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The position, however, for high earners after 2011 will be different. The Government announced at Budget 2009 its intention to restrict tax relief on pensions savings with effect from 6 April 2011 for those with incomes of £150,000 or over. Today it issued a consultation document on how the restriction will be implemented from April 2011.
Essentially, the basic intention is that tax relief on pensions contributions will be restricted for those on “gross incomes” of £150,000 and over, gradually tapering down so that for those on incomes of £180,000 and over the tax relief is worth the same as it is for a basic tax rate payer.
An individual’s “gross income” will include both the value of the individual’s pension contributions and any pension benefit funded, or eventually funded by, the employer on their behalf. It is also calculated before any deductions for charitable donations are made.
However, there will also be a ‘floor’, so it will only apply where the individual’s income (excluding employer pension contributions) is £130,000 or over. So an individual is not affected unless their pre-tax income including their own pension contributions and charitable donations is £130,00 or over.
That said, it seems from the consultation document that there are still a number of major issues, let alone detailed issues, to be considered (e.g. how tapering works, how employer contributions will be valued for final salary schemes, how the restriction on relief will be delivered). As such it will be sometime before we see how the legislation will truly shape up for high earners after 2011.
The consultation will run for 12 weeks and the closing date for responses is 3 March 2010.
Several opportunities have been provided to taxpayers ‘to come clean’ about the holding of undeclared offshore assets or bank accounts. These include the 2007 Offshore Disclosure Facility, the New Disclosure Opportunity and the Liechtenstein Disclosure Facility. The final opportunity for disclosure ends on 4 January 2010 (unless another final Facility is introduced (again) or the deadline for disclosure is set back (again)).
Having shown taxpayers some carrots, HMRC now would like some fasces.
A consultation document was released today that contains proposals for robust deterrents against taxpayers who fail to disclose their offshore assets or income behaviours. A requirement for taxpayers to notify all new offshore accounts in high risk jurisdictions is suggested also. HMRC’s proposals include tax geared penalties for non-compliance and up to 100% penalties for undeclared tax.
Any taxpayer who has not used the New Disclosure Opportunity but has offshore assets or bank accounts to declare can expect a penalty notice in due course.
In today’s pre-budget report, the Chancellor announced that the anti forestalling measures on tax relief to pension contributions for high earners (introduced at Budget 2009) will be extended to individuals with “relevant income” of £130,000 or more. The income threshold was previously set at £150,000 in April.
At the core of the anti-forestalling provisions is a special annual allowance set at £20,000 (or in certain circumstances where contributions have been paid less regularly than quarterly the limit may be increased to £30,000) and associated tax charge which has the effect of restricting tax relief on pension contributions to the basic rate of tax.
The change effectively means that anyone who earns above £130,000 and either they or their employer makes pension contributions above their normal ongoing regular pattern of pension savings will lose their higher rate tax relief on pension savings over £20,000 (or £30,000 if applicable) in any tax year. Industry experts believe that up to 150,000 additional people could be caught by the changes.
However, the extended anti forestalling provisions will only apply to contributions made after 9 December 2009 and will not apply to normal regular ongoing pension savings before that date whatever the value. But, the total value of non-regular contributions made between 6 April – 8 December 2009 will reduce the special allowance available for 2009-10.
A consultation document has been released containing draft legislation amending the regime requiring tax avoidance schemes to be disclosed to HMRC. These proposed measures include revising and extending the hallmarks (which identify the types of schemes that must be disclosed), bringing forward the trigger point for disclosure of marketed schemes, imposing additional information requirements on promoters and on intermediaries (who introduce scheme promoters to clients), as well as enhanced penalties.
New hallmarks are proposed for employment income schemes, income into capital schemes and offshoring schemes. These hallmarks no doubt target, in particular, perceived avoidance of the higher rates of income tax as well as the use of tax havens.
The consultation will run from today until 9 February 2010 and HMRC seek views on whether the proposed measures would be effective and proportionate. This shows the Government’s intention to continue to use the disclosure regime to identify and quickly outlaw perceived avoidance structures.
A few further points.
The 50% levy will not be deductible for corporation tax purposes.
It will be payable on 31 August 2010.
Although they are only stated as applying to bonuses awarded or paid before 6 April 2010 one could imagine that date maybe being extended.
It is not just banks – UK resident companies will be caught if they are authorised persons for the purposes of FSMA who accept deposits or whose activities consist in wholly or mainly certain regulated activities such as dealing in investments as principal or agent or arranging deals in investments.
For the levy to apply, the employee’s duties must consist wholly or mainly in certain regulated activities such as accepting deposits, dealing in or arranging transactions in investments and lending money. If any part of his duties are performed in the UK in the year 2009/10 or he or she is UK resident in that time then the whole the bonus will be caught.
Recent weeks have seen both the French and the Spanish Governments withdraw their sports-related tax breaks. The French have ended their “droit à l’image collectif”, which allowed football clubs to treat up to 30% of a player’s income as a payment for exploitation of their image rights rather than salary, and the Spanish have announced their intention to withdraw the so-called “Beckham tax” which permitted foreigners, including all soccer players earning over €600,000 per annum, to pay a 24% tax rate. Perhaps this puts the UK on a more level playing field in terms of attracting key sportspersons, albeit that we will soon have some of the highest personal income tax rates in Europe (which, as has been widely publicised, the football clubs are looking to mitigate since some players are insisting that the clubs, rather than the players, bear this additional tax burden).
In the UK, it remains possible for both footballers and clubs to separate remuneration received for services provided on the football pitch from income arising from the commercial exploitation of the footballer’s image rights. Where the footballer is domiciled in a country outside of the UK, the resulting tax savings can be material. This is, however, an area where we expect greater HMRC scutiny and so careful legal implementation of well thought-out and robust structures is crucial.
As has already been noted on this site, the condition that companies can claim research & development (R&D) tax relief on qualifying expenditure deriving only from intellectual property that they own has been removed for companies that are small and medium sized enterprises.
This change is welcomed but it is disappointing that the Government has not taken the opportunity to further widen the scope of eligible expenditure on which relief can be claimed.
The Chancellor announced a further increase of 0.5% (on top of the 0.5% rise we were already expecting) on employee and employer NICs. The increase will come into effect on 6 April 2011.
This means high earners will have a marginal NICs rate of 2% and companies will have to pay 13.8%. This widens the already substantial gap between the rates income tax/NICs and CGT. As a result of the Chancellor’s proposals, the effective rate of tax on the vesting of long term incentive plan awards or the exercise of unapproved share options, could be as high as 58.9%, some 40.9% more than the current CGT rate. This will no doubt lead to more companies implementing HMRC approved share plans and unapproved share plan structures which deliver capital gains rather than income.
However, a consultation has been announced entitled “Disclosure of Tax Avoidance Schemes” which is likely to require the disclosure of a wider variety of share based incentive arrangements. Time will tell if this leads HMRC to implement specific anti-avoidance legislation in respect of the arrangements that are disclosed.
Assuming no exemption is available then it seems to work like this:
Bank pays £100,000 bonus.
Bank is required to pay £37,500 in “supertax” to HMRC (the first £25,000 of the bonus does not attract the supertax).
The bonus of £100,000 is then subject to tax and NICs in the usual way. Employer’s NICs of £12,800 (at 12.8%) and income tax (40%) and employee NICs (1%) of £41,000 (assuming the higher rate to apply) are payable.
Our banker receives £59,000.
The cost of delivering this net £59,000 is £150,300. So in this example the effective tax rate is 60.7%.
Clearly, the £25,000 has a significant impact on the calculation of the effective rate. If this is ignored then the cost of delivering the net £59,000 is increased to £162,800 so the effective rate is 63.7%.
Also the bank cannot deduct the supertax in calculating its corporation tax profits – to the extent the bank has profits (or perhaps a reasonable prospect of making some) and therefore is tax paying, the effective rate needs to be increased to take account of the corporation tax cost of not getting a deduction.
The worldwide debt cap (by which interest relief for large groups will be restricted) is to be amended slightly in the Finance Bill 2010. The changes were first announced by a Ministerial Statement on 9 November 2009. The draft legislation has now been released – we’ll update further.
Finance Bill 2010 will block a potential stamp duty and SDRT avoidance arrangement that arose following the taxpayer’s victory in the HSBC Holdings case in the ECJ (reported here – click here to view) HMRC can no longer apply the 1.5% stamp duty or SDRT charge on new shares first being issued into an EU clearance service or depositary receipt system. However, transfers of shares between clearance services and/or depositary receipt systems (whether or not EU) are exempt from stamp duty and SDRT. This is intended to avoid a double charge.
The HSBC decision coupled with the exemption provided the opportunity to avoid stamp duty and SDRT by routing shares intended for a non-EU clearance service or depository receipt system through an EU clearance system or depository receipt system.
This exemption on transfers between clearance services and depositary receipt systems will now not apply. where there is a scheme between an issuing company and a clearance service or depository receipt issuer under which shares are issued to an EU clearance service or depositary receipt system (without the payment of the 1.5% charge) and subsequently transferred to a non-EU clearance service or depositary receipt system. This change was first announced on 1 October 2009 and will be effective as of that date.
There was little for the film industry to get excited about in today’s Pre-Budget Report. Thankfully, there is no further specific anti-avoidance legislation. There was a small tweak to the film tax credit legislation to remove an anomaly which impacted upon the amount of tax credit available where film production spanned more than one accounting period. I would like to have seen more extensive changes including extending the film tax credit to expenditure on British talent working abroad and increasing the quantum of relief available for qualifying co-productions. The existing restriction which limits the available relief to 8O% of the UK co-producer’s qualifying expenditure has resulted in a decline in films being co-produced in the UK.
As mentioned already, Alistair Darling announced the 10% rate of corporation tax on income from the exploitation of patents. What he did not say (but which is in the press releases) is that it is currently proposed that this reduced rate will not apply to income from patents until April 2013. The Government have said they will consult with business with the aim of introducing legislation in the Finance Bill 2011, with the new regime applying only to patents granted after the legislation is passed.
The Government has in place various initiatives to speed up the granting of patents, but businesses may now have a good reason to slow the process down!
No surprises here ! After weeks of speculation the Government appear to have closed down a loophole which enabled you to circumvent the £2 million limit per EIS/VCT company by amalgamating funds through partnerships. A new definition of small enterprise is proposed. It appears that the Government view is that funding large projects with EIS monies intended to promote high risk start up companies is not within the spirit of the EIS/VCT reliefs. Whilst there is little detail available rumour has it that such changes may be retrospective. This is likely to make EIS/VCT investment less attractive which is a great shame given the proposed relaxation in some of the rules, for example, enabling companies to trade internationally
Two important points to keep in mind:
1. It is temporary – The bank payroll tax will have effect from the time of the announcement on 9 December 2009 until 5 April 2010 for all discretionary and contractual bonus awards.
2. There are exemptions – There is an exception for contractual bonus entitlements where the payer has no discretion as to the amount of the bonus because of a contractual obligation existing at the time of the Chancellor’s announcement.
On the basis that most people will be prepared to wait (perhaps) then it seems to me that few cheques to HMRC will be written.
It is incredibly disappointing that after months of lobbying from the games industry the Government has rejected our calls for a tax break to incentivise games development in the UK. The UK’s position as a world leader has been eroded as other countries such as France and Canada encourage both games companies and our creative talent to relocate with the offer of targeted tax breaks. The effect of such continued corporate migration would be a loss of revenues derived from the profitable games industry for the Treasury. In my view we should be encouraging new and innovative games to be made in the UK. Cross party political support for this area remains strong and I will continue to lobby alongside the industry to keep this on the political agenda. I hope that we will be able to persuade the Government to extend the existing film tax credit regime to games on the basis we described in our recent paper.
There was a small piece of good news for the industry because changes have been made to the R&D rules which remove the IP ownership requirement for SMEs which should make it easier for games companies to claim R&D tax credits on their development spend.
Darling’s announcement of a 2% reduction in the rate of bingo duty (to 20%) was the (apparent) good news. However, the fact that such reduction is to take effect from a date to be announced in next year’s Spring Budget is very disappointing. So the Chancellor’s headline-grabbing comment (which got one of the biggest cheers from the Commons) will give no immediate relief for the struggling Bingo industry.
And what of the new rate of GPT on machines? The detailed press releases that have just gone live on the HMRC and HM Treasury websites appear to make no mention of the new replacement for AMLD. Perhaps by announcing the new bingo rate of 20%, the Chancellor was laying down a precedent for the new duty that is expected to apply to FOBTs and other machines (which, one assumes, will now be announced next Spring)?
Despite rumours and speculation there appears to be no change to the rate of CGT and VAT will revert to 17.5% (not higher) as from 1 January.
There has been widespread speculation concerning increases in rates as well as anti-avoidance measures to close such planning opportunities as remain. But no such changes have been announced today. This can only be good news for the property sector.
One proposed measure is the extension of the Disclosure Rules on SDLT avoidance (which requires scheme details to be given to HMRC) to high value residential buildings. This will come into efffect from 1 April 2010.
The Chancellor announced:
In addition enhanced capital allowances are announced for electric vans, as well as reduced company car tax for electric vehicles.
In a widely anticipated move, the Chancellor has introduced, with effect from today, a one-off bank ‘supertax’ of 50 per cent on any individual discretionary bonus paid by a bank to an employee that is over £25,000.
This is to be paid by the bank, not by the bank employee (although the employee will, of course, also have to pay, income tax at their top rate on any bonus they receive).
We await the draft legislation.
In a bid to increase investment in biosciences in the UK, the Chancellor has announced a 10% corporation tax rate on income from the exploitation of patents in the UK. This is good news for the UK, enabling it to compete with other jurisdictions that have similar regimes. However, it appears from his budget speech that it is limited to patents only, rather than all IP, so it does not go far enough in the bid to compete. We await to see the detail in the Government Press Releases.
Olswang’s tax group will highlight its initial thoughts on this year’s Pre-Budget Report (PBR). We would be very interested to know your views so please feel free to post your comments.
We will also publish our analysis of the PBR which you will be able to access by clicking on the link on the right-hand side. We will publish this shortly after the PBR.
We will update you with the key measures on the day of the PBR 2009. If you have any questions regarding the PBR 2009 or our coverage of it, please contact a member of the Olswang tax group.