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The Spring Budget 2016: Significant tax changes and a resignation

21/03/2016 by David Gibbens, Director, Poole Waterfield

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Not short on controversy

George Osborne’s eighth budget was not short on controversy, to say the least. The initial headlines were grabbed largely by the macro issues of the Chancellor missing his own economic targets and doubts about whether this budget would balance the books.

There was also real concern and anger over tax cuts that favour the wealthy against a backdrop of spending cuts, which will impact on the poorer parts of society. The fallout has continued with the resignation over the weekend of Iain Duncan Smith, with the budget apparently being the final straw for the former Works and Pensions Secretary. The authority and competence of the Chancellor are now being questioned as never before and this budget is being seen as a personal disaster for him and a real headache for the government. 

Amid the furore surrounding the politics of the budget, the detail, and there was a lot of detail, for once seems secondary, but in fact there was a host of significant tax changes for individuals, businesses and tax advisers to take on board. How many of these changes will remain is yet to be seen.

For business there was a mixture in terms of tax changes. Recent budgets have been tough on business and this time there were at least some positives, but also some less welcome tinkering. Some of the changes could add significantly to tax complexity and it is tempting to question how much thought is given to the practical implementation and management of these changes before they are introduced.

Many of the changes have been well documented so we will focus on a few of the less trumpeted changes as well as those which deserve a closer look.

Changes to Capital Gains Tax

This really caught the headlines (possibly not in the way the Chancellor had hoped). The rates for CGT of 18% and 28% for basic and higher rate tax payers respectively have each been reduced by 8%. The new CGT rates are now at a fairly generous looking 10% and 20% from 6th April 2016. These changes won’t apply to all assets, most notably to buy-to-let properties, and this exclusion could be seen as a continued attack on landlords. Commentators such as the Institute for Fiscal Studies have criticised a cut in a tax that generally only applies to the better off, whilst voices from the tax professions are unimpressed at the complexity that using four different rates will cause. Some will welcome these reductions but this move has clearly angered many.

There have been some relaxations on the conditions applying to Entrepreneurs Relief. This is a relief that applies to the sale of unquoted trading businesses and which gives a CGT rate of 10% on disposal. The most significant change here is likely to be the extension of the relief to shares issued after 16th March 2016 – provided they are held for three years, there will no longer be a requirement to be an officer or employee of the company or hold at least 5% of the share capital to qualify. This is a helpful move as it addresses a largely arbitrary distinction between qualifying and non-qualifying shareholdings. However, the fact that it will only to new shareholdings is another complexity going forward.

Business Premises Renovation Allowance

Unfortunately there is no reprieve for this allowance, which is a rather obscure but really useful relief for those improving a previously unused commercial property in a disadvantaged area. The application of this allowance means that expenditure which would normally be treated as capital for tax purposes could be set against company profits or personal income. It was due to end in March/ April 2017 and the Chancellor has adhered to that timetable.

Changes to Corporation Tax 

This is something of a headline grabber but it is only a slight revision to an earlier commitment. Rates will drop from the current 20% to 19% in 2017 and to 17% by 2020 rather than the previous level of 18%. All very useful but not exactly earth shattering news.

There has been a helpful relaxation on the use of losses and from 2017 a company will be able to carry forward losses to use against profits from any activity. Previously you could only offset losses and profits from the same activity. This could make a difference for businesses with more than one trade.

Many in business will know of the perils of having an overdrawn director’s (or participator’s) loan account. Among the problems of these is the so called s455 tax. This has meant that loans made by a company (controlled by five or fewer shareholders) to a shareholder result in an additional Corporation Tax charge of 25% if the balance is not repaid within 9 months of the year end. This tax can be reclaimed when the loan is repaid. The rate is increasing to 32.5% for loans made on or after 6th April 2016 to match the higher rate of tax on dividends.  It is easy to understand the Chancellor’s reasoning here, but the outcome is again having to juggle different rates as in the future loans will exist which will have been subject to different rates of tax – causing more work, particularly when the loans are gradually paid back and the tax reclaimed.
Tax Administration

The budget continued to advance the cause of taxpayers communicating electronically with HMRC. This is part of a strategy of moving away from conventional tax returns and payment dates to one where there will be on line accounts, pay as you go and from 2018 quarterly digital updates to HMRC for small businesses. In common with other changes such as auto enrolment of pensions this is bound to mean more bureaucracy for taxpayers and their advisers.

Most budgets have their controversies and George Osborne is certainly no understated Chancellor but the Spring Budget for 2016 has provoked a reaction that is unprecedented in recent times. It may be a little too early to judge but it does look like something of an economic and political miscalculation.

As with many of his previous budgets there is much to absorb in terms of his view of the UK’s economic prospects and how his bigger plans translate into fiscal policy and tax law. This budget saw further measures to clampdown on tax evasion, and that is something he clearly puts great store by, but in some respects it was quite a helpful budget for business through measures such as the expansion of business rates relief and reduction in Corporation Tax.

There was good news for middle income tax payers with increases to the personal allowance and higher rate thresholds and for some the highly controversial changes to CGT will be very welcome. Unless you benefit from the increase in the rent a room limit there was little cheer for landlords. The drive for digital tax administration is continuing but simplifying the underlying tax system seems as far away as ever.

Let’s see how much of it comes to pass. 

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Category: David Gibbens Blog Author: David Gibbens, Director, Poole Waterfield

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