Autumn Statement 2012Lexis®PSL Tax Analysis

A summary of the key business tax announcements made in the Chancellor’s Autumn Statement on 5th December 2012

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Contents

1 Autumn statement 2012 – summary of announcements

1 Business taxes

2 Real estate taxes

2 Personal taxes

4 Employment taxes

4 Tax avoidance and evasion

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Autumn statement 2012 – summary of announcementsThis is a summary of key announcements made in the Chancellor’s Autumn Statement on 5 December 2012.

The Chancellor of the Exchequer, George Osborne, delivered his Autumn Statement on Wednesday 5 December 2012 against some of the most challenging economic data in a number of decades and in the wake of some highly publicised tax stories and debates.

The backdrop to the tax specific measures announced by the Chancellor, outlined and summarised in this note, is characterised by:

• the austerity measures in the UK (originally introduced by the coalition government when it came to power in 2010), and

• a global economic slow-down

The difficult economic climate has inevitably resulted in the spotlight being increasingly turned on the UK’s tax regime. The controversies and public debates over the tax affairs of Starbucks, Google and Amazon have highlighted the strength, depth and divisions in opinions on political, economic and tax policy.

Despite this background and recognising that ‘much remains to be done’, the Chancellor remains confident that the UK’s ‘economy is healing’ and that ‘progress is being made’ along what is ‘a hard road’.

Business taxes

Corporation tax rates

2012-13 Tax Year 2013-14 Tax Year 2014-15 Tax Year

Corporation tax rate 24% 23% 21%

The information in this table comes from para 2.72 of the Autumn Statement 2012.

Capital allowancesThe annual investment allowance applying to capital allowances for plant and machinery will increase from £25,000 to £250,000. This follows a decrease in the same limit, from £100,000 to £25,000, that only took effect from April this year. The new £250,000 limit will apply to qualifying investments from 1 January 2013, and will last for two years (para 2.74 of the Autumn Statement 2012).

Bank levyThe full rate of the bank levy (for short-term liabilities) is to increase from 0.088% to 0.130% from 1 January 2013 (para 2.79 of the Autumn Statement 2012). Before the Autumn Statement announcement, the rate had been expected to increase on 1 January 2013, but only to 0.105%. According to the Chancellor’s speech to the House of Commons, the additional increase is to ensure that banks do not benefit from the future reduction in the corporation tax rate.

Reliefs for the creative sectorBudget 2012 announced that the government will introduce corporation tax relief for the video games, animation and high-end television industries. Following consultation over the summer, the government intends to introduce the relief from April 2013. Qualifying companies will be able to choose between an additional 100% deduction, or a 25% payable tax credit for surrendered losses. The measure is subject to EU state aid approval (para 2.73 of the Autumn Statement 2012).

Cash basis for small unincorporated businessesFollowing consultation earlier this year, the government has confirmed that it intends to introduce a simpler, cash basis for small unincorporated businesses to calculate their tax. The scheme will be available from April 2013 for businesses with receipts of up to £77,000 per year, until their receipts reach £154,000 per year (para 2.94 of the Autumn Statement 2012).

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Real estate taxes

SDLTHaving already introduced (from 21 March 2012) a 15% rate of SDLT on the acquisition of residential property for more than £2m by any purchaser other than an individual, the Chancellor stated that legislation would be published in the draft Finance Bill 2013 clauses next week ‘to stop the richest avoiding stamp duty’. This is, presumably, a reference to further measures to curtail the practice of ‘enveloping’ high value residential properties in companies (or other non-natural entities) to avoid SDLT on subsequent sales (which the annual charge on property over £2m had been intended to target).

Small business rate reliefThe government proposes to extend the temporary doubling of small business rate relief for a further 12 months from 1 April 2013 (para 2.84 of the Autumn Statement 2012).

Empty property ratesThe government will consult on a proposed exemption from empty property rates for newly built commercial property completed between 1 October 2013 and 30 September 2016 for the first 18 months (subject to state aid limits) (para 2.85 of the Autumn Statement 2012).

Personal taxes

Income tax rates and thresholds

Income tax rates and personal allowance

2012-13 Tax Year 2013-14 Tax Year

Tax rate Income bands Tax rate Income bands

Personal allowance for those whose income does not exceed £100,000*

0% £0–£8,105 0% £0–£9,440

Basic rate** 20% Up to £34,370 20% Up to £32,010

Higher rate** 40% £34,371–£150,000 40% £32,011–£150,000

Additional rate** 50% Over £150,000 45% Over £150,000

* This table only includes the personal allowance applicable to those aged 65 and under (for the 2012-13 tax year) and those born after 6 April 1948 (for the 2013-14 tax year).

** These figures ignore the effect of the personal allowance. The combined effect of:

• the amount of income that is subject to the basic rate of income tax being reduced to £32,010 (from £34,370), and

• the higher personal allowance

is that the threshold at which the higher rate of tax will start to apply will be £41,451 (down from £42,521) (para 2.48 of the Autumn Statement 2012).

The information in this table comes from:

• paras 2.47 and 2.50 of the Autumn Statement 2012, and

• the document published on HM Treasury’s website containing tables confirming tax and tax credit rates and thresholds for 2013–14

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The threshold above which income tax will be charged at the higher rate will increase by 1% in 2014-15 and 2015-16.

Capital gains tax annual exempt amountIt has not been announced what the annual exempt amount for capital gains tax will be for the 2013-14 tax year, so it is likely to be increased in line with the consumer price index (CPI). The Autumn Statement, however, announced that it will increase by 1% for 2014-15 and 2015-16, reaching £11,100 by 2015-16 (para 2.48 of the Autumn Statement 2012).

Inheritance tax nil-rate bandThe nil-rate band for inheritance tax will be increased to £329,000 from 2015-16 (para 2.49 of the Autumn Statement 2012).

Cap on reliefs against income taxThe government has confirmed, following its announcement at Budget 2012 and consultation in July 2012, that it will implement a cap on previously unlimited reliefs against income tax (para 2.51 of the Autumn Statement 2012).

The cap will be the higher of £50,000 and 25% of income (expected to have effect from April 2013). The government’s response to the consultation has not yet been published. Full details are expected with the draft legislation on 11 December 2012.

Integration of income tax and NICsNo changes were announced. The government is waiting for further changes to the operation of the tax system before consulting on the operational integration of income tax and NICs (para 2.52 of the Autumn Statement 2012).

If such integration happens it is likely to have an impact on employers (as well as individuals) because they will have to operate the new integrated collection and payment mechanism through their PAYE system.

Pensions taxThe limits for tax relief on contributions into pensions will be reduced from 2014-15 as follows:

• lifetime allowance to £1.25m (from £1.5m), and

• annual allowance to £40,000 (from £50,000) (para 2.57 of the Autumn Statement 2012)

Further details of the proposals have been contained in an Overview note, including proposals for:

• ‘Fixed Protection 2014’ which will allow pension savers to apply to fix their lifetime allowance at the higher limit of £1.5m in return for not making any further contributions (or accruing further benefits under a defined benefit scheme). Applications must be made before 5 April 2014 but cannot be made until the legislation comes into force (summer 2013). It is proposed that this will operate in the same way as the Fixed Protection 2012 regime

• a potential personalised protection, which will provide the same fixed cap but allow people to continue to make contributions into their pension scheme without losing the protection, but which will only be available to those with pension pots over £1.25m on 5 April 2014

The drawdown limit for pensioners with drawdown options on their pensions will increase to 120% of the value of an equivalent annuity (from 100%) to enable enhanced income (para 2.58 of the Autumn Statement 2012).

Extension of eligible investments in ISAsThe government will consult on expanding the list of stocks and shares that can be invested in through an ISA to include shares on smaller markets, eg AIM. Any such extension will increase the marketability to investors of companies listed on such exchanges (para 2.59 of the Autumn Statement 2012).

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Employment taxes

Employee shareholdersUnder recent proposals, employees may receive between £2,000 to £50,000 worth of shares in the company they work for in exchange for giving up certain statutory employment rights (eg rights to compensation for unfair dismissal and redundancy and the right to request flexible working). Employee shareholder status may become a common way for employees, particularly of private equity financed companies, to demonstrate their commitment to the business.

The government confirmed in the Autumn Statement 2012 that it will legislate to ensure that such employee shareholders are exempt from capital gains tax from April 2013 on any gains when they eventually dispose of such shares worth up to £50,000 on acquisition (para 2.55 of the Autumn Statement 2012).

The government is considering options to reduce income tax and NICs liabilities arising when employee shareholders receive the shares (para 2.56 of the Autumn Statement 2012) since otherwise the award of shares may be subject to income tax and NICs in the same way as a bonus or ‘golden hello’. The government suggests deeming employee shareholders to have paid £2,000 for shares they receive so that they effectively receive the first £2,000 of shares free from income tax and NICs. Alternatively, the employee might be deemed to have provided value for the shares by giving up employment rights (thereby also reducing any income tax or NICs upon receipt).

If the shares are subject to restrictions (such as compulsory transfer provisions for good or bad leavers), the employer and employee may need to enter into restricted securities elections on acquisition to prevent later income tax and NICs charges.

Employee share schemes simplificationFollowing this year’s consultation (and recommendations by the Office of Tax Simplification (OTS)), the government proposes to implement a package of simplifications for employee share schemes (para 2.93 of the Autumn Statement 2012). As most of these changes will take effect in 2013, draft Finance Bill 2013 clauses may be released on 11 December 2012.

OTS review of employee benefits, expenses and termination paymentsThe government will ask the OTS to review ways to simplify the tax treatment of employee benefits, expenses and termination payments (para 2.96 of the Autumn Statement 2012). Further details from OTS are expected shortly.

Tax avoidance and evasionThe Chancellor’s Autumn Statement contains a number of announcements on tax avoidance and evasion which aim to show that the government:

• is determined to crack down on illegal evasion and abusive avoidance, and

• will take sufficiently robust and positive steps to satisfy those that have been calling for action in this area (paras 2.97– 2.112 of the Autumn Statement 2012)

The announcements represent a diverse mixture of measures which are either:

• already in force (eg the Rubik agreement between the UK and Switzerland)

• agreed and about to be enacted (eg the intergovernmental agreement (IGA) between the UK and the US in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA) and the introduction of the UK’s first ever general anti-abuse rule (GAAR))

• designed to close, with immediate effect, specific tax avoidance schemes (presumably disclosed to HMRC under the disclosure of tax avoidance schemes (DOTAS) regime), or

• reflections of HMRC’s policy and strategy in tackling avoidance and evasion going forward

Some of the key developments are:

International agreementsThe Autumn Statement refers to both:

• the already enacted UK-Switzerland agreement which the government hopes will result in UK tax being levied on monies hidden by individuals in Switzerland (para 2.97 of the Autumn Statement 2012), and

• the imminent enactment, following the conclusion of the current consultation, of the IGA between the UK and the US in

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relation to implementing FATCA which should improve the automatic exchange of tax information between the Internal Revenue Service and HMRC—HMRC has stated that it will also actively look to conclude similar agreements with other jurisdictions (para 2.98 of the Autumn Statement 2012)

International policy and strategyPerhaps recognising the supra-jurisdictional nature of the economy and tax, the Autumn Statement included a number of interesting announcements that point to the development of an approach to build on the steps already taken towards cross-border cooperation in tackling evasion and aggressive avoidance.

Precise details are awaited but the government intends to:

• develop an ‘offshore evasion strategy’ during the first half of 2013 (paras 2.99–2.100 of the Autumn Statement 2012)—this will, in turn, include:

− establishing a ‘centre of excellence’ for tackling offshore evasion

− making better use of data collection and analysis to help identify tax evaders, and

− a review of HMRC’s cross-border legal powers

• increase HMRC’s specialist resources on transfer pricing (para 2.106 of the Autumn Statement 2012), and

• encourage the development of rules designed to prevent the artificial transfers of profits to tax havens by the Organisation for Economic Co-operation and Development (OECD) by making it a priority of the UK’s Presidency of the G8 during 2013 (Autumn Statement speech transcript)

Domestic tax loopholes closedFive specific measures to close down tax loopholes have been announced.

All five cases take immediate effect. The draft clauses will be included as part of the draft Finance Bill (due to be published on 11 December 2012).

Bank Levy—double taxation relief

Legislation is to be introduced that will:

• ensure that a company that makes a claim (on or after 5 December 2012) for double taxation relief for a foreign bank levy against the charge to the UK Bank Levy will not be entitled to a deduction from income tax or corporation tax in respect of that foreign bank levy, and

• with effect from 1 January 2013, ensure that foreign bank levies are not allowed as deductions from income tax or corporation tax

Tax Mismatch Schemes and the use of partnerships generally

Targeted anti-avoidance rules are to be introduced to close so-called tax-mismatch schemes which reduce a company’s tax liability by exploiting an asymmetric tax treatment of loans or derivatives.

Such schemes often involve companies becoming members of a partnership. As a result, and due to the apparently repeated use of partnerships (and other collective investment structures) in tax schemes, the government has announced that it will focus on the taxation of such collective structures as part of its review of high risk areas of the tax code.

The government is also looking at long-standing avoidance schemes involving partnership losses—this is thought to relate to film partnership schemes (para 2.107 of the Autumn Statement 2012).

Property total return swaps

Tax avoidance schemes that either use:

• property return swaps (PRS) derivatives to convert capital losses within a group into income losses, or

• the tax rules on PRSs to generate capital gains which are not in proportion to those actually arising from the swap contract are being closed.

Manufactured payments

Legislation will be introduced to block certain tax avoidance schemes that use stock lending arrangements designed to ensure the lending company receives non-taxable payments. In such cases, the new rules will ensure that the lender is taxable on any value it receives, in whatever form.

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Payments of non-trade patent royalties

The government proposes to include legislation in Finance Bill 2013 to abolish income tax relief for payments of non-deductible patent royalties with effect for payments made on or after 5 December 2012. The income tax relief in question only applies to payments of patent royalties by individuals (and other persons outside of the intangible fixed assets regime) that are not deducted in calculating income tax liability from any source (eg a trade). The proposed abolition therefore has no impact on payments of patent royalties deductible in computing taxable trading profits. This announcement is intended to counter an avoidance scheme exploiting this relief (para 2.107 of the Autumn Statement 2012).

General anti-abuse rule (GAAR)The Autumn Statement confirmed that:

• the GAAR (anti-avoidance legislation aimed at counteracting abusive tax avoidance) will come into force in 2013, and

• draft legislation and guidance is due to be published as part of the draft Finance Bill to be published on 11 December 2012 (para 1.178 of the Autumn Statement)

Disclosure of tax avoidance schemesThe government confirmed, shortly before the Autumn Statement, its intention to strengthen the rules on the Disclosure of Tax Avoidance Schemes (DOTAS). The changes expected to be included in the draft Finance Bill 2013 to be published on 11 December 2013, will increase the amount of information that must be disclosed to HMRC about avoidance schemes and the people who use them, as well as widening the range of schemes to be disclosed.

This statement follows from a consultation document, ‘Lifting the Lid on Tax Avoidance Schemes’, published on 23 July 2012. That consultation discussed a number of possible options, including increasing public information about avoidance schemes, and the ‘naming and shaming’ of promoters.

Domestic policy and strategyIn a similar way, the Autumn Statement seems to indicate that HMRC will revisit its current approach to identifying and dealing with tax evasion and avoidance. Rather than indicating a complete overhaul, however, it represents a reaffirmation of the risk analysis and categorisation approach towards taxpayers adopted over the past few years (including, for example, the introduction of the DOTAS and Senior Accounting Officer (SAO) regimes).

The developments here reflect, and build on, the joint announcement made by the Chancellor and the Chief Secretary to the Treasury on 3 December 2012 that confirmed an injection of £77m of new funding for HMRC—HMRC’s budget is, unlike that of other government departments, to be protected.

Details of most of the changes set out here are expected as part of the draft Finance Bill due to be published on 11 December 2012.

Other specific announcements in the Autumn Statement (and ‘Closing in on tax evasion’ document) that set out HMRC’s approach to evasion and avoidance included:

• increasing the number of HMRC tax inspectors looking at avoidance and evasion activities by around 2,500

• HMRC’s bulk data-gathering powers are to be expanded (para 2.101 of the Autumn Statement)

• using the data HMRC obtain to launch 20 new taskforces in each of 2013, 2014 and 2015 targeted at high-risk groups and/or sectors

• HMRC’s risk assessment capability is to be enhanced in relation to the large business sector and large multinational companies (MNCs)—the most obvious response in the Autumn Statement to the recent public debate over the tax affairs of MNCs such as Starbucks, Amazon, eBay and Google

• the expansion and strengthening of the UK’s existing intermediaries’ legislation (IR35) (para 2.103 of the Autumn Statement 2012)

• the expansion of HMRC’s Affluent Unit to extend its remit to include taxpayers with a net worth in excess of £1m (para 2.108 of the Autumn Statement 2012), and

• an increase in HMRC’s resources to tackle offshore evasion and abusive avoidance of inheritance tax (IHT) through the using offshore trusts, bank accounts and other entities (para 2.109 of the Autumn Statement 2012)

The government hopes that the combined effect of ramping up its anti-evasion and anti-avoidance activities will bring in an additional £2bn of tax per year that would otherwise not have been paid.

Last updated on 5 December 2012