Key announcements that were new for the Autumn Statement 2014 include:
The chancellor of the exchequer, George Osborne, delivered his fifth, and what was the current coalition government’s last, Autumn Statement on Wednesday 3 December 2014.
Unfortunately for the chancellor, although the figures released by the Office for Budget Responsibility (OBR) alongside the Autumn Statement (in its Economic and fiscal outlook report) were slightly better than expected, the country continues to face an uncertain economic outlook. Good news – falling public sector net borrowing, falling unemployment and growth forecasts revised upwards – was offset by bad news: public sector net debt continues to rise (set to peak at 81.1% of gross domestic product (GDP) in 2015/16) and weaker-than-hoped-for revenue receipts. News of economic growth and recovery at home was offset by renewed concerns overseas (especially across the eurozone).
As a result, while he may have planned to use this Autumn Statement to kick off the General Election 2015 campaign with some major, vote-winning, announcements and tax-related giveaways, the chancellor found his hands to be tied a lot tighter than he would have hoped. The focus was on ‘staying the course to prosperity’, ‘securing the economy’ and justifying the continued adherence to the government’s long-term economic plan.
In the main, therefore, this was an Autumn Statement of few surprises. Widely expected, pre-trailed (and mostly technical) announcements dealing with, for example:
were duly delivered. Perennial ‘hoped for’ measures, including the abolition of stamp duty and SDRT and the merger of income tax and NIC, were not. Perhaps the chancellor was trying to keep some of his powder dry in anticipation of his last Budget (in this Parliament at least) in 2015.
Nonetheless, he has still found some room for manoeuvre. Following up on pre-announced measures such as:
Draft clauses, for inclusion in the draft Finance Bill 2015, are expected to be published on Wednesday, 10 December 2014.
In a surprise announcement, the government is introducing two related measures, effective from 3 December 2014, to restrict the availability of tax relief where individuals incorporate a business. In both cases, the government has published draft legislation that will be included in Finance Bill 2015, but with immediate effect.
Intangibles relief
Under current rules, where individuals or partnerships transfer a business to a newly set up company, the company can claim corporation tax relief for any goodwill or other intangible assets that it acquires as part of that business, based on the assets’ market value.
We understand that HMRC regarded this as an inappropriate use of intangible fixed assets relief, particularly where the taxpayer used an artificially high valuation.
As a result, the Autumn Statement removes a company’s ability to claim this relief where goodwill or intangible assets related to goodwill (e.g. customer information) are acquired from an individual or partnership with a defined relationship with the company (typically, a close company and participator relationship).
(See: AS 2014, para 2.146; Draft legislation: Corporation tax – restricting relief for internally generated goodwill transfers; and TIIN: Corporation tax – restricting relief for internally generated goodwill transfers.)
Entrepreneurs’ relief
The government is concerned that some individuals are claiming entrepreneurs’ relief on business incorporations as a means of extracting funds from a business at the low (10%) entrepreneurs’ relief rate of capital gains tax (CGT) rather than in a manner that would attract income tax.
In order to remove this perceived unfair tax advantage, with effect from 3 December 2014, entrepreneurs’ relief will no longer be available on a disposal of goodwill to a close company to which the seller is related.
The change takes effect by removing goodwill from the definition of a relevant business asset where a related party (typically a participator) disposes of goodwill to a close company.
The draft legislation includes its own anti-avoidance rule under which goodwill will not qualify for entrepreneurs’ relief if the parties have entered into arrangements with a main purpose of avoiding this new provision.
(See: AS 2014, para 2.76; Draft legislation: CGT – denying entrepreneurs’ relief for disposals of goodwill to related companies; and TIIN: CGT – denying entrepreneurs’ relief for disposals of goodwill to related companies.)
In an unexpected move, the chancellor announced the introduction of regulations to prevent avoidance of stamp duty on takeovers. This is designed to counter the stamp duty advantage obtained by bidders that use cancellation schemes of arrangement to avoid paying stamp duty on a transfer of the target’s shares. Instead of transferring the shares, they are cancelled and then reissued directly to the bidder. Stamp duty is not due on an issue of shares. This measure is due to take effect early in 2015 (AS 2014, paras 1.249 and 2.101. Note: para 1.249 of AS 2014 contains a typo as it refers to SDLT instead of stamp duty).
The government announced that from 6 April 2015, it will remove the unfair tax advantage provided by special purpose share schemes, commonly known as ‘B share schemes’.
B share schemes are used by UK companies to return excess capital to shareholders. They are used typically, but not exclusively, by listed companies. B share schemes give shareholders a choice over the form the return takes; a shareholder can elect for an income or capital payment for tax purposes, depending on their tax position.
From 6 April 2015, pursuant to the Finance Bill 2015, where an individual shareholder is offered a choice over the form the return takes, the government will remove this tax advantage by treating the amount received the same way as dividend income (AS 2014, paras 1.254 and 2.152).
Autumn Statement 2014 makes it clear that the government is supporting science and research and development (R&D) programmes in its push to make the UK an attractive place in which to invest and create jobs. As part of this support, the government has announced that, with effect from 1 April 2015 (AS 2014, paras 1.142–1.144 and 2.97–2.98):
Following a number of cases on the compatibility of the UK rules on consortium relief with EU law, all requirements relating to the location of the ‘link company’ will be removed from the legislation. This means that, from 10 December 2014, there will be no difference in the treatment of link companies based on where they are located (AS 2014, para 2.137).
Following the recommendations of the Wood Review in early 2014, the chancellor announced three changes to the existing system of oil and gas taxation. Finance Bill 2015 will:
The change to the SC leaves the current rate of tax at 60% (other than for projects that are subject to petroleum revenue tax) with the chancellor also suggesting that a further reduction could be possible. This may be a sign of recognition that the unexpected increase to the SC (introduced by FA 2011 s 330), was harmful to the industry.
The change to the RFES is not a surprise as it was previously meant to be included in FA 2014. The most welcome change is the cluster area allowance which will exempt an amount of a company’s profit from the SC, equal to 62.5% of qualifying capital expenditure incurred in the cluster area. Most of the remaining North Sea oil is in small ‘pockets’ which are both more expensive and difficult to access. This allowance could therefore make a large number of those sites commercially viable. Unfortunately, the draft legislation is notably vague on what counts as a cluster area; defining it as ‘an offshore area which the secretary of state determines to be a cluster area’. The industry is certain to ask for more clarity on this definition (AS 2014, paras 2.104–2.106).
Normally, when a company makes a loss for corporation tax purposes, the loss can be carried forward and offset against profit arising in future periods. The chancellor announced that such carry-forward loss relief will be restricted for banks:
so that only 50% of a bank’s annual profits can be offset by such pre-2015 carried-forward losses. The reason for this restriction is that losses are considered to be ‘bad losses’ that the banks brought on themselves by failing to prepare for the recent financial downturn and for misconduct related to LIBOR rigging and PPI mis-selling. According to the chancellor, it is unacceptable for these ‘bad losses’ to wipe out the tax on current profits.
The unused losses are not permanently lost; they can continue to be carried forward and used against profits in another future period, again subject to this 50% restriction.
The restriction may mean that some banks may have to reconsider the value of their deferred tax assets for regulatory capital and accounting purposes.
The draft legislation includes two targeted anti-avoidance rules (TAARs). The first aims to prevent a banking group from accelerating the use of their losses before the restriction comes into force. This TAAR takes effect on 3 December 2014. The second TAAR aims to prevent profit shifting within banking groups after the rules come into force (AS 2014, paras 1.248 and 2.173).
Draft legislation to be included in Finance Bill 2015 has been published, alongside an explanatory note, a tax information and impact note (TIIN) and a technical note about this new restriction. (See: TIIN: Bank loss relief restriction; TIIN: Bank loss relief restriction; Draft legislation: Bank loss relief restriction; Explanatory note to the draft legislation; and Technical note: Restriction on brought forward reliefs in the UK banking sector.)
The government has confirmed, alongside its announcement repealing the late paid interest rules, that it will continue to take forward ‘wide-ranging’ amendments intended to simplify and rationalise the taxation of corporate debt and derivative contracts.
The review of this complex area of the tax code began following an announcement made during the Budget 2013. At that point, the review was long overdue and necessary, given the proposed changes to UK GAAP (including the implementation of IFRS 7 and IFRS 9, and FRS 100, FRS 101 and FRS 102 with mandatory effect for accounting periods beginning on or after 1 January 2015).
The announcement made in the Autumn Statement 2014 builds on the progress made to date in this area, the conclusions reached by the four working groups set up to look at different aspects of the regime and reflects the government’s priorities outlined in April 2014.
This week also saw both:
The Autumn Statement confirms that the latest improvements to the regime will include:
Draft legislation to achieve each of these aims is expected to be published next week and included in Finance Bill 2015 (AS 2014, para 2.138).
Following the consultation on modernising the taxation of corporate debt and derivative contracts (announced at Budget 2013), the Finance Bill 2015 will include legislation to repeal provisions of the late-paid interest rules that apply to loans made to a UK company by a connected company in a non-qualifying territory. Parallel rules that apply to deeply discounted securities will also be repealed.
The rules were originally introduced as anti-avoidance provisions to prevent mismatches between the timing of relief for the interest or discount in the debtor company and its taxation in the creditor. They apply in a number of situations, which include where the parties are connected and where one of the parties has a major interest in the other. In these two circumstances, the rules were limited in 2009 to only apply where broadly the creditor is resident in a tax haven.
The government believes that the limited application of the rules together with their use by groups to sidestep restrictions in the group relief rules means that they should be repealed. The repeals will apply to new loans entered into from 3 December 2014. For loans entered into before then, the changes will apply to interest accruing or discounts arising on or after 1 January 2016 (where material changes have not been made to the loan before then).
Draft legislation arising from the wider consultation, which will also be included in Finance Bill 2015, will be published on 10 December 2014. This will include a new regime-wide anti-avoidance rule which will counter timing mismatches such as those originally targeted by the rules. (See: AS 2014, para 2.102; and TIIN: Corporation Tax: preventing abuse of late paid interest rules.)
New legislation will be introduced to ensure that management fees received by investment fund managers for their management services are charged to income tax rather than capital gains tax. Investment fund managers are currently able to structure the receipt of management fees through partnerships and other transparent entities with the result that they are taxed as capital. The new legislation will separate the treatment of sums received by managers that represent payment for services (to be taxed as income), from those that are linked to investment performance. The legislation will therefore not apply to ‘carried interest’ (which is linked to investment performance) or to returns which are exclusively from investment by partners. This measure will take effect from 6 April 2015 (AS 2014, para 2.153).
Autumn Statement 2014 announces that:
The chancellor confirmed that the government will accept the recommendations of the Office of Tax Simplification (OTS) in their report on employee benefits. Arguably the biggest simplification in terms of legislation is the removal of the £8,500 threshold below which employees other than directors can receive certain employment-related benefits tax-free. That general exclusion for lower-paid workers is to be replaced with new exemptions for benefits provided to carers and ministers of religion. All other employees, regardless of their rate of pay, will pay tax on employment-related benefits under the benefits code.
The simplifications with the biggest impact in terms of administration are likely to be the new exemptions for trivial benefits in kind and for reimbursed business expenses and the introduction of a statutory framework for payrolling of benefits.
The new exemption for trivial benefits will apply where the benefits provided to the employee have a cost to the employer of less than £50. Based on the consultation on this proposal, this £50 limit is likely to be an annual limit per employee, although more detail will be available when the draft Finance Bill clauses are published next week.
The new exemption for reimbursed business expenses is intended to remove the need for employers to apply for dispensations each year or face the administrative chore of reporting all reimbursed expenses on each employee’s P11D with the employee then having to claim a deduction in his self-assessment return or via form P87. HMRC consulted on the detail of this proposed exemption in June this year and raised a number of design issues. The draft Finance Bill clauses to be published on 10 December 2014 are expected to clarify how HMRC proposes to deal with those issues in the light of the consultation responses.
The proposal for a system of voluntary payrolling of benefits is intended to allow employers to report and account for tax on certain benefits and expenses via the RTI system rather than as part of the annual reporting on forms P9D or P11D at the end of the tax year. Like the other OTS recommendations on expenses and benefits it was the subject of a consultation in the summer and, as with the other recommendations, we will have to wait for the draft Finance Bill clauses to be published for full details of the design of the system (AS 2014, para 2.136).
Successive governments have made various legislative changes to crack down on arrangements designed to allow workers to obtain tax relief for travel expenses which would normally be denied to employees. The chancellor indicated that the government intends to review the use of overarching contracts of employment by employment intermediaries such as umbrella companies, with a view to possible action in Budget 2015 (AS 2014, para 2.147).
The government will:
As part of the Budget 2014, the government announced that it will consult on two recommendations of the Office of Tax Simplification (OTS) relating to unapproved share schemes, namely:
The consultation on the employee shareholding vehicle can be found here and the consultation on marketable securities can be found here.
Following consultation, the government has decided not to proceed with a new employee shareholding vehicle and not to proceed with changes to the taxation of employee shares that would have introduced a ‘marketable security’ (AS 2014, paras 2.134 and 2.135).
Following completion of the government’s review into the tax charge on loans from close companies to individuals, trusts and partnerships that have a share or interest in them, the government has concluded that it does not intend to make any changes to the structure or operation of the close company loans to participators tax charge.
This follows HMRC’s previous consultation in 2013 on whether to reform the rules governing the taxation of close company loans to their participators (and other related arrangements). At Autumn Statement 2013, the government confirmed that no immediate changes would be made following that consultation (AS 2014, para 2.154).
Social investment tax relief (SITR) was introduced by FA 2014 s 57 following a consultation process in summer 2013 as part of a series of steps to promote social enterprise in the UK. The government originally outlined its plans for the expansion of the relief in the roadmap published on 30 January 2014, and has now announced the following measures to expand SITR (AS 2014, paras 1.166 and 2.55):
Subject to state aid clearance, these changes should come into effect on or after 6 April 2015.
The government will also:
The government has announced that from the date of expansion of SITR i.e. 6 April 2015 (AS 2014, paras 1.166, 2.59 and 2.60):
Gains that are eligible for entrepreneurs’ relief, but that are deferred into investments qualifying for EIS or SITR, will still be eligible for entrepreneurs’ relief when the gain is realised. This has effect for disposals that are deferred into EIS or SITR on or after 3 December 2014 (AS 2014, para 2.77).
It was announced in the Autumn Statement 2014 that the government would reform both the rates of SDLT applicable to residential property and how the charge is calculated.
Prior to this announcement, the charge to SDLT on the acquisition of residential property was determined by calculating the applicable percentage of the full purchase price (or the ‘chargeable consideration’) as set out in Table A of FA 2003 s 55. This meant that once the chargeable consideration exceeded a threshold amount, the whole of the chargeable consideration was subject to the relevant rate of SDLT and not just the amount above the threshold, i.e. SDLT was charged on a ‘slab’ rather than a ‘slice’ basis.
The government has announced new rates of SDLT applicable to the acquisition of residential property and these rates will now be charged on the portion of the chargeable consideration that falls within each rate band, i.e. SDLT will apply on a ‘slice’ basis in relation to residential property. The new rates and thresholds are set out in the table below:
These changes have effect for transactions with an effective date on or after 4 December 2014. Transitional arrangements are available where contracts for the acquisition of residential property have been exchanged but not completed as at 3 December 2014, whereby purchasers may choose which set of rates and payment structure should apply. Note that these changes will apply in Scotland until 1 April 2015, when the new land and buildings transaction tax will take effect.
The chancellor announced that 98% of residential property purchasers will make an SDLT saving as a result of the changes being introduced. However, those purchasing property in excess of £937,500 will face an increased SDLT bill.
HMRC has updated its online SDLT calculator to take account of the SDLT charge under the new rules. No changes have been made to the rates and/or calculation of SDLT on non-residential and mixed property or leases (see: AS 2014, paras 1.204–1.212 and 2.121; Draft legislation: SDLT – reform of structure, rates and threshold; and TIIN: SDLT – reform of structure, rates and threshold).
Authorised property funds
Following a consultation on the SDLT rules for property investment funds announced in Budget 2014 as part of the government’s investment management strategy, the government has confirmed that it intends to introduce a seeding relief for property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACSs) and also intends to make changes to the SDLT treatment of CoACSs investing in property so that SDLT does not arise on transactions in units.
Legislation introducing these changes is expected to be included in the Finance Bill 2016 (AS 2014, para 2.123).
Alternative property finance reliefs
The government has announced it will change the definition of a ‘financial institution’ for the purposes of the SDLT alternative property finance reliefs to include all persons authorised to provide Home Purchase Plans. This change will be included in the Finance Bill 2015 (AS 2014, para 2.124).
Increase in annual charges for properties worth over £2m
ATED has only been in force for just over a year and already collected more than its anticipated tax yield. Nonetheless, the government has announced it will increase the annual rates of ATED by 50% above the rate of inflation for residential properties worth over £2m. From 1 April 2015, the applicable rates of ATED will be as follows (AS 2014, paras 1.213 and 2.125):
Simplifying ATED administrative burden
HMRC published a consultation document in July this year considering how to assist businesses that are entitled to claim relief from ATED in satisfying their filing obligations in a way that reduces the related administrative burden. Following this consultation, the government has announced it will introduce changes to the filing obligations and information requirements with respect to properties within the scope of ATED but that are eligible for a relief. It is intended that these changes will be included in the Finance Bill 2015 and will take effect from 1 April 2015 (AS 2014, para 2.139).
Although not mentioned in the Autumn Statement 2014, it should also be noted that draft legislation to extend CGT to non-residents who dispose of UK residential property will be published for consultation as part of the draft Finance Bill 2015 on 10 December 2014.
The government has published a summary of responses to the consultation into the extension of CGT to non-residents which was carried out earlier this year, confirming that the charge will have a wide scope.
In response to concerns raised during the consultation, a test will be introduced to ensure that the CGT extension to non-UK residents will, with respect to companies, only affect those companies that are closely controlled, i.e. similar to a close company. This means that institutional investors (such as non-UK resident pension schemes or foreign real estate investment trusts (REITS)) investing in UK residential property should not have to pay the charge.
Changes will also be made to the principal private residence (PPR) relief rules. Under the proposals a new rule will be introduced to restrict the circumstances when an overseas residence (i.e. a residence in a jurisdiction where the person is not tax resident) can benefit from PPR. The changes will apply to both UK tax residents disposing of a residence in another country and non-UK tax residents disposing of a UK residence. Under the proposals, a taxpayer’s residence will not be eligible for PPR for a tax year unless either:
The government has also announced that it will introduce a new reporting and collection mechanism. All of these changes are likely to result in increased costs and complexity of residential real estate transactions.
The proposed changes will come into effect from April 2015 and will only apply to gains arising from the commencement date. The government has confirmed that it will continue to engage with stakeholders in relation to the draft legislation and the implementation of the policy.
The chancellor announced a review of the structure of business rates, to be completed by Budget 2016. This review is unlikely to make a significant difference to the size of business rates bills as one of the requirements of the review is that it must be fiscally neutral. Its scope will include administrative matters including billing and appeals.
The outcome in Scotland, Northern Ireland and Wales may be different as those administrations all to some extent have devolved powers in relation to business rates (AS 2014, paras 1.160, 2.25 and 2.132).
The government is proposing to amend the rules on promoters of tax avoidance schemes (the POTAS or high-risk promoter rules) introduced by the FA 2014 Part 5. The changes concern connected persons under the control of a high risk promoter, and the time limits within which HMRC can issue conduct notices under the rules.
According to the Autumn Statement 2014, these changes follow consultation, although from the little detail that is given it is difficult to see how these changes relate to the two sets of regulations that were published for consultation in October 2014.
Although not explicit, it is likely that these changes will be made in Finance Bill 2015 (AS 2014, para 2.157).
The government will consult on imposing measures, such as ‘additional financial costs’ (it is unclear how these would differ from ‘penalties’) and reporting requirements, on repeat users of known avoidance schemes. It will also consider naming and shaming taxpayers who fall into this category. No timetable is given (AS 2014, para 2.158).
As expected, the government is not proposing to make any changes to address concerns about the use of the disclosure of tax avoidance schemes (DOTAS) regime to trigger the accelerated payment rules in FA 2014. Instead, the government intends to proceed with a number of measures to widen the scope of the DOTAS rules.
Regime changes
Finance Bill 2015 will include measures to strengthen the DOTAS regime, including ‘updating existing scheme hallmarks, adding new hallmarks, and removing “grandfathering” provisions’.
These changes follow the ‘Strengthening the tax avoidance disclosure regimes’ consultation document published on 31 July 2014. The consultation covered the introduction of a new financial products hallmark, changes to the hallmarks relating to standardised tax products and losses, a new inheritance tax hallmark, new rules for offshore promoters and employee users of employment schemes, changes to penalties for non-disclosure and the introduction of safe harbours for whistle-blowers. The draft legislation to be published on 10 December 2014 may reveal how many of these changes are being implemented.
The Autumn Statement 2014 does not disclose whether the government is proceeding, at this stage, with the alignment of the VAT disclosure rules with DOTAS (AS 2014, para 2.161).
Transparency
HMRC is proposing to publish ‘summary information’ about promoters who make disclosures under the DOTAS rules, and their schemes. This is different from the existing right to name and shame high risk promoters who are subject to a monitoring notice (under the high risk promoter rules). The summary information would presumably be anonymised. The intention is to educate potential scheme users about the risks involved in using a marketed tax avoidance product (AS 2014, para 2.160).
The government announced that it will introduce legislation in Finance Bill 2015 to ensure that the accelerated payments legislation works effectively where avoidance arrangements give rise to losses surrendered as group relief. The accelerated payments notices were introduced to require those involved in avoidance schemes to pay the disputed tax upfront (AS 2014, para 2.149).
The government will consult on whether to introduce penalties in cases where the general anti-abuse rule (GAAR) applies. No further information has been provided at this stage (AS 2014, para 2.159).
Reinforcing its determination to be seen as one of the driving forces behind, and one of the earliest adopters of, the OECD’s BEPS Action Plan, the government has made three key announcements in Autumn Statement 2014 intended to both:
The three announcements, outlined below, are:
As interesting as what was included in the chancellor’s speech on BEPS, was what was not. One issue, in particular, not mentioned is the UK’s position on the adoption of the OECD’s proposal for a common reporting standard (CRS) which is designed to enhance the automatic exchange of tax related information across the globe. Implementing agreements under the CRS was the subject of consultation during the late summer – the government’s conclusions were expected to be published along with the Autumn Statement 2014, but were conspicuous by their absence. Details on this crucial action point, and other keep aspects of the BEPS action plan as it applies in the UK, are awaited.
As expected, the government has announced that it will introduce a new diverted profits tax (DPT). The DPT is intended to counter the use of complex, aggressive tax planning techniques – such as the ‘double Irish’ corporate structure adopted by Google – used by MNEs to artificially divert taxable profits away from the UK tax base, through the manipulation of international tax rules.
The new DPT (almost inevitably likely to be widely referred to as the ‘Google tax’), will be charged at a rate of 25% (notably higher than the current main rate of corporation tax, 21%, to enhance its deterrent effect) and is set to be applied to an amount deemed to be ‘diverted profits’. The new tax will take effect from 1 April 2015.
Two key issues, dependent on the draft legislation, arise:
Other obvious questions (unlikely to be addressed by the draft legislation) include:
In both cases, only time will tell.
The devil, as ever, will be in the efficacy of the detailed legislation, but the government expect the DPT to yield additional tax revenues totalling £25m in 2015/16, rising rapidly to £360m by 2017/18 (and then broadly stabilise at that level). Of course, whether the true yield reaches anything close to these estimates remains to be seen since one might expect multinational enterprises affected by the new tax to either restructure or argue that their structures are entirely legitimate (AS 2014, para 2.142).
In a slightly surprising move, the government has also announced that it will bring forward legislation that will enable the UK to implement the OECD’s model for country by country reporting (CbCR) in full, in accordance with BEPS action 13.
Some companies have already been voluntarily adopting a form of CbCR as ‘best reporting practice’. It is hoped the additional reporting burden imposed by the new rules will not be too onerous although MNEs should now be talking to their advisers to ensure that they have the structures in place to meet their new obligations when the rules are introduced.
Surprisingly, for a measure that primarily relates to compliance and reporting, the government expect the tax yield attributable to CbCR to rise steadily, and to raise approximately £45m, in the five years between 2015–2020.
CbCR is expected to be included in the Finance Bill 2015 and full details are likely to be released when the necessary draft legislation is released on 10 December 2014 (AS 2014, para 2.143).
The government is consulting on the introduction of a general anti-hybrids rule that will be significantly wider in scope and operation than the UK’s existing anti-arbitrage regime.
The OECD’s proposed new rules are intended to prevent MNEs avoiding tax through the use of certain cross-border business structures – that is, those that adopt hybrid entities, treated as tax transparent in one country but tax opaque in another – or finance transactions – using hybrid instruments, including, for example, those that are treated as debt in one country but equity in another.
The OECD approach is two-fold:
and is intended to produce rules that are mechanical, apply automatically and in the absence of any purpose test.
The consultation seeks input on the key design issues arising in connection with the UK’s implementation of the OECD’s proposals, including:
The consultation is open for ten weeks with comments required by 11 February 2015.
A summary of responses will be published during the summer 2015 and the conclusions drawn from those responses will inform the UK’s position in negotiations that will lead to the finalisation of the OECD's recommendations on this BEPS action point. Those recommendations are due to be delivered by the end of September 2015. Draft UK legislation will follow and is most likely to be published alongside (or shortly after) Autumn Statement 2015. That draft legislation will be subject to further consultation before (in all likelihood) forming part of Finance Act 2016.
It is anticipated that the new anti-hybrid rule will take effect from 1 January 2017 without any ‘grandfathering’ provisions (although a transitional period, allowing companies to unwind hybrid structures that would otherwise fall within the scope of the new regime, is expected).
Given the complexity and importance of the issue, the government only expects it to raise a relatively modest £260m in the four year period 2016–20, suggesting that the government expects the proposal to act as a deterrent, rather than as a revenue raising measure. Given the global nature of the problem, and the sheer variety of hybrid arrangements that can be created, action 2 is likely to prove to be a crucial test of the success of the BEPS action plan and the international cooperation that it necessitates. (See: AS 2014, para 2.144 and Consultation: Tackling aggressive tax planning: implementing the agreed G20-OECD approach for addressing hybrid mismatch arrangements.)
Following the publication of a consultation document in August 2014, legislation on an enhanced civil penalties regime for offshore tax evasion will be included in Finance Bill 2015.
The existing offshore penalties regime will be extended to include an aggravated penalty of up to an additional 50% for moving hidden funds to evade international tax transparency agreements. In addition, from April 2016, the existing regime will be expanded to include inheritance tax and to apply where the offence took place in the UK but the proceeds are hidden offshore. The regime’s existing territory classification system will also be updated in light of the new global standard on automatic tax information exchange.
There was no reference in the Autumn Statement to the separate consultation on a new strict liability criminal offence of failing to declare taxable offshore income and gains, which was published on 19 August 2014 and closed on 31 October 2014 (AS 2014, para 2.155).
Enhancing financial incentive for offshore intelligence
HMRC will review its existing framework for offering financial incentives for information on offshore tax evaders, in particular those who remain outside the reach of international efforts to achieve tax transparency (AS 2014, para 2.156).
The Autumn Statement 2014 confirms that the government intends to introduce the direct recovery of debts (DRD) in 2015, following the general election.
DRD, if introduced, will, subject to various safeguards, permit HMRC to recover tax and tax credit debts of at least £1,000 directly from debtors’ bank and building society accounts (including their ISAs).
Following responses the government received to its consultation on DRD, the government recently agreed to strengthen the safeguards to, among other things, require an HMRC agent to visit in person each debtor before using DRD to recover the debt (AS 2014, para 2.165).
Autumn Statement 2014 announces that the government will consult on a proposal to introduce a new power for HMRC to be able to achieve early resolution and closure of any aspect of a tax enquiry even if other issues are left open. Although this was an unexpected announcement, it makes sense given HMRC’s drive to resolve outstanding tax matters quickly, recouping as much tax as possible (AS 2014, para 2.169).
* This table only includes the personal allowance applicable to those born on or after 6 April 1948. The personal allowance for those born between 6 April 1938 and 5 April 1948 will increase from £10,500 to £10,600 from 6 April 2015 and the personal allowance for those born before 6 April 1938 will remain unchanged at £10,660. Where an individual’s income is above £100,000, their personal allowance is reduced by £1 for every £2 above this limit. This applies regardless of the individual's birth date.
** There is a starting rate for savings income only. For 2014/15, the starting rate is 10% and the starting rate limit is £2,880. If an individual’s taxable non-savings income exceeds the starting rate limit then the 10% starting rate for savings will not be available for savings income. From 6 April 2015, the starting rate for savings income will be reduced to 0% and the maximum amount of an individual’s income that qualify for this starting rate will increase to £5,000.
Blind persons’ allowance, married couples’ allowance and income limit for 2015/16
The government confirmed that it will increase the blind persons’ allowance, married couples’ allowance and the income limit by amounts equivalent to the retail prices index in 2015/16. This will take the blind persons’ allowance to £2,290 and the maximum married couples’ allowance to £8,355 for 2015/16 (AS 2014, para 2.52).
Personal income tax allowances for non-residents
At Budget 2014 the government launched the consultation Restricting non-residents’ entitlement to the UK personal allowance on whether and how the income tax personal allowance could be restricted to UK residents and those living overseas who have strong economic connections to the UK. Similar restrictions already exist in many other countries, including most other countries in the EU.
It was announced in the 2014 Autumn Statement that no change will come into effect before April 2017. The government will continue to discuss the proposed change with stakeholders and should the government decide to proceed a more detailed consultation will be undertaken (AS 2014, para 2.58).
Since 2008/09, individuals over the age of 18 who have been resident in the UK for at least seven out of the preceding nine years have had to pay a charge of £30,000 to access the remittance basis of taxation. Since 6 April 2012 there has been a two-tier remittance basis charge. For taxpayers who have been resident in the UK for at least 12 out of the last 14 tax years, the remittance basis charge is £50,000 per year. The two charges are mutually exclusive, meaning no taxpayer suffers a £30,000 charge and a £50,000 charge in the same tax year. These charges are collectively referred to as the remittance basis charge.
The government has announced that the £30,000 charge will remain unchanged, but the £50,000 charge is to be increased to £60,000.
A new charge of £90,000 will be introduced for people who have been UK resident for 17 out of the last 20 years.
The government also announced that it will consult on making the election apply for a minimum of three years (AS 2014, para 2.57).
Transfer to spouses on death
Under the current rules, an ISA account loses its tax-free status on the death of an individual as the tax fee ISA wrapper cannot be inherited by the beneficiaries of the deceased’s estate. The government will now legislate to allow an additional ISA allowance for spouses and civil partners when an ISA saver dies, equal to the value of that saver’s ISA holdings on their date of death (AS 2014, para 2.62).
Qualifying investments
At Budget 2014 the government announced that secondary legislation would be introduced to enable peer to peer loans to benefit from the tax advantages within an ISA. The government had suggested that it would explore the possibility of further extending the list of qualifying investments to include debt securities offered via crowdfunding platforms. The government has now confirmed that it will consult on whether to allow crowdfunded debt-based securities into ISAs and how this could be implemented (AS 2014, para 2.63).
New annual subscription limits: The annual subscription limits for ISAs, junior ISAs and child trust funds will increase in line with the consumer price index (AS 2014, para 2.64). In 2015/16 the limits will be increased as follows:
55% tax charge on inherited pensions
Under the current rules, where an individual dies under the age of 75 leaving some uncrystallised defined contribution pension funds or with a joint life or guaranteed term annuity, their beneficiaries will suffer a 55% tax charge on that sum. The chancellor announced in the Autumn Statement that, from April 2015, as long as no payments have been made to beneficiaries prior to 6 April 2015, such pension, life and annuity funds will, from that date, be available to beneficiaries free of tax.
The tax rules will also be changed to enable the payment of joint life annuities to any beneficiary.
Where the individual is over 75 the beneficiary will pay their marginal rate of income tax or 45% where the funds are taken in a lump sum. From 2016/17, the beneficiary will be charged at their marginal rate on lump sum payments (AS 2014, para 2.65).
Notional income rules
Currently, where an individual has a pension pot that has not been accessed or has been accessed flexibly, the notional income rules applicable to those pots for the purpose of means tested benefits for those over pension credit qualifying age is assessed at 150% of the income that an equivalent annuity would offer. This rate will be reduced to 100% or the actual income if higher (AS 2014, para 2.66).
Pensions flexibility
It was announced in Budget 2014 that, from April 2015, people will be able to access their defined contribution (DC) pension savings as they wish from age 55, subject to their marginal rate of income tax. It was also announced that, to help people make the decision that best suits their needs, everyone with a DC pension will be offered free and impartial face to face guidance on the range of options available to them at retirement.
Shortly after Budget 2014, HM Treasury issued the consultation Freedom and choice in pensions, seeking views on details of the government’s plans to offer greater flexibility in accessing DC pension savings. The consultation ran from 19 March 2014 to 11 June 2014 and the government’s response to the consultation was issued on 21 July 2014.
The Autumn Statement confirmed the following changes that were announced in the government's responses issued on 21 July 2014:
Uprating of pensions benefits
The Autumn Statement 2014 confirmed that the standard minimum income guarantee in pension credit will rise by the same amount as the cash increase in the basic state pension and the savings credit threshold will rise by 5.1%. The full new state pension will therefore rise to at least £151.25 per week, with the actual amount to be set in autumn 2015 (AS 2014, para 2.70).
Pension tax relief
At Budget 2014, the Chancellor announced plans to look into changing the current rules, which prevent individuals over the age of 75 from claiming tax relief on their pension contributions. However, today's Autumn Statement revealed that, following informal consultation, the government has abandoned these plans and tax relief will continue only to be available until age 75 (AS 2014, para 2.71).
IHT exemption for emergency services personnel and humanitarian aid workers
Following consultation since Budget 2014, the government will extend the existing exemption from IHT for service personnel who die on active service or who later die from wounds received on active service, to all emergency services personnel who die in the line of duty or whose death is hastened from injury that occurs in the line of duty as well as to humanitarian aid workers responding to emergencies for deaths on or after 19 March 2014. Legislation will be introduced in Finance Bill 2015.
This is intended to apply to all emergency service personnel in the United Kingdom whose death has been caused directly or hastened by an injury sustained while responding to emergency circumstances. It is also intended to apply to armed forces personnel who are supporting emergency service personnel however, there is presently no existing definition of emergency services personnel so it is hoped that the proposed legislation will clarify who exactly will benefit from the exemption (AS 2014, para 2.72).
IHT exemption for medals and other awards
The government will also extend the existing IHT exemption for medals and other decorations that are awarded for valour or gallantry so that, from 3 December 2014, it will apply to all decorations and medals awarded to the armed services or emergency services personnel and to awards made by the Crown for achievements and service in public life. Legislation will be introduced in Finance Bill 2015 (AS 2014, para 2.75).
IHT charges on trusts
After several consultations on simplifying the calculation of IHT charges on relevant property trusts, the third and last of which was launched after Budget 2014 and proposed a single settlement nil rate band (SNRB) per settlor to be divided between all relevant property trusts set up by that settlor, the chancellor announced in Autumn Statement 2014 that the government will not now introduce a single SNRB but will instead introduce new rules to target tax avoidance through the use of multiple trusts and simplify the calculation of trust rules with new legislation to be introduced in Finance Bill 2015.
Whilst this may be good news for settlors, practitioners continue to face uncertainty when advising on the use of multiple trusts as part of a wider estate planning strategy. There are however no further proposed changes to the wider IHT regime and the nil rate band will remain unchanged at £325,000 in 2015/16 (AS 2014, para 2.73).
IHT changes to support the new IHT digital service in 2015/16
The government will introduce legislation in Finance Bill 2015 dealing with interest, to support the introduction of the new IHT digital service announced in the Autumn Statement 2013 for introduction in 2015/16 as part of its new digital and online services strategy for agents and taxpayers. HMRC’s digital roadmap for 2015 estimates that the new online IHT digital service will be used by 600,000 customers (AS 2014, para 2.74).
Annual exemption
There was no mention of the capital gains tax (CGT) annual exemption in the Autumn Statement but FA 2014 s 9 confirms that the annual exempt amount for 2015/16 will be £11,100.
Military charities
In recognition of the sacrifice by military personnel in the last decade the government will redirect £50m of fines that have been collected as a result of the LIBOR scandal over the next six years to support military charities and other good causes. There is no indication at this stage of what those ‘other good causes’ might be (AS 2014, para 2.79).
VAT
In general, registered charities are entitled to reclaim the VAT that they have paid on their business activities. A glaring problem has been the VAT status of search and rescue and air ambulance charities as well as hospices who, in the main, carry on non-business activities and are therefore unable to reclaim their VAT payments. The government will, from April 2015, enable these organisations to claim refunds of VAT they have paid on purchases of goods and services for their non-business activities (AS 2014, paras 2.20 and 2.80).
Gift aid and donor benefits
As promised in the 2013 Autumn Statement, the government will publish, in the Finance Bill 2015, legislation that will permit regulations to be made giving non-charity intermediaries a greater role in administering gift aid on behalf of charities. The Treasury has already consulted on proposals to modernise gift aid to enable charities to reclaim tax on donations made online or by text message. The detailed rules on the role and regulatory regime of non-charity intermediaries will therefore be introduced by secondary legislation following Finance Act 2015.
There has been some confusion as to the manner in which gift aid works for charities and concern as to a lack of understanding as to its purpose. The government will work with the charitable sector to upgrade guidance on gift aid to reduce the confusion.
In its 2014 Budget the government indicated its intention to work with stakeholders with a view to simplifying the current rules which determine the treatment of benefits given to donors by charitable organisations. They will continue with this review and extend its remit to include a consideration of the rules for claiming gift aid on membership and entrance fees (AS 2014, paras 2.81–2.82).
According to the Autumn Statement 2014, devolution of corporation tax rate-setting powers to Northern Ireland ‘could’ be implemented, ‘provided that the Northern Ireland Executive is able to manage the financial implications’. The government is described as being ‘well-disposed’ to devolution: warm words that fall slightly short of the firm commitment to change that some commentators were expecting.
The government intends to introduce legislation in this Parliament (i.e. before the general election) provided that there is satisfactory progress in cross-party talks on a number of issues, including agreeing budgets for 2015/16 (AS 2014, paras 2.22–2.24).
Full devolution of business rates to Wales will be operational by April 2015.
This announcement follows the recent completion of the House of Lords stages of the Wales Bill, which (among other measures) allows the Welsh Assembly to set a rate of income tax to be paid by Welsh taxpayers, and enables the further devolution of tax powers (in relation to SDLT and landfill tax). (See: AS 2014, para 2.25; and for the Wales Bill see: Wales Bill on UK Parliament website.)
SDLT and landfill tax are to be fully devolved to Scotland from April 2015, with the introduction of a new Scottish land and buildings transaction tax and a new Scottish landfill tax. This means a reduction in the block grant (the public expenditure allocated to Scotland by the Westminster government) to reflect the SDLT that will no longer be collected in Scotland. The changes to (UK-wide) SDLT announced in this Autumn Statement will affect that calculation, so that the reduction in the block grant will now be smaller. Agreement of the reduction in the block grant has therefore been delayed beyond Autumn Statement 2014 (AS 2014, para 2.26).
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