What does the 2015 Budget mean for IPG members? Crowe Clark Whitehill provides some analysis
In his sixth and final Budget ahead of the General Election, the Chancellor declared Britain “the comeback country”. Tax-free savings, help-to-buy, ISAs, pension freedoms—this is a Budget clearly aimed at voters; individuals, not companies. But what does it all mean for publishers? Here are our thoughts on how the announcements will impact your business and some recommendations for maximising tax reliefs and allowances.Corporation tax rate
The main rate of corporation tax, currently 21%, will reduce to 20% from 1 April 2015. This brings it into line with the small company rate.Tax relief for capital expenditure
Tax relief on plant and equipment, fixtures and fittings and other chattels is generally available at either 18% or 8% on a reducing balance basis. Where the asset qualifies for 18% tax relief, it takes approximately six years to get tax relief for 70% of the cost and a further 18 years to get tax relief on the remaining capital cost.
Consider whether your business is eligible for the Annual Investment Allowance (AIA)—held at £500,000 until 31 December 2015. The current rate of £500,000 will run out from 1 January 2016. The Chancellor has announced that a new rate will be set at that time, which will be above the £25,000 to which it would automatically revert to—but there is no indication of what that level will be.
Transitional provisions will apply to businesses with an accounting period straddling 1 January 2016. If these mirror the 2014 transitional provisions then the rules are likely to be complex. The timing of planned capital expenditure is critical in order to maximise tax relief where an accounting period straddles 1 January 2016.
If your capital expenditure exceeds the AIA, allocate this first to any expenditure eligible for writing down allowances at the 8% rate before allocating it to expenditure eligible at the 18% rate.
Where your accounting period straddles 1 January 2016, careful consideration should be given to the timing of expenditure if the total planned capital expenditure is likely to exceed £500,000.Short life assets
Short life assets (SLAs) pooling is available for expenditure on assets with a useful life of less than eight years. It does not apply to cars or leased assets. SLA pools are maintained separately from the 18% ‘general pool’ and the 8% ‘special rate pool’.
Other assets eligible for 100% capital allowances
Several types of assets attract 100% capital allowances. These include:
* Low carbon emission cars.
* Assets used in Research and development (R&D).
* Expenditure on energy and water-saving plant and machinery and on water-saving plant. A list of qualifying assets can be found here
* Business premises renovation allowances. These are available on capital expenditure incurred on the renovation or conversion of business properties that have been unused for at least one year in certain specified disadvantaged areas of the UK.
* Enterprise Zone allowances. Available on expenditure on new plant and machinery in designated Enterprise Zones, and the 100% enhanced rate is available until 31 March 2020.Financing
The Government says it is committed to helping the best businesses access the finance they need to grow. There are a number of different funds available:
* The new ‘Help to Grow’ programme is being set up for businesses needing between £500 and £2 million.
* The Budget announced the near doubling of the funding for UK Trade and Investment activities in China, including a focus on the manufacturing businesses.
* Increased funding for exporters.
Tax relief for innovations
Research and Development (R&D) tax relief is an additional tax deduction beyond the 100% normally available and can reduce a company’s corporation tax liability. The Government wants to ensure that they remain effective in helping small businesses grow, and will implement a package of measures to improve their accessibility to smaller businesses, together with a roadmap for further improvements over the next two years.
Additional tax relief is currently 125%, which translates as a £45 tax reduction for every £100 of R&D spend. From 1 April 2015, the additional tax relief increases to 130%, equivalent to a £46 tax reduction for every £100 of R&D spend.
For loss making companies there is an option to cash R&D tax losses in at 14.5% for every pound of loss forgone. This can provide a valuable cash injection into a business and is equivalent to £32.63 for every £100 of R&D spend. From 1 April 2015 this will increase slightly to £33.35 for every £100 of R&D spend.
It can be difficult for companies to decide whether to cash in their R&D tax losses or to carry these forward in anticipation of offsetting the losses against future trading profits. Carrying unused losses forward not only defers the tax benefit by at least one year, but in some instances, if the company does not become profitable in the future, there is a risk that the tax benefit might not be available.
Large companies can claim 30% additional tax relief, which is equivalent to a £6.30 tax reduction for every £100 of R&D spend. With the corporation tax rate reducing to 20% from 1 April 2015, there is a consequential reduction in the tax benefit to £6 for every £100 spend.
Alternatively, a large company can choose to claim an Above the Line (ATL) credit. This is currently 10% of the R&D spend and from 1 April 2015 will increase to 11%. The credit is taxable, forming part of the pre-tax profit or loss, and can either be reflected in the accounts or by making an adjustment when calculating the company’s tax liability. An amount equivalent to the credit is then available to offset against the company’s tax liability.
The net effect of the two adjustments is equivalent to a £7.90 tax reduction for every £100 of R&D spend. From 1 April 2015, the tax benefit increases to £8.80 tax reduction for every £100 of R&D spend. Tax relief obtained by claiming ATL is more than the equivalent £6.30 or £6 tax reduction from claiming a 30% tax uplift.
For loss making companies there is an option to offset the credit against the company’s tax liability and, in certain circumstances, for companies with a nil tax liability, or a liability that is less than the taxable credit, there is potential to make a tax repayment claim. This option is not available if a company choses to claim the alternative 30% tax uplift.
If your company is large it should consider claiming under ATL rather than the 30% tax uplift. From 1 April 2016 a large company will only be able to claim the ATL tax credit.The Patent Box
The Patent Box is a reduced rate of corporation tax applied to Patent Box profits in companies that develop and exploit patented processes or products. The rate of tax applied to Patent Box profits is currently 13.3%, compared to the main rate of corporation tax of 21%. From 1 April 2015 the rate will reduce to 12% (when the main rate of corporation tax will be 20%) and it will gradually taper down to 10%, from April 2017, compared to the 2017 anticipated corporation tax rate of 20%.
Despite the contention by some EU members that this is anti-competitive, the UK Government’s view remains that the Patent Box, in some shape or form, is here to stay. Last November, the Government bowed to mounting pressure from the EU and announced that the Patent Box would be phased out by 2021. However, it is intended to replace it with a cut down version. The 10% tax rate is likely to remain but the Patent Box will be restricted to those companies where substantial economic activities take place in the UK. The changes are unlikely to affect companies carrying out R&D activities in the UK.Tackling tax evasion
Following the media furore concerning offshore banking and tax evasion, the Chancellor is to introduce new and more severe financial penalties for tax evasion. Details yet to be published are likely to cover not only the evaders but professionals such as bankers and accountants who aid and abet tax evasion. It may also include what HMRC terms ‘aggressive’ tax avoidance.Diverted Profits Tax
As expected tax will be charged at 25% of the profits diverted from the UK. The legislation is aimed at companies that generate profits in the UK but avoid having a taxable presence here, as well as those that have activities in tax havens but are deemed to lack economic substance. It is not intended to catch small and medium-sized enterprises or companies that have total sales revenue of less than £10 million, from UK customers.Corporate VAT
* Increase in the VAT registration limit from £81,000 to £82,000.
* Increase in the VAT deregistration limit from £79,000 to £80,000.
The Chancellor announced measures to help reduce labour costs. The aim is to encourage employers to recruit young people into the workplace and to hire apprentices.
* Abolishing National Insurance costs for the under 21s and apprentices.
* The introduction of an apprenticeship funding scheme by 2017. £2,000 discount from Class 1 employer’s NIC liability. This was introduced in 2014 and has been taken up by over 1,000,000 employers.Trivial benefits
From April 2015 there will be a statutory exemption for trivial benefits in kind (BIK) costing less than £50. Currently there is no monetary limit, but there is some confusion over the items covered under trivial benefits. This will provide a statutory exemption for items employers provide to employees such as flowers on the birth of a child. Following technical consultation, an annual cap of £300 will also be introduced for office holders of close companies and employees who are family members of those office holders.Dispensations
From 6 April 2016 the Government will exempt income tax expenses payments and Benefit in Kind (BIK) provided to employees where they would have been eligible for a deduction. Therefore, there will be no need for a dispensation to be granted. P11Ds/P9Ds
From April 2016, the Government will remove the £8,500 threshold below which employees do not pay income tax on certain BIK (requiring a P11D for all employers) and replace it with new exemptions for carers and for ministers of religion. Removing the £8,500 limit will mean lower paid employees will be taxed on some benefits that they currently do not pay tax on.
We will have to wait to see if unpaid volunteer expenses are included in any exemption. At present they are able to claim allowable expenses up to £8,500 without a tax consequence—which can include home to work travel. Over this limit the normal rules apply and home to work would become taxable.Voluntary payrolling
From 6 April 2016 employers will be able to payroll car, car fuel, medical insurance and subscriptions such as gym membership. This will be optional for employers. They will be able to continue reporting the benefits on the form P11D after the end of the tax year as normal if they wish.Travel and subsistence review
The Government announced they are still working on a review of the rules for tax relief on travel and subsistence payments. A full public consultation will occur in time.
Income tax allowances and tax bands
It was previously announced that the personal allowance will increase to £10,600 from 6 April 2015, and the basic rate band will be £31,785. The personal allowance will be increased to £10,800 for the 2016-17 tax year and to £11,000 for the 2017-18 tax year.
In addition, the Chancellor confirmed that the point at which high earners will pay 40% tax will increase above inflation. The threshold for paying higher rate tax will increase to £42,700 from 6 April 2016, and then to £43,300 for the 2017-18 tax year.
There were no changes to the rates or bands at the higher end. Individuals with income exceeding £100,000 will continue to see their personal allowance withdrawn, and the 45% tax rate applies to income over £150,000.
The personal allowance is progressively withdrawn for income over £100,000, giving rise to an effective tax rate of 60% for income between £100,000 and £120,000 in 2014-15. This upper limit becomes £121,200 in 2015-16 and £121,600 in 2016-17.
The age related element for taxpayers aged 65 and over is progressively withdrawn for income above £27,000 in 2014-15 and £27,700 in 2015-16. There will be no age related allowance from 2016-17.
Non-savings income is taxed as the first slice of income, followed by savings and dividends. Dividends falling into the basic rate band are taxed at 10%. The higher rate of tax for dividends is 32.5% and the additional rate is 37.5%.National Insurance Contributions
Class 2 National Insurance Contributions (NICs) are to be abolished and Class 4 NICs reformed to include new benefit tests. This will be a welcome change for the self-employed as the current system is both cumbersome and confusing. The proposals will be subject to consultation later this year to determine the detail and timing of the reforms.Abolishment of the annual tax return
The Chancellor announced plans to change the way the annual tax return is submitted, with a view to removing millions of individuals and small businesses from the current self-assessment system. Further detailed announcements will be made later in the year, but the plan is to introduce a digital tax account for each tax payer bringing together all their relevant information in one place. HMRC will populate the digital accounts with the information they receive from third parties, and individuals will be able to check their tax position in real time. These should be available by early 2016, and by 2020 small businesses will be able to use their accounting software to feed information straight into their digital tax account.Pensions
The lifetime allowance will be reduced from £1.25 million to £1 million from 2016-2017, but will be indexed in line with inflation from 2018-2019. The annual allowance for contributions will remain at £40,000 gross with higher rate tax relief remaining in place.
The new pension freedoms will be extended to those with annuities. This will affect a further five million people who will now be able to sell their annuities and give them access to the capital within their pensions. Tax on pension withdrawals will only be at the marginal rate of tax and not at 55%.Entrepreneurs’ relief
The Chancellor has indicated that certain loopholes with the entrepreneurs’ relief legislation will be closed from Budget day. For those making disposals of shares in trading companies, access to entrepreneurs’ relief and so to the 10% CGT rate usually requires an equity interest of at least 5%. The rules around joint ventures allowed certain groups to club together to reach this threshold, provided the underlying company was a trading company.
The proposed new measure will restrict entrepreneurs’ relief only to those shareholders with 5% directly held equity in a genuine trading company.
Also announced were measures limiting the application of entrepreneurs’ relief for certain ‘associated disposals’. These rules previously allowed individuals to make disposals of certain personally held business assets and benefit from entrepreneurs’ relief on the basis of only a very minor reduction of their participation in their main trading company. This will no longer be permitted, as a disposal of at least 5% (the minimum threshold to qualify for entrepreneurs’ relief) will be required before the associated disposals rules may be applied.For more information and advice about any aspect of this, please contact Paul Fay, Partner at Crowe Clark Whitehill at firstname.lastname@example.org.