Cuts in corporation tax and the promise of a £200,000 Annual Investment Allowance will improve the tax environment for business. But Chartered Accountants in practice won’t like the new notification obligations and penalty provisions featured in the Summer Budget.

Last month’s Summer Budget was much more than a mini-event or summer interim holding statement. Instead, it introduced significant business tax reform, confirmed a new focus against tax evasion and avoidance, and signalled an end to established tax treatments for pensions, dividends, non-doms and cars. The Government’s election manifesto tax promises, as expected, also featured. But there was no mention of any changes to the UK patent box regime despite the expectation that there would at least be a high level announcement.

A range of specific anti-avoidance measures come with a promise to require all financial intermediaries (including tax advisers) by law to notify their customers about exchange of information between revenue authorities, the penalties for evasion and the opportunities to disclose. Chartered Accountants Ireland is already in touch with HMRC to establish the proposed scope of this legislation and the implications for our members in business.

Let’s take a more detailed look at the tax announcements.

Northern Ireland

The Chairman of Chartered Accountants Ulster Society commented that the pro-business measures in the Summer Budget should help Northern Ireland. It is clear that the Chancellor sees a clear link between lower rates of corporation tax and job creation. This is no doubt a strong reminder to our politicians of the practical benefits attaching to a devolved rate of corporation tax for Northern Ireland. The promised lowering of corporation tax rates across the whole of the UK most certainly provides even greater impetus to resolve matters under the Stormont House Agreement to achieve an even more competitive rate for Northern Ireland.

In the words of the main Summer Budget document, “It is critical that the Northern Ireland parties deliver on the commitments they made at Stormont House, to ensure that the potential of the Agreement to support recovery and growth is realised.”

Income tax and capital gains tax

Rates and allowances

Keeping to their election manifesto promise, the government proposes to increase the personal allowance to £12,500 by the end of the current parliament. The personal allowance is currently £10,600 and will increase to £11,000 and £11,200 in 2016/17 and 2017/18 respectively. This is more than expected and previously announced in the March Budget.

As also promised pre-election, it remains the intention of the Government to increase the higher rate tax threshold to £50,000 by the end of the current parliament. Currently the income tax basic rate band is £31,785. A 0% starting rate band of £5,000 is available for certain types of savings income meeting specific conditions.

It was previously announced that the basic rate limit would be £31,900 and £32,300 for 2016/17 and 2017/18 respectively. These figures have now been further increased to £32,000 and £32,400. This means that the higher rate thresholds will be £43,000 and £43,600 in 2016/17 and 2017/18.

It is also intended to increase the national insurance contributions (NICs) upper earnings limit to ensure this remains aligned with the higher rate threshold.

The Chancellor also announced a further increase in the NIC employment allowance from £2,000 to £3,000 from April 2016. But, giving a very clear signal that this measure is aimed at encouraging employment, from the same date companies where the director is the sole employee will no longer be able to claim this.

The government will also actively monitor the growth of salary sacrifice arrangement schemes and their effect on tax receipts.

Tax locks

Legislation will be introduced to prevent an increase in the rates of income tax, NICs and VAT above their current (2015/16) levels for the duration of the parliament. This ‘tax lock’ will apply to the main rates of income tax, the standard and reduced rates of VAT, and employer/employee Class 1 NICs rates. The lock on income tax rates will apply to earnings income in England, Wales and Northern Ireland, and to UK-wide savings income. Scotland is excluded for obvious reasons.

The lock will also prevent the NICs upper earnings limit rising above the income tax higher rate threshold.

For income tax and VAT, the “lock in” legislation will take effect on whatever date the Summer Finance Bill 2015 receives Royal Assent. For NICs, this will take effect from Royal Assent of the National Insurance Contributions Bill.

Dividend tax reform

One of the surprise announcements was major reform to the way dividend income is taxed. From 6 April 2016 a new tax-free dividend allowance of £5,000 is to be introduced.

At the same time, the current dividend tax credit is to be abolished and new rates of dividend tax introduced of 7.5% for basic rate tax payers (currently an effective rate of 0%), 32.5% for higher rates taxpayers (currently 25%) and additional rate taxpayers will pay 38.1% (currently 30.56%).

The days of taking a dividend tax free from your company up to the higher rate threshold will be a thing of the past. These changes will most likely start to reduce the incentive to incorporate and remunerate through dividends, rather than wages, to reduce tax liabilities. The Summer Budget document poses that this will reduce the cost to the Exchequer of future tax motivated incorporation by £500 million a year from 2019–20.

Non-doms

Non-dom taxpayers came under the spotlight at the recent election. The March Budget had already signalled changes were afoot in this area. The announcements last week go some way to limiting the tax advantages of this status but stopped short of abolishing the regime in its entirety, wisely in recognition of the overall contribution non-doms make to the UK economy.

From 6 April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for tax purposes. Thus permanent non-dom status will be a thing of the past from the 16th year of UK residence. A detailed note explaining these proposals has been published alongside the Summer Budget. A technical consultation will be published later in the year.

Once the non-dom who has become deemed domiciled under the 15 year rule leaves the UK and spends more than 5 tax years outside the UK they will at that point lose their deemed tax domicile (‘the 5 year rule’).

From April 2017, individuals who are born in the UK to UK domiciled parents will no longer be able to claim non-domicile status whilst they are resident in the UK.

Following the consultation announced at Autumn Statement 2014, and as a result of wider reforms to the taxation on non-UK domiciled individuals, the government has decided to abandon introducing a minimum claim period for the remittance basis charge.

Overall, the measures may make non-dom status less contentious while simultaneously protecting the UK’s attractiveness as a location for wealthy individuals and entrepreneurs.

Corporation tax

Rates

Prior to the election the Government had pledged a triple lock on tax – namely no rises in rates of income tax, national insurance or VAT. But corporation tax did not feature in that promise.

A surprise announcement was the proposal to cut the rate of corporation tax further, from 20% to 19% in 2017 and to 18% in 2020. So by 2020 the rate of corporation tax in the UK will have fallen a staggering 10% from its starting point of 28% in 2010.

Instalment payments for larger companies

The Chancellor announced that companies with annual taxable profits of £20 million or more will now have to pay corporation tax earlier, with quarterly payments all due within the accounting period rather than, as now, two instalments being paid after the end of it.

Where a company is a member of a group, the £20 million threshold will be divided by the number of companies in the group. The measure will apply to accounting periods starting on or after 1 April 2017 with these companies required to make corporation tax payments in the third, sixth, ninth and twelfth months of their accounting period. The government will publish legislation in draft in the autumn for this measure.

Goodwill

The ability of a company to obtain tax relief for purchased goodwill and customer-related intangible assets was removed with immediate effect. Allegedly consistent with the rules in other major economies, this change was surprising but only impacts future purchases of assets from 8 July 2015. It comes in the wake of the removal of tax relief for goodwill on incorporation of a sole trade/partnership from 3 December 2014 as a result of the Finance Act 2015.

Business tax roadmap

The government will publish a business tax roadmap by April 2016, setting out plans for business taxes over the rest of the Parliament.

Capital allowances Annual Investment Allowance (AIA) limit

The Chancellor also announced that the future level of the AIA limit would not revert from £500,000 to £25,000 in January 2016 but instead be set at £200,000 for the life of this parliament. This should at least provide certainty and allow businesses to plan their capital expenditure.

Pensions landscape continues to shift

Annual allowance

Probably one of the most unstable areas of the UK tax regimes given the numerous changes in this area in recent years, more changes were announced to how tax relief is given for pension contributions. No doubt this will cause headaches for employees, employers and pension schemes.

From April 2016 a taper will be applied to the current £40,000 annual allowance for those with adjusted annual incomes, including their own and employer’s pension contributions, over £150,000. For every £2 of adjusted income over £150,000, an individual’s annual allowance, the limit on the amount of tax relieved pension saving that can be made by an individual or their employer each year, will be reduced by £1, down to a minimum of £10,000.

To ensure this measure is focused on those currently gaining the most benefit from pensions tax relief, those with income, excluding pension contributions, below a £110,000 threshold will not be subject to the tapered annual allowance.

Reform of pensions tax relief ?

The government also wants to make sure that the right incentives are in place to encourage saving into pensions in the longer term. A consultation has thus been launched on whether there is a case for reforming pensions tax relief to strengthen incentives to save, offering savers greater simplicity and transparency, or whether it would be best to keep the current system.

The government is interested in views on the various options that have been suggested for how the system could be reformed. These range from a fundamental reform of the system (for example moving to a system which is “Taxed-Exempt-Exempt” like ISAs and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances), as well as options in between.

Inheritance Tax

Main residence allowance

Probably the least surprising announcement, a new inheritance tax transferable nil nil-rate band will be introduced from April 2017 with the objective of taking the family home out of inheritance tax for all but the wealthiest.

This will apply when a main residence is passed on death to direct descendants, such as a child or grandchild. The allowance will be £100,000 in 2017–18, £125,000 in 2018–19, £150,000 in 2019–20, and £175,000 in 2020–21. This is in addition to the current inheritance tax nil-rate band, which is set at £325,000 for the estates of individuals.

The measure thus creates an effective £500,000 inheritance tax threshold for estates from 2020–21. As with the current nil-rate band, any unused main residence nil-rate band will be transferable to a surviving spouse or civil partner giving a potential effective inheritance tax threshold of £1 million from 2020–21.

Offshore structures targeted

From 6 April 2017, inheritance tax will be payable on all UK residential property owned by non-domiciles, regardless of their residence status for tax purposes, including property held indirectly through an offshore structure. A detailed consultation will follow later this year (Finance Bill 2017).

Deemed domicile

As noted earlier, the point at which an individual who is classed as a non-domicile is deemed domiciled for inheritance tax purposes is being brought forward to 15 out of the previous 20 years. This aligns inheritance tax with the changes to the income tax and capital gains tax regime and will take effect from 6 April 2017 (Finance Bill 2016).

The government intends to consult on whether other provisions need to be changed such as IHTA 1984 s267ZA (spousal election to be domiciled in the UK) and the effect of the change in relation to certain old estate duty treaties.

Property

Restriction of interest relief for landlords

Mortgage interest relief for individual landlords who use loans to finance buy-to-let properties will be restricted to basic rate (20%). This restriction will be phased in over four years, starting from 6 April 2017. Legislation to do so will be included in the Summer Finance Bill 2015.

Wear and tear allowance

From 6 April 2016, landlords letting out furnished property lose the current 10% wear and tear allowance. This will be replaced by a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets. The government has now published a technical consultation on this with the legislation to be included in the Finance Bill 2016.

Rent-a-room relief

Recognising that this has not changed in a number of year, rent-a-room relief will increase to £7,500 from £4,250 from 6 April 2016.

Anti-avoidance/evasion appears again

Additional HMRC resources

The Budget announced significant additional investment in HMRC’s work on noncompliance and tax evasion covering a range of areas. £800 million is earmarked to be invested over the lifetime of the current Parliament which will include tripling the number of criminal investigations that HMRC can undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the Parliament.

New powers

Legislation will be introduced to improve the transparency of tax strategies and give HMRC new powers to tackle businesses who persistently engage in aggressive tax planning. HMRC will be given the power to acquire data from online business intermediaries and electronic payment providers to help identify businesses that are trading but not declaring or paying tax. HMRC will consult on these proposals in July 2015.

A number of tax avoidance schemes were also closed down from 8 July 2015. The use of losses against tax that should be paid through the Controlled Foreign Companies rules will no longer be possible.

IR35

This long running saga continues. The government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation and a discussion document has recently been published in this area.

Wealthy individuals

The government plans to consult on enhancing the information reported to HMRC by wealthy individuals and trustees, and is extending HMRC’s use of dedicated Customer Relationship Managers to individuals with net wealth between £10 million and £20 million.

Serial offenders

Plans were announced to strengthen the penalty for serial offenders and the government intends to consult on the technical details of introducing tougher measures for those who persistently enter into tax avoidance schemes that fail, including a surcharge on those whose latest tax return is inaccurate due to use of a failed scheme and publishing the names of such avoiders.

GAAR penalties

Following the announcement at Budget 2015, the government will also consult on the detail of a new General Anti-Abuse Rule (GAAR) penalty. The GAAR penalty will be proportional to the amount of tax recovered by the GAAR.

Financial Intermediaries

As previously mentioned, the government will legislate to require financial intermediaries (including tax advisers) to notify their customers about the Common Reporting Standard, the penalties for evasion and the opportunities to disclose (Summer Finance Bill 2015).

Indirect taxes

VAT rate lock down

Provisions will prevent the removal of any items from the VAT reduced rate and zero rate, for the duration of the current parliament.

Insurance

From 1 November, the standard rate of Insurance Premium Tax will be increased from 6% to 9.5%.

The government will apply VAT ‘use and enjoyment’ provisions so that from next year, it will be clear that all UK repairs made under UK insurance contracts will be subject to VAT in the UK. This is intended to deter insurers from routing costs via offshore associates and ensure UK VAT is accounted for an all repair services on UK insurance contracts.

In addition, the government will consider a wider review of off-shore based avoidance in VAT exempt sectors, with a view to introducing additional use and enjoyment measures for services such as advertising in the following year.

VAT refunds for shared services

The government will legislate to refund to eligible public bodies the VAT incurred on specified shared services (Finance Bill 2016).

Miscellaneous announcements

Digital Tax Accounts

At March Budget 2015, the government announced it would transform tax administration for individuals and small businesses over this Parliament. It is intended that small businesses will be able to manage their tax through a digital account linked to business software.

HMRC will begin discussions with businesses and software providers about how best to integrate tax reporting and payment with everyday business activity, to inform a roadmap the government will publish by the end of 2015 setting out the policy and administrative changes needed. Chartered Accountants Ireland will be involved in this process where necessary.

Banking tax reform

The Budget set out a long-term roadmap for the taxation of banks involving three steps:

• the introduction of a new tax on banking sector profit from 1 January 2016, set at a permanent rate of 8%;
• a phased reduction of the bank levy rate; and
• a change in the bank levy’s scope from 1 January 2021, meaning that UK headquartered banks are levied on their UK balance sheet liabilities

The government will extend the £25 million allowance within the bank loss relief legislation to cover banks incorporated under the 1819 Savings Bank Act. The effect of this extension will be backdated to 1 April 2015 (Summer Finance Bill 2015).

Extending averaging for farmers

As announced at March Budget 2015, the averaging period for farmers will be extended from 2 years to 5 years as of April 2016. The government has now published a consultation on the detail of the extension (Finance Bill 2016).

Taxation of sporting testimonials

Following a call for evidence on extra statutory concessions in 2014, the government is currently consulting on proposals for reforming the rules on the tax treatment of payments made from sporting testimonials. The consultation is expected to conclude ahead of Autumn Statement 2015.

Reform of vehicle excise duty (VED) rates and bands for post-2017 cars

The government will introduce a new VED banding system for cars registered on or after 1 April 2017. First year rates will vary according to the carbon dioxide emissions of the vehicle.

There will be a flat standard rate of £140 for all cars except those emitting 0 grams of carbon dioxide per kilometre (gCO2/km), for which the standard rate will be £0. Cars with a list price above £40,000 will attract a supplement of £310 per year for the first 5 years in which the standard rate is paid. The new VED system will be reviewed as necessary to ensure that it continues to incentivise the cleanest cars.