Given the focus in this Budget on tackling coronavirus and climate change, it was perhaps unsurprising that there was not a great deal announced impacting the personal taxes of income tax, capital gains tax and inheritance tax.
Let’s start with what was announced, which was the change to the Entrepreneurs’ Relief lifetime limit. In advance of the Budget, speculation was rife that changes were afoot in relation to the relief with it being described as ‘expensive’, ‘ineffective’ and ‘unfair’. One think-tank went as far as saying that it is the ‘UK’s worst tax relief’. While the relief has not been scrapped as many had expected, these rumours of change have come to pass with a reduction in the lifetime limit from £10m to £1m; a potential tax impact of £900,000. The changes also contain anti-forestalling rules in place to disrupt any attempts made to ‘bank’ Entrepreneurs’ Relief in advance of the Budget unless by a genuine sale.
Although changes to the relief are not unexpected, it is clearly disappointing for entrepreneurs who were expecting a lower tax rate on sale of their business. It is also somewhat disappointing that this has been introduced as a stand-alone measure, rather than as part of a systemic review. Simply reducing the lifetime limit does not deal with the criticisms targeted at the effectiveness of the relief. Also, we now find ourselves in a position where it is more tax advantageous to be an investor in a UK company rather than to be directly involved in growing that business. Investors are able to benefit from reliefs such as tax-free exit through the enterprise investment scheme and the 10% rate applicable under investors’ relief that is still at a £10m lifetime limit. To give the Chancellor the benefit of the doubt, he has been in the office for less than a month and there are clearly other dominating factors in the UK at the moment. We would hope however that the commitment to ‘unleash the power of business’ in the UK will ensure that the people tasked with the ‘unleashing’ are given adequate support through the tax system in due course.
Aside from this change, there was very little announced. Given the spending discussed, one might have expected some tax increases. The Conservative manifesto specifically ruled out increases to income tax, national insurance and VAT. There could however have been increases to the main capital gains tax rates or possibly even alignment with income tax rates. It appears that given the low cost of borrowing and some careful financial framing within the fiscal framework, the Chancellor has been able to sufficiently fund his spending aims.
Following reports from the Office of Tax Simplification and an All Party Parliamentary Group for inheritance tax or intergenerational fairness, we had anticipated that the Government may consider consulting around changes to the UK inheritance tax system. There was no mention however of the IHT regime in either the Chancellor’s speech or supporting Treasury documents. This is something we may see more on as part of the Autumn Budget.
Also, over the past few years, we have seen a steady stream of changes impacting those not domiciled in the UK and buy-to-let landlords. There were no changes to these areas this time around.
Overall, a rather limited budget for individuals but a disappointing one for entrepreneurs.
Review of changes to the off-payroll working rules (IR35)
The Government has responded to the recent review of changes to the implementation of the off-payroll working rules, and confirmed that the changes will be implemented on 6 April 2020.
At Budget 2018, the Government announced that it would reform the off-payroll working rules in the private sector from April 2020.
The reform shifts the responsibility for both assessing and communicating the employment status of a worker operating through an intermediary to medium and large clients. The aim of the reform is to ensure individuals who work like employees, but through their own personal service company (PSC), pay the same income tax and national insurance contributions (NIC) as individuals employed directly.
The Government has recently reviewed the proposed reform and concluded the off-payroll working rules will be extended to medium and large businesses in the private and third sectors from 6 April 2020, as originally planned.
However, the Government announced in its review that it is making a number of changes to support the successful implementation of the rules. These include:
- the rules apply to services provided from 6 April 2020 but not to payments made after this date that related to pre-6 April 2020 services;
- HMRC will take a lenient approach for the first 12 months and will not levy penalties for inaccuracies but businesses must be able to show that reasonable care has been taken;
- group determinations are permitted if terms for groups of workers are identical;
- HMRC will not use the new rules to open compliance checks into PSCs for tax years before 6 April 2020; and
- HMRC has published further guidance and promises additional support.
In addition, the Government will continue to monitor and evaluate the operation of the rules following implementation.
Prior to the review there was a lot of uncertainty and lack of guidance regarding the application of the rules. It will be disappointing for a number of companies that the off-payroll working rules will be implemented from 6 April 2020 and businesses will not be given more time to prepare.
In addition, following the review, there remain several uncertainties in respect of the application of the rules. For example:
- there is uncertainty surrounding the application of ‘employment status indicators’, particularly in respect of ‘mutuality of obligation’. The correct interpretation of mutuality of obligation is a matter of dispute, and HMRC’s position has been criticised. Recent case law has highlighted the importance of the mutuality of obligation indicator, however, HMRC’s CEST (Check Empoyment Status for Tax) tool will continue to disregard mutuality of obligation; and
- the Government review suggests that use of the CEST tool might not be sufficient to demonstrate reasonable care, which exposes businesses to risk of PAYE and NIC liabilities.
Although the lenient approach and additional guidance from HMRC is welcome, further sector specific guidance would be helpful to ensure businesses understand the changes to the legislation and contractors do not inadvertently pay more tax than is needed.
When will it apply?
From 6 April 2020
Clarification of treatment of Limited Liability Partnership (LLP) tax returns
The Government will legislate to put beyond doubt that LLPs should be treated as general partnerships under income tax rules.
The new rules will ensure that HMRC can continue to amend LLP members’ tax returns where the LLP operates without a view to profit. This will only apply where an LLP has delivered an LLP partnership tax return on the basis that is operating ‘with a view to a profit’ and is subsequently found to be operating ‘without a view to a profit'.
A recent First-tier Tribunal decision drew attention to the validity of the income tax return enquiry process where an LLP was found not to be trading with a view to a profit.
If HMRC had issues with the trading status of the LLP it could, and should have, opened concurrent enquiries into the individual members' returns. In this case, and presumably many others, it failed to do so.
The legislative change will, and is intended to, have a retrospective impact to rectify the issue for HMRC.
Entrepreneurs' Relief (ER) lifetime limit reduced to £1 million
The ER lifetime limit is the overall amount of qualifying capital gains on which an individual can claim ER during their lifetime. The limit, previously £10 million, has been reduced drastically from 11 March 2020 to £1 million.
ER is a valuable relief reducing the capital gains tax (CGT) rate from 20% to 10% on qualifying disposals, commonly unlisted shares in a trading company for which the shareholder was an employee or director.
The reduction of the lifetime limit means that only the first £1 million of gains realised on qualifying disposals during an individual’s lifetime will qualify for the reduced rate of CGT.
The reduction to the lifetime limit will affect qualifying disposals made on or after 11 March 2020. Anti-avoidance rules will accompany the changes, however, and these rules aim to counteract attempts to plan in advance of the changes and will apply broadly in two scenarios:
- contracts entered into before the Budget in order to ‘bank’ ER, which have not yet completed. This is unless it can be shown that the contract was not entered into to exploit the rules governing the timing of a disposal and, where the parties to the contract were connected, that the contract was entered into for wholly commercial reasons; and
- company reorganisations involving a share for share exchange between 6 April 2019 and 11 March 2020, where specific conditions are met and an election is made for Entrepreneurs’ Relief to apply on the reorganisation.
It was widely expected in the run-up to the Budget that a significant change would be made to ER. This was amid concerns and growing pressure from within and outside the Government, calling for the relief to be abolished entirely.
In this context, the continuing commitment to maintaining the relief and the acknowledgement of its value in supporting the role that entrepreneurs play in the economy is heartening.
The substantial reduction to the lifetime limit, however, significantly limits its benefit to taxpayers. The fact that the ER claimed in respect of previous qualifying gains must be taken into account means that many individuals will now find they are no longer entitled to claim the relief.
It is recommended that a review is carried out of any transactions entered into prior to the Budget, to consider whether the anti-forestalling rules could apply.
When will it apply?
It will apply to disposals from 11 March 2020, with possible wider application to some disposals prior to this date.
ATED annual chargeable amounts increase with inflation
The annual tax on enveloped dwellings (ATED) charges automatically rise with inflation each year. From 1 April 2020, the ATED charges will increase by 1.7%.
Non-UK resident stamp duty land tax surcharge
The Government has announced a 2% stamp duty land tax surcharge on residential property purchases in England and Northern Ireland by non-UK residents.
The Government has confirmed that the proposed stamp duty land tax (SDLT) surcharge for purchases of residential property in England and Wales by non-UK residents will be introduced with effect from 1 April 2021.
The surcharge is expected to apply to purchases by individuals and ‘non-natural persons’, such as companies, trusts and partnerships, and will apply on top of existing SDLT rates.
Full details of the surcharge are yet to be published, but legislation is due to be included in Finance Bill 2020-21. It will only cover transactions involving English and Northern Irish residential property, as Scotland and Wales have separate land transaction taxes.
There will also be transitional rules where contracts are exchanged before 11 March 2020 but complete or are substantially performed after 1 April 2021.
The introduction of the SDLT surcharge was expected as it was first proposed in Budget 2018. There was a consultation on the initial proposals in 2019. The policy aim is to improve affordability of residential property for UK resident purchasers.
One eye-catching element of the announcement, however, was that the surcharge would be set at 2% rather than the 1% previously proposed.
Full details of the proposals are not yet clear, but there were a number of areas raised in the 2019 consultation that will require confirmation, such as the definition of ‘non-UK resident’. For example, the consultation suggested a specific definition of residence for the purposes of the surcharge, which could lead to purchasers being caught by the surcharge even if they are treated as UK resident for other tax purposes. The Government has announced it will shortly release a summary of the responses to the consultation.
It remains to be seen whether the surcharge will have the desired effect on residential property demand, but the Government has stated that funds raised from it will be used to help address rough-sleeping, which is to be welcomed, even if the additional complexity brought in by the surcharge could cause issues for purchasers and advisers.
When will it apply?
From 1 April 2021
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on www.smithandwilliamson.com prior to the launch of Evelyn Partners.