2012 Budget: A grand day out
We asked leading tax practitioners for their views on the 2012 Budget, announced on 21 March 2012. (Free access.)(Free access.)
An overview of the responses is set out below; click on a name to read the comment in full then use the back button on your browser to return to the overview. To see all PLC's Budget coverage, see PLC 2012 Budget.
The context of this Budget has not been particularly inspiring. The UK economy, whilst not plummeting, has been perilously close to flatlining, and the event has been played out under the previously unthinkable threat of a downgrade in the UK's AAA credit rating.
But politically this Budget has been compelling, and the press interest has been considerable. We are now half way through the political term, and the coalition government remains in place, despite the predictions, and despite the strain of what Richard Carson, Taylor Wessing LLP refers to as "the realities of coalition government". If any of the rumours are to be believed, it seems that significant Budget policy decisions were not made until the last minute; reports suggest advisers were called in for eleventh hour meetings at the Treasury as late as the afternoon before the Budget.
And it is not often that the Chancellor of the Exchequer refers to Wallace & Gromit or other fictional animated cartoon characters in the course of a Budget statement. Or that the Prime Minister refers to a kaleidoscope Budget. Or that they all seemed to be having such a good time, in a school boy, Billy Bunter kind of way.
So, what's new?
Notwithstanding the build up, as Caspar Fox, Reed Smith put it: "it took me a while to find a measure of substance which had not been leaked or previously announced". William Watson, Slaughter and May agreed there was "not much to say on the corporate tax front - Budgets are not what they used to be!".
Absolutely. But in fact, is this how Budgets are supposed to be now? This is a government involved in consultation and engaged with the taxpayer, industry and commerce. The new approach to tax policy making first set out in the June 2010 joint HM Treasury and HMRC discussion paper made a virtue of longer tax policy cycles and plenty of consultation. The resulting budgets are certainly not as exciting, but perhaps this is an inevitable consequence.
Headlines, headlines (but no technical substance?)
Patrick Mears, Allen & Overy LLP described it as a "a budget of headlines rather than a budget of detail". Specifically, the headlines were a further 1% reduction in the corporation tax rate to 24%, with effect from 1 April 2012, and a reduction in the top rate of income tax from 50% to 45%.
Politically, given that the government is in the back half of its first term, headlines matter. The reduction in the rate of corporation tax of course delighted the City. Andrew Loan, Macfarlanes LLP observed (crowed?) that "the UK will have significantly lower headline rates than competitors such as the US, France, Germany or Spain". Kevin Hindley, Alvarez & Marsal Taxand UK commented that "at a stroke [the Chancellor] has made the UK a more attractive proposition for international business". Ben Jones, Eversheds struck a note of caution though, pointing out that "tax is not the sole factor determining where a business establishes it operations, with the recent news that Prudential and HSBC are considering moves to Hong Kong demonstrating the importance of factors such as regulatory burden".
And inevitably the reduction in the top rate of income tax was pounced upon. Nicholas Stretch, CMS Cameron McKenna described it as "an opportunity to exploit: soon we will be dusting down work we did in 2010 when the rate increased to see how we do planning work in reverse i.e. to delay bonuses and share receipts etc otherwise due before April 2013 until after the reduction in tax rate takes effect". David Jervis, Eversheds also saw "opportunity to save tax by deferring discretionary bonuses".
But in the context of a fiscally neutral budget, reductions in corporation tax and income tax rates must be balanced by increases elsewhere. And indeed they were. As well as the vicious assault on SDLT (see Mansions and taxes: trouble in The Boltons), not to mention the rape and pillage of angostura bitters (see comment from Murray Clayson, Freshfields Bruckhaus Deringer), the government increased the rate of the bank levy. Again. Vimal Tilakapala, Allen & Overy LLP noted:
This represents a fourth rise since the bank levy was introduced, the last one having come in November 2011. There is a deliberate reference to the increase taking account of the additional reductions in the corporation tax rate, but whether the bank levy rate will continue to increase as a direct result of a reduction in corporation tax rates is not clear.
An observation made by a number commentators was that the Budget did not contain much by way of technical substance. Matthew Hodkin, Norton Rose LLP described it as "ironic that a budget which has attracted more press interest than other recent budgets should be relatively unexciting from a technical perspective". Steve Edge, Slaughter and May described it as "an interesting but not very technical budget which illustrated how tax sits at the crossroads of economics and political/social thinking".
Still, the degree of anti-avoidance rhetoric and hyperbole in parliament on Budget day more than made up for that. The Chancellor does not divulge who writes the Budget speech, but Winston Churchill himself would surely have been proud.
GAAR: Are we ready for the Brave New World?
What Darren Oswick, Simmons & Simmons LLP described as "the moral crusade" against tax avoidance steamrollers on as the government announced that it will consult on the introduction of a general anti-abuse rule (GAAR). Notably, the government has confirmed that it accepts the recommendations of the Aaronson report, and that it will consult on new draft legislation, to be based on the recommendations of the Aaronson Report. Some commentators, including Yash Rupal, Linklaters interpret this as implying that the draft legislation in the form drafted by the Aaronson panel will therefore definitely not be adopted.
Even if there is to be new legislation, it does seem implicit in the language of the announcement that the government has accepted that an advisory panel (described by Philip Gershuny, Hogan Lovells, LLP as "grey suited game keepers") should play a part. The government has also announced that it will extend the GAAR to SDLT. Charlotte Sallabank, Jones Day found this "somewhat surprising", but given the unpopularity of recent avoidance methods in the context of SDLT, this was probably inevitable. Brenda Coleman, Weil thought that a GAAR should include a clearance procedure "to help reduce any ... uncertainty". However, given the existing lack of HMRC resources, this seems unlikely.
A growing number of advisers now believes that a GAAR is otiose, believing instead that the role of the courts is sufficient. Murray Clayson, Freshfields Bruckhaus Deringer thought it was an "unnecessary and costly complication". Colin Hargreaves, Freshfields Bruckhaus Deringer agreed, saying that ..."the GAAR may well arrive at about the right time to throw the final bolt on the stable door". Sandy Bhogal, Mayer Brown International LLP thought it was "a matter of opinion as to whether the GAAR] is the inevitable consequence of an increasingly complex and interdependent world where change in business will always outpace tax law, or simply an admission that it is not possible to draft accurate primary legislation which reflects the will of Parliament".
Note that "GAAR" was initially an acronym for "general anti-avoidance rule". It is now apparently an acronym for "general anti-abuse rule". Presumably this is intended to demonstrate an intention that the rule should only catch abusive transactions, rather than legitimate tax planning. If this is the case, then someone should really have mentioned it to George Osborne. His Budget statement that "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant" may suggest that he confuses the two.
But perhaps it is not about the role of the courts anyway; it is about something more. Ashley Greenbank, Macfarlanes LLP said:
"The introduction of a GAAR is not about changing the outcomes of tax cases. ... As demonstrated by the Chancellor's reference to tax avoidance as "morally repugnant", this is all about changing attitudes and behaviour."
But it is not clear how this ties in with the needs of business for certainty and clarity. As Elaine Gwilt, Addleshaw Goddard, LLP put it: "the government will need to tread carefully ... to ensure that the inevitable degree of uncertainty which [the GAAR] will raise does not detract from its business friendly measures". Shiv Mahalingham, Alvarez & Marsal Taxand UK said "we don't need any more uncertainty in the UK tax system. It would completely destabilise the positive corporation tax changes introduced over the past few years".
Retrospectivity: where is the rule of law?
Linked to the spectre of the GAAR is the issue of retrospectivity. Although not technically part of the Budget, the anti-avoidance legislation applicable to debt buy-backs and announced at the end of February has been widely mentioned by contributors. That anti-avoidance legislation was, controversially and unusually, expressed to be retrospective in action. It is linked to the issue of the GAAR because, as David Taylor, Freshfields Bruckhaus Deringer put it: "Why do we need a GAAR when the law can just be changed retrospectively?" Simon Yates, Travers Smith LLP made a very similar point: "Why have a GAAR at all, if your view is that egregious tax planning can be countered by changing the law retrospectively without the rather tiresome need to persuade someone else of its egregiousness?"
The difficulties with retrospective legislation are legion. Not only does it run contrary to the rule of law, but it creates huge difficulty for business because of the lack of certainty. Yet this government has made a huge virtue of its support for business, and the importance of predictability and stability. Colin Hargreaves, Freshfields Bruckhaus Deringer said: "A reputation for reaching for the retrospective change button [can not] be helpful: business is attracted by certainty and stability". This was also echoed by Ian Hyde, Pinsent Masons LLP who said: "Tying business up in red tape and generating uncertainty will not be good for UK plc". Charles Goddard, Berwin Leighton Paisner LLP agreed, saying that "the damage done to the credibility of the UK by retrospective measures, or even the threat of them, is not worth the loss of revenue, however painful that may first appear".
Mansions and taxes: trouble in The Boltons
Given what Mark Baldwin, Macfarlanes LLP described as "the frenzied media campaign against residential property SDLT avoidance using corporate wrappers", it was clear a whipping was coming, but no one knew it would make our eyes water quite like it has. Until 21 March 2012, the owners of those houses in Kensington Palace Gardens and Cheyne Walk were blissfully unaware of the economic pain about to imposed upon them.
Perhaps one of the very few genuinely surprising aspects of this Budget has been the degree of lambasting of the high net worth individual. It was generally accepted that SDLT schemes would be attacked, but the 15% SDLT rate applicable to residential property purchased through a corporate vehicle (described as "punitive" by Nikol Davies, Taylor Wessing LLP and "swingeing" by Nick Cronkshaw, Simmons & Simmons) was not generally foreseen.
Patrick Mears, Allen & Overy LLP thought that some of the SDLT measures amounted to "an overreaction fuelled by policy neglect in this area"; they were similarly described by Iain Scoon, Shearman & Sterling (London) LLP as an "emotional overreaction". James Bullock, McGrigors LLP agreed, and thought that these announcements, "though politically popular in the short term, [had] the potential to make the UK a very much less attractive place for non-domiciled investors. The presence of these individuals (given their spending power) should be a key driver in the economic recovery that is badly needed". David Harkness, Clifford Chance agreed, noting that "Whilst one has sympathy with the Government on SDLT schemes for residential property, many of which probably didn't work anyway, the Government should be minded that further threats or use of retrospective legislation will affect the UK's competitiveness."
At a technical level, Simon Skinner, Travers Smith LLP thought that the proposed new rules looked "likely to be very problematic, and certainly to create complexity and difficulty out of all proportion to their intended results ". Heather Corben, SJ Berwin agreed that the charges were "likely to have significant ramifications not only for those that the legislation is intended to target but also for a wider group of property investors". Tom Scott, McDermott Will & Emery UK LLP agreed the changes were "likely to cause collateral damage".
More specifically, Kevin Ashman, Hogan Lovells noted that the reference in the Budget documentation to "non-natural persons" was too wide, complaining:
"...it will catch companies quoted on the London Stock Exchange (such as REITs) and widely held collective investment funds. On the other hand it does not catch some esoteric overseas entities which don't fall within this definition."
Jonathan Legg, Mishcon de Reya was concerned that "the carve-out for "property developers" from the 15% charge also seems much too limited". Richard Croker, CMS Cameron McKenna LLP was one of several contributors who noted that the interaction of the charge with inheritance tax might cause problems in particular.
Sara Luder, Slaughter and May thought that the policy issues behind the proposals were "complicated", concluding "this looks to have been a rushed announcement, and one hopes that some careful thinking will follow during the consultation period".
John Challoner, Norton Rose LLP mentioned that:
"The proposal to charge non-UK companies to CGT on residential property is potentially worrying. Although the announcement is grouped with the SDLT and annual charges on dwellings costing more than £2m there is nothing in the announcement that limits it to those buildings. If it is intended to apply to all residential buildings this will have a major impact, not only on funds and holding companies which only invest in residential property but also for such vehicles that own commercial property with some incidental residential accommodation, such as apartments above shops or offices. I assume that the change is not intended to go that far but hopefully this will be made clear very quickly."
Elliot Weston, Lawrence Graham LLP was concerned that it might be "the start of a reversal of the trend of overseas investment into UK property".
Janet Hoskin, Pinsent Masons LLP made the point that "residential properties are often held in companies for reasons other than tax ... such as security and confidentiality".
In any event, David Milne QC, Pump Court Tax Chambers observed that: "subjecting non-resident companies to CGT on the sale of UK mansions is unlikely to be very effective, since it is usually the shares in these companies which get sold, not the underlying property".
More retrospective legislation on the way?
And, as if the measures announced were not sufficient, the Chancellor warned openly (and with gusto) of the possibility of further retrospective avoidance legislation if his intentions were thwarted. Words seized upon by a number of contributors, and in particular described by Heather Gething, Herbert Smith LLP as "alarming". Jonathan Hornby, Alvarez & Marsal Taxand UK noted that "with the recent clampdown on the corporate debt buy-back schemes we have already seen that the government is not afraid to back date new legislation".
However, whilst tax provisions with retrospective effect invariably elicit rage from advisers, Angela Savin, Norton Rose LLP noted that "although commentators frequently condemn the use of retrospective legislation as giving rise to uncertainty for business, it is clearly more palatable where a warning has been given, and the area targeted is narrow and clearly defined".
Encouraging innovation: good news for angry birds
The government's changes to the taxation of intellectual property received an almost universally favourable response. Cliona Kirby, Olswang LLP was "delighted" with the announcement of tax credits for the creative industries.
Geoffrey Kay, Baker & McKenzie revealed that:
"A number of us in the office have spent considerable time speculating as to how a number of existing popular video games would have to be modified in order to qualify as "culturally British". Presumably "Grand Theft Auto" would need to be renamed "Taking and Driving Away"."
In relation to the proposed R&D credits for large companies, Geoffrey Kay also thought they would have "potentially ... a greater impact in attracting and retaining R&D activity for the UK than the patent box".
Investment incentives and the right trousers for entrepreneurs
Commentators remain optimistic about the introduction of the Seed Enterprise Investment Scheme. According to Mathew Oliver, Bird & Bird: "small businesses should be helped by to the relaxations in relation to EIS [and] the introduction of seed EIS".
One of the measures not trailed (or leaked) in advance was the increase in the individual limit on the grant of enterprise management incentives (EMI) options from £120,000 to £250,000. Described by Emma Bailey, Fox Williams as "extremely welcome" and by Judith Greaves, Pinsent Masons LLP as a "knock-out incentive". Colin Kendon, Bird & Bird LLP thought it would "reduce the number of companies that need to create a special class of growth shares to fit within the limit" and Mathew Gorringe, Eversheds LLP thought the amendments would make the EMI scheme "even more popular".
Income tax reliefs capped
One of the more oblique (and unanticipated) Budget announcements was that unlimited income tax reliefs would be capped. Adam Blakemore, Cadwalader Wickersham & Taft LLP thought it would be "interesting to see ... how "sideways" loss relief for genuine commercial activities might be affected". Nikol Davies made a similar point.
Nick Beecham, Field Fisher Waterhouse LLP mentioned that "charities will be concerned at the potential effect of the cap on income tax reliefs claimed by individuals ... It will be vital that representations are made during the consultation process with a view to ensuring that charities are not prejudiced by this change".
Other measures ...
A number of other measures were also mentioned by commentators.
Non-sterling functional currency
A number of advisers commented on the announcement that the government would consult on whether to allow companies with a non-sterling functional currency to compute their chargeable gains and losses in that functional currency. This was universally welcomed. Tony Beare, Slaughter and May observed that "It has long been an irritant that companies with non-sterling functional currencies had to calculated their chargeable gains in sterling". Eloise Walker, Pinsent Masons LLP agreed that this is "likely to make life simpler for such companies, although not necessarily fairer, as HMRC claim".
The announcement of a new consultation on the role REITs can play in supporting the social housing sector and the possible change in treatment of income received by a REIT investing in another REIT was welcomed by Martin Shah, Simmons & Simmons LLP. However, he complained about the lack of an announcement on mortgage REITs, as did John Christian, Pinsent Masons LLP. He said "this would have provided a valuable additional source of capital to help to unwind the property debt position of banks and is another lost opportunity for the REITs regime".
The government also announced an internal review to examine the role of employee ownership in supporting growth and examine options to remove barriers to its wider take-up. Graeme Nuttall, Field Fisher Waterhouse LLP is independent government adviser on employee ownership, and is conducting an informal consultation in this area.
The US Foreign Account Tax Compliance Act (FATCA) has been causing headaches for multinationals. As a result, Richard Sultman, Cleary Gottlieb Steen & Hamilton LLP thought that the forthcoming consultation over exchange of information between UK institutions and the IRS "may have a significant impact in the UK".
Oil and gas
After last year's unpleasant surprises, Michael Thompson, Vinson & Elkins RLLP thought the oil and gas industry would have "breathed a general sigh of relief and satisfaction" at the Budget announcements. No unwelcome surprises this year; instead, a package of measures, including a new targeted field allowance and a contractual promise by the government to guarantee the rate of tax relief on future decommissioning costs.
In relation to the consultation on VAT boundaries, Paul Hale, Simmons & Simmons LLP commented that "many of these issues cannot be regarded as avoidance and are really simple issues of classification. However, they do highlight the fact that some of the zero-rating provisions... desperately need to be brought into the 21st Century". Lee Squires, Hogan Lovells LLP pointed out that the "hotch potch of changes... to correct anomalies and close loopholes around the scope of certain exemptions and zero-rate, all ... have the effect of subtly increasing the tax base".
Overall, a "deeply political Budget", but wait and see
It was, as Jonathan Cooklin, Freshfields Bruckhaus Deringer LLP described it, a "deeply political Budget".
In terms of other conclusions, Neil Warriner, Herbert Smith LLP thought that size mattered: "Whilst bigger, profitable businesses will benefit from the additional 1 per cent cut in the corporation tax rate, smaller businesses, particularly ones with high fuel and vehicle costs, will not obviously be much better off". But others disagreed. Mathew Oliver, Bird & Bird concluded that "Overall, this seemed to be a good budget for business" and Howard Murray, Herbert Smith LLP thought that "the headline message from the Budget is a positive one for business". Susan Ball, Clyde & Co, described it in rather more cautious terms as "tinkering in the right direction".
However, it was generally acknowledged that the Budget was light on technical detail, with much of the detail yet to come. Dominic Stuttaford thought we must "await the real detail in the Finance Bill" (to be published next week).
Comments in full
Kevin Ashman, Hogan Lovells
(See profile for Kevin Ashman.)
"As expected the Budget contained a number of measures designed to catch high value residential properties.
HMRC will impose an SDLT charge of 7% on the acquisition of residential properties for more than £2,000,000. This charge will be increased to 15 % where the property is acquired by certain types of non-natural persons.
A number of points can be made on this. The Budget Resolutions say that non-natural persons means : companies, partnerships if one or more of the partners is a company, and collective investment schemes. To some extent this is broader than it needs to be to counter SDLT avoidance. For example it will catch companies quoted on the London Stock Exchange (such as REITs) and widely held collective investment funds. On the other hand it does not catch some esoteric overseas entities which don't fall within this definition. However in order to prevent tax advisers from becoming too inventive about this HMRC has retained powers to extend the number of non-natural persons caught by these provisions by statutory instrument. In addition the Chancellor has issued a statement which says that the government will act swiftly to curb further SDLT abuse, with the use of retrospective legislation where appropriate. (In passing I would comment that the use of retrospective legislation is very much regretted. It is contrary to natural justice and the rule of law)
It should also be noted that no charge to SDLT will arise on the purchase of shares in an SPV which owns residential property. Instead the government has announced a consultation on the introduction of an annual SDLT charge where residential property worth more than £2,000,000 is owned by a non-natural person. Such charge will be introduced in 2013. In addition the government has announced a consultation on introducing a CGT charge on non-natural persons which own residential property worth more than £2,000,000.The charge will be introduced in 2013.
As a result a non domiciliary who is offered the opportunity to buy shares in an SPV which owns residential property worth more than £2,000,000 has a difficult choice he can either buy the property direct and pay 7% SDLT, elect the property to be his principal private residence for CGT purposes (so that it is exempt from CGT) but be subject to potential inheritance tax charges in respect of the property. (UK property is within the scope of inheritance tax. Shares in a non UK company which owns UK property is not within the scope of inheritance tax if owned by a non dom). Alternatively he can buy the shares and pay no SDLT and not be subject to potential inheritance tax charges but be possibly subject to an unspecified annual SDLT charge from 2013 and be subject to a potential CGT charge on a later disposal of the property or the shares in the SPV after 2013."
Emma Bailey, Fox Williams
"The increase in the value of shares over which EMI options may be held from £120,000 to £250,000 is extremely welcome, as is the proposal that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for Entrepreneurs’ Relief (though we await the detail in the draft Finance Bill next week). More changes in the area of employee share ownership are likely to follow in the next few years given the announcement that HM Treasury are to conduct an internal review to examine the role of employee ownership in supporting growth and examine options to remove barriers, including tax barriers, to its wider take up; and the proposed consultation on taking forward the recommendations of the Office of Tax Simplification following their review of tax advantaged share schemes.
In light of the recent media furore surrounding Ed Lester’s remuneration at the Student Loans Company (and further examples in the public and private sector), it is not surprising that the Government is bringing forward a package of measures to tighten up on avoidance through the use of personal service companies, and will, in particular, consult on proposals which would require officeholders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source.
As expected, the Chancellor has closed down SDLT sub-sale schemes involving the grant or assignment of options and, as was muted immediately prior to the budget, imposed a 7% SDLT band for high value residential property. The extent to which the Chancellor has attacked the enveloping of high value residential property in a corporate wrapper was more of a surprise. It remains to be seen whether the consultation on the extension of the capital gains tax regime to gains made by non- resident non-natural persons on the disposal of UK residential property fuels the debate as to whether all non-residents should be subject to tax on UK real property gains."
Mark Baldwin, Macfarlanes LLP
(See profile for Mark Baldwin.)
"Given the frenzied media campaign against residential property SDLT avoidance using corporate wrappers, it was inevitable that there would be “anti-avoidance” measures announced in the Budget. The increased rate (7% on properties costing more than £2m) was also widely trailed in the lead up to the Budget. However, the immediate 15% SDLT charge on the acquisition of properties by “non-natural persons” and the consultation on an annual charge for such properties held in vehicles and a CGT charge on gains made by non-resident vehicles disposing of such properties with a view to introducing such measures next year raise very difficult issues for existing structures far removed from the target of the media campaign or the Chancellor’s objectve.
For example, many non-domiciled family structures incorporate “non-natural persons” holding high value residential property. The future of such structures (which are not put in place for SDLT planning) will need urgent review and likely restructuring.
More pressingly, there are a number of funds which invest solely/mainly in high value residential property (typically in Central London). These changes, if enacted, will have the potential to wreak havoc with the yield from such funds and may well drive them (and their managers) out of business. It is difficult to see how a fund (which would be subject to SDLT at 15%) can compete on price in a vibrant market with natural buyers (which will include individual investors as well as occupiers) who only have to pay 7% SDLT. Unlike family property owning structures, it is difficult to see how fund vehicles could reorganise themselves to avoid the 15% charge or the impact of the changes proposed for next year. To avoid the impact of these changes on their investors, they could be driven to making fire sales of existing properties and then liquidating.
This is the ultimate sledge hammer to crack a nut. In our experience residential property does not change hands through vehicles. Purchasers are rarely offered residential property in a wrapper and when they are they tend to turn the wrapper down in favour of a straightforward property purchase. They may buy a property into a vehicle, but they will do so for other reasons and the purchase will be subject to SDLT. Meanwhile, the proposed trap for this will o’ the wisp is likely to drive genuine investment vehicles out of business, depriving pension funds and others of the opportunity of participating in an important alternative asset class through a professionally managed risk spreading vehicle. The government should urgently review these proposals and their impact on the investment market (urgently because there will be funds looking to go to market, and it is difficult to see how they can successfully do so if their new fund will be subject to a penal tax regime where the only uncertainty is the level of negative impact on yield the new rules will bring about, and managers will be under pressure from investors to explain how these changes will affect them) and at the very least introduce a carve out (which could easily be constructed based on existing legislative tests) for genuinely diversely owned collective investment schemes."
Susan Ball, Clyde & Co
(See profile for Susan Ball.)
"There are some useful possible changes in the pipeline, judging by the consultations that have been announced, and most of the other newly announced measures should prove beneficial. However, there is still a lot of tinkering, even though it is tinkering in the right direction."
Tony Beare, Slaughter and May
(See profile for Tony Beare.)
I did not think that the Budget contained many surprises. Most of the announcements related to matters which had been previously trailed but the main points of interest as far as I was concerned were as follows:
(a) Not surprisingly, the Government has decided to accept the recommendations of the Aaronson report in relation to the GAAR and we can expect that to take effect next year following further consultation over the course of this. It isn't surprising that the GAAR is to be extended to SDLT given the amount of avoidance in that area;
(b) A most welcome announcement was the proposed consultation in relation to foreign currency assets and corporate chargeable gains. It has long been an irritant that companies with non-sterling functional currencies had to calculate their chargeable gains in sterling and the consultation which has been announced will hopefully lead to a change in that rule with effect from next year;
(c) Another welcome change was the proposed amendment to the grouping rules to enable debts convertible into the shares or securities of quoted unconnected companies not to constitute "equity" for the purposes of testing for group status. From the policy perspective, there is no reason why such instruments should count as equity and therefore this is a sensible change; and
(d) The proposed consultation in relation to taxing non-resident non-natural persons on residential property chargeable gains is a bit mystifying at first sight. One would have thought that capital gains on residential property made by an offshore company owned by a UK resident would be taxable under Section 13 TCGA 1992 in any event, whilst capital gains made by a non-UK resident individually would not be taxable in any event. Thus, it is not clear what this change is intended to catch. One possibility is that the change is intended to operate alongside the proposed SDLT changes (where the penal 15% charge applies only when a property is put into a company) as a way of encouraging the disposal of residential properties which are already held by non-UK resident companies. However, one would have thought that the proposed SDLT annual charge would see to that in and of itself.
Nick Beecham, Field Fisher Waterhouse LLP
(See profile for Nick Beecham.)
"Charities will be concerned at the potential effect of the cap on income tax reliefs claimed by individuals from 6 April 2013. The facility to make unlimited claims for Gift Aid relief is a major incentive for wealthy individuals to make large charitable donations. It will be vital that representations are made during the consultation process with a view to ensuring that charities are not prejudiced by this change."
Sandy Bhogal, Mayer Brown International LLP
(See profile for Sandy Bhogal.)
"One of the consequences of the revised consultation process introduced by the previous government (and built on by the current one) is that surprise changes of a technical nature are now rare at Budget time. That and the fact that we are approaching the mid-point of the current Parliament, it is perhaps inevitable that the Chancellor would use the Budget to set the political agenda with an eye to the next election. Given the desire for fiscal neutrality, the drop in the 50% income tax rate and the main corporation tax rate together with the increases in personal allowances and the bank levy are all examples of a give and take Budget.
Perhaps the most eye-catching change is the confirmation that the Government has accepted the recommendation by Graham Aaronson QC that it is possible to have a workable general anti-avoidance rule and will consult on this with a view to introducing legislation next year. It is a matter of opinion as to whether this is the inevitable consequence of an increasingly complex and interdependent world where change in business will always outpace tax law, or simply an admission that it is not possible to draft accurate primary legislation which reflects the will of Parliament. Hopefully, such a rule will be appropriately targeted to ensure no further uncertainty for business. Otherwise, much of the good work, for example, on changes to the CFC rules and the introduction of the Patent Box regime in making the UK business friendly will be undone.
The introduction of various measures aimed at SDLT avoidance in the residential sector was predictable (and in addition to the various press leaks, both HMRC and HM Treasury had given advance warning that such rules may be introduced). As is usual, a number of other anti-avoidance consultations and measures were announced and it will be important to ensure that these are drafted appropriately for obvious reasons, not least because otherwise the Office of Tax Simplification will give themselves a hernia trying to reconcile their objectives with that of HMRC."
Adam Blakemore, Cadwalader Wickersham & Taft LLP
"One of the most interesting announcements was also one of the least detailed, namely the announcement of a cap on individual income tax reliefs of £50,000, or 25 per cent. of income if greater, in a single tax year. It will be interesting to see how this proposal dovetails with the extension of the DOTAS hallmarks in the area of loss schemes used by individuals, as well as how “sideways” loss relief for genuine commercial activities might be affected. The Government’s announcement on restricting income tax reliefs is also particularly noteworthy given the vulnerability of several loss schemes when litigated recently through the courts and the announcement of the consultation on the GAAR which, assuming it is introduced, might be expected by the Government to materially reduce the number of marketed arrangements which are focused on producing or augmenting income tax losses."
James Bullock, McGrigors LLP
(See profile for James Bullock.)
"Not many real surprises in the Budget - most of the key announcements had been either predicted or trailed beforehand. On the business tax side the Budget is broadly positive - and the cut in corporation tax combined with Patent Box will be most welcome. The GAAR announcement was widely expected following the Aaronson Report - but the precise proposals of the Consultation will be awaited with interest - and some concern. The biggest shock has been the clobbering of HNWIs. Interestingly the Government pledged not to change the non-dom regime in the lifetime of this Parliament. Although strictly this is still true, the proposal to charge CGT on UK property held by non-resident companies was the one big surprise. This measure, together with other dramatic anti-avoidance provisions relating to property held in corporate structures, though politically popular in the short term, has the potential to make the UK a very much less attractive place for non-domiciled investors. The presence of such individuals (given their spending power) should be a key driver in the economic recovery that is badly needed."
Richard Carson, Taylor Wessing LLP
"As anticipated - and consistent with the realities of Coalition government - this Budget has been considerably more political, more leaked and more focused on personal and property taxation than most people will be able to remember in the middle of a Parliamentary term.
Inevitably, the headlines will be dominated by the proposed reduction in the additional rate of income tax to 45 per cent (from April 2013), the acceleration of increases in the personal income tax allowance (to £9,205 from the same date), the proposed cap on income tax reliefs (also from April 2013 and relevant to those claiming more than £50,000 in reliefs) and the various changes to the SDLT regime.
Again, with regard to SDLT, the eye-catching changes relate to the residential property market - a new 7 per cent rate on purchases of residential property for more than £2m, applicable (in general) where completion takes place after Budget Day but, apparently, with grandfathering for contracts (possibly including conditional contracts) entered into on or before 21 March 2012. Furthermore, a punitive 15 per cent rate is to be chargeable on such acquisitions of residential property by companies and other "non-natural" persons (so that this will not apply to acquisitions by individuals). It follows that the 15 per cent rate will extend to any acquisitions of residential properties for more than £2m that happen to be made by a corporate business even where such acquisition is not motivated by SDLT planning.
On the other hand, the proposed amendment to the SDLT sub-sale rules - designed to put a stop to certain avoidance schemes - applies to all interests in land and not just to residences.
The announcements made on corporate taxation are generally much less headline-grabbing, although the further reduction in the main rate of corporation tax (for non-ring fence profits) will be widely welcomed. This now falls to 24 per cent for the year beginning 1 April 2012, with subsequent reductions of a further one per cent per annum in each of the two following years.
There is confirmation of the introduction of full reform of the CFC regime, with the new rules having effect for any accounting period of a CFC which begins on or after 1 January 2013 (as previously announced). No further changes have been specifically mentioned and it therefore seems that we will have to wait until the Finance Bill is published to find out, for instance, whether there has been any change of policy as to the duration of the promised temporary period of exemption.
The bank levy is to be increased from 1 January 2013 but the oil and gas sector will be relieved that, after last year's rate increases, this year's Budget announcements - relating to field allowances for corporation tax purposes - are basically advantageous to taxpayers.
One of the few technical changes to the general corporation tax rules is the introduction of a slight relaxation in the tax grouping rules, allowing a company to issue certain convertible loan notes that will qualify as normal commercial loans and thus not de-group the issuer from its existing parent. It will now be provided that loans that carry rights of conversion into shares or securities of unconnected listed companies will be treated as normal commercial loans. This appears to be intended to facilitate convertible issues by companies in the financial sector.
Apart from the above, the announcements of most general interest to Business are likely to be those addressing various forms of perceived tax avoidance. It will seem slightly incredible to the casual observer that, yet again, there are going to be changes to both the finance leasing ("long funding lease") regime and the "sale of lessors" regime. In both cases, these seem to be a response to schemes notified to HMRC under the disclosure code. It is, in particular, striking that, notwithstanding modifications to the "sale of lessors" regime in successive Finance Acts, it has until now been possible for a leasing company to circumvent the tax charge simply by entering into the tonnage tax regime.
There is confirmation that the anti-avoidance rules for plant and machinery allowances will be amended along the lines of the draft legislation published last December. In particular there is no indication of any likely modification of the very wide formulation adopted in the draft version of the new CAA 2001, s 215, under which the offending transactions are broadly defined as those with a main purpose of enabling a person to obtain an allowance (or greater allowance) that would not otherwise be obtained. As previously, the summary in the relevant tax information note fails to give a true impression of the breadth of the new rule (unless it transpires that there are going to be material changes to the detailed legislation when it appears in the Finance Bill).
And that, finally, leaves the GAAR itself, another matter covered in the Budget that has been firmly caught up in Coalition politics. Unsurprisingly, perhaps, all that is stated is that the Government accepts the thrust and recommendation of the Aaronson Report (including, it would seem, the establishment of the somewhat controversial Advisory Panel) and that a further consultation will be issued this summer with a view to legislating in 2013."
John Challoner, Norton Rose LLP
(See profile for John Challoner.)
"The proposal to charge non-UK companies to CGT on residential property is potentially worrying. Although the announcement is grouped with the SDLT and annual charges on dwellings costing more than £2m there is nothing in the announcement that limits it to those buildings. If it is intended to apply to all residential buildings this will have a major impact, not only on funds and holding companies which only invest in residential property but also for such vehicles that own commercial property with some incidental residential accommodation, such as apartments above shops or offices. I assume that the change is not intended to go that far but hopefully this will be made clear very quickly."
John Christian, Pinsent Masons LLP
(See profile for John Christian.)
"The real estate sector will be disappointed by the lack of an announcement on “mortgage REITS” – REITS investing primarily in property backed debt- as it was widely anticipated that the Government would review the rules to allow REITs to participate in the refinancing of property debt. This would have provided a valuable additional source of capital to help to unwind the property debt position of banks and is another lost opportunity for the REITs regime. The consultation on social housing REITs is welcome but long overdue five years into a regime which was intended to provide funding for residential investment."
Murray Clayson, Freshfields Bruckhaus Deringer
(See profile for Murray Clayson.)
"Labour complained that the Chancellor's performance was not so much a Budget address but "a review of the papers". This is hardly constructive criticism, but it is true that lots of the Budget material had (quite properly) been trailed ages ago in order to shut loopholes, or to invite technical comment, or (less properly) had been leaked to test popular media reaction before the Chancellor committed himself. This politicised (transparent?) process has dampened down what used to be the frisson of an unpredictable Budget Day.
In the summer we will have a consultation on the Aaronson GAAR proposals; the Government has now indicated its approbation. Once the project was underway, it was never going to be otherwise, and in some form or other a GAAR will be law next year. But although business has offered a nervous endorsement of the concept, the GAAR will be an unnecessary and costly complication, aside from darker threats, lurking in the detail, to the rule of law and the separation of powers. The irony is that the courts are already more than up to the job. Mayes was an aberration the Supreme Court should have taken on and done down. And HMRC's astute scheme closures (this time: debt buybacks, MODs, sales of lessors, long funding leases, authorised investment funds, SDLT etc), with some subtle fine tuning of DOTAS, don't leave significant scope for mickey-taking. These days, things that seem too good to be true, are.
Which is the case, so it would seem, for pink gin. The abolition of excise duty exemption for Angostura bitters represents a cruel attack on the economy of Trinidad & Tobago, retired naval officers and the civilized world in general."
Brenda Coleman, Weil
(See profile for Brenda Coleman.)
"A narrowly focussed GAAR ,aimed at transactions with no business purpose,should be helpful in reducing aggressive tax schemes but the period of consultation will be necessary to ensure that it does not create uncertainty for commercial business .A clearance procedure would be important to help reduce any such uncertainty."
Jonathan Cooklin, Freshfields Bruckhaus Deringer LLP
"A deeply political Budget. The overall impression is of sound-bites ("tycoon tax" and "mansion tax") in search of policies (7% SDLT on expensive homes, 15% SDLT on enveloping expensive homes, SDLT planning kyboshed, CGT on homes owned by offshore companies/trusts, restriction on income tax reliefs, GAAR etc.) and furious quid pro quos (non-domiciled home owners paying the price of the reduction in the additional rate of income tax to 45%). I wonder whether the IHT implications of all of this have been adequately considered. As regards general corporate tax measures, it's pretty much steady as she goes (nothing new on CFCs, minor changes to the Patent Box, Solvency II tax regime for life assurances companies remains on track for the beginning of 2013) but the further reduction in corporation tax rates is welcome (down to 22% by 2014) as is the news on R&D tax credits and helpful tinkering around the edges on grouping. Only time will tell whether this Budget will stimulate growth by encouraging entrepreneurs and convincing corporates to invest (rather than return) their cash piles. Final plea: no more talk of retrospective tax measures please. It's a terrible story for groups thinking of coming to (or back to) the UK."
Heather Corben, SJ Berwin
(See profile for Heather Corben.)
"Whilst the proposed GAAR is designed to catch only the most contrived and aggressive schemes and not normal tax planning, this is, by its nature, a subjective judgment and it remains to be seen whether this is the way in which it will be applied.
The SDLT changes relating to high-value residential property (and the proposed annual charge and capital gains tax charge) are likely to have significant ramifications not only for those that the legislation is intending to target but also for a wider group of property investors."
Richard Croker, CMS Cameron McKenna LLP
"The package of SDLT measures on expensive property is nakedly designed to stop the packaging of residential property in a corporate wrapper. No one is going to transfer a UK property to a corporate at 15% SDLT - keeping it in ones own name or in a trust or nominee structure (if anonymity is important) will become the norm, at the cost of SDLT on future sales and a possibly more problematic IHT position. Nor are existing corporate wrappers excluded - the suggested annual SDLT charge from 2013 will help see them off over time. The clincher in this respect may well be proposed CGT on the non resident corporate property owner - another incentive to extract the property from a corporate wrapper before it is too late. This would be a clever move as double tax treaties tend to allow the UK to tax local property gains of non residents so the charge is hard to evade - unlike SDLT there is no mention of a £2m floor. The sweetener for voters in this package is the intent that Brits will - in SDLT terms at least - be taxed at the same rate as the non dom super rich in future.
The package of VAT measures contains some surprises, especially for self storage. HMRC has lost a couple of cases on container storage and seems to have decided as a result and under pressure from some warehouse operators to put VAT on all forms of storage, some of which are rightly exempt under EU law at present. This is ostensibly to reduce complexity - and save HMRC's legal costs - but the impact on the industry will be significant and it is likely the cost of self-storage paid by non business consumers will go up if the change proceeds. The Self Storage Association will be lobbying for the impact of any change to be minimised.
At least corporation tax is going in the right direction."
Nick Cronkshaw, Simmons & Simmons
(See profile for Nick Cronkshaw.)
"The introduction of anti-avoidance provisions dealing with corporate wrappers for high value residential property was no surprise, of course, though the nature of the new swingeing rate of 15 per cent as an entry charge on such arrangements, with the promise of a further annual charge and the levying of CGT on disposals of property held within such arrangements, was. It is, however, reminiscent of measures introduced in 2006 to attack IHT planning involving residential property, including the income tax charge levied on property in such schemes unless the donor elected to bring the assets back into their estate for IHT purposes. More generally, although many consider it an anomaly that non UK tax resident persons are not subject to CGT in relation to disposals of UK residential property, there is no suggestion at this stage that the proposal to charge CGT on disposals of residential property held within non UK corporate wrappers will extend to non UK resident individuals. Some might, however, wonder whether this could be the thin end of the wedge."
Nikol Davies, Taylor Wessing LLP
(See profile for Nikol Davies.)
"Unlike prior years, the details of most of the controversial measures in the Budget were leaked well ahead of the Budget Speech and on the whole the predictions were remarkably accurate. We were aware that the Government was looking to bolster tax revenues from non-resident wealthy property owners in Central London. However, it was surprising that, in addition to the increase in stamp duty to 7% for properties over £2m, the Chancellor also sought to impose a punitive 15% SDLT rate applicable immediately to those individuals buying residential property over £2m through corporate structures. Not content with this, he is also proposing an annual charge applicable to those individuals already holding such properties through corporate structures and to subject non-residents to capital gains taxes on a sale of UK residential property by the company or by sale of the company itself. It is unclear how he will collect such taxes from non-residents.
Also surprising was the announcement of the limits being introduced to income tax reliefs for individuals where such reliefs exceed £50,000. Capping such reliefs to 25% of an individual's income will surely further restrict the benefit to individuals of entering into sideways loss relief arrangements and it will be interesting to see if this measure further impacts on film and other investments made by individuals.
On a more positive note, it is pleasing to see that the rumours of a further reduction in corporation tax to 24% from April 2012 and a reduction in the additional rate of income tax to 45% were accurate and that the CFC reform and introduction of the patent box will proceed as anticipated."
Steve Edge, Slaughter and May
(See profile for Steve Edge.)
"An interesting but not very technical budget which illustrated how tax sits at the crossroads of economic and political/social thinking. In the background, the benefits of an open and mutually respectful relationship between government and business continue to create a good platform for long-term investment. Interesting, in that context, that a targeted GAAR (good messaging on the scope of the review yesterday) and retrospective anti-avoidance rules have not met with the howls of protest that they would once have merited. So, a good budget for business and the long-term - while in the foreground and short-term, the game of political or electioneering ping pong continues to impede sensible long-term reform of the personal tax and benefits system."
Caspar Fox, Reed Smith
"It took me a while to find a measure of substance which had not been leaked or previously announced.... The capping of income tax reliefs will prove controversial if it affects legitimate commercial situations such as individuals taking out personal loans to fund their businesses. The additional reduction in the corporation tax rate is welcome and lends weight to the view that the Government's end goal is a 20% rate. The Chancellor was right to set a timeframe for removing the 50% top rate of income tax, although in practice it will cause a postponement of some dividends and bonuses from next year. Sadly there sems to be no suggestion that the replacement 45% tax rate will itself be temporary, though, which could see an increase in tax planning activity to reduce its impact."
Philip Gershuny, Hogan Lovells
(See profile for Philip Gershuny.)
A well-targeted and persuasively articulated series of measures, which were to an extent foreshadowed by earlier briefings, but still managed to conjure up some surprises.
The 15% cost of buying an expensive residential property into a corporate wrapper mirrors the triple charge to SDRT when shares are transferred into depositary receipt form or a clearance system. The campaign against avoidance of SDLT on high end residential property began some while ago and the idea of an annual mansion tax charge has been much discussed in the press.
Next year we will have a GAAR. I hope the Aaronson proposals are modified before the rule is made law. I have grave misgivings about a rule that applies when a person has arranged his tax affairs in accordance with the law as it is written only to have that arrangement undone at the behest of an unelected committee of grey suited game keepers. That is not the rule of law and when you think about it, it undermines our civil liberties.
REITs on REITs
The consultation on tax effective investment of REITs in REITs is welcome and the introduction of this and other REIT rule relaxations is seen as a natural development of the sector.
The further reduction in the corporation tax rates for the coming and subsequent years is very welcome as is the prospective reduction of the top rate to 45% next year.
Heather Gething, Herbert Smith LLP
(See profile for Heather Gething.)
"The focus on avoidance was inevitable. The threat of retrospective legislation in the context of SDLT was alarming. The budget may be progressive overall but the methodology is regressive."
Charles Goddard, Berwin Leighton Paisner LLP
The City will be worried that the move towards a more competitive tax regime (by reducing the headline rates of tax) will be drowned out by other developments, in particular the repeated threat of retrospective changes to the law, the introduction of CGT on offshore investors’ ownership of property, and the proposed GAAR.
The damage done to the credibility of the UK by retrospective measures, or even the threat of them, is not worth the loss of revenue, however painful that may first appear. Changing the fundamental bedrock that UK CGT is not applied to overseas investors will also raise serious concerns. And if the GAAR is to be the headline grabbing attack on avoidance that Mr Osborne has predicted, it will throw a major spanner in the works of the UK tax system in terms of certainty, which is crucial to business.
Mathew Gorringe, Eversheds LLP
"The increase of the limit on the value of shares that can be put under EMI options from £120k to £250k will come as a most welcome surprise for growing businesses and their employees. The fact that the Chancellor has also indicated that reforms will be made in 2013 so that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for entrepreneurs’ relief, should make the EMI Scheme even more popular than it already is and could help spur employee motivation and the growth within entrepreneurial businesses that this country needs."
Judith Greaves, Pinsent Masons LLP
(See profile for Judith Greaves.)
"With the 45% top tax rate in view, companies that switched from contingent share awards to nil-cost options will be glad they did – others may now look at ways of "decelerating" vestings. As ever, it will be important not to lose sight of the wider commercial factors.
The significant improvements to EMI will give smaller companies a knock-out incentive that will really help them attract top talent."
Ashley Greenbank, Macfarlanes LLP
The introduction of a GAAR is not about changing the outcomes of tax cases. The decision in Mayes apart, HMRC win most cases on aggressive schemes. As demonstrated by the Chancellor's reference to tax avoidance as "morally repugnant", this is all about changing attitudes and behaviour.
Now the decision to introduce a GAAR has been made, attention will turn to refining the Aaronson proposals.
There have been calls for the GAAR to include a clearance system so as to overcome the uncertainty that a GAAR will inevitably bring. To do so would run counter to the recommendations in the Aaronson Report and seems little more than a vain hope given the current constraints on HMRC resources. That risks a two-tier system in which larger businesses can obtain the comfort that they require from their CRMs, but smaller businesses have no such opportunity.
Those involved in advising private clients and trusts have pointed out that the Aaronson GAAR is drafted in a manner which applies more easily to commercial and business transactions and is not so easily applied in a family and trust context. These concerns and many others will no doubt resurface as part of the forthcoming consultation.
Elaine Gwilt, Addleshaw Goddard, LLP
"The direction of travel for business taxation, and in particular making the UK a good destination for inward investment, is moving in the right way. The reduction in the CT rate, the reform of CFC legislation, the introduction of patent box and the reduction in top rate of tax are all to be welcomed.
The anti-avoidance measures were well trailed but the Government will need to tread carefully when introducing the GAAR to ensure that the inevitable degree of uncertainty which it will raise does not detract from its business friendly measures. Retrospective legislation, much talked about for many years but rarely seen, is very much back on the agenda given the changes to the debt buyback rules and the comments made re closing down retrospectively any SDLT avoidance. This sits uncomfortably with the certainty which business is looking for in its tax affairs and with the Press reports of George Osborne warning the Indian authorities against their own bout of retrospective legislation in relation to indirect sales of Indian assets.
The clamp down on the purchases of high end UK residential property through corporate wrappers was widely anticipated. However, the suggestion that non-UK residents may be subject to UK capital gains tax in relation to gains arising from UK residential property held within such wrappers feels to be the crossing of the Rubicon. It would be a relatively short step for a future cash strapped government to apply similar treatment to sales of UK commercial property by non-UK residents. Further, most of the UK's double tax treaties would not provide any protection from UK tax charges on gains from the sale of UK immoveable property.
Finally, the way in which the legislative process is working is to be applauded. The Budget was short on surprises and most of the detailed technical changes had been the subject of extensive consultation. A number of new changes were announced with a view to implementation in 2013 (e.g. removal of the concept of ordinary residence) thus allowing time for further consultation. This is a positive development and can only lead to better and more effective legislation."
Paul Hale, Simmons & Simmons LLP
(See profile for Paul Hale.)
"The VAT measures announced yesterday show the Government's frustration at what it perceives as attempts by taxpayers to push at the boundaries to secure zero-rating or exemption. In truth, many of these issues cannot be regarded as avoidance and are really simple issues of classification. However, they do highlight the fact that some of the zero-rating provisions, many of which date back to the Purchase Tax scheme first introduced during the Second World War, desperately need to be brought into the 21st Century".
Colin Hargreaves, Freshfields Bruckhaus Deringer
(See profile for Colin Hargreaves.)
"Headlines on an accelerated cut in the rate of corporation tax and a cut in the top income tax rate. Britain looks a bit more open for business. And yet, and yet... for investment in hard assets the UK is still not all that welcoming - lowish rates of depreciation allowances and boundary lines which mean large chunks of investment currently don't qualify for any allowance at all. Nor can a reputation for reaching for the retrospective change button be helpful: business is attracted by certainty and stability.
For the banks, which are a large part of the service economy, the CT rate cut is offset by a further increase in bank levy. The Chancellor didn't have huge room for fiscal manoeuvre, and it shows.
Credit where it's due: the proposed R&D tax credit open to larger companies could only be welcome.
Also welcome is some fence mending with the oil industry after last year's surprise hike in supplementary charge, with a package - some of it subject to consultation - including a new targeted field allowance and provision for contract-based certainty on tax relief for decommissioning costs.
In the real estate sector there is a much anticipated stamp tax change on enveloping high value residential properties in corporate or fund wrappers. This is coupled with consultations on an annual charging regime and on a CGT charge on non-residents. The details of those two will be interesting, quite possibly not just to ultimate owners who are individuals. And there is a stark warning of possible retrospective change to pull the rug from under any future SDLT planning.
The GAAR proposals trundle on, now inexorably in all likelihood. In big picture terms, leaving to one side the inexplicable failure of Mayes to get into the Supreme Court (conspiracy theory anyone?) the Revenue have been doing pretty well in the courts. Even assuming the Government can be weaned away from retrospective law changes, with the current approach of the courts, ever expanding DOTAS and ever more numerous TAARs, the GAAR may well arrive at about the right time to throw the final bolt on the stable door. So what price certainty and stability?
At the political level it will be interesting to watch developments in the Chancellor's surprising bout with the elderly over the freezing of age-related allowances. In the blue corner, a Chancellor with a reputation for political sure-footedness. In the angry red, an ever-growing constituency with the time to pen letters to editors, which is increasingly well organised in its lobbying, and which tends to get out and vote. Truly, a summer of sport awaits."
David Harkness, Clifford Chance
(See profile for David Harkness.)
"With the second announcement of retrospective legislation within a month the Chancellor has clearly signalled a toughened stance against tax avoidance. Whilst one has sympathy with the Government on SDLT schemes for residential property, many of which probably didn't work anyway, the Government should be minded that further threats or use of retrospective legislation will affect the UK's competitiveness."
Kevin Hindley, Alvarez & Marsal Taxand UK
"The Chancellor has played it smart with his plan to cut corporation tax to 22% by 2014. With an increased reduction to 24% this year, at a stroke he has made the UK a more attractive proposition for international business."
Matthew Hodkin, Norton Rose LLP
This was a rather old fashioned budget in that the majority of fiscal changes were made by adjusting rates and allowances whereas the structural changes had been well trailed and were unsurprising. After the budgets of the last decade which became increasingly more complex, this should be seen as an improvement in producing a more coherent and settled tax system. However, it is a little ironic that a budget which has attracted more press interest than other recent budgets should be relatively unexciting from a technical perspective.
Jonathan Hornby, Alvarez & Marsal Taxand UK
"The clampdown [on stamp duty land tax] will tick a few boxes but actually should not cost the Government many votes, given that the technique is employed by a relatively small number of wealthy individuals, many of whom are based overseas...
The Chancellor was quite clear in his speech that he intends to eradicate what is perceived as large scale abuse where offshore companies are utilised to hold high value residential properties. It was interesting that he explicitly threatened those that find ways around the new stamp duty rules with retroactive legislation to actively deter taxpayers from employing sophisticated schemes to avoid the new taxes. With the recent clampdown on the corporate debt buy-back schemes we have already seem that the Government is not afraid to back date new legislation."
Janet Hoskin, Pinsent Masons LLP
"The 50% rate having been trailed as a temporary rate it is not a particular surprise it has collected little tax given the flexibility most higher income earners have over the timing of the receipt of income. This is now likely to lead to even more deferral of remuneration until 2013/2014.
Residential properties are often held in companies for reasons other than tax where these properties are used by the very wealthy, such as security and confidentiality, it is likely many of these individuals will decide it is preferable to pay CGT and an annual "wealth tax" to keep their anonymity."
Ian Hyde, Pinsent Masons LLP
"One of the main themes from this budget has been the use of anti avoidance ( GAAR, SDLT and SPVs) and anti evasion (dishonest agents, alcohol fraud) measures to fund tax reductions. The challenge for the Government will be to implement these changes so that they do not have a negative effect on the workability of the tax system. Tying business up in red tape and generating uncertainty will not be good for UK plc."
David Jervis, Eversheds
"The reduction of the 50% rate to 45% is welcome, and presents an opportunity to save tax by deferring discretionary bonuses. It is not yet clear however if anti forestalling rules will apply and how any deferral may be affected by the introduction of a GAAR."
Ben Jones, Eversheds
"The concern with all GAAR legislation is that it has the potential to catch standard commercial transactions that are not undertaken for tax avoidance purposes. The tax code in the UK is generally recognised as being extremely dense and complex, and presents a vast challenge to businesses operating in this country. A wider GAAR would just add another layer of complexity. The uncertainty would make the choice of the UK more unattractive as compared to jurisdictions with a more stable tax system.
With the acceleration in the corporation rate reduction and the introduction of the revised CFC rules and patent box in Finance Bill 2012, the Government is hurtling towards the end of the road mapped out for corporate tax reform. With the destination of the reform now clear, it will be interesting to see the actual impact beyond ranking on a global competitiveness table. The Government will no doubt be encouraged by recent statements from WPP that it may return to the UK, and the announcement today from GSK that the patent box has influenced significant investment in the UK, but at present these appear isolated examples and there must be a risk that reform has come too late, with many multinational businesses comfortable with their current structures in equally competitive jurisdictions. It should also be recognised that tax is not the sole factor determining where a business establishes it operations, with the recent news that Prudential and HSBC are considering moves to Hong Kong demonstrating the importance of factors such as regulatory burden. To reap the real benefits of this corporate tax reform programme, the Government will need to deliver a full package for business, minimising and simplifying the other legal, regulatory and administrative constraints associated with doing business in the UK."
Geoffrey Kay, Baker & McKenzie
"There will be further encouragement for R&D activity by large companies from 2013 by way of above the line R&D credits. R&D credits are of interest to a much wider range of companies than the Government's other flagship measure for encouraging innovation, the patent box. If, when the detail is made known, these credits prove to be material, they would potentially have a greater impact in attracting and retaining R&D activity for the UK than the patent box. On the patent box proposals themselves, the Budget reaffirmed the introduction of the patent box from 2013, but there there was little by way of update on the detail of these proposals.
No doubt the creative sector will welcome the announcement of new tax reliefs for the production of "culturally British video games, television animation programmes and high end television productions". Since the publication of the Budget documentation, a number of us in the office have spent considerable time speculating as to how a number of existing popular video games would have to be modified in order to qualify as "culturally British". Presumably "Grand Theft Auto" would need to be renamed "Taking and Driving Away"."
Colin Kendon, Bird & Bird LLP
"The increase in the EMI limit to £250,000 is very welcome and will reduce the number of companies that need to create a special class of growth shares to fit within the limit. The extension of entrepreneurs' relief to EMI option shares is not quite the advantage it appears as the one year holding period will run from exercise not grant. The extension of ER will be of no use to the vast majority of private companies that operate exit only EMI plans unless the one year holding period can continue to run after the EMI option shares are exchanged for loan notes issued by the purchaser on exit. If the period continues to run in these circumstances, the change is potentially very helpful.
The proposed HM treasury internal review of the barriers to employee share ownership is of great interest - it would be very welcome if the review results in more radical changes which are designed to provide a similar boost to companies that do not qualify for EMI. The tax and company law rules on share buy-backs should be altered to allow companies to buy back shares from employees conveniently with the proceeds being taxed as capital. In addition, it should be possible to agree section 431 valuations in advance of acquiring shares as is currently the case for EMI."
Cliona Kirby, Olswang LLP
"We were delighted to see the Government announce its intention to introduce tax credits for TV, animation and video games with effect from April 2013 as a direct result of concerted lobbying by many industry leaders and trade bodies, including on the video games side Olswang. It is fantastic to see the Government recognise the significant contribution of the Creative Industries to the UK economy. We would have liked to have also seen a reduction in the headline rate of corporation tax (below the ultimate 22% in 2014) for IP rich companies to encourage retention of IP in the UK.
It was disappointing that the maximum amount that can be invested annually in any EIS company has been restricted to £5 million from the expected £10 million. EIS and VCT monies have been a useful source of funding for TV, film and games companies. Investor appetite for EIS/VCTs is likely to remain strong as the availability of other tax reliefs, for example, those generated under film finance structured products have been significantly curtailed through the introduction of annual caps on personal tax relief. However, the combination of the attractive new SEIS reliefs and tax credits should encourage angel investment in start up companies because the reliefs will go some way to de-risking the investment."
Jonathan Legg, Mishcon de Reya
"We were all wondering how HMRC would tackle the buying and selling of shares in high value residential SPVs, but HMRC has decided not to tackle this point directly. Instead, the new 15% rate, possible annual mansion tax and loss of CGT exemption from next year are designed to make owning property in a company so unattractive that people simply won't want to buy and sell companies owning such property.
So this may drive non-resident individuals in particular to acquire UK assets personally rather than through companies (which is what the Government wants), but clearly the commercial and non- SDLT issues would need to be properly considered, not least the exposure to UK Inheritance Tax and possible higher rates of income tax which would apply on any income arising from the property.
The carve-out for "property developers" from the 15% charge also seems much too limited, given that a 2 year track record is required. This is surely anti-competitive – an established property developer can acquire a £2m residential property and pay 7% SDLT whereas a new property developer will be hit by 15%."
Andrew Loan, Macfarlanes LLP
"Higher earners will welcome the top rate of income tax being reduced to 45% from April 2013. The additional tax take in the first year of the 50% rate seems to have been less than expected due to taxpayers accelerating income before the rate change in April 2010, and the additional tax take in its last year may also be low if taxpayers decide to defer income until after the rate falls again. A lower rate of tax should encourage mobile executives and investors to come to the UK, and a boost of income tax receipts in 2013/14 may play well for a general election in May 2015.
The best news for most corporate taxpayers was the increased 2% reduction in the main rate of corporation tax to 24% from next month, with an eventual target of 22% in 2014. The UK will have significantly lower headline rates that competitors such as the US, France, Germany or Spain, which can only help the UK to attract and retain internationally mobile businesses. Those who qualify for special tax regimes - such as the patent box or the new reliefs for the creative industries - will also be happy, but they are narrowly focussed on specific business sectors."
Sara Luder, Slaughter and May
(See profile for Sara Luder.)
"There is little in the Budget that was unexpected, given the current trend to test proposed changes in the media in the run up to their official announcement!
The policy issues raised by the proposed changes that affect residential property are complicated. Why should these changes only affect residential property? If the purpose of the annual charge is to discourage the avoidance of SDLT on residential property by enveloping, then why does one need the capital gains tax change as well? Why should a CGT charge be applied to non-UK companies holding residential property, but not to other non-residents, or to commercial property? And how will the annual charge and the CGT be collected from non-residents? This looks to have been a rushed announcement, and one hopes that some careful thinking will follow during the consultation period."
Shiv Mahalingham, Alvarez & Marsal Taxand UK
"The reduction in the top income tax rate is welcome but this is a political decision over what is essentially an economic issue. It would have been more advantageous economically to raise the £150,000 threshold in line with other European countries...
...The reduction in the top income tax rate is good news on the surface but in reality many of the supposed beneficiaries will pay for it through the increased tax on homes valued at over £2 million...
... A general anti-avoidance rule will be bad for business - we don't need any more uncertainty in the UK tax system. It would completely destabilise the positive corporation tax changes introduced over the past few years."
Patrick Mears, Allen & Overy LLP
(See profile for Patrick Mears.)
"A Headline Budget
This has felt like a budget of headlines rather than a budget of detail. Having said that, the budget materials this year, as in previous years, include extensive treasury budget documentation, a raft of HMRC press releases and some draft legislation. What is missing are consultation documents, for these we have to wait.
Accelerated progress towards a 20% corporation tax rate (where we would join at the top of the G20 table, Turkey, Russia and Saudi Arabia) is to be welcomed. Also to be welcomed is the reduction in the top rate of income tax. Headline rates are undoubtedly important in the international tax competitiveness battle.
High value residential properties will now very much be in the spotlight. It is understandable that the rate of stamp duty land tax for transfer of these properties will be higher than for less valuable properties. It is also understandable that, like stamp duty on transfers into a clearing system, a yet higher rate will apply to properties put into a corporate "envelope". I cannot help thinking, however, that the other high value residential property measures represent an over reaction fuelled by policy neglect in this area. Is this simplest way to deal with the perceived problem?. Seeking to draw non-trading non-UK residents into the UK tax net is surely an unfortunate precedent. In addition, the proposed annual toll looks likely to be expensive to administer, and hardly makes for a cohesive tax system.
Along with the GAAR consultation documents, the consultation document on the extension to the DOTAS hallmarks and the "consultation on possible changes to income tax rules on interest" could yet mark Budget 2012 as something more than a headline budget for the tax practitioner."
David Milne QC, Pump Court Tax Chambers
(See profile for David Milne QC.)
"Several of the most interesting measures will come in not this year but in 2013.
For those interested in promoting or discouraging off-the-shelf tax avoidance schemes, the introduction in 2013 of the Aaronson Committee's GAAR (now with added SDLT!) will be the most important development since the Ramsay case in 1980; much will depend on the final drafting, but it is safe to assume that the GAAR will at least kill off the type of marketed scheme which succeeded in the Court of Appeal last year in Mayes.
And although the new 15% SDLT rate on transfers to "non-natural persons" of "mansions" worth more than £2 million comes in straightaway, it will be next year when the many such properties already held by non-natural persons will be hit by an annual charge of between £15,000 and £140,000 a year: this looks like a real disincentive to putting mansions into companies, particularly if backed up by effective enforcement measures-- eg compulsory acquisition- for non-payment; on the other hand,subjecting non-resident companies to CGT on the sale of UK mansions is unlikely to be very effective, since it is usually the shares in these companies which get sold, not the underlying property."
Howard Murray, Herbert Smith LLP
(See profile for Howard Murray.)
"The headline message from the Budget is a positive one for business. The accelerated reduction in the main corporation tax rate, combined with the new CFC regime and the patent box and R&D credit proposals, as well as the lowering of the top rate of income tax, help to demonstrate that the UK tax environment supports business and innovation. Digging below the surface, however, a number of measures risk confusing this message, by adding to the statute books rafts of overly complex implementing and anti-avoidance legislation, some of which may have a wider impact that its stated aims. The hope is that any new legislation is properly targeted, is as simple as possible and contains appropriate taxpayer safeguards."
Graeme Nuttall, Field Fisher Waterhouse LLP
(See profile for Graeme Nuttall.)
"Employee owned and co-owned companies welcome the Chancellor's announcement of an HM Treasury review of what can be done to encourage employee ownership. Others should too, says Graeme Nuttall, partner at Field Fisher Waterhouse LLP and the Government's recently appointed independent adviser on employee ownership. Employee ownership is a flexible business model that works well as a business succession solution and which can work well in start-ups and spin-outs. In his 21 March 2012 Budget speech, the Chancellor said "The Treasury will review for this autumn what more we can do to encourage employee ownership".
This follows on from the Deputy Prime Minister's announcement on 16 January 2012 of a new Government drive to introduce the concept of employee ownership into the mainstream British economy. Many commentators missed the significance of this announcement. Articles picked up on the reference to creating a "John Lewis economy" and then discussed share options for executives or Sharesave. Employee ownership obviously covers employee financial participation but what is meant are business models in which employees have control of, or a significant stake in, the company for which they work. As the Deputy Prime Minister has explained "... we’re not just talking about a few members of staff owning a few shares. We’re talking about a big chunk of the company belonging to a significant number of staff."
HM Treasury will conduct an internal review to examine the role of employee ownership in supporting growth and examine options to remove barriers, including tax barriers, to its wider take-up. What might the review cover? Well it could cover your suggestions. As independent government adviser on employee ownership, Graeme Nuttall is conducting an informal consultation into the barriers to employee ownership and possible solutions, and is due to report to Norman Lamb, the Minister for Employment Relations, Consumer and Postal Affairs, by 4 July 2012. You should e-mail comments to the dedicated mailbox for this project: email@example.com. The HM Treasury review will consider the findings of this work on employee ownership. HM Treasury's review will conclude ahead of Autumn Statement 2012.
Mathew Oliver, Bird & Bird
"Overall this seemed to be a good budget for business, with the further reduction in corporation tax and the top rate of income tax. Small businesses should be helped by to the relaxations in relation to EIS , the introduction of seed EIS and, depending on the details, the proposed cash accounting scheme as well as consultation on disincorporation relief. Larger businesses will appreciate the new CFC and patent box rules as previously announced, although advisers are wary of the GAAR, particularly in the absence of a clearance procedure. I'm pleased to see new tax reliefs for the creative sectors as it seems odd to give relief for films but not, eg games. Hopefully, any damage caused by the previous u-turn on relief for gaming companies will not be irredeemable. Previously announced restrictions to EIS and capital allowances for FITs and RHI schemes show how increasingly complex the green energy tax and incentive regimes are becoming. The simplification of the Carbon Reduction Commitment will undoubtedly help, however a more radical simplification in this area, particularly for small businesses, would have been welcome."
Darren Oswick, Simmons & Simmons LLP
"The moral crusade against tax avoidance continued apace in yesterday's Budget, though it cannot be helpful to elide, as the Chancellor very publicly did, the difference between illegal tax evasion and legal tax avoidance (in addition to identifying a previously unheralded third category of behaviour, "aggressive tax avoidance"). Against this background, it was politically almost inevitable that the Government would decide to pursue Aaronson's GAAR, despite rumours that neither HM Treasury nor HMRC were particularly keen on the prospect. And, although the Aaronson makes a decent case in favour of a very limited measure, underlined by a need for it to operate effectively and fairly and providing a number of explicit taxpayer friendly safeguards, clearly with any such measure the devil will be in the detail of how it is implemented and operated."
Yash Rupal, Linklaters
(See profile for Yash Rupal.)
"Not much to write home about apart from the tax rate cuts. The CFC, patent box, employer asset backed pensions changes were all largely as expected. It will come as no surprise that we are to have a General Anti-Abuse Rule. Although the Government “accepts” the recommendation by Graham Aaronson QC that a GAAR targeted at tackling artificial and abusive tax avoidance schemes would improve the ability to tackle tax avoidance, it will consult on “new legislation” (implying that Mr Aaronson’s draft legislation will not be adopted) and on the establishment of the Advisory Panel and the process of issuing guidance. It would seem that HMRC may not be content with ceding control of the guidance and certain other aspects of the GAAR to the Advisory Panel – safeguards Mr Aaronson, quite rightly, regarded as important. My suspicion is that the GAAR unfortunately will accelerate the UK’s move towards taxation by HMRC discretion rather than by the rule of law, a process that started with the Bank Code of Conduct. We have also been promised consultation over extending the hallmarks for DOTAS. Quite what the DOTAS will apply to when we have a GAAR seems a mystery.
Another interesting aspect is the failure to deal with concerns identified with the drafting of the debt-buy back legislation that was announced on 27 February 2012. Aspects of this legislation are too wide and affect non-abusive transactions. Rather than amending the draft legislation to deal with these concerns, they will be addressed by HMRC publishing some guidance which will tell us to ignore the actual law and apply its view of the law as set out in the guidance (of course, with the normal caveats that apply to guidance).
The announcement that the Finance Bill 2012 will contain a power to “determine” the tax treatment of regulatory capital instruments is positive but we are given little clue on when the draft regulations will be available or what the determination will be."
Charlotte Sallabank, Jones Day
"Obviously the reduction in corporation tax rates together with the income tax rate reduction to 45% are of great interest to business, together with the various investment incentives.
The consultation over the GAAR over the summer is not unexpected, but the announcement, ahead of the consultation, that the taxes to be covered by the GAAR would be widened to include SDLT is perhaps somewhat surprising. The Budget contains, as usual, a significant number of specific anti avoidance measures and also includes notice of formal consultation on extending the DOTAS hallmarks; with an announced intention to introduce the GAAR in the Finance Bill 2013, there must be concern that HMRC views the GAAR as just an additional anti avoidance tool, rather than as a means of reducing the complexity and volume of anti avoidance rules which the GAAR, as proposed by Graham Aaronson, is intended to facilitate."
Angela Savin, Norton Rose LLP
"We have again seen anti avoidance legislation in areas which are familiar, repeated, targets for such measures - stamp duty, offshore trusts and leasing. The Chancellor's clear statement that he will be prepared to use retrospective legislation to combat stamp duty avoidance demonstrates an understandable frustration and, although commentators frequently condemn the use of retrospective legislation as giving rise to uncertainty for business, it is clearly more palatable where a warning has been given, and the area targeted is narrow and clearly defined."
Iain Scoon, Shearman & Sterling (London) LLP
(See profile for Iain Scoon.)
"The unexpected further reduction in corporation tax was good news for companies, while the continued progress on the CFC rules and the introduction of a patent box is helpful. We do have to hope, however, that the consultation on and - now likely - introduction of a GAAR are not accompanied by the emotional overreaction seen in relation to the measures on SDLT and CGT on residential property. So overall the Budget was a curious mix: there were elements of a "Let's re-elect Boris" campaign, some "Steady as you go" messages, and some points of downright hysteria."
Tom Scott, McDermott Will & Emery UK LLP
"The Budget is notable both for the ferocity of its attack on avoidance and for the marked extent to which so many of its proposals favour certain industry sectors over others.
If we were in any doubt, tax avoidance ( and not just tax evasion) is " morally repugnant". The General Anti-Avoidance Rule is now, more tendentiously, a General Anti-Abuse Rule. Counteraction may be immediate, retrospective, or ( as with the SDLT changes) punitive and likely to cause collateral damage. It is interesting that the extensions to the DOTAS hallmarks are almost entirely aimed at schemes involving individuals-- as are the tightening of IR35, the SDLT changes and the hastily conceived "annual cap" on reliefs. While the GAAR may also be squarely aimed at killing off the market in schemes being promoted to individuals, the critical question is whether the passage of the GAAR through Parliament might produce a system which creates uncertainty for corporates around less "abusive" planning, particularly where that planning goes to the operational structure of a group's business.
Sectors likely to be pleased with the Budget include multinationals and inward investors (the CFC changes) , pharma and life sciences (patent box, R&D), gaming, and oil (contractual certainty around decommissioning). Less thrilled might be those involved in banking (CT cut plus bank levy increase= the Lord giveth…), estate agents, leasing (anti-avoidance changes), charities (query the annual cap's impact on donations) and former Mayors of London ( IR35).
On a more personal note, I am pleased that my retired parents have agreed to help pay for the reduction in higher rate income tax; unlikely to move house any time soon; and, being at the folically challenged end of the spectrum, supremely indifferent to the VAT changes on Hairdessers Chair Rental."
Martin Shah, Simmons & Simmons LLP
(See profile for Martin Shah.)
"The Government announced that it is to consult on the possible role that REITs can play in supporting the social housing sector and on a technical change to the treatment of income received by a REIT when it invests in another REIT. These two consultations represent welcome moves to deal with issues identified in the recent consultation on changes to the REIT regime. By contrast, it is disappointing that there was no consultation announced on the possible introduction of a mortgage REIT regime, which is considered by many as both a necessary additional exit strategy for banks seeking to reduce their property related loan exposures and a source of new capital for borrowers. We understand, however, that the Government continues to consider the evidence in favour of such a regime, with the possibility of a future consultation not excluded."
Simon Skinner, Travers Smith LLP
"The new rules designed to use a variety of penal taxes to make it economically prohibitive to own your home through a company look likely to be very problematic, and certainly to create complexity and difficulty out of all proportion to their intended results.
It must surely be assumed that they are not intended to catch residential property funds (particularly since other pre-announced measures are designed to assist REITs investing in residential property), but there is little or nothing in the Budget documents to provide comfort on this. The 15% SDLT charge is already in place, even though unhelpfully we barely have the beginnings of a definition of who might have to pay it. Funds will also need urgent clarity on who will be targeted by the proposed annual charge and CGT charge on sales before they are able to make sensible judgments about likely returns.
It is worth remembering that a formal consultation was held aound a decade ago on the question of levying higher stamp duties on the transfer of shares in property rich companies. At that point, after proper and lengthy consideration, the then government concluded that the issue of how to identify such a company was just too difficult, and the measure was dropped. Although the proposed tax charges are now different, the issues of identifying the target base are substantially identical, and just as intractable. The new rules have clearly been included in haste as a result of a late political carve up, by individuals with no appreciation of the technical difficulties involved. We can only hope that rapid progress can be made to get to a position which limits collateral damage.
One unrelated point. Tom Lehrer famously reacted to Henry Kissinger being awarded the Nobel Peace Prize by remarking that "satire is dead". The news that George Osborne is berating the Indian government for having the temerity to introduce retrospective legislation shows that Lehrer was wrong: satire is clearly very much alive."
Lee Squires, Hogan Lovells LLP
"This was not a particularly exciting Budget from a VAT perspective, given that most of the significant changes (eg in relation to cost sharing groups and the abolition of low value consignment relief) were announced at the end of last year and remain unchanged from the draft legislation published then.
A 'hotch potch' of changes were announced to correct anomalies and close loopholes around the scope of certain exemptions and zero-rates, all of which have the effect of subtly increasing the tax base. Two of these come with anti-forestalling rules to prevent tax points from being accelerated to before the changes come into effect in October 2012. The change to subject self-storage to the standard-rate regardless of whether there has been an option to tax the land will affect warehouses and distribution centres as well as supplies to consumers in "self-store" facilities.
Following the UK's loss in the Rank ECJ case, the Government has decided to avoid any further disputes in this area by exempting gaming machines from VAT altogether, and replacing this with a new machine games duty (MGD). While in itself this change is unlikely to excite many practitioners, it is interesting that the Government is seeking to sidestep the EU law fiscal neutrality issues by taking gaming machines outside the scope of VAT and subjecting them to another domestic tax at effectively the same rate.
As predicted, the proposed GAAR will not cover VAT (which already has its own anti-abuse doctrine based on EU law). Practitioners will also want to look out for publication of changes to the VAT invoicing rules later this year."
Nicholas Stretch, CMS Cameron McKenna
(See profile for Nicholas Stretch.)
"The EMI changes are interesting. No one foresaw the doubling of the limit to £250,000 or the ability of EMI optionholders to benefit from entrepreneurs' relief, albeit that both changes are conditional on European Commission approval. There is still some confusion though on when the relevant shares from the EMI options can be sold and benefit from entrepreneurs' relief but that should be sorted out soon. All sorts of potential planning ideas come to mind though. For example, should every employee/director who is acquiring shares now acquire them through an EMI scheme if possible in order to get into entrepreneurs' relief territory? The fall in tax rate from 50% to 45% in 2013 is clearly an opportunity to exploit: soon we will be dusting down work we did in 2010 when the rate increased to see how we do planning work in reverse ie to delay bonuses and share receipts etc otherwise due before April 2013 until after the reduction in tax rate takes effect."
Dominic Stuttaford, Norton Rose LLP
Delighted to see that the CFC reforms and the patent box changes are still on track and the reduction in the CT rate and the income tax rate will help redress the damage done in previous years to the allure of the tax system to multinationals. Much still to do, but we await the real detail in the Finance Bill.
Richard Sultman, Cleary Gottlieb Steen & Hamilton LLP
"There were two key items foreshadowed in the Budget relevant for financial institutions where further details are still to come.
The first is the treatment of regulatory capital instruments that are issued in accordance with Basel III and CRD IV. It is hoped that the work of the Basel III Capital Instruments Working Group will yield a viable code to be brought into force (in good time) under the power to make regulations that will be introduced in Finance Bill 2012.
The second relates to the US Foreign Account Tax Compliance Act, which may have a significant impact in the UK. A joint statement issued last month (with the US, France, Germany, Italy and Spain) announced a proposed intergovernmental approach on implementing FATCA. This has now been followed in the Budget with the promise of a discussion document this summer on information powers for facilitating the UK's cooperation."
David Taylor, Freshfields Bruckhaus Deringer
(See profile for David Taylor.)
"A combination of an effective formal process for advance publication of Finance Bill proposals and a remarkably leaky coalition left us with few surprises, especially in the area of technical corporate tax reform. Those who act for wealthy property owners, especially non domiciliaries, will nevertheless have quite a bit of thinking to do, even if they knew that something was coming their way.
One thing to mention that may not otherwise get any headlines is the consultation on computing chargeable gains in functional currency. At last! This is a real problem area for some, which was highlighted by the value shifting changes last year.
Another in the international area is the consultation on the reform of the transfer of assets abroad rules and the CGT apportionment rules relating to non resident closely held companies. Changes are required, just as they have been in the CFC area, in order for the UK to be EU compliant. We might have hoped for more detail by now. But the limited announcement suggests that the Government is not quite ready. It is natural to fear complexity. We see this with CFC reform of course, which now shows signs of too much consultation.
Why do we need a GAAR when the law can just be changed retrospectively? The debt buy back change sends a message that will appeal to some but is in fact pretty confusing, given the widely known planning involved and the commercial context."
Michael Thompson, Vinson & Elkins RLLP
"The UK oil and gas industry will have breathed a general sigh of relief and satisfaction at the Budget announcements - relief that there were no unpleasant surprises (like last year's big hike in supplementary charge on North Sea profits) and satisfaction that Government has committed to some beneficial measures for which the industry has been lobbying. There are a few unwelcome points, such as the 'clarification' of the application of supplementary charge to gains, the reiteration of the 'fair fuel stabiliser' policy and the capping of decommissioning relief for supplementary charge purposes at 20%, but these have been trailed in advance and so were expected. The positive changes include new or improved field allowances by way of relief from the supplementary charge for small fields and West of Shetland developments. But the proposal which may benefit general North Sea oil and gas field economics the most (and also give rise to interesting constitutional law issues) is the prospect of Government binding itself by contract to guarantee the rate of tax relief on a company's future decommissioning costs. Another interesting development is the possibility of an extension of the UK tax regime to ensure those engaged in non-oil and gas related activities in the UK sector of the North Sea are taxed "on a level playing field"."
Vimal Tilakapala, Allen & Overy LLP
"For the tax professional, this felt like a relatively light Budget by recent standards. The further reductions in the main corporation tax rate are to be welcomed, although the financial sector will not be pleased to see a further rise in the bank levy rate, with effect from 1 January 2013. This represents a fourth rise since the bank levy was introduced, the last one having come in November 2011. There is a deliberate reference to the increase taking account of the additional reductions in the corporation tax rate, but whether the bank levy rate will continue to increase as a direct result of a reduction in corporation tax rates is not clear.
The Government's announcement that it intends to press ahead with a GAAR is unsurprising. This decision was widely anticipated. The indications are that the starting point for this summer's GAAR consultation will be a focused GAAR of the kind envisaged by Graham Aaronson. Some important concerns were raised during the initial period of informal consultation on the GAAR and it is hoped that they will be taken into account. It is crucial that the Government get the detail right in terms of implementing a GAAR otherwise the implications for the UK's competitiveness could be severe. Business needs certainty of tax treatment in advance of entering into a transaction.
A disappointment for the financial sector is the silence as regards the tax treatment of CRD IV compliant regulatory capital instruments. The financial sector had hoped for an indication of HM Treasury's policy on whether payments on such instruments will attract tax deductions. All we learnt was that Finance Bill 2012 will contain legislative power to enable regulations to be laid at such time as the CRD IV process concludes (whenever that is). What those regulations will say remains unclear. The continued silence on the question of interest deductibility from HMT is slightly troubling as Budget day would have been the perfect opportunity to have set minds at rest on this question. Nonetheless, some comfort can be taken from the fact that HMT will be under pressure to allow tax deductions to make the UK regime competitive and compare favourably with other European regimes.
The financial sector will also be interested in the consultation announced by HMRC on changes to the income tax rules on the taxation of interest and interest-like returns, and the deduction of income tax at source from such payments. Although the scope of the consultation sounds exceptionally broad, we understand, having spoken to HMRC, that it is intended to have more limited application. Looking at the detail of the proposals will be essential – as there is obviously scope for changes in this area to have implications for the debt capital markets."
Eloise Walker, Pinsent Masons LLP
"Unless you’re a residential property lawyer wrestling with SDLT schemes and the possibility of a “mansion tax”, there’s not that many key points of interest in the 2012 Budget that we didn’t already know about in detail. For businesses involved in any sort of planning, the now real possibility of a GAAR will be a matter of concern (or approval, depending on how you think it will develop), but buried in the 208 pages of the OOTLAR are some additional nuggets of interest: the government have seen sense and amended the proposed anti-avoidance rules around the manufacturer's exemption in the capital allowance regime, they are going to consult on the transfer of assets abroad and attribution of gains rules (although query whether the result will be simpler and easier legislation, given HMRC’s track record of amending legislation in response to EU non-compliance criticisms), and they’ll also consult this year on whether to allow companies with a non-sterling functional currency to compute their chargeable gains and losses in that currency (which is likely to make life simpler for such companies, although not necessarily fairer, as HMRC claim). Most interesting are the proposals to put certain convertible loans outside the definition of equity by tinkering with the definition of a normal commercial loan – it sounds like a sensible measure (to prevent a borrowing company from unintentionally leave its group), but it will be interesting to see how they’ll do it without messing with the definition of normal commercial loan for other purposes."
Neil Warriner, Herbert Smith LLP
(See profile for Neil Warriner.)
"Further to this, as far as business is concerned, it would appear from this Budget that 'size matters'. Whilst bigger, profitable businesses will benefit from the additional 1 per cent cut in the corporation tax rate, smaller businesses, particularly ones with high fuel and vehicle costs, will not obviously be much better off. At least, however, they will have access to more funding with more money being provided to the Business Finance Partnership scheme and the possibility of enterprise loans for start-ups (which is probably just as well given that access to bank funding may be further curtailed as a result of the fourth increase in bank levy since its inception)."
William Watson, Slaughter and May
"The changes and proposals relating to residential property clearly reflect politics as much as policy, but some of them are particularly hard to understand. Why 15%? And why contemplate CGT on disposals by non-resident vehicles - where there would typically be a charge already if the shareholder is UK resident - but not by non-resident individuals?
Not much to say on the corporate tax front - Budgets are not what they used to be!"
Elliot Weston, Lawrence Graham LLP
"The introduction of capital gains tax on non-UK resident companies holding UK residential property marks a radical departure in UK tax policy which for over one hundred years has been designed to encourage investment by non-UK residents into UK property. Increasing the top rate of stamp duty land tax to 15% on acquisitions by corporates of high value residential property will also discourage funds and property investment companies from investing in UK residential property. Along with the proposed annual tax charge on high value residential property held through vehicles, this could be the start of a reversal of the trend of overseas investment into UK property.
The introduction of a general anti-avoidance rule will change the way in which we view the payment of tax. Tax payers will have to determine not only the tax that is lawfully due, but also exercise judgement as to what is the "right" amount of tax to pay."
Simon Yates, Travers Smith LLP
"So the various pundits who said it would be more like What the Papers Say than a proper Budget speech had it right. There was precious little of interest that had not already been trailed in the depressingly public Budget negotiations. The Chancellor even made a virtue of the fact that much had been foretold, but it's not that long ago that leaks on this scale would have led to his resignation.
To my eye, the most significant measures – because of what they say about the nature of Government thinking rather than because of the effect of the measures themselves - were the retrospective changes announced a couple of weeks ago. UK tax policy makers have played increasingly fast and loose with the rule of law over the last decade or more. First we had the increasing prevalence of untaxing by ever-changing guidance. We have since seen the Bank Payroll Tax, the disguised remuneration rules and in this Budget the 15% SDLT charge, which have all been introduced with immediate effect but without immediate clarity as to who might be liable.
Regrettable as they were, none of these measures had such serious constitutional implications as the steps taken at the end of February, where the government simply retrospectively amended unambiguous and long-standing law on which taxpayers had relied, just because it decided that the law delivered unwelcome results. This is, in modern times at least, unprecedented. Unsurprisingly since the measures were targeted at a major bank (cue pantomime boo), media coverage was broadly positive. And yet more retrospection is now promised if SDLT schemes persist - which they probably will, given the lamentably narrow scope of Wednesday's new anti-avoidance measure.
The rule of law – the ability of all citizens of a country at any given moment to identify the laws of that country as they apply to them and to what they are proposing to do – is one of the most important and fundamental rights that distinguish proper constitutional government from the less palatable alternatives. Unless everyone (and that includes the morally dubious or worse) can rely on the rule of law, no-one can rely on it. You can't mostly abide by the rule of law any more than you can be a bit pregnant. It is absolute or it is nothing.
That a government that promised to place predictability and stability at the heart of its tax policy making has resorted to retrospective measures is particularly shocking. Whatever one's views on the morality of the structures which were attacked, the maintenance of such a fundamental constitutional principle as the rule of law is more important. And on a more utilitarian level, it's dreadful for UK competitiveness if investors cannot rely on the integrity of our laws. Finally, where does this leave the GAAR? Why have a GAAR at all, if your view is that egregious tax planning can be countered by changing the law retrospectively without the rather tiresome need to persuade someone else of its egregiousness?"