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Finance Bill 2018-19

Our view – both good and bad

The Treasury has published draft provisions for Finance Bill 2018-19. This was first published for consultation on 6 July 2018. This publication of draft legislation ahead of its introduction to Parliament is part of the government’s tax policy making process, which was updated last December.

The draft legislation runs to some 222 pages, including 40 draft clauses and 8 detailed Schedules. As well as the draft legislation there has also been published 141 pages of explanatory notes!

In my mind, the jury is still out as to whether this early publication is good news or not. The good news is that there aren’t many headline surprises, as most of what’s in it has already been trailed either in the Autumn 2017 Budget or the 2018 Spring Statement. The bad news is that the draft rules are open for technical consultation until 31 August. More good news – few of the draft rules have immediate or retrospective effect with those that do mainly correcting original legislation so that it operates as it was intended. Bad news – it makes tax planning hard as genuine commercial transactions may be delayed pending certainty as to how the new rules will apply.

The main provisions concern the EU’s reporting requirements for cross-border tax planning, countering profit fragmentation, bringing non-residents’ gains on disposal of UK real property within the scope of CGT, and making changes to the penalty regime.

For me, the key change which is likely to affect many readers of this is changes to Entrepreneurs’ Relief where a shareholding is diluted below the 5% threshold (for shares not acquired through the EMI share option scheme route). The new measure will allow individuals whose shareholding is diluted below 5% as a result of new share issues (eg on a funding round) to obtain relief for gains up to that time. The measure will take effect for shares held at the time of fundraising events which take place on or after 6 April 2019. Two elections will be required and I will comment on these in more detail nearer to the date when the rules kick in.

 

 

 

 

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Spring Statement 2018

The Chancellor has presented his first Spring Statement. As expected, it was a short statement, which concentrated on giving headline economic figures, rather than any detailed tax changes. However, the Chancellor did launch several consultations which invite views on future changes to the tax system. We would expect legislation to be announced in the Budget in the autumn.

Interestingly, there were strong hints that the Autumn Budget might be very interesting. The Chancellor more than alluded to tax cuts and increases in public spending. Might this be clever timing in advance of a General Election, possibly as early as Spring 2019? We will see. The consultations announced are:

Reducing single-use plastic waste through the tax system

There will be a consultation as how best to use the tax system to encourage the responsible use of plastic. Some of the money raised from any tax changes will be used to encourage the creation of new, greener products and services. In addition, £20 million from existing budgets will be given to businesses and universities to research ways to reduce the impact of plastics on the environment.

https://www.gov.uk/government/consultations/tackling-the-plastic-problem

Making sure multinational digital businesses pay a fair share of tax.

The use of digital platforms for selling goods and services has changed the way in which traditional businesses operate. Digital businesses create value in a unique way, relying on the participation and engagement of their users. This is not always reflected in where such multinational businesses pay tax on their profits. There is also the risk that not all the VAT collected on digital sales ultimately is paid over to the Exchequer.

The government has set out its thinking as to how the tax system can change to give a fair result for digital businesses.

https://www.gov.uk/government/consultations/corporate-tax-and-the-digital-economy-position-paper

Seeking views on the role of cash in the new economy

Digital technology has changed the way people shop, sell, and save. While cash will continue to be an important method of payment, more people are moving towards digital payments every year.

The government is consulting on what more it can do to:

  • support people and businesses who use digital payments
  • ensure that those who need to are able to pay with cash
  • prevent the use of cash to evade tax and launder money

https://www.gov.uk/government/consultations/cash-and-digital-payments-in-the-new-economy

Supporting people to get the skills they need

Improving people’s skills benefits both individuals and the wider economy. To support upskilling and retraining, the government is consulting on extending the current tax relief to support self-employed people and employees when they fund their own training.

https://www.gov.uk/government/consultations/taxation-of-self-funded-work-related-training

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Budget Analysis – Autumn 2017

The Headlines

“The UK will be prepared for every possible Brexit outcome.” “At this Budget we choose a balanced approach.”

There was a lot of talk about encouraging innovation and technology but not a lot of real substance or new money/incentives. Investment in 5G and fibre broadband, and Artificial Intelligence. Yes, a few changes to EIS and R&D but is it enough?

A lot of detail on new industries and cash for different parts of the country – but is it enough given the productivity and growth decline?

Setting the scene

Philip Hammond’s first and last (?) autumn Budget was never going to be easy. Mr Hammond had very little room for manoeuvre – both politically and financially. The first Budget after a General Election is usually radical and far-reaching, but the Chancellor had no such freedom this time.

Quite a lot has changed in the time since the Spring Budget: the UK has triggered Brexit and begun negotiations on the terms of its departure from the EU.

Economic conditions have changed too, although there is fierce debate about how much of this is attributable to uncertainty and negativity over Brexit.

Inflation has risen to 3%, its highest level in five years, while growth has slowed down. But productivity is even worse than was thought. All the other announcements need to be taken in the light of this, which really is pretty bad news.

However, borrowing levels are at a 10-year low, giving Mr Hammond more flexibility, whilst employment remains at record levels.

So, what were the key announcements and what is either in the small print or likely to emerge over the coming days?

Vehicle Excise Duty: to be increased for most polluting diesel cars from 2018 (not vans). But £400m for electric car charging infrastructure. Electric car charging at work will not be a benefit-in-kind.

Personal allowance to rise to £11,850 from April 2018. Higher rate threshold to rise to £46,350 from April 2018.

Tax avoidance is yet again a theme. Further detailed and targeted package of measures forecast to raise £4.8billion by 2022/23.

Corporation tax on capital gains – indexation allowance abolished after January 2018.

R&D – the R&D expenditure credit (RDEC) to rise from 11% to 12% on 1 January 2018.

Enterprise Investment Scheme – changes for knowledge-intensive companies

  • Double the annual individual investment allowance to £2million
  • Double the annual investment that knowledge-intensive companies can receive to £10million
  • Further flexibility for these companies over how the 10-year maximum company age test for the first investment is applied

Entrepreneurs’ Relief – changes to qualifying rules to remove the disincentive to take on external investment.

VAT threshold (£85,000) NOT to be reduced (frozen for next two years at least) as widely expected but there will be consultation, particularly over “cliff-edge” problem.

Business rates increases set by CPI rather than RPI from 2018.

Royalty payments – income tax to be applied on UK sales where payments go to low tax jurisdictions even if not taxable in UK under domestic rules: from April 2019. Aimed at the large digital companies.

Corporate tax and the digital economy: a position paper has been published looking at the challenges imposed by the digital economy for the international corporate tax framework. Overall theme is that the value created by the participation of users in certain digital business is recognised in determining where those business’ profits are subject to tax.

Stamp Duty Land Tax (SDLT): First time buyers SDLT abolished on purchases up to £300,000. Also on first £300,000 of price up to £500,000. Equivalent to £5K cut for most first-time buyers. But if price over £500K there will be no relief at all.

Other points

  • Consultation on employment status following the Taylor Review
  • Consultation on the taxation of trusts to make simpler, fairer and more transparent
  • NIC changes delayed a year, so Class 2 NICs continue for at least another 12 months
  • Rent-a-room- relief to be looked at
  • Taxation of employee business expenses – some changes
  • ISA annual savings limit remains at £20,000
  • Pensions lifetime allowance to rise in line with CPI to £1,030,000 for 2018/19
  • Technical changes to SSE and share reorganisation provisions to prevent unintentional triggering of gains
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Budget 22 November – predictions

The Chancellor will deliver the second Budget of 2017 on 22 November.

Our view is that it could be one or two things. Either it could be a “steady as you go Budget”, no doubt making a number of small legislative changes, or it could be far more radical and seek to raise taxes overtly rather than covertly. Much of the detailed content is already known following a series of consultation documents and discussion papers over the past year or so. In many cases, draft legislation has been published for technical consultation, and we are expecting little more than a confirmation that the government intends to include the legislation in the Finance Bill 2018. So, what are the main areas that we expect the Chancellor to focus on?

Avoidance and evasion

As always, this is highly topical, particularly following the publication of the so-called “Paradise Papers” only a couple of weeks ago. We expect to see further detailed changes tackling certain tax avoidance schemes, and also some general measures. It is likely that there will be new penalties for offshore non-compliance, a requirement to notify HMRC of offshore structures, and details on tackling non-compliance through avoidance and evasion in the economy. Finally, we expect VAT to be brought fully into the disclosure regime and completely aligned with DOTAS.

Business tax measures

We expect a response to the consultation to extend corporation tax to non-resident companies. We would also not be surprised to see changes to the transfer pricing rules, in response to the consultation which closed on 18 August 2016. We hope that this will not bring an onerous compliance burden on SMEs, although it is an obvious area for the government to focus on.

Compliance

The making tax digital programme has been chaotic, and has already been put on hold once. We expect final versions of the draft regulations to implement quarterly reporting, and draft regulations issued for the implementation of MTD. There is also likely to be consultation on penalties for inaccuracies promised as part of HMRC’s MTD and hidden economy consultations.

Employment

Following the Taylor Review, we would not be surprised to see further efforts to align the employment status of self-employed people working in the so-called “gig economy” with that of normal employees. This has clearly been in the news a lot lately with a number of high-profile cases surrounding employment status. It is likely that there will be an announcement on draft legislation about the proposal to transfer PAYE and NI liabilities to employees involved in disguised remuneration schemes and other forms of non-cash payments. There is also likely to be draft legislation on tax relief for employees’ business expenses.

R&D and exploitation of IP

It is possible that further details of the review that was announced in the 2016 Autumn Statement will be given, although it may be that the recent launch of HMRC’s consolidated collection of R&D materials concludes its work in this area. We do not expect to see significant changes to the R&D tax credit regime, although we would like to see further clarification and an extension on the definition of intellectual property for tax purposes (at the moment it is too closely linked to exploitation of patents rather than IP in general).

Owner-managed businesses

Following a major review on the taxation of partnerships/LLPs, we expect to see confirmation that the draft legislation to amend the rules concerning the allocation of partnership profits will be included in the Finance Bill 2018. If this happens, any business operating as a partnership or LLP will need to quickly review its structure to determine whether a move to a corporate structure might be more beneficial.

We also expect to see a government response on streamlining the online assurance process concerning venture capital schemes and giving more certainty and clarity to companies looking to raise capital in these circumstances.

A few wild cards

There have been calls to radically reform SDLT in order to free up the housing market. Suggestions have been made that SDLT could be significantly reduced or even abolished, and replaced with some form of enhanced council tax (maybe going back more closely to the old property rates system). We consider that this is unlikely given the changes already made to SDLT to make it more gradual rather than chunky.

We have been predicting for some time, despite pledges made by the government, that one of the easiest ways to raise tax whilst giving some element of discretion as to how it is paid, is to raise the standard rate of VAT. We still think this would be a wise move and we suggest that the standard rate of VAT should be increased from 20% to 22%.

Finally, we would like to see some changes to capital gains tax, making entrepreneurs’ relief more certain, and the annual lifetime limit being increased from £10 million to £15 million.

We will be producing a detailed commentary as soon as the Chancellor has presented his Budget speech, and will then be issuing updates as the Finance Bill is published and debated.

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My very personal view on tax avoidance

I’m not going to mince my words. I think that tax avoidance is morally wrong. I have no time for it. I do not advise on it – I never have and I never will.

Not the view of many tax advisors, I appreciate that. But with such a spotlight on it at the moment, I think I have a duty to be clear to my clients where I stand. Let me explain more.

The Duke of Westminster’s case (Inland Revenue Commissioners v Duke of Westminster [1936] 19 TC 490) is often cited as one of the leading cases concerning tax avoidance. One of the judges, Lord Tomlin, famously said “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax”.

Although this ruling was attractive for many seeking to avoid tax legally by creating complex structures, it has since been weakened by subsequent cases where the courts have looked at the overall effect. An example of the courts’ later more restrictive approach was the Ramsay principle where, if a transaction had pre-arranged artificial steps that served no commercial purpose other than to save tax, the proper approach was to tax the effect of the transaction as a whole.

Tax avoidance, of course, is legal (tax evasion is illegal). But where is the boundary between tax avoidance and (my words) legitimate tax planning? To me, it’s very clear. Tax avoidance is using the tax law to obtain a tax advantage that was never intended, and often involves contrived or artificial steps that serve no real commercial purpose. On the other hand, tax planning involves using tax reliefs for the purpose for which they were intended.

Tax law offers many valuable tax reliefs – R&D tax credits/Patent Box/VCT and EIS/SSE to name but a few. Then there are all the corporate reorganisation provisions designed to permit companies to reorganise their structures without undue tax hardship. There are charitable reliefs such as Gift Aid. There are CGT and IHT reliefs. All of these are intended reliefs, and it is my job to ensure that individuals and companies are aware of them, use them in the proper way, do not lose out on valuable benefits, and apply them correctly to the scenarios they face.

Tax legislation is complex. It has to be to try and stop abuse. But in doing this, it can also make intended reliefs hard to understand. That is what I’m here for: to understand, analyse, interpret, and apply tax law correctly, fairly, in the way it was intended.

I might not like everything in our current tax law. I may not agree with how all our taxes are spent (but I certainly do not want hypothecation as that can lead to anarchy). When I don’t like something I can (and do) make formal representations. I try and effect change. And ultimately, like everyone, I can choose where I put my X on the ballot paper.

And to end, an apposite quote from the Roman, Cornelius Tacitus in “Agricola” in AD 98. “The Britons themselves submit to the levy, the tribute and the other charges of Empire with cheerful readiness, provided that there is no abuse. That they bitterly resent; for they are broken in to obedience, not to slavery.”

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Autumn Budget – 22 November 2017

Here we go again! And the next one is on……. 

Wednesday 22 November at 12.30pm.

This is the first of what will become an annual autumn Budget, and replaces the Spring Budget and the former Autumn Statement. It will now become the main announcement of tax and fiscal changes each year.

Of course, this year is slightly different. We’ve already had a Budget in March, and the Chancellor then announced that there would be another in November. But that was before the General Election was called. As a result of that, many of the Spring Budget proposals did not make the Finance Bill, which was truncated. It is expected that most, if not all of these proposals, will be reintroduced into the Finance (No 2) Bill 2017 and we can expect some other surprises. And most of the original proposals will be back-dated to be effective from either the Spring Budget date, 1 April or 6 April. Not retroactive, but getting close to it!

We will be looking at some of the expected changes over the coming weeks. However, with rising inflation, a hike in interest rates now more than just a possibility, and pressure on public pay settlements, this promises to be interesting times.

Watch this space for more!

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Finance Bill – yet more delays and uncertainty

The Government has announced that it intends to reintroduce the provisions withdrawn from the pre-election Finance Bill in a new Bill as soon as possible after the summer recess. Parliament returns on 5 September and we expect to see the new Bill published soon after that.

You may recall that as part of the announcements in the Queen’s Speech, it was stated that three Finance Bills would be included over the next two-year parliamentary session. The first of these would reintroduce the measures previously dropped when the General Election was called, with the second and third bills coinciding with the move to annual autumn Budgets.

In terms of reintroducing the measures dropped before the Election, we expect that most provisions will be unchanged. However, revised draft legislation has been published covering corporate interest restrictions, corporation tax loss relief reform, amendments to the anti-hybrid rules, the “non-dom” reform, inheritance tax on UK residential property and tackling avoidance on disguised remuneration. The measures will apply from the dates previously announced.

So, there is yet more uncertainty for taxpayers, and this surely cannot be good for business or the economy.

Separately, the Government has also announced a relaxation of its making tax digital (MTD) approach, with provisions due to be included in the Bill to this effect. Most commentators always thought that the Government’s timetable for MTD was ambitious, and, apart from VAT, it may be some years before we see a full MTD system.

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We do not support the General Election decision

I write this just after the Prime Minister has announced that she will seek a snap General Election on 8 June.

Customarily, I do not comment on political issues, but in this case I believe that it will have such an impact on the economy, the business world, and stability in general that a brief comment is necessary.

In my view, the world has far too much uncertainty already. Why add to the uncertainty? Theresa May has a small, but working minority. Many pundits , and I agree with them, say that in the absence of a strong opposition to hold the Government to account, a slim majority keeps the Government on its toes and helps to ensure an open and frank debate on key issues.

If one accepts that realistically, there can be only one outcome from the election, what has really been gained?

What is certain is that the next six weeks will be frenetic, uncertain and cause turmoil in the financial markets. Do we really need this as we start Brexit negotiations? Does it really make sense to trigger Article 50, then have a General Election, and all this whilst there are several major tension hotpots in the world?

And finally, what about the Fixed Term Parliament Act? It makes a mockery of primary legislation. If the PM fails to get the two thirds majority she needs to overturn the Act, then there will be a Vote of Confidence.

What a mess! What a world we currently live in!

I guess all we can do is get on and run our businesses as best as we possibly can.

 

 

 

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Budget Analysis – Spring 2017

The Headlines

This Budget could be re-named an attack on the self-employed and SMEs, especially those in traditional manufacturing, construction and service industries! It could have been worse, but we’re struggling to see how. It’s a give with one hand and take away with the other. Larger companies, the employed and those in high-tech industries have got off very lightly.

  • Class 4 NICs (self-employed NICs) to rise by 1% in April 2018 and another 1% in April 2019 (that’s a 22% effective increase in the rate!)
  • The dividend tax-free allowance to come down from £5,000 to £2,000 in April 2018, affecting many owner-managers
  • R&D tax relief administrative burden to be reduced
  • Further anti-avoidance measures
  • Personal allowance rate will rise for the seventh year to £11,500 and the higher rate threshold to £45,000

 Setting the scene

Philip Hammond’s first and last spring Budget was delivered against a backdrop of economic resilience since the EU referendum last summer, but there is still uncertainty as the government prepares to invoke Article 50 to leave the EU.

The economy has performed better than the Office for Budget Responsibility expected in the latter half of 2016 and started this year with significant momentum which has raised the growth numbers for this year. Headline growth forecasts for 2017 have been revised sharply higher from 1.4 per cent to 2 per cent. The OBR also forecasts that the economy will grow at a slightly slower rate in 2018, before picking up to 2% in 2021. Household finances will be squeezed by higher inflation this year and that there is little sign that the medium-term outlook has improved.

Tax receipts for 2016-17 have proved stronger than was expected at the time of the Autumn Statement and the deficit is around £12bn smaller than feared in November. But part of the improvement is unlikely to last as it was caused by people bringing forward income and paying tax in January rather than in future years. The medium-term improvement in the public finances is also limited because higher tax revenues will be offset by greater interest payments on government debt. There will be a larger projected war chest for use if the economy swoons in the years ahead, but the Chancellor has not been tempted with a give-away Budget.

So, what were the key announcements and what is either in the small print or likely to emerge over the coming days?

Self-employed NICs: The main rate of national insurance contributions (NICs) for the self-employed will increase. Currently, the self-employed may have to pay both Class 4 and Class 2 NICs:

  • Class 4 NICs at 9% are paid on profits between £8,060 and £43,000
  • Class 2 NICs are paid on profits of £5,965 or more

From 2018, Class 2 NICs will be abolished. Class 4 NICs will rise to 10% in April 2018 and to 11% in April 2019.

Tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018: it is claimed that this will reduce the tax difference between the self-employed and those working through a company. Typically, general investors will need over £50,000 worth of stocks and shares outside an ISA to be affected.

Making Tax Digital: small businesses and landlords under the VAT threshold will have an extra year to prepare for MTD.

Unincorporated businesses (businesses owned privately by one or more people) that have an annual turnover below the VAT registration threshold will have until April 2019 to prepare before MTD becomes mandatory. Under MTD, businesses must use digital software to keep tax records and update HMRC quarterly.

Cash basis accounting: self-employed and partnerships of individuals with trading income within the cash basis thresholds will be given the choice to use the simplified cash basis of calculating profits.

Cash basis accounting (‘the cash basis’) is an optional and simplified method for calculating taxable profits for trading businesses with straightforward tax affairs. This measure increases the entry threshold for the cash basis from £83,000 (cash basis threshold for 2015 to 2016) to £150,000.

Research and development (R&D) tax review: there will be administrative changes to research and development (R&D) tax credits, following a review of the tax environment for R&D. This will increase the certainty and simplicity around claims, and will take action to improve awareness of R&D tax credits among SMEs. We have yet to see the details but on the face of it, this is good news.

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The Budget – 8 March – our predictions and thoughts

The Chancellor, Philip Hammond, present his first Budget on 8 March. It is the first of two this year, and the last to be held in the Spring. The Budget then moves to the Autumn, so we’ll have a second Budget this year in October/November.

We don’t expect this Budget to be very exciting, for three main reasons. First, there was an Autumn Statement only a few months ago, and little has changed since then. Secondly, the Brexit timetable is still uncertain and until Article 50 is triggered, new trade deal discussions can’t really start. Thirdly, the Autumn Budget is the most likely time to see major tax policy changes announced as the Chancellor will have been in the role for a year, there will be time to debate the changes before enactment in April 2019, and we might have a clearer idea as to the state of the economy post Brexit and some time into the Trump Presidency.

But what might we learn in the Budget?

Likely

  • Re-commitment to a 17% corporate tax rate
  • Re-commitment to increasing the personal tax allowance to £12,000 by the end of this Parliament
  • Confirmation of the changes to how partnerships/LLPs will be taxed and a further restriction on mixed partnerships with corporate members (in response to a consultation document issued last August)
  • A promise to simplify the qualifying criteria for various tax-efficient fund raising schemes (SEIS/EIS/VCT) once the EU shackles have been released
  • Confirmation of changes to the VAT Flat Rate Scheme to stop perceived abuse
  • Further anti-avoidance measures which will no doubt also catch perfectly legitimate transactions

Possible

  • Simplification of the personal tax residency rules – the Statutory Residence Test is fiendishly complicated and unworkable
  • A commitment to simplify (and rise?) VAT rates post Brexit (no longer tied to minimum rates by EU legislation)
  • Abolition of the Additional Rate Tax (45% for those earning above £150K pa)
  • Gradual merging of income tax and National Insurance

Unlikely

  • Hypothecated healthcare tax. There is probably more concern about healthcare funding than any other public service at the moment. There is a widespread call for a specific ring-fenced (hypothecated) tax to fund the NHS, with many people saying that they would pay more tax if they could be certain that it would go directly to healthcare. But hypothecation doesn’t work. It was dabbled with in the 1970s and many people tried to withhold tax rather than it going towards defence.
  • Reduction in corporate tax rate to 15% or lower to encourage trade deals. In our view this would isolate the UK from most of our major trading nations and be viewed as unfair competition and the attempt to create a tax haven. It would also widen the gap between personal and corporate taxation and there would need to be a raft of anti-avoidance legislation to prevent people using corporate structures to shelter tax.
  • Fundamental overhaul of capital gains tax to tax short-term gains as income and long-term gains as capital.

Finally, our greatest wish is that we start to see a simplification and shortening of the tax code. Of course legislation is required to ensure that taxes are not avoided, but we need clarity, not ambiguity, workable solutions, and above all, certainty.

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