Changes to ER mark biggest shake up for business owners this Budget

The last Budget of this Parliament, perhaps even this government, included quite an array of interesting measures. Many of the announcements were widely anticipated, for example, the so-called ‘Google tax’ aimed at preventing multinationals from diverting profits they make in the UK offshore, to lower tax jurisdictions. Legislation on this will be introduced next week.

We were also expecting tighter rules concerning the use of umbrella companies by recruitment and employment agencies trying to circumvent the IR35 legislation. In addition, foreign branches of a company will no longer be able to reclaim VAT incurred on overheads. And the rules concerning the claiming of tax relief on losses will also be changed to prevent abuses.

But there were also a few surprises. Pensions continue to be reformed and measures to curb the size of very large pension pots were unveiled. From next year, the Lifetime Allowance will be reduced from £1.25m to £1m, which will be index linked from 2018.

One of the most significant changes for business owners, which had not previously been reported, was a further strengthening of the rules concerning eligibility for entrepreneurs’ relief (ER). This shakeup was initially introduced during the Autumn Statement and some of the changes have already become effective. For example, the removal of tax relief on transfers of goodwill when a business incorporates from a sole trader or a partnership to a company owned by connected individuals – Read our earlier blog for details.

Additional restrictions to the availability of ER, which are effective immediately, are as follows:

• ER is no longer available for what the government calls ‘contrived structures’ whereby shares are disposed of in a company that is not trading in its own right. This is designed to clamp down on a number of people ‘pooling’ their shareholdings through a separate company in order to meet the qualifying requirements;

• Individuals cannot claim ER when they dispose of personal assets used in a business carried on by a company or a partnership, unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company.

It’s not all doom and gloom where ER is concerned though. If business assets that are eligible for ER are sold for a gain, any tax payable can continue to be deferred if the gains are transferred into investments that qualify for EIS or SEIS. And the question of whether academics should have greater flexibility to benefit from ER when they dispose of shares in spin out companies to which they have contributed intellectual property will be further debated.

Overall, George Osborne has said the introduction of tax avoidance measures including those outlined above will raise the treasury an extra £3.1billion. This will be further enhanced by another £3.5bn from banks, who face a series of new taxes and levies.

For personal taxpayers, we were unsure whether there would be a shake up of inheritance tax, and potentially, an increase to the current threshold of £325,000. Although it would have been a good vote winner, this did not materialise. Instead, George Osborne has pledged to review the use of Deeds of Variation to avoid inheritance tax. A consultation into this will commence this autumn.

Currently, the law allows a beneficiary of a deceased person to apply for a deed of variation to their will within 2 years of death, and effectively create a replacement will in which the disposal of assets is altered. The use of deeds of variation has been criticised for providing tax avoidance opportunities, which even Ed Milliband has been accused of exploiting. Depending on whether the Tories win the election, this change may or not materialize; we will have to watch this space. Either way, it remains important to have a will and consider carefully how you will transfer assets to family members. We blogged about the benefits of family investment companies recently.

What else was announced?

The personal allowance will be increasing from £10,800 to £11,000 and the higher rate tax threshold will rise to £43,000 from the current £42,385 by 2017-18. No announcements regarding a new top rate of tax were made.

A more flexible ISA is being introduced in the autumn, which is reportedly going to help savers by allowing them to withdraw money held within an ISA without losing their tax-free entitlement. This will be available provided the funds are replaced by the end of the tax year. A new help-to-buy ISA is also being launched, which will help first time buyers by providing a £50 top up for every £200 invested to provide a deposit on a house purchase.

One of the biggest shakeups to the system will be the abolition of paper tax returns, which are to be replaced with a new digital tax account. It may mean that taxes are calculated and paid on an ongoing basis, rather than on a single date. Taxpayers will also be able to link their digital tax account to their bank account – although this may not be a positive move given HMRC’s new stealth powers. We blogged about this for Real Business today.

Other new policies include greater support for the struggling oil and gas industry with a generous tax allowance to stimulate investment at all stages of the industry. From next year, the Petroleum Revenue Tax will be cut from 50% to 35% to support continued production in older fields. A further £100 million will be invested into the automotive industry to pursue research into driverless technology. There will also be a new tax credit for orchestras, more generous

TV and film tax credits plus promises of new support for struggling local newspapers and horse racing events such as Cheltenham.

For more information about what the changes to the tax system could mean for you, please contact Lesley Stalker by emailing las@rjp.co.uk.