UK BUDGET 2014
The UK Government issued its 2014 Budget proposals this week. This note is not intended to be an in depth comment on the Budget as a whole but simply to highlight some of the cross border tax proposals that may interest your clients, and which they may need to think about further.
UK residential property held by non natural persons
The UK already has in place a series of tax charges on residential properties worth over £2m where those properties are held by non natural persons (generally companies, partnerships with corporate members or collective investment schemes). These include an annual tax on enveloped dwellings (“ATED”), a high rate of Stamp Duty Land Tax (“SDLT”) of 15% on purchase of property and a capital gains tax charge of 28% on any sale of the property.
This Budget drops the threshold for these taxes down to include properties worth £500,000 or more. The ATED for properties between £500,000 and £1 million will be £3,500, and for properties between £1 million and £2 million £7,000 per annum. This means anyone holding or planning to acquire a residential property worth between £500,000 and £2 million in the UK through a company or partnership with a corporate member, will need to look closely to see if they can benefit from any of the exemptions available (letting out the property for example) and if not what other action should they take. The higher SDLT rate applies immediately so will affect those considering property purchases now. Other changes are slightly more delayed taking effect from 1 April 2015 (£1 – £2 million range) and 1 April 2016 (£500,000 to £1 million).
Tax and Partnerships
The UK Government made proposals last year, and repeated in the Budget, to two significantly change two areas on the taxation of partnerships. The Government is pressing ahead so that changes will take effect from 6 April 2014 despite significant pressure for delay till 2015.
The first relates to the taxation of members of a Limited Liability Partnership (“LLP”). The proposal is to tax members as employees (increasing the tax payable either by the individual or the LLP) rather than self employed individuals. Very broadly individuals can continue to be treated as self employed if they can demonstrate that either they have a variable element to their profit share based on the profits of the partnership has a whole, or have significant influence over the affairs of the LLP, or their contribution to the LLP exceeds 25% of the amount they might typically expect to take as remuneration in a year.
Secondly where a partnership, including LLPs, has individuals and companies as members then legislation will allow the UK Revenue (“HMRC”) to reallocate profits and restrict losses. Effectively HMRC can then reallocate to individual partners profits originally allocated to a corporate partner so that they are taxed at income tax rates of up to 45% rather than at the corporation tax rates.
In addition individual partners won’t be able to claim income tax and capital gains tax loss reliefs for losses allocated to them where these have arisen because there are arrangements in place, the main purpose of which is to allocate those losses to an individual.
The proposals also contain a new income tax collection mechanism for partnerships operating as alternative investment fund managers.
If you have clients who are either members of a UK LLP, or of a partnership generally where there is a corporate partner then they may want to consider if they are affected by these proposals.
Non domiciled individuals working in the UK with dual contracts
This measure was announced before the Budget, and repeated in the Budget. UK residents who are not domiciled in the UK can elect (at a cost) to be taxed on non UK income only when it is remitted to the UK (“the remittance basis”). It is not unusual for those individuals to have one contract of employment in place for their UK duties, and one for their employment overseas. The Government is proposing to bring in changes that will make it much harder for these individuals to claim the remittance basis on overseas employment. Anyone with a dual contract does need to look closely at their position to see if they are caught by this legislation.
UK and BEPS
The UK Government did take the opportunity to review international progress on tax base erosion and profit shifting for tax purposes, and indicated its support for the discussions taking place on this at the OECD and elsewhere. There were some hints, particularly on areas such as digital commerce that, if OECD proposals did not go far enough on the issues of permanent establishment and transfer pricing for digital commerce, then the UK may decide to make its own changes.
Inward Investment into the UK
For those clients considering investing into the UK, one or two other items that might be of interest include:-
- Annual Investment Allowance (tax relief at 100% of cost) on the purchase of plant and machinery has been increased to £500,000 a year from its old limit of £250,000.
- Businesses based in one of the UK’s Enterprise Zones can claim 100% of the cost of plant or machinery insofar as it is not covered by the Annual Investment Allowance.
- For those clients who may have a business that exports from the UK then there is increased funding available to help businesses export.