The Chancellor’s big challenge in this year’s Budget was to make savings to compensate for the economy’s sluggish performance without taking away the oxygen which is fuelling growth in the private sector. Having identified that the strongest and fastest growth is being driven by small and medium sized businesses (SMEs), the Chancellor’s strategy seems to once again involve tax breaks to help drive up the performance of those high growth companies. Fuelling growth now, for payback later.
In a relatively tax neutral Budget, it would appear from the costing data that the Chancellor is attempting to use tax breaks today to increase tax revenues in the near future, by supporting and accelerating the growth of SMEs in the UK.
The clearest indicator of this intention is through the reduction in business rates for 600,000 small businesses and the introduction of flexible loss reliefs. Both of these measures will cost the Government money in the short- term, but as those businesses grow, the incentives either disappear or reduce in their marginal benefit, and the clear hope is that tax receipts will flow back in, in the form of corporation tax, VAT, income tax, National Insurance, and so on.
A large chunk of the additional corporation tax being raised now comes from plans to restrict the tax deductions available to large corporates on the interest charges which go through their accounts. In new rules, tax deductions will be limited to 30% of earnings, a measure forecast to raise £2 billion by 2018/19.
The headlines focus largely on supporting business. Another surprise corporation tax rate reduction has been introduced; the next step in George Osborne’s mission to offer the lowest rate in the G20. With the rate now expected to reduce to 17% in 2020, this will benefit all companies regardless of their size.
Similarly, the measures introduced to reduce business rates for 600,000 small businesses are expected to reduce their rates burden by £1.6 billion by 2017/18, freeing up cash for them to invest into growing the businesses themselves.
The interest restrictions applying to large corporates will be a tax burden for them. However, this measure is part of a much bigger picture and is part of a raft of changes following the recent publication of the OECD’s report on base erosion and profit shifting (BEPS) so we can expect other tax authorities around the world to implement similar measures.
Loss reliefs are set to be simplified, allowing brought forward losses to be shared around a group of companies for the first time. This should help businesses to use losses from one company against the profits of another when previously they might have become ‘trapped’.
In a less helpful measure, a cap will be applied once a company begins to make taxable profits of at least £5 million — at present there is no limit on the profits which can be covered by brought forward losses within a single company, so long as the losses are available. Given the cap only kicks in at relatively high profit levels, it again appears that the Chancellor is helping the smaller companies and those that are relatively early in their lifecycle.
Whilst the primary message supports business growth, a secondary message of this Budget is about continuing to ensure that all businesses pay their fair share of tax in the UK. Public pressure in this area is still intense and further measures have been introduced today:
— Loans to participators — for many years close companies have been subject to a 25% tax rate on loans made to shareholders. More recently therefore, small company shareholders have been better off taking loans as opposed to receiving dividends. The increase in the loans to participators tax rate to 32.5% is intended to prevent higher rate taxpayers gaining an unfair advantage;
— Profits from trading in UK land — Anti-avoidance provisions and amendments to tax treaties with Guernsey, Jersey and Isle of Man are to be enacted to ensure that non-UK based property developers pay the same level of UK tax as UK property developers;
— Sale of online goods (VAT) — HMRC announced that it will introduce measures to tackle VAT avoidance on the sale of on-line goods, including the possibility of making the online market places (such as Amazon and eBay) joint and severally liable for sellers’ unpaid VAT; and
— Withholding tax on royalties — The changes are intended to bring the UK more into line with international practice and ensure that intra-group royalty payments cannot be used to shift profits from the UK to low-tax jurisdictions, either directly or via a treaty jurisdiction.
Alongside these structural changes and incentive measures, the Chancellor announced some forthcoming consultations.
Support is to be given to museums and galleries and a new tax relief will be introduced from 1 April 2017 to encourage them to stage creative new exhibitions and to display their collections to a wider audience across the country. The Government will consult with the sector on how to implement the relief over the summer.
A consultative document will also be issued in spring 2016, proposing changes to the UK tax treatment of leased assets. This has been expected following the recent finalisation of the new lease accounting standard: IFRS 16. No more is known at this stage but this could lead to major changes and we await it with interest.
A further consultative document will be issued to address how partnerships calculate their tax liabilities. The consultation will include a number of areas where the taxation of partnerships could be seen as uncertain, including an issue highlighted by the Office of Tax Simplification’s partnerships review.
Although the Chancellor made only minor changes to the existing capital allowances regime, they are worth a brief mention. It has been confirmed that 100% Business Premises Renovation Allowances will not be extended beyond their current expiry date of April 2017. This is not a big surprise given HMRC’s concerns on abuse of this generous relief. At the same time, an extension in the number of Enterprise Zones has been announced and the Government will ensure that all First-Year Allowances on Enterprise Zones are available for eight years from the date of inception, whereas currently there is a blanket expiry date of 2020 across all relevant sites. A further extension relates to the 100% First-Year Allowance for low emission cars, moving the expiry date back from April 2018 to April 2021, with changes to the emissions thresholds for all cars applying from April 2018.
In terms of Indirect Taxes, there had been speculation in the lead up to the Budget of a further increase to the standard rate of Insurance Premium Tax. The rise was smaller than suggested, from 9.5% to 10%, and the Chancellor attempted to soften it by suggesting that the revenue will be used to help the Government fund flood defences and resilience.
In a Budget that made Jamie Oliver jump for joy, there is plenty for businesses to like too. The deal that the Chancellor has struck with growing businesses seems to be “I will help you to grow, and when you become large and successful, I expect you to pay your way on tax”. Seems fair enough.
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