Budget 2012 Wish List
21 March 2012
Today's budget was trailed as a budget that "rewards work", that "unashamedly backs business" and makes reforms. Did the Chancellor deliver?
Click here and here to read articles published in the Bristol Evening Post written by Erika Jupe.
Rewarding work
The Chancellor has accelerated Government plans to reach a maximum personal allowance of £10,000 by announcing that the personal allowance will increase to £9,205 from April 2013 (up from £8,105 from April 2012).
The headline rate of income tax will be reduced from 50% to 45%, as widely rumoured before the budget from April 2013 allowing plenty of time for tax planning opportunities to defer income until the rate comes down.
As for pensions tax relief, our budget wish was answered and the Chancellor left this alone, for the time being at least.
Backing business
The proposed reductions in corporation tax have also been accelerated; the full rate of corporation tax will now reduce to 24% from April 2012 from its current 26% and then again to 23% in April 2013 and 22% in April 2014, a good result for business.
In line with our budget wish and after much lobbying by industry groups, it was good news for the creative and high-tech sectors. Most significantly, the Chancellor pledged to keep Wallace and Grommit "exactly where they are," as he announced a boost for the creative industry, which will see the introduction of a new tax-relief targeted at video games, animation and high-end television productions. Consultation on the design of this relief will take place over the summer and will be available from 1 April 2013.
The Chancellor showed further commitment to those companies involved in research and development (R&D) by confirming the introduction of the patent box, (another of our wishes), and its commitment to introduce an 'above the line' R&D tax credit from April 2013.
The budget also saw welcome and unexpected changes to the Enterprise Management Incentive (EMI) scheme, used by small and medium sized businesses to incentivise their employees. The changes will allow start-ups better access to the scheme and will double the amount of options that can be granted under the scheme to £250,000. The Government will also consult on amending rules that currently restrict the EMI scheme being used by start-up companies who employ academics, potentially good news for start-ups such as university spin outs. It is also expected that Enterpreneurs' Relief ("ER") will be amended to allow EMI options exercised on or after 6 April 2012 to qualify for ER.
Anti-avoidance
The Chancellor also confirmed thathe proposes to introduce f a General Anti-Abuse Rule (GAAR) as recommended in the Aaronson Report. This GAAR will be targeted at artificial and abusive tax avoidance schemes and a consultation will be launched later this year with a view to introducing legislation in the 2013 Finance Bill.
Our budget wish was for an introduction of the GAAR to be delayed and a full tax simplification programme to be pursued first (see our budget wishes below). Whilst the Chancellor confirmed the Governments support to move forward with certain areas of simplification, such as the integration of income tax and national insurance contributions, there is a huge amount to be done.
The Chancellor also made it clear in the budget that avoidance of tax through the use of companies or other structures to purchase properties worth £2 million or more would not be tolerated. These measures are effective from Budget day, 21 March in so far a they relate to SDLT and the Government will consult later this year on the introduction of capital gains tax and an annual charge on residential properties worth over £2 million and owned by a "non-natural" person..
Our Wish List
No further reductions to Revenue & Customs headcount
What’s the problem?
As part of the Government’s spending review, jobs in many areas of Government have been cut significantly in an attempt to reduce costs. One of the departments hit hardest by these measures has been HM Revenue & Customs (HMRC). However, in cutting these jobs the Government are taking away the very people that are capable of raising money for public finances by tackling the problem of uncollected tax and pursuing those seeking to avoid tax. The lack of experienced employees at HMRC also presents a problem for taxpayers who need to be able find a suitably qualified individual within a reasonable timescale when they have tax problems or need to clarify their tax affairs.
What’s the solution?
In the short term, the solution has to be no further cuts to HMRC staff numbers. In the medium to longer term, an increase in the number of HMRC employees, particularly skilled tax professionals who can be utilised to close the tax gap and make dealing with HMRC a less frustrating experience for customers. An increase in the number of skilled tax professionals will also allow both represented and unrepresented taxpayers access to HMRC staff on the telephone who can advise them correctly, rather than being referred to the HMRC website or other resources that cannot match a conversation with a knowledgeable HMRC member of staff.
Erika Jupe
Tax Partner
Incentivise the Interactive Entertainment industry
What’s the problem?
Globally, the interactive entertainment industry makes more money than the film industry. That’s a huge statistic, but the implication is plain. Any economy with a stake in the interactive entertainment industry benefits hugely from that association. It is in those economies’ interests to support and nurture their domestic interactive entertainment industry to help them to expand internationally. The UK is one of the global leaders in interactive entertainment and currently there are a number of factors that are threatening our position.
Most importantly, the lack of tax-breaks in the UK means that producing games is more expensive here than in countries that do offer tax breaks, like the US, Canada and France. That has a number of knock-on effects for the UK, including (according to figures produced by UK games industry body TIGA):
• a 10% per annum decline in employment since 2008 (with 41% of those jobs relocating overseas)
• a drop from third largest games producer globally to sixth since 2006
• low overseas investment in our games industry (in 2011, just 3.6 per cent of the global total was invested in the UK)
• a hostile environment for games start-ups (208 studios started between 2008-2010 but 197 shut up shop)
The UK interactive entertainment industry has grown by 23 per cent since the start of the global downturn and, with projected growth of 8.2 per cent pa until 2015, has the potential to make a very significant contribution to the UK recovery. But it can only do so if it can compete with other countries on a level playing field.
What’s the solution?
We support TIGA’s call for a new games tax relief to help create a level playing field and improve access to finance. TIGA’s proposal would allow games developers to keep more of their profits, which would allow them to reinvest in developing their business. In the event of a game making a loss, developers would benefit from tax relief to reduce the loss. This would work in a similar way to the reliefs currently given to the British film industry.
TIGA estimates that games tax relief would generate and safeguard 4,661 direct and indirect jobs, as well as helping increase the games development sector’s contribution to UK GDP by £283 million. Importantly, the Games Tax Relief would more than pay for itself. In the current economic environment, that’s a very compelling argument for the government to support one of our most interesting and export-focused industries.
In addition, we have worked with UK games industry body UKIE to formulate additional strategies to make the UK games sector more internationally competitive, including for example the creation of a copyright box to complement the government’s patent box initiative to stimulate the creation of IP, as well as reform of tax rules including the R&D tax credit and EIS and VCT schemes to better fit the games and other creative industries.
Paul Gardener
Head of Interactive Entertainment
Patent Box
What’s the problem?
As the Government seeks to stimulate economic growth, it must seek to incentivise those businesses capable of helping the UK out of its current economic decline. To help achieve this ultimate aim the Government is keen to make the UK a more attractive IP holding location and incentivise companies to perform innovative R&D and high tech manufacturing activities in the UK.
The Government needed to respond to large pharmaceutical companies in particular beginning to leave the UK as a result of what they considered to be an uncompetitive tax regime. The Government have responded in part through improvements to the R&D tax reliefs already available and the planned introduction of the patent box.
What’s the solution?
The Chancellor has already announced amendments to improve further the R&D tax reliefs available for companies and draft legislation for a new patent box regime (see our article Are you thinking inside the box?). In essence the patent box will introduce a 10% tax rate for company profits derived from patent interests and will be introduced in 2013.
The corporate response to date has been very positive, with many larger businesses being key players in the consultation process for the patent box. The scope and impact of the new regime is still taking shape and we wish to see confirmation from the Chancellor that implementation of the patent box is still on target for 2013. We also wish to see draft guidance published to accompany the already published draft legislation.
At this point in time, confirmation of the Government’s continued support of R&D and tech businesses will be good news and very welcome, not only by businesses already operating in the UK but by those seeking a tax efficient holding company location.
Theo Savvides
Intellectual Property Partner
Using Crowds to Help Fund Businesses
What's the problem?
Everybody knows that businesses are struggling to access funding using traditional routes. That's not just having an impact on entrepreneurs trying to establish new businesses; it's also making it difficult for more mature businesses to grow.
What's the solution?
We'd like to see the government make some really innovative tax and legislative changes to help make alternative fund sources as attractive as possible. We know that in the new tax year they are bringing in changes to Venture Capital and Enterprise Investment Schemes to make them more attractive to investors. They’ve also promised to introduce a Seed Enterprise Investment Scheme (SEIS), to give tax breaks to people investing in small businesses.
But for something really different, how about crowd funding? This is really cutting-edge stuff and you can find out more about it by clicking here (link to article). The government is already considering tax reliefs for crowd-funding as part of the SEIS. But if it really wants to support growing businesses, the government should amend financial regulation to encourage crowd-funding and lobby the EC to reduce the barriers that currently prevent crowd-funding becoming a mainstream investment option.
What is crowd funding?
David Blair, Osborne Clarke’s Head of Financial Regulation, says:
“Crowd-funding is inspired by the internet and social media, and allows companies to raise money from the mass market. It started in the mid-naughties as a way of raising funds for community and arts-based projects but now is emerging as an innovative fund-raising method for SME businesses and commercial projects. Raising finance through a high volume of micro-investments can produce a cost-reward ratio that is attractive to retail investor and SME alike. Direct public participation also reduces national over-reliance on banks.”
David Blair
Head of Financial Regulation
Please click
here
to read David's City AM article
Pensions tax relief
What’s the problem?
The Chancellor has an unenviable task ahead of him. How does he stick to his deficit reduction plan whilst stimulating clearly needed economic growth?
One option that has received a lot of press coverage over the past few weeks is whether or not the Chancellor will opt to reduce or abolish tax relief on pension contributions for those paying tax at the higher rate of 40% or the additional rate of 50%. It is claimed that total pensions tax relief amounts to £32.9bn a year, with a disproportionate share going to high earners. Restricting tax relief for high earners looks like a politically attractive way to save about £7bn of this relief.
However, we believe introducing such restrictions would be a mistake. It would “have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness”. Those aren’t our words, but are the words of the Coalition Government itself when it rejected the Labour Government’s proposal to introduce such a restriction in tax relief back in 2010. We couldn’t agree more.
Even putting aside arguments about the fairness of taxing both contributions to and benefits from a pension scheme, the short term saving for the Treasury will go entirely against the Government’s key objective of increasing pension saving.
The annual limit on pensions tax relief was significantly changed in both 2009 and 2011 and the lifetime limit is already changing this year. Each change causes expense and hassle to employers as well as individuals. As Keith Webster, a partner in Osborne Clarke’s pension team puts it, “while the Pensions Minister is promising deregulation for pension schemes, the Treasury keeps hitting those running the schemes. The Chancellor must avoid the temptation to target pensions tax relief to raise short term cash. The long term aim of encouraging pension saving is far more important.”
What’s the solution?
Given the more important aim of encouraging pension saving, we think the Chancellor must withstand pressure to hit pension savers and pension schemes to raise short term cash.
If the Chancellor decides that he has to touch pensions at all, it should only be to make changes which are easy to introduce, such as reducing the amount of tax free cash people can take on retirement. However, those changes raise very little revenue in the short term and so are barely worth doing.
Keith Webster
Pensions Partner
Employment Regulation
What's the problem?
As employment regulation increases, how do you make sure that your business operates legally? Small businesses face a disproportionately high burden when it comes to complying with employment regulation. That’s not just keeping on top of employees’ rights, like the national minimum wage, family-friendly working, statutory holiday and protection against unfair dismissal but also, increasingly, resisting and defending claims for breaches of rights.
In November 2011, the government set out proposals which it described as "the most radical reform to the employment law system for decades". The idea was to get a better balance between the burden on businesses and protecting individual rights. The problem is that apart from an increase the qualifying period for an employee to bring an unfair dismissal to 2 years (due on April 6), businesses have to date seen very little change.
The government has said (many times…) that it will help businesses by tackling various aspects of employment law and now is the time for it to act. We’re expecting new rules around dismissals for small businesses to be announced in the budget. The so-called ‘compensated no-fault dismissal’ will give employers in ‘micro-businesses’ the right to dismiss an employee without fear of an unfair dismissal claim in return for a fixed statutory compensation payment. We think this is a bit risky…
What's the solution?
Successful small businesses aren’t about ‘us and them’. The very best provide interesting employment opportunities and career development, as well as involving employees in building the business. Good employee relations and internal management of employment issues is the key.
Completely rewriting the employment rules for small businesses would create a two-tier employment system. That would be a radical, and risky, solution that would be as likely to damage the UK recovery as boost it. Businesses may decide to contract rather than expand to bring themselves within the less regulated tier, while low paid interns and work-experience students may be used instead of regular employees to plug gaps, leading to high staff turnover and only short-term gains. From our perspective, it’s not an option.
At the same time, small businesses are a special case and need special provisions or exemptions to help them, and the jobs they create, survive.
Flexibility is key to the success of small businesses. Whether it’s adapting to changing market demand or taking advantage of new opportunities, owners and employees have to work closely together to make the business work. We think that the government needs to recognise that and to build flexibility into any new regulation.
Our immediate solution would be for the government to drop plans for ‘compensated no-fault dismissal’ but grant micro-businesses exemptions from some new rights, like the proposal to extend the right to request flexible working to all employees.
David Cubitt
Employment Partner
Anti-Avoidance Measures
What’s the problem?
The press has been full of headlines about tax avoidance in recent weeks – with everyone from politicians to comedians scathing in their condemnation of tax avoiders. It is against this background that the Chancellor will have to consider whether to introduce a General Anti-Abuse Rule (GAAR) as recommended by the study group set up by the Treasury to consider the issue. Presumably this means that anyone who supports the introduction of a GAAR is on the side of the angels and anyone against it is on the side of the tax avoiders. We don’t agree and think there are good reasons for the Chancellor not to introduce the GAAR, or at least to delay its introduction.
The GAAR as proposed by Graham Aaronson, QC and his study group (click here to read) would “counteract abusive tax results”…”from abnormal arrangements”. It is an admirable attempt to tackle the question of tax avoidance in a measured way. But at a time of economic fragility and when HMRC’s resources are already overstretched we would prefer to see the Treasury focusing its efforts on encouraging business and investment, rather than making UK tax rules even more complex.
What’s the solution?
The real focus must surely be on the simplification of the UK tax system, currently one of the most dense and complicated in the world. The formation of the Office of Tax Simplification in July 2010 (click here to read) was a positive step, but so far the Office’s work has been confined to the recommendation of the abolition of minor, archaic rules and reliefs and has not attempted a wholesale simplification of UK tax legislation. If the UK is to become more competitive internationally, more radical thinking and fundamental reforms are required.
In better economic times, with a simplified UK tax system and a properly resourced revenue service, the GAAR will look much more attractive.
Our Budget wish is therefore for the Chancellor to delay introduction of the GAAR.
For press commentary on the proposed GAAR, see also:
BBC News
HM Revenue & Customs
FT Adviser
BBC News
Erika Jupe
Tax Partner
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