The Budget takes place on Wednesday 21 March and the draft Finance Bill will be published a week later on Thursday 29 March.
The ICAEW pre-Budget submission
ICAEW wrote to the Chancellor on 1 March and the letter had four key recommendations as to how the government can achieve sustainable economic growth:
· maintain the Annual Investment Allowance at £100,000;
· give tax relief to businesses that sponsor further and higher
· set out in the Budget speech the clear steps HMRC is taking to
tackle poor levels of service standards; and
· provide a full response and plan of action for each of the
recommendations in the Office for Tax Simplification’s (OTS)
Small Business Tax Review within the next 12 months.
The Budget and pre Consultation process
In the period since last year’s Budget the government has been consulting on potential changes to the UK tax system to be introduced in 2012 and on 6 December 2011 published draft clauses for further consultation prior to their inclusion in the Finance Bill to be published on 29 March.
ICAEW Tax Faculty responded to the more important of these consultations in TAXREP 70/11 and TAXREPs 3-11/12 and 13/12. All these representations were then published in a single document TAXREP 14/12 which was submitted to the Exchequer Secretary and the HMRC Permanent Secretary for Tax.
The Budget itself
On the tax front the Budget will look both back and forwards.
It will reflect the enormous amount of consultation that has taken place over the past nine months on measures to be included in Finance Bill 2012, to be published on 29 March, and look forward to the measures that are going to be the subject of consultation over the summer and autumn for inclusion in Finance Bill 2013.
And there will no doubt be a few white rabbits plucked out of the Chancellor’s hat to add to the theatre of Budget Day. The latter are more difficult to predict and we shall leave that task to others but will report on them in our Budget Commentary which we will be publishing towards the end of Budget week.
Rates and allowances for 2012/13
We already know what the rates and allowances are going to be as they were announced in the Autumn Statement in November 2011.
They were published on our website at that time 2012/13 rates and allowances.
Controlled Foreign Companies
The main element of the new CFC regime is going to be the Gateway test which should ensure that the majority of groups do not have to consider the detailed CFC rules. The initial draft legislation was not up to scratch and a substantially revised version was published at the end of February and is likely to be further amended before the Finance Bill appears on 29 March.
The CFC regime is going to be a key element of the government’s ‘most competitive in the G20 countries’ tax regime so the government is spending a lot of time getting it as right as it can. ICAEW is actively involved commenting on the changing proposals.
50% income tax rate
The government has commissioned HMRC to produce a report on the amount of money collected from the 50% top rate of income tax introduced by the previous government and effective for the first time in respect of the 2010/11 tax year. Receipts in January 2012 will provide a first indication as to whether the increase in the top rate has been a tax raiser.
The Chancellor has said on several occasions that he proposes to get rid of this top rate of tax but for political reasons, even if not for public finance reasons, now is almost certainly not going to be that time.
Child Benefit withdrawal
The current proposal is to withdraw Child Benefit from 1 January 2013 from all families where at least once member is a higher rate taxpayer. This will create rather perverse incentives to keep income below the threshold and will mean that families with two taxpayers who each have income just below the higher rate threshold could have income in excess of £80,000 and retain the Child Benefit while if there is only a single earner then the Child Benefit is withdrawn when income is in the mid £40,000s.
Pensions tax relief
There is inevitably speculation, at Budget time, that the Chancellor is going to remove or reduce the tax benefit from pension contributions, perhaps fuelled by the pension providers who want people to ‘buy now while stocks last’. This year has been no exception. We shall have to wait and see.
Taxing the value of land has had its fanatical supporters ever since Henry George propounded his theories in the mid 19th century. The LibDems have proposed a Mansion Tax and there may be moves to prevent avoidance of stamp duty in relation to very expensive properties by owning the properties via companies and other intermediaries.
But any comprehensive change to the taxation of land is likely to require comprehensive revaluation of properties and that hasn’t been carried out for 20 years since a poll tax was mooted by Margaret Thatcher’s administration in the early 1990s.
The Growth Strategy
There are likely to be a lot more announcements on Budget Day as to what the government intends to do to kick start growth in the economy. The Cabinet has had some fiery discussions on this topic in recent weeks but the silver bullet remains elusive. We hope the Chancellor will provide a clear narrative about the government policy in this area and how the different initiatives fit together.
Readers may also be interested in the approach of the LSE which launched a Growth Commission in January 2012 in conjunction with the Institute for Government with a high level panel of experts on board. They will provide ideas as to what the government ought to be concentrating on.
Seed Enterprise Investment Schemes
As we said in our response to the draft legislation ‘we believe that further funding support for start-up and early stage businesses is needed since a shortage of easily accessible funding is a hindrance to growth.’
Graham Aaronson presented his proposal to the government in November 2011 for a General Anti-Avoidance Rule (GAAR) and the Chancellor will announce in the Budget what he now intends to do.
While Tax Faculty has some reservations about a GAAR we believe that if a GAAR is introduced clearly targeted on only the most egregious of schemes then it should not lead to greater uncertainty and it will address the concerns that the present Coalition Government clearly has about potential abuses of the tax system. Another key objective is that any GAAR should not detract from the attractiveness of the UK tax system.
Taxation of micro business
The Office of Tax Simplification (OTS) published its final report on the taxation of micro business on 28 February which we reported at http://www.ion.icaew.com/TaxFaculty/24105 The Chancellor will announce the next steps in the Budget which is likely to be a full scale consultation on the proposals.
This was the subject of another report from the OTS suggesting that trading companies could distribute certain assets including internally generated goodwill to shareholders without charge on the company or the shareholders. The Chancellor may announce a consultation on this at the time of the Budget.
Administration of small business tax
This was the third of the OTS February reports in this area of small business. This one was designed to make the system more efficient and effective for small business and there may be further announcements in the Budget on this.
The OTS will be publishing its first report on the taxation of share schemes in the week beginning 5 March, after the present report has been published.
Statutory residence test
We should find out what the government intends to do about a statutory residence test. Ordinary residence is also going to be reformed but we do not yet know which of the two options consulted on, abolition except for the purposes of overseas workday relief or retention with a statutory definition, will be adopted. SP 1/09 – employees with duties in the UK and overseas – is going to be put on a statutory footing. All these issues are for further consultation with legislation in 2013.
Taxation of non-domiciles
Finance Bill 2012 will include legislation to increase the remittance basis charge to £50,000 for long term residents, defined as those who have been resident in the UK for 12 or more of the 14 years prior to the claim.
It will also include the proposals to encourage business investment in the UK, allowing non-domiciles to remit foreign income and capital gains to the UK for the purpose of commercial investment without incurring a tax charge.
As part of the simplification of the remittance basis rules there will be legislation on the relief for the sale of exempt property and the amendment to the nominated income rules to permit an individual to remit the first £10 of income or capital gains which they nominate free of tax and without becoming subject to the identification rules.
Foreign currency bank accounts
With effect from 6 April 2012 all sums within a foreign currency bank account held by an individual, trustees or personal representatives of deceased persons will be outside the scope of CGT.
Cultural Gifts Scheme
After widespread consultation last summer draft legislation was issued in December on the proposals to encourage donations of pre-eminent objects to the nation in return for a tax reduction. The scheme encourages lifetime giving and the reduction in the donor’s tax liability is based on a set percentage of the value of the object being donated.
IHT: 10% reduction for estates leaving 10% or more to charity
Legislation will be introduced in Finance Bill 2012 to provide for a reduction in the rate of IHT from 40% to 36% where 10% or more of a deceased person's net estate or component(s) of their net estate after deducting IHT exemptions, reliefs and the nil-rate band is left to charity. The measure will apply to deaths on or after 6 April 2012. It will apply equally whether the legacy is included in the will, under an intestacy or by way of deed of variation. The reduced rate of IHT will apply automatically if the estate or component passes the 10% test, but the executors can elect for it not to apply.
For the purpose of this relief the different components of an estate comprise the free estate, assets owned jointly (not as tenants in common), and settled assets in which the deceased had an interest.
The aim of the policy is to act as an incentive for people to make charitable legacies, or to increase existing legacies, and so increase the amount that charities receive from estates.