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Osborne Delivers UK Autumn Statement

by Robert Lee,, London

05 December 2014

UK Chancellor George Osborne's Autumn Statement plans an overhaul of the stamp duty system and the introduction of a raft of new anti-avoidance measures and small business tax incentives.

Osborne delivered his annual mini-Budget on December 3, 2014. The main thrust of his Statement was "low taxes, but taxes that will be paid."

Osborne announced a major shakeup of the slab-rate stamp duty land tax regime, effective from midnight on December 3. According to Osborne, under the old system, stamp duty was a "badly designed tax on aspiration," and one of the UK's "worst-designed and most damaging" regimes. His new system is band-based, with each rate applicable only on the part of the property value that falls within the given band.

The first GBP125,000 (USD195,793) of the property price is now exempt from stamp duty. A rate of 2 percent is payable on the portion up to GBP250,000, 5 percent up to GBP925,000, 10 percent up to GBP1.5m, and 12 percent on the value above GBP1.5m. Anyone who had exchanged contracts but has not completed by midnight on December 3 will be able to choose whether to pay under the old system or the new. The changes will apply in Scotland until the Scottish Government's new Land and Buildings Transactions Tax comes into effect in April 2015.

Osborne said that these reforms represent a tax cut of GBP800m a year and will benefit 98 percent of homebuyers who pay the duty.

Osborne also dedicated much of his Autumn Statement speech to a package of anti-avoidance measures. He announced plans for a 25 percent Diverted Profits Tax, to be implemented in April 2015. It is expected to raise more than GBP1bn over the next five years. The Government is also to limit to 50 percent the amount of profit in established banks that can be offset by carried-forward losses, meaning that banks will contribute almost GBP4bn more in tax over the next five years.

In addition, the Disclosure of Tax Avoidance Schemes (DOTAS) regime will be strengthened and a DOTAS taskforce will be set up, to ensure that the rules cannot be circumvented. HM Revenue and Customs (HMRC) will be allowed to publish summary information about notified tax avoidance schemes and their promoters. It will consult in early 2015 on the introduction of further deterrents for "serial tax avoiders" and on penalties for tax avoidance cases where the General Anti-Abuse Rule applies.

The Government will introduce legislation on country-by-country reporting, consult on the introduction of new hybrid mismatch rules, and review how best to enhance the collection and use of information on offshore tax evasion. It will stop tax relief from being claimed on reimbursed business expenses when they are paid in conjunction with a salary sacrifice scheme, crack down on the avoidance of stamp duty on takeovers, and take steps to prevent the disguising of fee income by investment managers.

Individuals and partnerships will be prevented from gaining an 'unfair' tax advantage by transferring their business to a company they control and then claiming corporation tax deductions for assets linked to the business's reputation and customer relationships. Individuals will be unable to claim Capital Gains Tax Entrepreneurs' Relief on the transfer of these assets to the company.

The other major tranche of tax-related reforms announced in the Statement is targeted at small- and medium-sized enterprises (SMEs). The Government will increase the research and development (R&D) tax credit for SMEs from 225 percent to 230 percent. The credit for large firms will rise from 10 percent to 11 percent. Qualifying expenditure for R&D tax credits will be restricted from April 1, 2015, so that the costs of materials incorporated in products that are sold are not eligible. The application process for smaller companies investing in R&D will be streamlined.

The Government will allow gains that are eligible for Entrepreneurs' Relief (ER) and deferred into investment under the Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR) to benefit from ER when the gain is realized. The annual investment limit for SITR will rise to GBP5m a year, up to a total of GBP15m per organization, from April 2015.

The inflation-linked increase in business rates (property tax) will remain capped at two percent, and the structure of business rates will be reviewed in time for Budget 2016. The Government will extend the doubling of the 100 percent Small Business Rate Relief to April 2016, and the rate discount for shops, pubs, cafes, and restaurants with a rateable value of GBP50,000 or less will be increased from GBP1,000 to GBP1,500.

Osborne also announced that:

  • The threshold for the 40 percent personal income tax rate will rise in line with inflation for the first time in five years, from GBP41,865 to GBP42,385 from next April;
  • The planned increase in the personal tax allowance will go up from GBP500 to GBP600, taking the allowance to GBP10,600 from April 2015;
  • From April 2016, the Government will abolish employer National Insurance contributions on earnings up to the upper earnings limit for apprentices aged under 25;
  • The non-dom levy for individuals who have been resident in the UK for 12 of the last 14 years will rise to GBP60,000, and a new, GBP90,000 charge will apply to those who have been resident for 17 of the past 20 years;
  • Corporation tax setting powers will be devolved to Northern Ireland, subject to an inter-party agreement;
  • The rates of the Annual Tax on Enveloped Dwellings (ATED) will be increased by 50 percent above inflation;
  • The Supplementary Charge on North Sea activity will be reduced from 32 percent to 30 percent from January 1, 2015, and the ring fence expenditure supplement will go up from six to ten accounting periods for all ring fence oil and gas losses and qualifying pre-commencement expenditure incurred on or after December 5, 2013;
  • The Government will aim to make the taxation of employee benefits and expenses more straightforward and effective. It will consider accepting 51 recommendations made by the Office for Tax Simplification;
  • Companies substantially benefitting from government support for the generation of renewable energy will be excluded from benefitting from other tax-advantaged venture capital schemes;
  • Air Passenger Duty for children under 12 will be scrapped from May 1, 2015, and for children under 16 from 2016;
  • A new children's television tax relief will be introduced in April 2015, with eligible companies able to claim 25 percent of qualifying production expenditure back through the relief;
  • The 55 percent so-called "death tax" that applies when an unused pension pot is passed on to a relative will be abolished;
  • Search and rescue and air ambulance charities will be eligible for value-added tax (VAT) refunds, and the Government will refund unrecoverable VAT incurred by the hospice sector; and
  • The inheritance tax exemption will be extended to cover aid workers and emergency services personnel who die responding to emergency circumstances.

Henry Stuart, Partner at international law firm Withers, commented: "There's no doubt that the proportional approach to stamp duty announced today will reduce the volume of high-value purchases. The concern is cost, and buyers will reassess their current approach accordingly from midnight tonight. Certainly non-UK buyers will now consider buying high value properties through corporate structures again, as the 15 percent duty won't appear so daunting under the new bands, and these structures will offer them an IHT shelter. Of course, as stamp duty land tax is a tax on transactions, it isn't accurate to compare this with the annual charge proposed under 'mansion tax' models, which is a tax on wealth."

On the anti-avoidance measures announced, Paul Rutherford, Tax Partner at DLA Piper, stated: "The Chancellor has announced that the UK will introduce a 25 percent 'diverted profits tax' - already being referred to as a 'Google tax' - on multinationals that artificially move profits out of the UK to lower-taxed jurisdictions. While the Chancellor didn't name names, it is likely that he had large multinational tech companies – many of which have been criticized recently for the amount of UK corporation tax they pay – in mind when making his announcement. It is entirely unclear how this new tax will work as the Government is yet to provide further detail."

Stephen Jones, Legal Director at DLA Piper, added: "The Government's launch of a consultation into measures to adopt the OECD's recommendations in relation to hybrid instruments is welcome. Rumors of immediate changes to the rules on the taxation of hybrids were proved to be false. The Government's willingness to engage with the international community on tax avoidance must be a good thing: the UK continues to combine low corporate tax rates with an internationally respected emphasis on fairness, which makes us a good place to base an international business."

TAGS: individuals | inheritance tax | Capital Gains | tax | investment | small business | business | property tax | tax avoidance | tax incentives | energy | accounting | corporation tax | United Kingdom | tax thresholds | tax credits | offshore | legislation | venture capital | stamp duty | HM Revenue and Customs (HMRC) | charities | penalties | HM Revenue and Customs (HMRC) | inflation | individual income tax | services | research and development | Invest | Scotland

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