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Budget 2016 summary

The Budget 2016 Summary


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The Budget Report 2016

The Budget 2016

It seems like only a few months ago that we were talking about Budget Day. Well perhaps that’s because this is the third Budget in 12 months. The difference this time is that the Chancellor had two major issues to consider:

  • The worsening global economy which appears to be threatening the UK’s recovery and the Chancellor’s plans for addressing the deficit
  • The political turmoil caused by the impending referendum in June on the UK’s membership of the European Community.

This year’s Budget followed the precedent of the previous two Budgets in announcing changes in advance. There were several changes announced in the previous two Budgets, or Finance Acts 2015, that come into effect on 6 April 2016; principally changes to business expenses

Since the last Budget in July 2015, consultations have been held on travel and subsistence (T&S) for intermediaries; proposals to revise temporary workplaces; changes to company distribution; and the discussion on IR35.

Towards the end of last year the government issued the majority of the clauses, in draft, of the Finance Bill 2016 together with updates on consultations. Publication of draft Finance Bill clauses are now an established way in which tax policy is developed, communicated and legislated.

The Budget 2016 updated some of these previous announcements and also proposed completely new measures, some of which apply immediately, others in April 2016 and some take effect at a later date.

So, after a tumultuous year it looks like the outlook for our world continues to be one of evolution and changes.

We’ve prepared a summary of the Budget announcements so you have everything you need to hand. On pages 3 to 14 you’ll find the announcements of most interest to the contractor community. Pages 15 to 25 have information about other issues arising from the Budget that are of interest to everyone, whatever their employment status.

Please remember, the Budget proposals may be subject to amendment in a Finance Act. You should contact your accountant before taking any action as a result of the contents of this summary.

Already a client? If you have any specific questions or concerns following yesterday’s Budget, please contact your Personal Accountant directly.

Not a client? We specialise in helping contractors get the most out of running their Limited Company. As an Intouch client you’ll benefit from year round service from your dedicated Personal Accountant supported by our online portal, built for contractors to access wherever you and whenever you want.

Call us on 01202 901 385 or email enquiries@intouchaccounting.com

Disclaimer This summary provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.

Budget announcements…for contractors

Here we look at Budget measures that are specifically of interest to contractors and freelancers, in particular:

  • Personal service companies (PSCs) in the public sector
  • Tax bands and rates for dividends
  • Loans to participators
  • Employment Allowance
  • Expenses
  • Anti-avoidance measures

Off-payroll working in the public sector

From April 2017 the government proposes to make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through Limited Companies in the public sector. The rules will remain unchanged for those working in the private sector

The outline of the proposals is:

  1. The public sector body or agency (paying) the PSC must assess “employment” status
  2. HMRC will provide “simplified tools” for this purpose

And where employment status is found:

  1. The fee due to the PSC, excluding VAT, will be reduced by 5%, then
  2. Income Tax and Employee’s National Insurance (NI) will be calculated and deducted before the PSC is paid
  3. The PSC will no longer be responsible for Employer’s NI, this will be met by the client or agency
  4. The combined deductions from the PSC and the Employer’s NI will be paid by the client or agency

The government will consult on a clearer and simpler set of tests and online tools.

Comment

What initially appeared as new legislation was in fact an announcement of a consultation that would consider proposals in advance of a change from April 2017.

The treatment of Employers NI, as proposed, is inconsistent with the current IR35 and we must wonder how those inconsistencies will be addressed in the final legislation. However, the principle of passing the Employer’s NI liability to the client or agency appears fair and likely to result in a proper consideration of status. Most consultations lead to legislation, so it is reasonable to consider these changes will occur in substantially the way proposed.

It’s likely that this or a separate consultation will look at IR35 further and in particular seek a simplified means of assessing status. We will be watching this space very carefully and reporting to our contractors as the situation emerges and develops. Intouch will continue to engage with HMRC during the consultation process to champion the cause of Limited Company contractors.

Tax bands and rates – dividends

The Chancellor made no further mention of the new dividend tax rules announced last year and which come into effect on 6 April 2016.

Currently, when a dividend is paid to an individual, it is subject to different tax rates compared to other income due to a 10% notional tax credit being added to the dividend. So for an individual who has dividend income which falls into the basic rate band the effective tax rate is nil as the 10% tax credit covers the 10% tax liability. For higher rate and additional rate taxpayers, the effective tax rates on a dividend receipt are 25% and 30.6% respectively.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

From 6 April 2016:

  • the 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax
  • a new Dividend Tax Allowance charges the first £5,000 of dividends received in a tax year at 0%
  • for dividends above £5,000, new rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Comment

There is still a short window of opportunity for you to take dividends, before 6 April 2016. As long as profits exist, if you are likely to exceed the basic rate threshold in the next tax year, you should consider accelerating those dividends likely to be taxed at 32.5% to before 6 April. But so seek specific advice to ensure all issues are properly considered.

You can download our full ebrief for more information about the changes and what you can do.

Loans to participators

The 25% rate of tax charged on loans to participators and other arrangements by close companies will increase to 32.5%. This applies to loans made and benefits conferred on or after 6 April 2016.

This increased rate mirrors the dividend upper rate. The government has noted that this will prevent individuals gaining a tax advantage by taking loans or making other arrangements to extract value from their company rather than remuneration or dividends.

Comment

What was very apparent in the Budget was that the Chancellor has realised that once the new dividends tax rules come into force, Directors loans would be have been a cheaper (tax) alternative. So, the mitigate this, the tax on loans taken from your company after 6 April 2016 will increase to 32.5% – exactly the same as the tax for any dividends falling in the higher rate tax band, under the new rules. This removes part of the incentive to make use of loans instead of taking dividends.

The benefit doesn’t entirely disappear though:

A dividend of £10,000 produces a dividend liability at 32.5% of £3,250, where taxed in the higher rate, and net cash of £6,750 for the recipient.

 A loan to the recipient of £6,750 would give rise to s455 tax of £2,193.75, payable by the company, a total cost of £8,943.75. This is less than the cost to the company of the dividend with a saving of £1,056.25. Without the change, the saving would be £1,562.50

Employment Allowance

The NIC Employment Allowance was introduced from 6 April 2014. It is an annual allowance which is available to many employers and can be offset against their employer NIC liability.

From April 2016, the government will increase the NIC Employment Allowance from £2,000 to £3,000 a year. The increase will mean that businesses will be able to employ four workers full time on the new National Living Wage without paying any NIC.

To ensure that the NIC Employment Allowance is focussed on businesses and charities that support employment, from April 2016 companies where the director is the sole employee will no longer be able to claim the Employment Allowance.

Employers who hire an illegal worker face civil penalties from the Home Office. The government will build on this deterrent by removing a year’s Employment Allowance from those receiving civil penalties, starting in 2018.

Comment

It is unclear whether simply appointing a spouse or partner as a second employee is sufficient to continue to claim the Employment Allowance. We have seen nothing to date to indicate that such a simple move will not be effective provided the employment is real and the salary commercially sensible for the work completed.

Employee benefits and expenses changes from 6 April 2016

From 6 April 2016 a number of changes are introduced relating to the tax treatment of employee benefits in kind and expenses:

  • There will be a statutory exemption for certain expenses, such as travelling and subsistence expenses, reimbursed to an employee. This will replace the current system where employers have to apply for a dispensation to avoid having to report non-taxable expenses (on forms P11D).
  • Employers will be able to include taxable benefits in pay and thus account for PAYE on the benefits. However, in order to payroll benefits for 2016/17, employers will have to register with HMRC for the service before the start of the new tax year. Employers will then not have to include these payrolled benefits on forms P11D.
  • The £8,500 threshold below which employees do not pay income tax on certain benefits in kind will be removed. There will be new exemptions for carers and ministers of religion.

Comment

This is good news for most Limited Company contractors as it will simplify the end of year reporting of expenses reimbursed and avoid many of the complications from incorrect tax codes early in the tax year.

Simplification of the administration of tax on employee benefits and expenses

The government will introduce a package of measures to further simplify the tax administration of employee benefits and expenses by:

  • extending the voluntary payrolling framework to allow employers to account for tax on noncash vouchers and credit tokens in real time from April 2017
  • consulting on proposals to simplify the process for applying for and agreeing PAYE Settlement Agreements
  • consulting on proposals to align the dates by which an employee has to make a payment to their employer in return for a benefit-in-kind they receive to ‘make good’
  • legislating to ensure that if there is a specific statutory provision for calculating the tax charge on a benefit in kind, this must be used.

Temporary Workplaces rules

In September 2015 the government published a discussion document aimed at modernising the tax rules for permanent workplaces. The government has analysed responses and concluded that, although complex in parts, the current rules are generally well understood and work effectively for the majority of employees and has decided not to make further changes at this time.

Employment intermediaries and relief for travel and subsistence

As announced at March Budget 2015, the government will introduce legislation in Finance Bill 2016 to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary. This will bring the rules into line with those that apply to employees.

The changes mean that umbrella workers who are subject to supervision, direction or control can no longer claim travel and subsistence expenses. A similar restriction applies to PSC’s that are caught by IR35.

Comment

We anticipate that the draft legislation issued earlier in the year that will remove tax relief for travel and subsistence for Umbrella workers subject to supervision, direction or control and for Limited Company contractors subject to IR35 will remain unchanged in the Finance Bill 2016. In addition to this, Umbrella workers will be losing tax relief on general business expenses from 6 April 2016.

We expect these changes to have a considerable adverse effect on Umbrella workers who will lose almost all tax relief on their expenses.

Corporation tax rates

The main rate of corporation tax is currently 20% and this rate will continue for the Financial Year beginning on 1 April 2016. The main rate of corporation tax will then be reduced as follows:

  • 19% for the Financial Years beginning on 1 April 2017, 1 April 2018 and 1 April 2019
  • 17% for the Financial Year beginning on 1 April 2020.

Company distributions

Legislation will be introduced with effect from 6 April 2016 to:

  • amend the Transactions in Securities legislation, which is designed to prevent tax advantages in certain circumstances. The amendments, for example, include liquidations as potentially coming within the scope of the legislation
  • introduce a new Targeted Anti-Avoidance Rule, which would prevent some distributions in a liquidation being taxed as capital, where certain conditions are met and there is an intention to gain a tax advantage.

Comment

These new rules will remove the tax advantage of the phoenixing technique, employed when contractors wind up their companies at convenient times to release the surplus they have built up in their company at 10% tax and then start again.

Unfortunately this will also penalise contractors genuinely ceasing their company permanently if they are likely to continue to work in a similar activity.

Corporation tax loss relief

The government will introduce reforms to corporate tax losses from April 2017. In future losses arising on or after 1 April 2017 will be useable, when carried forward, against profits from other income streams or other companies within a group.

Comment

Companies that make losses will have a more flexible means of offsetting against profits. The restrictions to large companies with profits over £5 million are unlikely to concern contractors!

Salary sacrifice

The government is considering limiting the range of benefits that attract income tax and NIC advantages when provided as part of salary sacrifice schemes. However, the government’s intention is that pension saving, childcare, and health-related benefits such as Cycle to Work should continue to benefit from income tax and NIC relief when provided through salary sacrifice arrangements.

Comment

HMRC has been concerned with the growth in salary sacrifice schemes, where an employee gives up some salary in return for their employer providing a benefit. These arrangements either provide tax free benefits or savings in NI.

HMRC are to seek restrictions on the more aggressive versions whilst protecting those that were intended to be tax advantaged, and more acceptable schemes, such as child care and cycle to work schemes.

Phased rollout of Tax-Free Childcare

The government has announced it will introduce Tax-Free Childcare in early 2017. Tax-Free Childcare will be gradually rolled out to children under 12 with the parents of the youngest children being able to enter the scheme first. The scheme will be open to all eligible parents by the end of 2017.

The existing scheme, Employer-Supported Childcare, will remain open to new entrants until April 2018 to support the transition between the schemes.

Simplifying the NIC rules

The government will commission the Office of Tax Simplification to review the impact of moving employee NIC to an annual, cumulative and aggregated basis and moving employer NIC to a payroll basis.

Comment

We see this as the first step in a much bigger move towards Income Tax and NI being calculated using more similar rules. It seems the merger of Income Tax and NI is closer than commentators suggest – perhaps as early as 2020.

Tax Avoidance and disguised remuneration schemes

The government will introduce a package of measures to tackle the current and historic use of disguised remuneration schemes, which are used to avoid income tax and NIC. Legislation will be included in Finance Bill 2016 which will prevent a relief in the existing legislation from applying where it is used as part of a tax avoidance scheme from Budget Day.

The government will hold a technical consultation on further changes to the legislation which will be included in a future Finance Bill. This will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.

Comment

For many years promoters of tax avoidance have offered tax schemes using Employee Benefit Trusts and loans to avoid Income Tax and NI. HMRC will now be given new rules that enable them to cancel out the tax advantage and any loans that remain outstanding in what might be considered a stealth backdating of the legislation.

Contractors having used such schemes should be wary and prepare to consider the full effect as proposals develop into law.

The Budget also threw up some initiatives that are particularly of interest to non-corporate contractors and freelancers:

Abolition of Class 2 National Insurance Contributions (NIC)

The government will abolish Class 2 NIC from April 2018. The government will publish its response to the recent consultation on state benefit entitlement for the self-employed in due course. This will set out details of how the self-employed will access contributory benefits after Class 2 is abolished.

The abolition of Class 2 NI is in addition to the reform of Class 4 NI to protect pensions and contributory benefits.

Property and trading income allowances

From April 2017, the government will introduce a new £1,000 allowance for property and trading income. Individuals with property or trading income below £1,000 will no longer need to declare or pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance.

Comment

This is an ideal solution for those unincorporated freelancers that only undertake occasional and small value assignments during the year.

Making tax digital

From 2018 some businesses, self-employed people and landlords who are keeping records digitally and providing regular digital updates to HMRC will be able to adopt pay-as-you-go tax payments. This will enable them to choose payment patterns that suit them and better manage their cash flow

Comment

Making Tax Digital is rapidly evolving from the initial announcement of the end of tax returns last year and its scope is rapidly expanding into a completely new way of working with HMRC, reporting income and paying taxes.

We welcome the objectives but are fearful of the reality as new digital processes are launched in a piecemeal fashion.

The Office for Tax Simplification (OTS)

The OTS undertook several reviews during 2015 that concern small companies. The government has accepted many of the recommendations and we are likely to see new rules over the next few years concerning company taxation, NI and even the creation of a new style Limited Company that combines personal tax with corporate protection from liabilities

Other points of interest from the Budget

Personal Tax

The personal allowance

For those born after 5 April 1938 the personal allowance is currently £10,600. Those born before 6 April 1938 have a slightly higher allowance. Legislation has already been enacted to increase the personal allowance to £11,000 in 2016/17. From 2016/17 onwards one personal allowance will apply regardless of age.

Comment

Not everyone has the benefit of the full personal allowance. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 which is £1 for every £2 of income above £100,000. So for 2015/16 there is no personal allowance where adjusted net income exceeds £121,200 (£122,000 for 2016/17).

Tax bands and rates

The basic rate of tax is currently 20%. The band of income taxable at this rate is £31,785 so that the threshold at which the 40% band applies is £42,385 for those who are entitled to the full basic personal allowance.

Legislation has already been enacted to increase the basic rate limit to £32,000 for 2016/17. The higher rate threshold will therefore rise to £43,000 in 2016/17 for those entitled to the full personal allowance.

The additional rate of tax of 45% remains payable on taxable income above £150,000

Tax bands and personal allowance for 2017/18

The Chancellor has announced that the personal allowance will be increased to £11,500 and the basic rate limit increased to £33,500 for 2017/18. The higher rate threshold will therefore rise to £45,000 for those entitled to the full personal allowance.

Tax on savings income

Savings income is income such as bank and building society interest. In 2015/16 some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

The starting rate limit remains at £5,000 for 2016/17.

In addition, from 2016/17 the Savings Allowance (SA) will apply to savings income. Income within the SA will be taxed at a new 0% rate (the ‘savings nil rate’). However, the available SA in a tax year will depend on the individual’s marginal rate of income tax. Individuals taxed at up to the basic rate of tax will have an SA of £1,000.

For higher rate taxpayers, the SA will be £500 whilst no SA is due to additional rate taxpayers. Alongside the introduction of the SA, banks and building societies will cease to deduct tax from account interest they pay to customers.

Comment

The new SA will exempt from tax interest receipts for many taxpayers. The government anticipates that around 95% of taxpayers will not have any tax to pay on their savings income. However, the allowance works in a complex way. For example, a taxpayer whose total nonsavings income is near to £43,000 in 2016/17 (the point from which higher rate taxes are payable) needs to be aware that savings income is still added to other income to determine whether the SA is £1,000 or £500.

Individual Savings Accounts (ISAs)

The overall ISA savings limit is £15,240 for 2015/16 and will remain at this figure for 2016/17.

Two changes are proposed with effect from 6 April 2016. The following changes will be made to the existing ISA Regulations:

  • Savers will be allowed to replace cash they have withdrawn from their account earlier in a tax year, without this replacement counting towards the annual ISA limit for that year. This flexibility will be available in relation to both current year and earlier years’ ISA savings where provided for in the terms and conditions of a ‘flexible ISA’.
  • A third ISA, the Innovative Finance ISA, is being introduced for loans arranged via a peer to peer (P2P) platform.
  • The total an individual can save each year into all ISAs will be increased from £15,240 to £20,000 from April 2017.

Lifetime ISA

A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.

Further details of the new account, which will be available from 2017, are as follows:

  • Any savings an individual puts into the account before their 50th birthday will receive an added 25% bonus from the government.
  • There is no maximum monthly contribution and up to £4,000 a year can be saved into a Lifetime ISA.
  • The savings and bonus can be used towards a deposit on a first home worth up to £450,000 across the country.
  • Accounts are limited to one per person rather than one per home, so two first time buyers can both receive a bonus when buying together.
  • Where an individual already has a Help to Buy ISA they will be able to transfer those savings into the Lifetime ISA in 2017, or continue saving into both. However only the bonus from one account can be used to buy a house.
  • Where the funds are withdrawn at any time before the account holder is aged 60 they will lose the government bonus (and any interest or growth on this) and will also have to pay a 5% charge.
  • After the account holder’s 60th birthday they will be able to take all the savings tax-free.

Comment

The new Lifetime ISA is designed to allow flexible saving for first time buyers and those wishing to save for their retirement. The Chancellor said in his speech:

‘My pension reforms have always been about giving people more freedom and more choice. So faced with the truth that young people aren’t saving enough, I am today providing a different answer to the same problem.’

Pensions consultation and reform

The government consultation ‘Strengthening the incentive to save’ looked at the way pensions are taxed. The consultation found that while the current system gives everyone an incentive to save into a pension, and people like the 25% tax free lump sum, it is also inflexible and poorly understood. Young people in particular are not saving enough, often because they feel they have to choose between saving for their first home and saving for retirement.

Comment

The Chancellor said in his speech:

 ‘Over the past year we’ve consulted widely on whether we should make compulsory changes to the pension tax system. But it was clear there is no consensus.’

The Chancellor is introducing the Lifetime ISA as a vehicle for younger people to save.

Pensions advice

The Financial Advice Market Review (FAMR) aims to support the provision of affordable and accessible advice. FAMR was a joint review between the Financial Conduct Authority and Her Majesty’s Treasury, and its recommendations were published on 14 March 2016.

The government commits to implement all of the recommendations for which it is responsible, and will:

  • Consult on introducing a single clear definition of financial advice to remove regulatory uncertainty and ensure that firms can offer consumers the help they need.
  • Increase the existing £150 Income Tax and National Insurance relief for employer arranged pension advice to £500. The new exemption will ensure that the first £500 of any advice received is eligible for the relief. It will be available from April 2017.
  • Consult on introducing a Pensions Advice Allowance. This will allow people before the age of 55 to withdraw up to £500 tax free from their defined contribution pension to redeem against the cost of financial advice. The exact age at which people can do this will be determined through consultation. This means that a basic rate taxpayer could save £100 on the cost of financial advice

The government will also restructure the delivery of public financial guidance to make it more effective

Business Tax

Capital allowances on business cars

The current 100% first year allowance (FYA) on businesses purchasing low emission cars will be extended to April 2021. A low emission car is one where the CO2 emissions do not exceed 75 gm/km and this threshold will fall to 50 gm/km from April 2018. In addition, the CO2 emission threshold for the main rate of capital allowances for business cars will reduce from 130 gm/km to 110 gm/km from April 2018.

Employment Taxes

NIC for apprentices under 25

From 6 April 2016 employer NICs are 0% for apprentices under 25 who earn less than the upper secondary threshold (UST) which is £827 per week (£43,000 per annum). Employers are liable to 13.8% NIC on pay above the UST. Employee NICs are payable as normal.

An apprentice needs to:

  • be working towards a government recognised apprenticeship in the UK which follows a government approved framework/standard
  • have a written agreement, giving the government recognised apprentice framework or standard, with a start and expected completion date.
  • Employers need to identify relevant apprentices and generally assign them NIC category letter H to ensure the correct NICs are collected.

Comment

The proposals exclude apprenticeships which do not follow government approved frameworks, also known as common law apprenticeships. A similar 0% rate of employer NIC already applies for employees under the age of 21.

Employer provided cars

The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are now announced well in advance. Most cars are taxed by reference to bands of CO2 emissions. There is a 3% diesel supplement. The maximum charge is capped at 37% of the list price of the car.

From 6 April 2016 there will be a 2% increase in the percentage applied by each band with similar increases in 2017/18 and 2018/19. For 2019/20 the rate will increase by a further 3%.

From 6 April 2017 the appropriate percentage for cars which have neither a CO2 emissions figure nor an engine cylinder capacity, and which cannot produce CO2 emissions in any circumstances by being driven, will be set at 9%. From 6 April 2018 this will be increased to 13%, and from 6 April 2019 to 16%.

Van benefit charge for zero emissions vans

The van benefit charge for 2015/16 is £3,150 increasing to £3,170 in 2016/17.

The government will extend van benefit charge support for zero-emission vans so that from 6 April 2016 the charge will be 20% of the main rate in 2016/17 and 2017/18, and will then increase on a tapered basis to 5 April 2022. The government will review the impact of this incentive at Budget 2018 together with enhanced capital allowances for zero-emission vans.

Taxation of termination payments

From April 2018 the government will tighten the scope of the income tax exemption for termination payments to prevent manipulation.

Termination payments over £30,000 which are subject to income tax will also be subject to employer NIC. The government will undertake a technical consultation on tightening the scope of the exemption.

Employee share schemes: simplification of the rules

The government will make a number of technical changes to simplify the tax-advantaged and nontax-advantaged employee share scheme rules.

Capital Taxes

Capital gains tax (CGT) rates

The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The government is to reduce the higher rate of CGT from 28% to 20% and the basic rate from 18% to 10%. The trust CGT rate will also reduce from 28% to 20%. The 28% and 18% rates will continue to apply for carried interest and for chargeable gains on residential property that do not qualify for private residence relief. In addition, the 28% rate still applies for ATED related chargeable gains accruing to any person (principally companies). These changes will take effect for disposals made on or after 6 April 2016.

The rate for disposals qualifying for Entrepreneurs’ Relief (ER) remains at 10% with a lifetime limit of £10 million for each individual.

Example

Annie, a higher rate taxpayer, has the following chargeable gains after the annual exemption:

  • Gains eligible for ER £100,000
  • A residential property gain £30,000
  • Other gains £10,000

The ER gain is taxable at 10%. The residential property gain will be taxed at 28% and other gains at 20%.

Goodwill on Incorporation and ER

New rules were introduced from 3 December 2014 which prevent individuals from claiming ER on disposals of goodwill when they transfer their business to a related company in which they, or a member of their family, held any shares whatsoever. This means that CGT became payable on the gain at the normal rates of 18% or 28% rather than 10%.

Revised legislation will be introduced in Finance Bill 2016 to allow ER to be claimed in respect of gains on goodwill where the individual holds less than 5% of the shares, and less than 5% of the voting power, in the acquiring company.

Relief will also be due where an individual holds 5% or more of the shares or voting power if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner.

This measure will have backdated effect and will therefore apply to disposals on or after 3 December 2014.

External investors and ER

ER will be extended to external investors (other than employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions will apply:

  • shares must be newly issued and subscribed for by the individual for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.
  • An individual’s qualifying gains for investors’ relief will be subject to a lifetime cap of £10 million

Capital gains and employee shareholder agreements

The ‘employee shareholder’ was a new employment status made available from 1 September 2013. Employee shareholders who agreed to give up certain statutory employment rights received in exchange at least £2,000 of shares in their employer or parent company free of income tax and national insurance. Qualifying conditions do apply.

Any eventual gains on shares received with an original value of up to £50,000 are CGT free. However, a lifetime limit of £100,000 on the CGT exempt gains is introduced on disposals under Employee Shareholder Agreements entered into after 16 March 2016.

Other Matters

Stamp Duty Land Tax (SDLT) and Land and Buildings Transaction Tax (LBTT)

The Chancellor announced in the Autumn Statement that new rates of SDLT on purchases of additional residential properties would apply from 1 April 2016. Similar legislation was introduced in the Scottish Parliament for LBTT which applies to property transactions in Scotland. The LBTT legislation has now been enacted.

The new rates will be three percentage points above the current SDLT and LBTT rates. The higher rates will potentially apply if, at the end of the day of the purchase transaction, the individual owns two or more residential properties.

The SDLT proposals were subject to a consultation. The government has now announced:

  • purchasers will have 36 months rather than 18 months to claim a refund of the higher rates if they buy a new main residence before disposing of their previous main residence
  • purchasers will also have 36 months between selling a main residence and replacing it with another main residence without having to pay the higher rates
  • a small share in a property which has been inherited within the 36 months prior to a transaction will not be considered as an additional property when applying the higher rates
  • there will be no exemption from the higher rates for significant investors.

Comments

The main target of the higher rates is purchases of buy to let properties or second homes. However, there will be some purchasers who will have to pay the additional charge even though the property purchased will not be a buy to let or a second home. The proposed 36 month rules above will help to remove some transactions from the additional rates (or allow a refund). Care will be needed if an individual already owns, or partly owns, a property and transacts to purchase another property without having disposed of the first property.

LBTT has been enacted with the 18 month periods rather than 36 months.

SDLT on non-residential property

The government will change the calculation of SDLT on freehold and leasehold premium nonresidential transactions, on and after 17 March 2016, so the rates apply to the portion of the purchase price within each band. The SDLT rates and thresholds for non-residential freehold and leasehold premiums will also change from the same date.

For new leasehold transactions, SDLT is already charged at each rate on the portion of the net present value (NPV) of the rent which falls within each band. On and after 17 March 2016 a new 2% rate for rent paid under a non-residential lease will be introduced where the NPV of the rent is above £5 million.

Comments

The LBTT on non-residential properties in Scotland is already based on a similar system to that proposed for SDLT.

VAT: overseas businesses and online marketplaces

Changes will be made to the existing rules which allow HMRC to direct an overseas business to appoint a VAT representative with joint and several liability. A new provision will then enable HMRC to hold an online marketplace jointly and severally liable for the unpaid VAT of an overseas business that sells goods in the UK via that online marketplace.

The measure will have effect from Royal Assent to Finance Bill 2016.

Comments

The objective of this measure is to give HMRC strengthened operational powers to tackle the non-compliance from some overseas businesses that avoid paying UK VAT on sales of goods made to UK consumers via online marketplaces. It is directed at getting overseas businesses, that are or should be VAT registered in the UK, paying VAT due either directly or through a VAT representative.

Insurance Premium Tax

The standard rate of IPT will be increased from 9.5% to 10% with effect from 1 October 2016.

New soft drinks industry levy

The government will introduce a new soft drinks industry levy to be paid by producers and importers of soft drinks that contain added sugar. The levy will be charged on volumes according to total sugar content, with a main rate charge for drink above 5 grams of sugar per 100 millilitres and a higher rate for drinks with more than 8 grams of sugar per 100 millilitres. There will be an exclusion for small operators.

It is proposed to introduce the measure from April 2018.

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