Dear Reader

Budget 2016 e-newsletter

• A long awaited revision of business rates.

• The introduction of a flexible lifetime ISA.

• A reduction in capital gains tax rates, except for residential property which does not qualify as your principal private residence.

• Corporation tax rate of 17% in 2020.

• An increase in the personal allowance and an increase in the level of income at which higher rate tax is paid.

• Bringing the calculation of stamp duty land tax on commercial property in line with the recent change to residential property, with immediate effect.

• A sugar tax – A levy to be calculated on levels of sugar in sweetened drinks produced in the UK or imported, based on two bands.

All of the above is dealt with in more detail below.

UK growth forecasts have been revised down markedly for the next five years as expected:

• 2016 – 2% down from 2.4% in November's Autumn Statement;

• 2017 – 2.2% down from 2.4%;

• 2018 – 2.1% down from 2.5%.

However, despite the downturn, the Chancellor still views that the UK will grow faster than any other major Western economy, creating a million jobs by 2020.

There are to be further cuts to public spending of £3.5bn by 2020, with spending as a share of GDP to fall to 36.9%.  The Chancellor’s debt target will be missed and has been revised, however he did point out that debt would be £9bn lower in 2015-16 in cash terms.  In addition, annual borrowing in 2015-6, forecast to be £72.2bn, £1.3bn lower than forecast in November.

The deficit as a share of GDP is projected to fall to 2.9% in 2016-17, 1.9% in 2017-18 and 1% in 2018-19.

The Chancellor’s long term solution was broken down into five areas:

1. Reforms to Business Taxation – Blocking some of the measures used by large multi-national corporations which have been highlighted in the press (the Google and Facebook recent news stories) and introducing measures to create a “level playing field” and attract business into the UK.  These include lowering the rate of corporation tax in 2020 to 17% (previous announcement 18%), major changes to business rates, VAT on offshore internet companies selling in the UK.  The business tax changes are dealt with in more detail below.

2. Devolution – Passing more decision making and power down to regional and local Government.

3. Infrastructure – Spending on large infrastructure projects, including more flood defences which is to be funded by a 0.5% increase in insurance premium tax.  In particular the Chancellor highlighted rail and road project in the north as part of the great northern power house project.

4. Educational Reform for Children – Making more funding available for free schools with a plan for all schools in England to become academies by 2022. Improved health care and sport for children.  The latter is to be funded by a new sugar tax on soft drinks, to be introduced in two years, to encourage manufactures to move towards less sugar in their products.  The funds from the tax to be given to schools to spend on sporting activities. 

5. Reward Individuals who work & save – To include, an increase in the personal allowance, increase in the higher rate threshold and an increase in the annual ISA allowance.  The introduction of the Lifetime ISA being a good announcement for him to avoid the pension reform debate, giving individuals under the age of 40 an opportunity to increase their long term saving strategy with an incentive of a 25% Government match for every £4 saved, to a maximum of £1,000 per year.

With uncertainty casting a deep shadow over this Budget, a budget deficit that appears to be almost impossible to bring under control and a pressing need to keep the electorate onside in advance of 23 June Euro Referendum, this was very much a ‘safety first’ Budget. Major changes were kept to a minimum but, like all good Chancellors, he still managed to pull some rabbits out of the hat.

A summary of the more detailed tax announcements below.

Income Tax

• The threshold at which an individual pays 40% income tax will rise from £42,385 to £45,000 in April 2017;  

• Tax-free personal allowance, the point at which an individual pays income tax, to rise to £11,500 in April 2017;

• Annual Individual Savings Allowance (ISA) limit to rise from £15,240 to £20,000;

• A New "lifetime" ISA for the under-40s, with government putting in £1 for every £4 saved.  Individuals who save a maximum of £4,000 towards a home deposit or retirement will get a £1,000 top-up from the state every year until they turn 50. It will be possible to draw funds as and when required.  Note there will be an option to roll in a Help to Buy ISA, if the individual has already set one up;

• Employees on in-work benefits who save £50 a month to receive a saving bonus of 50% after two years - worth up to £600;

• Pensions – Measures announced to deal with some specific areas of pension legislation, in particular those with a life expectancy of less than 12 months and members of registered money purchase schemes where the value does not exceed £30,000.

Business & Corporation Tax

• The headline rate of corporation tax - currently 20% - to fall to 17% by 2020 (previously 18% had been announced);

• Annual threshold for small business tax relief for business rates to be raised from £6,000 to a maximum of £15,000 and the higher rate from £18,000 to £51,000, exempting 600,000 business from business rates;

• Use of "personal service companies" by public sector employees to reduce tax liabilities are to end from April 2017.  The public sector bodies (NHS, Local Government etc.) will have the responsibility to ensure that the worker is paying the right tax, as opposed to HMRC relying on the commonly referred to “IR35 regulations”, which have been found to be difficult to operate.  Interestingly, at the moment the measure only applies to public sector;

• Stamp duty land tax (SDLT) for commercial property has been updated, effective from midnight tonight, to bring it in line with the basis on which residential stamp duty is calculated (but with different bands). A 0% rate will apply to purchases up to £150,000, 2% on the next £100,000 and a 5% top rate above £250,000. There is a new 2% rate for high-value leases with a net present value above £5m.  As with residential property, SDLT will be payable at each rate on the portion of the purchase price which falls within each band, i.e. it is graduated rather than fixed;

• To prevent large multi-nationals transferring taxable profits out of the UK, a number of anti-avoidance measures are to be introduced to tax profits in the UK.  As will have been seen in the press with the news items around Starbucks, Google etc., these companies lower their profits subject to UK tax either via:

  • the payment of interest on overseas debt, the amount of the interest payment which can be deducted for tax will now be restricted,

  • payments for offshore royalties, a UK withholding tax will now be applied to the payment,

  • place of business or permanent establishment being outside the UK.

• The rate of tax charged on loans to shareholders from their companies is to be increased from 25% to 32.5% to fall in line with the increase in dividend tax rates from 6th April.  This is not actually a tax, but a deposit HMRC retain, in case the loan is never repaid;

• Measures will be introduced to block offshore property trading structures which have been used to minimise or prevent the profits on the development being taxed in the UK;

• Class 2 NIC payable by self-employed individuals is to be abolished from 2018;

• Enhanced capital allowances for businesses operating in enterprise zones which can qualify for 100% capital allowance to be extended for up to eight years.  Enterprise zones are designated Government areas with tax incentives to encourage economic growth and investment;

• New tax allowance for individuals who sell services/goods online (E-Bay for example) or rent their properties online will not have to pay any taxes or fill in any forms for the first £1,000 of the income made.

VAT.

• A range of measures have been announced to target overseas business and online market places who fail to register for UK VAT, where their goods are located and delivered from the UK, but the order via the internet is treated as being placed outside the UK.  Measures will be introduced, which are not automatic but at HM Customs discretion to target businesses that should have a UK VAT registration;

• VAT registration threshold will increase to £83,000 for the 2017 tax year;

• VAT deregistration threshold will increase to £81,000

Stamp Duty Land Tax.

• Although announced in the Autumn Statement, the consultation replies regarding the 3% SDLT rate increase on second properties were released as part of the Budget along with the Government’s replies.  The consultation has not resulted in many changes other than the following two main ones:

  • The new rules included measures that if you acquired a second property which was to become your new home, but you had not disposed of your current home you would have to pay the increased stamp duty rate.  If the first property was sold within 18 months you could claim back the additional tax.  18 months was thought to be too short a time period and this has been extended to 36 months.

  • There were measures to exclude institutional investors, however it appears that anyone or entity that acquires residential property which is not a main home will pay the enhanced rate.

Other measures.

• Fuel duty frozen – despite the press hype;

• All alcohol duties frozen, other than wine which will increase in line with RPI inflation;

• Excise duties on tobacco to rise by 2% above inflation;

• Changes to the climate change levy.

Please do not hesitate to contact us if you wish to discuss anything covered in the newsletter or any tax, accounting or business related matter.

Dates for your 2016 diary

• 20 April 2016 Fredericks Trust Charity Quiz Night – Manor by The Lake
• 18-19 May 2016 Gloucestershire Business Show.