.png)
.png)
Key points
- The class 1 National Insurance threshold increases to £9,500.
- Loan charge review changes will be legislated.
- Pensions relief threshold will rise to £200,000.
- Entrepreneurs’ relief is restricted.
- Zero rate VAT on digital publications.
- Changes to research and development tax relief.
Having been parachuted into the job only a few weeks ago, the new chancellor, Rishi Sunak, made a confident start with his first Budget and the first since 2018. Given that the country and the world is reeling from the coronavirus, the implications of this on the country, its people and its businesses figured large, but what were the more immediate personal and business tax implications for tax advisers and their clients?
Personal tax
The chancellor had no particularly surprising new measures for personal taxpayers in his Budget. As ever, and despite the lack of a Budget at all in 2019, many had been pre-announced.
NATIONAL INSURANCE
The thresholds at which employees and the self-employed start paying National Insurance contributions will be increased to £9,500 from April 2020. According to the Treasury, this will remove about 1.1 million people from paying class 1 and class 4 contributions and is the first step in meeting the government’s ambition to increase these thresholds to £12,500.
Brian Palmer, tax policy adviser at the Association of Accounting Technicians, said: ‘While raising the threshold for paying National Insurance contributions to £9,500 a year will put more money into UK taxpayers’ pockets, ultimately it doesn’t come cheap. The policy will cost more than £2bn a year, projected to rise to £10bn a year if the government achieves its ambition to raise the contributions threshold further to £12,500 a year, in line with income tax. This means that, unless cuts are made, funding will need to be found from tax increases elsewhere, such as abolishing the proposed cut in corporation tax.’
A new income tax exemption will be legislated in Finance Bill 2020 to introduce an income tax and National Insurance exemption for the bursary paid by the Education and Skills Funding Agency to care leavers aged 16 to 24 who start an apprenticeship.
From April 2020, the flat rate deduction for homeworking is to be raised from £4 a week to £6. This deduction is available to employees to cover additional household expenses when they work at home under homeworking arrangements.
The Finance Bill 2020 will include income tax, inheritance tax and capital gains tax exemptions for payments made on or after May 2020 under the Troubles Permanent Disablement Payment Scheme and payments made on or after 3 April 2019 under the Windrush Compensation Scheme. The government will also introduce an inheritance tax relief for compensation payments made from the Kindertransport Fund.
SCOTLAND
The government will legislate in Finance Bill 2020 to clarify the income tax treatment of three new social security payments. The legislation will confirm that the following three benefits introduced by the Scottish government are exempt from income tax: job start; disability assistance for children and young people; and the Scottish child payment. The legislation also includes a new power that permits the government to confirm by secondary legislation when new social security benefits introduced by the UK government or any of the devolved administrations will be tax exempt.
These changes will take effect from April 2020.
IR35
As expected, the reform to the off-payroll working rules in the private sector will be legislated in Finance Bill 2020 and implemented on 6 April 2020.
LOAN CHARGE
The government confirmed the measures previously announced in response to Sir Amyas Morse’s independent loan charge review and that they would be legislated in the 2020 Finance Bill. The bill will also:
- allow HMRC to obtain information about the enabling of abusive schemes as soon as they are identified by strengthening information powers for HMRC’s existing regime to tackle enablers of tax avoidance schemes;
- ensure enabler penalties are imposed without delay for multi-user schemes, so that anyone enabling tax avoidance arrangements that are later defeated will face a penalty of 100% of the fees they earn;
- enable HMRC to act promptly when promoters fail to provide information on their avoidance schemes;
- equip HMRC to stop promoters from marketing and selling avoidance schemes as early as possible;
- ensure promoters fulfil their obligations under the promoters of tax avoidance scheme (POTAS) regime, including when they have tried to abuse corporate structures to get around the rules; and
- make changes to the general anti-abuse rule so it can be used to tackle avoidance using partnership structures.
In addition, HMRC will publish a new strategy for tackling the promoters of tax avoidance schemes. This will outline the range of policy, operational and communications interventions both underway and in development to drive those who promote tax avoidance schemes out of the market, disrupt the supply chain to stop the spread of marketed tax avoidance, and deter taxpayers from taking up the schemes.
The government plans to publish a call for evidence in the spring on raising standards for tax advice. This will seek evidence about providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the government’s efforts to support those standards, to give taxpayers more assurance that the advice they are receiving is reliable.
PENSIONS
After reviewing the tapered annual allowance for pensions and its impact on the NHS, as well as on public service delivery more widely, the annual allowance threshold will be raised by £90,000. From 2020-21 the threshold income will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an adjusted income above £240,000. For taxpayers with total income (including pension accrual) of more than £300,000, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from April 2020.
The lifetime allowance will rise to £1,073,100 for 2020-21.
More generally, the government wishes to review pension tax administration.
Individuals who earn around or below the level of the personal allowance and save into a pension may benefit from a top-up on their pension savings equivalent to the basic rate of tax, even if they pay no tax. Whether they receive this top-up depends on how their pension scheme administers tax relief. A call for evidence on this matter will be published soon.
Nathan Long, senior analyst at Hargreaves Lansdown, said: ‘Higher earners having been largely frozen out of pension saving are brought in from the cold today, with news that they’ll keep their full annual pension allowance of £40,000 unless their income plus employer pension payments tops £240,000. These are welcome changes as they largely fix the ludicrous problems of NHS consultants turning down work to avoid tax penalties, but also mean higher earners in other sectors have greater opportunity to save for their financial future.’
Despite the change, he added: ‘The system is crying out for an overhaul to simplify it, making saving for retirement easy and creating a compelling incentive to do so. As sticking plasters go, it’s a great one, but there still looks like unfinished business for the system as a whole.’
Head of pensions at law firm Fieldfisher, David Gallagher, said it would have been better to abolish the tapering allowance because it is complicated and discourages saving. ‘The surprise is that the allowance gets even smaller for the very highly paid – those with remuneration exceeding £300,000 a year will only have tax benefits for the first £4,000 a year they contribute to their pensions. While this group will be a very small percentage of the population, they are an unlikely victim for a tax increase from a new Conservative chancellor and the amounts involved may not justify the political grief it could bring.’
As an aside and following on from the above point about higher earners, HMRC appears to recognise that the tax charge will influence their decisions on work. In its overview of tax legislation and rates (tinyurl.com/ootlar2020, page 70) it says: ‘However, for those with very high incomes, being affected by the reduced minimum annual allowance may make them consider retiring earlier or reducing hours Especially if they can’t easily reduce contributions.’
SAVINGS
As previously announced, the 0% starting tax rate for savings income will remain at its current level of £5,000 for 2020-21. Similarly, the adult ISA annual subscription limit for 2020-21 will remain unchanged at £20,000. However, the limit for junior ISA and child trust funds more than doubles, increasing to £9,000 from £4,368.
In light of the low rate of interest paid on savings accounts and the Bank of England’s decision to slash the interest rate to 0.25%, Nimesh Shah, partner at Blick Rothenberg, considered it ‘highly unlikely that someone with £400,000 of savings will be a basic rate taxpayer’. He added: ‘Individuals with sizeable savings are likely to have taken advantage of their ISA allowances over the years, therefore a person would need such savings outside their tax-free ISAs to benefit from the personal savings allowance.’
He questioned the purpose of the personal savings allowance, saying it was ‘one of several measures that the government, together with HMRC and the Office of Tax Simplification, should look at scrapping.’ Instead, ‘with pensioners’ savings taking a significant hit with the stock market downturn over the last few weeks, a tax exemption on interest generated on cash savings in UK bank accounts would be a welcome move.’
Business tax
Various changes were proposed that will affect business clients. On the corporation tax front, the chancellor confirmed that the rate will remain at 19%, while stressing that this was ‘still the lowest rate in the G20’.
ENTREPRENEURS’ RELIEF
Various rumblings about the abolition of capital gains tax entrepreneurs’ relief had been heard for some time – not least in the pages of Taxation (see ‘To abolish or not to abolish’, 30 January 2020, page 12 – tinyurl.com/rchfm6r).
In the event, the chancellor decided against complete abolition, but resolved instead to limit the relief by reducing the lifetime allowance from £10m to £1m. This change is effective from Budget day, 11 March 2020, presumably to avoid a flurry of transfers to trusts, other family members and the like between now and, say, 5 April.
There will be measures to forestall arrangements entered into before Budget day.
HMRC’s tax impact note indicates that 17% of entrepreneurs’ relief taxpayers will be affected by the change and 58% of gains will be ineligible for the relief. This suggests that most of the entrepreneurs’ relief has been received by ‘a small minority of very affluent taxpayers’.
Ian Dickinson, tax director at UHY Hacker Young in Nottingham, said: ‘For SMEs, while likely changes to entrepreneurs’ relief were well trailed, the announced change was a bit of a kick in the teeth, with Mr Sunak reducing the lifetime limit from £10m to £1m – impacting people with deals in progress or planning to sell their businesses soon. The reduced tax rate, which has been in place since 2008, currently affords entrepreneurs a 50% cut in the rate of capital gains tax they pay on the sale of their business, with Mr Sunak claiming the relief as it stands is “expensive, ineffective and unfair”.’
Kelly Noel-Smith, partner at Forsters LLP, said: ‘Entrepreneurs’ relief is a very generous relief for comparatively few people and the chancellor’s reduction of the cap from £10m to £1m acknowledges this. For those whose gains will now fall outside the cap, it’s of note that the capital gains tax rate is still half the higher rate of income tax, so the UK regime should still remain attractive to entrepreneurs.’
James Austen, partner at Collyer Bristow, said: ‘Some entrepreneurs and business owners will be concerned about the additional tax costs of passing on their businesses – not least because the capital value of their firms is an important part of their retirement planning. But the Federation of Small Businesses estimates that 90% of entrepreneurs’ relief claims are for £1m or less, so the new change in the rules should affect a relatively small constituency of taxpayers over the long term.
‘In a major departure from normal practice, he has also decided that the change to entrepreneurs’ relief will take effect immediately, and not from the beginning of the new tax year. This is perhaps because the government wanted to sidestep criticism from tax activists about taxpayers using the short period between the Budget and 6 April to take steps to “bank” qualifying gains at the current 10% entrepreneurs’ relief rate. Those taxpayers who had foreseen this risk and who disposed of their businesses in advance of the Budget will be feeling very relieved today. Others may well be kicking themselves for not heeding the warnings from commentators.’
Martin Mann, director at Markel Tax, commented: 'Many clients, especially those in the middle of sales, will be breathing a sigh of relief that entrepreneurs' relief was not abolished yesterday and that their 10% tax rate is secure. However, conversely, there will be losers as a result of the drastic reduction of the lifetime limit to £1m. The anti-forestalling rules are the most interesting because they all seem to block the planning ideas that many advisers and commentators, including myself, have highlighted before the budget, including the use of holding companies, trusts and rescindable contracts, so perhaps there is a lesson learned there.'
RESEARCH AND DEVELOPMENT
The tax relief is to be increased for large companies (as well as some small and medium-size enterprises) that carry out qualifying research and development (R&D) and claim research and development expenditure credit (RDEC).
The current rate of RDEC is 12% of qualifying R&D expenditure, but this is to be increased to 13% for expenditure incurred on or after 1 April 2020.
Jeremy Coker, president of the ATT, said: ‘We welcome the introduction of increased tax relief for R&D carried out by large companies but it is disappointing that there will be no corresponding increase in the relief for the majority of small and medium-sized companies. Given the continuing political uncertainty surrounding Brexit, and the potential impact of COVID-19 on the economy, those SMEs which undertake research and development work are likely to be more in need of relief than ever.’
Jeremy added: ‘We are pleased to see that the government has delayed the introduction of a cap on the repayable R&D credit available to SMEs. We recognise that HMRC has to take steps to prevent fraudulent claims for credits. We have raised concerns previously that the proposed cap was something of a blunt instrument, and could affect many genuine businesses, in particular start-up businesses and those that use employee share schemes to incentivise their staff. It is encouraging that the introduction of these proposals has been delayed, and we would urge HMRC to use this time to ensure that the final design not only acts to prevent abuse, but also ensures that those companies who need support the most do not lose out.’
BENEFITS IN KIND
The van benefit charge and the car and van fuel benefit charges will be increased by the consumer price index from 6 April 2020.
- The flat rate van benefit charge will increase to £3,490 (previously £3,420).
- The multiplier for the car fuel benefit multiplier will increase to £24,500 (previously £24,100).
- The flat rate van fuel benefit charge will be increased to £666 (previously £655).
From 6 April 2020, new company cars first registered from 6 April 2020 will have their CO2 rating measured by reference to the worldwide harmonised light vehicle test procedure (WLTP). For cars registered before 6 April 2020, the company car tax and related charges will continue to be based on the new European driving cycle (NEDC) emission figures.
CAPITAL ALLOWANCES
To incentivise the uptake of zero CO2 emission vehicles, there will be an extension to the period for which the 100% first year (capital) allowances (FYAs) are available on such vehicles. Rather than expiring in April 2021, relief will continue to be available until April 2025.
On the other hand, the CO2 emission thresholds used to calculate the capital allowances available for business cars will be reduced.
These changes will also come into effect from April 2021.
INTANGIBLE ASSETS
The corporate intangible fixed assets regime (the IFA regime) which allows companies to claim corporation tax relief for pre-FA 2002 intangible fixed assets acquired from related parties is to be amended. From 1 July 2020, this measure that prevents some companies from claiming relief for older, well-established intellectual property rights will be removed.
James Ross, partner at law firm McDermott Will & Emery, said: ‘One surprise and welcome simplification was the change to bring pre-2002 intellectual property into the intangible fixed assets regime for corporation tax purposes, thus allowing it to be amortised. This removes one of the most significant complexities in that regime, which has been the subject of a considerable amount of planning in the past.’
ENTERPRISE ZONES
Enhanced first year allowances for investment in new plant or machinery in enterprise zones were introduced in 2012. Originally planned for investment over a five-year period, this was extended to eight years and it would have expired in March 2020.
These capital allowances will now remain available for expenditure incurred in relation to all areas, whenever designated, until at least 31 March 2021.
National Insurance – employment allowance
The employment allowance enables employers to reduce their National Insurance bill by £3,000 a year. From 6 April 2020 claims could only be made by firms with a class 1 National Insurance bill below £100,000 in the previous tax year. The allowance is made month by month until it is used in full.
From April 2020, the maximum allowance is increased by £1,000 to £4,000. It is expected that this measure will mean that the National Insurance contributions bill of a further 65,000 businesses will be reduced to nil in addition to the 590,000 businesses already paying no secondary contributions.
Tim Stovold, partner at Moore Kingston Smith, said: ‘This is good news for many employers, but its impact will be limited with the scaling-back of the employment allowance in April this year to employers with an employer’s National Insurance liability of less than £100,000 in the previous tax year.’
Property
The UK property market and the lack of affordable housing continues to be a concern and there were no general increases in stamp duty for UK buyers. However, overseas buyers will have to pay more because a higher rate of stamp duty is introduced for non-residents buying UK property after April 2021.
STRUCTURES AND BUILDINGS ALLOWANCE
Businesses that incur qualifying expenditure on the construction, renovation or conversion of non-residential structures and buildings on or after 29 October 2018 can claim structures and buildings allowances (SBA). The 2% was thought to be low and from 1 and 6 April 2020 for corporation tax and income tax respectively, the allowance will be increased to 3%. This means that full relief will be obtained in a little over 33 years rather than the previous 50 years. Many would probably have preferred an increase to 4% or 5% if only on the basis that these figures would be a factor of 100%.
ANNUAL TAX ON ENVELOPED DWELLINGS
The rates of the annual tax on enveloped dwellings (ATED) will be increased by 1.7% from 1 April 2020 in line with the September 2019 CPI.
STAMP DUTY LAND TAX
As mentioned above, the government previously announced that it would consult on introducing a stamp duty land tax (SDLT) surcharge on non-UK residents purchasing residential property in England and Northern Ireland. Finance Bill 2020 will propose a 2% surcharge from 1 April 2021 and transitional rules may apply subject to conditions.
Jeremy Coker said: ‘We are concerned that it will be difficult to restrict this additional charge to the intended target of overseas investors, and we hope that the issue will be addressed in the final legislation.’
The ATT is also concerned about how such a measure will work in practice. To charge non-residents more, it is necessary to determine who is a non-resident. The current test for income tax determines someone’s residence status at the end of the tax year, and may not therefore help someone understand their position at the point in a tax year when they are purchasing a property.
Jeremy continued: ‘If the end result of the additional charges is two separate residency tests – one for SDLT purposes and another for income tax – this will both introduce further complexity and cause confusion as an individual could be resident for income tax purposes but not for SDLT purposes.’
HOUSING CO-OPERATIVES
New reliefs from the ATED and the 15% rate of SDLT will be introduced for some qualifying housing co-operatives. Legislation will be included in Finance Bill 2020.
VAT
As well as the changes below, various consultations relating to VAT were announced, anticipating an increased legislative freedom once EU restrictions cease to apply.
DIGITAL PUBLICATIONS
Probably a long overdue change was the announcement that, from 1 December 2020, there will be no VAT on digital publications. This was always an example (along with, we suspect, many others) where the tax system was lagging behind changes in technology. Increasingly, the fact that physical publications such as books, newspapers, journals and the like were zero rated for VAT whereas their digital equivalents were not was seen as an anomaly.
Kevin Hall, VAT partner at Markel Tax, said: ‘A decision by the Upper Tribunal on 24 December 2019 ruled that supplies of electronic literature are, and always have been, zero rated. This decision is under appeal by HMRC who has stated its policy that such supplies are standard rated has not changed. This situation has led to confusion, hesitation and potentially a loss of VAT for taxpayers.
‘If HMRC wins its appeal and e-publications are and have always been standard rated, 1 December 2020 will be the first date that zero rating can be applied to such supplies. If, however, HMRC loses its appeal, e-publications are and have always been zero rated.’
WOMEN’S SANITARY PRODUCTS
The chancellor confirmed that a zero rate of VAT for women’s sanitary products will be introduced on 1 January 2021.
AGRICULTURAL FLAT RATE SCHEME
New entry and exit rules will be introduced for the agricultural flat rate scheme (AFRS). From 1 January 2021, the following changes will come into effect.
First, businesses can join the AFRS when their annual turnover for farming related activities is below £150,000.
Second, businesses must notify HMRC once their annual turnover for farming related activities exceeds £230,000 to be deregistered from the scheme and register for VAT instead.
Finally, businesses with turnover that exceeds £85,000 for non-farming related activities will still be required to register for VAT and will be ineligible for the scheme.
