June 2010 Budget: key business tax announcements
Our summary of the key business tax announcements in the 22 June 2010 Budget. (Free access.)
Leading tax practitioners told us what they see as the most important announcements in the Budget, see Article, June 2010 Budget: the second half.
Key tax measures in the Budget
Not surprisingly, George Osborne’s first Budget contained significant tax rises alongside large cuts to public spending. There are also a number of tax incentives, targeted at lower earners and at businesses, and some technical "tidying up" measures. The key tax announcements in the 22 June Budget are:
Increase in the rate of capital gains tax (www.practicallaw.com/8-107-5849) for higher and additional rate taxpayers from 18% to 28% with effect from 23 June 2010. The lifetime limit for entrepreneurs' relief (www.practicallaw.com/4-383-5915) increases from £2 million to £5 million from the same date. See CGT rises to 28% and entrepreneurs' relief to £5 million.
Increase in the standard rate of VAT from 17.5% to 20% from 4 January 2011. This is expected to raise £13 billion a year by 2013. See Increase to the standard rate of VAT.
Decrease in the main rate of corporation tax from 28% to 24% over four years from April 2011, decrease in the plant and machinery rate of capital allowances from 20% to 18% with effect from April 2012 and decrease in the annual investment allowance from £100,000 to £25,000 in April 2012. See Corporation tax rates reduced from 2011-12 and Capital allowances: writing down allowances and annual investment allowance reduced.
£1000 increase in the personal allowance from April 2011 (taking the personal allowance to £7,475), combined with a reduction in the basic rate income tax limit, so that higher rate taxpayers do not benefit from the increased personal allowance. See Reduction in tax and NIC for the lower-paid.
The government has also promised wide-ranging reform of corporation tax, with a view to making the UK's tax regime more competitive and more stable. See A roadmap for corporate tax reform.
The government will publish a Finance Bill shortly, containing the legislation that will enact this government's "key priorities". That Bill is expected to get Royal Assent before the summer parliamentary recess. The government will introduce a further Finance Bill into Parliament in the autumn, shortly after the summer recess, to legislate tax measures announced by the previous government which this government has chosen to adopt. The autumn Finance Bill will be published in draft in July.
Authorised investment funds and artificial tax credits
The government has enacted legislation aimed at preventing corporate investors from using authorised investment funds (AIFs) to create UK tax credits without any corresponding UK tax charge. (In relation to the taxation of AIFs and their investors generally, see Practice note, Unit trusts and open-ended investment companies: tax (www.practicallaw.com/2-382-5451).)
Under regulations made on 22 June 2010 and having effect for distributions made on or after 1.45 pm on that date:
If an AIF makes an interest distribution, it is denied a deduction to the extent it derives from dividends that are exempt from corporation tax. This is effected by stipulating that an amount derived from franked investment income (www.practicallaw.com/0-107-5792) is not treated as deductible interest when paid out by the AIF.
If foreign tax is suffered by an AIF, a proportionate part of the distribution received by the investor is treated as foreign income arising in a territory with which the UK does not have a double tax treaty (www.practicallaw.com/8-107-6151). The general rule under the existing legislation is that the distribution received by the investor is deemed to be an annual payment made after withholding (www.practicallaw.com/8-107-7508) of UK tax, meaning that the investor receives a UK tax credit for the deemed withholding. The new provision effectively denies this credit in relation to the foreign element of the distribution by the AIF.
DOTAS regime: inheritance tax on trusts and other changes
As announced in the March 2010 Budget (see March 2010 Budget: key private client tax announcements: Disclosure regime to include inheritance tax (www.practicallaw.com/4-501-7480)), the government has confirmed that it will consult on bringing inheritance tax (IHT) as it applies to trusts within the "Disclosure of Tax Avoidance Schemes" regime. The consultation will include draft legislation.
The government has also confirmed that the Finance Act 2010 changes to the DOTAS regime (see Legal update, March 2010 Budget: key business tax announcements: Disclosure of tax avoidance schemes (DOTAS): extension of scheme (www.practicallaw.com/4-501-6433)) will be brought into force in the autumn and that substantive changes to the descriptions of schemes that must be disclosed will be worked up in 2011-12, in tandem with the development of tax policy in the relevant areas.
General anti-avoidance rule?
As part of a proposed new approach to making tax legislation (see Tax policy making: a new approach), the government will consider whether to introduce a general anti-avoidance rule. There is no mention of the taxes to which this rule would apply.
Group mismatches and financial instruments
The government has confirmed that it will continue to consult on the possibility of introducing a generic or principles-based rule in relation to group mismatch schemes.
A "group mismatch scheme" arises where a group seeks to take advantage of differing accounting treatments for financial instruments and/or differing tax treatment of transactions as between companies in the same group. Broadly, such schemes involve tax relief arising to one group company without a corresponding tax charge arising in another, meaning that the group incurs an overall tax loss without suffering an overall economic loss.
To date, HMRC has tended to address such schemes on a piecemeal basis. However, HMRC proposes addressing such schemes instead using generic legislation. This would take the form of principles-based legislation, similar in style to that used in the "shares as debt" rules (see Practice note, Taxation of investments: shares as debt legislation: Rules applying from 22 April 2009 (www.practicallaw.com/2-375-8550)).
HMRC published a discussion document on the proposal as part of the March 2010 Budget: see Legal update, March 2010 Budget: key business tax announcements: Group mismatches (www.practicallaw.com/4-501-6433). The stated aim is to reduce legislative complexity and taxpayers' compliance costs, as well as to ensure that the anti-avoidance rules are comprehensive (as opposed to the existing specific rules, which may leave gaps for novel avoidance). However, the risk with principles-based legislation is that it is couched vaguely or in terms open to subjective interpretation and, as HMRC admits, it can be very difficult to pinpoint an acceptable construction.
Loan relationships and derivatives: derecognition of income
The government is to introduce legislation to prevent avoidance schemes involving the derecognition of income relating to loan relationships (www.practicallaw.com/2-107-6781) or derivative contracts (www.practicallaw.com/0-107-6094).
The general rule is that a company's loan relationships or derivative contracts are taxed in accordance with their accounting treatment (see Practice note, Loan relationships (www.practicallaw.com/9-219-4959) and Practice note, Derivatives: tax (www.practicallaw.com/6-204-7955)). However, in some circumstances, derecognition of amounts in the accounts is overridden, and the amounts recognised, for UK tax purposes. The government is to extend these circumstances to include cases where derecognition either:
Arises as a result of the acquisition or variation of a capital interest in a company, partnership or trust.
Is triggered by an event that occurs in a later accounting period to that in which the derecognition takes place.
This legislation is to be included in a forthcoming Finance Bill (probably the one to be published shortly after the Budget) and is to have effect for credits and debits arising on or after 22 June 2010.
A technical note is to be issued in early July 2010, setting out proposals for generic legislation to tackle avoidance schemes involving derecognition of loan relationships and derivative contracts. HMRC states that any further changes to the legislation on derecognition will be made in the Finance Bill 2011, with effect from a date to be announced.
Having started from the simple premise that the tax treatment of financial instruments should follow their accounting treatment, these provisions are the latest in a long line of measures that add ever increasing complexity to the loan relationships and derivative contracts rules in order to prevent tax avoidance. It is to be hoped that the forthcoming proposals for generic anti-avoidance legislation will seek to reduce this complexity, although it is possible that generic legislation will entail unwelcome uncertainty for taxpayers.
A roadmap for corporate tax reform
The government announced a "roadmap for corporate tax reform", with further details to follow in the autumn. The reform will be based on the government's view that a broad tax base, a low corporate tax rate and a more territorial approach will make the UK's tax system more competitive (see HMRC: June 2010: Business Taxes - Summary of Announcements). The elements of the roadmap announced in the June 2010 Budget are:
The Budget Report states that "the manufacturing sector as a whole will pay less corporation tax as a result" of the government's reforms. It is anticipated that these changes will be developed through the new approach to making tax policy, see below.
The government will introduce a new bank levy from 1 January 2011. The levy will be charged on:
The consolidated balance sheet of UK banking groups and building societies.
The aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK.
The balance sheets of UK banks in non-banking groups.
The rate of the levy will be 0.07%, although there will be a lower rate of 0.04% in 2011. There will also be a reduced rate for wholesale funding with more than one year remaining to maturity of half the main rate (0.02% then 0.035%).
The levy will only apply where the aggregate long- and short-term liabilities of the institution or group are at least £20 billion, excluding:
Tier 1 capital.
Insured retail deposits.
Repos (www.practicallaw.com/9-107-7145) secured on sovereign debt.
Policyholder liabilities of retail insurance businesses within banking groups.
The levy will not be deductible for corporation tax purposes and there will be anti-avoidance provisions to prevent avoidance.
The levy is intended to encourage banks to move to less risky funding profiles. It is stated to be a contribution reflective of economic risk, rather than an insurance against failure or a fund for future resolution.
The government proposes that only net derivative positions will be taken into account in determining the liabilities of an institution or group, but will consider the technical details of this and other aspects of the levy in consultation with industry over the summer. Final details of the levy are to be published later in 2010.
It remains to be seen how this proposal will affect the attractiveness of the UK as a base for banking operations. However, the German government has already announced a similar levy and the French government is due to do so shortly. These levies are likely to supplement the taxes that the EU has agreed that member states should impose to fund any future bailout of banks (see Legal update, EU to impose bank taxes (www.practicallaw.com/1-502-5641)). The government also announced in the 2010 Budget Report that it will take action to tackle "unacceptable bank bonuses", consult on a remuneration disclosure scheme for the banking sector, and, with international partners, explore the costs and benefits of a Financial Activities Tax on profits and remuneration.
Capital allowances: writing down allowances and annual investment allowance reduced
From 1 April 2012 (for corporation tax (www.practicallaw.com/1-107-5999)) or 6 April 2012 (for income tax) the annual rate of writing down allowances (WDAs) for both new and unrelieved expenditure on plant and machinery will be reduced to 18% (from 20%) and the annual rate for special rate pool expenditure will be reduced to 8% (from 10%). In addition, also from 2012, the maximum annual investment allowance will be reduced to £25,000 (the maximum was increased from £50,000 to £100,000 by section 5 of the Finance Act 2010). The legislation for this will be included in a forthcoming Finance Bill. These changes do not apply to oil and gas ring-fence activities. For taxpayers whose chargeable period spans 1 April or 6 April, a hybrid rate will apply. The applicable rate will depend on the proportion of the chargeable period falling before the April date: the greater the proportion falling before April, the greater will be the rate. For further information on plant and machinery allowances see Practice note, Capital allowances on property transactions: Plant and machinery allowances (www.practicallaw.com/6-362-6968).
Capital distributions: corporation tax treatment clarified
The rules on the taxation of income distributions received by corporation tax payers in Part 9A of the Corporation Tax Act 2009 (CTA 2009) will be extended so that they apply to certain capital distributions. The legislation will have retrospective effect for all distributions made on or after 1 July 2009 but companies will be able to opt for the rules not to apply retrospectively.
HMRC has long treated UK distributions as being of an income nature save in limited circumstances such as distributions in a liquidation. However, Part 9A CTA 2009 introduced a new corporation tax regime for UK and overseas source distributions from 1 July 2009, which expressly excludes distributions that are capital in nature (section 931A(2), CTA 2009). Essentially, Part 9A exempts from corporation tax all income distributions by UK or non-UK companies unless the distribution falls within certain anti-avoidance rules: see Practice note, Dividends: tax: Common corporation tax regime for UK and overseas dividends from 1 July 2009 (www.practicallaw.com/1-366-8036). By contrast, distributions that are capital in nature may be subject to corporation tax on chargeable gains unless the substantial shareholding exemption or another exemption or relief is available. (HMRC's approach to distributions by overseas companies has long been to determine whether the distribution is capital or income in nature on general principles and then tax the receipt accordingly.) This change means that distributions will not be prevented from falling within the distribution exemption regime at Part 9A of the Corporation Tax Act 2009 because they are capital in nature. The new legislation will also clarify that distributions made out of reserves arising from a reduction in capital are distributions within the definition in Part 23 of the Corporation Tax Act 2010 (CTA 2010). These change will have full retrospective effect for distributions by UK-resident companies, and will apply to distributions made on or after 1 July 2009 by non-UK resident companies. However, companies receiving dividends will be able to opt out of the retrospective effects of this legislation.
The definition of "distribution" in Part 23 of CTA 2010 also applies for certain income tax purposes. Therefore, the clarification concerning distributions from reserves arising from capital reductions will also have effect for income tax purposes where the distributing company is UK-resident but only for distributions made on or after 22 June 2010.
This measure was announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Capital distributions: corporation tax treatment clarified (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement differs from the March 2010 Budget announcement in that its adds the following to the March announcement:
Distributions made out of reserves arising from a reduction in capital will be "distributions" within the definition in Part 23 of CTA 2010.
The clarification concerning distributions from reserves arising from capital reductions will have effect for income tax purposes where the distributing company is UK-resident but only for distributions made on or after 22 June 2010.
HMRC has published draft legislation and explanatory notes. The government intends the legislation to appear in the autumn Finance Bill.
Corporation tax rates reduced from 2011-12
The main rate of corporation tax (www.practicallaw.com/1-107-5999) will be reduced to 27% (from 28%) for the year commencing 1 April 2011. This will apply to companies and groups whose annual profits exceed £1.5 million. The legislation for this will be included in the next Finance Bill (due to be published shortly). The rate of corporation tax for companies with ring-fenced profits from oil extraction in the UK and UK continental shelf (ring-fenced profits) will remain at 30%. Further annual reductions of 1% each subsequent year will also be made, culminating in a rate of 24% for the year commencing 1 April 2014.
The small companies rate of corporation tax will be reduced to 20% (from 21%) for the year commencing 1 April 2011. This will apply to companies and groups whose annual profits do not exceed £300,000. The legislation for this will be included in the Finance Bill 2011. The small companies rate for companies with ring-fenced profits will remain at 19%.
CFCs and foreign profits
The government has set out its timetable for reforming the taxation of controlled foreign companies (www.practicallaw.com/7-107-6340) (CFCs) and foreign profits:
New CFC rules are to be legislated in spring 2012. Consultation will take place over summer 2010 on interim improvements to the existing regime, to be legislated in spring 2011, aimed at making the rules easier to operate and more competitive. (For a discussion of the current CFC rules, see Practice note, Controlled foreign companies and attribution of gains: tax (www.practicallaw.com/7-367-0989). For background on the reform of these rules, see Practice note, Foreign profits of companies: tax reform: Future reform of the CFC rules (www.practicallaw.com/8-369-8105).)
The government plans to move towards a more territorial basis for taxing the profits of foreign branches. The rules will be reformed in spring 2011, with consultation in summer 2010 on options for retaining foreign branch loss relief as part of this. (For background on the reform of these rules, see Practice note, Foreign profits of companies: tax reform: Profits of overseas permanent establishments (www.practicallaw.com/8-369-8105).)
These reforms, particularly, the reform of the CFC rules, have been long awaited. While they need to be considered carefully so that they operate easily and effectively, balancing the needs of both the state and the taxpayer, it is to be hoped that they will not be further delayed.
Consortium relief: proposed amendments
The government will introduce amendments to the conditions that a company must satisfy in order to claim consortium relief.
Group relief can be claimed in certain circumstances where one of the companies is owned by a consortium. This is often referred to as consortium relief. For further detail, see Practice note, Groups of companies: tax: Group relief (www.practicallaw.com/6-107-3728) and Practice note, Joint venture companies: tax: Group and consortium relief: restrictions relevant to JVCs (www.practicallaw.com/8-371-3988).
The government proposes two amendments to the consortium relief rules that will:
Allow European Economic Area (www.practicallaw.com/0-107-6555) (EEA)-resident companies engaged in UK consortia "link companies" to pass on relief for those losses to their UK-resident subsidiaries.
Strengthen rules to ensure that consortium relief is given in proportion to the member company's active involvement in the consortium.
The purpose of the first amendment is to correct an abuse of the principle of freedom of establishment identified in Philips Electronics UK Limited v HMRC  UKFTT 226(TC) (see Legal update, Consortium loss relief rules incompatible with EU law (www.practicallaw.com/7-500-2825)). This measure will amend the "link company" aspects of consortium relief to allow any company established within the EEA to be a link company.
The purpose of the second amendment is to prevent abuse of the consortium relief rules through artificial arrangements. The additional test will be based on the proportion of voting rights and the extent of control the member holds in the consortium.
Draft legislation has not yet been published.
The proposals were first mentioned in the March 2010 Budget although they were not contained in a Budget Note. For further detail see Legal update, March 2010 Budget: key business tax announcements: Proposed amendment to the consortium relief rules (www.practicallaw.com/4-501-6433).
The amendments will be introduced in the autumn Finance Bill and will have effect for accounting periods commencing on or after the date that the legislation is published (likely to be July 2010).
Debt cap rules: changes
HMRC has reiterated the changes to be made to the debt cap rules (see Practice note, Limits on tax deductions for interest: the "debt cap" (www.practicallaw.com/7-386-4223)), announced in a technical note published on 9 November 2009 (see Legal update, Worldwide debt cap: HMRC announces changes (www.practicallaw.com/2-500-7279)), reflected in draft legislation published as part of the 2009 Pre-Budget Report (see Legal update, Draft legislation amending debt cap rules (www.practicallaw.com/0-500-9892)), and in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Debt cap rules to change (www.practicallaw.com/4-501-6433)). The changes referred to as part of the June 2010 Budget are as follows:
In the "gateway test" (see Practice note, Limits on tax deductions for interest: the "debt cap": Gateway test (www.practicallaw.com/7-386-4223)), the measure of debt is to be adjusted where a mismatch would otherwise occur (see Legal update, Worldwide debt cap: HMRC announces changes: Accountancy mismatches in the gateway test (www.practicallaw.com/2-500-7279)).
Regulation-making powers will enable HMRC to resolve mismatches arising in connection with the main debt cap rules (see Legal update, Worldwide debt cap: HMRC announces changes: Definitions of finance expense amount and available amount to be expanded in regulations (www.practicallaw.com/2-500-7279)).
The mismatch that may arise where borrowing is carried out by a partnership will be corrected (see Practice note, Worldwide debt cap: HMRC announces changes: Partnership borrowing: mismatches (www.practicallaw.com/2-500-7279)).
Companies within the special corporation tax regime for securitisation companies (see Practice note, Securitisation: tax: The SPV: tax treatment as a securitisation company (www.practicallaw.com/6-107-4445)) will be excluded from the main debt cap rules (see legal update, Worldwide debt cap: HMRC announces changes: Securitisation companies (www.practicallaw.com/2-500-7279) and Legal update, March 2010 Budget: key business tax announcements: Debt cap rules to change (www.practicallaw.com/4-501-6433)).
HMRC may make regulations allowing a company involved in capital market arrangements to transfer any additional tax liability arising from the operation of the debt cap to another company in its group (see Legal update, March 2010 Budget: key business tax announcements: Debt cap rules to change (www.practicallaw.com/4-501-6433)).
The assets and liabilities of companies that are taken into account for the gateway test will include long-term arrangements that have the economic effect of loans (see Legal update, March 2010 Budget: key business tax announcements: Debt cap rules to change (www.practicallaw.com/4-501-6433)). Groups will be able to elect for this change to apply only prospectively.
The definition of "financial instrument" (see Practice note, Limits on tax deductions for interest: the "debt cap": Relevant dealing in financial instruments (www.practicallaw.com/7-386-4223)) will be subject to a minor expansion when determining whether a financial services group is excluded from the debt cap (see Legal update, Worldwide debt cap: HMRC announces changes: Exclusion for dealings in financial instruments (www.practicallaw.com/2-500-7279)).
Groups will be prevented from allocating a debt cap disallowance to a dual resident investing company (see Legal update, Draft legislation amending debt cap rules (www.practicallaw.com/0-500-9892)).
Guarantee fees will be included in the financing income of a company (see Legal update, Worldwide debt cap: HMRC announces changes: Guarantee fees to count as finance income (www.practicallaw.com/2-500-7279)).
A drafting error relating to group treasury companies will be corrected (see Legal update, Worldwide debt cap: HMRC announces changes: Exemption for group treasury companies (www.practicallaw.com/2-500-7279)).
Distributions made by industrial and provident societies will be excluded from the financing expenses of such companies (see Legal update, March 2010 Budget: key business tax announcements: Debt cap rules to change (www.practicallaw.com/4-501-6433)).
Interest paid to a non-departmental public body will be excluded from the debt cap rules (see Legal update, Worldwide debt cap: HMRC announces changes: Paying interest to tax-exempt bodies will not count as a finance expense (www.practicallaw.com/2-500-7279)).
The meaning of "ancillary expenses" in the definition of the "available amount" will be clarified (see Legal update, Worldwide debt cap: HMRC announces changes: Ancillary costs (www.practicallaw.com/2-500-7279)).
Two restrictions on entities that can be the “ultimate parent” of a group of companies will be introduced. Presumably, these relate to collective investment schemes (www.practicallaw.com/5-107-5940) (see Legal update, Worldwide debt cap: HMRC announces changes: Collective investment schemes (www.practicallaw.com/2-500-7279)) and limited liability partnerships (www.practicallaw.com/2-107-6762) (see Legal update, March 2010 Budget: key business tax announcements: Debt cap rules to change (www.practicallaw.com/4-501-6433)).
The June 2010 announcement does not mention the exclusion of preference shares from the definition of "relevant liabilities" (see Legal update, Worldwide debt cap: HMRC announces changes: Preference shares (www.practicallaw.com/2-500-7279)); it is unclear whether this means that this proposal has been dropped.
Except as mentioned above, these changes are to have effect for periods of account of worldwide groups (see Practice note, Limits on tax deductions for interest: the "debt cap": The "worldwide group" (www.practicallaw.com/7-386-4223)) beginning on or after 1 January 2010. They are bound to add even further complexity to what is already a very challenging area of the UK tax rules. The government intends to legislate the changes in the autumn forthcoming Finance Bill.
Investment funds tax rules
The government has announced that it will hold discussions with industry, including formal consultations, on a range of issues concerning asset management. These issues will include implementation of the UCITS IV Directive (see Practice note, Unit trusts and open-ended investment companies: tax: UCITS IV (www.practicallaw.com/2-382-5451)). They will also include:
The possibility of introducing a tax-transparent contractual fund vehicle.
Reviewing the tax treatment of investment trusts (as to which, see Practice note, Investment trusts: tax (www.practicallaw.com/7-382-5458)).
Reviewing the taxation of funds investing in non-reporting funds (as to which, see Legal update, Authorised investment funds investing in offshore funds: regulations made (www.practicallaw.com/3-501-4670)).
Reviewing the stamp duty reserve tax rules relating to investment funds in Schedule 19 to the Finance Act 1999 (as to which, see Practice note, Unit trusts and open-ended investment companies: tax: Stamp duty surrenders and transfers of units in a unit trust or shares in an open-ended investment company (www.practicallaw.com/2-382-5451)) in the context of investments in underlying funds.
These issues were suggested as consultation topics as part of the March 2010 Budget: see Legal update, March 2010 Budget: key business tax announcements: Reform of investment funds tax rules (www.practicallaw.com/4-501-6433).
Details of potential reforms in these areas are unknown at present.
Simplification of chargeable gains rules for groups
The government is to include measures simplifying the chargeable gains rules for groups of companies in the Finance Bill 2011.
On 22 February 2010, HMRC and HM Treasury published a consultation document setting out proposals (including draft legislation) for reform of these rules in the following areas:
Capital losses following a change in ownership.
Value-shifting and depreciatory transactions.
For details of the proposals, see Legal update, Consultation document on chargeable gains rules for corporate groups (www.practicallaw.com/6-501-5507).
As part of the June 2010 Budget, HMRC announced that the responses to this consultation will inform revised draft legislation to be issued later in 2010. HMRC also stated that changes arising from the consultation are to be included in Finance Bill 2011.
Zero-emission goods vehicles: 100% first year allowance
The autumn Finance Bill will introduce a 100% first year allowance, subject to certain conditions, for the purchase of new and unused (not second-hand) zero-emission goods vehicles. The allowance will have effect for a five year period beginning on 1 April 2010 for companies (6 April for unincorporated businesses) until 31 March 2015 (5 April 2015 for non-corporates).
Expenditure on assets for leasing will be excluded. There will also be a cap of 85 million euros per enterprise. A number of other conditions will also apply in order for the legislation to comply with the State Aid rules.
This measure was first announced as part of the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Zero-emission goods vehicles: 100% first year allowance (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement is virtually identical to the March 2010 except that the March 2010 announcement attributed the 85 million euros cap to compliance with the State Aid rules. The June 2010 Budget announcement does not include this statement.
Interest harmonisation: corporation tax and petroleum revenue tax
Legislation to bring corporation tax (CT) and petroleum revenue tax (PRT) within the harmonised interest regime will be included in the autumn Finance Bill. The legislation will be brought into effect by Treasury Order, with implementation phased in over a number of years.
The Finance Act 2009 created a harmonised interest regime for most taxes and duties, with the exception of corporation tax and petroleum revenue tax (see Practice note, Penalties, compliance and powers reforms: legislation tracker: Alignment of interest rules across taxes (extension for corporation tax and petroleum revenue tax (www.practicallaw.com/7-385-1046)). As part of the 2009 Pre-Budget Report, HMRC published for consultation draft legislation intended to bring CT (other than CT paid under the quarterly instalments payment regime) and PRT into the harmonised interest regime. In its consultation response document, HMRC reported that all respondents confirmed that the draft legislation was appropriate. This note is unchanged from the version released as part of the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Interest harmonisation: corporation tax and petroleum revenue tax (www.practicallaw.com/4-501-6433)).
Penalties for late filing and late payment of tax: extension to remaining taxes and duties
Legislation to bring VAT, environmental taxes and duties within the harmonised penalty regime for late filing of tax returns and late payment of tax will be included in the autumn Finance Bill. The legislation will be brought into effect by Treasury Order, with implementation phased in over a number of years.
The Finance Act 2009 created a new penalty regime for late filing and late payment of tax for income tax (including amounts collected under PAYE and the construction industry scheme), corporation tax, inheritance tax, Stamp duty land tax (SDLT) (www.practicallaw.com/2-107-7304), Stamp duty reserve tax (SDRT) (www.practicallaw.com/9-107-7305) and petroleum revenue tax (see, Practice note, Penalties, compliance and powers reforms: legislation tracker (www.practicallaw.com/7-385-1046)). As part of the 2009 Pre-Budget Report, HMRC published for consultation draft legislation intended to bring the remaining taxes and duties within the penalty regime, based on the same principles and with similar penalty models (see Legal update, 2009 Pre-Budget Report: key business tax announcements: Penalties for late filing and late payment of tax: extension to remaining taxes and duties (www.practicallaw.com/4-500-9404)). The only change from the March 2010 Budget proposals in this area (see Legal update, March 2010 Budget: key business tax announcements: Penalties for late filing and late payment of tax: extension to remaining taxes and duties (www.practicallaw.com/4-501-6433)) is the confirmation that the penalties for failure to file monthly returns will be £100 for the first six failures and £200 for any subsequent failures (the March 2010 Budget materials were inconsistent on this point).
Withholding tax obligations for non-corporates
HMRC is to be given power to amend the rules on when and how individuals and other persons other than UK resident companies must report and pay income tax withheld (www.practicallaw.com/8-107-7508) from interest, royalties and other annual payments. (For a general discussion of withholding tax, see Practice note, Withholding tax (www.practicallaw.com/5-201-9175).)
Currently, a person other than a UK resident company required to withhold tax from certain payments (including interest and royalties) must report the payment to HMRC without delay and they may be assessed to the tax that they are required to withhold (section 963, Income Tax Act 2007). The government intends to legislate in the autumn Finance Bill to allow HMRC to amend these rules in regulations. However, no details have been provided as to the changes that are envisaged.
Employment and pensions
Capital gains tax reforms: implications for employee share incentives
The June 2010 Budget included an immediate rise in the rate of CGT from 18% to 28%, for taxpayers with combined income and taxable gains above the income tax basic rate band, together with an increase in the lifetime allowance for entrepreneurs' relief from £2 million to £5 million (see CGT rises to 28% and entrepreneurs' relief to £5 million). Otherwise, CGT remains substantially unchanged. The increased CGT rate reduces by 10% the differences between the CGT rate and the 40% and 50% rates of income tax. However, the change seems unlikely to reduce the popularity of either tax-favoured share options, or arrangements for employees to secure capital gains tax treatment of the growth in value of interests in shares or other securities, especially when National Insurance contributions liabilities on earnings subject to income tax are taken into account.
For more analysis of the implications for share plans, see Legal update, June 2010 Budget: capital gains tax reforms: implications for employee share incentives (www.practicallaw.com/8-502-5893).
Consultation on tax treatment of growth shares, JSOPs, carried interest and similar arrangements
The June 2010 Budget confirms that a consultation will be undertaken during 2010 on the tax treatment of employment-related shares and securities offered under "geared growth" and similar arrangements.
A review of these arrangements was initially announced in the March 2010 Budget (see March 2010 Budget: review of tax treatment of growth shares, JSOPs, carried interest and similar arrangements (www.practicallaw.com/5-501-8337)), but the new announcement states clearly that "the aim of the consultation is to . . . ensure that employment income from employment related securities is subject to income tax and National Insurance Contributions".
Enterprise management incentives (EMI) changes
The June 2010 Budget confirms that a previously-announced change to enterprise management incentives (www.practicallaw.com/7-107-6533) (EMI) legislation will go ahead. The change will enable companies with a permanent establishment (www.practicallaw.com/6-107-6996) in the UK to grant EMI options (currently, only companies which carry out a qualifying trade wholly or mainly in the UK can grant EMI options). The amendment is needed to ensure that the EMI legislation complies with EU state aid rules, and will now be included in a forthcoming Finance Bill to be introduced after Parliament's summer recess in 2010, and will take effect when that Finance Bill receives Royal Assent.
The amendment was orginally announced in the 2009 Pre-Budget Report and included in the March 2009 Budget (seeMarch 2010 Budget: amendments to enterprise management incentives (EMI) legislation (www.practicallaw.com/3-501-8244)), but legislation introducing the measure was postponed until after the 2010 general election.
PAYE, workplace canteens and employer-supported childcare
The June 2010 Budget Report includes the following announcements regarding PAYE and income tax measures:
A commitment to explore ways of improving the PAYE system, starting with a consultation with employers and payroll providers on ways of capturing more frequent or even real-time PAYE data. (Para 2.25, June 2010 Budget Report.)
A consultation on introducing powers for HMRC to require financial security where PAYE and NICs are at serious risk of non-payment. This measure was originally announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Financial security for PAYE and NICs (www.practicallaw.com/4-501-6433)). The consultation will also consider the proposed criminal penalty for failure to provide a financial security. Draft legislation will be published as part of the consultation process. (Para 2.112, June 2010 Budget Report and page 3, June 2010 Budget - Summary of Announcements - Enforcement and Compliance.)
Confirmation that legislation introduced in Finance Act 2010 to restrict tax breaks for workplace canteens (see 2009 Pre-Budget Report: salary sacrifice arrangements in relation to workplace canteens (www.practicallaw.com/3-500-9843) will take effect from April 2011. (Para 2.122, June 2010 Budget Report.)
Confirmation of changes to employer-supported childcare such as nursery vouchers, (see Legal update, April 2011 changes to employer-supported childcare (www.practicallaw.com/7-501-5371)), including the restriction of the tax benefits for higher and additional rate taxpayers, which will take effect for new joiners to a scheme on or after 6 April 2011. (Para 2.123, June 2010 Budget Report.)
Reduction in tax and NIC for the lower-paid
With effect from 6 April 2011, the income tax personal allowance for those aged under 65 will increase by £1,000 to £7,475. However, legislation will be introduced to ensure that higher rate taxpayers do not benefit from the increase. This will be achieved by lowering the threshold above which higher rate tax is paid. The exact figure will be announced in the autumn, as it will depend on the movement in the retail price index (RPI) in the year to September. The government has also confirmed that the higher rate lower threshold will be frozen in 2012-13.
For NIC, the increase of £570 in the primary (employee) threshold, which was announced in the March 2010 Budget will take effect from 6 April 2011 to coincide with the increase of 1% in employee contributions (from 11% to 12%) and in employer contributions (from 12.8% to 13.8%). The secondary (employers') threshold will be increased by £21 above the RPI, also from 6 April 2011. At the same time, the upper earnings limit will be reduced to align it with the higher rate threshold. A separate NICs Bill will legislate the NICs changes that require primary legislation.
Regional employer NICs holiday for new businesses
The government will shortly announce details of a scheme to promote the creation of new businesses in those parts of the UK that are most reliant on public sector employment. Those areas are Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West. During a three-year period, new businesses in these areas will be exempt from the first £5,000 of Class 1 employer NICs (www.practicallaw.com/8-201-8297) due in the first twelve months of employment. This will apply for the first ten employees hired in the first year of business. Subject to meeting the necessary legal requirements, the scheme is intended to start from 6 September 2010 but this has yet to be confirmed.
HMRC will shortly publish full details of the how the scheme will work and who is eligible to participate. HMRC intends to release the draft legislation and detailed guidance for new businesses before the scheme is launched. At this stage, HMRC has stated the following about the scheme:
A "new" business is one that commences a trade, profession or vocation on or after the date that the scheme begins and that is able to meet certain criteria. Steps will be taken to ensure that only businesses that undertake a sufficient degree of new economic activity will benefit. Existing businesses will not be eligible.
If a business is established after 22 June 2010 but before the scheme starts and meets the eligibility criteria, the business will be liable to pay employer NICs in the period before the start of the scheme but will receive a "holiday" of equal duration once the scheme starts.
Most employees will be within the scope of the scheme but there will be some exclusions, including for employees operating under companies caught by the IR35 (www.practicallaw.com/9-200-3356) rules (as to which, see Practice note, IR35 (www.practicallaw.com/9-201-7626)) and employees engaged through managed service companies (www.practicallaw.com/3-223-1993) (as to which, see Practice note, Managed service companies (www.practicallaw.com/6-225-4030)).
Most kinds of business (including property and investment businesses) will be eligible for the scheme. Further details will be available about which sectors are to be excluded but, at this stage, HMRC states that businesses in the coal sector will not qualify and the agriculture and fisheries sectors will be subject to restrictions.
Restricting pensions tax relief: back to the drawing board
Following intense lobbying from employer organisations and the pensions industry, the government has resolved to overhaul the previous government's plans for restricting pensions tax relief for high earners, which were due to be implemented from 6 April 2011 (paragraph 1.118, June 2010 Budget Report).
Rejecting the previous government's approach as too complex, the government will investigate whether equivalent revenue (estimated at £3 billion in 2011/12) can be raised through the alternative means of significantly reducing the annual allowance (www.practicallaw.com/6-201-6478), which is set at £255,000 in 2010/11. Preliminary analysis apparently suggests that an annual allowance in the region of £30,000 to £45,000 may achieve this aim.
The government recognises that a number of technical points will need to be reflected in the design of any alternative method. Particular areas that the government will consider in consultation with interested parties are:
How defined benefit accruals should be valued.
How to ensure the restriction is limited to individuals who are higher or additional rate tax payers (and how to avoid inadvertent one-off charges for basic rate tax payers).
The extent to which there should be flexibility for individuals paying any charge due under the measures.
How any charge due under the measures should operate in practice and compliance monitored.
The measures enacted in the Finance Act 2010 putting in place the framework for the high income excess relief charge will be repealed in regulations enacted under the forthcoming Finance Bill. The repeal will only take effect once the government has decided on a replacement approach. For background about the previous government's plans, see Practice note, Restricting pensions tax relief: Labour government’s plans (www.practicallaw.com/8-501-1339).
In the meantime, there will be no changes to the anti-forestalling regime, though the government says it will continue to monitor the regime and take action to protect revenues if necessary. For the details of the anti-forestalling regime, see Practice note, Restricting pensions tax relief: anti-forestalling measures (www.practicallaw.com/5-422-1726).
For coverage of other pensions announcements in the Budget, see PLC Pensions, Legal update, June 2010 Budget: pensions (www.practicallaw.com/2-502-5810).
Tax avoidance using employee benefit trusts
The June 2010 Budget confirmed that the coalition government will introduce legislation with effect from April 2011 to tackle "arrangements . . . which seek to avoid, defer or reduce liabilities . . . to income tax and National Insurance Contributions or to avoid restrictions on pensions tax relief". The measure is aimed at arrangements which use employee benefit trusts (www.practicallaw.com/6-205-8072) (EBTs) and similar vehicles. This measure was initially announced in the March 2010 Budget (see March 2010 Budget: tackling tax avoidance using employee benefit trusts (www.practicallaw.com/8-501-8350)), but the June 2010 Budget Report confirms that:
Legislation will definitely be introduced and will take effect from April 2011.
Employer-financed retirement benefits scheme (www.practicallaw.com/6-205-6493) (EFRBS) are within the scope of this proposal.
For analysis of all the main environment-related announcements, tax and non-tax, see PLC Environment, Legal update, June 2010 Budget: environmental announcements (www.practicallaw.com/6-502-5827).
Intellectual property and R&D
Film tax relief: multi-year claims: correction of legislation restricting surrenderable tax credit
The government has announced that legislation will be introduced in the autumn Finance Bill to correct an unintended anomaly affecting the amount of film tax relief that may be claimed where films are produced over more than one accounting period.
Film tax relief may be claimed by film production companies for films that satisfy the cultural test for being a British film. Where a film production company satisfies the relevant provisions it may claim an enhanced tax deduction or surrender a loss in return for a payable tax credit. For further detail, see Practice note, Film tax relief (www.practicallaw.com/7-385-1193).
Where a company claims tax credit over two or more accounting periods, the existing legislation has restricted the losses that may be surrendered for payment in respect of any second or subsequent accounting period in an unintended way where there is an increase in UK spend in the second or later periods.
The measure will have effect for accounting periods ending on or after 9 December 2009 and will be treated for those periods as always having had effect.
This measure was first announced as part of the 2009 Pre-Budget Report (see Legal update, 2009 Pre-Budget Report: key business tax announcements: Film tax relief: correction of legislation restricting surrenderable tax credit (www.practicallaw.com/4-500-9404)). The June 2010 Budget announcement is virtually identical to that contained in the 2009 Pre-Budget Report. It is therefore expected that the legislation will follow the form of draft legislation published as part of the 2009 Pre-Budget Report.
Intellectual property and R&D credits: review
The government intends to consult with business to review:
The taxation of intellectual property (as to which, see generally Practice note, Intangible property: tax (www.practicallaw.com/1-107-5008)).
The support that research and development (R&D) tax credits (as to which, see generally Practice note, Intangible property: tax: Research and development (www.practicallaw.com/1-107-5008)) provide for innovation.
The proposals in the Dyson Review, which sets out proposals to make Britain the leading high-tech exporter in Europe and recommends that tax relief for companies investing in R&D should be refocused on small, high-tech firms to "stimulate a new wave of technology".
No details are given of this review, so it is unclear exactly how wide ranging it will be and whether any proposals are already being considered.
Landline duty dropped
The Budget confirmed that this government will not introduce the proposed landline duty (dropped from the Finance Act 2010 due to lack of Parliamentary time before the election).
Research and development tax relief: abolition of IP ownership condition for SMEs
The government has announced that legislation will be included in the autumn Finance Bill to abolish one of the conditions that a small or medium-sized company must satisfy in order to claim the enhanced tax relief for research and development expenditure.
Companies that are small or medium enterprises (SMEs) may claim an enhanced tax relief at the rate of 175% for qualifying expenditure on research and development. For further detail see Practice note, Intangible property: tax: Research and development (www.practicallaw.com/1-107-5008) and Practice note, R&D tax reliefs: practical aspects (www.practicallaw.com/9-385-2182).
One of the conditions that a SME company must satisfy in order to claim this relief is that the company owns any intellectual property (IP) deriving from the R&D to which the expenditure is attributable. The government has announced that this condition will be abolished. The change will have effect for any expenditure incurred by a SME company on R&D in an accounting period ending on or after 9 December 2009.
This measure was first announced as part of the 2009 Pre-Budget Report (see Legal update, 2009 Pre-Budget Report: key business tax announcements: Research and development tax relief: abolition of IP ownership condition for SMEs (www.practicallaw.com/4-500-9404)). The June 2010 Budget announcement is virtually identical to that contained in the 2009 Pre-Budget Report. It is therefore expected that the legislation will follow the form of draft legislation published as part of the 2009 Pre-Budget Report.
Video games industry: tax relief dropped
The government has announced that it will not introduce a tax relief for the UK video games industry.
As part of the March 2010 Budget the government announced that it would consult on the introduction of a new tax relief to support the UK video games industry (see Legal update, March 2010 Budget: key business tax announcements: Tax relief for video games industry (www.practicallaw.com/4-501-6433)). However, as part of the June 2010 Budget, the government has stated that it will not now introduce such a relief.
This section covers measures specifically aimed at smaller businesses.
Small business tax review
The government has announced that it "remains committed" to a review of IR35 (www.practicallaw.com/9-200-3356) (as to which, see generally Practice note, IR35 (www.practicallaw.com/9-201-7626)) and small business tax, and that it will release further details "shortly". This announcement follows a promise in the government's Coalition Agreement to carry out such a review (see Legal update, Coalition agreement final version: further tax measures (www.practicallaw.com/9-502-3247)).
Small companies rate of corporation tax
The small companies rate of corporation tax will be reduced to 20% (from 21%) for the year commencing 1 April 2011. This will apply to companies and groups whose annual profits do not exceed £300,000. The legislation for this will be included in the Finance Bill 2011. The small companies rate for companies with ring-fenced profits will remain at 19%.
The Budget also confirmed that from April 2011, the associated companies rules as they apply to small companies will be reformed (for background, see Legal update, Consultation on ignoring rights of associates for small companies' rate of corporation tax (www.practicallaw.com/6-500-6471)).
Venture capital schemes: changes to obtain EC state aid approval
Legislation to implement four changes to the Enterprise Investment Scheme (www.practicallaw.com/9-107-6532) (EIS) and the Venture Capital Trust (www.practicallaw.com/0-107-7480) scheme (VCT), to meet commitments given to the European Commission (www.practicallaw.com/1-107-6244) to obtain state aid (www.practicallaw.com/9-385-1413) approval, will be introduced in the autumn Finance Bill. The four changes are to:
Replace the current rule that requires at least 50% of a company's qualifying activities to be in the UK with a requirement to have a permanent establishment (www.practicallaw.com/6-107-6996) (PE) in the UK. (The definition of PE is to be based on Article 5 of the OECD (www.practicallaw.com/0-107-6942) Model Tax Convention.)
Prevent "enterprises in difficulty" from being eligible for investment under the schemes.
Replace the current requirement that VCTs must be listed in the UK with a requirement that their shares must be traded on an EU "Regulated Market".
Require VCTs to hold at least 70% of their qualifying holdings in "eligible shares" (eligible shares requirement).
(For further detail about these changes, see Legal update, EIS, VCTs and CVS obtain state aid approval (www.practicallaw.com/3-385-8931)).
The first three changes will have effect from a date to be appointed (irrespective of when the money was raised from the EIS or VCT investment); the eligible shares requirement will have effect for monies raised by the VCT after that date.
HMRC published draft legislation intended to implement these changes as part of the 2009 Pre-Budget Report (see, Legal update, 2009 Pre-Budget Report: key business tax announcements: Venture capital schemes (www.practicallaw.com/4-500-9404)).
This measure was announced in the March 2010 Budget (see March 2010 Budget: key business tax announcements: Business: Venture capital schemes (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement is virtually identical to the March 2010 version.
Other tax measures relevant to OMBs
Personal tax and investment
Below are the key personal tax announcements. For analysis of all the main announcements relevant to private client practitioners, tax and non-tax, see PLC Private Client, Legal update, June 2010 Budget: key private client tax announcements (www.practicallaw.com/2-502-5607).
CGT rises to 28% and entrepreneurs' relief to £5 million
The Chancellor has announced that for gains arising on or after 23 June 2010, the rate of CGT will increase to 28% for higher and additional rate taxpayers, trustees and personal representatives. Basic rate taxpayers will continue to be liable at 18%. The new rate will apply equally to any deferred gains that come into charge on or after 23 June 2010. For CGT purposes, the date of disposal of an asset is the date on which a contract for sale becomes unconditional The annual exempt amount (AEA) will remain at £10,100 for the tax year 2010-11.
The liability to CGT will be determined by aggregating capital gains realised between 23 June 2010 and 5 April 2011 (net of reliefs and allowances) with taxable income. Any excess over £37,400 (the higher-rate threshold) will be taxable at 28% to the extent that it represents gains, income being taxed at the higher (and, if applicable, additional) rate. Because all gains realised from 6 April to 22 June 2010 will be taxed at the flat rate of 18%, they will not be taken into account when calculating total income and gains for the purposes of determining the extent (if any) to which the 28% rate will apply to post-22 June 2010 gains. In addition, HMRC has indicated that a taxpayer will be free to allocate the AEA and any other reliefs available (such as losses) in the manner that gives the lowest overall tax liability for the year (in other words, the reliefs can be set against the later gains in preference to the pre-23 June 2010 gains).
The re-instatement of the link between income levels and rates of CGT, which was abolished by the Finance Act 2008, may provide a significant (although probably short-lived) incentive for those with income below £130,000 to take advantage of higher rate pension relief while it is still available to reduce their liability to CGT for 2010-11. The Chancellor will be reviewing the rate of CGT in the March 2011 Budget and further rises cannot be ruled out.
To a limited extent, a planning opportunity also exists for the directors of owner-managed companies, who are able to control the amount of income that they receive in a given year. If such directors are planning to realise capital gains (for example, on the sale of a second home or an investment portfolio), they may reduce their income levels for the year of the disposal in order to pay CGT at the lower rate.
Also with effect from 23 June 2010, the lifetime limit for entrepreneurs' relief (www.practicallaw.com/4-383-5915) will rise from £2 million to £5 million. Currently, entrepreneurs' relief achieves an effective rate of tax of 10% on the first £2 million of qualifying gain by reducing the gain by 4/9 and taxing the balance at 18% (see Practice note, Entrepreneurs' relief (www.practicallaw.com/4-381-1491)). However, as a consequence of the introduction of the 28% rate of CGT, the method of giving the relief will be reformulated such that a tax rate of 10% will apply to the first £5 million of qualifying gain. The increased limit will apply in relation to disposals on or after 23 June 2010. To the extent that any gains realised by the taxpayer before that date exceed the current £2 million lifetime limit of entrepreneurs' relief, CGT will remain payable at the full rate of 18% on the excess, but only the £2 million of relief claimed will be set against the increased limit for future qualifying disposals. There are no other changes to entrepreneurs' relief in this Budget.
HMRC has helpfully released a set of questions and answers on the application of the new rates and limits. Unsurprisingly, non-domiciled individuals who elect to pay £30,000 in order to be taxed on the remittance basis will be deemed to have used up their lower rate band and will, therefore, be liable for tax at 28% on gains.
50% income tax rate to remain in place for time being
The 50% additional income tax rate will remain in place for the time being. The rate took effect on 6 April 2010 and applies to income over £150,000. The Conservatives have previously said that they do not regard the rate as a permanent feature of the tax system, but will not abolish it while asking public sector workers to accept a pay freeze (see Legal update, General election 2010: implications for private client practice: Conservative party (www.practicallaw.com/8-500-9218)).
For more information about income tax rates, see Practice note, Tax data: income tax (www.practicallaw.com/2-385-5457).
(See June 2010 Budget - Budget Report (paragraph 1.97).)
Income tax adjustments between settlors and trustees
The government has confirmed that settlors of settlor-interested trusts who receive repayments of tax on trust income will be required to pay the sums received to the trustees. This extends the requirement in section 646 of the Income Tax (Trading and Other Income) Act 2005 for these settlors to pay over repayments of tax in respect of an allowance or relief in relation to trust income. The payments by settlors to trustees will be disregarded for inheritance tax purposes.
The previous government announced this measure in the March 2010 Budget (see 2009 Pre-Budget Report to Finance Act 2010: legislation tracker: Income tax: adjustments between settlors and trustees (www.practicallaw.com/1-500-9392)). The new announcement is virtually identical.
The government will include this measure in a Finance Bill to be introduced as soon as possible after the summer recess. The extended rule will apply to repayments relating to trust income arising on or after 6 April 2010.
IHT nil rate band to remain frozen at £325,000 until 5 April 2015
The inheritance tax (IHT) nil rate band (www.practicallaw.com/1-382-5649) will remain frozen at £325,000 until 5 April 2015. This measure was enacted by the previous government (see 2009 Pre-Budget Report to Finance Act 2010: legislation tracker: Inheritance tax: nil rate band (www.practicallaw.com/1-500-9392)).
For more information about IHT rates and allowances, see Practice note, Tax data: inheritance tax (www.practicallaw.com/6-385-5460).
(See June 2010 Budget - Budget policy decisions (paragraph 2.126).)
ISA limits to be linked to inflation from 6 April 2011
The government has confirmed that the limits on tax-free investment in individual savings accounts (www.practicallaw.com/7-107-6260) will increase in line with the retail prices index (www.practicallaw.com/5-377-4351) (RPI) from 6 April 2011. If the RPI is negative, the limits will remain unchanged. The previous government announced this measure in the March 2010 Budget (see Practice note, Tax data: individual savings accounts: 2011/2012 onwards (www.practicallaw.com/8-385-5459)).
The new announcement contains three minor changes from the previous announcement:
While both announcements refer to increases on an annual basis, there is no longer a specific commitment to continue the increases over the course of the current Parliament.
The new annual limits will be rounded to a "convenient" multiple of 120 rather than "the nearest" multiple of 120, for the benefit of individuals who save monthly. In the current economic climate, this may mean that an increase is rounded down rather than up.
HMRC will announce the new limits in advance of each tax year, but there is no longer a commitment to do so at least four months before the start of the tax year.
Non-dom rules to be reviewed
The government will review the taxation of non-domiciled individuals. This review will assess whether changes can be made to the current rules to ensure that non-domiciliaries make a fair contribution to reducing the deficit, in return for greater certainty and stability. For background, see Practice note, The remittance basis: What individuals need to know: overview (www.practicallaw.com/8-500-4602).
(See June 2010 Budget - Budget Report (paragraph 1.98)).
Shared lives carers: assistance confirmed
The government has confirmed that it will introduce legislation to establish a new income tax relief for shared lives carers (that is, those who share their homes and family life with individuals, including adults, placed with them under the shared lives scheme). The relief, which will be known as "qualifying care relief", will be introduced as soon as possible after the summer recess. It will allow shared lives carers to claim a tax free allowance and will available from 2010-11.
The relief is broadly the same as that announced in the 2009 Pre-Budget Report (see 2009 Pre-Budget Report: key private client tax announcements: Measures to assist shared lives carers (www.practicallaw.com/0-500-9383)). However, it will allow shared lives carers to claim the same income tax relief as that available to foster carers rather than that similar to the foster care relief, as reported in the 2009 Pre-Budget Report. There is also an additional measure which provides that shared lives carers can choose between the existing simplified arrangements for adult placement carers and the new tax free allowance for the tax year 2010-2011 only. The simplified arrangements will be withdrawn from 2011-12.
Below are the key property tax announcements. For analysis of all the main property-related announcements, tax and non-tax, see PLC Property, Legal update, June 2010 Budget: property implications (www.practicallaw.com/4-502-5404).
Furnished holiday lettings rules will not be withdrawn
The government announced that it will not proceed with the proposal to withdraw the furnished holiday lettings (FHL) rules, first announced in the 2009 Budget and confirmed in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Withdrawal of furnished holiday lettings rules from April 2010 confirmed (www.practicallaw.com/4-501-6433)). The existing rules will continue to apply to holiday lettings situated in the UK or elsewhere in the European Economic Area during the tax year 2010-11.
The government will consult over the summer about a proposal to change the taxation of furnished holiday lettings from 6 April 2011 (and from 1 April 2011 for companies). The previous Labour administration proposed the repeal of the FHL rules as they may not be compliant with EU law. The government states that its proposal will ensure that the rules comply with EU law by changing the eligibility thresholds and restricting the use of loss reliefs.
Any changes to the FHL rules will take effect from April 2011.
REITs: stock dividends will count towards 90% distribution requirement
Legislation will be introduced to allow stock dividends to be counted as property income distributions for the purposes of the requirement for a UK real estate investment trust (REIT) to distribute 90% of the net income profits from its tax exempt business. Currently, the 90% test can only be satisfied by cash dividends. In the current economic climate this will be a welcome change for REITs. This measure was announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Stock dividends will meet 90% distribution requirement for REITs (www.practicallaw.com/4-501-6433)).
The June 2010 Budget announcement is virtually identical to the March 2010 version except that the new version makes it clear that income tax will have to be accounted for when a property income distribution is made by way of a stock dividend (in the same way as if it were paid in cash). The legislation will be included in the Finance Bill to be introduced in the autumn. The timing will be important as the changes will only apply to distributions made on or after the date of Royal Assent of that Bill. For more detail on REITs see Practice note, UK REITs: questions and answers (www.practicallaw.com/7-201-8033).
SDLT avoidance on high value residential properties
In the June 2010 Budget, the government announced that it will examine whether the SDLT rules for high value property transactions need to be changed to combat tax avoidance in this area.
This forms part of an overall drive by the government, to tackle tax anti-avoidance measures in general.
(See June 2010 Budget - PN03 - Tackling tax avoidance.)
SDLT first-time buyer relief
In the March 2010 Budget, the former Labour government announced the introduction of SDLT relief for first-time buyers of residential property where the consideration does not exceed £250,000.
In the June 2010 Budget, the new government said that it will review first-time buyer relief taking into account its impact on affordability and value for money.
The former Labour government stated that the relief would be available where the effective date (www.practicallaw.com/3-107-6200) falls on or after 25 March 2010 and before 25 March 2012. Where the relief is available, the nil rate threshold is effectively doubled.
The existing nil rate of SDLT on residential purchases not exceeding £125,000 continues to apply as before (which means that it is not limited to first-time buyers).
For more information, see:
SDLT and PRT overpayment claims
The government has announced that it will introduce legislation, in the Finance Bill to be introduced in the autumn, to provide a means of reclaiming SDLT (and petroleum revenue tax) overpayments where there is no other statutory route, with effect on and after 1 April 2011. This announcement also applied to petroleum revenue and is identical to the March 2010 version (as to which, see Legal update, March 2010 Budget: key business tax announcements: SDLT: overpayment claims (www.practicallaw.com/4-501-6433)).
The June 2010 Budget has confirmed that a new SDLT rate of 5% for purchases of residential property where the consideration exceeds £1 million, will take effect on 6 April 2011.
The new rate was announced in the March 2010 Budget. The previous highest rate was 4% for purchases where the consideration exceeds £500,000. All other SDLT rates and thresholds remain unchanged.
For further information, see:
Increase to the standard rate of VAT
The government has announced that the standard rate of VAT will increase (from 17.5%) to 20% with effect from 4 January 2011. This measure, which is intended to raise revenues to reduce the budget deficit, will be introduced in a forthcoming Finance Bill. The 20% rate will apply to supplies made on or after 4 January 2011 and acquisitions or importations taking place on or after that date. Anti-forestalling legislation and changes to the VAT flat rate scheme will also be introduced as a result of the increase (see Standard rate of VAT increase: anti-forestalling legislation and Standard rate of VAT increase: flat rate scheme changes).
Note that this measure does not affect supplies subject to other rates of VAT, such as the zero-rate (www.practicallaw.com/2-107-7530) or reduced rate (as to which, see Practice note, Value added tax: Calculation and rates (www.practicallaw.com/2-107-3725)).
For general information about the standard rate of VAT, see Practice note, Value added tax: Standard-rated supplies (www.practicallaw.com/2-107-3725).
As with the previous increase (from 15% to 17.5%) to the standard rate of VAT, on 1 January 2010 (see Practice note: Overview: How to deal with the VAT rate increase on 1 January 2010 (www.practicallaw.com/6-500-6701)), PLC Tax will be publishing its own guide for businesses on how to deal with this increase to the standard rate of VAT shortly. For HMRC's guide for VAT registered businesses on the standard rate increase (see HM Revenue & Customs: VAT - Change of the Standard Rate to 20 per cent - a detailed guide for VAT registered businesses).
(See June 2010 Budget - BN 43 - VAT: Change of standard rate, Clause 3 of the draft legislation and explanantory note and HM Revenue & Customs: Impact Assessment of a change to the standard rate of VAT.)
Standard rate of VAT increase: anti-forestalling legislation
The government has announced that it will introduce anti-forestalling legislation in a forthcoming Finance Bill, which is intended to counter artificial arrangements that purport to apply the 17.5% standard rate of VAT to goods delivered or services performed on or after 4 January 2011 by manipulating the tax point (www.practicallaw.com/7-107-7373) rules.
This measure has effect from 22 June 2010 and is not intended to apply to normal commercial supplies. It is expected to affect very few businesses; it will apply where a business does either of the following:
Receives a prepayment or issues an advance VAT invoice before 4 January 2011 for a supply of goods to be delivered or services to be performed on or after that date.
Makes supplies of rights or options to receive goods or services before 4 January 2011, where the goods or services are supplied free or at a discount and will be delivered or performed on or after that date.
Under the anti-forestalling legislation, a supplementary charge of 2.5% will be levied on such supplies where the customer is not entitled to recover all of their input tax (www.practicallaw.com/8-107-6716) on the supply and one or more of the following conditions is met:
The supplies are made directly or indirectly to a connected person (section 1122, Corporation Tax Act 2010).
The business provides or arranges funding of the customer's payment.
The business issues a VAT invoice that does not have to be paid in full within six months of the invoice date. (This condition is relevant to prepayments or advance invoicing arrangements, but not to supplies of rights or options.)
The payment or VAT invoice exceeds £100,000 and is not normal commercial practice.
Any supplementary charge levied will not become due until 4 January 2011 and will be chargeable in addition to standard rate VAT on the supply at 17.5% on the normal due date. The supplementary charge will not apply to certain excepted supplies, for example, real property lease premiums paid on grant prior to 4 January 2011 relating to a lease term extending beyond that date or prepayments and advance invoicing of rental or hire charges for the leasing of any assets under normal commercial practices, provided that the period concerned does not exceed one year. HM Treasury has the power to add to the list of excepted supplies by Treasury order.
(See June 2010 Budget - BN 44 - VAT: Change of standard rate: Anti-forestalling Legislation, HM Revenue & Customs: Schedule 2 to the draft legislation and explanantory note and HM Revenue & Customs: Anti-forestalling legislation: guidance note.)
Standard rate of VAT increase: flat rate scheme changes
The government has published a table of new flat rate scheme percentages and thresholds to reflect the 4 January 2011 increase in the standard rate of VAT to 20%. The new percentages have effect on and after 4 January 2011 and will be introduced via changes to secondary legislation, which will be made later in 2010.
Currently, only businesses with an annual turnover not exceeding £150,000 are eligible for the flat rate scheme. A business must leave the scheme if its annual flat rate turnover exceeds £225,000 (or is expected to exceed that threshold in the next 30 days), unless it due to a one-off transaction and there is an expectation of supplies falling back below a VAT-inclusive threshold of £187,000. These exit thresholds will be increased to £230,000 and £191,500 respectively from 4 January 2011.
For general information on flat rate schemes, see Practice note, Value added tax: Accounting for VAT (www.practicallaw.com/2-107-3725).
Lennartz accounting: abolition
The government has announced that it will introduce legislation, in the autumn Finance Bill, to implement:
EU (www.practicallaw.com/6-107-6562) changes abolishing the Lennartz rule on VAT input tax (www.practicallaw.com/8-107-6716) recovery on the purchase of an interest in real property, boats and aircraft (see Legal update, EU Council adopts Directive abolishing Lennartz rule on VAT input tax recovery (www.practicallaw.com/5-501-1717)) and the removal of legislation on the recovery of VAT on directors' accommodation, which will become redundant as a result. These changes will take effect from 1 January 2011.
Revenue protection measures to ensure that existing Lennartz accounting users continue to pay the VAT due under the accounting mechanism. These measures will be treated as having always had effect.
This measure was announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement is virtually identical to the March 2010 version. The June 2010 Budget announcement differs from the March 2010 Budget announcement in that it additionally refers to amendments to the Value Added Tax Act 1994 (www.practicallaw.com/3-107-7469) which will include provisions to ensure that VAT is not recoverable in respect of private use of directors' accommodation.
Place of supply of gas, heat and cooling amendments
Legislation will be introduced to amend the scope of the section 9A Value Added Tax Act 1994 (VATA 1994) reverse charge on gas supplied through the natural gas distribution network. The amended rules will also be extended so as to apply to heat and cooling supplied through networks. The measures will take effect on 1 January 2011 and will be included in the autumn Finance Bill. This measure was announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Amendments to scope of place of supply of gas, heat and cooling (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement is virtually identical to the March 2010 version.
Postal services exemption to be narrowed
The scope of the UK VAT exemption for supplies of postal services is to be narrowed so as to comply with EU law. This is a direct response to the decision of the ECJ in R (on the application of TNT Post UK Ltd) v The Commissioners for Her Majesty's Revenue and Customs (Case C-357/07) (see Legal update, ECJ clarifies the scope of the Royal Mail's VAT exemption (www.practicallaw.com/4-385-8681)). Currently, the exemption from VAT applies to the conveyance of postal packets (and connected services) by the Royal Mail (including Parcelforce). For supplies made after 30 January 2011, the exemption will be confined to supplies made under a licence duty. Therefore, supplies made by Parcelforce and those made under conditions that have been freely negotiated will be subject to VAT at the standard rate. This measure was announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Postal services exemption to be narrowed (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement is virtually identical to the March 2010 version. This measure will be included in the autumn Finance Bill.
Zero rating: definition of "qualifying aircraft" to change
The definition of a "qualifying aircraft" contained in Group 8 of Schedule 8 to the VATA 1994 is to be changed. The supply of a qualifying aircraft and various supplies made in relation to it (such as repair and maintenance) are zero rated (www.practicallaw.com/2-107-7530). Currently, a qualifying aircraft is defined primarily by reference to its weight (not less than 8,000 kilograms). For supplies made on or after 1 January 2011 an aircraft will only qualify where it is used by airlines operating for reward chiefly on international routes. This is the definition used in Article 148 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. This measure was announced in the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Definition of "qualifying aircraft" change for zero rating (www.practicallaw.com/4-501-6433)). The June 2010 Budget announcement is virtually identical to the March 2010 except that the introduction of the changes has been postponed by three months. The legislation will be included in the autumn Finance Bill.
A new approach to making tax policy
HMRC and HM Treasury have published a joint discussion document on the creation of a new approach to tax policy and changes in taxation. The key tenets of the proposed new approach are:
The government's proposals in relation to each of these are considered in more detail below.
An increase in the predictability of tax reform
The government intends to provide taxpayers with clear details of its policy on the future direction of the tax system. Specifically the document states that, when embarking on significant areas of reform, the government will set out:
Its policy objectives.
How reforms will be taken forward.
The timetable for reform.
An increase in the stability of tax reform
The discussion document specifically refers to tax avoidance in this context. It acknowledges that frequent announcements of change in legislation contribute to a perception of instability and that detailed and narrow anti-avoidance rules have contributed to the complexity of tax legislation.
The government intends to focus on fewer and better developed proposals, with improved consultation methodology. A principles-based approach and a general anti-avoidance rule (GAAR) are also contemplated.
The government's specific proposals to improve stability include:
Publication of a statement on its approach to consultation on tax changes.
A new convention to confirm the majority of tax changes at least three months prior to the start of the tax year in which they come into effect or publication of the Finance Bill in which they will be included. Changes would also be accompanied by draft primary legislation and any significant secondary legislation, plus explanatory notes and technical notes.
A more strategic approach to tax avoidance and a protocol for announcements taking effect outside fiscal events, such as the Budget.
The possible introduction of common commencement and announcement dates.
An increase in the simplicity of tax reform
Creation of an independent Office of Tax Simplification.
A framework for the introduction of new reliefs.
Improved scrutiny of tax reform
The government accepts that, in order to increase confidence in tax policy-making, it must ensure that changes to the tax code are properly scrutinised. The paper therefore suggests:
Publication of more tax legislation in draft, to allow for a minimum of eight weeks scrutiny before inclusion in the Finance Bill.
Review of Treasury Committee suggestions to strengthen the role of Parliament in scrutinising tax legislation.
The paper expressly acknowledges that many changes to the tax code are effected by secondary legislation. It states that where secondary legislation makes substantive changes to the tax code, the government will apply the same principles and disciplines as are applied to primary legislation.
Improved transparency of tax reform
The government also considers that better scrutiny requires more transparency. As a general principle, the government intends to provide more information on the underlying rationale for tax policy changes. In addition, it proposes:
A new tailored Tax Impact Assessment.
More information on costing of tax policies.
Better supporting documentation accompanying tax changes.
Post-legislative evaluation (also referred to as "sunset clauses").
Comments on the proposals are requested by 22 September 2010 and should be addressed to email@example.com. Those who wish to be involved in discussions or who have an interest in a particular proposal should contact the same address by 12 July 2010.
Clearly the new approach outlined in the discussion document represents a significant development in this area. It is likely to generate considerable public interest. We will consider its implications closely and publish a more detailed analysis in due course.
Increase in insurance premium tax rates
The rates of insurance premium tax (IPT) are to be increased from 4 January 2011. (For a general discussion of IPT, see Practice note, Insurance premium tax (www.practicallaw.com/7-200-9364).)
At present, the rates are as follows:
The standard rate is 5%. This is to be increased to 6%.
The higher rate is 17.5%. This is to be increased to 20%.
The increases are to have effect for premiums received, or in relation to which the written premium date (see Practice note, Insurance premium tax: Tax accounting and payment and special accounting schemes (www.practicallaw.com/7-200-9364)) falls, on or after 4 January 2011. They reflect the increases in the rates of VAT (see Increase to the standard rate of VAT).
HMRC has published draft legislation effecting the increases. This legislation is intended to be included in a forthcoming Finance Bill (probably the one to be published shortly after the Budget). The draft legislation modifies existing anti-avoidance provisions (sections 67A and 67C, Finance Act 1994) with the effect that insurers cannot avoid the increase by adding additional or new risks to, accepting payment for, or extending contracts between the date on which the increases were announced (22 June 2010) and the date when they have effect (4 January 2011).
Oil and gas fiscal regime: extension of certain reliefs
Legislation will be introduced to make five improvements to the tax measures for UK's oil and gas regime made by the Finance Act 2009 (as to which, see Practice note, Oil taxation: Discussions about the future of the North Sea tax regime and recent legislative changes (www.practicallaw.com/2-200-9267)):
The Finance Act 2009 provided that chargeable gains would not arise in certain cases where disposal proceeds were reinvested in new oil trade assets and the disposal and acquisition qualified for roll-over relief (www.practicallaw.com/7-201-4025). The Finance Bill 2011 will widen the scope of this reinvestment relief so it can apply when proceeds are reinvested in exploration and development expenditure, including drilling costs. This change will have retrospective effect for disposals made on or after 24 March 2010.
The reinvestment relief rules will be amended so that they apply as intended in a group context when the company making the reinvestment is not the company making the disposal. Legislation will be introduced in a forthcoming Finance Bill and the change will have retrospective effect for disposals made on or after 22 April 2009.
The Finance Act 2009 provided that chargeable gains would not arise on a swap of UK or UK continental shelf licences in some circumstances. Swap agreements usually provide for payments to be made between the parties, which are typically treated as adjustments to the consideration. The existing legislation does not remove the chargeable gains liability that may arise in respect of the receipt of such payments. The Finance Bill 2011 will remove some of these payments from the scope of taxation on chargeable gains with effect for disposals made on or after the date of the 2011 Budget.
The Finance Act 2009 introduced a field allowance to provide an incentive to invest in new fields. The allowance reduces the profits on which the supplementary charge is payable. The Finance Bill 2011 will extend the allowance to investment in previously decommissioned fields that are being redeveloped. The extension will have retrospective effect for fields whose development is authorised on or after 22 April 2009.
Finally, the field allowance qualifying criteria for an ultra high pressure/high temperature (HPHT) field will be reduced, and the allowance tapered. The changes will be made by an order, which will be introduced before 29 July 2010 and will come into force on the day after it is made.
These measures were announced in the 2009 Pre-Budget Report (see Legal update, 2009 Pre-Budget Report: key business tax announcements: Extension of the new field allowance regime announced for North Sea assets (www.practicallaw.com/4-500-9404)) and the March 2010 Budget (see Legal update, March 2010 Budget: key business tax announcements: Other miscellaneous announcements: North Sea tax regime (www.practicallaw.com/4-501-6433)) but none of them were enacted in the Finance Act 2010. The June 2010 Budget announcement consolidates the 2009 Pre-Budget Report and March 2010 Budget announcements and is virtually identical to them, save that:
The widening of the scope of reinvestment relief, the group relief change and the changes to the licence swap rules were originally intended to apply to disposals made on or after 24 March 2010 (the date of the March 2010 Budget).
The reduction in the qualifying criteria for an HPHT field was originally intended to be effective on and after 1 April 2010.
For other tax measures relevant to the oil and gas sector, see: