Tomorrow’s Budget Speech is likely to have a split personality, being the final Budget of the Con/Lib Coalition Government but also an opportunity for this most political of Chancellors to publicise some of the more electorally attractive policies to be included in the forthcoming Conservative manifesto. This blog post concentrates mainly on the former aspect.
As there will be only a few days for the Finance Bill to go through the necessary Parliamentary stages before MPs head off back to their constituencies, it is likely that a substantial part of the legislation published in draft in December will be postponed until after the election and included in a second Finance Bill. However there are likely to be announcements on the outcome of consultation processes which will indicate the direction of travel.
We will be looking out for the following in particular:
- Diverted Profits Tax, nicknamed “Google Tax”: headline-grabbing legislation designed to prevent multinationals making huge profits in the UK without paying UK tax on them and to sharpen up the transfer pricing rules for UK companies. HMRC indicated in January that the Government planned to include it in the pre-election Finance Bill relying on cross-party support, but there are serious flaws in the draft legislation and a controversial measure such as this would normally be given much longer time for Parliamentary scrutiny. See our earlier blog for details.
- Disguised fee income: legislation causing particular concern in the private equity industry which seeks to prevent investment fund managers receiving guaranteed income from investment funds without paying income tax on it as trading or employment income. The draft legislation goes much further than taxing guaranteed general partners’ profit shares and potentially brings carried interest and co-investment interests into charge to income tax unless they fall within narrowly defined exclusions which do not reflect current market practice (we considered these measures in more detail here). We hope to see better targeted legislation before the 6th April 2015 start date or a postponement of the changes.
- Bank losses: restriction of carry forward of losses to 50% of current profits in any accounting period. The aim is to ensure that, once banks return to profit after the financial crisis, they pay tax on their profits rather than offsetting the huge losses brought forward from the recession to eliminate profit for what could be the next 10 – 20 years. See our earlier blog for more information.
- Capital gains tax: extension to non-UK residents disposing of UK residential property and reform of the main private residence exemption. This long-trailed measure (which we discussed back in December) is due to come into force next month along with changes to the taxation of enveloped properties.
- Corporate debt and derivatives: the draft Finance Bill legislation included a large volume of highly technical legislation on corporate debt and derivatives including the partial abolition of the late paid interest rules. It seems likely that much of this will be postponed until after the election, but may have effect from April 2015 or earlier once enacted. One of the main measures is a new “regime anti-avoidance rule” stated to come into force with effect from 1st April 2015. This is so general in terms that detailed HMRC guidance will be needed to make it workable. We hope that at least a first draft of this will be published before the end of this month.
- Disclosure regimes and penalties: revised hallmarks for disclosure of tax avoidance schemes and harsher penalties for non-disclosure; also increased penalties for failure to declare taxable offshore income, stricter monitoring of promoters of tax avoidance schemes and extension of the accelerated payments rules.
- Capital gains tax entrepreneurs’ relief: it is hoped that the lifetime limit of £10m will be maintained despite rumours of a reduction.
- Annual Investment Allowance (AIA) and R&D: the CBI has called for this to be raised to £250,000 permanently rather than falling back from the temporary £500,000 level to only £25,000 at the end of this year. It is also urging the Government to extend R&D tax credits to include the manufacture of innovations and prototypes.
- Non-doms’ remittance basis charges: in December the Chancellor announced increases in the annual amounts non-doms must pay to ensure that their foreign income and gains are not subject to UK tax unless remitted to the UK. He also announced a consultation on whether remittance basis elections should be for a minimum of three years, thereby potentially committing some non-doms to three payments of £90,000. Viewed cynically, we can expect to hear more about this tomorrow as most non-doms can’t vote in UK General Elections (as we discussed in a previous post).