An imminent election, and an electorate to be convinced seemed to be more on the Chancellor’s mind for his 2014 Budget than the extensive reforms of the corporation tax system which have been a feature of earlier Budgets. The structural changes to the corporate tax system are now pretty much complete, the threats on the horizon being the potential reforms to the international taxation of business under the OECD Base Erosion and Profit Shifting initiative and the loan relationship review.
For individuals, especially savers and those with defined contribution pension schemes, there was much greater excitement. Changes to ISAs and greater flexibility for enjoying pensions benefits will be welcomed.
Anti-avoidance measures are mainly centred on those who use aggressive marketed tax planning schemes, and those who sell to them.
Banks and insurance companies escape relatively unscathed, although the 283 banks who have signed up to the banking Code of Conduct will now be exposed to the threat of public naming and shaming if they fail to comply and there are further changes to the bank levy. Oil and gas is, as ever, a winner and loser - new reliefs being matched by a new regime for leased drilling equipment and accommodation rigs which are likely to lead to increased costs.
Ownership of UK residential property by non-residents through corporates continues to be targeted, with the value of properties caught now reduced to £500,000.
F1 fans will no doubt be delighted that a tax exemption has been granted to incentivise teams to compete in the Glasgow Grand Prix, and operators of satellites will be relieved to be exempted from Insurance Premium Tax.
The effective date of the provisions described in this briefing will vary; publication of the Finance Bill is due on 27 March 2014, and Royal Assent will normally occur in July 2014.
For corporates, the 2014 Budget proved to be a relatively quiet event. For the first time in many years no major structural reform was on the immediate agenda. The proposed review of the loan relationship and derivatives regime is largely deferred to 2015, although there is some minor tinkering. A paper addressing the UK Government’s reaction to the OECD BEPS initiative is long on aspiration but short on concrete proposals. Corporates will need to start to address the requirements of wider information exchange powers, but not, as yet, to restructure their operations.
There are a couple of proposals addressing avoidance activity; one preventing tax avoidance by shifting profits between group companies, the other preventing capital gains roll-over from tangible to intangible assets. The former is likely to give rise to some concerns, as it is widely drafted and only circumscribed by a motive test. In a welcome development, Research and Development Allowances will be excluded from the wide ranging anti-loss buying rules introduced in 2013.
The UK’s attraction as a base is enhanced by a consultation on simplifying tax administration, something identified in recent reports as detracting from the UK’s competitiveness.
Some smaller incentives are improved, the most significant being the doubling of Annual Investment Allowance to £500,000. Smaller companies will qualify for a more favourable payable R&D credit, and the period for Enterprise Zone capital allowances is extended by three years. A new theatre tax relief will be introduced. The list of energy saving and water efficient technologies qualifying for enhanced capital allowances is extended to include further technologies.
Banks will be frustrated at another bank levy redesign: whilst the intention may be good, and the result ultimately beneficial, any system changes required will create additional work.
Insurance companies will be pleased that a sensible tax regime has been confirmed as proposed for Solvency II regulatory capital instruments.
Loan relationships and derivative contracts – degrouping charges
As widely reported, HMRC has been consulting with financial institutions, advisers and other interested parties on the modernisation of the taxation of loan relationships and derivative contracts. The scope of the consultation is wide ranging, with many of the proposed changes being scheduled for Finance Bill 2015 at the earliest.
Budget 2014 contains one change to the taxation of loan relationships and derivative contracts arising from this consultation. Under current rules, where a loan relationship or derivative contract is transferred intra-group, it is transferred at “notional carrying value”, so that neither a gain nor a loss is triggered on its transfer.
Much like the corporation tax on chargeable gains rules, under current law there is a de-grouping charge in certain limited circumstances where the transferee ceases to be a member of the group within six years of acquiring the loan relationship. Only in limited circumstances will a loss be brought into account on such a de-grouping.
The proposed changes will ensure that both gains and losses will brought into account whenever the transferee leaves the group within the six-year period.
The other changes to the loan relationship rules arising from the consultation which are expected to be included in the Finance Bill 2014 (changes to the “bond fund” legislation, and other anti-avoidance measures) have not been included in the Budget 2014 press releases, but we expect them to be included in the Finance Bill 2014.
OECD action plan on Base Erosion and Profit Shifting – UK response
One particular area of interest was what the Government would say in Budget 2014 in relation to the OECD 15-point action plan to counter “Base Erosion and Profit Shifting” (BEPS). This is a term which encompasses a range of activities undertaken by multinational groups that are perceived to lead to avoidance of corporate income tax (ie, tax on a multinational group’s profits). This has been the subject of considerable public and political debate, particularly in the context of the digital economy. The initiative was started in 2012 and may lead to profound changes to corporate taxation.
There is very little in the way of immediate changes that will be made to domestic UK tax rules under this Budget in connection with BEPS. As detailed later, it was announced that an anti-avoidance rule that addressed a form of BEPS and was previously announced on 5 December 2013 is to be extended. This new provision is designed to prevent UK companies claiming a deduction for a payment that effectively transfers profits to another group company. This applies both domestically and internationally if there is a tax avoidance motive (with profits transferred to a low-tax jurisdiction being a potential indicator of a tax avoidance purpose), but may be a pre-cursor to other steps.
However, a general update on the UK Government’s approach to BEPS was given in the form of a policy paper, published on 19 March 2014 by HM Treasury and HMRC (with a foreword from the Chancellor) that sets out the UK’s priorities in relation to the 15 action points intended to address BEPS. The policy paper is in most part an endorsement of the BEPS initiative and highlights the prominent role that the UK has played to date; nevertheless, it is possible to discern a different approach to some of the action points. Some action points will clearly give rise to changes that will affect UK taxpayers and are likely to be fully endorsed by the Government, whereas others invite a more measured response. There are, however, some action points where it is clear that the Government considers that no real change is required. For these action points it is suggested that only limited changes should be made and, indeed, that changes are likely to be resisted as a potential barrier to a competitive UK tax system for business.
UK endorsement for change
It is generally recognised that the digital economy has brought new challenges that need to be addressed and the policy paper reflects this, although the Government does express caution in developing rules targeted only at digital business and states that the ability to grow businesses through digital technology should not be tempered. However, it seems very likely that the Government will support recommendations to implement changes to the definition of a permanent establishment to ensure that permanent establishments arise where significant economic activity takes place and that agency arrangements and activities previously considered to be preparatory or auxiliary are increasingly caught. This could, for example, affect how advertising profits of digital businesses are taxed.
In addition, there is endorsement for the work on the transfer pricing of intangibles that intends to examine exactly where value is created in global digital business and provide guidance as to how profits should be allocated. This work will have a much broader impact than just on the digital economy. It will include guidance on what value should be allocated to risk and capital (which is arguably too easily diverted to lower tax jurisdictions). New methods for allocating profits – and potentially a greater use of profit share methodology – are likely to be endorsed. The Government supports this and indeed envisages that, in certain circumstances, a departure from the arm's length principle may be permitted.
Other changes that are likely to receive Government endorsement include measures intended to prevent the abuse of double tax treaties - eg, the use of conduit companies incorporated within a structure with the primary purpose of obtaining benefits under a double tax treaty. A range of options were set out in a public discussion document released by the OECD on 14 March 2014, which include provisions already adopted by the UK in a number of its double tax treaties, but would lead to additional changes designed to prevent treaty shopping and the introduction of a “main purpose” rule to prevent treaty benefits being obtained where they are a “main purpose” of arrangements.
In addition the UK has already gone to significant lengths to promote transparency between tax jurisdictions – for example, through information exchange agreements – and is clearly endorsing the OECD proposals designed to promote transparency.
UK already BEPS compliant?
The policy document also highlights some areas where the Government considers the UK is already consistent with OECD objectives. A clear example of this is in relation to controlled foreign company (CFC) rules (which, broadly, seek to tax the undistributed profits of low-tax subsidiaries). The policy document states that, as the UK has just reformed its CFC rules, no substantial changes are anticipated in this area.
The Government also considers its own rules for the disclosure of tax avoidance schemes to be a model for achieving one of the OECD objectives and that it provides a suitable template to extend on a more international basis, so as to encourage disclosure of schemes that run counter to OECD objectives.
In other areas the endorsement given by the Government is more qualified. Although the Government endorses the work examining base erosion through interest deductions, the policy paper sets out in detail the UK’s rules that currently restrict a company’s ability to claim deductions for interest expenses. Before the BEPS project started, the Government indicated a desire not to move from this position in order to preserve the competitiveness of the UK tax system. The suggestion in the policy paper is that existing measures should be sufficient to address BEPS. In addition, the policy paper does refer to specific industry issues that need to be considered in relation to any proposed rules restricting deductions for interest expense (eg, for infrastructure projects and in connection generally with the financial services sector). Although the Government does express some caution, it should be noted that the policy paper still states that the Government will look at the recommendations arising from this particular action point.
The Government also supports the work to determine what qualify as harmful tax practices undertaken by countries, whilst confirming its view that the UK patent box is a regime based on substance and should not be considered to be harmful.
Finally, an endorsement is also given to initiatives (for which an OECD discussion document was released on 19 March 2014) to neutralise the effect of hybrid mismatches – for example, financing costs that are deductible in one territory but are recognised as non-taxable returns on equity in other jurisdictions – whilst recognising the need to ensure that consideration is given to the hybrid nature of certain regulatory capital in the financial services sector. This reflects the Government’s introduction of specific tax measures to aid banks to raise regulatory capital, and the future proposals to do the same for insurers faced with the introduction of Solvency II.
Clearly, the Budget was regarded as an opportunity for the Government to state its position in relation to the BEPS initiative. Although the policy paper does not provide a definitive guide as to what the outcome of the action points will be – which is inevitable in respect of a global project such as this – it is useful in providing an insight into the likely approach that the Government will take and how the Government intends to strike a balance between, on the one hand, addressing international tax avoidance and, on the other hand, preserving the competitiveness of the UK as a place to do business.
Profit transfer arrangements
In the Autumn Statement 2013 the Chancellor announced that an anti-avoidance provision would be introduced to counteract disguised profit distributions made through the use of derivative contracts known as total return swaps. HMRC were concerned that these arrangements were being used to transfer profits offshore.
In the Budget the Chancellor announced a more broadly based measure to counteract profit transfer arrangements effected through methods other than derivative contracts. The Autumn Statement measures relating to derivative contracts will nonetheless be included in the Finance Bill 2014.
The new measures will apply where two companies within the same group are party to any arrangements which result in what is in substance a payment from one company to the other of all or a significant part of the profits of a company. The provisions will only apply if the main purpose, or one of the main purposes, of the arrangement is to achieve a tax advantage. Where the provisions apply, the profits of the paying company are to be calculated for corporation tax purposes as if the profit transfer had not taken place. The test of whether two companies are part of a group is taken from the rules relating to the patent box. It is a wide test which will be met if the two companies are under common control or if their results are consolidated in a set of group accounts. The test will also be met where one company or a third company has a major interest in the other. The major interest test will apply to certain joint ventures where two companies together control a third company if each has at least a 40 per cent interest in the third company.
The new provisions will apply to payments made on or after 19 March 2014.
The measures announced in the Autumn Statement in relation to derivative contracts were widely criticised for their broad scope and the uncertainty they would create for business. Following consultation the draft provisions were amended to provide some additional clarity. It is surprising that this additional clarity has not been reflected in the new draft provisions. In particular, transactions were excluded from the derivative contract provisions where the contracts were of a kind companies involved in the same kind of business would enter into in the ordinary course of that business. The only protection available under the new provisions is to establish that obtaining a tax advantage was not one of the main purposes of the arrangements, which can be difficult to show, even if the arrangement is fundamentally commercial. The derivative contract rules also provided for a two-way adjustment so that the party receiving the disguised distribution would be entitled to relief corresponding to the amount of the disguised distribution on which the payer was taxed. There is no corresponding relief under the new measure which will expose companies to the risk of double taxation. It seems likely that this measure will be subject to intense debate and a request from businesses for there to be more certainty as to when it will apply.
Chargeable gains roll-over relief: investment in intangible fixed assets
When certain business assets are sold at a gain, a taxpayer may elect to roll-over any capital gain into newly acquired business assets; this is known as roll-over relief. The intended position, as far as HMRC are concerned, is that roll-over relief on the disposal of a tangible asset (which would normally fall within the tax on capital gains regime) should not be available where proceeds are reinvested in an intangible fixed asset such as intellectual property and goodwill. Intangible assets are taxed under a separate regime, which gives tax relief by reference to the relevant accounting treatment, and not by reference to the base cost, which will be reduced by the rolled-over gain. The provisions will be amended (with effect from 19 March 2014) to ensure that roll-over relief is not available under the chargeable gains rules where proceeds are reinvested in an intangible fixed asset. Legislation will also be introduced to prevent double tax relief, where roll-over relief has been claimed on a reinvestment in intangible fixed assets, between 1 April 2009 and 19 March 2014.
Competitiveness of UK tax administration
The Office of Tax Simplification (the OTS) has been asked to carry out a project to improve the competitiveness of UK tax administration for businesses. This review has been heavily influenced by the latest annual report prepared by the World Bank entitled “Doing Business” which has rated the UK as the tenth easiest place to do business. The UK hopes to join the top five (which are currently Singapore, Hong Kong, New Zealand, the USA and Denmark). The World Bank reports look at a number of factors when deciding upon its rankings. Two of these are relevant to tax administration. The first is paying taxes which looks at the cost of taxes, the time to comply and the number of payments required. The UK is fourteenth measured on this indicator. The second is the steps needing to register a new business, so for example, registering with HMRC. On this indicator, the UK ranks twenty-eighth. Whilst the project hopes to improve the UK’s ranking, it also wishes to produce recommendations which provide real simplifications for businesses. The review will concentrate on the SME sector and will focus on corporation tax, VAT and payroll taxes.
The OTS has carried out initial consultations with a small number of businesses. These appear to indicate that it would be helpful to reduce the number of adjustments which need to be made to accounting profit when calculating taxable profit (so for example, accounts depreciation is added back in computing profits with capital allowances being substituted for certain classes of assets) and that businesses would like a single named contact at HMRC, rather like a customer relationship manager. The initial indication is that VAT compliance is not felt to be problematic for many businesses. Some issues were raised in respect of the operation of payroll taxes, in particular PAYE and employers’ NICs, although real time information may have improved these difficulties.
The OTS will be consulting with businesses, with the intention of publishing a report in the summer of 2014.
Business Premises Renovation Allowances
Further changes were announced in the Budget to business premises renovation allowances (BPRA). BPRA were introduced in 2005 as a temporary measure (which currently applies to expenditure incurred before April 2017) to incentivise the conversion or renovation of empty business premises. BPRA provides taxpayers with a 100 per cent first year allowance for the cost of such work. In July 2013, HMRC launched a public consultation into proposed changes to BPRA, which it is understood was triggered by DOTAS disclosures it received. HMRC have also published “Spotlight 21” in which they indicate their intention to challenge claims for BPRA which they consider to be inappropriate.
The main changes that have been announced are:
- the types of expenditure for which relief is available will be limited to the costs of building work, architectural and design fees, surveying or engineering services, planning applications and statutory fees or statutory permissions. Other costs incurred on converting, renovating or repairing qualifying buildings (such as the cost of employing a project manager) will only be eligible to the extent those costs do not exceed 5 per cent of the expenditure incurred on building works. Certain types of expenditure are expressly excluded from qualifying, for example, the cost of buying the land on which the building is located and the cost of most plant or machinery. Plant and machinery which is an integral feature or falls within certain additional items (details of which will be provided at a later date) will not be prevented from qualifying for BPRA;
- where expenditure is incurred in advance and the works to which that expenditure relates are not completed within 36 months, BPRA will be withdrawn until the works are completed. The driver behind requiring the works to be completed within a set timeframe is that expenditure is typically incurred for the purposes of BPRA when an unconditional obligation to pay that expenditure is made, provided the sum is paid within four months of the making of the contract. Unlike with capital allowances which are available under Part 2 CAA 2001, the BPRA legislation does not contain a provision which requires a claw back of any allowances, or a disposal value, to be brought into account if the works are not actually undertaken;
- if a business receives another form of Government assistance, it will not be entitled to claim BPRA for the amount covered by it. The impacts report indicates that this is aimed at grant funding which is received towards the cost of BPRA projects, and not at situations where, say, capital allowances could be available for part of the cost.
Revised legislation should be published shortly which should make the exact scope of the changes clear. It is anticipated that these changes will apply for expenditure incurred on or after 1 April 2014 for corporates and 6 April 2014 for individuals.
Enterprise Zone Scheme
The scheme, which gives 100 per cent first year allowances to companies investing in plant or machinery for use in designated areas (Enterprise Zones), will be extended until 31 March 2020. Enhanced allowances in this form have been given since 2012 in order to incentivise companies to make new investments in certain assisted areas. The tax relief is part of a wider package which comprises simplified planning and business rates discounts for businesses located in assisted areas (the intention was that these areas would be chosen because they had a strong focus on manufacturing).
The focus on tax avoidance in Budget 2014 is “collect now, contest later”. Compared with previous years, there are relatively few announcements of targeted anti-avoidance legislation to close down schemes, perhaps a sign that a combination of disclosure, media focus and better working relationships between taxpayers and HMRC are, slowly, leading to a change in behaviour.
Other avoidance measures include profit shifting, bareboat chartering and dual employment contracts. A further consultation of DOTAS hallmarks is promised, as is a possible strengthening of HMRC powers to tackle non-compliance.
Accelerated payments of tax – “follower” notices, DOTAS and GAAR
Budget 2014 contains measures to speed up the collection of tax in tax avoidance cases in three circumstances:
- where the taxpayer’s transaction is relevantly similar to a case where there has been a final decision of a court in HMRC’s favour (so called “follower” notices)
- where the taxpayer’s transaction falls to be disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation
- where HMRC are contending that the General Anti-Abuse Rule (GAAR) applies to the transaction, the transaction has been referred to the GAAR Panel, and the GAAR Panel’s opinion supports HMRC’s position.
In each of these cases HMRC will be able to issue a notice requiring the taxpayer to pay the contested tax within 90 days of the receipt of the notice. Such amount (with interest) would be repaid to the taxpayer should the taxpayer ultimately be successful in litigation or through settlement.
It is proposed that these HMRC powers would apply to any transaction which is under enquiry at Royal Assent of the Finance Bill 2014, and any transaction enquired into thereafter. Transactions entered into before Royal Assent will therefore be affected.
These proposals have been the subject of a short consultation, the results of which have not yet been published. Many of the legal, tax and accountancy representative bodies made representations, which have been published, and all of those published representations are highly critical of the proposals. Particular points which were raised in the responses include:
- it was not proposed that a taxpayer would have any right to appeal against the issue of a follower notice; this is unsatisfactory;
- that HMRC, having collected the tax, would not be incentivised to proceed to litigation;
- that, in respect of the DOTAS proposals, the measure is poorly targeted. DOTAS disclosures may have been made on a protective basis, where advisers were unsure of whether the criteria for disclosure are met, and as such, the transaction under consideration is unlikely to be as offensive as a transaction where a court has found for HMRC, or where GAAR counteraction is being taken; and
- the proposals have retrospective effect.
Draft legislation has not yet been published, so we wait to see whether the Government has taken into account any of these representations.
Building on the 2012 changes, the threshold for properties subject to the 15 per cent stamp duty land tax (SDLT) rate and the Annual Tax on Enveloped Dwellings (ATED) is reduced to £500,000 (from £2m). In addition, consideration continues to be given to levying CGT on disposals of properties by non-UK residents.
Where a “dwelling” worth £2 million or more is acquired by a “non-natural person” such as a company, the rate of stamp duty land tax (SDLT) is 15 per cent (as opposed to 7 per cent where the acquisition is by an individual). Also, such persons are subject to an ATED at rates which vary from £15,000 to £140,000 per annum. Further, where ATED applies, any gain on a disposal of the property is subject to capital gains tax at 28 per cent, even if the vehicle is not UK resident for tax purposes. The 15 per cent SDLT rate and the ATED regime are being extended to dwellings worth over £500,000. The SDLT change applies to acquisitions on or after 20 March 2014 unless contracts have already been exchanged before that date. The ATED changes (other than capital gains tax) apply from April 2015 for properties worth between £1 million and £2 million (where the annual charge will be £7,000) and April 2016 for properties worth between £500,000 and £1 million (where the charge will be £3,500). The capital gains tax changes apply to disposals after 5 April 2015 for properties worth between £1 million and £2 million, and after 5 April 2016 for properties worth between £500,000 and £1 million. In each case it is only the gain which accrues after the relevant date that will be subject to the tax.
These punitive taxes are targeted at individuals who “envelope” their UK residential property in offshore companies. This historically had the advantage of avoiding SDLT on property sales by transferring the shares in the companies rather than the land itself. Also, the use of non-UK companies has inheritance tax benefits for non-UK domiciled individuals. There are important exemptions. In particular, where the property is held by a company or other non-natural person for investment purposes and there is no right of occupation for any individual who is connected with the owning company, the charges will not apply. Similarly, there is an exemption for properties owned by property developers. These exemptions will continue to apply so that bona fide commercial operations should not be affected by these changes.
Employers and employees
In addition to countering perceived abuses, such as dual employment contracts, the Budget confirms measures which will provide some modest simplification in relation to employment taxes. Most were previously announced, and many result from the efforts of the Office for Tax Simplification (OTS). The process has done much to bring legitimate concerns to the Government’s attention, particularly in relation to the difficult issue of internationally mobile employees (IMEs). One example is the grant from April 2015 of corporation tax relief for UK companies which host IMEs who are subject to UK employment taxes in respect of shares awarded in their non-UK employer.
In addition, the £5,000 limit for interest free (or low interest) loans to be made without triggering employment taxes will be raised to £10,000, and some relief is now available from the penal (section 222) charge which applies where employees do not make good their employers for certain PAYE charges associated with share incentives. Employees will now have 90 days from the end of the tax year in which the relevant event occurs, rather than 90 days from that event, in order to make good the PAYE.
Other proposals by the OTS on unapproved share schemes will be the subject of consultation.
Employment taxes – action against use of ‘dual contracts’ by non-domiciliaries
The Budget confirmed that the Government will proceed with a modified form of the proposals to deny the remittance basis to certain income of UK tax resident but non-UK domiciled employees (non-doms). This change will only affect non-doms who have employment contracts with both a UK employer and, for their overseas duties, a non-UK employer. Such ‘dual contract’ arrangements offer the possibility to defer being taxed on the remuneration for the overseas duties until it is remitted to the UK (the remittance basis of taxation) provided the functions of the two employments are kept separate.
The Government proposes to deny the remittance basis for such overseas remuneration and tax the employee on an arising basis in respect of income from the overseas employment, but only if the two employers are associated to each other, the two employment contracts are related and any overseas tax which is payable on the overseas remuneration is significantly less than the UK tax that would have been paid on that income. These proposals were first published in January 2014, but are intended to have effect from 6 April 2014.
There were concerns about the breadth of the proposals; in particular, that the threshold for the two contracts being ‘related’ was a very low one (for example, the non-dom being a director of one of the employers would automatically result in the contracts being related). Although some concessions have been made in response to these concerns, it is doubtful that the proposals have been narrowed sufficiently to counter only the intended mischief, namely avoidance involving the artificial splitting of employment contracts.
The main concession is that the remittance basis will not be lost merely because the individual is a director of one of the employers, but this is subject to the condition that the individual owns/controls less than 5 per cent of the company’s ordinary share capital. Another change is to the formula for calculating whether the overseas tax is significantly lower than the UK tax. Now the test is whether the overseas rate of tax on the overseas remuneration is less than 65 per cent of the UK’s additional rate, rather than 75 per cent of that rate – that is, the overseas tax on overseas remuneration must be less than 29.25 per cent, rather than 33.75 per cent, for the remittance basis to be denied for that income.
No change is proposed to the commencement date, which will be 6 April 2014. However, it will not apply to remuneration earned for duties performed in any earlier tax year (that is, 2013/14 or earlier).
In cases not caught by the new provisions, extreme care is nevertheless required to operate this type of arrangement properly, as modern technology has made maintaining the required separation of functions more difficult.
Consultation announced on Simplification OTS review of unapproved share schemes
The Government will issue a discussion document later this year to collect views on the OTS’ recommendations to introduce the concept of a ‘marketable security’ and a new employee shareholding vehicle.
The ‘marketable security’ proposal would allow individuals to choose the time when a tax charge arises in relation to an employment related security, being either on acquisition of the security or on a later date when the security can be sold for cash. The default position would be that no tax charge arises until the security can be sold for cash.
The employee shareholder vehicle proposal involves the introduction of a simple vehicle to enable companies to both manage their employee share arrangements and create a market for employees’ shares. This is consistent with recent Government policy aimed at encouraging wider employee share ownership in private companies. Whilst the structure could take the form of an employee benefit trust, the OTS are keen to move away from the negative associations of such trusts as tax avoidance entities.
Oil and Gas
For the oil and gas sector, Budget 2014 represents a mixed bag. On the one hand the Government have confirmed their commitment to maximising the remaining North Sea oil and gas resources and implementing the recommendations to tackle falling productivity and rising costs as set out in the report by Sir Ian Wood.
To that end, the Treasury will be conducting a wholesale review of the UK’s oil and gas fiscal regime to take account of the changing environment as the basin matures and extraction becomes increasingly difficult and costly. As announced in February 2014, stewardship of the UK’s oil and gas resources will move to a new arm’s length body, which will work with the Treasury in their review. Initial conclusions will be set out in this year’s Autumn Statement and it is expected that any specific proposals for change coming out of this review would be subject to full consultation.
On the other hand, members of the industry will be frustrated to learn that the Government is pushing ahead with their controversial bareboat chartering proposals. Whilst some changes have been made for the better, the likely impact (for example, on marginal projects that would rely on leased drilling rigs) appears inconsistent with a commitment to maximise the potential of the UK Continental Shelf.
Turning back to positive developments, it is to be hoped that a new allowance for ultra high pressure, high temperature projects will lead to increased investment. Oil and gas companies will also welcome the removal of research and development allowances from the scope of the anti-loss buying rules introduced last year.
In another welcome development, following representations from the oil and gas industry, successful onshore planning and permitting costs will in the future be eligible for 100 per cent first year allowances as expenditure on mineral exploration and access. Finally, as previously announced, the scope of reinvestment relief andsubstantial shareholdings relief will be extended, benefiting companies involved in exploration and appraisal activity.
The Government announced highly controversial proposals in the Autumn Statement to cap the amount deductible for intra-group leasing payments for large offshore oil and gas assets and to introduce a new ring fence to protect the resulting revenue. These proposals caused deep concern amongst members of the UK oil and gas industry, not least due to the surprise nature of the announcement. Companies at the point of sanctioning the development of marginal fields through projects involving the lease of major assets such as floating production storage and offloading vessels (FPSOs) were suddenly faced with the potential for additional costs that could render the projects uneconomic. The uncertainty surrounding these proposals has meant that proposed projects have been placed on hold.
The Government has been consulting with members of the industry in relation to these proposals and has received over 90 responses. Notwithstanding the hostile response from industry members, the Government has announced that they will proceed with their bareboat chartering measures. However, the following changes will be made:
- the scope of the measure will be limited to drilling rigs and accommodation vessels. All other vessels (including FPSOs, seismic vessels, and heavy-lift) vessels will be excluded,
- the “hire cap” (the deduction available for the bareboat charter) will be increased to 7.5 per cent of the historical cost of the asset which is subject to the lease, up from the 6.5 per cent announced in the Autumn Statement,
- the pro-rata calculation will be based on worldwide use of the asset, and
- the Government will review the impact of the measure a year after its implementation.
Whilst these changes go some way to addressing the concerns of industry members, the measure will still be very unwelcome, as will the introduction of a new ring fence for this income source. The UK has some of the highest drilling rig rates in the world and it can only be expected that asset charterers will now seek to pass on the additional costs resulting from this measure to upstream operating companies leasing these assets.
Draft legislation will be published on 1 April 2014, the date from which these changes will have effect, and will be open for technical comments until 9 May.
Ultra high pressure, high temperature cluster allowance
The Government will be consulting on the introduction of a new ultra high pressure, high temperature (HP/HT) cluster allowance, to replace the existing HP/HT field allowance. The allowance is expected to be similar in structure to the onshore allowance announced in the Autumn Statement. It will exempt a portion of a company’s profits from its adjusted ring fence profits for the purposes of the supplementary charge. The amount of profit that will be exempt will be calculated as a percentage of the capital expenditure a company incurs on qualifying projects. A rate of 62.5 per cent is put forward, though the exact rate will be announced following consultation with industry over the summer.
The Government is anticipating that the new allowance could generate billions of pounds of capital investment in large HP/HT projects in the central North Sea. In that respect, it is to be hoped that the revised allowance (being directly linked to a company’s qualifying capital expenditure) will provide a greater incentive to investment in HP/HT oil and gas projects than its predecessors, as these projects have the potential to fulfil a significant portion of the UK’s gas demand.
Legislation will be introduced in Finance Bill 2015.
Loss buying rules (research and development allowances)
The loss buying anti-avoidance rules introduced in the Finance Act 2013 apply where there has been a change in the ownership of a company. They restrict the use of unrealised losses (deductible amounts) against total profits within the company, or as group relief by the purchasing group, and restrict any use of those amounts within the company (or one connected to it) following the transfer of profits to that company. In each case an avoidance motive must be present.
These rules had an unintended impact on research and development allowances (RDAs). RDAs are available as a 100 per cent allowance for capital expenditure incurred by a person on research and development directly undertaken by him or on his behalf if he is carrying on a trade connected with the research and development or (importantly) after incurring the expenditure he sets up and commences a trade connected with the research and development. An expense crystallising as RDAs would form part of the ‘deductible amounts’ of a company. The loss buying rules catch situations where a company does preliminary capital work in the furtherance of research and development, but does not reach the point of trading, and then is sold on to a trading group. Before the introduction of the loss buying anti-avoidance rules, the trading group would have been entitled to claim the research and development allowances. The avoidance motive test did not reduce uncertainty surrounding the application of the rules sufficiently as it can be difficult to demonstrate that the ability to utilise research and development allowances is not amongst the purposes for which a company is being acquired (not least because the availability of the allowances is likely to be taken into account in arriving at the purchase price).
Following consultation with industry, research and development allowances will be excluded from the scope of the anti-loss buying rules. This will affect non-trading (or pre-trading) companies that have incurred capital expenditure on research and development, and those buying such companies in whose hands the expenditure will qualify for RDAs. The change is likely to be particularly welcomed by the oil and gas industry, where exploration and appraisal expenditure qualifies for RDAs.
The change will be in effect from 1 April 2014, and introduced in Finance Bill 2014.
Mineral extraction allowances - onshore planning and permitting costs
The Government will extend the scope of qualifying expenditure on mineral exploration and access to include expenditure on seeking planning permission and permits, where these are granted. As such, these costs will be treated as expenditure on mineral exploration and access rather than as expenditure on acquiring a mineral asset. In the context of the oil and gas industry, this means that onshore planning and permitting costs will receive 100 per cent first year allowances.
The measure will have effect in respect of qualifying expenditure incurred on and after the date that Finance Bill 2014 receives Royal Assent.
Reinvestment relief and the substantial shareholdings exemption
As previously announced in the Autumn Statement, the scope of the substantial shareholdings exemption and reinvestment relief will be extended to include exploration and appraisal activity.
The scope of the substantial shareholdings exemption 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 the disposal, where that subsidiary is using assets for oil and gas exploration and appraisal activity that have been transferred from other group companies, and where the other conditions for the exemption are met.
The scope of reinvestment relief will be extended to prevent a chargeable gain being subject to a corporation tax charge, where an asset is disposed of by a company in the course of oil and gas exploration and appraisal activities, and the proceeds are then reinvested in the UK or UK Continental Shelf. Following consultation, the legislation has been revised to allow proceeds also to be invested in oil assets used in a ring fence trade.
Draft legislation had stated that these changes would become effective from the date of Royal Assent of the Finance Bill 2014. However, it has been confirmed today that the changes will now be introduced with effect for disposals on or after 1 April 2014.
Renewable energy/carbon pricing
The energy policy of successive Governments has been shaped by a mixture of:
- tax incentives aimed at encouraging green behaviour,
- subsidies and other incentives intended to encourage investment in renewable energy and other low-carbon ventures, and
- tax disincentives aimed at discouraging high-carbon behaviour.
The specific energy policies have been overlaid by the general tax policies covering investment generally (such as capital allowances).
The consequence of this mix is that some combinations of subsidies and tax reliefs have led to some activities obtaining greater tax relief than was perhaps intended. Conversely, once the effect of taxation disincentives (such as the carbon price floor) starts becoming apparent, so too do other unintended effects which are at odds with long-term economic policy.
This year’s Budget contains a mix of measures intended to clear up some of these unintended consequences, and these are summarised below.
Climate change levy/Carbon price support
As announced last year, the main rate of climate change levy (CCL) will not in future be charged on energy that is used for certain metallurgical and mineralogical processes. The aim of this is to maintain the competitiveness of certain parts of the UK manufacturing and recycling industry by removing the CCL element of the energy prices faced by these businesses (which, because of CCL and the high energy use by these businesses, could make them uncompetitive). The legislation will contain certain consequential amendments to dovetail the change with the Climate Change Agreement and Carbon Reduction Commitment schemes. The change will take place in relation to supplies of taxable commodities made after 1 April 2014.
The main rates of CCL will be increased in accordance with inflation.
The carbon price support mechanism (CPS) is intended, in conjunction with the EU Emissions Trading Scheme (EU ETS), to equalise the cost of producing electricity whether produced from renewable or non-renewable sources (and thus remove the natural price advantage that high-carbon methods of electricity production have). The price of carbon under the EU ETS has not been as high as had been anticipated when the scheme was set up and therefore the UK’s own CPS mechanism was leading to unduly high energy prices for businesses and consumers. As widely expected, it was announced in the Budget that the UK element of the CPS rate of CCL will be fixed at a maximum of £18 per tCO2 until 2019-20 in order to provide certainty. Secondary legislation will also be introduced to set the CPS rates of fuel duty.
From 1 April 2015, the CPS mechanism will also be amended to allow an exemption from the carbon price floor for fossil fuels that are used in combined heat and power plants to generate good quality electricity that is used on-site.
Venture capital schemes and subsidised energy schemes
It has been announced that, from Royal Assent to the Finance Act 2014, investments in Enterprise Investment Schemes (EIS), and Seed Enterprise Investment Schemes (SEIS) and investments by Venture Capital Trust Schemes (VCT) will not be able to obtain tax benefits under those schemes where they relate to investments that also benefit from Renewable Obligations Certificates or Renewable Heat Incentive subsidies. This is consistent with the recent approach that has been taken in trying to dovetail existing tax reliefs with subsidies available to the renewables sector so that people are not able to benefit from beneficial tax regimes in order to invest in a subsidised cash flow.
VAT on gas and electricity supplies – reverse charge
It was announced that legislation will be introduced to prevent carousel fraud in the wholesale gas and electricity markets. This will involve introducing a reverse charge in a way similar to that introduced in relation to the EU ETS when similar fraud issues were discovered. This may require changes to VAT accounting systems in these wholesale markets but further detail is due to be announced at a later date.
Pensions and savings
The overwhelming theme of Budget 2014 was to liberalise the ways in which defined contribution pension schemes can be enjoyed by their owners, and to give additional incentives to savers. The removal of a punitive (55 per cent) tax rate on certain pension drawings should be welcomed, although the considerable increase it generates in the tax take in future years may raise some eyebrows.
The introduction of a more flexible ISA regime (the distinction between cash and share ISAs being removed) and the increase in the ISA limit to £15,000 will be popular measures, notwithstanding the (rather cringe-worthy) NISA acronym. In addition, permitted investments will be widened to include Peer to Peer (P2P) lending, and retail bonds, enabling investors to target assets with a better return rate than at present.
The Seed Enterprise Investment Scheme (SEIS) is made permanent, but rules are introduced to prevent certain perceived abuses in relation to VCTs which enable recovery of funds at an early stage.
For those on lower income, a zero tax rate on savings income up to £5,000 per annum, with the ability to receive bank interest gross will ameliorate to an extent the low interest rates currently being paid.
The abolition of stamp duty on the transfer of certain AIM listed shares will be a benefit to that market, which suffered after the removal of the low CGT rate it offered prior to 2008. SDLT on setting up PAIFs is to be consulted on, but there is a less welcome change to the SDRT rules on in specie redemptions.
The following are the key measures of interest in the Budget in relation to pensions.
Pensions tax relief - annual allowance and lifetime allowances
There is no change to the previously announced reduction in the annual allowance to £40,000 for the 2014-15 tax year onwards and the reduction in the lifetime allowance to £1.25 million for the 2014-15 tax year. These reductions, together with the new option of “individual protection 2014” to protect certain individuals from retrospective tax charges, will proceed as planned.
More freedom and choice in pensions
The Government’s proposals for allowing more flexible access to pensions savings from April 2015 are radical and are intended to be popular with individual savers.
In response to the increasing proportion of the population who will become entitled to pensions as a result of compulsory “auto enrolment” into a pensions scheme, the perceived difficulties in the annuity market and the sheer cost of annuities, it is proposed that by April 2015:
- legislation will permit members to access all their defined contribution pension savings from age 55 (this age may become 57 when the state pension age increases to 67 in 2028);
- tax-free lump sums would apply to defined contribution savings as now and any additional lump sum would be taxed at an individual’s marginal rate of tax;
- pension providers will have a new duty to deliver free and impartial face-to-face guidance to help individuals make a choice by April 2015.
A consultation has been launched on these proposals including on whether the right of an individual to transfer from a defined benefit scheme to a defined contribution scheme should be removed. The consultation will close on 11 June 2014.
The Government will also explore with interested parties whether the rules which prevent individuals aged 75 and over from claiming tax relief on their pension contributions should be amended or abolished.
Interim flexibility in pension options
Prior to the proposed changes outlined above coming into force, the following changes will apply from 27 March 2014 as an interim measure:
- capped income drawdown limit - the amount that a member can be paid directly from capped income drawdown funds is increased by raising the capped drawdown limit for pensioners from 120 per cent to 150 per cent of the value of an equivalent annuity;
- flexible income drawdown - the availability of flexible drawdown is extended by lowering the minimum income required to qualify for flexible drawdown from £20,000 to £12,000 per annum. Where flexible income drawdown applies, a member may access all his or her defined contribution pension savings, subject to tax at the member’s marginal rate of tax;
- commutation of total trivial pension savings - the maximum amount of overall pension savings which can be exchanged for a cash sum is increased from £18,000 to £30,000. (Where a member has overall pension savings of £19,000, the savings cannot be exchanged for cash under the current tax rules on trivial commutation);
- commutation of individual trivial pension pots - the maximum size of small pension pots which can be exchanged for a cash sum, regardless of total pension savings, is increased from £2,000 to £10,000. The number of small personal pension pots that can be cashed in this way will increase from two to three.
New pensions liberation fraud legislation
The Government intends to further tackle pensions liberation fraud. Pensions liberation fraud often involves an unsolicited approach offering members early access to pension savings before the age of 55 (by transferring their assets to a new scheme) without disclosing the penal tax consequences of doing so and the frequently high charges imposed by the other scheme, which may turn out to be completely bogus.
The changes are aimed at increasing the powers HMRC needs to identify and tackle pension schemes which are being, or are intended to be, used as liberation vehicles.
Legislation will be introduced in the Finance Act 2014 (amending the Finance Act 2004) to widen the circumstances in which HMRC may refuse to register a pension scheme where HMRC believes:
- that the scheme administrator is not a fit and proper person to fulfil that role; and
- that the scheme has been established for purposes other than to provide pension benefits.
The amendments will also increase HMRC’s information powers in relation to scheme administrators and third parties in connection with new applications to register pension schemes. The new powers will enable HMRC to enquire into whether a scheme administrator is a fit and proper person, with new penalties for false information of up to £3,000 being introduced in connection with the registration application.
Similar changes to the circumstances when HMRC can refuse to register a pension scheme will be made to circumstances when HMRC can de-register a pension scheme.
Authorised Property Funds
It has been announced that the Government is to consult on the stamp duty land tax (SDLT) treatment of the seeding of Property Authorised Investment Funds (PAIFs) and co-ownership authorised contractual schemes (CACS).
A PAIF is a UK resident open-ended investment company which invests in UK land and buildings and is subject to a beneficial tax regime. At present, SDLT is payable in the normal way when land and buildings are transferred to a PAIF (apart from transitional relief which applies where an authorised property unit trust converts to a PAIF) and this has acted as a deterrent to the launch of new PAIFs.
CACS are a form of collective investment scheme which can be authorised by the Financial Conduct Authority and take the form of either a contractual co-ownership arrangement or a limited partnership scheme. At present these are generally treated as partnerships for SDLT purposes.
Consultation on the SDLT treatment of these vehicle is welcome as it is assumed that the intention is to provide reliefs which are aimed at making them more attractive to set up.
Stamp Duty Reserve Tax for unit trusts and OEICs
At present there is a complicated set of rules which impose Stamp Duty Reserve Tax (SDRT) on transactions in units in UK unit trusts and shares in open-ended investment companies (OEICs). These rules are required because investors in such vehicles usually acquire their interests by subscribing for new units or shares and dispose of them by redemption (as opposed to simply buying and selling them in the market as is the case for shares in closed-ended companies). In simple terms, the rules impose a charge to SDRT at 0.5 per cent on the relevant vehicle where units or shares are redeemed or bought back.
Where the shares or units are redeemed in consideration for the transfer in specie of the underlying shares or securities owned by the unit trust or OEIC, there is an exemption from SDRT on the transfer of those securities. This is necessary to avoid a double charge, once on the redemption of the units/shares and again on the transfer of the underlying securities.
It was announced in 2013 that these rules, contained in Schedule 19 Finance Act 1999, are to be abolished from 30 March 2014.
It has now been announced as part of the Budget that, as the abolition of these rules means that there could no longer be a double charge for in specie redemptions, the exemption from SDRT on the transfer in specie of underlying investments is to be withdrawn – that is, there will now be a charge to SDRT where UK shares or securities are transferred to unit holders or shareholders in an OEIC in consideration for the redemption or buy-back of the units/shares. This charge will not apply where the securities are transferred to investors in proportion to their holding of units/shares. This is because such pro-rata redemptions result in no real change in the beneficial ownership of the securities when looking through the existence of the unit trust or OEIC. Where the charge applies, it will be at 0.5 per cent of the value of the units or shares surrendered.
Duties and levies
Air Passenger Duty (APD): banding reform
Presently the rate of APD is determined by reference to the distance between London and the capital city of the destination country. This has led to some distortion in the rates applicable as the capital city of one country can be significantly closer than the actual destination of the aircraft. For example, a flight to Vladivostok is presently within Band A due to the proximity of London to Moscow, whereas a flight to nearby Seoul is in Band C.
From April 2015 the number of APD destination bands will be reduced from four to two, by merging the former bands B, C and D. Band A will continue to apply to flights where the destination is 2,000 miles or less from London. Band B will apply to all long haul flights where the destination is more than 2,000 miles.
The changes to the rates of APD are less favourable for those travelling on private jets. Since April 2013 private jets have been charged APD at the rate of four times the rate applicable to economy class passengers. This will rise to a rate that is six times the rate applicable to economy class passengers. Private jets for these purposes are aircraft with an authorised take-off weight of 20 tonnes or more, and fewer than 19 seats. These changes will also have effect from 1 April 2015.
Planned increases in the rates applicable to all Bands (in line with inflation) that were scheduled to take effect from 1 April 2014 will go ahead as previously announced. Legislation will be introduced in the Finance Bill 2014.
Various exemptions in the aggregates levy rules are currently under investigation by the European Commission as possibly constituting illegal State Aid. Although the UK Government says it is defending the current position, it has announced a suspension of those exemptions until agreement is reached with the Commission on the status of the exemptions.
The rates of landfill tax will rise in line with inflation for 2015-16.