Chancellor George Osborne's fourth Budget clearly aims to stimulate the economy by making Britain a competitive place to do business. The way to restore our economic prosperity is to energise the aspirations of the British people… he said. If you want to work hard and get on, we are on your side. It is a budget for an aspiration nation.
From a tax lawyer's perspective, this is a quiet Budget. However, it does contain good news for entrepreneurs, SMEs and the business angels who invest in them - for example the stamp duty exemption on trading AIM shares and the new employment allowance as well as the relaxation of the entrepreneurs relief rules for Enterprise Management Incentive (EMI) options and the extension of the Capital Gains Tax (CGT) holiday for Seed Enterprise Investment Scheme (SEIS) investors. The Budget also favours specific sectors such as construction through support for new housing. Finally, in a nod to the current political and social climate, the Government continues to make it very clear that it has no time for tax avoiders.
In this briefing, we highlight some of the main points we think will be of interest. Please contact our tax team if you have any queries.
Corporate tax rate to be 20% and unified from 1 April 2015
The Government has announced that the main rate of corporation tax will be 21% for the financial year commencing 1 April 2014 and 20% for the financial year commencing 1 April 2015. The small profits rate is to remain the same at 20% for the financial year commencing 1 April 2014. Legislation is to be introduced in Finance Bill 2014 to unify the small profits rate and the main rate of corporation tax at 20% from 1 April 2015. This has a dual positive effect. Internationally, the UK will continue to have the lowest corporate tax rate amongst the developed countries making it extremely attractive location to establish and do business from. The unified rate will also remove the complexity of calculating the marginal rate between the relevant thresholds (£300,000 and £1,500,000).
EMI Entrepreneurs Relief now available on disposals of shares acquired under an EMI scheme
Entrepreneurs Relief (ER) is a key tax relief for those selling shares in the company they work for as it provides a reduced CGT rate of just 10% instead of the standard 28%. However, the ER rules contain strict conditions. These include the requirement to own at least 5% of the shares and to have owned the shares for at least one year before sale. Where employees acquire their shares on the exercise of an option under an Enterprise Management Scheme, and then sell them, they will rarely meet those conditions. The Government recognises this and has agreed to relax the rules in such cases. As previously announced, legislation will now be introduced that removes the 5% minimum holding requirement. The ER legislation has also been revised to allow the period during which the option is held to count towards the qualifying one year minimum holding period requirement. ER will also apply on the sale of shares that replace EMI shares following a corporate reorganisation, and to certain shares following an exchange for shares in another company.
These welcome changes affirm the Government's commitment to encouraging employee equity participation in smaller entrepreneurial companies. With many thousands of EMI options being granted every year, the impact of the changes will be widespread. Employee pressure to implement EMI schemes is likely to build on SMEs where they have not yet done so.
High value UK residential property: annual tax on enveloped dwellings, SDLT and CGT
The Government's aim is still to penalise owner-occupiers who own their property through a company. To discourage them, a new annual charge (referred to as the "Annual Tax on Enveloped Dwellings") will apply from 6 April 2013 to companies owning a residential property worth over £2m. CTG at 28% will also apply to companies that dispose of a property worth over £2m and only on gains that accrue from April 2013 onwards. For genuine property development and investment businesses, there are reliefs and exemptions, including reliefs from the 15% SDLT rate introduced in March 2012. Disappointingly, the Government failed to bring forward the SDLT relief, which will only apply from Royal Assent of Finance Bill 2013, likely to be July this year. This leaves an unwelcome limbo period between now and July where developers and landlords, who would otherwise be able to claim relief and pay a reduced 7% rate of SDLT on new purchases, will remain stuck with the 15% rate. Expect a quiet few months in the prime residential investment and development market. As for £2m+ residential properties held in existing corporate structures, these should be examined now action taken to avoid the new tax charges.
Tax recovery from offshore centres
The Government will include legislation in Finance Bill 2013 to implement the UK-US Agreement to improve international tax compliance and to implement the US Foreign Account Tax Compliance Act (FATCA). The Isle of Man, Guernsey and Jersey have agreed to enter into similar automatic exchange agreements with the UK. HMRC has set up disclosure facilities with the Isle of Man, Guernsey and Jersey to allow investors to come forward and regularise their past tax affairs in advance of information being automatically exchanged. There will also be discussions to update the existing Double Taxation Arrangements with the UK.
It is clear that pressure from cash-strapped governments is being brought to bear on non-compliant depositors and the offshore centres where they invest. Tax evasion is no longer economically, politically or socially acceptable. Non-compliant investors should seek urgent advice on how best to disclose their offshore assets before HMRC catch up with them.
CGT exemption extended for investment in SEIS companies
The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012. It is designed to help small, early-stage companies raise equity finance by offering a generous range of tax reliefs to individual investors who purchase new shares in SEIS companies. To kick-start the scheme, CGT relief was given to an investor who made a gain of up to £100K on any asset in 2012-13, where the gain is re-invested in SEIS shares. The Government clearly wants SEIS to work and has therefore extended the CGT relief for another year. This means gains made in 2013/14 will also be relieved from CGT if invested in SEIS companies until April 2015. The downside is CGT relief will now be restricted to half of the amount invested in SEIS shares.
The extension of the CGT holiday is very welcome and shows strong Government support both for start-up companies and the business angels who invest in them. The restriction on the rate of relief is less welcome but is perhaps an understandable reaction to the fact that currently top-rate taxpayers can actually get back more in tax relief than they invested, in circumstances where the SEIS company becomes worthless.
Mixed domicile marriages and inheritance tax
Mixed domicile marriages are very common in the UK. However, unlike couples who share the same domicile, there is no unlimited inheritance tax (IHT) exemption when a UK domiciled spouse or civil partner leaves their estate to their non-domiciled partner. Fortunately the tax-free amount that can be left by the UK domiciled spouse is now being increased from £55,000 to £325,000 for deaths after 6 April 2013. This is on top of the usual £325,000 IHT allowance. The Government will also allow the non-UK domiciled spouse or civil partner to elect to be treated as UK domiciled for IHT purposes. The election can apply not only to inheritances received on the death of the UK domiciled spouse but also if they make lifetime gifts to their non-UK domiciled spouse or civil partner.
The right to make an election is very welcome as it allows for a full inheritance exemption on a gift or legacy from the UK-domiciled spouse or civil partner. It also removes an apparent anomaly that often catches out mixed domiciles couples. However, making the election should be approached with caution as it will bring all of the recipient spouse's worldwide assets into the scope of IHT.
Retrospective tax on SDLT sub-sale schemes
The Government has introduced a specific amendment to the SDLT "sub-sale" relief rules to ensure that a specific scheme (involving a sub-sale which was not completed for a number of years) fails. Whilst this will be of no relevance to ordinary commercial property transactions, it is interesting to note that the Chancellor has followed through on the introduction of retrospective taxation in this area – the amendments will catch any transactions dating back to March 2012. The Government will view this as a salutary lesson for anyone who has taken part in one of these types of schemes.
General Anti-Abuse Rule to attack abusive tax avoidance
As expected, the Government is pressing ahead with the introduction of the GAAR, which will come into effect at Royal Assent of Finance Bill 2013 in respect of "abusive tax arrangements" entered into after that date. In our view, the reasoning behind introducing the GAAR is sound, on the basis that it is intended to stop promoters of certain schemes "selling" entirely artificial and contrived sorts of tax arrangements. It is hoped that HMRC (supported by the GAAR Advisory Board) will ensure that the GAAR is not used to counter ordinary commercial transactions which are at the opposite end of the spectrum to the contrived schemes noted above.
Changes to the VAT place of supply rules for telecommunications, broadcasting and e-services from 1 January 2015
The proposed changes to the VAT place of supply rules will mean that supplies of telecommunications, broadcasting and e-services made by a business established in one EU Member State to a private consumer located in another Member State will be taxed in the Member State in which the consumer is located. These services are currently taxed where the business is established. These changes are to come into effect from 1 January 2015. These changes mean that providers of services in telecommunications sector (fixed and mobile phones), broadcasting sector (television and radio) and e-services (video on demand, downloaded apps, music downloads, e-books, anti-virus software and on-line auctions) will need to have new compliance and VAT accounting procedures in place. The changes are however true to the ideals of VAT being a consumption tax in that these supplies will be taxed in the Member State of consumption.