Finance Act 2014: Tax reliefs, partnerships and VAT
Andrew Goodall’s third AccountingWEB article summarising the key measures in Finance Act 2014 sets out the main provisions relating to tax reliefs, the taxation of partnerships, and VAT, stamp taxes and inheritance tax. Links are provided to recent HMRC guidance.
Section 41 increases the maximum drawdown pension payable in respect of a money purchase arrangement from 120% to 150% of the “basis amount” or “equivalent annuity”. The minimum income requirement that a member must meet in order to be eligible for “flexible drawdown”, instead of being subject to this cap, is reduced from £20,000 to £12,000.
Section 42 increases the commutation limit, the maximum amount that may be paid under the trivial commutation lump sum rules, from £18,000 to £30,000. The amount that may be paid as a small lump sum regardless of total pension savings is increased from £2,000 to £10,000. Section 42 also increases from two to three the maximum number of small lump sums an individual can receive as an authorised payment from registered pension schemes other than public service pension schemes or occupational pension schemes.
Section 43 and schedule 5, added at Report stage of the Finance Bill, are transitional provisions relating to the new “flexibilities” provided by sections 41 and 42 and “further flexibilities” to be introduced from April 2015. The transitional rules are intended to enable pension savers to take a tax-free lump sum and wait until April 2015 to decide how they want to access their pension savings.
Section 44 and schedule 6 introduce IP2014, a new transitional “individual protection” regime for pension savers affected by the reduction in the standard lifetime allowance from £1.5m to £1.25m from 6 April 2014. The stated aim is to give individuals greater flexibility in protecting pension savings that were built up before that date from the lifetime allowance charge.
Section 45 removes an anomaly resulting from interaction between the rules for taxation of employment income and employer contributions to certain non-UK pension schemes.
Section 46 and schedule 7 make changes to tackle “pension liberation” schemes that encourage individuals to access pension savings before reaching the age of 55.
HMRC has invited comments by 3 September on a draft Taxation of Pensions Bill, and has published a draft explanatory note, draft guidance, and a tax information and impact note on the pension flexibility measures.
Section 47 introduces an exemption from UK income tax for non-UK resident competitors at the Glasgow Grand Prix athletics event held in July 2014. Section 48 introduces a new power allowing the government to give exemptions from income tax and corporation tax for major sporting events held in the UK.
Employee share schemes
Section 49 increases the maximum value of shares that can be awarded or purchased each year under an “all employee” share incentive plan or SIP, and section 50 enables future changes in the limits to be made by Treasury order. With effect from 6 April 2014 the maximum market value of “free shares” that can be awarded each year to an employee is increased from £3,000 to £3,600, and the maximum amount that can be deducted from an employee’s salary to purchase “partnership shares” each year is increased from £1,500 to £1,800.
Section 51 and schedule 8 implement recommendations of the Office of Tax Simplification (OTS) to simplify administration of employee share schemes. Self-certification replaces HMRC approval for share incentive plans (SIP), SAYE share option schemes (SAYE) and company share option plans (CSOP). There is a new purpose test for SIP, SAYE and CSOP schemes, and online filing is introduced for all employment-related share scheme returns including those relating to enterprise management incentives.
Section 52 and schedule 9 implement recommendations made by the OTS to simplify tax rules on employment-related securities (ERS), such as employee shares or ERS options, awarded to employees. There are detailed changes relating to shares and share options awarded to internationally mobile employees, a new relief for certain ERS exchanges, simpler rules for “notional loans” arising on the award of nil-paid and partly-paid securities, and extended corporation tax relief in relation to employee share acquisitions.
HMRC’s Employee Shares and Securities Unit Manual has been amended “significantly” to take account of the Finance Act 2014 changes to tax advantaged share schemes.
Section 53 and schedule 10 amend the venture capital trust (VCT) regime to ensure that the reliefs available in respect of a subscription for shares in a VCT “continue to be well-targeted”. New restrictions apply in specified circumstances, including a sale of VCT shares linked to reinvestment in the same VCT. The time limit for an assessment withdrawing or reducing VCT income tax relief is increased to six years after the end of the tax year for which relief was obtained.
Section 54 removes the time limit on income tax relief for investments meeting the conditions for seed enterprise investment scheme (SEIS) relief. The relief was introduced in 2012 for five years, but is now made permanent.
Section 55 makes permanent the capital gains tax relief for reinvestment in SEIS shares. The CGT relief originally applied to gains accruing in 2012/13 only. It was extended to gains accruing in 2013/14, while the relief was reduced from 100% to 50% of the amount reinvested.
Section 56, added at Report stage of the Finance Bill, amends the EIS, SEIS and VCT rules to exclude companies benefiting from government subsidies for investment in renewable energy.
Social investment tax relief
Section 57 and schedules 11 and 12 provide income tax and capital gains tax reliefs to encourage individuals to invest in qualifying social enterprises. A “social enterprise” is a community interest company, a community benefit society that is not a charity, a charity, an accredited social impact contractor, or any other body prescribed by a Treasury order. The investment must in be in the form of new shares or new “qualifying debt investments”.
Several amendments were made to schedules 11 and 12 at Report stage of the Finance Bill, including an extension of the relief to investors in special purpose companies entering into social impact contracts.
HMRC has published guidance on social investment tax relief. Relief for investment in social impact bonds – contracts awarded by public sector bodies for the delivery of social outcomes – was announced at Autumn Statement 2013, and HM Treasury provided more information in a social investment roadmap in January 2014.
Section 74 and schedule 17 make significant changes to the taxation of partnerships. The measures are intended to prevent tax losses arising from disguised employment through limited liability partnerships (LLPs) and from arrangements involving “excess allocation” of profits and losses in mixed partnerships.
The presumption of self-employment is removed for salaried members of an LLP who meet three new conditions concerning the extent to which the member’s income is “disguised salary”, the degree of the member’s influence over the partnership’s affairs, and the member’s contribution to the partnership.
“Tax-motivated allocations” of profits and losses in mixed partnerships are addressed by reallocating “excess” profits that have been allocated, for example, to a company. There are also measures dealing with the allocation of profits for partnerships that manage alternative investment funds (AIFMs) and the use of partnerships to dispose of income streams or assets under arrangements intended to secure a tax advantage.
HMRC published in March 2014 two revised technical notes and guidance on the salaried member rules and the mixed membership partnership, AIFMs and asset disposal rules.
Section 75 amends the transfer pricing rules to remove an individual’s ability to claim a compensating adjustment where the person subject to the related transfer pricing adjustment is a company, and clarifies the tax treatment of interest that has been subject to a transfer pricing adjustment.
Sections 103 to 106 and schedule 22 provide that supplies of broadcasting, telecommunications and electronically supplied services to UK consumers will be subject to VAT in the UK from January 2015, and introduce the optional special accounting schemes known as the VAT mini one-stop shop (MOSS) to allow businesses to file a single return for digital supplies to consumers in EU member states.
Section 107 adds two new NHS bodies to the list of bodies within the definition of government departments that may claim refunds of VAT paid on certain goods and services.
Section 108 clarifies the treatment of prompt payment discounts to ensure that VAT is accounted for on the consideration actually received.
Stamp taxes and ATED
Sections 109 and 110 extend the annual tax on enveloped dwellings (ATED). From April 2015 there will be a new charge of £7,000 a year for properties held in corporate structures and worth more than £1m and up to £2m. From April 2016 there will be an additional band for properties worth more than £500,000 and up to £1m, with a charge of £3,500 a year.
Section 111 reduces the starting threshold for the 15% rate of stamp duty land tax (SDLT), payable by a “non-natural person” on the acquisition of a “higher threshold interest”, from £2m to £500,000.
Section 112, added at Report stage of the Finance Bill, extends the reduction made by section 111 to the SDLT relief for exercise of collective rights by tenants of flats, so that where lessees of flats buy the freehold through a company and claim the relief SDLT will be charged at 15% if the mean consideration (i.e. the price divided by the number of flats) exceeds £500,000.
Section 113 and schedule 23 amend the SDLT rules to make it clear that partial relief is available where a charity purchases land jointly, as tenants in common, with a person who does not have charitable status.
Section 114 abolishes the stamp duty reserve tax (SDRT) “schedule 19 charge” levied on UK unit trusts and open-ended investment companies.
Section 115 and schedule 24 introduce exemption from stamp duty and SDRT for transfers of securities quoted on recognised growth markets.
Section 116 is a procedural change to enable the government to vary or abolish stamp duty on a provisional basis, ensuring that a resolution remains effective until replaced by an Act of Parliament.
Section 117 and schedule 25 freeze the nil rate band at £325,000 until 2017/18; change the treatment of certain foreign currency bank accounts; treat income arising in “relevant property” trusts that remains undistributed for more than five years as part of the trust capital for the purpose of the 10- year anniversary charge; and align the deadlines for reporting and payment of charges on relevant property trusts.
Andrew Goodall is a freelance tax writer.