Autumn Statement 2014

 

The Autumn Statement for 2014 was delivered on Wednesday 3 December 2014. The Autumn Statement itself can be downloaded from this page. There is also an overview to be found here.

However, for tax practitioners, the key page is the page where you can find the documents with the details and draft legislation.

The draft legislation for Finance Bill 2015 together with explanatory notes was published on 10 December 2014, and can be downloaded from this page. It is a very long document, so the page contains further links directing you to pages where you can find what you are looking for in a separate standalone document. Alternatively, you can access these links on the Finance Bill 2015 Supporting Documents page. (Why are there several pages on the GOV.UK site, taking you to the same link?)

There is also a separate page for Tax Information and Impact Notes.

I shall be filling this page over the course of the next week or so, with details of some of the key points.

Finance 2015 measures with immediate effect:

You can find these all on one page at this link. Each separate link will take you to a Policy paper, and further clicking takes you to the draft legislation and explanatory pages. But I’ll be providing these below.

SDLT reforms to residential property

Perhaps the most important announcement concerned the changes to the SDLT rules for residential property.

Until now, SDLT has been charged by applying a single rate to the total value of the purchase price, with the rate depending on the relevant band that the consideration falls into. From tomorrow (4 December 2014), the calculation will be on a progressive basis – the purchase price will be split into its constituent bands and different rates will apply to each band – in the same way that income tax is charged.

The new rates are:

Rate Property value band
Nil rate £0 – 125,000
2% £125,001 – 250,000
5% £250,001 – 925,000
10% £925,001 – £1,500,000
12% £1,500,001+

Note the increased rates at the higher end of the property market. While most people will benefit from the new system, properties in excess of £937,500 will be subject to an increased SDLT charge.

There is a new SDLT calculator to take into account these changes.

Note that from 1 April 2015, SDLT will cease to apply in Scotland. Instead Scottish properties will be subject to the new Land and Buildings Transaction Tax, which is also to be charged on a progressive basis.

 Draft legislation here.

Guidance note here.

Capital Gains Tax – Entrepreneurs’ Relief on goodwill abolished (related companies)

Entrepreneurs’ Relief – or ER for short – is the tax relief for individuals selling a trading business. The disposal can be in the form of an asset sale, or shares in a trading company or group. Those who qualify are taxed at the reduced 10% rate.

From now on, goodwill will be excluded from the relief when transferring a business to a related close company. Furthermore, the company will be unable to deduct the goodwill in accordance with the usual accounting treatment, until the business is eventually sold.

This measure is not going to be popular with sole traders or partnerships who are looking to incorporate their business, especially where the goodwill forms a large part of the value.

Policy document for entrepreneurs CGT treatment is here.

Draft legislation is here.

For the corresponding documents restricting the company’s goodwill tax deductions:

Policy document is here.

Draft legislation is here.

Corporation Tax – Restriction on loss reliefs for banks

This is a measure which will no doubt be popular with the general population, but certainly not for the banks. The intention is to restrict the availability of losses to carry forward against future year profits. From now on, certain carry forward losses will only be be relieved against 50% of the company’s profits. These are:

  •  Trading losses;
  •  Non-trading loan relationship deficits; and
  • Management expenses.

The restriction will take effect from 1 April 2015 and will only apply to reliefs accruing prior to this date. So it is a temporary measure – losses after this date can be carried forward freely. But how many banks and financial institutions are there, that have built up huge losses during the credit crunch? These losses will now take even longer to relieve. What impact will this have on banking customers (that is, you and me?) Will the banks pass on the cost?

The targeted anti-avoidance rule which forms part of the measure will apply to arrangements entered into on or after 3 December 2014. These are essentially “forestalling rules” – preventing banks from taking pre-emptive action by bringing profits forward to accounting periods falling before 1 April 2015 when the new rules take effect

Policy document is here.

Draft legislation here.

There is also a Technical Note which you can find on this page.

Corporation Tax – preventing abuse of late paid interest rules for connected companies

Under the corporate debt rules, interest is taxed and relieved on an accruals basis. In other words, it is taxed or relieved when it is recognised in the profit and loss account, irrespective of when the money is actually paid.

This rule is modified when the borrower and lender are connected companies. In these circumstances, interest is taxed or relieved when it is paid. This is to counter possible abuses where the lender is unlikely to be taxed on the interest, or at least will have a low tax liability – which will normally be the case where a tax haven is involved. For while the lender pays little tax, the borrower may obtain tax relief long before it parts with any money, which will be the case where the borrowing takes the form of a discounted security.

 However, this anti-avoidance rule can itself be manipulated by companies to time their interest payments to take advantage of other tax reliefs on offer. So the rule will now be abolished.

This will take effect for new loans taken out on or after 3 December 2014. For existing loans, the old rules will continue to apply up till 1 January 2016.

Policy paper is here.

Draft legislation is here.

Income Tax – miscellaneous loss reliefs

This is an anti-avoidance rule to deny miscellaneous loss relief on tax motivated arrangements. The term “miscellaneous” is a technical term which has a specific meaning – see ITA 2007 s 152. This section is about losses that can be relieved against the various types of income listed in ITA 2007 s 1016 which includes royalties and intellectual property receipts as well as rentals from electric-line wayleaves (how many of you wanted to know that? Well, now you know…)

Policy document is here.

Draft legislation is here.

And finally – not an anti-avoidance rule:

Oil and Gas – new “High Pressure High Temperature Cluster Area Allowance”

What does that mean? No doubt this is aimed at the fracking industries. It is a new allowance to enable companies with ring fenced trades (usually North Sea oil and gas), to reduce the amount of profits that are subject to the supplementary charge.

Policy document is here.

Draft legislation is here.

And if there’s anyone willing to enlighten us all on what it means, I’m sure we’d all be grateful for their illuminating comments!

This deals with the immediate measures that came into effect on 3 December 2014. During the next few days, I shall be looking at some of the other measures that we can all look forward to next spring.

Other measures – draft legislation expected on 10 December 2014

Diverted profits tax – Google Tax

Another acronym to look forward to – DPT or Diverted Profits Tax, aimed at multinationals using aggressive tax planning to divert tax away from the UK. From 1 April 2015, those profits that have been “diverted” are to be subject to a 25% tax charge – note this is higher than the current 21% rate.

Draft legislation here.

Guidance notes here.

Not everyone is happy about Google Tax. Apart from the companies who will be affected, a number of practitioners have doubts as to whether this is really a good idea. In his blog, Waiting for Godot, tax barrister Jolyon Maugham raises the issue whether this is actually contrary to EU law.

Consultation Paper on addressing hybrid mismatch arrangements

Still on the topic of multinationals, a Consultation Paper has been published on how to address tax mismatches arising out of hybrid instruments. Further details can be found here, and also at International Tax Plaza.

Accelerated payments and group relief

These measures will bring group relief arrangements into the accelerated payments regime. Under the accelerated payments rules, anyone using a tax avoidance scheme is required to pay the tax saving upfront to the Government, pending any determination that the scheme actually works. New rules are to be introduced to ensure that the rules work effectively in the case where a company has generated losses to be surrendered as group relief.

In this context, a tax avoidance scheme is either a scheme that has been disclosed under the Disclosure of Tax Avoidance Scheme rules (“DOTAS”) or has been neutralised by the new GAAR.

Draft legislation here.

Corporate and Business Tax

Corporate Restructuring – stamp duty cancellation schemes will no longer work 

When a corporate group or company is restructured, there are various tax reliefs in place to ensure that the companies involved and the ultimate shareholders don’t face an unwanted tax liability. This makes sense, since there is in substance, no change in ownership in the underlying business.

A typical restructuring will involve shareholders exchanging shares in an existing company for shares in another new company. While there are stamp duty reliefs in place, they can be tricky to achieve in practice. An alternative is to use a scheme of arrangement – normally accompanied by a reduction in share capital. The existing shares are cancelled in return for the shareholders being issued with new shares. Because the shares are cancelled and not transferred, there is no conveyance on sale and so no duty applies.

This is going to come to an end from early 2015. Instead of changing the tax legislation, there will be an amendment to the Companies Act 2006 s 641, prohibiting the reduction in share capital under a scheme of arrangement.

Company “B” share schemes – return of capital to shareholders

A “B” scheme is a way in which companies can return excess capital to shareholders. Investors are given a choice as to how they can receive their money – either as income or capital, depending on what suits their individual tax preference. For example, when Vodafone sold its stake in Verizon earlier this year, shareholders were allocated B shares for capital and C shares for income. The proceeds of the Verizon sale were then distributed and the shareholders taxed accordingly.

Well, this is now going to come to an end. All shareholders will be treated as receiving an income receipt, taxed as a dividend. But the idea behind the B scheme doesn’t sound abusive compared to other practices. There are various dicta from case law which say that no one can blame a person if, when presented with a number of choices he opts for the choice which gives him minimal tax liability.

Consortium relief – link company requirements removed

 Consortium relief is similar to group relief. Instead of a group, we have a consortium consisting of:

  • A single company – the consortium company;
  • Corporate shareholders – being the consortium members. Each member must hold at least 5% of the ordinary share capital of the consortium company and between them they must hold at least 75%.

In other words, one can “group” the consortium members together and think of them as a single company with a 75% subsidiary. In short, we have a structure that can be regarded as a group – which explains why consortium relief is similar to group relief. Losses can be passed to and from consortium members to consortium company, with an appropriate adjustment for the proportion of shares held in the consortium company.

A link company is a company that is part of the consortium but also a member of another group. It is called a link company because consortium relief can be accessed by members of the group via this link.

It used to be the case that the link company had to be in the UK or the EEA – either as a resident or trading through a permanent establishment. This restriction will now be removed so that relief can pass through the link to and from UK group members.

Draft legislation here.

R&D

Three measures aimed at R&D (“techie tax”). These measures will apply from 1 April 2015:

  • For large companies, the “above the line” rate for R&D credits will increase from 10% to 11%;
  • For SMEs, the rate for R&D credits will increase from 225% to 230%;
  • R&D relief is to to be restricted so that the cost of materials incorporated into the end product won’t qualify for the tax credit.

The Government intends to provide an “advance assurance scheme” for small companies making their first claim and further guidance on R&D tax credits. This looks like a clearance procedure, so that businesses can assess beforehand whether their costs qualify – but why is it only for those companies making their first claim? There will also be a further consultation on the issues faced by small businesses claiming the relief.

Draft legislation for excluding the cost of materials is here.

Tax incentives for TV and entertainment

No, this isn’t a tax relief for couch potatoes (if only one were paid to sit in front of the TV!) There are three new measures to encourage the production of television programmes and musical events:

  • A new tax relief for the production of children’s programmes (Clanger tax?). This will be at the rate of 25% of qualifying production expenditure and will come into force from 1 April 2015;
  • A consultation on “high end television tax relief” on whether to reduce the minimum UK expenditure for high-end TV relief from 25% to 10% and modernise the cultural test, to bring the relief in line with film tax relief;
  • A consultation on orchestra relief – the intention is to introduce this in April 2016.

Draft legislation on kiddie TV tax relief here.

Property Tax

We’ve already seen that there are to be major changes to the SDLT system for residential property. The Annual Tax on Enveloped Dwellings – where residential property is held withing a corporate or other wrapper – will also see some changes. First another change in the rates – to apply from 1 April 2015:

Property value 2015/16 2014/15 2013/14
Less than £2m 0 0 0
£2m – £5m £23,350 £15,400 £15,000
£5m – £10m £54,450 £35,900 £35,000
£10m – £20m £109,050 £71,850 £70,000
£20m or above £218,200 £143,750 £140,000

From 1 April 2015, for those who are eligible to relief from ATED, there will be simplified filing obligations and information requirements.

Draft legislation on the new rates here.

Draft legislation on administrative rules here.

CGT for non-resident property investors

As expected, the Government is going ahead with its plans to introduce a CGT charge on non-resident property investors holding residential property. This is a measure distinct from the ATED scheme, which will continue to be in force. The Summary of responses to the original Consultation Paper was published a few days before the Autumn Statement, but the draft legislation has been published as part of Finance Bill 2015.

We have already published an article on this site when the Consultation Paper first came out. The following are some of the key points arising from the latest developments:

  • From April 2015, non-resident investors will be subject to CGT on their residential property holdings;
  • Only gains arising from that date will be subject to the charge – any gain already accrued will be outside the scope. This means that where the property has appreciated in value, investors will have the benefit of an uplifted base cost;
  • The tax will be collected by a payment on account system, similar to that operating for SDLT. So no withholding tax obligations on the purchaser, and furthermore, no such obligations on solicitors and other professional advisers;
  • As expected, certain types of property such as communal homes will be exempt. Previously, there was a condition that such homes needed to be attached to an institution such as a student hall of residence. However, there appears to be some tweaking of this condition, in that purpose built student accommodation will also be exempt;

The scope of the tax is, in substance, aimed at individuals:

  • As expected, foreign funds – the equivalent of UK authorised funds, REITs, pension funds and the like will be exempt. There will be a “genuine diversity of ownership” test for this type of fund;
  • But also companies are to be exempt, unless they fall within the “narrowly controlled test” – in other words, they are like close companies, controlled by five or fewer persons. This is intended to catch family arrangements. This is a significant change – previously the Government proposed to tax corporate investors, large or small, unless the company would have been exempt as a corporate fund.
  • There is also to be a PPR-type relief for individual investors, while corporates will have the benefit of indexation relief.

An article will appear in due course, once I have looked closer at the draft legislation.

Authorised property funds and SDLT seeding reliefs

These reliefs are aimed at three types of authorised fund:

  • Property Authorised Investment Funds – (“PAIFs”) which are OEICs with special rules for investing in property – they are the open ended version of REITs;
  • Co-ownership funds where the fund’s investments are held by investors as tenants in common; and
  • Authorised limited partnerships.

The last two – collectively known as authorised contractual schemes – are a fairly recent addition to the family of collective investment schemes, following a consultation that took place two years ago. They are both tax transparent – no tax at all at the fund level, unlike OEICs and unit trusts which pay corporation tax on income, though not on capital gains.

Seeding relief is a stamp tax relief when property is transferred into the fund in return for shares, or units. This is particularly relevant for the authorised contractual scheme, since it was originally envisaged that this type of scheme would be suitable as a master fund vehicle in which other funds (“feeder funds”) could pool their assets.

There are already stamp tax reliefs in place when securities are transferred into the fund, but until now, no relief for property transfers. This state of affairs will be amended, the new relief being introduced in Finance Bill 2016 (that’s right, we’ll have to wait for a year).

The Consultation Paper on authorised contractual schemes can be found here.

And there is also a useful page where one can find the draft entry on authorised contractual schemes which will eventually go into the relevant HMRC Manual (the document is described as being draft legislation but it isn’t).

And finally, here is the original consultation paper on the SDLT seeding reliefs

There will also be a change to the legislation to ensure that units in a co-ownership scheme are exempt from SDLT. In other words, investors cannot be subject to SDLT to the extent that any of the fund’s assets consist of property investments.

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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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  2 Responses to “Autumn Statement 2014”

  1. Great piece of work! Thanks for putting so much effort in collecting all this information and placing it all on 1 easy accesible location

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