Last week, the UK Government presented the 2014 Autumn Statement to Parliament, highlighting the progress it has made towards its economic goals but still echoing the same warnings of risky global economic exposure (particularly to another European recession) that we heard this time twelve months ago.
The announcement was released against a background of mixed economic news – the OBR was revising upwards its GDP growth forecasts for 2014 and 2015, but lowered the 2016 forecast.
Although not quite as extensive as last year’s package, the 2014 Autumn Statement still presents a raft of modest individual measures that seek to modernise the current tax system, target tax evasion, reduce tax inefficiencies and continue to incentivise businesses. A selection is included below:
- Diverted Profits Tax (immediately called the ‘Google tax’) – a tax of 25% will apply from April 2015 to company profits that are judged to have been artificially diverted from the UK to connected entities through complex arrangements with no economic basis other than to avoid tax;
- Base Erosion Profit Shifting (BEPS) – legislation expected in the Finance Bill 2015 will permit the UK Government to require multinationals to follow the OECD model for country-by-country tax reporting and provide HMRC with a high level description of the economic activity, as well the allocation of profits and taxes paid in each country;
- Research & Development – the R&D tax credit for SMEs will increase from 10% to 11% from April 2015. However, the cost of materials incorporated in products sold will not be eligible;
- Employers’ NIC – this will be removed for apprentices under the age of 25 from April 2016; and
- Bank Corporation Tax Losses – from April 2015, Banks will be restricted from offsetting more than 50% of pre-tax profits with carried forward losses.
Entrepreneurs’ Relief (ER)
- Restricting ER – from 3 December 2014, the UK Government will prevent individuals from claiming ER on disposals of the reputation and customer relationships associated with a business (‘goodwill’) when they transfer the business to a related close company; and
- Deferred ER – the UK Government will permit gains which are eligible for ER, but which are instead deferred into investments which qualify for the Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR), to remain eligible for ER when the gain is realised. This will benefit qualifying gains on disposals that are deferred into EIS or SITR on or after 3 December 2014.
Fund Investments and Lending
- Investment Management Fee Income – from April 2015, new legislation will be introduced to ensure that funds paid to fund managers for their services will be charged as Income Tax, rather than lower Capital Gains rates. However, ‘carried interest’ and co-investment returns are expected to remain treated as capital gains; and
- P2P Lending – the government announced plans to review the financial regulation prohibiting institutional lending through P2P platforms. A new relief was also announced, effective from April 2016, allowing losses on bad loans to be offset-able against other P2P income.
Overall, the Autumn Statement had a mixed reception. Paul Johnson, Director of the Institute for Fiscal Studies warned that, “There are huge cuts to come. On these plans, whatever way you look at it, we are considerably less than halfway through the cuts”. However, Kevin Daly, Chief UK Economist for Goldman Sachs was more optimistic, “Our view is that some of the pessimism surrounding public finances is overdone.”