Osborne’s summer budget announcements contained a number of surprise proposals, many of which could have a significant impact on CI businesses and individuals. Overall, the proposals represent a mixed bag for UK residents, with some tightening in tax rules being balanced by greater benefits and investment in the NHS and infrastructure, along with a reduction in the headline corporate tax rate.
However, to achieve a ‘balanced’ outcome where spending does not exceed income, Osborne outlined a plan that includes a further crack down on tax avoidance and a number of changes to existing beneficial tax rules for corporates and individuals. Some of the key tax announcements made in the Budget are outlined below.
Reduction in Corporate Tax Rate
Osborne announced a 1% cut in the corporate tax rate to 19% in 2017 to help the UK grow, invest and create jobs. The rate will be further reduced to 18% in 2020, bringing the UK’s corporate tax rate closer to that in place in countries like Singapore and Hong Kong. The UK will continue to have the lowest tax rate in the G7 and G20, which aligns with the goal of making the UK “open for business”.
This may impact Jersey incorporated companies that are managed and controlled in the UK, which have been hitherto seen as UK resident, as Jersey tax law requires at least a 20% rate of tax to apply to any company, for the existing treatment to apply. We will have to see whether DPT and income tax, 25% and 20% respectively, could substitute for corporation tax from now on. Companies relying on this aspect of Jersey law should assess whether their residency position could change.
Combatting tax avoidance
To fund the decrease in corporate tax rate, new tax cuts and some spending increases, Osborne announced a plan to raise £5 billion annually from combatting tax avoidance, continuing the trend laid out in the previous budget. To do this, Osborne announced a substantial investment (£800m) to assist with investigations into tax fraud, offshore trusts and the hidden economy, with the ultimate aim of raising an additional £7.2 billion in tax revenues over the next five years. The focus on offshore trusts could have the most significant impact on CI companies and individuals.
Osborne also announced a number of changes to corporate tax rules to crack down on perceived abuses, including use of losses against controlled foreign companies profits (more on this below) and the use of personal service and other companies to disguise employment income. Again, a review of situations where these structures are being used will be key to assess whether there is substantial risk.
The budget also included a mention of adding tougher new penalties to the General Anti-Abuse Rule, including a “name and shame” list of those that use schemes. Along with this, Osborne announced that HMRC would seek to triple the number of criminal investigations into serious and complex tax crime, focusing on companies and wealthy individuals, ultimately aiming at 100 criminal investigations a year.
The budget also reiterates support for the Diverted Profits Tax introduced in the previous budget and, in line with the introduction of the Common Reporting Standard, notes that HMRC will be allowed to access more data to identify businesses that are not declaring or paying tax. Overall, offshore companies and individuals may come under increasing scrutiny as a result of the proposals.
Changes to the Loss Regime and CFC
New rules have been introduced with effect from 8 July 2015, which remove the ability of UK companies to reduce or eliminate a CFC charge by offsetting UK losses and surplus expenses, including group relief, against that CFC charge. This could have a significant impact for captive insurance entities that are treated as CFCs in the UK.
Focus on Financial Services
A number of the proposals focused specifically on the financial services industry, in particular asset managers, banks and the insurance industry.
The budget also included reform to the way banks are taxed, based on the increase in bank profits and changes in bank regulation. The main aspect of these changes will be a new 8% tax on banking sector profits from January 2016. The rule only applies to UK bank profits and the profits of offshore subsidiaries subject to a CFC charge. This tax will apply to profits over £25 million within a group, but will ignore any carried-forward losses.
In the longer term, the existing bank levy will be phased down to 0.1% by 2021, with overseas subsidiaries being completely excluded from the bank levy in 2021 as well.
Banking business in the islands, if not subject to the new 8% tax and freed from the levy, might be made more attractive by these changes.
Tax burdens are also increasing in the insurance industry, from 1 November 2015. The standard rate of insurance premium tax will increase to 9.5% from that date, although there will be a concessionary period to February 2016 for insurers using the IPT cash accounting scheme.
Taxation of carried interest
HMRC have announced a policy objective of ensuring that individuals to whom a gain arises in the form of carried interest are taxed on the true economic gain. As a result of a statement of practice known as SPD12 carry holders are often taxed on gains which are significantly lower than their economic returns.
This is in effect a widening of the legislation on disguised investment managers fees to ensure that where an individual provides investment management services for a collective investment scheme through a partnership or series of partnerships any sums received as carried interest will constitute a chargeable gain with limited deductions available to reduce the taxable gain.
Combined with the changes to the rules on non domicile status this could significantly increase the tax burden for some UK resident carry holders.
Companies operating in these industries should closely review the new guidance to assess the impact and take the opportunity, where available, to comment on the HMRC consultation document.
The chancellor made reference to amending the rules relating to non domiciled individuals. He intends to curb the use of this status. From 2017 individuals who are tax resident in the UK for 15 of the last 20 years will be taxed as if UK domiciled. This is introducing a ‘deemed domicile’ concept to income tax and capital gains tax which currently exists for inheritance tax (17 of the last 20 tax years which will now also fall to 15).
Part of a package of reforms to the rules for non domiciled individuals includes a proposal to ensure that UK inheritance tax is paid on UK residential property, even when the property is held indirectly through an offshore vehicle. This will impact islanders holding UK residential property either directly in their own name, or through offshore companies and excluded property trusts or similar structures.
The legitimate use of offshore structures and holding assets offshore is very common amongst the non domiciled community. The introduction of these rules whilst potentially giving opportunity in the short term will inevitably reduce the number of non domiciled individuals using offshore structures.
Furthermore, it will no longer be possible for somebody who is born in the UK, to parents who are UK domiciled, to claim non domicile status if they leave but then return and take up residency in the UK. These changes will bring an end to the permanent non domicile status.
Continuing the fight to counter tax evasion
Along with the announced £800 million investment in measures to further combat tax evasion including measures which target offshore trusts, HMRC intend to make regulations to impose customer notification obligations on financial institutions, tax advisers and other professionals. This may include obligations to notify customers or clients of:
Overall this was the expected consequence of reporting under UK FATCA but HMRC have now clearly stated that they intend to use the information reported to ensure that the correct amount of tax is paid and to seek to impose obligations on overseas service providers and advisers to assist them. Businesses in the Channel Islands need to be ready to deal with the increased level of scrutiny that this will bring and to ensure that they are fully compliant with all their UK tax reporting obligations.
Enhanced reporting for Trusts
HMRC has announced plans to increase the level of reporting required by wealthy individuals and trusts by extending their use of dedicated Customer Relationship Managers to individuals with net wealth between £10m and £20m to help them gain an in-depth understanding of wealthy individuals tax affairs and the risks they present. They also plan to pursue more criminal investigations.
Other Tax Rule Changes
The budget included a number of other changes to existing tax rules that could impact CI businesses and individuals. These are outlined below.
If you would like any further information, please do not hesitate to contact Justin Woodhouse, Debbie Payne, Garry Bell, Siobhan James or David Waldron, whose details appear alongside.