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UK Budget: Targeting the Grey Vote?


By Tax-News.com Editorial
March 25, 2014


On March 19, UK Chancellor George Osborne announced a government budget for “makers, doers and savers” with extended tax breaks for business investment, minor tax cuts for most individuals and a surprise shake-up of pension rules.


Economic and Fiscal Context

Although the Coalition Government remains constrained by a budget deficit and rising public debt, the UK economy appears to have recovered from the financial crisis faster than most had predicted. Expectations for growth this year and next have been revised up by the Office for Budget Responsibility (OBR), to 2.7% in 2014 and 2.3% in 2015. 

The budget deficit, which reached a level equivalent to 11% of gross domestic product in 2009 is now forecast to have fallen by half to 5.5% this year and the Government says that the deficit will be eradicated by 2018/19. Just over 80 per cent of the reduction is accounted for by lower public spending. The remainder of the drop in borrowing is accounted for by higher receipts, with the majority having taken place by 2012-13, largely as result of rises in the standard rate of VAT. The OBR now predicts that there will be a surplus of 0.2 percent by 2018-19, and that debt reduction will save the UK GBP47bn (USD77.5bn) in interest payments.

Debt as a percentage of GDP remains worryingly high however, and is not expected to start falling in meaningful amounts until 2018. According to the OBR, public sector net debt will peak at 78.7% of GDP in 2015/16, will decrease slightly in 2016/17 and then fall to 74.2% by 2018/19.

While Osborne obviously was keen to trumpet the Coalition’s economic track record since coming to power in 2010, the OBR remains cautious over the country’s long-term fiscal health, warning that “there is huge uncertainty around all public finance projections.”


Business Measures

Since coming to office the Coalition has already cut the rate of corporation tax by 8% (with the last of the phased reductions, to 20%, due to take place in April 2015). It was not very surprising then that Osborne decided to keep his rabbits in his hat for another year, preferring small targeted measures aimed at boosting investment in research and development and small businesses.

The Research and Development tax credit for loss-making small businesses will be raised from 11 percent to 14.5 percent, the Seed Enterprise Investment Scheme for start-ups will be made permanent, and social enterprises will in future be eligible for Social Investment Tax Relief at 30 percent. Further, the GBP250,000 Annual Investment Allowance, which was due to expire at the end of 2014, is to be extended to the end of 2015, and doubled to GBP500,000 from April this year.

Obsorne said that enterprise zones with business rates discounts and enhanced capital allowances were "flourishing", and confirmed that these would be extended for a further three years. He said a new zone would be established near Coleraine, Northern Ireland.

The Chancellor further described a GBP7bn package to cut energy bills for UK manufacturers, noting that energy costs to business in the UK are double those in the United States. He unveiled a cap on the Carbon Price Support rate at GBP18 per ton of CO2 from 2016-17 for the rest of the decade, an extension of the existing compensation scheme for energy-intensive industries for a further four years, to 2019-20, new compensation to protect these manufacturers from the rising costs of the Renewable Obligation and Feed-In Tariffs, and the exemption of electricity from combined heat and power plants from the carbon price floor.

Other energy-related measures for business include a reduction of fuel duty on methanol, and an increased discount for ultra-low emission vehicles. However, a 2 percent increase on the company car tax will be extended in 2017-18 and the following year.

Osborne also confirmed that the European Commission had approved the extension of the UK's film tax credit, and said that the same approach would now be used to grant 20 percent tax relief for qualifying theatre productions, and 25 percent for regional touring.


Personal tax

The budget also includes changes to personal tax, although no tax rate cuts. As anticipated, the personal tax-exempt allowance will rise in 2015 by GBP500 to GBP10,500, but Osborne resisted recent calls from within the Conservative Party to raise the threshold for the highest rate from GBP41,450 to GBP44,000. Instead, the threshold will rise to GBP41,865 next month, and then to GBP42,285 next year. Other changes include moving Class 2 National Insurance Contributions into self-assessment, abolishing what Osborne called a "wholly unnecessary bureaucracy." A new exemption from inheritance tax is to be introduced for members of the emergency services who give their lives during the course of their duties.

On savings and pensions, from July 1, tax-free Individual Savings Accounts (ISAs) will be restructured, merging the cash ISAs and stocks ISAs elements into a single ISA with an annual limit of GBP15,000. The pension system will be significantly reformed.


Property Taxes

Continuing his recent policy of making the property tax system fairer by increasing the amount of tax paid by, predominately wealthy, foreigners, Osborne announced that the taxes on residential properties acquired by businesses worth over GBP2m will be expanded to properties worth more than GBP500,000. This includes the 15% higher rate of Stamp Duty Land Tax and the Annual Tax on Enveloped Dwellings. These measures are designed to impact house buyers seeking anonymity by purchasing houses in the name of a company, and also support anti-tax avoidance efforts.


Other Taxes

Osborne sought to address in Budget 2014 the highly unpopular Air Passenger Duty (APD) regime, which he identified "creates a sense of injustice" among Caribbean and South Asian communities in the UK. He explained that from next year, the current four APD bands will be reduced to two. Consequently all long haul flights will be taxed at the Band B tax rate now paid to fly to the United States, and confirmed the taxation of business jet flights.

Osborne's budget freezes duty on spirits, cuts the duty on beer nominally, and freezes duty for "ordinary cider," in recognition of the effect of recent floods on the West Country cider industry. On gambling, bingo duty is to be halved to 10 percent "to protect jobs and protect communities," and Osborne said that the Government would consider reforming the horserace betting levy to support the industry. However, duty on fixed-odds betting terminals is to be raised to 25 percent, and he confirmed that the horserace betting levy is to be paid by bookmakers based offshore on a place of consumption basis. Tobacco duty will continue to rise at 2 percent above inflation. A planned fuel duty increase for September has now been put on hold.


Anti-Avoidance

Unsurprisingly, Budget 2014 picks up where previous budget announcement left off by introducing yet more anti-avoidance measures.

Many of these continue the Government’s attack against the use of companies by contractors and freelancers to avoid tax they would otherwise owe as an employee. For example, new legislation will strengthen obligations to ensure the correct income tax and National Insurance contributions are paid by offshore employment intermediaries and prevent employment intermediaries being used to avoid employment taxes and obligations by disguising employment as self-employment.

New legislation also will tackle the disguising of employment relationships within partnership arrangements and tax-motivated allocations of business profits and disposals of assets through partnerships.

Additional legislation aims to prevent high earning non-domiciled individuals from avoiding tax by artificially dividing the duties of a single employment between a UK and an overseas contract.

As usual, new measures have been targeted towards the tax planning industry, and additional information powers and penalties aimed at “high-risk” promoters were proposed.

In addition it is proposed that HMRC can insist on advance payment of tax even when a tax inquiry is ongoing or a tax demand is being appealed.

The most controversial anti-avoidance measure though is that HMRC be given new powers to collect debts directly from bank accounts.


Pensions

Last, but certainly not least, was Osborne’s unexpected announcement that pensioners will be allowed to take a lump sum cash amount, which will subject to income tax, and will no longer be required to invest in annuities. Osborne said this would allow pensioners "to draw down as much or as little of their pension pot as they want, anytime they want."


Reaction

While Budget 2014 was on the whole an unremarkable affair, tax experts and those in business still had plenty to say about Osborne’s announcements.

The Chancellor generally has been congratulated for his policy of cutting taxes on business, but there are doubts about the effectiveness of increasing the AIA this time around.

“It is questionable how much of an impact the doubling of the AIA will have on SMEs,” said Stephen Hemmings, corporate tax director at Menzies LLP. “An increase in the AIA, an allowance that provides 100% tax relief for qualifying capital expenditure, is to be welcomed. However, it is unlikely that this increase to GBP500,000 will be useful to many small and medium businesses, as they are tend not to invest at these levels.”

Hemmings did however commend the Chancellor for increasing the R&D tax credit for loss-making SMEs. “It applies to small and medium enterprises, typically in the earlier stages of their business where investment levels are high and cash flow can be tight. This increase is therefore an unexpected bonus for a number of growing businesses.”

While the GBP500 increase in the personal tax allowance has been seen as a good move, providing the majority of workers with a small tax cut, it has been balanced by taking away high earners’ tax allowance, and those earning between GBP121,000 and GBP150,000 will find themselves particularly badly hit by this move.

“Individuals with income of over GBP121,000 for 2015/16 will not have the benefit of any personal income tax allowance as this is clawed back once income exceeds GBP100,000 on the basis of the loss of GBP1 allowance for every GBP2 income,” observes Nigel May of MHA MacIntyre Hudson. “Yet these individuals have also seen the basic rate band shrink from GBP37,400 in 2010/11 to GBP31,785 for 2015/16. This means that whereas a basic rate taxpayer will have gained GBP805 as a result of tax reductions due to the personal tax allowance increases since 2010/11, those whose income is above GBP121,000 but do not benefit from the top rate reduction for those whose income is above GBP150,000 will find themselves GBP1,123 worse off over the same period because of the basic rate band shrinkage.”

Nevertheless, the changes to ISAs announced by the Chancellor “are nothing short of extraordinary” according to Andy Creak, Director at rplan.co.uk. “The UK in general, and savers in particular, have taken a battering recently with below-inflation interest rates, budget cuts and austerity - some good news was long overdue,” he added.

While the extension of the new property taxes on “oligarchs” is likely to be a politically popular move for the Chancellor, some observers warn that they may have unintended consequences.

“The extension of the punitive 15% Stamp Duty Land Tax charges and the ATED (Annual Tax on Enveloped Dwellings) to corporate-held properties worth more than GBP500,000 will affect more people than the clutch of oligarchs with houses in Belgravia it was originally intended to catch,” said  Philip Alfandary, associate director at Menzies LLP.

"Potentially, it could affect mass affluent retirees or people who are already non-domiciled and who wish to engage in legitimate estate planning in relation to UK property. It will also catch many property investors who have legitimately structured their finances.  There is a massive element of retrospection as these structures are costly to break away from.”

Predictably strong views have been expressed on the usual battery of new anti-avoidance measures, with the proposal to allow HMRC to access taxpayers’ bank accounts prompting worries about privacy and the potential for expensive blunders.

Said May: “Whilst it is proposed that these draconian new powers will be the subject of rigorous safeguards and that HMRC will only use the powers where they have failed to collect tax due by conventional methods, it does have to be questioned whether HMRC, a body that has not been exactly free from administrative gaffes, can be shown to have understood the concept of rigorous safeguards based upon its own past performance. The spectre is raised of tax that is not actually due for payment being extracted by an over confident HMRC which has rushed to judgment, leaving an innocent taxpayer entirely financially embarrassed. In addition, it is not entirely clear how for example joint accounts or accounts held for children would be dealt with.”

The proposed pay-in-advance rule for disputed amounts of tax elicited a harsh response from Cormac Marum, former inspector of taxes, and head of tax advisory at UK200Group member firm Harwood Hutton, who remarked: “The Chancellor has decided to commemorate the up-coming 800th anniversary of the signing of Magna Carta by introducing a wholly new concept in UK tax that a taxpayer is ‘guilty until he proves his innocence’. That is the effect of the pay-in-advance measure he is planning to introduce in cases where individuals have followed proper professional advice, no tax liability has yet been legally established and where, in many cases, no tax will ever be legally established. It is retrospective in character and appears to offer no right of independent appeal against the imposition of the up-front payment.”

Osborne naturally earned many plaudits for dispensing with the need to take an annuity at retirement and handing retirees more flexibility as to how they use pension pots built up over a lifetime.

“The pressure on those crystallising their pension pots to take annuities at rates depressed by the historically low interest rate policies of recent years has been enormous and the announcement that this is to be no longer necessary is extremely welcome,” said Mike Franklin, Chief Investment Strategist at Beaufort Securities. “Also good news is the removal of the restrictive pension income drawdown rates that have been imposed by Government in recent years. Consequently, those starting to take pensions now have valuable new freedoms for how they manage their finances in retirement.”

However, Franklin does sound a note of caution. “Of course, changes like this carry consequences and these new freedoms bring with them the challenge of how well people can cope with this new responsibility. This suggests that savers and investors will need to develop a stronger relationship with those advisers that they feel they can trust. This all represents a great opportunity for the public to take a more mature approach to their financial planning. However, probably never has it been truer that the price of (financial) freedom is eternal vigilance. Good advice and guidance will continue to attract a premium.”

So, overall, Budget 2014 was a relatively tame affair. Osborne still finds himself with little fiscal room to manoeuvre, and he was therefore never going to be able to announce any dramatic cuts in tax. The only major surprise was the proposed changes in the pension rules, and, with a general election looming large on the horizon in 2015, this could turn out to be a very shrewd move by the Government as it targets the “grey vote”, a constituency which is becoming increasingly important in electoral terms. Osborne would of course deny that this was a cynical election ploy, but it is easy to see why he chose to make this move now.

 

Tags: tax | business | Tax | budget | energy | Investment | Invest | Investment | individuals | interest | Other | legislation | investment | inflation | retirement | Insurance | offshore | pensions | small business | United States | property tax

 

 

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