Budget 2013 looms: what are the predictions?

What can we expect?

On 20 March, the Chancellor George Osborne will deliver his Budget speech. As businesses and individuals across the country wait to see what is in store, partners from accountancy firms Saffery Champness and Crowe Clark Whitehill consider the likely changes and discuss the implications below.

Ronnie Ludwig comments: “George Osborne really needs to pull something special out of the bag this year. Stimulating the economy is imperative, especially given that we have now lost our Moody’s rating. The Coalition is hardly high on political capital, so the choices are likely to be tricky ones and are certain to be interesting.”

Inheritance tax

Tim Gregory says: “There are lots of very good reasons to leave this alone, not least of them political pressures. I can however foresee some tinkering here. The Coalition plans to fund the new £75,000 cap on elderly care costs with changes to IHT. So far, they have proposed to freeze the nil rate band for another few years. This seems unlikely to be enough to cover the care costs, and so something further may need to be done."

Capital gains tax

Ronnie Ludwig comments: “We may well see a reduction in the headline rate of CGT, bringing it down from 28 per cent to 25 per cent. This would be very nice little incentive to get people investing again. Recent evidence suggests that CGT has also raised less tax since it was increased to 28 per cent, so a return to 25 per cent would make sense on a fiscal level too.”

Incentivising business creation

Tim Gregory comments: “If this Government is really serious about creating a start-up economy, it should give some time to further reconsidering income tax loss relief restrictions for businesses. Not doing this just prolongs an unnecessary disincentive for people to start new businesses and dampens the entrepreneurial spirit we seem to be missing.”

First time buyers

Ronnie Ludwig suggests: “The housing market is still sluggish, but Government can have a hand in boosting it; especially with first time buyers. One way of doing this would be to re-introduce tax relief on mortgage interest. Another solution could be a Stamp Duty holiday for first time buyers. The housing market is a good economic indicator, so the Government would do well to try and give it a leg up."

Cutting corporation tax

David Mellor, Head of National Corporate Business at Crowe Clarke Whitehill, comments: “The big announcement in the Budget is expected to be that corporation tax for larger businesses is to be cut to 21 per cent from April 2014. When this comes into force it will be the lowest rate of corporation tax in G8 countries. This reduced tax rate will help to ensure that the UK remains a desirable destination for corporations and maintains its competitive edge in a time of global economic turbulence.

“However, more could be done. The tax system itself is complex and costly to administer, as well being difficult for taxpayers to understand and process. A simpler regime would lessen the red tape associated with compliance and reduce the cost to the government of verifying, enquiring into returns and collecting taxes. These savings could be used to reduce the headline rate of corporation tax further, which should be lower than 20 per cent if the UK really is set on being an inward invsestment direction. We know that the Chancellor has announced that the Office of Tax Simplification will undertake a review of employee benefits and expenses in December.”

Combating corporate tax evasion

David Mellor, Head of National Corporate Business, continues: “Given the recent media focus on corporate tax evasion, the Chancellor is likely to announce greater investment in resources to ensure that multinational companies pay more tax. The closure of tax loopholes, which combined with a crackdown on tax evasion through Swiss bank accounts should bring in £2bn per year.”

“Employee shareholders” schemes – risk of creating tax avoidance opportunities for owner managed businesses?

Director Susan Ball comments: “The Chancellor is expected to announce that the Government will be proceeding with the proposed ‘employee shareholders’ scheme. However, it is not obvious that this will have material tax benefits.

“The essential idea is to encourage employees to give up employment rights for a tax incentive. As the proposals stand, there are significant tax costs in connection with the issue of these shares and the tax saving only applies when the shares are sold, making it unlikely that many employees will wish to participate.

“On the other hand, if the Government increases the incentive, it runs the risk of creating an avoidance opportunity for smaller owner managed businesses (as the issue of shares presents no cash cost to the company but, in most cases, entitles it to a tax deduction). So the development of this policy is something to watch carefully. We know that the Chancellor has announced that the Office of Tax Simplification will undertake a review of employee benefits and expenses in December.”

Mansion tax – damaging for business?

Partner Stacey Eden comments: “We can expect more changes to the taxation of property to be confirmed in the Budget. 

“The Government's focus remains on stamping out certain types of Stamp Duty Land Tax (SDLT) avoidance in a way that does not damage business by focusing on attacking high-value residential property transactions and investments, with wide-ranging exemptions if the property is part of a rental or development operation. However despite the reliefs these changes make it necessary for overseas holders of residential property worth £2m and held for “personal use” via a non-natural person (effectively a company) to consider significant restructuring prior to 5 April 2013.

“There is a further possibility of the Chancellor proposing an increase to the SDLT rates, or attempting to appease the Liberal Democrats in the Coalition by proposing a higher council tax for high-value residential properties. These measures, if introduced, could go some way towards taking some of the sting out of the prime residential property market in London, restricting the massive price hikes we have seen in recent years.

“The other possibility is the introduction of further anti-avoidance measures following on from the proposed wholesale re-drafting of the rules on sub-sale relief (transfer of rights). The existing rules have been the vehicle for widespread avoidance. Limiting them to the intended purpose of allowing purchasers to immediately sell on land surplus to their requirements without incurring a double charge is not going to be easy. It remains to be seen if the final rules meet the challenge.”

Limit on income tax relief – holding back start-ups?

Partner Laurence Field comments:  “Provisions in the 2013 Finance Bill are expected to limit certain income tax reliefs to the higher of: 25 per cent of total income or £50,000.

“The Government, having been forced to give ground by removing charitable donations from the scope of this restriction, are unlikely to make any further amendments. This is a revenue raising change. It seems likely that a significant part of that revenue will be from people starting new businesses.

“Businesses frequently make losses in their early years and the opening year loss rules have allowed those setting up on their own to recover significant amounts of tax paid while in their previous employment. The cap may reduce those recoveries considerably.

“The usefulness of income tax relief for lost investments in unquoted trading companies may also be significantly impaired by this restriction. Those who make larger trading losses will also be affected but, where able to survive, will be able set the losses against future profits. It will take time to fully appreciate the implications of these provisions.”

Further regulation (GAAR, FATCA)

Partner Laurence Field continues:  “The Chancellor announced in the Autumn Statement that the Government will be pushing ahead with a General Anti-Avoidance Rule (GAAR) in its attempt to counter perceived abuses of the tax system. The GAAR is intended to give HMRC broader powers in closing off abusive tax avoidance. The majority of taxpayers would argue they are not involved in abusive tax arrangements and it will be interesting to see how many people will be surprised by HMRC enquiries.

“Foreign Account tax and Compliance Act (FATCA) requires financial institutions outside the US to report information about their account holders to the IRS. The Chancellor’s is also expected to confirm that the Treasury will be allowed to make regulations to override data protection laws to allow compliance with this.”

International tax issues – ‘exit charge payment plan’ to alleviate cash flow issues

Partner Laurence Field continues:  “The Budget is expected to confirm some interesting proposals on international issues. Companies looking to leave the UK typically suffer an “exit charge” on the value of certain assets. The thinking is that UK Government should be able to tax gains that have arisen while the company was UK resident. However, it is not clear this is consistent with UK law.

“The Chancellor has proposed that where an European Economic Area (EEA) incorporated company ceases to be UK resident and takes up residence in another EEA state it can enter into an ‘exit charge payment plan’. Essentially, allowing it to defer payment of UK tax on exit for a period of up to ten years. This should alleviate cash flow issues for companies who give up UK tax residence.

“There will also be welcome changes that will allow non-UK resident companies to surrender losses from their UK branches to tax paying UK members of the same group. There are protections to ensure the losses cannot be used in both the UK and overseas.”

Statutory residence test – marginal cases will remain as difficult to resolve

Tim Norkett, Partner, comments: “The draft Finance Bill published in December 2012 contained a revised version of the legislation originally published that summer. It seems unlikely that any significant changes will be made between now and the 2013 Budget.

“There is no doubt that the statutory residence test is going to be an improvement on the current situation based almost entirely on case law. Nevertheless, the new provisions are disappointing inasmuch as they lack precision, and it will mean that in many marginal cases will remain as difficult to resolve as before.

“The most significant recent amendment has been to introduce a new minimum presence test when considering possession of a home. This has the laudable effect of meaning UK homes occupied for less than 30 days a year are less likely to make a person UK resident. On the other hand, an overseas home which is occupied for less than 30 days is also ignored so it cuts both ways.”

Annual Investment Allowance

Partner Laurence Field adds: “Although the Annual Investment Allowance (AIA) was increased tenfold from 1 January 2013 for a period of two years, the legislation is not yet been enacted and will actually be in the Finance Bill 2013. There are two key points to be made about the allowance now standing at £250,000 per accounting period.

“The first is that it is time apportioned over the two years to 31 December 2014 using complex transitional provisions. Unless you have a calendar year accounting period, care is needed in calculating the position in the accounting periods straddling either end of those two years, and careful thought given to the timing of capital expenditure.

“The second point is that the new restriction on income tax losses applies to losses generated by this relief. So individuals will need to consider their overall tax position, to ensure they will be able to utilise the relief.”

This article first appeared on Spears.

Photograph: Getty Images

This is a story from the team at Spears magazine.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.