Budget 2016: ICAS reaction

George Osborne
By ICAS Budget Team

16 March 2016

With the ink barely dry on Chancellor George Osborne’s 2016 Budget Statement, the ICAS Budget Team provides its analysis of some of the key announcements.

Lifetime ISA

Of late, this Chancellor's Budgets have been a roller coaster ride for pension savers and the pensions industry. Today's was a bit different with confirmation that fundamental changes to pensions tax relief have been taken off the table.  However, it was not altogether quiet on the pensions front with the announcement that a new lifetime ISA would be made available to the under-40s, from April 2017, as a savings vehicle for the purchase of a home or for a pension.

Christine Scott, ICAS Assistant Director, Charities and Pensions

Personal Allowance

The Conservative manifesto promised that the personal allowance would be increased to £12,500 by 2020/21.  It had already reached £10,600 for 2015-16 and £11,000 for 2016-17. Today’s announcement of an increase to £11,500 from April 2017 accelerates the move towards the £12,500 goal.  This is good news for the lower paid as it will remove them from tax completely. However, it may not help the very lowest paid who no longer pay income tax anyway due to earlier increases in the personal allowance – but still pay NIC because the threshold is different.

Susan Cattell, Head of Taxation (England and Wales)

Increase in the higher rate threshold

The point at which people start paying the higher rate of tax (40%) was £42,385 for 2015/16. It is £43,000 for 2016/17. Today the Chancellor announced that it will be raised to £45,000 from April 2017. The number paying tax at 40% has been increasing for some years. Official statistics suggest that around a million additional earners were pulled into the 40% band in the years between 2010 and 2015 because the thresholds were not increased. This therefore marks a movement in the other direction, with the Chancellor saying that today’s increase in the threshold will take half a million people out of the higher rate band. Once the Scotland Bill 2015/16 is passed thresholds could change in Scotland – as the Scottish Parliament will gain powers to set rates and bands from 2017/18.

Susan Cattell, Head of Taxation (England and Wales)

Corporation tax

The government, already committed to reducing the corporation tax rate to 18%, has now taken this further by reducing the rate to 17% by April 2020. This will make the UK rate the lowest among the G20 nations. However, it is tempered by a comprehensive package of measures to tackle tax avoidance and evasion – including measures specifically targeting multinational companies. The Budget states that tax avoidance and aggressive tax planning by multinationals is unacceptable and the government’s new business tax roadmap sets out a package specifically targeting multinational enterprises that are engaged in these activities.

Donald Drysdale, for ICAS

Capital gains tax

The Chancellor’s options were restricted by the “triple lock” – the promise not to raise income tax, national insurance or VAT rates during this parliament. It might have been expected therefore that he would consider increasing CGT rates. Instead in a surprise move the Chancellor announced that CGT rates would be reduced for gains accruing on or after 6 April 2016. The rates will move from 18% to 10% for gains up to the basic rate income tax limit and from 28% to 20% for gains above the limit. However, some gains will be excluded – those accruing on the disposal of residential property (that do not qualify for private residence relief) and carried interest. The retention of the higher rates for residential property is apparently intended to encourage individuals to invest in companies over property. Reducing the rate for residential property would also have conflicted with other measures being introduced on taxation of buy-to-lets.

Susan Cattell, Head of Taxation (England and Wales)

IR35

In a very significant change for Personal Service Companies, from April 2017, the responsibility for deciding if intermediary legislation applies for work in the public sector, will move to the public sector employer, agency, or third party that pays for the worker’s services. A new digital tool will be created to provide certainly in decision making. Legislation is expected in the 2017 Finance Bill and will be subject to consultation.

Philip McNeill, Head of Taxation (Practice & Small Business)

Oil and Gas

Low oil prices are causing major problems for businesses in the oil and gas sector. John Swinney (Scotland’s Deputy First Minister) wrote to George Osborne asking him to use the Budget to help the industry and companies in the sector were calling on him to give them some tax breaks. They will therefore welcome two announcements. Firstly a reduction in the supplementary charge on certain oil and gas profits (‘ring-fence profits’) from 20% to 10%. Secondly the “effective abolition” (by zero rating it) of Petroleum Revenue Tax – PRT was at 35% so this is a significant reduction. The reduction in the rate of PRT will have effect for all chargeable periods ending after 31 December 2015. The reduction in the rate of supplementary charge will have effect for accounting periods commencing on and after 1 January, 2016. There are transitional rules for accounting periods beginning before the operative date.

Susan Cattell, Head of Taxation (England and Wales)

Close company loans to participators

Alongside the dividend allowance of £5,000 a year and the new rates of income tax to be applied to dividend income in excess of that amount – at 7.5%, 32.5% and 38.1% within the basic, higher and additional rate bands respectively – it has been announced that the rate of tax payable by close companies on loans to participators will rise from 25% to 32.5% on loans, advances and arrangements made on or after 6 April, 2016. For proprietors of owner-managed companies, this means that the effective tax rate is being increased on all methods of extracting profits other than as remuneration.

Donald Drysdale, for ICAS

Termination payments

The rules for the taxation of termination payments are currently very complex for employers and employees.  A consultation last year, based on recommendations from the Office of Tax Simplification, considered options for changing the rules – and to simplify them. From the Chancellor’s perspective this also offered a potential opportunity to restrict tax relief and raise some revenue. However, he stopped short of radical reform. Instead today he announced that redundancy payments over £30,000 (which are already subject to income tax) will, from 2018, also be subject to employers’ national insurance contributions. However for individuals losing their jobs payments up to £30,000 (which meet the relevant conditions) will remain tax and NIC-free.  Employers and employees may be disappointed that an opportunity for simplification has been missed – but relieved that the basic £30,000 exemption remains intact.

Susan Cattell, Head of Taxation (England and Wales)

Sugar Levy

The Budget announced that soft drinks companies will pay a levy on drinks with added sugar from April 2018. This will apply to drinks with total sugar content above 5 grams per 100 millilitres, with a higher rate for more than 8 grams per 100 millilitres, with exemptions for milk-based drinks or fruit juices. Some of the money raised is earmarked to increase the additional money schools have to spend on PE and sports.

Experience with the rules for the zero-rating of some food and drink suggests that defining the terms will be difficult and is likely to add to complexity for businesses in the sector. A recent First Tier Tribunal case on the VAT liability of Nesquik demonstrates the potential problems. Although the Sugar Levy will be based on new rules introduced in conjunction with the industry, the rate of change in food technology is likely to mean that there will be anomalies – so different flavours of the same base product could attract different rates of the levy.

Anne-Marie Roberts, Head of Taxation (Scottish Taxes and Indirect Taxes)

Stamp Duty Land Tax

The Chancellor confirmed the introduction from 1 April, 2016 of higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties, such as second homes and buy-to-let properties as announced in the Autumn Statement – and the subject of a consultation on the details.

He also announced that from 17 March, 2016, SDLT on freehold commercial property and leasehold premium transactions will be calculated on a sliding scale. The new rates and tax bands will be 0% for the portion of the transaction value up to £150,000; 2% between £150,001 and £250,000, and 5% above £250,000. These rates are in line with the residential rates but there are no higher rates of 10% and 12% for commercial property – the rate is capped at 5%. There will also be a new 2% rate for those high value leases with a net present value above £5m. This change will bring the system for commercial property into line with the approach for residential property.

Anne-Marie Roberts, Head of Taxation (Scottish Taxes and Indirect Taxes)

Insurance Premium Tax

The pre-Budget commentaries all highlighted a possible hike in the standard rate of Insurance Premium Tax (IPT). In the summer 2015 Budget, the Chancellor increased the standard rate from 6% to 9.5%. However, the dire warnings about the impact on household budgets have been heeded by the Treasury and the rise in the standard rate has been limited to 0.5% taking the standard rate to 10%.The amount of IPT collected in 2014/15 – when the rate was 6% - was £2,965m out of total tax revenues of £515,348m. IPT was not included in the Chancellor’s tax lock.

Anne-Marie Roberts, Head of Taxation (Scottish Taxes and Indirect Taxes)

Making tax digital

No major new announcements, but from 2018, the self-employed and landlords will be able to make pay-as-you-go tax payments alongside regular updates to HMRC from their digital records. From earlier information this is likely to apply where self-employment or property is a main source of income, or is a secondary source of £10,000 or more. There is a promise to explore simplified tax rules. Consultation on the new measures will be ongoing from 2016.

Philip McNeill, Head of Taxation (Practice & Small Business)

Abolition of class 2 NIC

Class 2 NICs are to be abolished from April 2018. Many self-employed taxpayers will see some simplification, but questions remain on the link to benefit entitlement which would need to be provided by revisions to class 4 National Insurance. Low-profit and loss making business owners may face a higher cost through paying class 3 National Insurance. Significant changes to benefits rights attaching to both class 4 and class 3 National Insurance will be needed. Possible options were outlined in a recent consultation.

Philip McNeill, Head of Taxation (Practice & Small Business)

Exemption for small levels of trading and rental income

In a move analogous to the rent a room scheme, two new £1,000 exemptions will be available, from April 2017, for low levels of rental and trading income. This is particularly aimed at small internet based trading. Where income is under the limit it will not be taxable, and does not need to be reported to HMRC. Where income exceeds £1,000, the £1,000 can be deducted from total income, removing the need to calculate expense deductions.

Philip McNeill, Head of Taxation (Practice & Small Business)

HMRC Help and Support

There are major changes in the pipeline as HMRC embarks on its digital transformation programme to change tax services over the next few years. In the meantime the government has recognised that more needs to be done to ensure that individuals and businesses can get help and support from HMRC. The Budget therefore announced an investment of £71m to improve the service HMRC provides to taxpayers. This investment will deliver some welcome improvements including:

  • A seven-day-a-week service by 2017, with extended hours and Sunday opening on online services and the tax and tax credits phone lines, so that people and businesses have more opportunity to contact HMRC outside of working hours.
  • Improved telephone services and reduced call waiting times by recruiting over 800 new staff into HMRC call centres.
  • A dedicated phone line and online forum for new businesses and self-employed individuals to get help and support about filing and paying their taxes for the first time, and on the transition to using digital services.

Image: Twocoms/Shutterstock.com

ICAS Tax Conference

Find out more about the Budget implications and other important topics at the ICAS Tax Conference 2016.


Free BPP Budget webinar – 17 March at 11am and 1pm

BPP’s Budget Webinar will give you an overview of the main announcements in the 2016 Budget, and their implications. It will also give you the chance to raise questions with the expert tax presenter Geoff Sykes.

Register now

HMRC Help and Support

There are major changes in the pipeline as HMRC embarks on its digital transformation programme to change tax services over the next few years. In the meantime the government has recognised that more needs to be done to ensure that individuals and businesses can get help and support from HMRC. The Budget therefore announced an investment of £71m to improve the service HMRC provides to taxpayers.

This investment will deliver some welcome improvements including:

  • A seven-day-a-week service by 2017, with extended hours and Sunday opening on online services and the tax and tax credits phone lines, so that people and businesses have more opportunity to contact HMRC outside of working hours.
  • Improved telephone services and reduced call waiting times by recruiting over 800 new staff into HMRC call centres.
  • A dedicated phone line and online forum for new businesses and self-employed individuals to get help and support about filing and paying their taxes for the first time, and on the transition to using digital services.

Topics

  • Tax
  • Pensions
  • Business
  • Accountancy

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