Private Client Tax Analysis
While telling us that Britain's economic plan is working, the Chancellor reminded us in his Autumn Statement today that there is more to do and that difficult decisions are still to be taken to restore stability in the current fiscal crisis.
Underpinning his recovery plan is a desire to create a fairer tax system in which those with the most contribute the most and George Osborne announced further measures designed to ensure those with the means of doing so pay their fair share of tax.
Creating a fairer system
For individuals, the headline tax giveaways are firstly, that from April 2014 the income tax personal allowance will be increased to £10,000 meaning that a typical basic rate taxpayer will pay £705 less income tax per year compared with the amount they would have paid in 2010-11. Secondly, from the start of the 2015-16 tax year married couples and civil partners will be able to transfer £1,000 of their income tax personal allowance to their spouse/civil partner where neither is a higher rate taxpayer. The transfer will be available where neither spouse/civil partner is a higher rate or additional rate taxpayer and will worth up to £200 per tax year.
From April 2014, the income tax relief for interest paid on loans to invest in close companies and employee-controlled companies will be extended to investments in such companies resident throughout the European Economic Area (EEA).
In regard to tax on pensions the government will introduce individual protection 2014 (IP14) as a consequence of the reduction in the lifetime allowance to £1.25 million from 6th April 2014. Individuals with IP14 will have a lifetime allowance of the value of their pension savings on 5th April 2014 subject to an overall maximum of £1.5 million. There is also good news for savers in that the government will increase the ISA, Junior ISA and Child Trust Fund annual subscription limits in line with CPI. The 2014-15 ISA limit will be increased to £11,880 (half of which can be saved in a cash ISA). The Junior ISA and Child Trust Fund limits will both be increased to £3,840.
On the other hand the government will increase the personal tax take by introducing capital gains tax on gains made by non-residents disposing of UK residential property from April 2015 (and a consultation on how best to introduce this measure will be published in early 2014). This was expected. What was not expected however is a reduction in the capital gains tax private residence relief final period exemption from 36 months to 18 months. This is a surprise move to reduce the incentive for those with multiple homes to exploit the rules.
There are also new measures aimed at tackling tax avoidance, as detailed below.
The UK Government believes that giving employees a meaningful stake in the business they work for can help companies become more successful. Following on from the announcement in the main Budget earlier this year to provide £50 million annually to incentivise growth of the employee ownership sector, the government now intends to increase this to £75 million annually to fund the following:
- Relief from capital gains tax on disposals of shares that result in a controlling interest in a company being held by a trust used as an indirect employee ownership structure
- An annual exemption from income tax on bonuses or equivalent payments up to an amount of £3,600 paid to employees of companies that are indirectly employee owned
- An increase in the maximum annual value of shares that an employee can acquire with tax advantages under the Share Incentive Plans to £3,600 a year for 'free' shares and to £1,800 a year for 'partnership' shares. The Save As Your Earn savings contribution limit will be doubled from £250 to £500. This will be the first increase for these schemes in over a decade.
- A reduction of the so called 'jobs' tax' by making it cheaper for businesses to employ young people; this will involve abolishing employer National Insurance contributions for under-21 year olds on earnings up to £813 per week (equivalent to the point at which higher rate tax is charged).
Personal tax avoidance and evasion
As expected, tax avoidance remains high on the Government's taxation agenda. Having consulted over the summer on proposals announced at Budget 2013 to introduce a new information disclosure and penalty regime for the high-risk promoters of tax avoidance schemes, the Government will introduce objective criteria for identifying high-risk promoters, and a higher standard of 'reasonable excuse' and 'reasonable care' that will then apply to them. Clients of high-risk promoters will also be required to identify themselves to HMRC.
The Government is concerned about the number of high-earning, non-domiciled individuals avoiding UK tax through split contract arrangements where there is an"artificial" division of their employment duties between the UK and overseas. From April 2014, UK tax will be assessed on the full employment income where a comparable level of foreign tax is not payable on earnings under the overseas contract. Although the number of individuals likely to be affected by this will be relatively small, it is further evidence of the Government's desire to keep tax benefits for non-domiciled individuals in check.
In a further move relating to employment income, legislation is to be introduced to prevent employment intermediaries being used to avoid employment taxes by disguising employment as self employment. This aimed is at preventing National Insurance Contributions (NICs) and there will be consultation on strengthening existing legislation to ensure that from April 2014 the correct amount of tax and NICs are paid where the worker is, in effect, employed. Similar measures are being introduced to counter the use of limited liability partnerships to disguise employment relationships to reduce employer NIC costs. Such partnerships are also regarded as potential tax avoidance vehicles where used to funnel profits in to corporate partners paying lower rates of tax. Counteracting legislation is intended to be introduced in Finance Bill 2014.
As announced on 25th October 2013, legislation, effective from that date, is introduced to prevent abuse of the rules relating to"compensating adjustments" in the transfer pricing code. This will seek to counter individuals receiving tax free income as a consequence of contrived arrangements. However, following consultation launched at Budget 2013, the Government does not now intend to make any immediate changes to the structure or operation of the tax charge on loans from close companies to individuals who have a share or interest in them.
Tax evasion also features significantly in the Statement and sends a clear message that the Government is committed to improving its network of havens with which it holds exchange of information agreements and to strengthening the range of sanctions to penalise those who hide funds offshore.
In summary, there were few tax surprises in the Statement but is abundantly clear that the Government does not intend to let up in any way in its fight against perceived tax avoidance.