Catering Scotland

As today sees the dual ‘anniversary’ of 40 days since this UK Government’s inaugural summer Budget and their first 100 full days in office since being elected last May, David McComb lays bare the first Conservative-only Finance Act since 1996…

The run-up to the election had seen various promises made that the main rates for income tax, National Insurance contributions and VAT would not be touched. Furthermore, other than an increase in the Personal Allowance and the IHT threshold for family homes, there didn’t appear to be much of a pre-election give away, either. Given the talk of austerity and ongoing efforts to reduce the budget deficit, we should perhaps have expected little else, but the refusal to allow any rates increase did beg the question where were tax increases were going to come from.

In this respect, the summer Budget gave a few surprises, the biggest arguably being the change to the taxation of dividends. The reduction in corporation tax rates and increases in National Insurance over the years has generated an imbalance between paying a salary and taking dividends, a choice which is afforded to many owner-managed businesses. This privilege has now given the dreaded ‘tax avoidance’ label by the Chancellor, and the new dividend rates as outlined below are the result of this avoidance clampdown.

Dividend Tax Rates From 6^th April 2016

– The notional 10% tax credit will be abolished

– There will be a new dividend allowance of £5,000 per tax year.

The new dividend rates are as follows:

• 7.5% for Basic Rate taxpayers (2015/16 – effective nil rate of tax)
• 32.5% for Higher Rate taxpayers (2015/16 – effective 25% rate of tax)
• 38.1% for additional rate taxpayers (2015/16 – effective 30.6%)

Whilst the soundbites may be that the majority of shareholders are either better off or at least no worse off as a result of the changes (largely due to the number of small shareholders covered by the £5,000 exemption), there will be a significant amount of small businesses experiencing increased tax burdens under the new rules.

Such organisations will need to look at how profits are extracted from the business, whether these should be accelerated before the 6 April 2016, whether pensions become more attractive, or whether the possibility of charging the company interest on any directors’ loans should be considered.

Similarly, there was also a surprising attack on goodwill for any acquisitions made post-8th July 2015. HMRC have long harboured concerns about the valuation of certain intangible assets, and the first Finance Act of the year blocked the relief on goodwill transferred as part of the incorporation of a business. Consequently, companies will no longer receive tax relief for the costs of goodwill acquired as and when the costs are written off in the accounts, and so the new measure may therefore alter the acquisition strategies of many businesses.

Together with the reduction in the Annual Investment Allowance for qualifying capital expenditure – from £500k to £200k per annum* – this collective focus on business represents a new Government strategy of restricting certain reliefs in order to increase overall tax take.

Elsewhere, there were also attacks on pension relief and buy-to-let properties. While a restriction to the former had been rumoured, it was expected to hit higher earners who obtained further tax relief on contributions. This additional relief will now be tapered away for those earning over £150,000 to the point where, at £210,000 of earnings, taxpayers will only receive relief on contributions up to £10,000.

Likewise, restrictions on previous universal reliefs seem to be the way in which tax increases will be funded, with interest relief being restricted to 20% for residential property lets.

Whilst this is being phased in over the next four years, it will start to hit higher rate taxpayers who have significant debt on their property portfolios, and they will need to consider how these assets are held both in the immediate future and beyond.

Meanwhile, the clampdown continues on perceived tax avoidance, and a greater number of prosecutions are being sought in order to combat the problem.

As part of this, the controversial Permanent Non-domicile status (A.K.A ‘Non-Dom’) has been removed, which may end up bringing many individuals into the UK tax net.

It’s not all doom and tax-laden gloom, however; the rate of Corporation Tax is to be reduced to 18%, perhaps as compensation for businesses having to fund the new ‘National Living Wage’, while an increase in the Inheritance Tax (IHT) threshold to £1m will no doubt please many, especially in high value property areas.

And because this allowance increase will only apply to the value of the family home, we could well see a spate of pensioners ‘upsizing’ in their later years, in order to reduce their potential IHT liability.

With all this in mind, the overarching theme of this year’s summer Budget seems to be one of clamping down in specific areas, rather than increasing headline tax rates.

While such a strategy will not affect the masses, per se, it will nevertheless carry significant financial implications for those who do fall into its areas of focus.

The Chancellor announced that 2016 will see a business tax road map produced for the UK, which may give a better indication of where business taxes are heading. A similar exercise for corporate tax back in 2010 outlined the steps to the attractive tax system we have for companies in the UK.

Personally, I suspect we will see further changes in personal tax in order to benefit lower and basic rate taxpayers, and it remains to be seen if the dividend changes will be there for the long term or if planning around the additional £5,000 personal allowance will impact this.

Of course, we also have the Scottish Government elections coming up in 2016, and with the prediction of another Scottish National Party majority – together with the large contingent of SNP ministers ensconced at Westminster – there will no doubt be a sustained push for more devolved powers north of the Border.

With this in mind, businesses will have to keep a close eye on developments.

David McComb is Tax Director at Mazars UK.

For more information on these and any other tax- or finance-related issues, contact Mazars on 0131 313 7900 or visit www.mazars.co.uk.

*As it was originally due to revert back to £25,000 this year, the reduction in the Annual Investment Allowance for qualifying capital expenditure from £500k to £200k per annum was heralded in this year’s Budget as an increase.