The Summer Budget of 8 July 2015 will be remembered as a reforming budget, with major changes to welfare provisions, including limiting tax credits, and introducing the new National Living Wage. Looking through those headline measures there are a number of important tax measures which will impact individuals and businesses.
Companies will be able to look forward to further reductions in the corporation tax rate to 18% from 2020 and a permanent investment allowance of £200,000 which will give business the stability for investment in plant and machinery in the years ahead. This will enable businesses to plan ahead for investments, rather than rely upon annual changes in this allowance.
However, this good news will be offset by the adverse cash flow impact on bringing forward corporation tax payments by 4 months for accounting periods commencing after 1 April 2017. Whilst this will only apply to companies with chargeable profits of at least £20 million, (calculated on a group basis), this measure is expected to increase the Government’s corporation tax receipts by over £4 billion in 2017/18 – a significant overall permanent cash flow advantage. The introduction of new measures specific to the bank sector has continued with a new supplemental charge of 8% on profits albeit this is somewhat offset by planned reductions in the bank levy.
There are some specific tax changes which ensure that profits charged under the controlled foreign companies regime are not reduced by UK losses or expenses. In addition, the abolition of corporation tax deductions for amortisation of goodwill that was brought in last December for acquisitions of goodwill from individuals and partnerships related to the company in question has been extended to include all business acquisitions from 8 July 2015. This will facilitate a more level playing field between business acquisitions and those structured as purchases of shares.
Universities and charities will also no longer be able to claim the repayable research and development tax credit for expenditure incurred on or after 1 August 2015.
Large businesses will also be charged a new apprentice levy which is aimed at spreading the cost of new apprentices around all large companies. The new national living wage will also have a large economic impact for certain businesses which rely upon low paid staff. Sectors such as care services will be particularly affected, with potential knock-on impacts for local government.
Whilst there are only minor current changes for VAT and for many businesses, employment taxes, the increase in the employment allowance by £1,000 to £3,000 from April 2016 will reduce employers’ national insurance bill, except for those companies who only employ one director. Specific measures such as the changes to the domicile rules and separately announced changes to the treatment of short term business visitors to the UK will also affect certain businesses. On pensions, there has been confirmation of the Conservative pre-election commitment to reduce the lifetime limit to £1 m and tapering the annual limit for earners above £150,000 towards £10,000. The Chancellor has also announced a fundamental review into the taxation of pensions, potentially moving towards a regime where pension contributions would be taxable, but pension receipts would be tax free. This would have a large impact on the savings industry as a whole and it will be interesting to see how the consultation develops.
Significant changes abound in the private client arena. The tax definitions of domicile will limit the number of years a UK resident can claim non UK domicile status. This will bring in to tax worldwide income and gains for individuals who have been resident in the UK for 15 out of the past 20 years. There are other domicile changes. These will also apply for Inheritance Tax (IHT) purposes. Further changes will bring homes owned by non-domiciled residents through offshore structures into the IHT net.
There is also a levelling in the house purchase arena with the introduction of a restriction of mortgage interest relief to 20% for buy to let properties. This will significantly impact on those individuals who have invested in buy to let properties as an alternative to pension provision although the phasing in over 4 years commencing from 1 April 2017 may provide them time to plan for the increased income tax that may fall due.
Owner managed companies will need to consider the timing of the payment of dividends over the next few years as a new system for the taxation of dividends will apply from 6 April 2016. Although a £5k tax free dividend allowance is being introduced, this will be offset by the abolition of the associated tax credit and the increase in rates of tax by 7.5% on dividends. The Government has estimated that over £2.5 billion of tax will arise on dividends paid prior to 6 April 2016 by individuals seeking to extract funds from companies before the higher rates of tax come in. The overall effect of these changes will be to narrow the tax gap between profits paid as bonuses and profits paid as dividends.
Overall this is a major tax raising budget with significant reductions in the Government’s welfare bill. By 2020, it is predicted that the net effect of all measures announced at the Summer Budget will be over an additional £18 billion income/savings for Government. Pensioners appear to be mainly unaffected by these changes.