Mould-breaking budgets don’t, by definition, come along very often. James Callaghan’s introduction of CGT and Corporation Tax in 1965; Geoffrey Howe’s tax-slashing 1979 Budget. And perhaps – just perhaps – now joined by George Osborne’s Budget of 16 March 2016. Much ink and hot air has been expended in recent months and years on the imbalances between North and South, between Baby Boomers and Generation X; between multinational corporations and small private businesses: and this Budget seems genuinely to attempt to redress the worst of those imbalances and to go some way towards levelling the playing field for all taxpayers.
Among big changes to CGT we see rates reduced (from 6 April 2016) to 10% for basic rate taxpayers and 20% for higher- and additional-rate payers. And that 10% rate will extend also to any investor in an unquoted trading company who subscribes for shares after Budget Day, holds them for at least three years and disposes of them after 5 April 2019, with a lifetime limit of £10m – effectively extending Entrepreneurs Relief to external investors in unquoted companies. It’s not quite as good as the unlimited CGT exemption afforded to investments made under the Enterprise Investment Scheme but given the complexity and restrictions of the latter you have to wonder whether EIS is really going to be worth the candle in future. Entrepreneurs’ Relief is further amended by reversing (with retrospective effect) the worst of the ill-thought-out amendments introduced last year. In particular, relief is restored, subject to conditions, for shares in companies which are members of a trading partnership or co-owners of a trading joint venture company (relief which, as the government tacitly concedes, should never have been removed in the first place). Relief is also restored for “associated disposals” in some circumstances from which the over-enthusiastic 2015 changes removed it.
Note however that the existing rates of CGT (18% and 28%) are preserved for gains on residential property (including ATED-related gains) and for gains on carried interests: the government plainly wants to discourage investment in residential property and divert it to investment in trading companies.
Companies further benefit from a reduction in Corporation Tax to 17% (though only from 1 April 2020) and a more flexible use of losses. From 1 April 2017, losses will be available against all income streams (so that the use of trading losses, for example, will not be restricted to trading profits) and further will be available for use not only by the loss-making company itself but also by members of the same group. A restriction is to be introduced so that only 50% of profits can be covered with losses: once a company becomes profitable it will start to pay tax, regardless of the size of its past losses.
It’s notable that this restriction on losses will apply only to profits in excess of £5m, so is unlikely to affect most owner-managed companies. And that differentiation between smaller businesses and their larger competitors is a recurrent feature of the Budget. Some domestic businesses (especially smaller owner-managed ones) undoubtedly feel that they have hitherto been fighting against their multinational competitors with one hand tied behind their back; this Budget goes some way to changing that by removing some tax breaks exploited by multinationals but not available to purely domestic businesses. For example:
- Multinationals will no longer be able to shelter UK profits by injecting large amounts of tax-deductible interest: relief for net interest will be restricted to 30% of the UK EBITDA (or, where higher, the worldwide group’s net interest to EBITDA ratio)
- The circumstances in which withholding tax will need to be applied to royalties on intellectual property will be extended, making it harder for multinationals to suck profit out of the UK by way of payment for use of brands and other IP
Similarly, arrangements under which overseas developers of UK property have sometimes been able to minimize UK taxes by avoiding having a permanent establishment in the UK are to be countered: henceforth when a company deals in or develops and sells UK land, UK tax will be due, regardless of the residence status of the company, regardless of where the trade is carried on and regardless of whether the trade is conducted through a permanent establishment in the UK. That certainly does represent a levelling of the playing field between domestic and overseas developers (whether of playing fields or of any other UK land).
A further equalization of arms can be seen in the 3% SDLT surcharge on the purchase of residential property, coming in from 1 April 2016. It had been proposed that companies with large property portfolios would be exempt from the surcharge. It is now clear that no such exemption will be available. The surcharge is of course an unwelcome burden; but it is now at least an unwelcome burden that applies on the same terms to everyone in the marketplace.
The failure by some internet-based businesses properly to account for VAT on goods sold from UK-based fulfillment centres has also been a point of contention for their UK-based competitors. This is to be remedied by giving HMRC the power to appoint UK representatives of the foreign vendor with joint and several liability for VAT.
The pre-budget whisperings to the effect that use of personal service companies (“PSCs”) was to be attacked (again) proved over-cautious. The change proposed is simply that where a PSC is engaged by a public sector body, the onus of deciding whether IR35 applies is to shift from the PSC to the customer; and if it does the customer is required to operate PAYE and NIC on the payment to the PSC.
Among the other changes, smaller businesses will be among those benefiting from an increase in the limit for business rates relief; and replacing the “slab” system for SDLT with a “banded” system reduces the SDLT on commercial property up to around £500,000. Less welcome, but not unexpected in the light of the 7.5% increase in the tax rate on dividends, is the increase to 32.5% of the rate of tax chargeable on “shareholder loans”.
Finally (as if anyone really cares) Class 2 NIC is to be abolished from April 2018. Sad really: it was a hangover from the days when a self-employed person physically bought a weekly stamp and affixed it to his contribution card every week, presumably before popping down to the saloon bar at his local for a mild and bitter or two at 3d a pint and back in time to watch Dixon of Dock Green on a flickering black-and-white TV purchased on the never-never. Nostalgia’s not what it used to be…