Perkins Slade guest blog is brought to you by Claritas Tax Limited.
Last Wednesday was a day dominated by sugary drinks. After all, how would we get through 63 Budget announcements plus a “Business Tax road map” without a healthy dose of Coke and Dr Pepper? There are times when aspartame is simply not enough, despite the increasing cost of the full fat variety!
Anyway, George Osborne delivered his eighth Budget today and there were, genuinely, some nice surprises. There were also, of course, some bitter medicinal pills. A spoonful of sugar may help the medicine go down, but, as an example, the joy of reduced capital gains tax for the seller of a commercial property will be significantly offset by the increased stamp duty land tax for the purchaser of the same building.
More significantly for our clients, there are general reforms to capital gains tax which will be welcomed, even if some merely rectify the problems caused by botched and rushed legislation in 2015. Businesses will welcome the reduction in the corporation tax rate to 17% from April 2020, but institutional investors may be less impressed at the restriction of tax deductions for interest to 30% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).
There is mixed news on the use of brought forward losses, as the UK will be moving closer to a European model of consolidated tax returns but companies with profits over £5 million will only be able to offset 50% of their profits against brought forward losses in a given year.
Our normal objective when analysing the Budget is to restrict our commentary to the 5 or 6 key items and to leave everything else to the News at Ten. However, this year, there are 10 measures we feel we need to tell you about.
Because this mailer is so unusually long, we’ve taken the unusual step of listing the topics so that you can decide whether or not to read on. However, if you do get to the bottom, there’s a great piece about Jeremy Clarkson!
- Capital gains tax rate changes
- Entrepreneur’s relief on disposals of goodwill
- Entrepreneur’s relief and joint venture companies
- Investors’ Relief
- Lifetime limit for employee shareholder status shares
- New rules on the use of corporate tax losses
- Tax deductions for interest
- Loans to participators
- Stamp Duty Land Tax increase on commercial property
- Company car taxation
Reduction of capital gains tax rate
The main rate of CGT has been reduced from 28% to 20% (10% for basic rate taxpayers). This will apply from 6 April 2016 to all disposals other than of residential property and private equity carried interest. The 10% rate for entrepreneur’s relief remains as before.
What this means to you
Bluntly, don’t sell that Picasso, office block or share portfolio until 6th April 2016!
Entrepreneur’s relief on disposal of goodwill
In December 2014, entrepreneur’s relief was abolished for sales of goodwill to companies by sole traders or partnerships if the seller was a shareholder in the acquiring company afterwards. This was designed to counter perceived abuse of entrepreneur’s relief, mainly by partners selling goodwill to companies on incorporation and then extracting several years’ worth of profits with only 10% tax.
The application of this rule has obviously caught transactions where there was no intention to avoid tax, and so the rule has been relaxed so that entrepreneur’s relief will still be available where the seller has less than 5% of the shares and voting power of the purchasing company.
What it means to you
This clearly won’t reopen the door to tax driven partnership incorporations, but partners or sole traders wishing to sell their businesses and retain a small stake in the acquirer, for example to ensure an orderly handover, will benefit.
The change applies to all transactions since December 2014. If you are looking to sell a partnership or trade, or have done so since December 2014, please talk to us.
Entrepreneur’s relief for joint venture companies
In an attempt to block further tax avoidance concerning entrepreneur’s relief, changes were made in 2015 to the treatment of companies which had entered into joint venture arrangements. The object of the legislation was to prevent “Management Companies” or “Mancos”, which were designed to get around the entrepreneur’s relief requirements for an individual to have a 5% shareholding and 5% of the voting rights in a trading company. However, the legislation was poorly drafted and so has now been amended.
The activities of joint ventures held by companies will now be apportioned to the shareholders in the parent company when calculating entitlement to entrepreneur’s relief. If an individual owns 20% of a holding company which has a 40% share in a joint venture trading company, that individual will be treated as having 8% of the trading company and so will qualify for entrepreneur’s relief.
What it means to you
The structure of joint ventures held by a company should be reviewed to determine whether entrepreneur’s relief will be available for shareholders of the parent.
Entrepreneur’s relief will be extended through a new Investors’ Relief to individuals who invest in trading companies, meaning that they will pay 10% capital gains tax on sales.
The relief will be subject to a lifetime limit of £10m (although we assume that this will be part of the lifetime entrepreneur’s relief limit rather than an additional limit). An individual will need to hold the shares for at least three years and must not be an officer or employee of the company.
The shares must be subscribed for at any time from 17 March 2016 as this is designed to encourage support for business. Shares purchased from a selling shareholder will not qualify.
The shares must be in unlisted trading companies, but there appears to be no limit on the size of companies which benefit.
What it means to you
This could be a useful extension to the enterprise investment scheme for companies which are ineligible. However, it does not address the problem faced by minority employee shareholders in companies who cannot qualify for entrepreneur’s relief because they do not have a 5% shareholding. Equally, and more surprisingly, it discriminates against angel investors who may wish to invest in a company and then provide expertise to it.
Nevertheless, if you are looking to acquire shares or if your company is looking to raise capital, this could be a useful addition to the tools available.
Overall, this feels disappointingly like a measure which has missed its target and which may need to be refined in future Budgets to increase its usefulness.
Lifetime limit for employee shareholder status shares
ESS shares were introduced as part of the Coalition government’s attempt to create a “John Lewis economy” of employee owned businesses. The aim was that employees would give up employment rights in return for the gift of shares by their employers and that we would achieve a new worker’s paradise of happy engaged employees owning shares in their rapidly growing employer.
If you have an image of fluffy bunnies jumping through lush green meadows whilst birds sing, the Chancellor clearly wants to disabuse you of those notions. There is a feeling that the rules have been abused and that the beneficiaries of corporate largesse have not been the downtrodden proletariat but their plutocrat bosses, benefiting from substantial tax free gains.
As a result, a lifetime limit of £100,000 on tax exempt gains has been imposed to all ESS shares issued after midnight tonight.
What this means to you
If you already have ESS shares, this will have no impact. However, it will reduce (but not remove) the attractiveness of the scheme for future awards. With the new capital gains tax rate of 20%, this benefit is still worth up to £20,000 per employee.
However, we have been worried for a while that changes could be made to ESS. This is the first change that has been made and, whilst there are no indications that more are to come, further changes cannot be ruled out. Therefore, wherever possible, structuring share awards in order to enable entrepreneur’s relief to be claimed, such as by issuing EMI options as a back up or alternative to ESS, will remain valid.
Increase to the loan to participators tax charge
From 6 April 2016, there will be an increase on the tax charged on loans made by close companies to participators. The tax charge will increase from 25% to 32.5%.
What it means for you
Following the introduction of the new dividend tax rules, which will apply from 6 April 2016, the amendment to the loan to participator tax charge has been made in order to continue mirroring the taxation of dividends.
This change ensures that no tax advantage is obtained where a participator receives a loan from their company rather taking a salary or dividends.
The Business Tax Road Map
There are two key reform objectives outlined in the Government’s tax map:
- New rules on the tax deductibility of corporate interest expense; and
- Reform of the corporation tax loss relief rules.
Both measures will come into force from April 2017.
What it means for you
Limit on corporate interest expense
The Government have tried many times to limit the interest expense a company can offset against its taxable profit (e.g. Transfer Pricing, World Wide Debt Cap etc) but clearly these rules have not gone far enough in their view. They are concerned that some multinational groups borrow more in the UK than they need for their UK activities, for example because the funds are used for activities in other countries which are not taxed by the UK.
Therefore, new rules will be introduced to replace the current complicated rules which will limit the interest expense a UK company can take against its taxable profits. Conceptually, the Government will introduce the following rules:
- Fixed Ratio Rule limiting corporation tax deductions for net interest expense to 30% of a group’s UK EBITDA.
- Group ratio rule based on the net interest to EBITDA ratio for the worldwide group. This is to help groups where high external gearing is required for commercial reasons.
A consultation will take place on how these OECD recommendations should be incorporated in the UK tax system. No detailed guidance has been published and but we suspect the rules will be tweaked to ensure the operation of the rules does not catch innocent debt structures.
Groups should review their current debt structures to ensure their arrangements are not impacted by the new rules. If they are caught, a group/debt restructure maybe required before the commencement date.
Reform of the corporation tax loss rules
Under the current UK tax rules, there are a number of restrictions in place that dictate how carried forward losses can be used. For example, in some cases, they can be used only against certain types of taxable income and cannot be surrendered as group relief to other group companies.
The Government has decided to remove these restrictions for any losses incurred after 1 April 2017. The new measures will allow:
- companies to use carried forward losses against profits from other income stream;
- or from other companies within a group.
However, the Government will introduce a restriction on the level of carried forward losses that can be off set against taxable profits. This restriction will be equal to 50% of the profits, but this only applies to profits in excess of £5m. The result is that large profitable companies will always pay tax even where they have brought forward losses and seems designed to appease the ‘Daily Mail’ rather than to promote a competitive tax system.
The new measures are a welcome surprise as it means groups will no longer have trapped losses for losses generated after 1 April 2017 and ensures the cash tax flows payable by group companies can be managed.
Stamp Duty Land Tax increase on commercial property
A year ago, SDLT was reformed for residential property with the introduction of graded bands rather than the old single rate system. This reform will now be extended to commercial properties.
The SDLT rate will be 0% on the first £150,000 consideration, 1% on the next £100,000 and 5% on all consideration over £250,000.
The rate on leases is based on the net present value of the lease, derived by a complex formula designed by the computer which beat the world’s number one player of the Asian game “Go” last week! In summary, there is no SDLT on the first £150,000 of NPV, 1% on the NPV up to £5 million and 2% above that level.
What it means to you
As with houses, this means an end to the objective of paying consideration just under an SDLT threshold, so may increase the value of properties around those thresholds. However, this is a tax increase, forecast to raise £590 million for the Exchequer in 2020-21.
This increase applies from tomorrow, so there is little time for planning!
Company car tax increase
The benefit in kind on low emission cars is increasing from April 2017 onwards.
In this job, I probably get asked more questions about which car to buy than Jeremy Clarkson. Fortunately, I won’t punch you if you don’t offer me a steak dinner and I’ve never insulted an entire Latin American country, although I did once complain about an undercooked enchilada on a night out in Birmingham! The answer invariably is that low emission cars are the best company cars…in the world. This may be about to change.
From April 2017, electric cars will be subject to a 9% benefit in kind charge based on their list price, rising to 16% from April 2019. Low emission cars, producing less than 50g CO2 will be subject to similar benefit in kind charges.
What it means to you
If you’re fortunate enough to drive a BMW i8 or a Tesla Model S, your tax liability is about to increase. The same applies to more modest low emission cars, of course. This will be another factor in the decision as to whether to have a company car or to buy a car privately and, if you can’t decide, just go for Powerrrrrrrrr!
Please visit www.claritastax.co.uk to learn more about Claritas Tax Limited.Back to top
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