Overall, tacking tax avoidance continues to be a government priority, with £800m being invested over the next five years into tackling avoidance and addressing imbalances in the tax system. It is hoped this will generate a further £5bn in revenues and 100 prosecutions a year.
To improve tax compliance among small businesses that are trading but not declaring or paying tax, the government is proposing to give HMRC greater powers to acquire data from online business intermediaries and electronic payment providers to help identify revenues. A consultation will begin to review these proposals this month.
What else is coming up for taxpayers?
The non-dom tax rules are being significantly changed to ensure that “those who choose to live in the UK for a long time pay taxes here like everybody else”. From April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for all tax purposes and subject to the same rates of tax on any income.
As part of this shake up, it will also no longer be possible for somebody who is born in the UK to parents who are UK domiciled to claim non-domicile status if they leave but then return and take up residency in the UK, effectively bringing an end to the current “permanent non-domicile” status.
In addition, from April 2017 the ability for non doms to avoid inheritance tax (IHT) by holding their property within an offshore structure is also being removed. This applies to all UK properties owned by a non-dom, regardless of value and whether the property is let or occupied.
However, there is good news on the IHT front, as with effect from April 2017 a “family home allowance” is being introduced. Initially this starts at £100,000 and will increase to £175,000 by April 2020. The aim is that eventually estates with a value of up to £1m will be able to be passed to immediate family without an IHT liability. As with the existing nil rate band of £325,000, any unused allowance can be passed onto a surviving spouse. It should be noted that where the value of the estate exceeds £2m, there will be a clawback of the allowance.
Landlords with a buy-to-let property portfolio are impacted by the Budget in two ways. Firstly, the current relief for mortgage interest is being restricted to only give tax relief at the basic rate (currently, higher rate taxpayers get additional tax relief of up to 45p for every £1 of finance costs); this will be phased in over 4 years.
In addition, the automatic entitlement for landlords of furnished property to claim a flat rate 10 per cent annual allowance for wear and tear, irrespective of how much maintenance cost was actually incurred, is being removed from April 2016. Instead tax relief will be available to all landlords of residential property for the actual costs incurred.
Finally, for landlords, in recognition of the growing number of people who are choosing to let rooms in their own homes, rent a room relief is being increased to £7,500.
From September 2017, the free childcare entitlement will be doubled from 15 hours to 30 hours a week for working parents of three and four year-olds.
As anticipated, tax relief on pension contributions will be restricted for those who pay tax at 45 per cent. From April 2016, for those whose income exceeds £150,000 the annual exemption (currently £40,000) will be reduced by £1 for every £2 earned in excess of this amount; for everyone who earns in excess of £210,000 the annual exemption will be £10,000.
Read more from our summer Budget commentary:
- George Osborne says tax dodgers have “nowhere to hide”
- George Osborne adds more detail to Northern Powerhouse plans
- George Osborne permanently fixes Annual Investment Allowance at £200,000
- Cut in corporation tax welcomed by British businesses
- Apprenticeship levy so firms “get back more than they put in”
- Roads Fund introduced as part of the plan to boost productivity
Key summer Budget changes affecting businesses
Corporation tax will be reduced from the current 20 per cent to 19 per cent from 2017 and 18% from 2020 for all UK companies.
The Employment Allowance will be increased from £2,000 to £3,000 a year to help offset the cost to employers of the new National Living Wage of £7.20 being introduced in April 2016. However, it should be noted that with effect from April 2016, the Employment Allowance cannot be claimed where the director is also the sole employee of the company.
The Annual Investment Allowance, which was due to drop to £25,000 from December 2015, will now increase to £200,000 a year on a permanent basis starting from January 2016. This is good news for many businesses as it means that typically all capital expenditure will get full tax relief in the year of acquisition.
One change, which may have very wide reaching implications, is the announcement to review the taxation of dividends. This impacts both investors with investment portfolios and company owners who take their remuneration in the form of dividends.
In addition to a continued review and intended tightening of the IR35 legislation, this is aimed at deterring tax-driven incorporations as this is perceived to be an area in which there is considerable tax leakage.
The changes, effective from April 2016, mean that dividends will no longer carry a 10 per cent tax credit and instead there will be a flat rate annual exemption for dividend income of £5,000.
Where dividends are received in excess of that amount, they will be taxed at 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers.
Based on the information currently available, our understanding is that an individual currently taking a minimal salary and £30,000 of dividend income (and assuming no other income sources) is likely to end up with a tax liability of around £2,000 as a result of the changes in the rules. Under the existing rules they would not be paying any tax in these circumstances.
The loss of the ten per cent tax credit on dividend income, means that those people who earn dividend income in excess of £100,000 will see an increase in their tax bills of a modest amount but those with income in excess of £150,000 will have a significantly increased liability.
Another change for business is a restriction on the amount of tax relief available on goodwill amortisation. Few details are available on this at the moment but it appears that tax relief will no longer be available on the cost of writing off the price paid for goodwill on the acquisition of a business. This may well affect how individuals choose to grow their business or how future business acquisitions or disposals are structured.
Although specific details have not yet been announced, a restriction to salary sacrifice arrangements is likely to be introduced at some point, pending a full consultation.
It is clear that this July 2015 Budget has wide reaching tax implications for a wide variety of individuals and business owners.
Lesley Stalker is head of tax at RJP.
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