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Osborne Delivers UK Budget

by Robert Lee,, London

19 March 2015

The UK Coalition Government's sixth and final pre-election Budget delivers tax cuts for the oil and gas industry, cracks down on tax avoidance and evasion, and makes further changes to the personal income tax system.

Delivering his 2015 Budget, Chancellor George Osborne said: "We choose, as the central judgement of this Budget, to use whatever additional resources we have to get the deficit and debt falling. No unfunded spending. No irresponsible extra borrowing. For no short-term giveaway can ever begin to help people as much as the long-term benefits of a recovering national economy."

Among the headline tax measures unveiled are additional increases in the personal income tax allowance, to GBP10,800 (USD16,177) for the 2016-17 tax year and to GBP11,000 for 2017-18. The basic rate (20 percent) limit will be increased to GBP31,900 for 2016-17 and GBP32,000 for 2017-18. As a result, the higher rate (40 percent) threshold will be GBP42,700 in 2016-17 and GBP43,300 in 2017-18. According to the Treasury, in 2016-17 these changes will benefit 29.1m individuals, of whom 24.3m will be basic rate taxpayers and 4.8m higher rate taxpayers.

Osborne acknowledged that the fall in oil prices poses a "pressing danger" to the future of the North Sea industry. He announced that the Petroleum Revenue Tax will be cut from 50 percent to 35 percent for chargeable periods ending after December 31, 2015. The Supplementary Charge – an additional charge on a company's ring fenced profits, excluding finance costs – will be reduced from 30 percent to 20 percent, effective January 1, 2015. A new single tax allowance will reduce the amount of adjusted ring fenced profits subjected to the Supplementary Charge. The portion of profits reduced by the allowance will depend on a company's investment expenditure, and will be generated at 62.5 percent of that spend from April 1, 2015.

Together, these measures are expected to increase oil production by around 15 percent by 2019, and drive GBP4bn (USD5.99bn) of new investment over the next five years.

Following two temporary rises, the Annual Investment Allowance (AIA) cap was scheduled to fall from the current GBP500,000 to GBP25,000 on January 1, 2016. However, Osborne said that business groups have made clear that this reduction "would not be remotely acceptable." He added that the AIA "will be set at a much more generous rate," but did not specify the new cap.

Osborne also offered a boost to the creative industries. The Film Tax Relief will be increased to 25 percent, and the distinction between limited budget films and all others will be removed. The minimum UK expenditure requirement for high-end Television Tax Relief will be reduced from 25 percent to 10 percent, and the cultural test will be modernized. Subject to state aid approval by the European Commission, these changes will have effect on or after April 1, 2015, or from the date of EU approval – whichever is later.

A fresh crack down on tax avoidance and evasion will raise GBP3.1bn over the forecast period. Osborne clarified that the Diverted Profits Tax (DPT), announced at the 2014 Autumn Statement, will enter into force from April 2015, and confirmed that the Government will legislate for the Common Reporting Standard, which provides for the automatic exchange of tax information between tax authorities internationally. Corporation tax rules will be amended to prevent companies from obtaining a tax advantage by entering into "contrived" arrangements to convert forward reliefs into in-year deductions. This change will have effect for the purposes of calculating a company's taxable profits for corporate tax purposes for accounting periods beginning on or after March 18, 2015.

In addition, businesses will no longer be able to take into account foreign branches when reclaiming value-added tax (VAT) on overheads. The Government will also clamp down on agencies and umbrella staff who abuse tax reliefs on travel and subsistence and close loopholes to ensure that Entrepreneurs Relief is only available to those selling genuine stakes in businesses.

The Budget also featured the following announcements:

  • The bank levy will increase to 0.21 percent, raising an additional GBP900m a year;
  • Banks will no longer be able to deduct from corporation tax the compensation they make to customers for mis-sold products;
  • The Government will legislate to clarify the effect of the capital allowances anti-avoidance rules where there are transactions between connected parties or sale and leaseback transactions;
  • The Government will act to make clear that to qualify for the capital gains tax (CGT) exemption for gains accruing on the disposal of certain wasting assets, an asset must have been used in the business of the person disposing it;
  • The rate of income tax relief for investment in a Social Venture Capital Trust Scheme (Social VCT) will be set at 30 percent, and investors will pay no tax on dividends received from a Social VCT or capital gains tax on disposals of shares in Social VCTs;
  • The Government will conduct a review into the avoidance of inheritance tax through the use of deeds of variation;
  • The Lifetime Allowance (for pensions savings) will fall from GBP1.25m to GBP1m in 2016, and will be indexed from 2018;
  • The 55 percent tax on the sale of annuities will be abolished, and tax will be applied at the marginal rate;
  • A tax-free allowance of GBP1,000 (or GBP500 for higher rate taxpayers) will be introduced for interest on savings from April 2016;
  • Changes to Individual Savings Accounts (ISAs) will mean that taxpayers will be able to take money out and put it back in later in the year without losing any of their tax-free entitlement;
  • Under a new "Help to Buy ISA," the Government will top-up every GBP200 saved by first time buyers toward their deposit with an additional GBP50, up to a maximum GBP3,000;
  • The annual tax return will be abolished, and information on a majority of taxpayers will be automatically added to new digital tax accounts;
  • Class 2 National Insurance contributions will be abolished for the self-employed;
  • The rate of the new transferable tax allowance for married couples will rise to GBP1,100;
  • Beer duty will be cut by GBP0.01, the duty on cider, Scotch whisky, and other spirits will be cut by two percent, and wine duty will be frozen;
  • The fuel duty increase, scheduled for September, has been canceled;
  • Palliative care charities will be able to reclaim the VAT they incur on purchases made to support their non-business activities; and
  • Medical courier charities will be able to reclaim the VAT incurred on the purchase of goods and services, and the acquisition and importation of goods from outside the UK, used for their non-business activities.

Commenting on the Budget, Lee McGuirk, Media Partner at DLA Piper, said: "The reforms to tax credits that have been announced by Osborne are extremely positive for the creative industries in light of an increasingly competitive TV and film incentive market. Accessing incentives to maximize financing for a production is now key. More than ever this shapes where productions are shot. On the back of comparable incentive improvements in the last six months from Ireland, Hungary, and Spain, Britain will welcome today's announcement. However, this comes with a health warning as it is subject to state aid approval - which can take up to six months - and with the general election on the horizon, the changes could be short-lived."

Sally Brown, Tax Associate at DLA Piper, added: "The Annual Investment Allowance ("AIA") which gives a 100 percent allowance for qualifying expenditure on plant and machinery incurred by companies is now unlikely to be reduced to GBP25,000 at the end of 2015. Osborne announced he would address this properly in the Autumn Statement later this year, but the AIA (currently GBP500,000) will be set at a rate "much more generous" than GBP25,000. This will give UK companies much needed comfort to continue to invest in the coming months. On-going investment is strongly linked to the continuing economic recovery of the UK, and is a move that I expect will be greatly welcomed by a wide range of business sectors, particularly for UK manufacturing companies."

TAGS: individuals | capital gains tax (CGT) | inheritance tax | tax | investment | business | value added tax (VAT) | tax avoidance | tax incentives | interest | accounting | budget | corporation tax | United Kingdom | tax thresholds | oil and gas | tax rates | charities | dividends | tax reform | individual income tax | services | Europe | Tax | Tax Evasion

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