The Chancellor of the Exchequer presented a worsening economic picture at Budget 2016, mainly caused by lower international growth and less UK productivity improvements. But whilst Government spending was cut to keep within his fiscal principles, from a tax perspective the measures announced in the Budget were broadly financially neutral. However, there were significant tax raising proposals counteracting large tax giveaways. The main beneficiaries of the Chancellor’s largesse were small businesses, entrepreneurs and higher rate taxpayers – and large international companies are subject to a number of tax raising measures to help fund this.
The promised business tax road map was published but provides little more than a summary of the Budget announcements affecting businesses. These include major changes to the use of losses by companies, getting rid of the streaming rules from April 2017 - however, only 50 percent of profits over £5 million will be able to be offset against losses. In addition, the continued introduction of the OECD proposals on base erosion and profits shifting (BEPS) shows the Chancellor‘s hard approach to international businesses, with new rules on the restriction of tax deductions on interest payments and an extension of the new hybrid instrument rules. However, these adverse changes to large companies will be partially mitigated by a reduction of the rate of corporation tax to 17 percent from 2020.
For employers, there will be changes to the rules on termination payments from April 2018 including greater alignment between the income tax and NIC treatment. From April 2017 there will also be a new requirement for employers in the public sector to assess whether the IR35 rules apply to contractors engaged via personal service companies and, if so, to account for tax and NIC at source. And there is a shot across the bows on salary sacrifice arrangements, albeit no action is to be taken against pension saving, childcare and health-related benefits such as cycle-to-work. Further commentary on issues relevant to employers can be found on our Employers’ Club site.
There were changes to SDLT too, with revised SDLT rates for commercial property. It was also confirmed that the 3 percent additional SDLT top up for acquisitions of additional residential property that had been announced at the Autumn Statement will now also apply to large-scale investors click here for a detailed note on these changes. .
Entrepreneurs are well catered for in the Budget. Whilst a number of commentators feared that Entrepreneurs’ Relief would be restricted, instead a new £10 million lifetime limit has been introduced for external investors into unlisted companies who hold their shares for at least three years. The reduction of capital gains tax to 10 percent for basic rate taxpayers and 20 percent for other taxpayers is another unexpected change, although this reduction in rate will not impact on the rate payable on carried interest or residential property.
As had been expected, the Government have decided not to introduce significant changes to the pension regime, but instead have increased the savings limit for ISAs to £20,000 from 2017 and introduced a new ‘Lifetime ISA’ for under 40s, for which HMRC will provide a 25 percent top up.
In summary, the Chancellor has tried to keep those individuals who matter politically on board with tax reductions — whilst continuing his tough approach to international companies.
For KPMG in the UK’s commentary document covering the main tax changes in the Budget, as well as our Tax Rate Card and our On A Page summary of the key points, please visit our dedicated Budget 2016 webpage.