PKF Budget Review 2012
March 26, 2012
Now that the initial, often angry, reactions to the Budget have died down, there is time for deeper reflection on its contents. Overall, I think it is fair to say that there was less help for businesses in the real estate, construction and hotel sectors than most of us had hoped for.
The stamp duty land tax changes may have a negative impact on the residential property market in London and the South East and the anti-avoidance rules on ‘enveloping’ are flawed. In particular, the exemption for developers in the provisional legislation seems incomplete and the definition of dwelling problematic: it is hoped this is resolved quickly. If not, this could delay certain transactions until matters are put right in the Finance Act.
Clearly, the cut in corporation tax, and the Chancellor’s obvious commitment to achieve a standard 20% rate in the future, is good news and the relaxation of the EMI limits will be a great help for those businesses seeking to retain key people. However, there was no new help for the commercial property sector and only additional funding of £150m for the Get Britain Building Fund to support house building.
Away from tax, we can hope for better news next week when the National Planning Policy Framework is published.
You can read more on the key budget measures below. When you have, why not have your say on the Budget by completing our short online questionnaire .
If you would like to discuss the impact of any of the Budget measures in detail, please don't hesitate to contact me.
PKF (UK) LLP
The National Planning Policy Framework is published and will come into effect on Tuesday 27 March. While the volume of guidance will be drastically reduced, it remains to be seen if the new ‘presumption in favour of sustainable development’ will speed up the planning process and release more land for development.
Corporate tax rate
The main rate of corporation tax will be reduced to 24% for the year commencing 1 April 2012, 23% from 1 April 2013 and 22% from 1 April 2014.
From 1 January 2013, the bank levy rates will increase from 0.088% to 0.105% and from 0.044% to 0.0525%. This is to ensure that the banking sector does not benefit from the higher than expected reduction in the corporation tax rate. The bank levy legislation will also be amended so that the liabilities of joint ventures are aggregated into a foreign banking group or relevant non-banking group’s chargeable equity and liabilities for the purposes of determining the amounts on which the levy is based.
Consultation on REITS for housing associations
The Government had already announced several changes to the REIT regime, designed to facilitate new entrants to the REIT market. It also intends to consult on the potential benefits of REIT status in encouraging the raising of funds for social housing associations. The consultation will also explore whether to change the tax treatment of income received by a REIT when it invests in another REIT.
Stamp duty land tax
A new top rate of SDLT, 7% on residential properties valued at £2m or more, takes effect from 22 March 2012. In addition, a number of SDLT anti-avoidance measures are to be introduced. The stamp duty holiday for first time buyers on properties costing between £125,000 and £250,000 ends on 24 March 2012 as originally planned: the rate will revert to 1% for subsequent transactions.
SDLT anti-avoidance legislation is introduced with effect from 21 March 2012 which applies a 15% SDLT rate to residential properties worth over £2m purchased by non-natural persons, such as companies, trusts and CIS. This is to target anti-avoidance schemes that involve transferring a property to a company and then selling the shares in the company so that only 0.5% stamp duty is charged on the shares, rather than 5% SDLT being charged on the property.
The emergency legislation on this is available .
Other SDLT anti-avoidance measures to apply from 21 March 2012 aim to close down schemes that make use of the SDLT sub-sale relief provisions. These measures will make clear that the grant or assignment of an option cannot satisfy the requirements of the SDLT sub-sales rule. Further SDLT anti-avoidance measures will be introduced in April 2013. The Government is to consult on the imposition of an annual charge on properties worth over £2m already enveloped within companies or other structures.
CGT on UK residential property of non-resident bodies
The Government will extend the CGT regime to gains on disposals of UK residential property by non-resident, non-natural persons i.e. companies, trusts and other structures such as collective investment schemes (CIS) and partnerships which have a corporate or CIS partner. This will also apply to shares and interests in such property and is to commence in April 2013. This will bring the UK closer in line with most OECD jurisdictions, which tax gains on all real (i.e. not just residential) properties situated within their territories. This measure will be consulted on in conjunction with the SDLT enveloping annual charge for high-value residential properties.
General anti-abuse rule
Underlining all these moves against tax avoidance, the Chancellor announced that he will be taking forward the idea of as general anti-abuse rule (GAAR) with consultation during 2012 and legislation in 2013. The GAAR will apply to SDLT avoidance schemes as well as corporation tax, income tax, capital gains tax and petroleum revenue tax.
VAT issuesThe Government claims to be concerned about what it regards as anomalous VAT treatments and loopholes. However, the solutions announced will take effect from 1 October 2012 and sweep aside a swathe of case law and long standing VAT reliefs. A consultation has been launched asking for comments on the proposals before 4 May 2012. Anti-forestalling rules, effective from 21 March 2012, prevent the use of ‘pre payment’ schemes to create a tax point before 1 October for goods and services used after that date.
- The long standing zero-rating of approved alterations to listed buildings will be withdrawn, meaning VAT will be payable on all building work carried out on listed buildings used as dwellings or for a charitable purpose. Those using listed buildings as places of worship will, however, be able to apply for reimbursement of VAT under an extension of the current Listed Places of Worship Scheme. The law allowing zero-rating of the first sale or long lease of a substantially reconstructed listed building will also be tightened - a building must be demolished so only its external walls remain before reconstruction work can qualify for the relief. Where binding contracts were already in place before 21 March 2012, supplies may be zero-rated under the old rules until 20 March 2013.
- Holiday caravans will be redefined as ‘caravans that are not designed and constructed for continuous year round occupation’ to distinguish them from residential caravans, which are eligible for zero-rating as dwellings. VAT treatment has until now been determined by the caravan’s size.
- All provision of self-storage facilities will become subject to VAT, ironing out varying VAT treatments applied across the industry. Currently, an operator that has not ‘opted to tax’ its premises and lets out a defined storage area to a customer can treat its services as an exempt supply of land. The new measure makes all charges for storage in the UK subject to VAT at 20%.
From 2013, the Government will withdraw the reduced VAT rate of 5% from energy saving materials used in the construction of buildings used for charitable purposes and village halls.
In 2013, a number of bodies created by NHS reforms, including the National Institute for Health and Clinical Excellence, will be added to the list of NHS bodies eligible for the Section 41 VAT Refund Scheme.
Enterprise management incentives
Many companies have benefitted from the use of enterprise management incentives (EMI) employee share schemes. However, they were handcuffed by the relatively low individual limit of £120,000. In the Budget, the Chancellor announced that this figure is to increase to £250,000. The exact date of the change is not yet known as this is awaiting European approval but it is imminent.
The Government also wishes to extend entrepreneurs’ relief to gains on shares acquired through EMI, allowing more people who get shares through EMI to have an effective CGT rate of only 10%. Even if this doesn't become available, those who benefit from EMI usually have a highest effective tax rate of 28% on the shares.
EMI is broadly available to companies or groups in the sector that have a UK permanent establishment, under £30m of gross assets and fewer than 250 employees. If the idea of introducing or expanding EMI is of interest, please let us know. Should you be too large to qualify, we can also help you to take advantage of a number of other tax-effective employee share incentives arrangements.
Personal service companies and IR35A package of measures will be introduced to tackle avoidance through the use of personal service companies and to make the rules (IR35) easier to understand for those who are genuinely in business. This will include:
- strengthening specialist compliance teams to tackle avoidance of employment income
- simplifying the way IR35 is administered, and
- subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NIC deducted at source by the organisation by which they are engaged (this reflects current HMRC policy).
Any legislation required to implement these changes will be introduced in Finance Bill 2013.
Personal tax allowances, rates and bands
The personal allowance for 2012/13 is to be increased to £8,105 (£10,500 for those aged between 65 and 74 and £10,660 for those aged over 74) with a corresponding decrease in the basic rate band to £34,370. The allowance will increase to £9,205 from April 2013, while the basic rate band will reduce to £32,245.
From April 2013, the additional rate of tax will reduce from 50% to 45%, with the additional rate on dividends reducing from 42.5% to 37.5%. The 45% rate will also apply to trusts (dividends 37.5%), and some payments out of employer-financed retirement benefit schemes.
Download Tax Facts 2012/13 .
Cap on unlimited income tax reliefs
Legislation will be introduced in Finance Bill 2013 to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25% of income or £50,000, whichever is greater. The cap will apply only to reliefs which are currently unlimited (i.e. not to EIS, VCTs or pension contributions) such as sideways and carried forward loss reliefs (including film investment losses), interest relief on loans - for example to invest in close companies or partnerships - and charitable donations. The Government has recognised that this will be a disincentive to charitable giving, and will consult on limiting the impact of this change for charities. Draft legislation will be published for consultation later in 2012.
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