Ahead of the Chancellor’s speech on Wednesday, our tax and pensions lawyers consider the key measures businesses can expect from Budget 2016.
BEPS developments generally, and corporate interest deductions in particular
The Base Erosion and Profit Shifting (BEPS) project is a fundamental priority for the international tax community and the UK. In the UK we have already seen regulations made to implement country-by-country reporting, and draft legislation or consultations published in three of the main areas tackled by the BEPS project:
- corporate interest deductions;
- patent box; and
- hybrid instruments
We expect to see responses from HMRC on these three areas, as well as potential consultations or responses to other elements of the BEPS project.
The corporate interest deductions consultation, which proposes changes to current UK tax law to restrict the tax deductibility of interest, has sparked much interest in the Real Estate sector. Concerns have been raised by the industry as to the proposed new rules (particularly the impact on highly leveraged
companies which can sustain such borrowing on current arm’s length principles), how the proposed ‘public benefits exemption’ could apply, and the lack of certainty on the grandfathering provisions. The government is being lobbied hard, but there are no simple solutions if it wishes to follow BEPS. We would hope for further comment by the government on this in the Budget – but our expectation is that little will be said and that the current uncertainty will remain.
Pensions tax relief
In July 2015, the government launched a consultation on changes to pensions tax relief. The proposed key options for reform ranged from the introduction of a flat rate of tax relief on pensions contributions to a more radical move from the current ‘exempt taxed’ system to something more like an ISA (where contributions are taxed and topped up by the government, but the end benefit is paid tax free).
Recent media coverage suggests that neither option is likely to be pursued at this time. However, given the concerns about the sustainability of the current tax relief system that were highlighted by the 2015 consultation, it seems unlikely this will be the end of the matter. We watch this space with interest.
There have been two key announcements made by the Chancellor in previous Budgets/Autumn Statements with regard to entrepreneurs’ relief, but
we are still waiting for any changes to come through.
The Chancellor announced in Autumn Statement 2015 that changes to the entrepreneurs’ relief rules would be made to mitigate the unintended consequences of a previous change in legislation that withdrew entrepreneurs’ relief for structures which looked through trading joint ventures and partnerships (including LLPs) to establish participators’ trading activity. It was also suggested that he would ensure that relief was available on certain genuine commercial transactions.
Budget 2015 announced a review of the availability of entrepreneurs’ relief for academics who contribute towards intellectual property used in spin-out companies, but we have not had further details.
It is hoped that these changes will be progressed or at least an update provided at Budget 2016.
Employment tax issues
The consultation on the tax treatment of termination payments closed recently – we expect the government to take the opportunity to publish a summary of responses and to set out the action it intends to take in this tricky area. It will be interesting to see whether there is appetite to proceed with some of the more radical recommendations made by the Office of Tax Simplification (OTS).
The OTS’ report on its review of the alignment of income tax and NICs has been published recently, with recommendations including the proposed convergence of employed and self-employed NICs. The government may respond to the recommendations at or around the time of the Budget. In view of the complexity of this subject, we would expect that any recommended changes are likely to be long-term in nature.
At Autumn Statement 2015, the government indicated that it remains concerned about the growth of salary sacrifice arrangements – it is perhaps too early to expect an update at Budget 2016, but it may be that the government will indicate whether it considers action to be necessary in this area.
The additional 3% SDLT charge on the acquisitions of second homes and buy-to-let properties has been making the headlines as people look to purchase such properties ahead of 1 April 2016.
We expect HMRC to announce the final arrangements for this increase on Budget day following the consultation that was opened in December
2015. At present there is uncertainty as to whether the government will allow an exemption for larger property investors and, if so, the scope of any such exemption. Accordingly, property investors will be keen to see the detail of the draft legislation when it is released.
Hopefully, the announcements on Budget day will add some detail to the plans for inheritance tax on residential property held via offshore vehicles and the new tax on trust distributions. Further consultations are expected and/or late in relation to both proposals, which are due to take effect from April 2017.
Ideally, we might see an abandonment of the DOTAS extension relating to inheritance tax proposed last Autumn. This was drawn incredibly widely – catching virtually any inheritance tax planning – and was postponed following vigorous opposition to the consultation paper and draft legislation.
Tackling offshore evasion
The government announced a raft of proposed new measures to tackle offshore tax evasion at Autumn Statement 2015; further draft legislation and consultations are expected to be published in the Budget.