sailing a steady course - pwc uk · introduction when mr osborne stood to deliver his budget 2013...

Sailing a steady courseBudget 2013

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Budget 2013 Summary document

March 2013

In what are challenging economic times, the Chancellor needed to announce a confident, stable Budget; one based on sound, practical, economic decisions, rather than vote-winning, short-term, political solutions. So, has he delivered on this?

The Budget certainly had a more positive tone than we expected with a strong emphasis on supporting the UK open for business agenda.

Word cloudWhen the Chancellor sat down after delivering Budget 2013 the over-riding theme was that of a Budget aimed at helping to drive growth but with limited room for manoeuvre. But what else did his speech focus on? Our word cloud shows you the main themes in this year’s speech.

The Chancellor’s focus

Chancellor’s Budget March 20132

Introduction

When Mr Osborne stood to deliver his Budget 2013 speech he found himself in a far from enviable position. The deficit is still high, the economy is still sluggish, not to mention the additional woes of the ongoing eurozone crisis.

Against this challenging backdrop, the Chancellor needed to announce a confident, stable Budget; one based on sound, practical, economic decisions with no surprises. So, has he delivered on this?

A positive toneThe Budget certainly had a more positive tone than we expected with a strong emphasis on supporting the UK being open for business. The Chancellor gets marks for sticking to his plans, emphasising Britain as an attractive place to be based and do business.

The Chancellor talked about building the most competitive tax system in the world and of a desire to support the entrepreneurial spirit in the country. He backed this up by announcing that corporation tax would come down to 20% and giving more support toward research and development (R&D). The Chancellor also spoke of supply-side reform, something we feel could really benefit UK business, and made a start by simplifying the corporation tax rates.

Investing in UK infrastructure The announcement of infrastructure investment of £3bn a year from 2016 could provide some medium-term opportunities for businesses in the construction sector. While the employment allowance for the first £2,000 of a company’s National Insurance bill will benefit all businesses, particularly small and growing businesses wanting to take on staff.

Kevin Nicholson

Head of Tax

There was much in the Budget about tax avoidance but businesses knew this was coming and much of it had been pre-trailed.

Building business confidence So, taken as a whole, has the Chancellor done enough in this Budget to deliver the much-needed groundwork for a stable economic recovery and to build on business confidence? Overall, there were no major surprises but, given that businesses are looking for stability and certainty right now, that’s no bad thing.

Confidence is elusive, but today’s Budget has emphasised stability, certainty and making the UK internationally attractive for businesses.

3Chancellor’s Budget March 2013

What it means for business and individuals

Impact on individualsThe Chancellor confirmed that the personal allowance for people born after 5 April 1948 will be increased to £9,440 for 2013/14. He also announced that the rate will go up to £10,000 from 2014 – earlier than we thought.

As far as inheritance tax (IHT) goes we heard that the nil rate band has been confirmed, the tax free amount everyone can leave on their death, will be frozen at £325,000 until April 2018. There was an interesting announcement regarding loans and when they can be deducted when working out the value of someone’s estate. Currently, most loans can be taken off the value of the estate to arrive at the IHT value. From the date the Finance Bill receives Royal Assent, likely to be in July, this won’t be the case.

Very little on capital gains tax today and what there was related mainly for employees. We got confirmation that gains on shares acquired through the employee shareholder scheme, where shares worth between £2,000 and £50,000 which employees can get free of income tax and National Insurance contributions, will be exempt; the cost being loss of certain employment rights.

There were no further restrictions on pensions so the current annual allowance remains £50,000 and as we expected this will fall to £40,000 from April 2014. The lifetime allowance will reduce from £1.5m to £1.25m from the same date.

Jersey, Guernsey and the Isle of Man have all agreed to exchange information with HM Revenue & Customs (HMRC) to try and identify undeclared assets. All three islands have also announced a disclosure facility to encourage people who think they may have underpaid tax to put their affairs in order.

Finally, some good news for beer drinkers. No increase in duty and a penny off a pint. My learned colleagues who know about these things, tell me that works out as buy 300, get one free.

The overall impact on businessGeorge Osborne alluded to an ‘aspiration nation’ but Budget 2013 had a strong flavour of him doing his best in a difficult situation.

There was a new remit for the Bank of England, now focusing on growth with a more flexible target around inflation. There was also a suggestion of unconventional policy instruments to support this.

The Chancellor was keen to emphasise levels of exports to growth markets such as BRICs. These are up two-thirds, echoing what we are seeing with our clients who are looking to these markets to stimulate growth. But these are coming from a relatively low base and there were no specific new measures to encourage activity here.

In our recent CEO Survey, 80% of UK CEO’s said Government priority should be creating and fostering a skilled workforce and, though there have been no specific moves here, there have been steps to help early stage companies gain access to finance – including measures around the seed enterprise investment schemes and extended capital gains tax holiday but of a relatively small scale. The £2,000 National Insurance employment allowance will be particularly welcomed by smaller businesses. Overall, a fiscally responsible and coherent Budget from the Chancellor, given his limited options.

Michael Magee

Advisory Partner

Leonie Kerswill

Private Client Tax Partner

4 Chancellor’s Budget March 2013

Impact on large corporationsFrom the outset we really got the Plan A tone, with little room for manoeuvre.

He cited the open for business agenda, trying to boost confidence and the mood music around it. I think he delivered on some of that in terms of a further corporate tax rate cut down to 20%. He talked about stability in the system and the introduction of the general anti-abuse rule on tax, which we all expected, but he has also positioned the wider multi-national tax system debate.

With regard to regional business in the UK, the competitive pot (local growth funds) from the Heseltine review looks like it will be taken forward, but more detail in June and probably no real introduction until 2015.

In terms of the giveaways, there were quite a few things on employment, mostly targeted at the small and medium-size enterprises. We also had a welcome re-affirmation of support for the creative sector reliefs and a further boost to R&D.

The bank levy went up again on the basis that he didn’t want banks to benefit from the corporate tax rate deduction, which many of them don’t, given the losses they’ve sustained. Since the bank levy was introduced we’ve had a near doubling of its rate, so I think that sector will feel a little bruised.

On energy, there were some welcome announcements around shale gas and carbon capture, and also a home building boost announced through measures to help people buy more houses.

You can see how he is trying to build confidence with little room for manoeuvre. He may not be popping the champagne corks this evening, but if George Osborne is sitting down for a well-deserved beer at the end of a hard day, at least it will cost him a little less now he has frozen beer duty.

Impact on small to medium-sized businessesIn his Budget speech, the Chancellor paid tribute to the energy and enterprise of British businesses and reiterated a desire to support and have confidence in the entrepreneurial spirit of the country. A call to arms, if you like, for the support of business endeavour and sustainable job creation.

There was recognition of the need to compete in a global environment in order to prosper and grow – either as a business or as a Government competing for international investment.

While there was a further reduction of the main corporation tax rate to 20% announced from April 2015 there’s no longer a lower rate for small businesses. Some may be disappointed at this but pleased at the introduction of the new employment allowance – an exemption of the first £2,000 of National Insurance contribution cost for any business or charity from April 2014. This is intended to equate to one new worker paid £22,400, or four employees on the minimum wage.

On access to finance, the seed enterprise investment scheme will have its initial capital gains tax holiday, intended to kickstart the incentive for investing in early stage companies, extended for a period.

The introduction of the new employee shareholder status, under which employees can be given free shares in exchange for giving up some of their employment rights, has been deferred until 1 September 2013. But it’s been confirmed that as well as a £50,000 exemption on capital gains, those employees will also be entitled to income tax and National Insurance contributions relief on the first £2,000 of share value received.

There were other announcements around increasing the exemption from income tax for loans for things like season tickets from £5,000 to £10,000 and a commitment to infrastructure investment that could create some real medium-term opportunities for businesses in the construction sector.

But perhaps, to my mind, the most important re-statement of policy intent in terms of a buoyant thriving environment for all businesses was the Chancellors reiterated commitment to ‘building the most competitive business tax system in the world.’

Barry Murphy

Tax Partner

Mary Monfries

Tax Partner


Growth

The Chancellor is sticking to his guns and emphasising Britain is open for business by cutting the corporation tax rate, and reiterating a commitment to ‘building the most competitive business tax system in the world’. Having set low expectations given the limited room for manoeuvre, Budget 2013 was, at least in tone, intended to help build confidence and support what the Chancellor described as the entrepreneurial spirit of the country. It may be particularly house builders, breweries and small businesses who feel the impact of that through specific measures.

The new employment allowances are likely to have the biggest impact on the ground. A refund on the first £2,000 of employers’ National Insurance payments is of real benefit to small enterprises. Raising the zero tax threshold of the personal allowance to £10,000, the extension of tax relief on employer loans for season tickets, fuel duty freezes and moves to support child care could potentially work well together, increasing labour mobility and widening the talent pool for

businesses. Equity loans of 20% to help people buy houses and the £130bn of guarantees promised for deposits for those wishing to buy could also help, though the risks of personal over-leverage should not be discounted should interest rates rise.

Tax incentives for more home grown R&D activity will bring jobs and the extra infrastructure spend of £3bn a year from 2015 should go some way to resuscitating current poor housing completion rates.

The Chancellor has announced a range of measures to drive investment in small businesses, including the abolition of stamp duty on shares traded on AIM and other UK stock exchanges used by smaller companies. There has also been an extension to the capital gains relief for the seed enterprise investment scheme. A welcome abolition of stamp duty on shares traded on growth markets from April 2014 could prove a boost for the

liquidity in the shares of businesses vying to become the blue chip plcs of tomorrow.

The scrapping of the beer duty escalator may go some way to reversing the 17% decline in beer consumption that has occurred since the escalator was first introduced in 2008 and this in turn may lead to further jobs in the sector. The decision to retain the escalator on other alcoholic drinks, including spirits such as whisky, is likely to be a dampener on any excessive celebrations.


John Hawksworth

Chief Economist

“The innovative extension of Help to Buy to everyone buying a new home will ease a blockage where families want to trade up but have not been able to afford to. With equity in their property, low interest rates and a loan of up to 20%, moving will start to look attractive again. ”Rosalind Rowe, Real Estate Tax Partner

Global economic shifts“The shift in the global economic centre of gravity is clear; but there are still major challenges for the emerging economies to sustain their recent strong growth. At the same time, there are huge opportunities for Western companies in the emerging markets – but also great competitive challenges from fast growing emerging market companies.

UK businesses are relatively strong in the kind of tradable services that may grow strongly in future decades due to rising demand from the BRICs and other emerging economies – such as creative industries, business and financial services, university education and healthcare/pharmaceuticals. So we should see the rise of these emerging markets as an opportunity to be grasped for UK business rather than a threat.”


Attractiveness

This is the fifth time the Chancellor has cut the rate and 20% seems a likely landing point for this parliament. The cut sends a clear signal to business and investors in the UK that the Government is committed to delivering a competitive tax system.

Manufacturers and high technology industries are set to benefit from 10% funding by Government of their R&D activities which is especially good news for those in high end technology sectors such as automotive, life sciences and aerospace. This credit, coming into place on 1 April 2013, will provide extra funding for businesses which may now be able to pursue projects that would otherwise have been abandoned. The move will undoubtedly help make R&D centres become more globally competitive and

Today’s reduction in the headline corporate tax rate to just 20% from 2015 makes the UK corporation tax rate the lowest in the G8 and delivers one single headline rate.


attract vital skills. Additionally, smaller businesses (less than 500 employees) will for the first time get a payable credit on R&D for customers.

The bank levy rate, however, has now risen by over 80% since it was introduced in 2011. This is a major cost for banks operating in the UK and is not a good advert for the City of London’s competitiveness as a global financial centre. Also, whilst the extra £3bn a year earmarked for infrastructure (paid for from Government department savings) is welcome, this amount of funding will be insufficient to cover the entire infrastructure backlog. The reality is that upgrading Britain in a time of austerity will take more than this.

PwC 16th Annual Global CEO Survey – Country Summary: the UK 3

Reshaping for a changing worldAcross the globe, profound structural changes are creating a new world order. With the European economy largely flat and the US remaining fragile, opportunities to expand are concentrated in growth markets. UK CEOs are actively reshaping their businesses for this, with three-quarters anticipating changes in their company’s organisational structure over the coming year.

Some 83% plan cost-reduction initiatives in 2013, well above the global average. Strategic deals are also on the agenda, with over half of UK respondents having entered a new strategic alliance or joint venture in the past year, and 60%–the highest proportion in Western Europe–planning to do the same in the coming year.

While 30% are contemplating cross-border M&A, a much higher proportion are planning a domestic deal – 43% of UK CEOs, compared to a Western European average of just over a quarter and just 11% in Germany. This suggests that UK businesses see more opportunity than their European counterparts to generate growth in their mature–and currently subdued–home market.

However, it may also be a signal that UK CEOs are more concerned about the risks associated with overseas acquisitions or are struggling to find acceptable international targets. Either way, the focus on the low growth home market is perplexing. This overly domestic focus is borne out by the fact that only a third of UK CEOs say China’s GDP growth rate falling below 7.5% would be bad news for their business. This is a far lower proportion than in Germany, which has more exposure to China’s economic fortunes through higher exports and more China-based operations.1

Also, at a time when the UK Government is encouraging businesses to invest in innovation to drive high-value exports, UK CEOs are half as likely to name R&D as a top three priority over the next 12 months as Western European CEOs (17% versus 41%). And only half of UK CEOs say they intend to increase R&D capacity over the coming year, compared to two-thirds of German and three-quarters of French CEOs. Instead, UK CEOs say they’re keener to invest in growing their customer base and improving operational effectiveness.

The challenge is to understand how and where UK businesses will generate growth in the future. Our experience shows that many recognise the need to be present in fast-growth economies, but end up targeting the UK, US or Western Europe because these markets are more familiar and promise returns on investment within a shorter timeframe. We believe sustainable, longer-term growth requires a longer-term view. Additionally, with many

1 Source: PwC UK Economic Outlook November 2012, page 26

Figure 1: Priorities for UK CEOs over the next 12 months

Q: What are your top 3 investment priorities in the next 12 months?

Base: All UK CEOs (63) Source: PwC 16th Annual Global CEO Survey

Lower R&D may point to a shorter-term view

“For some time, there have been signs that business leaders have become increasingly short-term in their outlook. Risk aversion and scepticism about the benefits of R&D have institutionalised a cycle of lowered expectations that looks more to quarterly performance rather than a longer-term view of where new growth might come from. These figures suggest that short-termism is now entrenched in the minds of UK business leaders.”Norman Lewis, Director, PwC

New M&A /joint ventures /

strategic alliances

Fillingtalent gaps

Enhancingcustomer service

Growing yourcustomer base

Improvingoperational

effectiveness

CEOs often in the position for shorter terms, the role company boards and strategy teams play in supporting longer-term change is a vital one.


Other measures

Real estateAs expected, a new annual tax is being introduced for high value (£2m+) residential property held by companies and used for owner occupation rather than business purposes. The tax is being accompanied by an extension to the capital gains tax regime, so that owner occupied properties sold for a gain by foreign companies will be subject to capital gains tax at 28%. For UK companies any gain on the sale of an owner occupied property will also now be subject to capital gains tax at 28%.

PensionsThe Chancellor confirmed that the introduction of the single state pension has been brought forward by one year to start in April 2016. Bringing its introduction forward a year will benefit more people, particularly women who are affected by the previous changes in state pension age.

The reforms mean the end of contracting-out, meaning employers who sponsor these types of defined benefit schemes, and employees in these arrangements, will face an increase in National Insurance costs. Private sector companies can mitigate this cost by increasing employee contributions and/or reducing the generosity of their scheme. But employees in these schemes may still see a reduction in their take home pay of £300 a year on average due to their increased National Insurance contributions (NIC).

Limited liability partnershipsThe Government will consult on measures to tackle limited liability partnerships (LLPs) if they are being used to disguise employment relationships, or where profits are being artificially allocated to achieve a tax advantage. No further details of the

remit of the consultation have yet been published, but organisations that operate or are considering operating through LLPs should keep the position under review and consider participating directly or via their advisers in the consultation to ensure ordinary commercial arrangements are not adversely affected.

Statutory corporation tax relief for employee sharesA change has been proposed to the legislation dealing with statutory corporation tax deductions for employee share acquisitions. The Government intends to clarify that, where the conditions for statutory relief are met, no deductions are available under any other provisions of the tax legislation. This is similar to existing rules but will extend their scope to prevent deductions being claimed where no shares are acquired, for example because options lapse without being exercised. The change applies with effect from 20 March 2013 but will apply to existing options which have not been exercised by that date. This will result in reduced tax relief for affected companies.

Employee shareholder status The new relief proposed for employees giving up employment rights in return for shares (employee shareholder status) is being made more attractive from an income tax and NIC perspective. No income tax or NIC charge will arise on the first £2,000 of these shares acquired. It was also confirmed that up to £50,000 of shares (valued at the date of acquisition) will be exempt from CGT on disposal. Employee shareholder status arrangements will now be available from 1 September 2013.

Scheme fundingThe Government announced a statutory objective for the Pensions Regulator to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer. This will be put into force as soon as possible in 2013. We hope that the wording will be sufficiently assertive to give this objective substance in ensuring that funding plans are affordable. The proposal for asset and liability smoothing has been abandoned.


To encourage development of the UK shale gas industry, the Government announced new measures to support shale gas exploration. The details will be a very welcome boost to the shale gas industry and will encourage new investment in an area that could provide

significant jobs and growth for the UK economy.

Shale oil: the next energy revolution – a PwC global report

Our report shows that the global impact of shale oil could revolutionise the world’s energy markets over the next couple of decades, resulting in significantly lower oil prices than would otherwise be the case and a consequent increase of around £500-£800 in GDP per person in the UK (at today’s GDP values).

Download the report at: http://www.pwc.co.uk/oil-gas/publications/shale-oil-the-next-energy-revolution.jhtml

A boost to the shale gas industry

Shale oil: the next energy revolution

The long term impact of shale oil on the global energy sector and the economy

February 2013

www.pwc.co.uk

Adam Lyons

Direct: +44 (0)20 7804 3175

[email protected]


http://www.pwc.co.uk/oil-gas/publications/shale-oil-the-next-energy-revolution.jhtml

http://www.pwc.co.uk/oil-gas/publications/shale-oil-the-next-energy-revolution.jhtml

Contacts

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Head of Tax

Direct: +44 (0)1509 604232

[email protected]

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Tax Partner

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[email protected]

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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The Design Group 21401 (03/13)

PwC Budget tweets

Alex Henderson @AHendersonTax I think that’s a tick for growth and confidence, but the Chancellor was never going to get a gold star this time round #Budget2013

Andrew Sentance @asentance Inflation target remains 2pc, but other changes to MPC remit re transparency and unconventional monetary policy. Devil will be in the detail

Barry Murphy @BarryMurphyPwC Good to hear reaffirmation of Britain open for business #Budget2013

Carol Dempsey @CarolPwCReward Employment allowance introduced – one third of all businesses will pay no “jobs tax”. Will help SMEs #Budget2013

www.pwc.co.uk/budget

sailing a steady course - pwc uk · introduction when mr osborne stood to deliver his budget 2013...

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