By Clare Munro, Tax Partner
Given the political dramas following last month's Budget it's hard to know whether we can expect all the proposals to be enacted as announced. However, assuming that they stand, with the staging of changes over several years, and the need to build in changes announced last year, it remains a challenge to assess the impact on our clients.
Take the corporation tax rate changes. Last year the proposal was to reduce corporation tax to 19% from 1 April 2017 and to 18% from April 2020. In the Budget the Chancellor announced that the 2020 reduction will be to 17%, giving the UK the lowest corporation tax rate in the G20 (although not the lowest in the EU – Latvia and Lithuania have 15% and Ireland 12.5%).
Lower rates will help companies to reinvest, but the true picture on taxation of corporate earnings, needs to factor in the changes to taxation of dividends which take effect from 6 April 2016. Out goes the tax credit system which, until 5 April 2016, means that basic rate taxpayers have no further liability on dividend income; in comes new higher tax rates on dividend income. It’s hard to generalise but in very broad terms, every £100 of corporate income distributed to basic rate taxpayers (in excess of the £5,000 dividend allowance) will suffer tax of £23.23 in 2020 (and the rates will be higher still in the intervening period until corporation tax falls). At present the effective tax cost is limited to the corporate tax of £20. Higher and additional rate taxpaying shareholders will experience increases in the tax cost on distributed corporate income of just under and over 4% respectively.
Greater flexibility for loss usage should prove useful for some of our clients, allowing the company to use brought forward losses against all income streams rather than being limited to offset against profits of the same trade. This measure is restricted to losses incurred on or after 1 April 2017, so it will be at least two years before companies benefit. We live in an age where companies frequently have more than one activity, or have activities whose nature develops with changing technology. This measure should help to avoid arguments with HMRC about the subtle differences between aspects of trade in order to prove that current profits come from the same trade as that which generated the historic losses.
At the large multinational end of the corporate scale, the government is continuing to implement changes to prevent profit shifting from the UK. Measures will include a cap on interest deductions at 30% of UK earnings where the net UK interest expense exceeds £2m and restrictions on deductions for outbound royalty payments for use of intellectual property.
Incentives for investment
These include the changes to capital gains tax. With effect from 6 April 2016 the higher rate of capital gains tax comes down from 28% to 20% and for basic rate taxpayers from 18% to 10%. In fact, this may only benefit a limited set of taxpayers. Residential property is specifically excluded from the advantageous rates so these gains will continue to be taxed at existing rates. Entrepreneurs with 5%+ shareholdings or interests in trading businesses should be eligible for the 10% entrepreneurs’ rate in any event. Most in line to benefit would seem to be external investors with shares and securities.
In addition to the new general CGT rates, a new £10m entrepreneurs’ relief allowance will be made available to ‘long term’ investors in unlisted companies. The minimum holding period of three years and requirement for the investment to be in ‘newly issued shares’ indicates an element of overlap with the current EIS schemes which already give a CGT exemption in similar circumstances. Perhaps this will fill the gap for investment in a company undertaking non-EIS qualifying activities such as leasing or property development.
Finally, we welcome the government’s U-turns in relation to availability of entrepreneurs’ relief for companies in partnerships and joint ventures so as to focus on avoidance and prevent the collateral damage to commercial structures.
Overall, this budget sets out a road map towards lower business taxes for UK-based businesses over the coming years, albeit that much of the sweet stuff will not be with us until next year or beyond. Accepting that mistakes have been made and, where anti-avoidance has been imposed too harshly, back tracking, is refreshing and, once the identified tax plans are consolidated, the business community should have increased certainty going forward.
Need help with taxation and tax-related issues?
If you want to talk about corporation tax, dividends, loss usage, profit shifting, incentives for investment, entrepreneurs' relief, but also to receive tax compliance, estate planning, VAT and trusts advice, get in touch with our tax partner Clare Munro.