The Chancellor of the Exchequer delivered his 2014 Budget on Wednesday 19 March 2014, in which various tax amendments and developments were announced. Notably, part of the budget speech was dedicated to the issue of tax avoidance. The Chancellor reiterated the Government’s commitment to tackling avoidance and announced various new combative measures.
This briefing highlights the most significant proposals affecting both business and potential investors.
Accelerated Payment of Tax in Disclosed Tax Avoidance Schemes
Legislation is to be introduced to enable HM Revenue & Customs (HMRC) to issue notices requiring taxpayers to pay disputed tax amounts before a decision on the correct tax treatment has been reached, where the taxpayer has claimed a tax advantage under a transaction that has been:
- disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) Rules, or
- is subject to possible counteraction under the General Anti‑Abuse Rule (GAAR).
Payment of the disputed tax will be required within 90 days of the notice, or a further 30 days if the taxpayer asks HMRC to reconsider the amount of disputed tax. Penalties will apply for late payment. On appeal, if the taxpayer is ultimately successful, HMRC will repay the disputed tax with interest.
This controversial measure will apply to any company that has an open enquiry, or a matter under appeal, on the date that the Finance Act 2014 comes into force. This is a dramatic extension of the disclosure rules and the GAAR and may have a significant impact on a large number of cases currently being investigated or challenged by HMRC.
Users of Failed Avoidance Schemes – Accelerated Payment of Tax
As previously announced, the Government has confirmed that measures will be introduced to enable HMRC to issue notices to taxpayers who have used avoidance schemes that have been defeated in the courts in another party’s litigation, to either amend their tax returns and pay the disputed amount of tax upfront, or settle their disputes with HMRC accordingly. Taxpayers who choose not to pay the disputed tax risk penalties for non‑compliance.
Corporate & Finance
Annual Investment Allowance – Increase to £500,000
From April 2014, the annual investment allowance (AIA) limit will increase from £250,000 to £500,000. This increased limit will be available until 31 December 2015. Broadly, the AIA enables a business to deduct 100% of its expenditure on qualifying plant and machinery from its taxable profits.
Chargeable Gains roll‑over relief: Intangible Fixed Assets
From 19 March 2014, companies will no longer be able to claim a tax deferral on chargeable gains realised on the disposal of tangible assets, where the proceeds are reinvested in intangible fixed assets.
Tax Avoidance – Involving the Transfer of Corporate Profits
From 19 March 2014, companies will no longer be able to obtain a corporation tax advantage by transferring profits between companies within a group, where the transfer is effected for tax avoidance purposes. In such circumstances, where a company transfers all or a significant part of its profits to another group member, the transferor company’s profits will be taxed as though the transfer had not occurred.
Redesign of the Bank Levy
The Government intends to introduce a new charging mechanism for the bank levy, where banks would be assigned to different bands according to their chargeable equity and liabilities and then charged an amount set for that band. A consultation document is expected to be published on 27 March 2014 and any subsequent changes will apply for chargeable periods commencing on or after 1 January 2015.
Oil & Gas
Extension of the Substantial Shareholding Exemption (SSE)
From 1 April 2014, the SSE will be extended to treat a company as having held a substantial shareholding in a subsidiary being disposed of for the 12‑month period before disposal, if that subsidiary is using assets for oil and gas exploration and appraisal activity that have been transferred from other group companies. Subject to the satisfaction of various conditions, the SSE provides that any chargeable gains realised on the disposal of shares by a company that has a substantial shareholding in the company whose shares are being sold (generally, at least 10%) are tax exempt.
Reinvestment Relief for Pre‑Trading Companies
The Government has confirmed that from 1 April 2014, a corporation tax exemption will apply where an asset is disposed of in the course of oil and gas exploration and appraisal activities and the proceeds are then reinvested in the UK or the UK Continental Shelf. Following consultation, the Government has now announced that the exemption will also allow proceeds to be invested in oil assets used in a ring fence trade.
Mineral Extraction Allowances – Planning and Permitting Costs
Legislation will be introduced to accelerate the tax relief available to the mineral extraction industry on costs incurred in obtaining planning permission. It is proposed that the scope of qualifying expenditure on mineral exploration and access will be extended to include expenditure on seeking planning permission where that planning permission is granted. Relief is currently available at 25% per annum for qualifying expenditure on mineral exploration and access.
UK Oil & Gas – Bareboat Chartering
Despite strong lobbying against the measure, the Government has now confirmed that legislation will be introduced to cap the amount deductible for intra‑group leasing payments relating to large offshore oil and gas assets used on the UK continental shelf. It is now expected that the scope of the measure will be limited to drilling rigs and offshore accommodation vessels and will not, as some operators had feared, extend to FPSO units. The cap will be increased from 6.5% (as previously announced) to 7.5% of the historic capital cost of the asset which is subject to the lease. The new legislation will also introduce a new ring fence to subject any resulting profit to tax. Draft legislation is expected to be published on 1 April 2014 and the changes will become effective from that date.
Salaried Membersʹ Rules for Limited Liability Partnerships (LLPs)
The Government has confirmed that the controversial salaried members’ rules for LLPs, which, broadly, will operate to tax salaried members of LLPs as employees will become effective on 6 April 2014.
Personal Allowances – From April 2015, the income tax personal allowance will increase by £500 to £10,500. The basic rate is also going to be reduced to £31,785. The reduction to the basic rate limit is designed to ensure that the higher rate threshold (the level of income after which taxpayers begin to pay tax at 40%) is increased by 1%. Therefore, from April 2015, the higher rate threshold will be increased from £41,865 to £42,285.
Personal Allowances for non‑residents – The Government has announced that it intends to consult on whether and how the personal allowance could be restricted to UK residents and those living overseas who have strong economic connections in the UK, as is the case in many other countries, including most of the EU.
Inheritance Tax (IHT) – Liabilities and Foreign Currency Accounts
Legislation is to be introduced to further restrict how liabilities are deducted from the value of an estate for IHT purposes. New measures will ensure that funds held in foreign currency accounts in UK banks are treated in a similar way to “excluded property”, and therefore, cannot be deducted from the value of an estate where the borrowed funds have been deposited into a foreign currency bank account to avoid an IHT charge. Broadly, IHT is payable on the value of a deceased person’s estate after deducting any outstanding liabilities and certain reliefs and exemptions. Property situated outside the UK and held by a non‑UK domiciled individual constitutes “excluded property” and therefore, should not form part of that individual’s estate for UK IHT purposes. Additionally, a liability that has been incurred to acquire “excluded property” cannot be deducted from the value of an estate. Currently, funds held by a non‑UK domiciled and non‑UK resident individual in foreign currency accounts in UK banks are not chargeable to UK IHT, despite not constituting “excluded property”.
The Remittance Basis – Capital Gains Tax and Split Year Treatment
Legislation will be introduced to ensure that capital gains realised by an individual and taxed under the remittance basis of taxation in the overseas part of a split year of residence are not liable to UK capital gains tax if remitted to the UK.
Making the Seed Enterprise Investment Scheme (SEIS) Permanent
The Government has announced that the tax reliefs available to individuals investing in qualifying companies under the SEIS are to become permanent. There will also be a permanent extension of the associated capital gains tax relief for re‑investing chargeable gains in shares that qualify for relief under the SEIS.
Artificial Use of Dual Contracts by Non‑Domiciles
As previously announced, legislation is to be introduced to prevent UK resident nondomiciled individuals from electing to use the favourable remittance basis of taxation for overseas employment income, where they are artificially separating their UK and overseas employment duties by using separate employment contracts for UK and overseas duties, with the same or associated employers. Following consultation, the legislation has been amended to prevent the provisions applying to arrangements which are not motivated by tax avoidance. It is also proposed that a number of additional changes will be made including:
- Excluding directors who own/control less than 5% of their employer company’s shares;
- Clarifying that any income relating to employment duties performed in tax years prior to 2014/15 will be excluded; and
- Taking into account employments held for legal/regulatory reasons.
Property & SDLT
Extension of 15% SDLT rate for residential properties purchased by “non‑natural” persons
From 20 March 2014, the 15% SDLT rate on acquisitions of high‑value UK residential properties by certain “non‑natural” persons is to be extended to transactions where the chargeable consideration exceeds £500,000. Currently, this elevated SDLT rate only applies where the chargeable consideration exceeds £2 million. This change will apply to land transactions where the effective date (normally the date of completion) is on or after 20 March 2014. Transitional provisions will ensure that, broadly, the existing £2 million threshold will continue to apply to contracts entered into before 20 March 2014 but completed on or after that date.
Extension of the Annual Tax on Enveloped Dwellings (ATED)
ATED is to be extended to UK residential properties owned by certain “non‑natural” persons that are valued at more than £500,000. Currently, ATED only applies to UK residential properties worth more than £2 million. This change is to be implemented in phases. From 1 April 2015, properties valued at more than £1 million will become subject to ATED and an annual charge of £7,000 will be imposed. From 1 April 2016, a charge of £3,500 will take effect for residential properties valued at more than £500,000. The 28% capital gains tax charge on disposals of property subject to ATED will also be extended to apply to disposals of properties falling within the new ATED thresholds.
Capital Gains tax: Non Residents and UK Residential Property
As previously announced, the Government has confirmed that it intends to introduce a capital gains tax charge on gains realised on disposals of UK residential property by non‑ UK resident individuals. A consultation document is expected to be published shortly after Budget 2014, with a view to introducing the charge from April 2015.