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ONLINE ACCOUNTANTS & TAX ADVISERS

Budget 2016



The Chancellor of the Exchequer presented his Budget to Parliament on 16th March 2016.


Summaries of the main announcements which affect Small businesses, Contractors / Freelancers, Private individuals and Landlords are outlined below.


All applicable clients will automatically receive an expert and bespoke review (not a standard mail shot) of their tax affairs to identify any specific and relevant tax planning opportunities or restrictions arising from the legislative changes.


The proposals below are subject to change upon the passing of the actual legislation.


Rate and threshold changes


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The proposed rates and thresholds for 2017/18 onwards are also stated to facilitate longer term tax planning.


Corporation tax rate


The CT rate will be reduced from 20% to 19% from 01/04/17 and to 17% from 01/04/20.


Age related allowance


The age related personal allowances have been phased out.


Class 2 NIC


From April 2018, Class 2 NICs will be abolished.


Termination payments


From 2018/19, termination payments in excess of the £30,000 exemption will be subject to employer’s national insurance contributions (NIC).


The scope of £30,000 exemption is likely to be reduced following government consultations.


Tax free property and trading income


From 6 April 2017, tax free allowances of £1,000 each will be introduced for property and trading income (turnover before the deduction of expenses).


Those with income above the allowance can benefit by simply deducting the relevant allowance from their gross income instead of calculating and deducting their exact expenses.

Trading and property income received in non-monetary form

For transactions occurring on or after 16 March 2016, legislation will be introduced to reinforce that trading income (including that of a property letting business) received in non-monetary form is taxed at the appropriate value (money’s worth).


Bad debt relief on peer-to-peer lending


From 6 April 2016, a new relief will be introduced to enable individuals who invest in certain P2P loans (e.g Zopa) to deduct losses realised on defaulted loans against income received from other P2P loans or carried forward against interest received in the next four tax years from other eligible P2P loans.


ISAs


A new ‘Lifetime ISAs’ will be available from April 2017. These will be available to adults under the age of 40 who will be able to contribute up to £4,000 each year to the account (upto the age of 50). The funds which will include a 25% bonus provided by the Government can either be used to buy a first home (upto £450k) or withdrawn from the age of 60.


The overall annual ISA subscription limit will also increase from £15,240 to £20,000 from 6 April 2017.


Clients under the age of 40 now will need to consider whether a traditional pension remains the attractive vehicle for retirement planning instead of this new Lifetime ISA.


Reduction of CGT rates


From 6 April 2016, the higher rate of capital gains tax will be reduced from 28% to 20% and the basic rate from 18% to 10%.  This will apply to disposals on or after 6 April 2016.


The 28% and 18% rates will, however, continue to apply for ‘carried interest’ and for chargeable gains on ‘residential’ property.


Property which has consisted of or included a dwelling and interest in land subsisting under a contract for an off-plan purchase will be excluded from the reduction in the rate. Rules will be announced in due course for mixed-use properties.


CGT entrepreneurs’ relief


Entrepreneurs’ relief will be extended to external investors in unlisted trading companies from 6 April 2016 for shares acquired after 17 March 2016, where the following conditions are met:



If all of the conditions are met, the rate of CGT charged on the qualifying gain will be 10% with the total amount of gains eligible for relief subject to a lifetime cap of £10m per individual.


Entrepreneurs’ relief will be allowed on the disposal of a privately-held asset when the disposal of the accompanying business or company is to a family member.


Finance Act 2015 originally introduced new restrictions for entrepreneurs’ relief in respect of certain goodwill disposals made on or after 3 December 2014 to combat perceived abuse.


Finance Act 2016 relaxes the above restriction on entrepreneurs’ relief if:



The condition relevant to the restriction where individuals are related to the acquiring company shareholders will also be removed.


The Government has announced that it will review the definition of a trading company in relation to entrepreneurs’ relief.


Employer provided pensions advice


Tax relief available for employer-arranged pensions advice will increase from £150 to £500 per employee as of April 2017.


Deduction of income tax on investments


Interest paid on non-ISA savings held with banks and building societies (plus open-ended investment companies, authorised unit trusts, investment companies and on peer-to-peer loans) will no longer be subject to the automatic deduction of basic rate tax.


Personal savings allowance


From April 2016, a personal savings allowance will apply for up to £1,000 of a basic rate taxpayer's savings income and up to £500 of a higher rate taxpayer's savings income each year.


Dividend taxation


As previously announced, from 2015/16 (6th  April 2016) the 10% dividend tax credit will be abolished and there will be a new dividend tax allowance of £5,000 a year. New rates of tax on dividend income will apply above the allowance as follows:





The overall effect is to increase the current rate of tax on dividends above the new allowance by 7.5%.


For ordinary smaller investors an ISA wrapper may now be more worthwhile to ensure the £5,000 allowance is not wasted on sundry investment income.


Distributions upon winding up


Distributions made on or after 6 April 2016 in a winding up will be charged to income tax (and not CGT) if the following conditions apply:


   Condition A –  the individual has at least a 5% stake in the company

   Condition B –  the company is a close company or was such within the two years prior to the winding up

   Condition C –  at any time within a two-year period after the distribution:


i) the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company, or a 51% subsidiary of the company


ii) the individual is a partner in a partnership which carries on such a trade or activity


iii) the individual, or a person connected with him or her, is a participator in a company in which he or she has at least a 5% interest and which at that time carries on such a trade or activity, or is connected with a company which carries on such a trade or activity, or the individual is involved with the carrying on of such a trade or activity by a person connected with the individual


   Condition D – it is reasonable to assume having regards to all the circumstances that –


i) the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or


ii) the winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax.


Non-resident companies also fall within the scope.


Wear and Tear Allowance


From April 2016, the Wear and Tear Allowance will be replaced with a new relief that will allow all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets.


Rent-a-Room relief


The level of Rent-a-Room relief will increase from £4,250 to £7,500 from 6th April 2016.


Trivial benefits statutory exemption


Benefits provided by an employer to an employee is exempt from tax as a trivial benefit if all the following conditions are satisfied:






Benefits that are likely to be in scope here as trivial could include a bunch of flowers, a bottle of champagne or a box of chocolates.


Trivial benefits (even if exempt from tax) will continue to be liable to Class 1 NIC for a period of time after 5 April 2016 until the Finance Act 2016 receives Royal Assent, which will most likely be in July 2016.


Qualifying trivial BiKs provided to directors / office holders of close companies (or to their families or households) will be subject to an annual cap of £300.00. Where the cost of an additional trivial benefit results in a total cost that exceeds the annual exempt amount, none of the benefits that exceed the cap are exempt.


Members of the office holder’s family or household, who are also employees of the close company, will also have their own £300 per annum cap. If a family member who is not an employee receives a benefit, the cost should be split between the office holders / employees of the family equally.


Loans to participators


Loans made to participators by close companies will be subject to a higher rate of tax of 32.5% (increased from 25%) for loans or benefits made available to participators from 6 April 2016.


Stamp duty land tax (SDLT)


From 1 April 2016 existing SDLT residential property rates will be increased by 3% for purchases of additional properties such as buy to let properties, second homes and furnished holiday accommodation.


It will not apply to purchases of less than £40,000, leasehold interests originally granted for a term of less than seven years, or freehold or leasehold interests that are reversionary on leases with more than 21 years remaining at the date of purchase.


There will be no exemption for corporate or large property portfolios.  Purchasers will have 36 months in which to claim a refund of the additional rate where a purchaser acquires a new main residence but only subsequently manage to sell their original main residence. The 36 month period will commence on 25 November 2015 for those who disposed of a main residence prior to this date while still holding another property.


Additional residential property will take account  properties held anywhere in the world.  


Joint owners and married couples will be treated as one unit so that each party is treated as owning an interest in the property they hold together for the purpose of determining whether any individual has more than one residential property. Married couples who are living separately in circumstances that are likely to become permanent will not be treated as one unit.


A minority share (50% or less) in a single property which has been inherited within the 36 months prior to the transaction will not be considered as an additional property.


The additional 3% SDLT charge will not apply to mixed use property in England, Wales or Northern Ireland.


Annual tax on enveloped dwellings (ATED) and 15% rate of stamp duty land tax (SDLT)


The Government has announced an extension to reliefs from ATED and 15% SDLT charges applicable to certain ownership of high value residential property, to take account of property transactions currently caught by these charges but outside their intended target.  The new reliefs will apply from 1 April 2016.


The new reliefs will apply to non-natural persons (for example, companies) acquiring high value residential property as a result of equity releases schemes, or for conversion to non-residential use (for example conversion or demolition of a residential property for using the land for the purpose of a trade, e.g. for use as a factory or school).  There will also be an extension to the relief available where a property is occupied by a qualifying employee.


Administration of employee benefits and expenses


The measures announced are to:





From 6 April 2016 businesses will no longer be able to apply for a dispensation and all existing dispensations will come to an end. Instead, a new exemption will be introduced to avoid the reporting of applicable expenses. The exemption is subject to the condition that the business satisfies itself that the employee would be entitled to full tax relief on that payment or benefit.


The main types of expenses to which the exemption applies are:



Employment intermediaries


From April 2017, where individuals are working for the public sector, the responsibility for determining whether IR35 apples and ensuring the correct tax is paid will fall onto the public sector departments and organisations, rather than the intermediary themselves.


If, however, the public sector body engages with an agency or other form of intermediary the responsibility for carrying out the employment status assessment and deducting PAYE and NIC will pass to the agency or intermediary.


There will also be a consultation on employment status tests and online tools prior to the implementation of these new rules.


Non-domicile status


From 6th April 2017 an individual 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. A technical consultation will be published later this year.


Individuals who are born in the UK to parents who are domiciled in the UK will no longer be able to claim non domicile status whilst they are resident in the UK.


Non-doms who establish a non-UK resident trust before becoming deemed-domiciled in the UK under the new rules will not be taxed on foreign income and gains (including UK gains) retained in the trust.


Non-doms who become deemed domiciled in April 2017 can treat the cost of their non-UK based assets as being the market value of that asset on 6 April 2017


Employee share schemes


The capital gains tax rules for preserving the 10% tax rate offered from entrepreneurs’ relief will be amended so as to also allow the employee 90 days to exercise following a disqualifying event.


The new rules will also remove the non-standard treatment of EMI shares on a rights issue to align the treatment with non-EMI shares.


Disguised remuneration (loan schemes)


Legislation will be introduced with effect from 16 March 2016 to deny tax relief in cases where disguised remuneration arrangements have been used for tax avoidance purposes. The government will consult on further measures to tax loans that are still in place as part of disguised remuneration schemes.


This announcement follows on from the introduction of the original disguised remuneration legislation introduced in Finance Act 2011 that taxes monies and benefits provided by third parties to employees. It was aimed primarily, but not exclusively, at employee benefit trust arrangements.


Employee shareholder status (ESS)


The government will introduce an individual lifetime limit of £100,000 on gains eligible for Capital Gains Tax exemption through the Employee Shareholder Status. This limit will apply for arrangements entered into on or after 17 March 2016.


Employment allowance increase


The NIC employment allowance increases from £2,000 to £3,000 a year from 6th April 2016.


However, it will also be withdrawn from single person limited companies.


Withdrawal of renewals allowance


The renewals allowance will be repealed and replaced with standard capital allowances for businesses.


Traders will no longer benefit from renewals allowance when replacing tools but will from April 2016 be able to obtain relief under the same regime as for other capital items. Businesses will be able to claim capital allowances.


Business premises renovation allowance


The BPRA will expire on 31 March 2017 for corporation tax and 5 April 2017 for income tax.


The BPRA currently provides 100% tax relief to property owners on conversion or renovation works to unused business premises in order to bring them back to business use.


Offshore property traders and developers


The proposed changes remove the current territorial restriction in UK legislation so that profit arising from dealing in or developing UK land with a view to disposing of it is subject to UK tax regardless of company residence.


HMRC will set up a new taskforce to ensure tax on UK property development profits is collected by identifying and investigating offshore business


Royalty withholding tax


The Government has announced changes to the rules regarding withholding tax to be deducted at source on royalty payments made to non-UK resident persons.


The changes will affect:





Utilisation of brought forward losses


Losses arising on or after 1 April 2017 can be offset, when carried forward, against profits from other income streams and will be available for surrender to other group companies via group relief.


The Government will consult on the design of the reforms in 2016 and will legislate for the measure in 2017.


Partnerships


Amendments will be introduced to clarify the tax treatment on transfer of intangible fixed assets to partnerships and the application of the corporation tax intangible fixed assets rules when calculating taxable profits of corporate partners.


The simplified expenses regime will be changed to ensure that partnerships can access the use of a home provisions.


Substantial shareholdings exemption


The government has announced it will consult on the possible reform of the substantial shareholdings exemption (SSE) for corporate capital gains.


VAT - online sales of goods by overseas suppliers


Overseas businesses who sell goods located in the UK to UK consumers are required to account for VAT on these supplies.


HMRC will have the ability to direct overseas businesses to appoint a UK VAT representative to account for the tax and greater flexibility to require security from an overseas business, either in addition to or instead of appointing a VAT representative.  HMRC will also have the power to issue a notice to the online marketplace making them jointly and severally liable for the VAT debts of an overseas business in relation to sales made through that marketplace.


Insurance premium tax (IPT)


The standard rate of IPT will increase from 9.5% to 10% from 1 October 2016.


Research & Development (R&D) relief


The large company scheme for R&D tax credits ends on 31 March 2016.


Business rates


From 1 April 2017, small business rates relief (SBRR) will be permanently doubled from 50% to 100% and the thresholds will be increased to benefit a greater number of businesses. Properties with a rateable value of £12,000 or less will receive 100% relief.  


Pensions legislation changes


Serious ill-health lump sums will now be aligned to lump sum death benefits. This will mean that these can now be paid tax-free where someone is under the age of 75 and has already accessed their pension benefits but has less than 12 months to live. For those over the age of 75, the lump sum should be taxed at their marginal rate of tax.


Legislation will be drafted to allow for dependents’ flexi-access drawdown account to be converted to nominees’ accounts when dependents turn 23 so they do not have to take their funds a as lump sum (taxed at 45%). Further legislation will be drafted to allow for personal pensions already in payment to be paid as a trivial commutation lump sum where total pension would be under £30,000.


Enterprise Investment Scheme and Venture Capital Trusts


Legislation will be included in Finance Bill 2016 to ensure the legislation introduced in Finance (No 2 Act) 2015 works as intended:




Tax avoidance


New legislation commencing on 6 April 2017 will:







For these purposes, schemes are defeated when the courts decide an arrangement fails or where the taxpayer’s position is concluded in another way to remove the anticipated tax saving, eg via a follower notice, assessment or contract settlement.


Patent box


The Patent Box is a reduced rate of corporation tax applied to Patent Box profits in companies that develop and exploit patented processes or products. The rate of tax applied to Patent Box profits is currently 11%, compared to the main rate of corporation tax of 20%. From 1 April 2017 the rate will reduce to 10%.


A new, less generous, ‘modified nexus’ has been developed and will, from 1 July 2016 replace the existing Patent Box regime for companies electing in to it after 30 June 2016.