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UK Chancellor Delivers Autumn Statement

by Robert Lee,

09 December 2013

UK Chancellor George Osborne has unveiled plans to tackle tax avoidance and evasion, lower the tax burden on businesses, and help families.

Osborne delivered his Autumn Statement yesterday, announcing to Parliament that economic growth is to hit 1.4 percent this year. This is up from the 0.6 percent forecast on Budget day in March. The Office for Budget Responsibility has also revised its figure for 2014, with growth expected to stand at 2.4 percent, rather than the 1.8 percent originally envisaged.

According to Osborne, this indicates that the UK is now "growing faster than any other major advanced economy." Unemployment will remain flat at 7.6 percent to the end of the year, but is projected to fall to 7 percent in 2015 and to 5.6 percent by 2018. The underlying deficit has dropped from the 11 percent recorded when the Coalition took office in 2010, to 6.8 percent for 2013. It will reduce to 5.6 percent next year, to 4.4 percent in 2015, and 1.2 percent in 2017-18.

Moving away from fiscal projections, Osborne turned to the contentious subject of tax avoidance. He stressed that if the UK hoped to have "sound public finances," it would need to boost its power to "collect the taxes that are due." Osborne's Statement includes what he says is the "largest package of measures to tackle tax avoidance, tax evasion, fraud and error so far this Parliament."

Among these initiatives is a crackdown on profit shifting by controlled foreign companies (CFCs). Osborne has "switched off" the partial exemption rules for loan relationship credits that arise from an arrangement which aims at transferring profits from existing intra-group lending, and out of the UK. This change is to apply to arrangements entered into, on, or after December 5, 2013. The anti-avoidance rule on the transfer of external debt to the UK is to be amended, to ensure that it works as intended. Accounting periods beginning on or after December 5 will be the first to be affected.

Specific action on avoidance schemes is also being taken. Schemes where deductions are claimed for payments between companies in the same group under derivative contracts, which are linked to company profits, will be blocked. Legislation will be included in Finance Bill 2014 to prevent a charity's entitlement to tax reliefs if one of the main purposes of establishing that charity is to avoid tax. The definition of a charity for tax purposes will be amended accordingly.

There will be a new information disclosure and penalty regime for high risk scheme promoters, with objective criteria and a higher standard of reasonable excuse and care to be implemented. Clients of such promoters will find themselves subject to new obligations, including the requirement to identify themselves to HM Revenue and Customs (HMRC).

Users of a scheme that HMRC has defeated in a tribunal or court hearing in another party's litigation will have to concede their position to reflect that ruling. HMRC will issue a notice to all users, stipulating that they must amend their return or advise HMRC as to why they believe they should not. A "tax-geared" penalty will be levied if the required amendments are not made and it is found that the scheme in question failed on the same point of law. Payment of the tax in dispute in an enquiry of this kind will be mandated when an "avoidance follower penalty notice" is issued.

HMRC will launch a project in early 2014 to ensure that it is ready to make sufficient use of data received under new exchange of information agreements (TIEAs). At Budget 2014, HMRC will consult on a range of enhanced proposals to penalize those "hiding" their money offshore. Onshore intermediaries will also feel HMRC's force, as existing legislation is to be strengthened to guarantee that the correct tax and national insurance contributions (NICs) are paid where a worker is employed.

Finally, a review of partnerships taxation will impact on mixed membership partnerships where partnership profits are allocated to a non-individual partner in circumstances where an individual member may benefit from those profits. In addition, the new regime will affect cases where partnership losses are allocated to an individual partner, instead of a non-individual partner, to enable the individual to access certain loss reliefs.

The Chancellor hopes that the package will generate an additional GBP9bn (USD14.7bn) over the next five years. Richard Mannion, national tax director at accountancy and investment management group Smith & Williamson, thinks this is over-optimistic, especially when "the work done to stamp out tax evasion and avoidance to date, and the receipts already generated," are taken into account.

Mark Saunders, tax director at PwC, also raised concerns about the ramifications of the partnership review. He admitted that "some businesses have exploited the use of partnerships to avoid national insurance contributions," but added that "in some professions, such as the legal sector, there are good commercial reasons why someone has the title of partner without having a real equity stake in the business."

Saunders warned that "it will be hard to work out where the dividing line is in practice between what's legitimate and disguised remuneration, and [the] changes move the bar much higher than expected. For the many law firms where salaried partners are off the payroll, the tax changes could mean crippling costs. It's not uncommon for half or two thirds of a law firm's partners to be salaried and off payroll. For a mid tier law firm the extra NIC bill could easily be over GBP1m, and across the sector as a whole the costs could run to many tens of millions a year."

Caution has similarly been sounded over plans to overhaul the capital gains tax (CGT) system and hike the banking levy.

From April, 2015, CGT will apply to gains made by non-residents on the sale of residential property in the UK. The Chancellor's justification for this was that it is "not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don't live here do not."

Craig Kemsley, partner and London head of private client tax at Grant Thornton, said that it was "important to bear in mind that this is not just a tax on rich foreign investors but will hit all non-residents including people who retire abroad and keep their UK property to rent it out." He thinks that the manner in which the tax is to be enforced and the money collected will be crucial in determining its success. It could "create a level playing field between UK and overseas investors, but there is a risk that any changes will create more of an administrative burden for the Government with little additional tax being raised ... [and] by trying to make it more difficult for overseas investors to invest into UK property we are potentially jeopardizing the significant other economic benefits they bring when investing in UK real estate, which should not be underestimated."

The Withers tax team, headed by Sophie Dworetzsky and Chris Groves, think the 2015 start date will invite an "interesting test of how much non-resident investors are in UK property for the long term, or whether we see a flurry of sales in the next 12 months. Equally, this gives a good window for alternative holding structures to be explored."

The rate of the bank levy is to rise to 0.156 percent, and its base will be broadened, from January 1, 2014. This could raise as much as GBP2.7bn in 2014-15 and GBP2.9bn in each year from 2015-16. Matthew Barling, PwC banking tax partner, described the increase as "a double hit for the UK's competitiveness - it makes the UK a less competitive location for banking business and it makes UK headquartered banks less competitive when doing business overseas. Seven rate rises in three years sends a stark message regarding whether Britain really is open for banking business."

As Osborne would see it, however, his Statement delivered plenty of good news. For instance, he committed the Government to taking "further steps to make our business taxes yet more competitive." Stamp duty will be abolished on shares purchased in exchange traded funds, the film tax relief will be made more generous, and a new tax break for investment in social enterprises and social impact bonds will be introduced.

Osborne will cap the inflation increase in business rates for all premises at 2 percent from next April, and businesses will be able to "pay their rates in 12 monthly instalments, and clear almost all of the backlog of valuation appeals by July, 2015, with reform of business rates on the agenda for the 2017 agenda." In an effort to regenerate the UK's high streets, every retail premises in England with a rateable value of up to GBP50,000 will have access to business rate discounts for the next two years. This could take up to GBP1,000 off their bills.

Yet even these efforts are regarded as "not enough" by some industry experts. David McCorquodale, head of retail at KPMG, explained that "rates have become one of the retail industry's biggest costs and biggest burdens, outpacing rents, revenue growth and curtailing the amount retailers are able to invest back into their businesses. A cap rather than a freeze still means a rise in costs."

For McCorquodale, "what is really needed is an urgent re-think and overhaul of the business rates system, which is simply no longer fit for purpose. Only a top to toe review will deliver a long term solution and allow the industry to move with the times. This should be done in 2014, not 2017."

The third and final cluster of the Chancellor's main tax-related reforms affects individuals and families. From April, 2014, the personal income allowance will reach GBP10,000, a tax cut Osborne says is worth up to GBP700 a year. From April, 2015, married couples will be able to take advantage of a transferrable tax allowance that will enable them to transfer GBP1,000 of their personal allowance to their husband, wife, or civil partner. An up-rating mechanism will automatically increase this allowance in line with the personal allowance.

Dominic O'Connell, Head of Tax, Trust & Estate Planning at Coutts, said that the group remains "mildly cynical about the real impact this will have and wonder whether a more universal tax break could not have been given to the lower paid."

As for "young people," employer NICs will be scrapped altogether in the case of employees under the age of 21. This was hailed by Confederation of British Industry Director-General John Cridland as likely to "make a real difference and help tackle the scourge of youth unemployment."

TAGS: individuals | court | capital gains tax (CGT) | compliance | Finance | tax | investment | business | tax compliance | tax avoidance | tax incentives | interest | revenue guidance | law | banking | insurance | employees | United Kingdom | tax thresholds | payroll | tax credits | offshore | agreements | unemployment | legislation | tax planning | tax rates | HM Revenue and Customs (HMRC) | tax breaks | revenue statistics | tax reform | retail | HM Revenue and Customs (HMRC) | trade | inflation | individual income tax | Tax | Tax Evasion

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