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Surprise Tax Policies In UK's 2016 Budget

by Robert Lee, Tax-News.com, London

17 March 2016


The UK's 2016 Budget includes plans to overhaul the business rates (property tax) regime, cut taxes for lower- and middle-income earners, and reduce capital gains tax rates.

George Osborne delivered his eighth Budget as Chancellor on March 16. According to Osborne, his Budget is "one that reaches a surplus so that the next generation doesn't have to pay our debts. One that reforms our tax system so that the next generation inherits a strong economy... This is a Budget that gets investors investing, savers saving, businesses doing businesses – so that we build for working people a low-tax, enterprise Britain, secure at home, strong in the world."

Prominent among Osborne's announcements was the publication of the business tax roadmap he promised in his 2015 Autumn Statement. This plan, which builds on the Coalition Government's 2010-2015 corporate tax roadmap is designed to "deliver a low-tax regime that will attract the multinational businesses we want to see in Britain, but ensure that they pay taxes here too. And it will level the playing field, which has been tilted against our small firms."

In delivering on the roadmap, Osborne will increase the small business rate relief threshold from GBP6,000 (USD8,582) to a maximum of GBP15,000. In addition, the threshold for the higher rate will increase from GBP18,000 to GBP51,000.

The administration of business rates will be simplified, and from 2020 the uprating mechanism will be switched from the Retail Price Index to the Consumer Price Index. The Greater London Authority will move towards full retention of its business rates from April 2017.

Osborne explained: "From April next year, 600,000 small businesses will pay no business rates at all. That's an annual saving for them of up to nearly GBP6,000 – forever. A further quarter of a million businesses will see their rates cut."

The other major reforms included in the roadmap are as follows:

  • The corporation tax rate will be reduced to 17 percent by 2020, rather than the scheduled fall to 18 percent;
  • From April 2017, the Government will restrict interest deductibility for the largest companies to 30 percent of UK earnings;
  • The maximum amount of profits that can be offset using past losses will be restricted to 50 percent;
  • The proportion of a banking company's annual taxable profit that can be offset by brought forward losses will be restricted to 25 percent from April 1, 2016;
  • New hybrid mismatch rules will "stop the complex structures that allow some multinationals to avoid paying any tax anywhere, or to deduct the same expenses in more than one country;"
  • New legislation will align the UK deduction of tax at source regime for royalties with UK taxing rights over such income;
  • The definition of "transfer pricing guidelines" will be updated to incorporate recent revisions to the Organisation for Economic Cooperation and Development's (OECD's) transfer pricing guidelines;
  • 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;
  • Plans to more closely align payment dates for the largest firms to when profits are earned will be pushed back to April 2019;
  • Overseas suppliers will be prevented from storing goods in Britain and selling them online without paying VAT; and
  • New tax-free allowances will be introduced for trading and property income for start-ups.

On personal income tax, Osborne will implement a key Conservative manifesto pledge to increase the entry threshold for the "higher" (40 percent) tax rate. The threshold will rise from GBP42,385 to GBP45,000 from April 2016. "That's a tax cut of over GBP400 a year. It is going to lift over half a million people who should never have been paying the higher rate out of that higher tax band altogether," he said.

At last year's general election, the Conservatives also promised to increase the tax-free personal allowance to GBP12,000 over the life of the current Parliament. In line with this commitment, the allowance will increase to GBP11,500 from April 2017. It is already due to rise to GBP11,000 next month. According to Osborne, this measure "means a typical basic rate taxpayer will be paying over GBP1,000 less income tax than five years ago. And it means another 1.3m of the lowest paid taken out of tax altogether."

Somewhat more surprisingly, Osborne unveiled plans to slash the headline rate of CGT from 28 percent to 20 percent. In addition, the CGT paid by basic-rate taxpayers will be cut from 18 percent to 10 percent. These reductions will take effect next month. The current rates will however be retained for gains on residential property and carried interest. A new 10 percent rate will apply on long-term external investment in unlisted companies, up to a separate maximum of GBP10m of lifetime gains.

Also unexpected was Osborne's 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 remaining tax-related measures included in the Budget are as follows:

  • Class 2 National Insurance contributions will be abolished from 2018;
  • The annual Individual Savings Account (ISA) contribution limit will increase from GBP15,000 to GBP20,000 from April 2017;
  • The rates of commercial stamp duty will be reformed, with the introduction of: a zero rate band on purchases up to GBP150,000; a two percent rate on the next GBP100,000; and a five percent rate above GBP250,000;
  • The Carbon Reduction Commitment will be abolished and the Climate Change Levy will rise from 2019;
  • The Supplementary Charge on oil and gas (payable in respect of adjusted ring fence profits) will be halved from 20 percent to 10 percent;
  • The Petroleum Revenue Tax will be reduced from 35 percent to a zero rate;
  • GBP12m raised by the VAT on sanitary products will be allocated to women's charities;
  • Fuel duty will be frozen for a sixth year in a row;
  • Tobacco duty was increased by two percent above inflation from March 16, and loose tobacco rose by an additional three percent; and
  • The duties on beer, cider, and spirits will be frozen.

TAGS: capital gains tax (CGT) | Insurance | tax | investment | small business | business | value added tax (VAT) | interest | royalties | banking | corporation tax | United Kingdom | oil and gas | multinationals | legislation | transfer pricing | stamp duty | charities | inflation | Tax

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