Summer Budget 2015: Your guide to the key measures

Background

• stall-setting – long term plans for the government’s approach over the whole parliament, such as the election pledge to lock in tax rates; establishing the Office of Tax Simplification (OTS) as a permanent office of HM Treasury; setting its next targets as the alignment of income tax and NICs and the taxation of small businesses; and promises to publish tax roadmaps for:
  • tax administration for small businesses and individuals (by the end of 2015);
  • banking; and
  • business tax (by April 2016).
• unpopular measures (depending on your point of view) – measures that will either save money or raise revenue and which will be unpopular to some elements of the electorate, including:
  • sweeping changes to tax credits and other working benefits;
  • changes to reduce the tax benefits for buy-to-let individual landlords; and
  • wide-ranging changes to the taxation of dividends for individuals, which are expected to be a significant revenue raiser.
• crowd-pleasers (again depending on your point of view) – including:
  • continued focus on ‘combatting tax evasion, avoidance and aggressive tax planning’ with the aim of raising an additional £7.2bn a year;
  • some further bank bashing, with the introduction of a supplementary charge of 8% on banking profits;
  • a reduction in the headline rate of corporation tax to 18% by 2020;
  • increases to the personal allowance and higher rate tax thresholds, alongside the introduction of the national living wage; and
  • changes to the inheritance tax regime to remove many homes from the scope of inheritance tax.

Business and enterprise

Corporation tax rates and payments

• 19% for financial years 2017, 2018 and 2019; and
• 18% for financial year 2020.

Intangible fixed assets: abolition of relief for purchased goodwill

CFC loss restriction

Capital allowances: annual investment allowance

Research and development: universities and charities

Oil and gas taxation

Consortium relief

Future developments

• Distributions:  the government will consult on the rules on company distributions in Autumn 2015, see: Summer Budget 2015, para 2.122.
• Apprenticeships levy: The government will introduce a levy on large UK employers to increase the number of apprenticeships. Details, such as the meaning of ‘large’, the rate of the levy and when it will start, have not been announced and are expected in the Spending Review. The chancellor’s speech suggested that there may be consultation with business on the details. It is expected that employers who appoint apprentices will be able to use some of the funds raised by the Apprenticeships Levy to support the apprenticeships. See: Summer Budget 2015, para 2.201.

Funds

Taxation of carried interest

Future developments in funds

• Limited partnerships: a consultation will be published on technical changes to limited partnership legislation in the context of the private equity and venture capital sector. No further information has been provided other than that the changes will enable private equity and venture capital funds to use the limited partnership structure more effectively. See: Summer Budget 2015, para 2.184.
• Performance linked rewards paid to asset managers: a consultation has been launched alongside Summer Budget 2015 on the circumstances in which fund managers’ performance linked rewards should benefit from capital gains treatment. There are currently no relevant tax rules specific to the asset management sector and applying normal investment/trading principles can be difficult. The consultation proposes statutory tests to clarify the position and to set out when performance fees arising to fund managers from their fund management activities may be treated as capital in nature. According to the consultation, the default rule will be that such fees will be charged to tax as income with capital treatment given in certain circumstances. Although private equity carried interest is expected to be taxed as capital gain, this is not certain and will be dependent on the investment strategy of the fund. The consultation closes on 30 September 2015. See: Summer Budget 2015, para 2.179 and consultation document: Taxation of performance linked rewards paid to asset managers.

Finance

Bank levy

Bank corporation tax surcharge

Banking tax definitions

Banks’ compensation payments

Modernisation of the taxation of corporate debt and derivative contracts

• with effect for accounting periods commencing on or after 1 January 2016, clarifying the relationship between tax and accounting – measures will include removing the ‘fairly represent’ requirement and basing the calculation of taxable loan relationship profits solely on accounting entries in a company’s income statement (and so not in reserves or equity);
• with effect from the date Summer Finance Bill 2015 receives Royal Assent (although originally intended to apply from 1 April 2015), the addition of a new regime-wide anti-avoidance, ‘main purpose’, rule in each of the loan relationships and derivative contracts rules; and
• also from the date of Royal Assent of Summer Finance Bill 2015 (although it was originally intended to apply from 1 January 2015), a new ‘corporate rescue’ rule providing tax relief where loans are released in cases of debtor companies in financial distress with a view to ensuring their continued solvency.

• FOREX hedging;
• convertible instruments; and 
• property-based derivatives

Employment taxes

National insurance contributions

• following the introduction of a £2,000 NICs employment allowance in April 2014 (as announced in the Budget 2013), the government announced in Summer Budget 2015 that the NICs employment allowance will be increased to £3,000. This allowance will enable an employer to hire four employees on the newly proposed national living wage of £7.20 per hour (effective from April 2016) without paying any NICs. As a result, up to 90,000 employers will see their employer NICs liability reduced to zero. See: Summer Budget 2015, paras 1.127 and 2.61; and
• companies where the director is the sole employee will no longer be able to claim the NICs employment allowance. See: Summer Budget 2015, paras 1.198 and 2.62.

Measures pre-announced

• statutory exemption for trivial benefits: as previously announced in Autumn Statement 2014 and March Budget 2015, the statutory exemption for trivial benefits in kind costing less than £50 will be effective from April 2016 and will be introduced in Finance Bill 2016. For details of these measures, see Summer Budget 2015, para 2.161;
• benefits in kind and expenses: as previously announced in FA 2015 (following recommendations made by the OTS) the following measures will be effective, from the 2016/17 tax year:
  • abolition of the £8,500 threshold for benefits in kind;
  • allowing employers to voluntarily report and deduct tax on benefits in kind in real time; and
  • introduction of an exemption for qualifying business expenses.
  • The draft regulations required to deliver these changes were released alongside Summer Budget 2015. See: Summer Budget 2015, para 2.161;
• travel and subsistence expenses: following a report by the OTS and as previously announced at Budget 2014, the government will review the rules underlying the tax treatment of travel and subsistence expenses. The consultation can be found here. The deadline for the review has been extended several times, the most recent of which extended stage 1 of the review until 1 May 2016. A discussion paper will be published shortly outlining a potential framework for the new rules. See: Summer Budget 2015, para 2.165;
• ordinary commuting: as previously announced in March Budget 2015, the government has published a consultation document detailing proposals to restrict tax relief for ordinary commuting (in general home-to-work travel and subsistence expenses) for workers who are supplying personal services engaged through an intermediary (including umbrella companies, certain employment business and personal service companies) and who are working under the supervision, direction or control of any person. The proposed change is to ensure that individuals, whose relationship with their engager is such that they look and act as employees, cannot claim relief on the everyday cost of travelling to work, when employed through an intermediary. The consultation can be found here. The consultation is open for comments until 30 September 2015 and the changes will take effect from April 2016. See: Summer Budget 2015, para 2.182; and 
• NICs reform: as previously announced at March Budget 2015, the government will consult in Autumn 2015 on the abolition of Class 2 NICs and to reform Class 4 NICs for the self-employed. See: Summer Budget 2015, paras 1.246 and 2.16.

Future developments

• actively monitor the growth of salary sacrifice schemes that reduce employment taxes and their effect on tax receipts. See: Summer Budget 2015, paras 1.197 and 2.66
• commission the OTS to review:
  • the closer alignment of income tax and NICs; and
  • the taxation of small companies.
  • (the terms of reference for the OTS reviews on the closer alignment of income tax and NICs and the taxation of small companies will be published shortly. See: Summer Budget 2015, paras 1.245 and 2.158-2.159)
• consult on the tax and NICs treatment of termination payments, to make the system simpler and fairer. See: Summer Budget 2015, paras 1.246 and 2.164; and
• engage with stakeholders on how to improve the effectiveness of the existing intermediaries legislation (IR35) which is designed to protect against disguised employment. A discussion document will be published shortly as the government has admitted that IR35 (the current anti-avoidance legislation introduced to ensure that individuals choosing to work through their own limited company (but who would have been employees if they were providing their services directly) pay the same tax and NICs as employees) is ‘not effective enough’. In addition, the government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. See: Summer Budget 2015, paras 1.180-1.181 and 2.182.

Incentivised investment

Venture capital schemes

• New measures in Summer Budget 2015: new rules to prevent EIS and VCT funds from being used to acquire existing businesses, whether through a share purchase or asset sale;
• Minor changes in Summer Budget 2015:
  • new qualifying criteria to limit eligibility for companies receiving their first risk finance investment (SEIS, EIS or VCT). The limit will be 10 years after the first commercial sale took place for ‘knowledge intensive’ companies and 7 years (originally 12 years) for other qualifying companies (except where the total investment represents more than 50% of turnover averaged over the preceding five years);
  • a new cap on the total investment a company may receive under EIS and VCT at £20m for ‘knowledge intensive’ companies and £12m for other companies (originally £15m); and
  • an increase in the employee limit for ‘knowledge intensive’ companies to 500 employees (originally 499 employees).
• Implemented measures:
  • EIS and VCT will be amended to require all investments to be made with the intention to grow and develop a business, and require all investors to be ‘independent’ from the company at the time of the first share issue;
  • the removal of the requirement that 70% of SEIS money must be spent before EIS or VCT funding can be raised;
  • the establishment of a stakeholder forum to allow investors to raise queries and concerns about the operation and use of venture capital schemes;
  • as announced at the Autumn Statement 2014, the government will introduce a new digital process for companies and investors using SEIS, EIS and the Social Investment Tax Relief (SITR) by the end of 2016; 
  • the government also intends to work with VCTs to develop a standard format for the annual VCT returns. This will be discussed at the new stakeholder forum. 

Real estate taxes

Restricting finance cost relief for individual landlords

Reform of wear and tear allowance

Rent a room relief increase

SDLT and authorised property funds

Business rates review

• consulting further with stakeholders on the proposed appeals system ahead of enabling legislation being considered in parliament in the Enterprise Bill;
• incorporating provisions on improved information sharing between the Valuation Office Agency and local authorities as part of the Enterprise Bill; and
• continuing to work across government to reduce the taxpayer burden of sharing the same information with multiple government bodies.

Indirect taxes

VAT use and enjoyment rules

VAT refunds for shared services

IPT standard rate increase

Private client 

Income tax

• the higher and additional rates of income tax applicable to earnings income in England, Wales and Northern Ireland and UK wide savings income (see ITA 2007 s 6(1)) will not increase above 20%, 40% and 45% for the duration of the current parliament;
• Class 1 NICs rates payable by employers (13.8%) and employees (main rate 12%, additional rate 2%)(see Social Security Contributions and Benefits Act 1992, s 8(2) and s 9(2)) will not be increased for the duration of this parliament; 
• the upper earnings limit (UEL) for class 1 NICs (currently £815 per week) will not exceed the higher rate tax threshold (HRTT) – the UEL (reg 10(b) of the Social Security (Contributions) Regulations 2001) is the point at which employee’s earnings no longer count toward contributory benefits and they start to pay NICs at 2% and the HRTT is the sum of the personal allowance (currently £10,600 and the basic rate limit (£31,785) equating to £42,385 (reg 11(2A)(b) of the Social Security (Contributions) Regulations 2001) in 2015/16;
• for the duration of this parliament, the standard rate under VATA 1994 s 2 can be no higher than 20% and the reduced rate under s 29A can be no higher than 5%.

• basic rate taxpayers: 7.5%
• higher rate taxpayers: 32.5%
• additional rate taxpayers:38.1%

Bad debt relief for peer-to-peer (P2P) industry

P2P withholding tax

Anniversary Games

Individual savings accounts (ISAs)

Pensions

• it should be simple and transparent;
• it should allow individuals to take personal responsibility for ensuring they have adequate savings for retirement;
• it should build on the early success of automatic enrolment in encouraging new people to save more;
• it should be sustainable.

Inheritance tax and trusts 

Non-domiciliaries (non-doms)

• IHT will be payable on all UK residential property owned by resident or non-resident non-doms regardless of whether the property is held directly or indirectly through an offshore structure. 
• Non-doms who have been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for all tax purposes.
• Individuals who have a UK domicile of origin will no longer be able to claim non-dom status while they are resident in the UK.

• all UK residential property will be subject to the charge, whether the property is occupied or let;
• the charge will apply to UK residential property of any value;
• the charge will be imposed on the occasion of a chargeable event, including:
  • death of the shareholder, wherever resident;
  • a gift of the shares into trust;
  • the trust’s ten year anniversary;
  • a distribution of the shares out of the trust;
  • death of the donor within 7 years of gifting the shares; and
  • death of the donor or settlor who benefits from the gifted UK property or shares in the 7 years prior to death;
• any borrowing taken out to purchase the UK residential property will be deductible when calculating the charge (although note the restrictions on deductibility of debt for IHT purposes);
• the same reliefs (e.g. the spouse exemption) will apply as if the shares were owned directly by the non-dom (although such reliefs may not be available if the shares are held by a trust); and
• the gift with reservation of benefit rules will apply similarly to the shares as they do to UK residential property held directly by non-doms and UK domiciled individuals.

• the new IHT charge will apply to UK residential property of any value (although the nil rate band may be available in the case of low value property) whereas ATED currently only applies to properties worth in excess of £1m; and
• there will be no exemption from the new IHT charge for let properties as there is with ATED.

• the individual was domiciled in the UK under general law at any point in the last three years (the three year rule);
• the individual has been resident in the UK for not less than 17 of the last 20 years (the 17 year rule).

• The government will consult on whether split years of UK residence will count towards the 15 years or whether complete tax years of UK residence are required. 
• From the 16th tax year of UK residence:
  • a non-dom will no longer be able to access the remittance basis of taxation and will be taxed on an arising basis on their worldwide personal income and gains; and
  • IHT will be paid on the non-dom’s worldwide personal assets.
• The £90,000 RBC currently payable by a non-dom who wants to access the remittance basis and who has been resident in at least 17 of the last 20 tax years will cease to be relevant from 6 April 2017 since a non-dom will be taxed on an arising basis after 15 years. The £30,000 and £60,000 RBCs will remain.
• The government will consult on the need to retain a de minimis exemption beyond 15 years where total unremitted foreign income and gains are less than £2,000 per year (ITA 2007s 809D(2)).
• The new rules will be effective from 6 April 2017 irrespective of when someone arrived in the UK, and there will be no grandfathering rules for those already in the UK.
• The present rules will apply to those who leave the UK before 6 April 2017 but would nevertheless be deemed domiciled on 6 April 2017 under the 15 year rule.
• A non-dom who leaves the UK after becoming deemed domiciled under the 15 year rule has to spend more than five tax years outside the UK to lose their deemed domicile (the five year rule). This is consistent with the requirement to be non-resident for five years under the temporary non-residence rules.
• The government will also consult on whether other provisions need to be changed such as the domicile election and the effect of the change in relation to the old estate duty treaties.
• To ensure that UK domiciliaries (UK doms) and non-doms are treated the same under the new rules, UK doms who leave after 5 April 2017 having been here for over 15 years will also be subject to the 5 year rule even if they intend to emigrate permanently and settle in a particular place on the day of their departure. The government will consult on the detail of the various interactions between the 5 year rule and the existing 3 year and 4 year rule.
• If an individual spends more than five tax years abroad and then returns to the UK, while remaining non-dom under general law, the 15 year clock will restart. This will not apply to returning UK doms (who will be subject to different rules below).
• The deemed domicile of the long-term resident non-dom has no effect on the domicile status of the non-dom’s children whose actual and deemed domicile position is looked at independently.
• Once deemed domiciled under the 15 year rule, non-doms will not be able to claim reliefs such as the remittance basis for overseas chargeable earnings under ITEPA 2003 s 22. There will be consultation on the employment-related securities provisions. 
• Non-doms who have set up an offshore trust before becoming deemed domiciled in the UK under the 15 year rule will not be taxed on trust income and gains that are retained in the trust and such excluded property trusts will have the same IHT treatment as present (subject to the proposals referred to in Changes to the IHT treatment of enveloped UK residential property).
• Non-doms who are deemed domiciled in the UK under the 15 year rule will be taxed from 6 April 2017 on any benefits, capital or income received from any trusts on a worldwide basis. The government will consult on the necessary changes to the transfer of assets regime and CGT trust provisions. 
• Transitional rules relating to trusts were introduced for non-doms in 2008 (e.g. rebasing provisions). The interaction of these rules with the new regime after the non-dom becomes deemed domiciled in the UK will be subject to consultation.

• the UK dom did not spend more than 15 tax years here; and
• they did not acquire an actual domicile in the UK under general law when they were in the UK (i.e. their domicile of choice, as a matter of general law, remained in place).

Administration and anti-avoidance

Common Reporting Standard developments

Additional resource to target non-compliance by wealthy individuals

Additional specialist personal tax (SPT) resource

IR35 reform

Interest on tax-related judgment debts

Large business tax compliance

HMRC information powers: tackling the hidden economy

Disposal of stock other than in trade

Measures pre-announced

• Serial avoiders: The government will publish a further consultation on sanctions for serial users of defeated tax avoidance schemes, following an earlier consultation on this topic that was published in January 2015. The proposed measures include a special reporting requirement, a surcharge, and ‘naming and shaming’ serial avoiders. In addition, the promoters of tax avoidance schemes (POTAS) regime, also known as the ‘high-risk promoters’ regime, would be widened by bringing in promoters whose schemes are regularly defeated. Legislation to implement these measures will be in Finance Bill 2016. See: Summer Budget 2015, para 2.174
• GAAR penalty: The government will consult on introducing a general anti-abuse rule (GAAR) penalty and new measures to strengthen the GAAR. A previous consultation on introducing a penalty where arrangements are counteracted under the GAAR was published in January 2015. The measures would be included in Finance Bill 2016. See: Summer Budget 2015, para 2.175
• Direct recovery of debts: Summer Finance Bill 2015 will include measures originally proposed in Budget 2014, to increase HMRC’s powers to recover tax and tax credit debts directly from taxpayers’ bank accounts. This measure has been widely criticised, and the government has promised that there will be ‘robust safeguards’ including a county court appeal process and a face-to-face visit to every taxpayer before they are subject to this form of debt recovery. Draft legislation was published in Finance Bill 2015 but was dropped as part of the ‘wash up’ to enact the Bill before the general election. The draft did not include a requirement for a face-to-face meeting and it remains to be seen whether this will be placed on a statutory footing. See: Summer Budget 2015, para 2.170.

This summary was provided the LexisPSL and private client teams, and includes some commentary from Tolley Guidance. LexisPSL provides tax lawyers with practice notes and precedents, with links to trusted sources. See www.lexisnexis.com/uk/lexispsl/tax/home.