Bill Dodwell, head of Tax policy at Deloitte, considers what tax measures the Chancellor is expected to focus upon in the Budget on 21 March, and what we already know is in Finance Bill 2012:
Following a particularly tough 2011, when growth was hampered by sharp rises in commodity prices and events in the Eurozone, Chancellor George Osborne faces a challenging environment for his 2012 Budget.
The Office for Budget Responsibility forecast in November 2011 that tax receipts for 2011-12 would be £554 billion, but public spending and investment (net of other receipts) would push the UK into borrowing £127 billion. The Institute of Fiscal Studies forecast a slightly better outlook in its Green Budget: tax receipts fractionally higher at £555 billion, but a lower borrowing requirement of £122 billion. The January receipts and spending figures were positive, which supports the lower borrowing requirement.
The Chancellor is being urged by some to cut tax to stimulate the economy. The quickest way to get money into the hands of consumers is through a VAT cut; the second best is a cut in employer National Insurance contributions. Cutting income tax through increasing the personal allowance is less rapid, as some would have to wait until January 2014. The personal allowance is scheduled to increase to £8,105 from 6 April 2012. The coalition agreement provides for this to be increased to £10,000 by the end of the Parliament, however, the LibDems are keen to accelerate this. Some LibDems have suggested it might be financed by a mansion tax and the withdrawal of higher rate tax relief for pension contributions.
So, what could the Chancellor announce?
50% Tax Rate – HMRC is due to report to the Chancellor before the Budget on the impact of the 50% rate of income tax. Although it is too soon to be able to effectively assess the impact this has had on tax revenues, our view is that it is likely to have raised a small amount. We have no idea, however, how much tax has vanished through emigration (and lack of immigration), acceleration and deferral. We would like to see the Chancellor abolish this rate, or as a minimum set a clear timetable for its withdrawal.
General Anti-Avoidance Rule (GAAR) – Graham Aaronson QC concluded a narrowly focussed GAAR would deter particularly abusive tax avoidance. The Chancellor is expected to announce his GAAR plans at Budget 2012 and political pressure may mean he proposes taking forward a GAAR. We believe principles-based drafting, the use of Targeted Anti-Abuse rules, disclosure rules, and a new look at areas of law which have been under attack is more effective at eliminating aggressive planning. The fundamental problem with a GAAR is uncertainty, and even its proponents don’t think it would raise a significant amount of revenue.
Child Benefit – the Chancellor must announce how he proposes to withdraw child benefit from higher rate taxpayers. The initial proposal – full withdrawal once anyone in the household had income over £42,500 – was simple, but quite unfair. We expect the Chancellor will introduce a taper, so that withdrawal is spread over a greater level of income. What a taper would do, though, is impose an effective rate of 50-60% on that income range (depending on the taper rate). This creates its own disincentives. In reality, it is impossible to offer benefits at lower income levels without imposing high effective tax rates, as the benefits are withdrawn for those on higher incomes.
Childcare – the previous Government decided to limit tax relief for childcare vouchers to the 20% basic rate and the amount to £2,915 pa for new claimants – worth less than £600. However, childcare is increasingly costly and there have been a range of calls for additional tax relief to help parents return to work. It is quite possible the Chancellor will launch a consultation on new ways to offer support.
Stamp duty land tax (SDLT) – the use of schemes to avoid SDLT on residential property has grown, partly because of ineffective enforcement of the rules by HMRC. HMRC has now significantly stepped up its compliance work, but it is still possible to avoid SDLT on future sales by buying a property into a company. Levying duty on company sales is harder to enforce, as there is no easy way to track share sales, but some other countries manage to do so. The only practical way to aid enforcement would be to impose a reporting duty on estate agents. The measure would not raise a very substantial amount, though.
Withdrawal of higher rate relief for pension contributions – we doubt the Chancellor will respond to calls to cut pension tax relief, not least because the current system was only put in place in April 2011. Withdrawing higher rate relief would be much more complex than it might at first appear. The way in which Defined Benefit schemes work could mean employees in such schemes could end up with a big pension and low earnings. Some public sector schemes aren’t funded, so levying a charge which is then borne by taxpayers raises no money at all. There’s also a problem with Defined Contribution schemes. Cutting tax relief could mean many put in less money. However, many schemes operate on a matched contribution basis, cutting an employee’s contributions would also cut the employer contribution. Another option being floated would be a cut in the amount that could be put into a pension scheme each year; currently this is £50,000.
Property taxation – there have been suggestions from different quarters that higher taxes on residential property could be charged. The UK has about 27 million homes, but only 154,000 fall into the top band for council tax, with a further 920,000 in the next band. We do not support a mansion tax, suggested to be an uncapped levy on the market value of homes. There is insufficient correlation between income and the capital value of property - so an uncapped levy could be very damaging. However, there may be scope to raise money by increasing council tax charged in the top two bands. A house in the top band is worth at least £1.2 million in London (where one third are located) and at least £700,000 throughout England. The top band house in Scotland is worth at least £550,000, but just £420,000 in Wales. However, even if an increase were to be spread over both the top two bands, it would be unlikely to raise more than £1 billion. This could cover just over one million homes, compared to the four million liable to higher or additional rate tax.
Small business taxation – the Office for Tax Simplification has recently reported on its review of taxation of small businesses (defined as businesses with turnover up to £30,000). The OTS suggests there may be scope to simplify accounting for these businesses. One recommendation is the introduction of a disincorporation relief, equivalent to the relief available on the incorporation of a business, to enable small businesses to disincorporate without incurring significant tax cost. Operating a very small business through a company involves additional administration, but usually carries a lower tax and National Insurance cost. The Chancellor will announce whether he plans taking forward any of these recommendations.
Manufactured Overseas Dividend Regime – there have been too many cases of unintended planning using these rules and it would not be surprising if HMRC were to consult on changes to the manufactured overseas dividend regime. Market participants may need to justify the economic benefits of the regime and find a way to cut down the tax-motivated side if it is to survive.
What’s already in Finance Bill 2012?
Corporation tax
Reduction in the main rate of corporation tax – as previously announced, the main rate will be reduced by 1% to 25% from 1 April 2012. The Chancellor could cut the rate to 24% from 1 April 2012, as he did in the prior year; however, we believe this is unlikely. It costs about £800 million to cut the rate by 1%.
Controlled foreign corporations (CFCs) – following consultation on the draft legislation, the Government has made major changes to the Gateway test designed to reduce the compliance burden for groups assessing whether or not a foreign subsidiary’s profits fall within the CFC rules and hopefully take companies outside of the rules. A new ‘Gateway to the Gateway’ allows companies to more readily determine whether other Gateway chapters need to be considered at all and is intended to ensure the CFC rules apply only to profits that have been artificially diverted from the UK. Profits obtained from commercial operations capable of operating independently of the UK activities, or which do not have a main purpose of achieving a UK tax reduction, will be outside of the CFC charge for general business profits. It is hoped further changes will be made to the legislation, most notably the Excluded Territories Exemption, prior to it being enacted.
Patent Box – announced in Budget 2011, the keenly awaited Patent Box regime will, from April 2013, tax income from patents and certain other qualifying intellectual property rights at an effective tax rate of 10%. Consultation on the draft legislation closed on 10 February 2012, so further amendments to the draft legislation could still be seen.
Debt cap – the worldwide debt cap rules were introduced in 2010, so as to limit upstream loans (loans from an overseas subsidiary company to its UK parent). Amendments to the debt cap legislation are anticipated to resolve identified issues, making the debt cap rules simpler to apply and eliminate situations where the rules apply unfairly.
Personal tax
Reform of taxation of non-doms – proposals include the increase in the annual charge for non-domiciled individuals who claim the remittance basis to £50,000 and a removal of the charge to UK tax on overseas income or capital gains remitted to the UK for the purpose of making a commercial business investment in an unquoted company, or one listed on an exchange-regulated market, for example AIM. These changes would take effect from 6 April 2012.
Statutory residence test – the introduction of a statutory definition of tax residence was proposed at Budget 2011. However, it has already been announced this will be deferred until April 2013 to enable detailed issues raised by responses to the Government’s consultation to be addressed in the draft legislation. A further consultation document is expected to be launched at the Budget.
Seed Enterprise Investment Scheme – From 6 April 2012, a new scheme to provide relief for investors subscribing for shares in small companies carrying on, or preparing to carry on, a new business in a qualifying trade, where the investor has a stake of less than 30% in the company will be introduced. A capital gains tax holiday will apply to gains realised on the disposal of assets and reinvested through the scheme in the first year of the scheme. Regrettably, the rules look to be too complicated to attract significant investment.
Capital gains tax on foreign currency accounts – gains arising from the withdrawal of funds from a bank account denominated in a foreign currency will no longer be liable to capital gains tax and losses will not be allowable.
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