UK Autumn Statement 2012
We've gotten used to the Government's Autumn Statement being a bit of a damp squib in recent times but announcements on Wednesday 5 December were still closely watched by many and analysed at length by tax practitioners around the country.
Whilst the majority of the changes to rates, bands and allowances weren't much of a surprise in the well-known by now context of the Government's Programme for Government, there was the traditional glut of measures aimed at tackling avoidance which is seldom out of the news headlines these days.
Let's take a look at some of the tax measures included and consider some imminent changes in the UK tax arena.
Where does the Corporate Tax Reform Roadmap Stand?
The Chancellor's drive to make the UK the most competitive corporate tax regime in the G20 saw a further drop in the main rate of corporation tax from 1 April 2014. Currently the rate sits at 24%. A ‘1%’ fall from 1 April 2014 to 21% was announced. At Budget 2012 it was stated that the rate will be 23% at 1 April 2013. Does the Chancellor plan a further 1% fall to 22% beforehand?
Whilst there were no announcements in the statement on the reform of Controlled Foreign Company (CFC) legislation it is timeous to mention that the new rules shortly come into play for accounting periods beginning on or after 1 January 2013. HMRC continue to publish draft guidance for comment and updates to the guidance are available at http://www.hmrc.gov.uk/drafts/cfc.htm Guidance will continue to be developed and once final will then be incorporated into the International Manual in 2013.
Overall, the new regime is designed to reflect that businesses operate in a globalised economy whilst moving towards a more territorial corporate tax system and protecting the UK tax base.
Key features mean that the regime is more targeted by taking an “all out unless in” approach.
The main change is that for the first time, the legislation is based on the principle that overseas activities are not taxed in the UK unless there is an artificial reduction of the UK tax base. Additionally, where a CFC charge applies, it is now proportionate, targeting only profits that have been artificially diverted from the UK rather than being “all or nothing” as it currently is. A new Gateway is also used to specifically identify circumstances in which there has been an artificial diversion of UK profits. Companies have also been given a level of flexibility to self-assess using the entity level exemptions or the Gateway test.
It is also now just over 3 months until the new Patent Box regime comes into operation. The scheme is intended to encourage UK businesses to retain high-value jobs associated with commercialisation of patents and to invest further in innovation by providing a 10% corporate tax rate for profits from patents.
There a number of conditions to be met before a company can benefit – the company must be liable to Corporation Tax and must make a profit from exploiting patented inventions. It also must own or exclusively license-in the patents and must have undertaken qualifying development on them. Companies that are a member of a group may qualify if another company in the group has undertaken the qualifying development.
The regime only applies if a company owns or exclusively licenses in patents granted by the:
- UK Intellectual Property Office
- European Patent Office
- Certain specified countries in the European Economic Area
The full benefit of the regime is being phased in from 1April 2013 next and companies will need to apply the relevant percentages to the profits it earns from its patented inventions.
The appropriate percentages for each financial year are:
- 1 April 2013 to 31 March 2014: 60%
- 1 April 2014 to 31 March 2015: 70%
- 1 April 2015 to 31 March 2016: 80%
- 1 April 2016 to 31 March 2017: 90%
- from 1 April 2017: 100%
Other Business Tax Measures
A significant temporary increase in the Annual Investment Allowance was announced in the statement. From 1 January 2013 this will rise from £25,000 to £250,000 for two years; the Chancellor had previously reduced this from £100,000 to £25,000.
A simpler income tax scheme for small unincorporated businesses will be introduced from the tax year 2013–14. The scheme will allow eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. They will generally not have to distinguish between revenue and capital expenditure.
This new cash basis will apply to businesses with receipts of up to £77,000 who will be able to continue to use the cash basis until receipts reach £154,000.
All unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis rather than having to calculate actual amounts.
Budget 2012 previously announced that the Government will introduce corporation tax reliefs from April 2013 for the video games, animation and high-end television industries, subject to EU State Aid approval. Following consultation on their design, the Government plans to make these reliefs among the most generous in the world by offering a payable tax credit for all three worth 25% of qualifying expenditure.
Avoidance, Evasion et al
A major theme of the statement was one scarce out of the news headlines. Further measures to tackle evasion will be introduced to maintain the momentum from recent agreements with Switzerland and the US.
A further £77 million is planned to be invested in HMRC to increase revenues raised from tackling tax avoidance and evasion by:
- accelerating resolution of avoidance schemes;
- expanding HMRC's Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million;
- increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax; and
- improving HMRC's risking technology, including increased use of third party data.
It is also intended that this investment will be used to strengthen HMRC's risking capability for large business, including accelerating work on identifying and challenging transfer pricing arrangements and further strengthening risk assessment capability across the large business sector.
The UK's first ever General Anti-Abuse Rule will also come into operation next April with guidance and draft legislation due in December.
Other measures included:-
- consulting on the introduction of significant new information disclosure and penalty powers to target the promoters of aggressive tax avoidance schemes;
- closing down with immediate effect on 5 December five schemes associated with tax avoidance; and
- HMRC conducting a review of offshore employment intermediaries being used to avoid tax and NICs with an update to be provided at Budget 2013.
The Government is legislating to introduce a new employee shareholder status that will give staff a stake in their firms’ future success and offer businesses greater choice about the contracts they can offer to individuals.
Employee shareholders will have different employee rights and shares worth a minimum of £2,000 in the firm they work for.
As announced, from 6 April 2013 the Government will exempt gains on up to £50,000 of shares acquired by employee shareholders from capital gains tax. The Government is also considering options to reduce income tax and National Insurance contributions liabilities that arise when employee shareholders receive their shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive. This option would mean that the first £2,000 of shares received under the new status would be free from income tax and NICs.
For the tax year 2013–14 the Personal Allowance will increase to £9,440 and the basic rate limit will be set at £32,010. For 2013–14, there will be no changes to the percentage rate of contribution for Class 1 and Class 4 National Insurance contributions but there are (positive) changes to all of the thresholds and limits. The higher rate threshold for the 40% rate of income tax will increase by 1% to £41,865 (2014–15) and in 2015–16 it will be £42,285.
- the capital gains annual exempt amount will increase to £11,000 in 2014–15 and £11,100 in 2015–16; and
- the inheritance tax nil-rate band will increase in 2015–16 to £329,000.
The 3.02 pence per litre fuel duty increase that was due to take effect on 1 January 2013 will be cancelled and the increase that was planned for 1 April 2013 will be deferred until 1 September 2013.
Over the next three years, HMRC intends to significantly expand it's range of digital services:
- 20 million taxpayers will receive a Personal Tax Statement, showing how their tax is calculated and spent by government, and
- To provide a more joined-up digital experience for business customers, by providing an overview of their HMRC ‘account’ with links to all their online transactions.
Interestingly it also notes that these services will also be made available to tax agents to use on behalf of their clients under the proposals forming part of the ongoing Agent Strategy project.
Pensions Savings - Tax Relief
Pensions tax relief came under fire again with reductions in the annual allowance and the lifetime limit in future.
For tax year 2014–15 onwards:
- the annual allowance for pensions tax relieved savings will be reduced from £50,000 to £40,000
- the standard lifetime allowance for pensions tax relieved savings will be reduced from £1.5 million to £1.25 million
- a transitional ‘fixed protection’ regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance
Legislation will be introduced in Finance Bill 2013 to make these changes and will be published in draft this month.
The Government also announced that they will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.
The biggest decision relevant to Northern Ireland for many years now rests with the Prime Minister. The Joint Ministerial Working Group established to look at measures to rebalance the Northern Ireland economy held its fourth meeting in October and was due to report thereafter.
Chartered Accountants Ireland has long campaigned on the merits of a reduced rate of Corporation Tax in Northern Ireland. Though the costs are noted, there is strong evidence for the positive impact it will have. The Government's response is awaited with interest.
Readers are reminded that at the time of writing, draft Finance Bill 2013 clauses due to be available in early December had not been published. Therefore the aforementioned synopsis should be read in that context.
Finally, as is a tradition of the season, a very Merry Christmas and a Happy New Tax Year to you all.
Leontia Doran is Education and UK Taxation Specialist for Chartered Accountants Ireland.