The Budget Speech contained several announcements further to the recommendations of the Office of Tax Simplification in relation to approved and unapproved share schemes, including provisions relating to limits on approved plans and rollover of restricted securities.
The UK's Chancellor of the Exchequer, George Osborne, delivered his annual Budget Speech on 19 March 2014. More details of measures announced will be known when a new draft of the Finance Bill 2014 is published on 27 March. A full analysis of each and every measure announced in the Budget Speech is beyond the scope of this Alert, which aims to highlight some of the key business-related measures introduced. From a business point of view, this was not a speech that introduced any radical policy changes. The government will likely be keen to retain the status quo given the improving UK economy and the general election next year.
Tax on residential property purchased through companies
In an anticipated measure, various taxes applicable to residential properties purchased through companies (referred to as "enveloped dwellings") will be extended so as to apply to dwellings worth more than £500,000, a rise from the value of £2 million previously in place.
Stamp Duty Land Tax (SDLT) will apply at a rate of 15 percent to purchases of enveloped dwellings worth £500,000 or more from 20 March 2014, although transitional provisions may alleviate the impact of this on transactions in progress. The annual tax on enveloped dwellings will also be extended to lower-value properties, with those worth £1 million or more impacted from April 2015 and those worth £500,000 or more affected from April 2016. The same implementation dates are to be used for the introduction of capital gains tax at 28 percent on disposals of enveloped dwellings.
Duane Morris comment: These measures were anticipated and thus do not come as a surprise. Certain property investment companies and funds may be impacted, but there are exemptions to the rules for certain property rental businesses. These changes indicate that more consideration of these provisions is likely to be required since significantly more properties will be impacted, especially in London.
Accelerated payments of tax associated with avoidance schemes or under the General Anti-Abuse Rule (GAAR)
The UK has operated a system known as the disclosure of tax avoidance schemes (DOTAS) in which known tax avoidance schemes are assigned a reference number that must be quoted on the self-assessment return of those using the scheme. Additionally, the GAAR was introduced last year and is subject to self-assessment. Under current law, if taxpayers do not disclose a scheme under DOTAS or do not regard themselves as being within the remit of the GAAR, they retain the tax benefit of their position while HM Revenue & Customs (HMRC) has the burden of pursuing the tax it considers due. Proposed revisions will take effect from the date the Finance Bill receives Royal Assent, which will allow HMRC to issue a "notice to pay" to taxpayers who have not disclosed under DOTAS or who have taken a position which HMRC counteracts under the GAAR, following an opinion of the GAAR Advisory Panel. The aim is to give HMRC the benefit of the tax while any dispute is resolved.
Duane Morris comment: This is likely to be the subject of considerable debate, with objections having already been raised as to the principle of a taxpayer's being required to pay a disputed amount before the position has been resolved. Some commentators have also raised the issue of whether this proposal contravenes the European Convention on Human Rights in relation to deprivation of property without due process.
Dual Contract Arrangements
Individuals who are resident in the UK but are not domiciled there may use the remittance basis of tax on income from employment exercised wholly outside the UK. This means their income from overseas employment is taxed in the UK only if it is "remitted" (brought in) there. This has resulted in internationally mobile executives entering into "dual contract" arrangements in which they have one employment in the UK and another, separate, employment overseas, the earnings from the latter not being subject to UK tax and often arising in a low-tax jurisdiction. It has long been the case that HMRC has been sceptical of such arrangements being truly separate employments, save in very limited circumstances, and it was announced in December 2013 that counteracting measures were to be introduced. The announcement was followed by draft legislation in January 2014 upon which there has been a period of consultation. The new rules will now provide that, from April 2014, earnings on overseas employments which are part of artificial arrangements will be subject to tax on an arising basis and the remittance basis will not be available for such earnings.
Duane Morris comment: This is an expected measure and it is likely to be welcomed that the government has recognised that the draft legislation issued in January might catch legitimate arrangements. It has now been clarified that nominal directorships are definitely outside the remit of the new rules and that they will not apply to income arising from employment duties performed in the 2014–2015 tax year.
Seed Enterprise Investment Scheme (SEIS) and the capital gains tax reinvestment relief
SEIS was introduced in 2012 and was designed to offer a range of tax reliefs to individuals subscribing for shares in small, early stage companies. To encourage this, gains from SEIS investments were, subject to certain limits, exempt from capital gains tax entirely to the extent they were reinvestment into other SEIS projects. These reliefs were introduced as temporary measures, but it was announced in the Budget Speech that they would be made permanent.
Duane Morris comment: This is likely to be welcome news for individual investors, including high net worth individuals who may invest through fiscally transparent private equity funds. It reflects the government's stated intention to encourage investment.
Annual investment allowance increase
A temporary increase to £500,000 has been announced in the annual investment allowance available to businesses on their investment in plant and machinery. This means that, up to the £500,000 limit, businesses will be able to claim tax relief on such expenditure in the year it is made rather than capitalise on the expense and claim relief gradually under the capital allowance rules. This will commence in April 2014. The allowance will revert to £25,000 in April 2015.
Duane Morris comment: Again, this is likely to be welcome from a business perspective and should enable businesses of all types (partnerships, sole traders and companies) to benefit. Businesses should consider updating computer equipment, etc., in the coming tax year to take advantage of this change.
Further partnership reform
As announced in December 2013, the Finance Bill will include further reforms targeting avoidance through partnership structures. They will be in addition to the incoming rules on the employment status for tax purposes of members of limited liability partnerships (LLPs).
Duane Morris comment: This will be an area to monitor. The legislation on LLPs is still undergoing a process of amendment, and any further reforms will require analysis to ensure that the legitimate use of partnerships, e.g., in the private equity industry, is not caught.
Avoidance involving the transfer of corporate profits
It has been announced that legislation will be introduced to counter artificial arrangements in which the profits of a company are transferred to another company in the same group for tax avoidance reasons. This legislation will supplement similar provisions introduced in December 2013 but will have a wider remit, in response to perceived avoidance of the December 2013 regime, which applies only to derivatives. This legislation has immediate effect, and thus, the new law and related guidance has already been published.
Duane Morris comment: The new rules seem to be widely drafted and there is likely to be much debate over some of the terms used. For example, the profits must be transferred "in substance," which is central to the legislation but which is not an entirely clarified phrase. Comment is to be anticipated.
Base erosion & profit shifting (BEPS)
The government has published a policy paper entitled "Tackling aggressive tax planning in the global economy: UK priorities for the G20-OECD project for countering Base Erosion and Profit Shifting." The paper expresses the UK's commitment to supporting the OECD action plan on BEPS and lists the UK position on the 15 action points given by the OECD. Noteworthy points include the view that care should be taken in the area of hybrid mismatch arrangements such as in circumstances where the taxpayer has no influence over whether a vehicle is treated as transparent or opaque by another jurisdiction. The UK government has also expressed support for clarifying when arrangements have "substance," for modernising the permanent establishment rules to reflect modern business practices and for updating the transfer pricing rules. However, the government has stated that care should be taken to ensure that genuine commercial arrangements are unaffected and that the needs of small businesses are taken into account.
Duane Morris comment: This paper adds some clarity to the US position on BEPS but the changes referred to are not imminent. The UK has already taken action in some areas raised by the OECD, such as exchange of information.
Incentive arrangements – The Budget Speech contained several announcements further to the recommendations of the Office of Tax Simplification (OTS) in relation to approved and unapproved share schemes, including provisions relating to limits on approved plans and rollover of restricted securities. More details will be included in the Finance Bill when it is published later this month. Additionally, consultation will take place on certain other incentive measures, such as the use of a safe harbour employee shareholder vehicle.
Venture capital reliefs – The regimes relating to venture capital trusts and enterprise investment schemes are to be reviewed following perceived abuse. This is an area to monitor since anti-avoidance legislation should be targeted at genuine avoidance. Details on this review are currently scant.
Savings and pensions – Although not business related, the Budget Speech announced generous changes to the taxation of savings and pensions that will impact individuals.