The Chancellor of the Exchequer George Osborne announced the 2016 Budget last month on 16 March. Despite there being little wriggle room where public finances are concerned, the Chancellor still pulled some rabbits out of his Budget hat, just in time for the Easter break.

As expected, a new Business Tax Road Map formed a significant element of a package of mainly pro small-business measures including a commitment to further reduce the rate of corporation tax to 17 percent from 1 April 2020.

Headline business items

These included:

• Cuts in capital gains tax rates from 28 percent to 20 percent and 18 percent to 10 percent for business asset categories
• The abolition of Class 2 NIC contributions from April 2018
• A fixed ratio rule limiting corporation tax deductions for net interest expenses of large multinational enterprises
• Reforms to the hybrid mismatches rules and the patent box regime
• Greater flexibility on use of losses forward from 2017, though tempered with loss offset restriction rules for larger companies and financial institutions
• A move to “pay as you go” tax payments from 2018; optional for smaller businesses and landlords
• Legislation promised for enhanced capital allowances within the Coleraine enterprise zone
• An increase in the rate of tax on loans to participators, from 25 percent to 32.5 percent, from 6 April 2016

Grabbing the headlines more generally were exemptions announced for the first £1,000 of trading income and property income, along with the introduction of a sugar tax.

Lifetime individual savings account (ISA)

Proposals to undertake a major reform of pensions tax relief were shelved, although a new lifetime ISA for those under 40 that might be a model for the pension of the future was announced. Under this new flexible lifetime ISA, people will be able to save up to £4,000 each year and receive an additional 25 percent bonus from government. The current ISA limit was also increased to £20,000.

Northern Ireland corporation tax on track?

The Chancellor’s comments during his Budget speech and further reference to Northern Ireland corporation tax in the accompanying Budget documentation make very clear that the impetus for “switching on” the regime in 2018 remains with NI’s political leaders. They are being urged to press on with the reforms necessary to put the Executive’s finances on the sustainable footing required to complete corporation tax devolution.

With just over two years to go to the proposed introduction of a 12.5 percent rate of corporation tax for NI, are you ready for the change?

In the meantime the Coleraine Enterprise Zone forges ahead, some two years after it was announced in Budget 2014. The boundaries of this pilot enterprise zone have finally been set with the first investors expected on site later in 2016.

The Budget also confirmed that where the Northern Ireland Executive tops-up UK-wide benefits from within its block grant (as it implements welfare reform), the government will exempt from tax the top-up payments of non-taxable benefits.

Corporation tax positives and negatives

Changes to the UK corporation tax regime featured a mix of positives and negatives. It’s quite clear from the positives that the Chancellor’s largesse is focused on smaller business especially those in the SME sector. Measures designed to curb big business also featured.

Rate of corporation tax

In the last parliament, the main rate of corporation tax was cut from 28 percent to 20 percent. In a major simplification of the corporation tax system, the small profits rate was also cut to 20 percent, and the two rates unified from 1 April 2015.

Future reductions in this unified rate had already been announced: to 19 percent from 1 April 2017 and 18 percent from 1 April 2020. Budget 2016 announced that corporation tax will fall 2 further percentage points from 1 April 2020 to 17 percent. Clearly aimed at ensuring the UK has the lowest tax rate in the G20.

Loans to participators

Despite a consultation in this area concluding that changes would not be made to this regime, the Budget unexpectedly announced an increase in the rate of tax payable by close companies under the loans to participators rules. The change means that this tax mirrors the higher rate of dividend tax which moves to 32.5 from 6 April 2016 with the notional 10% tax credit no longer available.

The tax rate will be increased from 25 percent to 32.5 percent in April 2016, with effect for loans, advances and arrangements made on or after 6 April 2016.

Corporation tax loss relief

Under the current rules, losses carried forward can only be used by the company that incurred the loss, and not used by other companies in a group. In addition, some losses carried forward can only be set against profits from certain types of income; for example trading losses can only be set against trading profits. The Budget announced changes intended to make these rules more flexible.

For losses incurred on or after 1 April 2017, businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group. However this positive change was tempered by the announcement that from the same date the amount of profit that can be reduced by carry forward losses will be restricted to 50 percent. This restriction will apply only to profits in excess of £5 million.

From 1 April 2016, the amount of profit that banks can offset with pre-2015 losses is reduced from 50 percent to 25 percent.

Interest cap

Following a recent consultation examining proposals to cap relief for interest and related finance costs of companies, relief will be capped to 30 percent of taxable earnings in the UK or based on the net interest to earnings ratio for the worldwide group. The rule will include a threshold limit of £2 million net UK interest expense.

The NI Tax Committee in its submission to this consultation expressed its concern regarding the potential impact of these proposals on certain sectors, including public infrastructure. Pleasingly, this rule will make provision for public benefit infrastructure, though details are not clear as yet.

Earlier corporation tax payments for large companies

At Summer Budget 2015, the government announced that corporation tax payment dates for the largest and most profitable companies – those with profits in excess of £20 million – would be brought forward, so tax is paid closer to the point at which these companies make a profit. These companies will be required to make payments in the third, sixth, ninth and twelfth months of their accounting period.

This measure is now being deferred to give businesses more time to prepare for the transition to the new payment schedule and will now apply to accounting periods starting on or after 1 April 2019.

Royalty withholding tax

Perhaps not unexpectedly given recent controversy in this area, a UK withholding tax will be introduced for royalty payments. The deduction of tax at source regime is to be amended to bring all international royalty payments arising in the UK within the charge to income tax, unless those taxing rights have been given up under a double taxation agreement or the EU Interest and Royalties Directive. The reform will comprise three distinct strands.

Capital gains tax changes focus on entrepreneurs

A number of proposed changes to the capital gains tax (CGT) regime were made with a clear focus on benefiting entrepreneurs. Some measures are clearly designed to pull-back on recent restrictions to entrepreneurs’ relief (ER).

Interestingly, the government will also add CGT to the list of taxes that may be collected on a provisional basis. However, worryingly, the government also intends to review the definition of a trading company for ER purposes.

Rate changes

From 6 April 2016, the higher rate of CGT falls from 28 percent to 20 percent. Gains within the basic rate fall from 18 percent to 10 percent. An 8 percentage point surcharge will apply to these rates where the gains relate to carried interest and disposals of residential property – in effect no reduction for these categories of asset.

ER

This relief will be extended to long term external investors in unlisted trading companies. The extension will provide a 10 percent rate of CGT for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016. This relief will apply to a separate lifetime limit of £10 million of such gains.

ER on associated disposals

ER will be available on the disposal of a privately-held asset when the accompanying disposal of business assets is to a family member. These changes take effect for disposals made on or after 18 March 2015.

Goodwill and incorporations

After previously banning ER on goodwill gains arising on incorporation, ER can be claimed, subject to certain conditions, on gains on the goodwill of a business when that business is transferred to a company controlled by five or fewer persons or by its directors. This change will have retrospective effect for transactions on or after 3 December 2014.

Joint ventures and partnerships

The government will allow ER to be claimed in some cases involving joint ventures and partnerships where the disposal of business assets does not meet the existing 5 percent minimum holding conditions. These changes will take effect for disposals made on or after 18 March 2015.

Income tax changes aimed at fulfilling election promise

The last two Budgets focused on tax changes designed to encourage savers. This time around the emphasis was on making progress towards achieving the government’s election manifesto promise of increasing the higher rate tax threshold to £50,000 by the end of the current parliament with a further promise to increase the personal allowance to £12,500 in that timescale.

Rates and thresholds

The personal allowance in 2017/18 will be £11,500 and not £11,200 as previously-announced. The income tax basic rate band for 2016/17 remains unchanged at £32,000 with a 0 percent starting rate band of £5,000 for certain types of savings income and new personal savings and dividend tax-free allowances.

The government previously announced that the 20 percent basic rate limit would be £32,400 for 2017/18. This has now been increased to £33,500. Taken together, these changes increase the higher rate threshold above which individuals pay income tax at 40 percent to £45,000 in 2017/18. The national insurance contributions (NIC) upper earnings limit will also increase to remain aligned with this threshold.

Property and trading income allowances

From April 2017, a new £1,000 allowance for property income and a similar allowance for trading income will be available. Individuals with property income or trading income below £1,000 will no longer need to declare or pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance.

Termination payments

From April 2018, the scope of the exemption for termination payments will be tighter and legislation in this area will align the income tax and NIC rules.

Currently, certain forms of termination payments are exempt from employee and employer NIC and the first £30,000 is income tax free. The first £30,000 of a termination payment will remain exempt from income tax and the full payment will be outside the scope of employee NIC.

However, employer’s NIC on such payments will be aligned with the income tax treatment, so that amounts over £30,000 will be subject to employer’s NIC if they are subject to income tax. The rules on which types of payments will be treated as salary and those subject to the termination payment rules will also be tightened and clarified.

Making tax digital

We may have expected to hear more in the Budget on this contentious project, but new details were scant. As we’ve been promised close consultation, perhaps that’s not a bad thing.

Pay as you go

From 2018 businesses, self-employed people and landlords who are keeping records digitally and providing regular digital updates to HMRC will be able to adopt “pay as you go” tax payments. This will be optional only, according to the Budget publications.

And as promised before, we can expect the government to consult on these measures in 2016 alongside publishing detailed proposals for other elements of the Making Tax Digital programme announced previously including the format and content of the quarterly updates (Finance Bill 2017).

Once the formal consultations have been launched, the Institute’s Northern Ireland Tax Committee intends to begin a programme of engaging directly with members with a view to making robust, representative and comprehensive submissions on this important project.

Stamp duty land tax reform continues

The reform of stamp duty land tax (SDLT) continued with the announcement of a new slicing system for non-residential property transactions. This follows on from the slicing regime introduced from 3 December 2014 for residential property.

New rates and banding for non-residential property

From 17 March 2016, SDLT is now payable on the portion of the transaction value which falls within each tax band. The new rates will be 0 percent for the portion of the transaction value between £0 and £150,000; 2 percent between £150,001 and £250,000; and 5 percent above £250,000. A new 2 percent rate will apply for leasehold rent transactions where the net present value is above £5 million. All leasehold rent transactions up to £5 million will remain unaffected.

These changes took effect on 17 March 2016. For transactions which had already exchanged contracts but not completed when the changes came into force, transitional rules are available to ensure taxpayers do not lose out.

Budget wrap up

The Budget also contained the now traditional plethora of anti-avoidance and evasion measures; many not unexpected. And HMRC has been set an ambitious compliance yield target for 2016–17 of £27 billion. Most prominent to many will be the new criminal offence for tax evasion that removes the need to prove intent for the most serious cases of failing to declare offshore income and gains. Whatever happened to mens rea?

A surprise announcement paved the way for a £71 million investment in HMRC, targeted at improving the service it provides to taxpayers. There were also the usual announcements relevant to VAT; from 1 April 2016, the VAT registration threshold increases from £82,000 to £83,000 and the deregistration threshold from £80,000 to £81,000.

Whilst beer, spirits and most ciders won’t be more expensive, the duty rates on most wines and higher strength sparkling cider increased by RPI from 21 March 2016. The standard rate of insurance premium tax will increase from 9.5 percent to 10 percent with effect from 1st October 2016. And gaming duty will also be raised in line with RPI for accounting periods starting on or after 1 April 2016. Duty rates on all tobacco products increased by 2 percent above RPI inflation and hand-rolling tobacco by an additional 3 percent above this rate, to 5 percent above RPI. The tobacco duty changes came into effect from 6pm on 16 March 2016.

Budget publications

The above is just a flavour of some of the key changes; if you peruse the Budget announcements and numerous accompanying publications you’ll see many more measures. Check out the Budget publications on GOV.UK on the main Budget 2016 webpage. One page also links to all the HMRC Budget 2016 tax-related documents and announcements.

As usual, the main Budget documents are the Red Book, and the Overview of Tax Legislation and Rates (OOTLAR). OOTLAR contains detailed tax information including tax information and impact notes on all the Budget and Finance Bill measures.

And don’t forget; many new measures announced during previous Autumn Statements and Budgets also take effect from 6 April 2016. The aforementioned OOTLAR is a useful summary of all measures effective 6 April 2016 (and et seq.) whether as a result of this or previous Budget/Autumn statement announcements.

As always, the devil is often in the detail – at the time of writing the Finance Bill 2016 had not been published. The aforementioned should therefore be read in that context.

Leontia Doran is the Institute’s UK taxation specialist

Email: leontia.doran@charteredaccountants.ie

Website: www.charteredaccountants.ie