The May 2015 general election could potentially set a new direction of travel for the country. Tax is taking centre stage. Here, TINA RICHES, National Tax Partner Smith & Williamson, sets out the detail of the tax proposals.
The main parties pledge to reduce tax avoidance and evasion by between £5bn and £7.5bn. But how will that be defined, let alone achieved? There is an appetite for change, but this needs to be workable and have the support of business and taxpayers, not kneejerk reactions delivered in a hurry after the election.
So, what do taxpayers – both individuals and businesses – need to think about before the election? It is not unusual for any new government to implement the majority of tax rate rises at the start of a parliament. Will tax rates increase sharply, thresholds change or new taxes be introduced after the election? Only time will tell.
Key tax policies:
- Commit not to increase the rates of VAT or NICs – the Conservatives will pledge a law banning any rise in income tax, VAT or NIC during the lifetime of the next parliament.
- Set a new, significantly higher, permanent level for the annual investment allowance.
Allow farmers to ‘smooth their profits’ for tax purposes over five years, up from the current two years, to counter income volatility.
Keep the bank levy in place and restrict the ability of established banks to pay less tax by offsetting their profits against past losses.
Continue to help smaller businesses take on new workers through the employment allowance, which exempts the first £2,000 of employers’ NICs so that a third of employers pay no NICs.
Oppose other parties’ plans to increase corporation tax.
Conduct a major review into business rates by the end of 2015 to ensure that from 2017, they properly reflect the structure of our modern economy.
Maintain the abolition of employers’ NICs for the under 21s and next year for young apprentices under 25.
- Ensure Britain continues to have the most competitive business tax regime in the G20.
- Lead international efforts to ensure global companies pay their fair share of tax.
- Review the implementation of the new international country by country tax reporting rules.
Devolve certain tax-raising powers to cities including piloting permission for local councils in Cambridgeshire, Greater Manchester and Cheshire East.
- Make it a crime if companies fail to put in place measures to stop tax evasion and other economic crime in their organisations; make sure that penalties punish and deter such behaviour.
Key tax policies:
- No increase in rates of VAT or NICs.
- Raise a bank bonus tax.
- Pledge not to cut the main rate of corporation tax further.
- Remove SDLT for first time buyers on homes up to £300,000.
Rewrite the carried interest rules that allow private equity managers to pay CGT, rather than income tax.
Close perceived loopholes in the Eurobonds rules, used by hedge funds to avoid stamp duty and which allow some large companies to move profits out of the UK and avoid corporation tax.
Give tax rebates to businesses that sign up to paying the living wage in the first year of a Labour government.
Scrap the ‘shares for rights’ scheme, which the Office for Budget Responsibility has warned could enable avoidance and cost £1bn.
Tackle disguised self-employment by introducing strict deeming criteria.
Tackle the use of dormant companies to avoid tax by requiring them to report more frequently.
Raise a levy on tobacco firms.
- Continue to have the most competitive rate of corporation tax in the G7.
- Force the UK’s Overseas Territories and Crown Dependencies to produce publicly available registries of beneficial ownership.
- Make country by country reporting information publicly available.
Cut and then freeze business rates for over 1.5m smaller business properties.
Key tax policies:
- Take tough action against corporate tax evasion and avoidance, including:
- Implement the planned new offence of corporate failure to prevent economic crime, including tax evasion, with penalties for directors up to and including custodial sentences;
- Levy penalties on firms proven to be facilitating tax evasion, equivalent to the amount of tax evaded by their clients; and
Make sure corporations cannot avoid their tax responsibilities.
Plan for no increase in the headline rates of VAT or corporation tax.
Ensure the tax system helps attract and retain jobs in the UK.
Continue the banking levy and introduce a time-limited supplementary corporation tax charge on the banking sector.
Adjust the tax system away from subsidy for high leverage debt and tackle the bias against equity investment.
Remove a series of distortions, loopholes and excess reliefs, including ‘dividend tax relief’.
- Continue to reform business tax to ensure it stays competitive, making small and medium-sized enterprises the priority for any business tax cuts.
- Lead international action to ensure global companies pay fair taxes in the developing countries in which they operate, including tightening anti-tax haven rules.
- Improve tax transparency, including in low-income countries, by extending country by country reporting from banks and extractive industries to all UK-listed companies.
Introduce land value tax (LVT), which would replace business rates in the longer term and could enable the reduction or abolition of other taxes.
Extend the business rates review to ensure it considers the implementation of LVT.
- Establish a low-carbon transition fund using 50% of any tax revenues from shale gas to fund energy efficiency, community energy, low-carbon innovation and renewable heat.
- Consult on and introduce a tax levy on tobacco companies so they fairly contribute to the costs of health care and smoking cessation services.
- Establish a coherent tax and regulatory framework for landfill, incineration and waste collection to drive continuous increases in reuse and recycling rates.
- Investigate the potential for other resource taxes, including deposit refund schemes.
Key tax policies:
- Reintroduce the tax on bankers’ bonuses.
- Make proposals around the bank levy.
- Support an increase in the employment allowance from £2,000 per business to £6,000 per business per year over a four-year period.
- Examine proposals to maintain the annual investment allowance at a stable rate and consider if it can be maintained at £500,000 and extended until the end of the next Parliament in 2020. Back reduced employers’ NIC.
- Back the retention of the video games tax relief.
- Back industry calls for an increase in the seed enterprise investment scheme investment limit.
- Use targeted changes in business tax allowances to encourage higher levels of investment in capital or research and development, and encourage the growth of SMEs. Support a review of controlled foreign companies’ exemptions.
- Oppose UK withdrawal from the EU. In any future referendum, there should be a double majority requirement where each of the four constituent nations of the UK would have to vote for withdrawal before the UK as a whole could leave the EU.
- Support examining a reduction in VAT for the hospitality sector.
- Demand that VAT on certain products is changed.
- Press for Police Scotland and Scotland’s Fire and Rescue Service to receive the same VAT exemption as other forces.
- Press for the early devolution of air passenger duty (APD), with a reduction of 50% and longer-term plans to abolish APD completely.
- Support a levy on tobacco firms.
- Remain committed to a Treasury review of alcohol taxation to better reflect alcohol content, while securing health benefits through minimum pricing.
- Force ‘an end to Tory and Labour austerity cuts’ and support a modest public spending increase of 0.5% above inflation for each year of the next Parliament to enable investment in jobs and public services.
- Maintain Scotland’s position as the best place to do business in the UK with a package of business rates relief.
Key tax policies:
- Cut business rates for small businesses.
- Remove stamp duty on the first £250,000 for new homes built on brownfield sites.
- Take control of VAT, outside the EU, introducing zero-rate on certain goods and services previously chargeable to VAT, such as repairs to listed buildings.
- End the unfairness under which some large companies pay zero or negligible corporation tax.
- Remove VAT from repairs to listed buildings and ensure tax and planning policies support historic buildings and the countryside.
- End the practice of businesses paying tax in whichever EU or associated country they choose.
- Set up a Treasury Commission to monitor the effectiveness of the new diverted profits tax and bring in any further measures necessary to prevent large multinational corporations using aggressive tax avoidance schemes.
- Offer tax breaks to smaller breweries to encourage microbreweries.
- Improve small business rate relief from business rates.
- Earmark community infrastructure levy income from shale gas operations for lower council taxes or local community projects.
- Levy petroleum revenue tax (currently 50%) on any shale profits and invest the income into a sovereign wealth fund, potentially to release older people from having to sell their homes to pay for care.
- Discontinue the carbon floor tax.
Key tax policies:
- Maintain corporation tax for small firms at 20% while raising it to 30% for larger firms.
- Abolish the employees’ NICs upper threshold, and reduce the rate of employers’ NICs in the long run to 8%.
- Prohibit corporation tax relief on any part of a salary that exceeds the maximum allowed by the 10:1 ratio in that company, to make it harder for companies to pay excessive salaries.
- Crack down on tax evasion, especially in the informal economy and through non-payment of VAT.
- Take real action to end tax evasion and avoidance and transfer mispricing by transnational corporations, which ‘steals resources especially from poorer countries’.
- Gradually phase out SDLT, council tax and the uniform business rate, and consider a LVT.
- Introduce a financial transaction tax to reduce destabilising speculation.
- Lower VAT for cooked food, entertainment and accommodation to the reduced rate (5%) to help small businesses in the tourism and restaurant businesses, costing £6bn a year.
- Reduce VAT on housing renovation and repair work (including insulation) to 5%.
- Increase alcohol and tobacco taxes to help fund the annual increases in NHS spending over the Parliament.
- Introduce a potential tax revenue generating system, which brings under state control the market for drugs currently banned under the Misuse of Drugs Act, starting with cannabis.
- Decentralise the economy gradually, with a shift towards local taxes and distribution of wealth taking account of the industrial base, natural resources and environmental damage.
- Tax plastic bags and unnecessary packaging.
- End the tax exemption for aviation fuel or introduce a flight tax.
- Reintroduce the fuel duty escalator.
- End fossil fuel industry tax breaks.
- Levy eco-taxes on non-renewables or pollutants, the use of water by businesses and on waste heat from power stations. Use taxation and regulation to ensure that products and packaging are designed with a view to what happens to them when they stop being useful and so that packaging is reduced.
- Use carbon taxes (based on the present system) to fund energy efficient investment.
SOME POTENTIAL ACTIONS TO CONSIDER
A note of caution: tax changes introduced by a new government could be backdated to April 2015 or may come in part way through the tax year, so action before the election or the next Budget could potentially be caught by a subsequent change. Backdated forestalling provisions may make steps ineffective.
While actions should be driven by commercial and other nontax factors, taking action in advance of the implementation of any potential changes to the system may be worth considering.
STEPS FOR BUSINESSES:
Purchase of assets for capital allowances: It is unclear what may change in this area, but where a higher annual investment allowance remains unused, it may be worth considering accelerating the purchase of capital expenditure eligible for capital allowances. The rules around the calculation of the relief available can be complex so advice may need to be taken.
Business income: Whether you should defer or accelerate income so as to potentially have it taxed at a different rate will depend on your ability to choose when to take income and your view of the outcome of the election – a Conservative-led government that wishes to move towards lower rates or a Labour led one that wishes to halt or reverse reductions. Either way the tax base is likely to widen not narrow, leading one to consider trying to accelerate the accrual of income.
Disposal of businesses: With few firm proposals in this area, business owners may wish to await further developments. However, some may wish to consider accelerating the timing of the disposal of businesses and business property to try to help maximise the use of entrepreneurs’ relief, in case it is capped, removed or the rate altered.
Those already in the process of disposing of a business may wish to consider the potential benefits of making use of current reliefs before the election. Those already considering giving a part of their business away to family members, the potential for a new government to cap, remove or change the rate of relief for business property relief or agricultural property relief may wish to consider accelerating this process, though they should bear in mind the possibility of new anti-avoidance measures being backdated.
Restructuring: If relief for loan interest is limited, raising finance by equity may become more attractive for the future.
Incorporation: If a business is considering incorporating, it may be worth considering accelerating the decision; it is advisable to take advice on this.
Consider international business structures: Where different tax jurisdictions are used, it may be sensible to review cross border trading arrangements. This is likely to be relevant after the election too, regardless of which party takes power.
Salary sacrifice arrangements: It may be worth reviewing and putting measures in place before the election. This might help if employers’ NIC rates were to rise, the employee’s upper threshold were to disappear or income tax reliefs, such as the higher-rate relief on pension contributions, were to fall, or if future salary sacrifice arrangements become ineffective for tax purposes.
STEPS FOR PRIVATE CLIENTS:
Non-doms and the remittance basis elections and remittances: Given the current government is consulting on the rules in this area, it makes sense to take advice on the timing of elections and when remittances are made.
Non-doms residence in the UK: If the non-domiciled rules are abolished, non-doms may wish to manage their UK tax position, including considering now how many days to spend in the UK.
Taking income before the election: It is not unusual for any new government to make most tax rate rises at the start of a parliament, so income that can be accelerated and earned prior to the election may be taxed at a lower rate.
Cashing in gains before the election: Making disposals before the election or a new government’s Budget, rather than afterwards, may help to hedge against a potential rise in the CGT rate or potential reductions in reliefs or exemptions.
Defer taking gains: If a new government rewards longer-term investment holdings with a return to taper relief, holding onto assets may, subject to market conditions and changes in tax rates, prove more beneficial in the long run.
Pension contributions: Pension contribution relief and taxation of pensions are likely to continue to change, so individuals may wish to use up any available reliefs and as much of their lifetime allowance as possible in advance of the election or forthcoming Budget.
Private residence: Consider retaining, rather than downsizing, your main residence to maximise potential future IHT savings; however, where you are considering moving and the property value trips you into a band for a potential mansion tax, consider whether there will be any advantage in having two smaller properties rather than one larger one.
Private residence disposals: Given the evolving rules and discussions around tax relief on private residences, it makes sense to consider the potential timing on the disposal of any property in the UK (or abroad if you are UK resident) that is or has been an only or main residence (OMR) and the giving of any notice that a property is an OMR.
Mansion tax: If a tax on higher-value properties is introduced, owners would need to budget for a significant tax liability. Some owners are reportedly already considering whether their property could genuinely be split into separate properties or replaced by two or more properties, with a view to downsizing and renting out or selling the unrequired parts or properties.
Reconsidering wills and gifts: Given the wide range of possibilities for IHT, specific advice will be difficult until new proposals are announced. However, it may be a good time to consider whether any lifetime gifts should be made now to make use of available reliefs.
Anti-avoidance rules: It seems certain that there will be further change in this area. Most of the parties have a desire to stop outright what they describe as avoidance. Businesses and individuals with complex affairs may wish to start reviewing the way they run their affairs, with a view to getting their house in order ready for a tougher regime.
Disclosure of errors: Use the existing disclosure facilities, such as the Liechtenstein disclosure facility, while they are available, to put right past errors before penalty rules change significantly.
This abridged article first appeared in Tax Journal