UK: Deloitte Preview of Autumn Statement 2014

Bill Dodwell comments: “Chancellor George Osborne will deliver the final Autumn Statement of this parliament. We expect that most of the announcements will concentrate on the outcomes from proposals launched at earlier Budgets, together with some technical changes. There will also be the first consultation on how the UK should implement the initial proposals from the OECD on international corporate tax – the Base Erosion and Profit Shifting project.” Ian Stewart, chief economist at Deloitte, said: “This year’s Autumn Statement will include modest upgrades to the Office of Budget Responsibilities forecasts for GDP growth in 2014 and 2015. While the pace of year on year growth is set to slow, we see the OBR forecasting a respectable rate of about 2.5% for 2015, slightly higher than its 2.3% forecast made in March. Sharp declines in inflation over the summer suggest that the OBR may well downgrade its forecast for inflation in 2015 below the Bank of England’s 2.0% target. The OBR is also likely to forecast that 2015 will see the first significant growth in real earnings in more than seven years.”

Personal taxation – Changes to property taxation

On 27 November, the Government published its response to the Consultation into extending the Capital Gains Tax (CGT) charge on UK residential property to non UK-residents. It confirmed that the new CGT charge on non-residents will start on 6 April 2015. Properties will be revalued to market value at 5 April 2015 with an election for time apportionment or original cost – so initially the new charge will raise very little as it will tax only the property growth from April 2015.

The government has come up with a neat answer to the problem of allowing taxpayers to elect which of two residences should be exempt from capital gains tax. Under the current rules it is possible for an individual with more than one residence to elect which should benefit from the Principal Private Residence exemption (PPR).

The original consultation considered abolishing PPR elections and using a facts-based approach to determine which property should be treated as the exempt one.

This would have been unfair to UK residents, as well as administratively complex for HMRC and taxpayers.

The government accepts this and will retain the election. However, it now proposes that those who have a property in a different country from their country of residence will need to stay at the property for at least 90 days a year to qualify for the exemption. This will apply to UK residents with homes abroad as well as to non-residents with homes in the UK. Occupation by the individual’s spouse or civil partner will count towards this total.

Therefore for UK residents whose residences are only in the UK, the current position appears to have been preserved. However, where the residence is not in the same jurisdiction as the taxpayer, the taxpayer will need to satisfy the 90 day rule in respect of the overseas home to qualify for relief. Overseas tax may also apply. For non-UK residents who own a residence in the UK, satisfying the 90 day test for the UK property may have wider consequences with regard to residence status, as the number of days spent in the UK are a key test for residence.

Personal taxation – trusts and inheritance tax (IHT)

We expect to see draft legislation following the latest Government consultation on simplifying the calculation of IHT charges on relevant property trusts. This is the third such consultation – rather demonstrating that the goal of simplification is hard to reach. The changes will affect those with multiple trusts and are likely to result in extra tax being levied on trusts set up after June 2014.

We do not expect any changes in the wider inheritance tax regime, so the exempt allowance will remain unchanged at £325,000.

Personal taxation – rates and allowances

We already know the personal allowance and higher rate threshold for 2015/16 as these were announced in the Budget earlier this year.

The personal allowance will rise from £10,000 to £10,500 from 2015/16 and the higher rate threshold will increase by 1% for 2015/16 from £41,865 to £42,285, giving a basic rate tax band of £31,785 in 2015/16. These changes will save basic rate taxpayers £100 in 2015/16 and higher rate taxpayers £184. Higher rate taxpayers will receive some benefit from the personal allowance increase; in some previous years this has not been the case.

Those with income of more than £120,000 will actually have a slightly higher tax liability, as they do not receive a personal allowance and the basic rate band of income has been reduced.

The savings rate of tax, which has previously stood at 10% for income of up to £2,880 has been replaced with a 0% rate. This will apply from 2015/16 to savings income of up to £5,000 (instead of the expected 1% increase). However, this rate will only affect people on low incomes as non-savings income is taxed as the lowest slice of income and does not attract the 10% band. Hence, only those whose non-savings income is less than £15,500 (in 2015/16) will benefit from this change. The main group likely to benefit are pensioners.

The primary earnings threshold for national insurance for 2015/16 has not yet been announced. At present this remains some way apart from the personal allowance at £7,956, so people whose earnings are between £7,956 and £10,500 will continue to have a national insurance liability, despite paying no income tax.

Personal taxation – transferable personal allowance

The new transferable personal allowance starts in 2015/16 – and is worth up to £210pa. Couples where both are basic rate taxpayers will benefit, where one spouse has income below the personal allowance. Up to 10% (initially £1,050) of the allowance can be transferred. The recipient spouse receives a tax reduction of 20% of the allowance, (£210), rather than an additional allowance of £1,050, which means it may be beneficial to transfer some or all of the personal allowance where the transferor is paying 10% tax (e.g. on dividend income or where the starting rate on savings income applies). Taxpayers who are not domiciled in the UK and who have elected for the remittance basis to apply would not be able to benefit from this measure, and non-UK resident individuals will only be able to benefit if their worldwide income is less than the personal allowance due (even if all this income is not taxable in the UK).

Personal taxation – possible withdrawal of personal allowances for non-residents

The government initiated consultation in the summer on whether non UK residents should no longer be eligible for a personal allowance in taxing their UK source income unless they have a strong economic connection to the UK, possibly to be demonstrated through a comparison of UK income to worldwide income.

Granting the personal allowance to non UK-residents is estimated to cost some £400m annually. However the potential savings from the measure are thought to be modest. It is thought that removing the allowance in its entirety would be contrary to European law as well as damaging to the UK’s international competitiveness. It would also result in increasing complexity and administration particularly if employers would need to establish whether a personal allowance is available in operating PAYE.

International taxation – consultation on hybrid mismatches

The UK is one of the leading countries supporting the G20’s Base Erosion and Profit Shifting project, being conducted by the OECD. One of the first proposals is that countries should enact domestic laws to remove the saving currently available from hybrid mismatches. These are typically arrangements which can give a multinational a tax deduction in one country without taxing equivalent income in another. The OECD continues to work on the detail of proposed counter-action but both the Chancellor and the Chief Secretary announced that consultation on aspects of the changes would be introduced at the Autumn Statement. We think it is unlikely that legislation would be introduced before 2016 due to the need to coordinate the plans with other G20 and OECD countries.

International taxation – transfer pricing documentation

Another OECD proposal is that multinationals should prepare enhanced transfer pricing documentation to help tax administrations focus enquires on areas of higher risk. The Government committed to introduce the OECD recommendations and it is possible that we could see a consultation on detailed aspects. Again, the OECD and G20 continue to work on this area and an agreement is not expected until 2015.

Business taxation – North Sea’s fiscal regime

It is widely expected the Chancellor will provide a road map for future tax changes arising from its review of the North Sea’s fiscal regime, following the industry consultation which closed in October. A recent Deloitte survey found that the oil and gas industry thinks the UK Continental Shelf (UKCS) has a high level of taxation and an unpredictable, as well as unnecessarily complex fiscal regime.

The industry wants a predictable regime that is appropriate for a mature oil & gas basin, but this is a tall order for any fiscal review, particularly with recent falls in the oil and gas prices. This could be the last chance to get the regime right, if the objectives of the Wood review, Maximising Economic Recovery for the UKCS, are to be achieved. Success could mean restoring investor confidence and international competitiveness, but failure could lead to accelerated decline and early decommissioning of assets, reduced energy security, lost tax revenues and further jobs cuts.

Business taxation – loan relationships

We expect more technical changes to be announced on the UK’s rules for loans and financial contracts as part of the modernisation of the rules and to reflect forthcoming accounting changes.