TaxDec 1 2016

Tax planning changes post-Autumn Statement

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Tax planning changes post-Autumn Statement

Tax changes abounded in the Autumn Statement, with pledges from chancellor Phillip Hammond to close tax loopholes while making the tax burden fairer on lower-income households.

He told parliament: "Mr Speaker, I said that the tax system must be fair and that means rewarding those who work hard by helping them to keep more of what they earn."

Personal savings allowance

The Autumn Statement pledged to pursue existing measures to raise the tax-free personal allowance, which Mr Hammond called "one tax reform the government has pursued since 2010 to improve the lot of working people".

When the Conservatives entered government in 2010 as part of the then coalition with the Liberal Democrats, the tax-free allowance was £6,475 a year.

This is set to increase to £11,500 in April, which Mr Hammond said has resulted in more than halving the tax bill of someone with a salary of £15,000 to just £800.

He said: "Since 2010 we’ve cut income tax for 28 million people and taken four million people out of income tax altogether."

The complexity of the tax system is becoming so mind boggling for individuals on comparatively low levels of income that very few of these reliefs are likely to be used.Tim Stovold

Government is committing to deliver on raising the lower-rate allowance to £12,500, and the higher rate threshold to £50,000, by the end of this Parliament.

Once £12,500 has been reached, the personal allowance will increase automatically during the 2020s in line with inflation, rather than in line with the National Minimum Wage as currently planned.

New tax allowances

There will also be two new income tax allowances of £1,000 each, for trading and property income, to help the so-called eBay traders and driveway renters who make small amounts of money each year.

As mentioned by former chancellor George Osborne, people who let out a room via sites such as AirB&B or rent out their driveway for less than £1,000 a year will no longer have to declare or pay tax on that income.

The trading income allowance will now also apply to certain miscellaneous income from providing assets or services.

Sue Moore, technical manager at the Institute of Chartered Accountants of England and Wales, says: "It basically decriminalises what some people have been doing anyway.

"People might not bother reporting they have rented out their driveway, for example, every time there has been a match at Twickenham, so this change saves on administration for everybody."

Tax crackdown

In his speech, the chancellor said: "The government is committed to tackling tax evasion, avoidance and aggressive tax planning, and the UK tax gap is now one of the lowest in the world.

But we must constantly be alert to new threats to our tax base – and be willing to move swiftly to counter them."

He pledged to shut down inappropriate use of the VAT flat rate scheme that was put in place to help small businesses and to introduce a penalty for those who enable the use of a tax avoidance scheme that HM Revenue & Customs later challenges and defeats.

In August, HMRC unveiled new proposals to penalise what it claimed were 'enablers' of tax avoidance, which could include advisers and accountants, as well as ensure tax is not lost to overseas schemes. 

Rajiv Vadgama, director of tax at London-based RSM, says: "The government has been taking an anti-avoidance stance of late and, yes, this is to do with public perception of the [financial services] sector.

"The problem is that an IFA will now have fewer options, which could lead to some being less proactive for their clients."

Employee share plans

While Mr Hammond pledged to let employees "take home more of what they earn" by making sure personal allowances are raised, he also set about removing some perverse incentives on employee share schemes.

In his Autumn Statement speech, Mr Hammond said: "We will abolish the tax advantages linked to employee shareholder status in response to evidence it is primarily being used for tax-planning purposes by high-earning individuals."

This means income tax reliefs and capital gains tax exemption will no longer be available with effect from 1 December 2016 on any shares acquired in consideration of an employee shareholder agreement entered into on or after that date.

According to the Autumn Statement, the effective date will be 2 December, where independent legal advice is received on 23 November prior to 1.30pm.

This will allow any individual who has received independent advice regarding entering into an employee shareholder agreement before the 23 November 2016 the opportunity to do so before 1 December 2016 (but not later).

They can still receive the income and capital gains tax (CGT) advantages that were known to be available at the time the individual received the advice.

Surely it was never the intention of any government to allow tax relief on excessive benefits in kind provided by employers.Trevor Clark

Henry Cobbe, head of Copia Capital, says: "There is a clear and concerted attack on closing down exploited tax loopholes around disguised earnings.

"Earnings as an individual or through a service company will be looked at, tax advantages of salary sacrifice arrangements (excluding pensions) will be phased out, and employee share plans will be scrutinised."

Along with this will be changes to most salary sacrifice schemes, which will be subject to the same tax as cash income, as of April 2017.

This will affect salary sacrifice schemes where employees exchange some of their salary for a non-cash benefit in kind (such as a mobile phone). 

Both the employer and employee make a tax saving, because the benefit is taxed less than a salary or not taxed at all.

Pensions, pensions advice, childcare, Cycle to Work and ultra-low emission cars will be exempt from the changes to the taxation of salary sacrifice schemes.

All arrangements in place before April 2017 will be protected for up to a year, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected for up to four years.

How much will be raised?

  • £5bn will be be raised from measures to stop multi-nationals avoiding paying tax.
  • Mr Hammond also said measures to crackdown on inappropriate tax avoidance would raise around £2bn.
  • £630m will be raised by removing tax benefits of disguised earnings for the self-employed and employer.

According to Trevor Clark, operations director of financial planners Rutherford Wilkinson, it is good news that the "core schemes" such as pensions and childcare have "survived".

He explains: "These are key benefits that can truly make a difference to someone’s life, and at the same time save on both the employees’ and employer’s National Insurance bill. 

“Surely it was never the intention of any government to allow tax relief on excessive benefits in kind provided by employers and this just mops that up without withdrawing its use for the more important schemes which was threatened at one stage.”

Social investment tax relief

Moreover, social investment tax relief (SITR), which investors in community and other "socially responsible" investment bonds and similar schemes have been using, has been given a huge boost.

From 6 April 2017, the amount of investment social enterprises aged up to seven years old can raise through SITR will increase to £1.5m.

Currently, the maximum that can be invested into a SITR-qualifying scheme is £293,000 over three years. 

Thomas Gillen, chief financial officer for Social Investment Scotland, says the raising of this ceiling to £1.5m is a "significant boost for the UK’s social investment market".

He explains: "Not only does it underline the government’s commitment towards social investment but it also reinforces the success of SITR as a social investment funding mechanism.

"We have always argued a buoyant social enterprise sector simply cannot sustain its growth without adequate capital to meet an increase in funding demand.

"For the social investment sector, this has meant looking beyond traditional institutional, government and public sector funding sources and tapping into a wider pool of social investment capital."

Since its introduction in 2014, charities and social enterprises have raised £3.4m. The tax incentive allows investors to claim 30 per cent tax relief on loans or equity investments made into social enterprises and charities.

Ongoing tax reviews 

In his Autumn Statement, Mr Hammond said the government has also asked the Office of Tax Simplification to carry out reviews of the VAT system and stamp duty on share transactions.

However, there are now so many changes the lower end of the tax system is "bewildering", according to Tim Stovold, head of tax at Kingston Smith.

He comments: "In recent Budgets the chancellor has added to the bewildering array of minor tax reliefs for individuals.

“The personal savings allowance, the dividend allowance, the property income allowance, the trading income allowance and the transferable personal allowance for married couples and civil partners, are a few among the many.

“The complexity of the tax system is becoming so mind boggling for individuals on comparatively low levels of income that very few of these reliefs are likely to be used. It is disappointing the chancellor has made no effort to simplify the tax system for the very lowest earners.”

simoney.kyriakou@ft.com