Richard Blackwell, Tax Partner at Deloitte in Cambridge, considers what tax measures the Chancellor is expected to focus upon in the Budget on 20 March, and what we already know is in Finance Bill 2013:
Deloitte preview of Budget 2013
Sluggish growth is keeping public spending up and tax revenues down. Many economists expect the deficit in 2012-13 will be similar to, or higher, than in 2011-12.
For the wider economy the worst is probably past. The Office of Budget Responsibility and most other independent forecasters expect the economy to grow modestly in 2013-14. However, for now, at least, this looks like a choppy, fragile recovery. The Prime Minister is keen to point out the lack of magic money trees in his economic forest. He has been careful to dampen down public expectations about big tax giveaways in the forthcoming Budget.
What could the Chancellor announce?
It is possible that we will see the completion of the reduction in headline corporation tax rates to 20%, following the cut to 21% which is to apply from 2014. The Chancellor has previously stated that a tax rate of 20% is an aspiration and it would simplify the tax system by having a single rate of corporation tax for all companies.
Whilst there has been considerable media interest in the taxation of international groups, substantive changes require international agreement. The Chancellor may give an update on the OECD’s Base Erosion and Profit Shifting project, where the UK is leading the Transfer pricing working party.
It is expected that we shall see a consultation on the reform of the loan relationship rules which are both complex and have been open to planning over the last decade.
Personal service companies
The Autumn Statement confirmed that plans to change the IR35 rules, and, in particular to introduce a new 'controlling person’ test, would not proceed. This affects individuals working through personal service companies (PSCs), in circumstances where they would be regarded as employees if engaged directly. In these circumstances, the PSC must operate PAYE and NIC when payments are made to the individual. The intention is to include changes in the 2013 Finance Bill to bring officeholders engaged via intermediaries within the scope of the IR35 rules for PAYE purposes. The effect of this would be to require the personal service company to deduct PAYE when making payments to the officeholder. There are however, still concerns that the proposed changes do not remove the PAYE obligation from the end user, and there may be amendments to clarify this matter.
We expect a new consultation to be announced at Budget Day, which is expected to consider the introduction of anti-avoidance provisions limiting the use of partnerships to reduce artificially overall tax liabilities. Potential areas for review may well include the use of companies in partnership with individuals and disguised employment arrangements.
Individuals – move to £10,000 personal allowance?
The personal allowance for 2013/14 has already been announced in the Autumn Statement at £9,440. This moved nearer to the Coalition Government's flagship goal of £10,000. It is likely that the Budget will include the announcement that the final increase to £10,000 will be completed from 2014/15. This will reduce the impact of the earlier decision to withdraw the higher age allowance for those reaching 65 from April 2013.
We already know that the increase in the higher rate tax threshold and the capital gains tax exempt amount will be kept at 1% for 2014/15 and 2015/16. However, whilst the personal allowance has been increased considerably over recent years, benefitting most basic rate taxpayers, the lower earnings threshold for national insurance has not increased at the same rate and has been set at £7,755 for 2013/14. Some movement towards narrowing this gap would be welcomed – although this would be an expensive policy.
Consultations – the final legislation?
Many of the changes that are planned for the 2013 Finance Bill have already been the subject of consultation over the last nine months. We expect to see the final outcome of the consultation process on many of these topics, with possibly some relaxations in some areas. Particular areas are:
- Income tax Reliefs Cap – the ability to set certain losses off against general income is to be restricted from 6 April 2013 to the greater of £50,000 and 25% of total income. Whilst there have been some improvements to the original proposals, there are still concerns that full relief should be available for all genuine business losses. It is possible that we will see some further relaxations in the Budget announcements.
- High value residential property – amendments are due to be enacted dealing with the taxation of high-value (more than £2m) residential property held by non-natural persons, mainly companies. The tax changes are under three headings: Stamp Duty Land Tax (SDLT); a new tax to be known as Annual Residential Property Tax; and an extension to the Capital Gains Tax regime to apply to gains made on such properties. There are a number of exemptions from the charges to protect investors and developers. However, the exemption from the SDLT charge at present is only intended to apply from Royal Assent to the Finance Bill, expected to be in July 2013.It is hoped that these will be back-dated to apply from April 2013, when the other charges will be introduced. Without this, the property market will inevitably be put on hold until the end of July.
- General anti-abuse rule (GAAR). Whilst the draft legislation has already been published and is unlikely to change substantively. It is hoped that the HMRC guidance will be expanded to provide more examples and clearer guidance so that taxpayers are able to consider whether the GAAR applies to a proposed transaction. This is important, as the legislation is widely drawn, but the expressed target of the GAAR is to attack the most aggressive tax planning. It is likely that revised guidance will be issued with the Finance Bill on 28 March. The GAAR takes effect from Royal Assent (expected to be the third week in July).
- Statutory residence test – a new test for individual residency is being introduced from 6 April 2013. There have already been several rounds of consultation on this subject, and we expect to see the final version of the legislation in the 2013 Finance Bill. The new rules will give a welcome certainty to the internationally mobile, who up to now have needed to use a mixture of HMRC practice and case law to determine their residence status.
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