Budget 2012 – Other TaxationMonday, April 2nd, 2012
Cap on Unlimited Tax Reliefs
Finance Bill 2013 will include legislation to apply a cap on tax reliefs which are, currently, unlimited. This will apply on tax relief claimed on or after 06 April 2013. These tax reliefs allow, for example, an Additional rate taxpayer to contribute unlimited amounts which may bring their income down into the Higher or Basic rate bands.
The cap on the reliefs will be set as 25% of taxable income, or £50,000, whichever is the greater, appear to include:
- Qualifying loan interest relief
- Gift Aid and charitable donations of shares and land, and
- Loss relief
It is, possibly, the restriction to charity donations that will affect payroll. Of course, a taxpayer can pay unlimited amounts to charity, however, under the Chancellor’s announcements, only 25% of income, or £50,000 will be eligible for tax relief.
Draft legislation will be published for consultation later in 2012.
In payroll terms, it seems clear from the Budget Report that the target taxpayer group that will be impacted is those with incomes above £150,000, i.e. paying at the Additional rate. The Report notes that, together with this cap, the reduction in the Additional rate to 45p and in the increase in stamp duty for high value properties, these taxpayers can be expected, on average, to have increased contributions to the Exchequer of £1,300 per annum.
Charities in particular have commented and protested that such a cap may undermine donations by the wealthiest taxpayers. Although information is limited with regard to donations, the National Council for Voluntary Organisations suggested that up to half of annual gifts are provided by just 7% of donors. In response, HMRC commented that ‘the underlying rationale is that we cannot allow people to use reliefs to deplete their tax liability’. Given that they have abolished the ‘SA Donate’ method of contributing to charities via the Self-Assessment return from April 2012; it is understandable that charities are feeling that this move does bring the Government’s Big Society strategy into question.
Thankfully for the pensions and savings industries, there was no change to the tax relief on pensions, where the annual limit remains at £50,000 for 2012/13. In the wider business environment, loss relief and loan interest relief are justifiably used by businesses and these would appear to be adversely affected by this cap.
We await the draft legislation with interest.
Personal Tax Statement
On 25 January 2012, Conservative Ben Gummer, MP for Ipswich, introduced his Statements of Taxation Bill under the Ten Minute Rule Motion to the House of Commons. In this, he called for a personalised tax statement – ‘something that lands on the doormat at the same time across the country and corresponds with our entire tax paid’. This would detail exactly how our taxes are distributed in terms of money to the police, NHS, defence etc. Although applauded by colleagues, Rhondda Labour MP Chris Bryant dismissed the Bill as ‘nothing more than political puff and a press release for the Daily Mail’ and indicated that the Government would not be serious about the issue. The Bill was scheduled for a second reading.
Mr Gummer must have been delighted to be mentioned in the Chancellor’s Budget address to the House as having had an excellent idea which he intended to put into practice. He gave the green light for the Personal Tax Statement, which is to be issued from 2014/15. As part of its efforts to ‘simplify the tax system’ and be transparent, the Chancellor said ‘in the information age, people should know what taxes they’re paying and what their money is being spent on’.
These will be issued to ‘roughly half of taxpayers each year’, around 20 million people including those in Self-Assessment or receiving a PAYE Coding Notice.
The Government does seem committed to transparency and the Personal Tax Statement appears in the section ‘A simpler and more sustainable tax system’ in the Budget notes. As Mr Osborne said ‘People will know what they are paying and what they are paying it for’.
It seems, however, as though it is only going to people with whom HMRC have paper correspondence.
NICs Upper Earnings Limit
On 21 March 2007, the Chancellor announced that from April 2009, the Class 1 Upper Earnings Limit (UEL) and the Class 4 Upper Profits Limit for National Insurance would be aligned with the point at which tax via PAYE becomes payable at the Higher rate. This was done via a National Insurance Bill.
The Chancellor announced that from 06 April 2013, the Upper Earnings / Profits Limits will be reduced to ensure that they are still aligned with the point at which the Higher rate becomes payable. From 2013/14 tax year, this will be the value of the Basic rate limit (£32,245) plus the Personal Allowance (£9,205), i.e. £41,450.
Income Tax and NICs Reform
Under the title ‘Simplification’ in the Budget Report, the Government confirmed that it is continuing to explore long-term reforms to simplify personal taxes, one of which is integrating the operation of tax and NICs. This builds on the initial Budget 2011 announcement, which was followed up with the Call for Evidence and the ‘Next Steps’ document detailing the responses, the timetable for change and the objectives of the change.
It is important to detail the parameters of what change is being reviewed, which does not include abolishing the contributory principles of the National Insurance system:
- To reduce burdens on employers
- To remove distortions in the economy and improve transparency
- Deliver fairer outcomes, and
- Cut administrative costs for Government
Further, Government anticipates that any changes will span two parliaments and would not be introduced before 2016/17.
Following further consultations with stakeholders, and as announced at the Autumn Statement, the Chancellor confirmed that a broader and detailed consultation will be issued in April 2012. This will progress the issue of integrating the operation of tax and NICs and set out a broad range of options for the operation of employee, employer and self-employed NICs.
This is another exciting time for payrollers and one where we all have the opportunity to shape and simplify our profession. The consultation document will feature in the Newsletter when it is published.
- HM Treasury – Integrating the Operation of Income Tax and National Insurance Contributions
- HM Treasury November 2011 – Integrating the Operation of Tax and National Insurance Contributions – Next Steps
- Payroll Help 17 July 2011 – Views Sought on Integration of Income Tax and NICs
- Payroll Help 18 November 2011 – Calls for Evidence Response
Tax Simplification for Small and Medium-sized Enterprises (SMEs)
Alongside other announcements aimed at SMEs, HMRC published, as per the Budget Report, a document entitled ‘Making tax easier, quicker and simpler for small business’. This was as a result of recommendations by the Office of Tax Simplification (OTS) intended to ease and simplify administration with HMRC. David Gauke, Exchequer Secretary to the Treasury, stated that this document sets out how HMRC intends to deliver, by 2015, an environment in which small businesses are allowed to carry out their core function of actually running the business. This agrees with the OTS recommendation that ‘simplified and clearer rules for the taxation of business income would mean that more businesses would be able to get their taxes right and that HMRC would also find the regime easier to police’.
Therefore, the documents sets out to ensure small businesses find tax easier to understand, make it simpler and quicker and ensure they are provided with greater certainty as regards accuracy and compliance. The document looks at changes to existing rules and initiatives that HMRC is taking to improve the experience of SMEs when dealing with the tax system. Some of the key points mentioned include:
Cash Basis Accounting
The OTS called for simplified income tax and Budget 2012 offers this as an option. Currently, all companies have to use the same method of calculating trading profits and the tax that is due. Whilst a large organisation has sufficient resources to make these, the burden and cost of making the same calculations for a small employer is ‘disproportionally’ higher when sometimes there is not a need for professional accounts to be prepared. Subject to consultation, Budget 2012 announced that SMEs with receipts of up to £150,000 will be able to use cash-based accounting from April 2013 before being required to revert to the standard GAAP accounting method.
This will mean that taxable income will be calculated as receipts less allowable expenses and will have the following differences from the ‘normal’ accounting:
- No need to understand the rules that apply to the larger businesses
- Tax is only paid when cash is received
- Record-keeping will be reduced under the new scheme, except for the ones required for the normal operation of a company. HMRC’s document suggests that the need for stock records and debtors and creditors listings may be removed
- The need to understand capital allowances is removed
- Key expenses will be simplified by using standard rates instead of actual
- A standard mileage rate for business use of cars or motorcycles
- Flat rate expenses for business use of home
- Flat rate adjustments for personal use of business premises
The OTS report in February 2012 looked at the question of disincorporation, and how that might be made easier. The Government recognises that some small businesses may have opted to become a limited company in the past and now feel ‘trapped’ in the more complicated tax regime for companies, and could benefit from moving to the simpler cash basis scheme. The Government will be consulting on options for making it easier to move out of Corporation Tax
Improving PAYE for SMEs
The HMRC document mentions the RTI project as a programme that ‘will streamline PAYE reporting for all businesses by linking it to the employer’s normal payroll activity (using payroll software…)’. This is, perhaps, the simplest definition we have seen of RTI to date! According to the document, SMEs have told HMRC that RTI will avoid them building up debt, reduce the pressures of year-end and help get PAYE responsibilities right. At the same time, the document also details a new facility which will make it quicker and easier for employers to check the National Insurance Number for new employees (the NVREP submission).
Recognising that businesses will take ‘a little time’ to understand the new system and that it will involve some set-up costs, HMRC assures SMEs that they will ‘provide clear advice, guidance and information’ plus allow free software to be used.
Is this the same RTI scheme that the rest of us will be operating? Where is our clear advice, guidance and information?!
Transparency, Guidance, Education and Support
The document talks about the new online ‘Business Tax Dashboard’ that will be available for April 2012. Once an employer logs onto the Government Gateway, this will allow SMEs to view current liabilities and payments made in respect of Corporation Tax, VAT, and PAYE for employers. The Dashboard will also provide improved guidance, education and support in addition to the existing ‘My New Business’, Webinars and HMRC YouTube channel.
Following various OTS recommendations, HMRC will use E-Mail communication more to new SMEs, complete pilots on the use of two-way E-Mail (E-Mail to HMRC and a reply), expanding their Webinars and making more use of social media such as Twitter. It sets two ‘service standard goals’ for call answering and post handling, to be achieved by March 2015:
- Service level of 90% of call attempts handles
- Deal with 80% of correspondence within 15 days and 95% within 40 days
Further, from April 2012, a single online tax registration form will be available via the ‘Online Tax Registration Service’ and, from October 2012, VAT registration will move to online with an enhanced service from April 2013 meaning that VAT numbers are received within three working days.
For SMEs that use agents to handle their tax affairs, more and improved online services will be available to make it easier and faster for them to complete transactions on their behalf. There is also mention that the tone of HMRC communication will be more customer-focused and ‘less confrontational’ and ensuring staff have more commercial awareness of the issues faced by SMEs.
Integration of Tax and NICs
The HMRC document talks about the on-going simplifications that were announced at Budget 2011, focusing specifically on the fact that self-employed people have two different systems for paying their National Insurance Contributions. This will form part of the wider consultation on Income Tax and NICs reform.
In consideration of the topics raised in this report, and as a further result of the Office of Tax Simplification’s Review of Small Business Taxation, at the same time as this HMRC document of intention, a formal consultation document has been published entitled ‘Simpler Income Tax for the Simplest Small Businesses’. This consultation is open until 22 June 2012.
This is a welcome document and consultation for small businesses and any simplification for them are to be applauded. However, does the move to a new cash accounting system running alongside the current one not equal tax complication rather than tax simplification? Also, some of the simplifications would also be welcome easements in larger organisations as well. Administration burdens are not solely confined to SMEs.
- Payroll Help 13 March 2012 – Office of Tax Simplification
- HM Treasury – Small Business Tax Review, HMRC Administration
- HMRC March 2012 – Making tax easier, quicker and simpler for small business
- HMRC March 2012 – Simpler Tax for the Simplest Small Business