The first all-Tory Budget of this most political of Chancellors will have to balance his stated commitment to cut government spending by £30bn over the next two years with his self-denying ordinance prohibiting increases in NICS, VAT or income tax in this Parliament. He will want to get the economic pain over with as soon as possible in the hope of going into the Conservative leadership campaign and the 2020 General Election on the back of an economic surplus and rising prosperity.
Much of the pre-Budget speculation has centred on welfare cuts, including the expected reductions in tax credits for low income workers, contrasted with the pre-announced additional transferable IHT allowance for family homes and exhortations from senior Conservatives to abolish or reduce the additional 45% rate of income tax; current indications are that George Osborne does not regard reduction of the 45% rate as a priority this time round.
There has been less focus in the media on the likely corporate tax changes in the forthcoming Finance Bill, yet there is a considerable amount of unfinished legislative business left over from the previous Parliament as the Finance Act following the March Budget was rushed through in a few days with much of December’s draft legislation postponed until after the election. It is expected that most this will now resurface, alongside responses to pre-election consultation exercises and measures in the Conservative manifesto. Those we expect to see include the following:
Corporate debt and derivatives: confirmation of the changes to the tax treatment of certain types of debt restructuring, in particular the new relief for debt releases and modifications where there is a material risk that the company may otherwise become unable to pay its debts within 12 months; also the precise terms of the new regime-wide anti- avoidance rule for loan relationships and derivatives which will prevent deduction of interest and other debits in a wider range of circumstances than under previous law. These may be back-dated as the draft legislation provided for a 1 April 2015 start date for the new anti-avoidance rule and stated that the new debt restructuring rules would apply for accounting periods commencing on or after 1 January 2015.
Partnership taxation: an update on which of the recommendations of the Office of Tax Simplification the Government intends to accept; it will be especially interesting to see whether there is any attempt to legislate, rather than merely update, Statement of Practice D12, which is currently relied upon to prevent “dry gains” arising on changes in profit shares in private equity and other investment partnerships and to effect the base cost shift when carried interest is triggered. SP D12 is far from perfect but there seems to be a reluctance to tinker with it too much for fear or unintended consequences.
US Limited Liability Corporations (LLCs): possibly an announcement of a change in the UK tax treatment of LLCs following HMRC’s recent Supreme Court defeat in the case of Anson v HMRC  UKSC 44. The UK has until now treated LLCs as opaque for tax purposes like companies, rather than transparent like partnerships but the Supreme Court held that the LLC in the Anson case was transparent, at least for income purposes.
Enterprise Investment Scheme, Venture Capital Trusts and Seed EIS: confirmation of legislative changes to ensure these schemes do not fall foul of EU State Aid rules; draft legislation included a 12 year age limit on companies at the time of first investment under these schemes.
Social Investment Trusts: we will also be interested to see if there are further details of these proposed new tax-favoured investment vehicles for investment in social enterprises.
Capital gains tax: CGT was a notable omission from the list of taxes which the Government pledged not to increase so it is possible that rates may increase. The current rates of CGT (18% and 28%) are significantly below the higher and additional rates of income tax (40% and 45%). However it seems more likely that the Chancellor will tighten up the qualifying conditions for reliefs, possibly including further restrictions on entrepreneurs’ relief (in addition to those already implemented: see our earlier blogs on this topic) coupled with an extension of the relief to some academics with shares in spin out companies.
Annual investment allowance: the Conservatives have pledged to set this at a significantly higher permanent level before it reverts back from the temporary rate of £500,000 to £25,000 in December 2015.
Stamp taxes and ATED (the annual tax on enveloped dwellings) are also unprotected. Recent changes to these have hit higher value residential property hard while commercial property has remained largely unscathed. There have been calls for abolition of stamp duty on UK listed shares but this still makes a considerable contribution to the Exchequer and the recent clamp down on share cancellation schemes on M&A deals suggests that stamp duty and SDRT will be with us for some time to come.
Diverted Profits Tax: one of the few complex and controversial measures rushed onto the Statute Book before the election, there may be tidying-up amendments to the legislation but the Government seems likely to stick to its guns on DPT despite suggestions of infringement of EU law and international tax treaties. It was electorally popular, consistent with (in fact, anticipating) the international BEPS project and appears already to be having an impact, notably Amazon’s decision to book sales to UK customers through the UK – although it remains to be seen how large those profits turn out to be.
Pensions: a reduction in relief for pension contributions of high earners seems inevitable; the Conservative manifesto pledged to reduce the annual £34.8 billion pension tax relief bill by limiting tax relief on pension contributions for those paying the top rate of income tax. The size of the annual allowance would be gradually reduced from £40,000 to £10,000 for those earning £150,000 a year or more.
Anti-avoidance: we are expecting further measures clamping down on serial tax avoiders and promoters of unsuccessful tax avoidance schemes. The Conservatives are seeking to raise an additional £5bn in revenues from counteracting tax avoidance so we can expect disclosure rules to enforced and extended, schemes counteracted when disclosed and penalties increased.
Nom-doms: one of Labour’s more popular policies in the election campaign was to end the favourable tax treatment of non-UK domiciled individuals. In response, Osborne indicated that the Conservatives would increase the remittance charge (but did not say by how much), and was reportedly considering removing the ability to inherit non-dom status, although this was not a manifesto pledge and may no longer be a priority now that the Conservatives have formed a majority government.