Budget 2012

"That went as well as could be expected, didn’t it?"

- a quote from Wallace & Gromit (or George Osborne).

A GOOD BUDGET FOR BUSINESS

Business

Corporation tax will be reduced from 1 April 2012 by a further 1% to that already announced. The headline rate will be 24%, reducing by 1% over each of the next two years. This is a welcome announcement to keep the UK competitive internationally.

Clients should be looking wherever possible to defer taxable income recognition and maximise / accelerate tax reliefs (e.g. through maximising capital allowances, especially in the area of fixtures where claims can be undervalued). The small profit rate remains at 20%.

85% of property owners are not claiming their full entitlement of commercial property allowances  Around a quarter of the total purchase price of a property can be eligible for allowances, so property buyers are almost certainly missing out. Every commercial property contains plant and machinery items as defined for tax purposes. The key action is to identify and agree their value to claim any allowances in any deal. For future commercial property sellers helping the buyer maximise their allowances will help them achieve the best price. For the future buyer there are substantial benefits claiming allowances; and the recent buyer can make a retrospective claim. See flyer attached.

Business owners should continue to review their business structure to take advantage of the difference in income tax and corporate tax rates. The potential benefits of maximising the arbitrage between the two will be greatest in 2012/2013 (income tax 50% vs corporate tax 24%). There are a number of solutions which can help deliver these tax benefits.

Dividends from companies after 6 April 2013 will be taxed at a rate 5.5% lower than at present.

Companies

Apart from further reduction in headline corporation tax rates, there was not much in the Budget that we didn’t already know about such (eg CFC changes, Patent Box and R&D). Companies with offshore interests need to review their structures to minimise the impact and maximise the opportunities of the CFC and Patent Box changes (especially finance company exemptions and taxing intellectual property at 10%).

Personal

Income tax rates will be unchanged for next year. However, the Government have recognised that the 50% rate has been a deterrent to inward investment and entrepreneurship as well as encouraged more aggressive tax avoidance, and acted to reduce this to 45% from April 2013.

Clients should be thinking now about whether and how to defer taxable income recognition and accelerate allowances and reliefs (eg pension contributions).

Thankfully, we did not see the predicted tampering with pensions, either in reducing higher rate relief for contributions or taxing pension funds themselves. Also, we did not see any reduction in the £50,000 annual allowance for tax free pension contributions. However, we will need to see the details of the proposed 25% cap on tax reliefs for anyone claiming reliefs over £50,000 in a year to see if this becomes one of the more controversial elements of the Budget.

Clients who made advanced pension payments before budget day will therefore be in the same position as those who contribute between today and 5th April. Business owners should start to give careful thought to how to maximise pension contributions at the highest rate (50%) and how and when these should be funded by their companies, especially given effective dividend rates will reduce from 36.1% to 30.6% from 6th April 2013.

Stamp Duty / Wealth Tax

As expected, the Chancellor attacked specific stamp duty land tax avoidance schemes including bringing in a penal 15% rate for residential properties over £2m purchased by companies (from today). As to "mansion tax by another name", the Government have also increased the rate of SDLT from 5% to 7% for homes worth more than £2m (from tomorrow). The Government have also said they will consult over the introduction in April 2013 of an annual property charge for residential properties over £2m.

Anti Avoidance

Further consultation on the introduction of a general anti-avoidance rule is welcome although the interaction with the existing disclosure regimes could potentially create more rather than less uncertainty for businesses in managing their tax affairs.

Employee Incentives

The individual limit on qualifying Enterprise Management Incentives (EMI) options will increase from £120,000 to £250,000. This makes EMI schemes even more attractive to businesses wishing to retain and incentivise employees in a tax efficient manner. Potentially of greater benefit is the announcement that gains on EMI shares would qualify for entrepreneurs relief (ie 10% tax) for exercises post 6 April 2012. We await more detail but this could be very attractive to many businesses with EMI schemes or considering them.

Individuals holding EMI options should NOT exercise options before 6 April 2012 without taking advice first.

Other incentives

Business Property Renovation Allowance (BPRA) can allow investors to pay as little tax as they choose by investing in commercial property while taking the bulk of the cost as a write-off for tax. With no upper limit on the amount which can be invested there is more relief overall from BPRA than is offered by venture capital schemes. There are limitations. The aim is to direct investment into the conversion or renovation of commercial or office sites that have been unused for at least one year and must be in projects in Assisted Areas. After renovation the property has to be rented out for at least seven years making the scheme an 8-year investment. The Budget have announced some minor improvements to the relief.

Tim Davies
UK Head of Tax

Government changes tack on clawing back child benefit from those with high incomes.

The chancellor has introduced a halfway house to the concept of a minimum rate of tax for the rich with effect from 2013/14. The proposed capping of income tax reliefs means that 75% of an individuals income should be taxed. The measures will increase the effective rate of tax suffered by the wealthy.

Will changes to personal tax reliefs cause a funding crisis in the UK third sector?

No significant changes were made to previous announcements. Further changes to the detail may appear in next week’s Finance Bill. We set out our views on what we expect and would like to see.

The Government has put on notice that anybody who currently uses or is considering using an offshore structure to limit their exposure to UK capital gains tax should seriously reconsider their position.

The Government has announced it will consult on aligning the IHT exempt amount that a UK domiciled individual can transfer to their non UK spouse or civil partner.

There is great news, but no real surprises, for innovative businesses in George Osborne’s budget speech today. As trailed in our pre budget commentary, the Patent Box should give a corporate tax rate of 10% for profit generated from patents from 1 April 2013.

The Government has set out its ambition to attract and retain the creative entertainment industries, beyond the historic film tax reliefs into the video games, animation and high-end TV sectors.

Following the reform on the taxation of investment trusts to be implemented in the Finance Bill 2012, the Government has announced further consultation on the REITs regime. Depending on the outcome, any changes could be implemented in the 2013 Finance Bill.

As part of the objective to simplify the tax environment, the Chancellor announced that the Government will address certain anomalies that exist within the VAT system.

Now is the time to be making capital allowance claims on integral fixtures and fittings which are incorporated in your commercial property - and which you may not even know you have!

The Chancellor signalled his determination to eliminate unacceptable avoidance and in particular provisions were introduced to against two “packaged” schemes.

The government has today announced that it plans to introduce a cap on income tax relief for anyone claiming more than £50,000 a year in reliefs.

The cap will only apply to reliefs which are currently unlimited, so would therefore not seem to apply to Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) - which can provide income tax relief capped at 30% - but would seem to apply to BPRA schemes which have the potential to provide up to 50% relief.

The March 2011 budget announced the introduction of a new category of Authorised Investment Fund (“AIF”) which would be constituted as a tax-transparent fund (“TTF”) in the UK. Following draft legislation and consultation, we finally have clarification on what the fund will actually look like.

From 6 April, we will have three tax-favoured venture capital schemes to encourage investment in trading companies. At the same time, these give some potentially very attractive tax breaks for investors.

In the context of the limitation of tax relief for wealthy individuals, the Government has announced its intention to place a limit of £3,600 on aggregate premiums that can be paid into qualifying policies.

It was widely predicted in the run up to the Budget that pensions tax relief would be cut.

The good news is that the Chancellor has resisted any temptation to further tinker with the pension rules and pensions tax relief remains available at your marginal rate of tax.

Enterprise Management Incentive (EMI) share options already provide a tax efficient way to deliver reward to the employees and directors of entrepreneurial businesses. Today’s announcements mean that potentially the tax analysis is further ameliorated.

The Chancellor announced in the Budget the intention to introduce legislation in the 2012 Finance Bill to give effect to the agreement dated 6 October 2011.

Following much discussion and debate, the actual reforms have been announced with no fanfare whatsoever.

It was hoped that the Chancellor would today announce a firm date for the issuing of more information regarding the introduction of a statutory residence test.

This will affect corporate members of Lloyd’s who take out Stop-loss Insurance at member-level. It will align the timing of the tax deduction for the premiums with the recognition of the profits that they relate to.

Repeal of the tax rules for CERs from the introduction of Solvency II. This is a change that will affect general insurers in the Lloyd’s Market as well of those outside who write the most volatile lines of business.

It had been anticipated that pension reliefs would be reduced in the Budget. The top rate of tax will be reduced from 50% to 45% from April 2013, but pension reliefs are unchanged.

The UK-Swiss Tax Cooperation Agreement affects individuals with financial assets held directly or indirectly in Switzerland. There remain opportunities in the agreement for UK resident but non-domiciled taxpayers to reduce their effective rates of taxation.

Whilst the government confirmed that Business Property Renovation Allowance (BPRA) will be extended for a further five years to April 2017, will it be restricted by the new cap of £50,000 or 25% of income to apply to currently unlimited tax write offs?

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