that the UK will have only one rate of corporation tax from 2015. Currently, corporate income up to GBP300,000 is taxed at the small business rate of 20%, but there is a more complex relief system for determining corporate tax on income between this threshold and the GBP1.5m main rate threshold. Therefore, the Government claims, calculating a company’s corporate tax payments will become a simpler affair when the two rates are unified.
“By merging the small company and main rates at 20p, we will abolish the complex marginal relief calculations between them, and give Britain a single rate of corporation tax for the first time since 1973,” Osborne observed.
The corporation tax cut will not however, be passed on to the banking sector, which will see a commensurate rise in the rate of the Bank Levy. Based on a bank’s liabilities, the Bank Levy will rise from its current 0.105% to 0.142% from January 2014.
Businesses will also benefit from a new Employment Allowance from April 2014, which will reduce the National Insurance bill of each business by GBP2,000; companies, charities, and community sports clubs will be able to hire someone on GBP22,000, or four people on the minimum wage, without paying anything in what Osborne referred to as "jobs tax."
According to the Chancellor, the new Employment Allowance will mean that 450,000 small businesses – one third of all employers in the country – will pay no national insurance contributions tax at all.
“For the person who’s set up their own business, and is thinking about taking on their first employee – a huge barrier will be removed,” he said, adding that 98% of the benefit of this new scheme will go to small- and medium-sized companies.
Another measure aimed at stimulating business investment was the extension of the Capital Gains Tax holiday under the recently introduced Seed Enterprise Investment Scheme. The new announcement means that any investors making capital gains in 2013-14 will receive 50% capital gains tax relief when they reinvest those gains into seed companies in either 2013-14 or 2014-15.
In addition, there will be a capital gains tax exemption on up to GBP5,000 worth of shares acquired in a business by employees, the first GBP2,000 of which will also be exempt from income tax and National Insurance.
In relation to financial services, Osborne announced the abolition of the Schedule 19 Stamp Duty Reserve Tax, which is charged on UK domiciled unit trusts and open-ended investment companies, and of Stamp Duty on shares traded on growth markets such as the Alternative Investment Market. He quipped: "In parts of Europe they're introducing a financial transaction tax; here in Britain we're getting rid of one."
The Chancellor also announced proposals to introduce a new tax incentive to encourage further investment in the exploration and extraction of shale gas industry, which will effectively reduce the tax rate for some shale gas production from 62% to 30%. Shale gas producers will also be permitted to inflate losses to be offset against future income by 10% per year over 10 years (up from six years previously).
While these measures represented the extent of new tax relief for businesses and investors, Osborne confirmed to the Commons that previously announced tax reforms would also be legislated for. Key among these is the introduction of an “above the line” (ATL) research and development (R&D) tax credit, which will replace the current system based on a “super deduction.” Under the present R&D tax relief regime, businesses must wait until they enter profit before they benefit from government support. However, the ATL credit will instead be calculated directly as a percentage of the company’s R&D spend and will be payable to loss makers. This will bring UK support for R&D into line with other countries such as France, Canada and Ireland. Budget 2012 announced that the minimum rate for the ATL credit would be 9.1% before tax. Budget 2013 increases the ATL credit to 10%. The ATL credit will be introduced alongside the existing super deduction in April 2013, and will fully replace the super-deduction in April 2016.
Another key change to the corporate tax system will be the introduction of the patent box regime from April 2013, under which companies will be permitted to apply a 10% corporation tax rate to profits attributed to patents.
There was, however, something of a sting in the tail, and in Budget 2013 it was Osborne’s announcement of another round of anti-avoidance measures described by the Chancellor as “one of the largest ever packages of tax avoidance and evasion measures presented at a Budget.”
The Budget document, known as the Red Book, provides greater detail on the changes sketched by Osborne in his speech. The Red Book sets out four key areas in which the Budget represents a crackdown, focusing on offshore tax evasion, the avoidance of employment taxes, tax avoidance schemes, and corporation tax. It is estimated that collectively Osborne's measures will raise over GBP4.6bn (USD7bn) in new revenue over the next five years. The immediate closure of ten loopholes will also protect against the loss of billions in revenue, the Treasury calculates.
On the anti-avoidance front, the Red Book confirms the inclusion of the UK's first General Anti-Abuse Rule (GAAR) in Finance Bill 2013 (which will be published on March 28). It says that the GAAR will "provide a significant deterrent to abusive avoidance schemes and strengthen HM Revenue and Customs' (HMRC's) means of tackling them." No further details were advanced in addition to the draft legislation and guidance published last December. The Government has made clear that it intends for the GAAR to have a comparatively narrow application, targeting artificial and abusive tax avoidance. It is thought that a "broad spectrum" GAAR would not be beneficial for the UK, and multinational business will not be included within its scope. However, Osborne promised in his speech that the UK's presidency of the G8 would be used to promote the updating of rules regarding the taxation of multinational businesses, and the Red Book describes the Government as being "at the forefront of calls for collective action."
Also confirmed in the Budget are proposals to target the promoters of tax avoidance schemes. The aim here is "to tackle both the supply and demand of these schemes." The Government will shortly consult on this plan, and HMRC will carry out a parallel consultation on an inter-related "naming and shaming" initiative. Last month, HMRC publicly revealed the details of "deliberate" tax defaulters for the first time in a list that will be updated each quarter. Similarly, the Budget builds on an announcement made in February that companies and individuals found to have been involved in failed tax avoidance schemes may be disqualified from receiving Government contracts. Potential suppliers will be obliged to declare whether they have had an "occasion of non-compliance" in recent years. The Red Book adds that the Government will review the policy's effectiveness within the next year, and will amend the rules if necessary.
The Government will also now act on a warning made by Osborne at the 2012 Budget that he could introduce retrospective legislation to address aggressive stamp duty land tax (SDLT) avoidance schemes. A separate document published alongside the main Red Book explains that, in spite of the Chancellor's cautioning, two specific SDLT schemes have been growing increasingly popular. They in particular target residential properties and abuse the transfer of rights rules. Onward sales made under the schemes are intended not to be completed for a number of years, with the result that the immediate purchaser is left in possession of the property. This purchaser then bears no SDLT liability, and the transfer of rights falls below the SDLT threshold. These schemes will be closed, and the enabling legislation made applicable from March 21, 2012 – the date of Osborne's last Budget. Loopholes relating to inheritance tax and the corporate tax loss relief system are also to be closed.
With regards to offshore tax evasion, the Budget again represents more of a confirmation of earlier initiatives than the unveiling of new ones. Osborne will proceed with his "Son of FATCA" agenda, promoting last week the pre-announced conclusion of information-sharing agreements with the Isle of Man, Guernsey, and Jersey. According to the Red Book, these deals "will significantly increase the amount of information on potentially taxable income that is automatically exchanged, in order to further clamp down on tax evasion." Disclosure facilities have been put in place, and an additional GBP1bn in revenue over the next five years is anticipated. The Government is also looking to sign similar agreements with other jurisdictions, and is in discussions with its Overseas Territories. Further, in result of a review announced at the 2012 Autumn Statement, the Red Book states that the Government will strengthen employment obligations, to ensure that the correct income tax and national insurance contributions (NICs) are paid by offshore employment intermediaries. A consultation on the details will be launched imminently.
Determined to avoid a repeat of past Budget tax measures coming back to bite him (last year’s infamous “pasty tax” debacle being one such episode), Osborne’s 2013 Budget was a relatively dull affair, with the few tax measures that were announced designed not to create a whole litany of unintended consequences weeks and months down the line.
The Climate Change Levy will rise in line with inflation from April 1, 2014, the Government will set 2015-16 carbon price support rates equivalent to GBP18.08 per tonne of carbon dioxide in line with the carbon price ?oor set out at Budget 2011. However, the Government will continue to provide support to energy intensive industries to compensate for the indirect cost of the Carbon Price Floor in 2015-16 and further details will be announced at the next spending round.
The most significant announcement with regard to personal taxation was the raising of the personal tax allowance to GBP9,440 in April 2013, and to the magic number of GBP10,000 in April 2014. This means that individuals will only pay tax on income above the GBP10,000 threshold from next year, and it is expected that 2.7m people will be taken out of the tax system altogether from April 2014. This achieves a key objective of the Liberal side of the coalition and was enshrined in the agreement binding the two parties together.
Conspicuous by its absence was any announcement concerning the top rate of income tax. Controversially, Osborne decided to cut the 50% top rate on incomes above GBP150,000 to 45% last year after tax returns suggested that the tax raising negligible amounts of revenue. It was hoped that an additional cut in the top rate would provide another signal that Britain was “open for business,” as the Chancellor has been keen to stress on numerous occasions.
As expected, Osborne declared that he had cancelled a planned September rise in fuel duty. However, his decision to scrap the beer duty calculator was more of a turn up. While duty on other alcoholic drinks will rise, and the government remains committed to introducing minimum pricing, beer duty will in contrast decrease by GBP0.01.
Obviously, the additional corporation tax cut and other business and investor tax relief was welcomed by the tax and business community.
"[The] Budget announcement that corporation tax will fall to 20% in April 2015 will be of comfort to the international business community as re-affirmation of the UK’s position as being ‘open for business’ was critical to improving morale and confidence among international businesses,” commented Sally Brown, associate at Milestone International Tax Partners. "Osborne is clearly adamant that the UK should remain at the forefront of internationally competitive jurisdictions to attract business and a 20% corporation tax would certainly be among the most competitive rates of OECD member countries, which can only be a good thing for the country."
“The CBI was clear this Budget needed to deliver a good dose of business and consumer confidence, while being necessarily fiscally neutral,” said John Cridland, Director-General of the Confederation of British Industry, the UK’s largest business association. “An extra one penny cut in corporation tax will also make the UK one of the most internationally competitive locations in which to do business. Small and medium-sized businesses will be particularly encouraged that there was money available for the Chancellor to cut the jobs tax through a new employment allowance.”
Although a relatively low-key announcement, the scrapping of Schedule 19 Stamp Duty Reserve Tax is expected to have a significant boost for the UK’s asset management industry. As Rob Mellor, PwC asset management partner observed: "This is something that the industry has been requesting for some time. It is great news for the UK asset management industry as it levels the playing field with other European fund locations and should help to encourage more UK and non-UK asset managers to launch UK based fund products."
On the other hand, while the rise in the bank levy looks on the surface to be a relatively minor tax rise, the tax has almost doubled over the last two years, and PwC warns that this can only have a negative impact on one of the UK’s largest industries.
"The bank levy rate has now risen by over 80% since it was introduced in 2011. This is a major cost for banks operating in the UK and is not a good advert for the City of London's competitiveness as a global financial centre, particularly at a time when this is already under threat from other quarters."
Overall, there is a worry that the UK’s progress towards creating an attractive business and investment tax regime is being checked by increasingly aggressive crack-downs on tax avoidance, with the Government desperate for fresh sources of revenue.
“The Chancellor’s announcement that corporation tax is to fall to 20% in 2015 positions the UK very competitively against other countries, making it attractive for inbound investment and as such, this is indeed a positive approach and to be welcomed, commented Nick Farmer, Tax Partner at Menzies LLP. “However, this message is to be contrasted with mounting pressure on multinationals to pay their fair share of tax in the UK. This ‘UK is open for business but on our terms’ rhetoric needs to be modified to ensure that companies do view the UK as an attractive low tax jurisdiction of choice rather than a location with uncertain and complex tax law.”
“There needs to be a sensible balance between the UK positioning itself as an attractive location to do business, and dealing with tax avoidance by multinationals,” Farmer continued. “Tax avoidance cannot be dealt with by the UK in isolation, and it is right that the OECD have taken the lead with their Base Erosion and Profit Shifting Report on tax avoidance by multinational companies. The carrot of a 20% corporate tax rate has been dangled, and if it is to achieve the desired result, the anti-avoidance stick to beat multinational companies with should be tempered for now.”
The Government’s decision to forge ahead with the proposed General Anti-Abuse rule could, perversely, create more uncertainty as to where the line between “acceptable” and “unacceptable” tax planning lies. As Sandy Bhogal, London Head of Tax at legal services firm Mayer Brown observes: “It could be seen as either a reasonable compromise that will not affect the centre ground of tax planning, or as another example of using a sledgehammer to the crack the nut of a minority of aggressive tax avoidance schemes which are generally being knocked down by the courts and, if legislation was appropriately drafted, such schemes would not even be contemplated. However, what cannot be argued is the uncertainty that it creates, and maybe more consideration should have been given as to whether it was really necessary.”
ConclusionIn the circumstances there were probably very few options open to Osborne when he began drafting Budget 2013, and he was never likely to shower businesses and individual taxpayers with tax gifts. The tax relief for business he did manage to fit into this year’s Budget does send out a positive message, that the UK is indeed “open for business.” However, tax is only one part of a business’s decision to invest in one place over another, and within that tax rates are a component of the overall tax equation. Osborne likes to emphasise the current Government’s tax simplification credentials, but the reality is that the reams of anti-avoidance legislation that get tacked onto to the main tax laws every year are tending to make the tax system more dense and incomprehensible rather than simpler. That the Treasury released over 1,000 pages of new legislation following the autumn fiscal statement, together with almost 300 pages of overview and other related documents, clearly shows that things are not improving on this front. Low tax rates might entice buyers into the shop, but they won’t hang around long if the place is so cluttered they can’t find what they’re looking for!
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