Tax Measures in the 2014 UK Budget

by Morgan Lewis
Contact

UK government continues to support growth and build on economic recovery.

On 19 March, UK Chancellor of the Exchequer, George Osborne, released the UK’s 2014 budget. From a business tax perspective, the budget contained few surprises, reflecting the government’s policy of consulting on significant tax changes in advance. The government continues to drive tax cuts to help businesses grow and to encourage global competitiveness, with corporation tax reducing to 21% from April 2014 and to 20% from April 2015. This will give the UK the joint lowest rate of corporate income tax in the G20 (the group of finance ministers and central bank governors from 20 major economies) by April 2015.

Alongside this policy is a focus on fairness, with the government concentrating on reducing tax avoidance and evasion. The government has introduced 34 separate measures to address tax avoidance since 2010, and, although the rate of change is slowing, there are several provisions in the 2014 budget to address tax avoidance techniques of which the government has become aware.

It is acknowledged that one aspect of tax competitiveness is simplicity, and the government has committed to continue its work to produce a clear and logical tax structure with transparency and certainty. Work will be undertaken to investigate ways to minimise the statutory differences between accounting profits and taxable profits.

Business Taxes

One of the most fundamental changes to affect businesses is the expected overhaul of the tax treatment of members of a UK limited liability partnership (LLP). Currently, such members are taxed as partners, broadly resulting in tax transparency and payment of income tax by self-assessment as a self-employed person, rather than through payroll as an employee.

Although notice of the intended changes was given in March 2013, the scope of the changes was vastly increased in December 2013, and the proposed changes will now catch a much wider range of LLP members. Amongst other things, members who are caught must, from April 2014, be taxed as if they were employees. This includes the need for LLPs to account to HM Revenue & Customs (HMRC) for employer’s national insurance contributions (NICs) as well as to deduct income tax on a current basis.

In brief summary, members in LLPs will be treated as employees (for tax purposes only—they will not benefit from the employment law rights available for employees) if

  • at least 80% of their expected remuneration is fixed or variable otherwise than by reference to the profits of the LLP as a whole (disguised remuneration);
  • they do not have significant influence over the affairs of the LLP (a mere right to vote is insufficient); and
  • they have contributed less than 25% of their disguised remuneration as capital to the LLP.

Accompanying these changes are anti-avoidance provisions to prevent abuse through the allocation of profits and losses of partnerships where the partners include both companies and individuals.

It had been hoped that the introduction of the new rules would be postponed to give businesses time to adapt to the major changes that were announced in December 2013. However, the Chancellor has made it clear that the changes will take effect from 6 April 2014. Firms are now left with very little time to organise their affairs and restructure if necessary. Firms will need to take care not to fall foul of specific or general anti-avoidance provisions, and careful thought will need to be given in particular to UK LLPs that operate as part of a wider global firm. This task is somewhat complicated by the announcement that further “minor” amendments will be made before the draft legislation released in March 2014 is finalised, as no details of those changes are yet available. The Finance Bill will be released on 27 March, so if the changes are not released prior to that, businesses will have only nine days to adapt.

A positive development, however, is the government’s announcement that it will publish a draft manual on partnership taxation principles for comment in April 2014. This announcement follows a review of partnership taxation—a notoriously complex area—by the Office of Tax Simplification. The government will also proceed with some simplification of a few areas of partnership taxation.

There are also some measures designed to help business and encourage investment. These include a doubling (from £250,000 to £500,000) of the expenditure on plant and machinery qualifying for the annual investment allowance, which permits a 100% upfront deduction for such expenditure, from April 2014. The availability of this enhanced allowance is extended from the current period expiring in December 2014 to cover expenditure incurred to December 2015.

Tackling Tax Avoidance

The UK government strongly supports and plays an active role in the work of the Organisation for Economic Co-operation and Development, the European Union, and the G20 to tackle aggressive tax planning and to counter base erosion and profit shifting (BEPS). In connection with this, the government has released a position paper on the UK’s priorities for countering BEPS.

In the position paper, the government recognises the need for tax systems to produce adaptable solutions addressing the modern economy and delivering neutrality between different businesses. This necessitates a dual approach in revising international tax concepts and domestic tax provisions.

Areas of focus include the following:

  • The digital economy, which is closely linked with the modernisation of the permanent establishment and transfer pricing principles and should focus on how value is created, but which the UK believes would not benefit from a separate regime for businesses operating in the digital economy[1]
  • Global advancement of permanent establishment concepts, focusing on the threshold at which a presence in a country is sufficient to trigger taxes there and preventing artificial splitting of operations within a group
  • An update of the transfer pricing rules to reflect true value creation and prevent separation of profits from economic activities, for example, by allocations of economic risks and capital
  • Encouraging jurisdictions to adopt measures that prevent “treaty shopping”, to adopt controlled foreign corporation (CFC) rules, to prevent harmful tax practices that distort tax competition, and to adopt greater exchanges of tax information with other countries

On the domestic side, various provisions are to be introduced in the continued drive to reduce—or to discourage taxpayers from—tax avoidance. These will include the following:

  • An obligation to pay on demand disputed taxes arising from avoidance schemes if another taxpayer suffers a litigation defeat on the same scheme or face penalties for failure to do so
  • An accelerated obligation to pay disputed taxes relating to schemes that were notified to HMRC under the disclosure of tax avoidance schemes rules or schemes that are subject to counteraction under the general anti-abuse rules (following an opinion of the independent General Anti-Abuse Rule Advisory Panel that the arrangements in question were not a reasonable course of action), pending resolution of any dispute with HMRC over such taxes, to remove the cash flow advantages of entering such schemes
  • Provisions to counteract contrived schemes that permit companies to reduce their corporation tax bill by transferring profits (through the use of a total return swap or otherwise) to other group members
  • A measure to prevent avoidance of CFC charges arising by transferring profits from intragroup lending outside the UK and/or the transfer of external debt to the UK

Energy sector

The government continues to support the UK’s energy sector with some new reliefs. These include the following:

  • Extending the exemption from capital gains tax on disposal of shares in a company (the substantial shareholding exemption) to disposals of companies that have acquired oil and gas exploration and appraisal activity assets from other group companies in certain circumstances
  • Permitting tax-free reinvestment for pre-trading companies into the UK and UK Continental Shelf of proceeds from the disposal of assets used in oil and gas exploration and appraised activities
  • Providing accelerated tax relief for expenditure on a successful application for planning permission as expenditure on mineral exploration and access, permitting relief at 25%, rather than the 10% relief available for expenditure on mineral assets
  • From 2015, replacing the ultra-high pressure high temperature cluster field allowance with a new allowance removing at least 62.5% of qualifying profits from the ring fence profits subject to the supplemental charge
  • The instruction of an “onshore allowance”[2]

In addition, the government has committed to consult with industry to ensure the oil and gas tax regime encourages exploration, reduces decommissioning costs, and accommodates the maturing oil and gas basin.

Employment and Employee Incentives

While there are no fundamental tax changes to employment tax rates, a number of changes are proposed to simplify tax rules and administration. These include the requirement to file all employee share schemes with HMRC online from April 2014. Few details are available, and the online filing deadlines and processes are not yet finalised.

The tax treatment of internationally mobile employees is complex, particularly when they receive share-based awards. The government has acknowledged the need for simplification in this area, but the bulk of the changes (and details) are to be deferred until April 2015.

As was originally announced at the Autumn Statement 2013, measures will be introduced to counteract certain dual contract arrangements that are used by non-UK-domiciled UK resident individuals and that are designed to artificially divide employment duties between the duties of a UK employment (taxed as the income arises) and overseas employment (taxed only on remittance to the UK) in order to obtain a tax advantage. The effect of this measure would be, broadly, to deny remittance-based taxation to the income that arises to such individuals with respect to their overseas employment duties. The final legislation will be clarified to ensure that, amongst other things, the measure is limited to arrangements involving tax avoidance and that genuine noncontrolling directorships or directorships held under certain regulatory requirements would not be caught by this measure.

Stamp Duties

As previously announced, stamp duty and stamp duty reserve tax (SDRT) (generally charged at 0.5% of the consideration) will be abolished on sales of shares in growth markets from 28 April 2014. This will include shares listed on AIM.

In addition, SDRT charged on fund managers when investors surrender units in UK unit trusts and open-ended investment companies (OEICs) will be abolished from 30 March 2014. This measure is designed to make the UK a more attractive domicile for such collective investment schemes. This is coupled with a minor change to prevent non-pro rata in specie redemptions of units in unit trusts and interests in OEICs qualifying for the current exemption from SDRT that applies to in specie redemptions.

Personal Taxes

The UK government announced a number of changes to personal taxation that are broadly designed to assist those with low and middle incomes and to encourage savings. These include an increase of the tax-free personal allowance from 6 April 2015. In addition, from 6 April 2015, the UK government is expected to abolish the current 10% starting tax rate for savings income and to increase the starting tax rate limit for such savings to £5,000.

A number of measures relating to taxation of pensions were announced in the 2014 budget. These measures form part of an extensive set of measures designed to reform the current system of pension taxation. The initial changes are aimed at improving the flexibility in terms of accessing pension funds and changing the way in which withdrawals from pension funds are taxed. The government intends to consult on further proposals for reforms that are intended to change the current structure of pension benefits and the administration of pension schemes.

UK Residential Property

Currently, acquisitions of UK residential property valued at more than £2 million are subject to a 15% stamp duty land tax (SDLT). From 20 April 2014, this SDLT charge will be extended so that properties with values starting at £500,000 would be caught by the same SDLT charge. Transitional rules are expected to apply with respect to certain contracts entered into before 20 March 2014 but completed on or after that date.

As a linked measure, the application of annual tax on enveloped dwellings (ATED) to UK residential property is also expected to be broadened. In particular, from 1 April 2015, an annual charge of £7,000 would apply to affected residential properties with values falling between £1 million and £2 million. An additional annual charge of £3,500 would apply to affected residential properties falling within the value bracket between £500,000 and £1 million from 1 April 2016.

Currently, disposals of high-value UK residential property held through non-natural persons (e.g., companies, partnerships that have companies as their members, and collective investment schemes) are subject to a 28% capital gains tax charge (CGT) on any gain. As a result of the extension of the SDLT and ATED measures set out above, non-natural persons disposing of such properties that fall within the extended ATED bands (as referred to above) would also be subject to the CGT charge. The full CGT charge applying to any gain resulting from the disposal of affected properties with values between £1 million and £2 million is expected to take effect from 6 April 2015. For affected residential properties falling within the value bracket between £500,000 and £1 million, the CGT charge will take effect from 6 April 2016.

[1]. The OECD’s draft discussion paper on the digital economy is due for release on 24 March 2014.

[2]. For further information, read our 6 December 2013 LawFlash, “Tax Measures in UK Chancellor’s 2013 Autumn Statement”, available here.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis
Contact
more
less

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.