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What to expect from the Autumn Statement from the Chancellor

29 November 2013

Finance Bill 2014 itself will be published towards the end of March or more likely at the beginning of April following the Budget which will take place sometime in March, date to be announced.

It is likely that the main tax changes and developments will be covered on 5 December when the Chancellor delivers his Autumn Statement but you may have to wait until 10 December to find out about the details and some of the more minor changes. We are also expecting to see some secondary legislation in areas where ground rules were laid in Finance Act 2013.

ANNOUNCEMENTS IN THE AUTUMN STATEMENT

CGT on disposals by non UK tax residents of UK assets

It has long been anomalous that the UK does not charge non UK residents if they realise a capital gain on the disposal of UK assets.

There have been rumours, and hints, that this might change and the Chancellor may announce the change in the Autumn Statement.

This is going to be a big topic and there are enormous amounts of tax, potentially, at stake.

Finance Act 2013 (FA 2013) changed the rules about the taxation of residential property when the owners of that property are not physical persons ie the property is owned by a company or some other “non physical” person.

The FA 2013 rules mean that if you are buying a property worth more than £2m you will have to pay Stamp Duty Land Tax (SDLT) at 15% and you will have an Annual Tax on Enveloped Dwellings (ATED) of up to £140,000 depending on the value of the property. There is also, already, a CGT charge on disposals of properties owned in this way, and that charge is by reference to the gain accrued after April 2013.

So if there are to be new provisions they are going to have to “integrate” with what was already legislated earlier this year.

What are the owners of residential property going to do?

Prior to the hike in stamp duty a lot of non residents will have bought their properties through offshore companies. If they sell the shares in the companies then that, on the face of it, won’t be the disposal of a UK asset. But the purchaser of the property may be unhappy about incurring a very high stamp duty land tax charge so there will, already, be quite a lot of debate about the best way to structure the deal.

And what about the Principal Private Residence (PPR) exemption and the ability to elect to treat one of the properties you own as your PPR?  Non residents who own several properties, but with only one of those properties in the UK, will have been able to elect for that UK property to be treated as their PPR as long as they do it within the statutory time limit. That may allow them to escape the new CGT tax unless the rules are changed. If there is only one property which they own then they will need to be aware that HMRC these days looks more closely at the quality of the occupation.

If there is, indeed, going to be  a proposal to change the CGT rules for non-residents there are going to be plenty of details for everyone to get their teeth into!

It might also be worth bearing in mind what the US did more than 30 years ago when they introduced their FIRPTA (Foreign Investment in Real Property Tax Act) legislation which introduced a withholding of 10% when persons who were not US citizens etc disposed of their US property. 

Strengthening the Banking Code of Practice

Following a consultation in the summer, HM Treasury published in October a response document and a technical note with draft clauses. The main changes to the existing code will be more regular reporting from HM Revenue & Customs (HMRC) on banks’ compliance with the code, a review process with an independent reviewer and the possibility that banks could be named if they breach the code. Any transaction that falls within the scope of the General Anti-Abuse Rule (GAAR) will automatically be treated as a breach of the code.

Full details are contained in our newswire posting Strengthening the Banking Code of Practice.

International Business and Tax Avoidance

The UK was President of the G8 in 2013 and tax was one of the three key issues for the G8 Summit at Loch Erne in Northern Ireland in June this year. It was also a key issue at the G20 Summit in St Petersburg in September. The G20 has tasked the OECD to sort out the problems of the current international tax regime and OECD published its 15 point Action Plan in July 2013 which was endorsed in its entirety by the G20 in September.

The September 2013 G20 St Petersburg Declaration states:

“We welcome the establishment of the G20/OECD BEPS project and we encourage all interested countries to participate. Profits should be taxed where economic activities deriving the profits are performed and where value is created. In order to minimize BEPS, we call on member countries to examine how our own domestic laws contribute to BEPS and to ensure that international and our own tax rules do not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions. We acknowledge that effective taxation of mobile income is one of the key challenges. We look forward to regular reporting on the development of proposals and recommendations to tackle the 15 issues identified in the Action Plan and commit to take the necessary individual and collective action with the paradigm of sovereignty taken into consideration.”

The Chancellor is certain to refer to this ongoing work which is going to be overseen in 2014 by Australia which has the Presidency of the G20 next year.

There are unlikely to be any direct UK legislative changes as a result of this work but there will be changes to the international agreements of which UK is a signatory including the UK Model Double Tax Agreement and the OECD Transfer Pricing Guidelines, the latter of which is incorporated in UK domestic law (Schedule 18AA Finance Act 2008).

THE DETAILED TAX CHANGES ON WHICH THERE HAVE BEEN PRIOR CONSULTATIONS

Business measures

Business Premises Renovation Allowance

A Technical Note was published in July 2013 as the government is concerned that the allowance is being exploited in ways that Parliament had not intended. The intention was to issue a further Technical Note in autumn 2013 with a view to possible legislation in FB 2014. We assume that the revised proposals will appear on 10 December.

Encouraging independent share ownership

HM Treasury issued a consultation in July 2013 with a view to giving CGT relief on the sale of a controlling interest in a business into an indirect employee ownership structure and for income tax and NIC reliefs for employees. We were quite sceptical about the potential success of such a tax regime and recommended that it should be clearly targeted, easy to understand and have a clearance arrangement.

Personal Tax measures

Partnerships

There was a consultation on two aspects of partnerships: the first dealing with disguised employment and the other with profit and loss allocation. We were concerned that the proposals are a sledgehammer to crack the tax avoidance nut and need to be amended if they are to be proportionate and not create unnecessary administrative burdens for smaller businesses.

The Office of Tax Simplification has also been reviewing the tax treatment of partnerships, but it is unlikely that it will report before the early part of next year.

Social Investment tax relief

HM Treasury consulted in June on the introduction of a new tax incentive to encourage private investment in social enterprise. We welcome the new relief argue that it should be based as far as possible on existing rules for Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments. We felt that the size of the eligible investment into social sector organisations should be increased from the proposed €200,000 but if the relief is too generous for individual investors then it could have a negative impact on charitable donations.

 

Removal of tax relief for interest on loans to purchase life annuities
In a July Consultation HMRC proposed to introduce legislation to remove relief for interest on loans to purchase life annuities taken out by people before 1999 with repeal of the relief taking effect from a fixed date in the future. We are concerned that the financial impact on some individuals will be quite significant and withdrawal of the relief amounts to retrospective taxation: the individuals affected will have taken out their loans in good faith and built the tax relief into their financial budgets.  

Gift Aid and Digital Giving
Changes to the law may be made in either FB 2014 or 2015 depending on the response to the July HM Treasury consultation. The proposal was that if the gift aid donor has insufficient taxable income to support the donation then the tax that has to be recovered should come from the charity rather than the donor. We argue that shifting the liability for the donor’s tax shortfall to the charity is unacceptable. We expressedconcerns that if the liability is allocated to the charity such declarations might be made recklessly by donors. We speculated this could result in less Gift Aid claims being made, as charities would go through the process of making a claim only to have to repay it.

IHT and trusts

There is continuing consultation on how to deal with IHT and trusts and a consultation was published in June . The aim is to simplify the IHT charge on trusts and align filing and payment deadlines within self assessment. We support these objectives but we think the proposals in the June consultation document need a lot of improvement before they become workable. We do not support the approach regarding the other matter covered in the consultation document which is the standardisation of the treatment of accumulated income.

Pensions tax: individual protection from the lifetime allowance charge

HM Revenue & Customs published a consultation document in June on how best to protect individuals who might otherwise be caught by the reduction in the lifetime allowance from £1.5m to £1.25m, and the reduction in the annual allowance from £50,000 to £40,000, both from April 2014. We are extremely concerned that these latest proposals add even further complexity to the new system, introduced in 2006, and are likely to further discourage provision for one’s pension which goes quite contrary to the Government’s overall policy objective to encourage pension saving.

ADMINISTRATION

Offshore employment intermediaries

HM Revenue & Customs published a consultation in May. There was considerable criticism of the original proposals and these were significantly revised in the response document published in October. The revised proposal will amend and strengthen existing legislation to make it clearer and more effective, rather than creating new legislation and the taxation, record keeping and return requirements, as well as related penalties, will form part of Finance Bill 2014. Draft legislation, explanatory notes and guidance will be published, probably on 10 December.

VALUE ADDED TAX

Business to EU customer electronic services

There will be legislative changes to give effect to very important EU wide changes which will provide that cross border, intra EU, sales of Business to Customer (B2C) services of telecommunication, broadcasting and e-services will be taxed from 1 January 2015 by reference to where the customer is based (the destination basis of taxation). This means that UK businesses will have to account for VAT by reference to the circumstances in the country of their customer. 

TAX AVOIDANCE

Promoters of tax avoidance schemes

The Government has been consulting on specific measures to target promoters of tax avoidance schemes and published a consultation document in summer 2013 with a view to introducing legislation in FB 2014. 

Reform of close company loan to participators
The law in this area was changed in FA 2013 and there are proposed further onerous changes in FB 2014 as proposed in a consultation document published in July 2013. If there are to be further legislative changes these will be set out in draft clauses on 10 December and, in any event, HMRC will published the responses to the consultation.

Corporate debt and derivative contracts

The Government is carrying out a fundamental review of the tax regimes for corporate debt and derivative contracts introduced in 1996 and 2002 respectively. In FB 2014 there will be anti avoidance provisions to strengthen the existing regime and the “new” regime will be introduced in FB 2015 after further consultation. A consultation was published in June, we welcome the proposal to merge what are in effect two separate regimes and create a clearer regime which is more robust against anti avoidance as well as ensuring that the new provisions will follow the new accounting regime being introduced under FRS 101 and 102.

 

 
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