By Claire West
The Treasury today published draft legislation intended to form the basis of the Finance Bill 2011. This represents the first concrete step in a new approach to making tax law by the Coalition Government.
Previously, the Chancellor made tax policy announcements at both an autumn Pre-Budget Report and a spring Budget but legislation was not generally published until after the spring Budget, leaving only a few months before it had to be finalised, with Royal Assent being granted in July each year.
The Pre-Budget Report has now been abolished but the publication of the draft legislation has been brought forward to three months ahead of the introduction of the Finance Bill.
The Exchequer Secretary to the Treasury, David Gauke MP, considers this new system will improve the tax policy making process, heralding "a more predictable and stable system, and a policy cycle that allows proper time for scrutiny of draft legislative proposals".
Taxpayers and their advisers are now struggling to digest over 500 pages of detailed draft legislation and commentary ranging from simply confirming the income tax rates and bands for 2011/12 to significant reforms to the corporate tax system, the pensions framework and additional complex anti-avoidance measures.
There are many other measures as diverse as higher duties for super-strength beers, the new Bank Levy and rules for the taxation of MPs’ expenses.
Stephen Herring, Senior Tax Partner, BDO LLP commented:
“This is tantamount to an early draft of the Finance Bill and, predictably, amounts to something of a mixed bag. The sheer volume of proposals issued today demonstrates the challenges faced by the Chancellor in his ambition to radically simplify the UK's tax system but clarity of legislation cannot merely be measured by the number of pages of the Finance Bill."
"The tax rates themselves merely confirm the announcement in the June Budget. BDO considers it highly regrettable that higher rate income tax applies on incomes as low as £42,500 which is much less than twice the median UK salary of around £26,000. BDO considers it essential that the Coalition Government prioritises taking such middle earners out of the scope of the 40 per cent higher rate tax band alongside their priority of increasing the personal tax allowance to £10,000."
"The technical measures included a number of important but complex corporate tax reforms, albeit largely unveiling measures already in the pipeline. Changes to the Controlled Foreign Companies rules and the taxation of foreign branches are intended to restore and enhance the competitive position of the UK as a location for global businesses.
However, further reforms are in the process of consultation and these merely represent the first steps in the necessary process of ensuring that the tax rules are regarded as a positive incentive to do business in the UK. A number of these corporate tax reforms including tax rates and the treatment capital gains and losses in groups of companies represent the first fruits of a drive for tax simplification."
"It should come as no surprise that the Coalition Government has introduced sweeping far reaching anti-avoidance rules which the Treasury see as essential to fund much needed - and overdue - reductions in corporate tax rates and to raise personal tax allowances.
These include measures seeking to prevent financial institutions and other large groups from implementing highly artificial pre-packaged finance structures to reduce corporation tax liabilities. The central thrust of these measures is to ensure that members of a group are treated in a symmetrical fashion for transactions within the group. This principle should be accepted and the representations on these measures should focus on implementing this objective in a straightforward and workable manner."
"Overall, providing greater scope for proper scrutiny of tax legislation must be welcomed as a positive step and BDO LLP urges taxpayers, their advisers and other interested bodies to engage with legislators to simplify the UK's excessively complex tax legislation and to create the room for cuts in tax rates for both businesses and individuals."
FURNISHED HOLIDAY LETTINGS
Following the Labour and Coalition Governments' previous consultations on the taxation of Furnished Holiday Lettings, the draft Finance Bill clauses published today introduce changes previously accepted by concession for treatment as furnished holiday lets to be available in the EEA (i.e. the European Union, Iceland, Norway and Liechtenstein) as opposed to just the UK.
As stated in the July consultation, the qualifying criteria and the availability of loss set-off rules have been tightened. Essentially, with effect from April 2012, properties must now be available for letting for a period of 210 days (as opposed to the original 140 days) and must actually be let for a period of 105 days (rather than the original 70 days). Although a two-year period of grace will initially be available for the 105 day requirement.
Loss relief rules will also be much more restrictive from April 2011. Currently losses arising from a furnished holiday let can be used to reduce an individual or a company's total profits in a period, however from April 2011 losses arising in a UK (or EEA) furnished holiday letting business can only be used to reduce subsequent profits arising in a UK (or EEA) furnished holiday letting business. Similar restrictions apply to so-called terminal loss reliefs.
Stephen Herring, Senior Tax Partner, BDO LLP comments:
"Rather than abolishing all of the tax advantages available to furnished holiday lettings, as announced by the Labour Government in 2009, the Coalition Government has made the rules compliant with European Law by extending the relief to qualifying properties within the EEA, whilst at the same time restricting the availability of loss relief and introducing more vigorous rules for lettings to qualify for the relief as stated in their July consultation."
"However, the tourism industry will be relieved that the beneficial capital gains tax advantages remain and have been extended. For example, an individual could roll-over a capital gain arising on the sale of a trading business by acquiring qualifying furnished holiday accommodation in Tuscany, Provence Cote d'Azur or the Algave, rather than being restricted to qualifying furnished holiday properties in Blackpool, Hunstanton or Bognor Regis."
Impact of Changes to Pensions Tax Relief
As promised by the Chancellor in his June 2010 Emergency Budget, draft legislation has been released that restricts pensions tax relief for individuals. This reduces the annual allowance from £255,000 to £50,000 from 6 April 2011and the lifetime allowance from £1.8 million to £1.5 million from 2012. Also announced was the removal from April 2011 of the (effective) requirement that members of pension schemes acquire an income, usually by way of the purchase of an annuity, by the age of 75 from April 2011.
Stephen Herring, Senior Tax Partner, BDO LLP comments:
"The reduction in the annual allowance for pensions tax relief from £255,000 to £50,000 is predicted by the Government to only impact 100,000 individuals. Whilst this may be the case in the current economic climate, with fewer people with incomes above £100,000, this number will almost certainly increase as economy recovery improves investment returns which have been generally poor in recent years. The Government ought to state that they will increase the pensions lifetime limit in the future (as well as increasing the pensions annual allowance) otherwise, many higher earners will find it increasingly difficult to ensure that they stay still within the lifetime limit.
However, by removing the requirement for member of registered pension schemes to buy annuities before they reach 75, the Government has from April 2011 allowed many pension holders with defined contribution schemes the choice of entering an income draw-down arrangement which permits far greater flexibility in access to pension savings over the duration of their retirement."
"BDO is convinced that the reduction in the lifetime cap from £1.8 million to £1.5 million will affect more top earners than the Government anticipates because of the effect of compounding investment returns. For example, a 50 year-old executive with an existing pension fund of £0.5 million who obtains a 3% annual dividend return and 5% annual capital growth and retires at 65 would be caught by the additional tax charge above the proposed lifetime cap."