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How Finance Bill 13 will affect payroll professionals

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24th Dec 2012
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Following the Autumn Statement on 5 December, the government published the draft clauses for the Finance Bill 2013 for consultation, writes CIPP's Diana Bruce.

Many of the measures have already been consulted upon so there weren’t too many surprises in the 296 page document. 

To follow is a summary of the key elements which affect the payroll function, some indirectly, but those not in the payroll profession would be surprised by the variety of issues that are actually dealt with.

Tax status of Universal Credit

Universal credit is part of a package of measures in the Welfare Reform Act 2012 that replaces six benefits and tax credits, two of which are taxable to some degree.

It is not possible to disaggregate components of an award of universal credit, which will as a whole will become exempt from income tax. Awards of universal credit will commence during the 2013-14 tax year.

Cap on unlimited tax reliefs

As announced in Budget 2012 and following consultation earlier this year, legislation will be introduced to apply a cap on currently unlimited income tax reliefs claimed by individuals from 6 April 2013. 

For those seeking to claim more than £50,000 in reliefs, a cap will be set at 25% of income,or £50,000, whichever is greater.

Those affected are within the Self Assessment population and the relief cap will be operated via automated calculations using information already reported as part of the SA process.

Individuals making charitable donations through payroll giving and wishing for these to be taken into account when calculating their adjusted income for the purpose of the cap, will need to add up their annual contributions from their payslips, as this figure is not reported on the annual certificate of pay and tax, P60.

This will be voluntary, but will increase the level of relief available to an individual.

Statutory residence test

As announced in Budget 2011 and following consultation in 2011 and 2012, a statutory residence test will be provided for individuals from 2013-14 which will provide greater clarity and certainty to individuals when determining their residence status for tax purposes in the UK.

The legislation will also provide for a tax year to be split into a UK part and an overseas part in certain circumstances, and contain new rules for the taxation of certain income and gains arising during a period of temporary non-residence.

The current rules for determining tax residence depend to a large extent on cases decided by the courts and many cases, decided some time ago, do not reflect modern work or travel patterns. The statutory residence test will replicate as far as possible the residency outcomes delivered by the current rules.

The test will also take into consideration the days spent in and connections to the UK and will be structured into three parts:

  • The automatic overseas test – this will determine if an individual is automatically non-resident
  • The automatic UK test – this will determine if an individual is automatically resident
  • The sufficient ties test – this will determine the residency position if an individual meets neither of the tests above. This test determines residency based on a combination of the amount of time spent in the UK with the number of ties a person has

Ordinary residence

As announced in Budget 2012 and following consultation, the concept of ordinary residence for tax purposes will be eliminated as far as possible.

Individuals who currently claim the remittance basis of taxation on the grounds of being not-ordinarily resident and individuals who currently benefit from Overseas Workday Relief (OWR) for three full tax years will be affected. However, transitional rules will minimise any impact on these individuals.

OWR will also be available to non-domiciles who come to the UK regardless of their intention to settle in the UK. This measure will support the aim of simplifying the tax system and will also provide greater certainty and clarity to individuals. The legislation will have effect on and after 6 April 2013.

Statement of practice 1/09 (SP1/09)

As proposed in the June 2011 consultation document, ‘Reform of the taxation of non-domiciled individuals’, legislation will be introduced to put SP1/09 on a statutory basis. The changes aim to make the implementation in statute more workable, clearer, and less restrictive. SP1/09 applies to employees who:

  • Are resident but not ordinarily resident in the UK;
  • Are taxed on the remittance basis
  • Who carry out duties both in the UK and overseas under a single contract of employment.

The government published an early draft of the legislation as part of a further consultation in October 2012 and intends to publish a summary of the responses to this consultation alongside a final draft of the legislation in January 2013.

Pensions tax relief

As announced in the Autumn Statement, legislation will be introduced to reduce the standard lifetime allowance from £1.5 million to £1.25 million for the 2014-15 tax year onwards.

Transitional protection will be introduced to provide individuals with a lifetime allowance of £1.5 million subject to certain conditions. The government will also consult on whether a personalised protection regime should supplement ‘fixed protection 2014’ in order to offer a more flexible protection regime. 

Also announced was that legislation will be introduced to reduce the annual allowance from £50,000 to £40,000 for the 2014-15 tax year onward.

Family pension plans

As announced in Budget 2012, legislation will be introduced with effect from 6 April 2013 to remove unintended tax advantages from arrangements where an employer pays a pension contribution into a registered pension scheme for an employee’s spouse or family member as part of the employee’s flexible remuneration package.

Income tax and national insurance contributions (NICs) reform

Following the already extensive work with stakeholders in 2011, Budget 2012 announced that a more detailed consultation on the proposal to integrate income tax and national insurance would follow. 

It was announced in May that this consultation would be delayed until Autumn 2012 and has now been delayed again as the government are going to wait for further progress on planned operational changes to the tax system before formally consulting further.  

With the introduction of RTI and auto-enrolment, employers have a lot of change in processes to deal with. The delay of this project is a positive move for the government as they realise the importance of taking the time to consult in detail with employers and payroll professionals when they actually have the time to do so.

The technical working groups (including the CIPP) that were set up in 2011 have been looking at the misalignments between income tax and NICs and also the possibility of annual and/or cumulative NICs so it is imperative that any proposals in these complex areas are considered very carefully.

Employer supported childcare

Employees who are additional rate taxpayers and who joined an employer supported childcare scheme on or after 6 April 2011 will see an increase in the tax exempt amount for employer supported childcare.

Due to the additional rate of income tax reducing from 50% to 45% from 6 April 2013, the weekly amount of £22 will increase to £25 to ensure it remains aligned to the value received by basic rate taxpayers.

Legislation will be introduced by Treasury Order to increase the maximum weekly amount which can be subject to tax relief for additional rate taxpayers to £25 with effect from 6 April 2013.

There is no change for additional rate taxpayers who continue to be members of an employer-supported childcare scheme, providing childcare vouchers or directly contracted childcare, of which they were members before 6 April 2011. They will continue to be eligible for a tax exempt amount of £55 per week.

Section 318D of ITEPA provides the power to vary the exempt amount and qualifying conditions. Changes will also be made to the Social Security (Contributions) Regulations 2001 which sets out the value of the NI disregard for childcare vouchers.

Further information

Each clause of the draft Finance Bill 2013 is accompanied by a Tax Information and Impact Note (TIIN) which sets out what the legislation seeks to achieve and why the government is undertaking the change and a summary of the expected impacts; and an explanatory note which provides a more detailed guide to the legislation.

Accompanying documents also include overviews and responses to various consultations held over the summer.

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