Budget 2015: Our Full Analysis

INTRODUCTION

With fewer than 50 days until the General Election, Chancellor George Osborne took this last pre-election opportunity to highlight the successes of the economy over this parliament. With plenty of playing to the audience, he delivered a polished performance to mirror his underlying messages.

He confirmed that certain crowd-pleasing measures previously announced in the 2014 Autumn Statement would proceed, albeit in some cases further enhanced. He also emphasised the commitment of the Government to support UK businesses to grow and flourish, as well as to support individuals who may have borne the brunt of the recent recession.

The Government has continued to demonstrate a commitment to tackle tax evasion and aggressive tax avoidance with new sanctions and penalties.

The following were among the headline comments.

The Chancellor has announced further measures to support savers, workers and those aspiring to own their own homes. This includes further increases in the personal tax allowance, new measures to make ISAs more flexible, and the introduction of a new personal savings allowance for basic and higher rate taxpayers. However, there is a less welcome reduction from £1.25m to £1m in the pension contributions Lifetime Allowance (LTA) from 6 April 2016. The Government confirmed that non-residents will be subject to capital gains tax (CGT) on some gains accruing on the disposal of UK residential property on or after 6 April 2015, with the standard rates applying to UK individuals and corporate taxpayers. Annual exemptions for individuals and indexation allowance for companies will also be available. New legislation will give the UK power to implement the Organisation for Economic Cooperation and Development (OECD) model for country-by-country reporting, as part of the OECD's ongoing Base Erosion and Profit Shifting (BEPS) project. New rules prevent Entrepreneurs' Relief (ER) being claimed on disposals of personal assets being used in a company or partnership business if there is not a simultaneous disposal of at least a 5% share in the company or partnership, and new provisions from today prevent ER applying to certain indirect holdings in trading companies. The Government's proposal to toughen sanctions for tax evaders came as no surprise. What was more unexpected is the early closure of the Liechtenstein disclosure facility (LDF) and the Crown dependency facility, at the end of 2015. This will provide a very sharp twist of the arm to anyone still hesitating to come forward; the alternative is likely to be a criminal conviction when HMRC finds them. Our tax experts have provided their detailed and insightful analysis of the Budget measures and the implications of the Chancellor's comments for taxpayers. While generic in nature, we hope this provides a very useful flavour of the Budget implications.

You can also see our analysis online on the Smith & Williamson website.

1 PERSONAL AND TRUST TAXES

1.1 Personal allowances and thresholds

Increases to both the personal allowance and higher-rate band for 2015/16 were confirmed with announcements made for 2016/17 and 2017/18.

Income tax rates and thresholds will remain at their 2014/15 levels in 2015/16, except as noted below. All thresholds are set out in the appendix.

As announced at the 2014 Autumn Statement, the personal allowance in 2015/16 for those born after 5 April 1938 will increase to £10,600 with the higher-rate threshold increasing to £42,385.

The plan set out is for the personal allowance to increase to £10,800 for 2016/17 and to £11,000 for 2017/18 for all taxpayers regardless of age. The benefit of this increase will be passed on to higher rate taxpayers with an increase in the higher-rate threshold taking it to £42,700 in 2016/17 and £43,300 in 2017/18.

The national insurance upper earnings and upper profits limits will remain aligned with the higher-rate threshold.

The blind person's and married couple's allowances and thresholds will increase in 2015/16 in line with the retail prices index (RPI).

Comment: The further increases to the personal allowance reflect the ongoing pledge by the coalition Government to support those on low and middle income. This has seen a rise in the allowance from £6,475 in April 2010 to the above levels.

However, although the increases are welcome news, not all taxpayers benefit. Those earning above £100,000 continue to see their personal allowance abated on a £1 for £2 basis.

1.2 A new personal savings allowance

From April 2016, a new personal savings allowance will be created, exempting individuals from tax on the first slice of their savings income.

Basic-rate taxpayers will be exempt from tax on the first £1,000 of savings income and higher-rate taxpayers on the first £500. Additional-rate taxpayers will not be entitled to an allowance. Coupled with this, HMRC plans to code out automatically taxable savings income that remains taxable through PAYE from 2017/18, although trials will commence in autumn 2015.

Because so many people will no longer pay tax on their savings, the Budget announced that the automatic deduction of 20% income tax by banks and building societies on non-ISA savings will cease from April 2016.

Comment: With low interest rates on savings, the income from significant deposits could potentially be exempt from tax. Even for those receiving interest at a rate of 1%, income from savings of up to £100,000 would be exempt from tax. This is a welcome relief for pensioners and it will be interesting to see how the banks cope with requests to have interest paid gross although they do have a year to prepare.

The details of automatic coding are not yet available, but it appears that this might accelerate the payment of tax for individuals with taxable savings income. It is hoped that this will not add further levels of complication for those who will need to report the income to HMRC in any case.

1.3 Alternative to the annual tax return

Digital accounting will replace the need for individuals and small businesses to complete annual tax returns. Also, a consultation will take place on enabling the collection of tax and national insurance contributions (NIC) through these digital accounts.

With the aims of modernising and simplifying the UK tax system, the existing tax returns will be replaced by 'digital accounts'.

These accounts will allow HMRC to use information it holds to calculate tax liabilities without the need for taxpayers to re-supply that information. It will also supply a gateway for both individuals and small businesses to upload details of income and gains not already held by HMRC.

The ultimate aim is that these digital accounts will replace the need for these individuals and small businesses to file annual tax returns.

Other services will also be offered, allowing access to a wide range of government services through one portal.

The aim is to start the introduction of the digital tax accounts from 2016, allowing accounting software to feed data straight into digital tax accounts, and fully replace the tax return by the end of the next parliament. Individuals and small businesses will have the option to 'pay as you go' to help manage their cash flow. Taxpayers will be able to let agents manage their digital account on their behalf.

Further details will be released later this year and a consultation will also take place on a new payment process for tax liabilities which will use these digital accounts.

Comment: Any attempt to modernise and, more importantly, simplify the UK tax system should be welcomed.

Many will see the compliance burden reduced, especially where their income is limited to accurate information HMRC receives from third parties, such as employment income, pension receipts and bank interest. However, all taxpayers will need to check the online information to ensure it is correct as the obligation to ensure their tax affairs is correct remains with the taxpayer.

In addition, those with more complex affairs will still need to engage with the 'digital account' in the same way they currently engage with HMRC's online filing software to provide other information not currently in HMRC's possession, such as business accounts, capital gains and claims for relief.

It is likely that the same deadlines on provision of information and payment liabilities will apply to these more complex situations. Also, the responsibility for accuracy of the information will remain with the taxpayer, meaning engagement will still be needed by all taxpayers.

How the digital accounts will interact with third-party software and how accounts information will flow through to HMRC automatically will need to be explored. Use of XBRL tagging down to a granular transaction level, which has been discussed before, and which is accessible and transparent in real time to HMRC, may be a step too far.

As always, it will be necessary for HMRC to consult on the specific detail of the policy and administrative changes before casting this in stone. If handled properly, it could bring advantages to HMRC, taxpayers and their agents.

1.4 Remittance basis charge - changes

The Government has announced changes to the remittance basis charge applying to long-term residents from 6 April 2015, including the introduction of a new £90,000 charge for certain remittance basis...