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26th May 2016Budget 2016: Carrot or stick choice for tax-avoiding businesses, while BTL investors can be forgiven for being paranoid

Some of the biggest announcements centred on business taxes, with George Osborne scrapping business rates for small firms, as well as announcing a further cut to corporation tax.

Small business rate relief is to be made permanent, with the relief threshold to be more than doubled from April 2017 – making properties with a ‘rateable value’ of below £15,000 exempt from the tax.

Meanwhile, corporation tax, which currently stands at 20 per cent, will fall to 19 per cent next year and then 17 per cent by 2020, benefitting an estimated one million companies.

The Government estimates this will mean 600,000 businesses will pay no rates.

This will be funded by a crackdown on multinationals that trade in the UK but avoid tax payments by being resident overseas.

Meanwhile, corporation tax, which currently stands at 20 per cent, will fall to 19 per cent next year and then 17 per cent by 2020, benefitting an estimated one million companies.

Huge boost for entrepreneurs

Still smarting from accusations that he was soft on Google, the Chancellor clearly sought to walk a tightrope between a voter-pleasing bashing of multinationals and encouraging inward investment.

…the removal of business rates for Britain’s smallest firms will provide a huge boost for entrepreneurs, but more valuable still is the reassurance that the exemption will be permanent.

What is certain is that few people will shed a tear for the global companies with complex tax arrangements that now face an additional £9bn tax hit, and the Chancellor offered an ingenious pitch to foreign firms – come to Britain, pay your fair share of taxes and enjoy the lowest rate of corporation tax in the G20.

This comprehensive assault on loopholes will force companies that aggressively seek to avoid tax to radically rethink their structuring – and such a low corporation tax rate will reduce many of the incentives for avoidance, too.

At the other end of the spectrum, the removal of business rates for Britain’s smallest firms will provide a huge boost for entrepreneurs, but more valuable still is the reassurance that the exemption will be permanent.

However, more established businesses and larger investors will be hit hard by the dramatic increase in stamp duty for purchases of commercial properties.

For most businesses, this is a good Budget. But large, tax-avoiding businesses have been offered a stark carrot or stick choice on tax.

Other countries may accuse the Chancellor of seeking to turn Britain into a corporate tax haven, but Mr Osborne has shown that tax avoiders will not be tolerated.

Buy-to-let exclusion

Meanwhile, other areas of the Budget look set to have a major impact on landlords. The Chancellor revealed that capital gains tax (CGT) would fall from 28 per cent to 20 per cent for higher rate taxpayers and to 10 per cent for basic rate taxpayers from April.

However, he added that buy-to-let investors would be excluded from these changes as residential property would not benefit from this reduction.

Buy-to-let investors could be forgiven for being completely paranoid, as on this evidence, the Chancellor really has got it in for them.

The Chancellor also confirmed the 3 per cent stamp duty surcharge on second homes, starting this month, while rejecting initial proposals that companies and individuals buying more than 15 properties be exempt.

This was all a slap in the face for landlords, already reeling from the tapered reduction of mortgage interest tax relief.

Buy-to-let investors could be forgiven for being completely paranoid, as on this evidence, the Chancellor really has got it in for them.

Just weeks before the 3 per cent hike in the stamp duty paid by property investors came into force, the Chancellor has excluded buy-to-letters from a huge capital gains tax giveaway.

With more incentives to help savers and first-time-buyers get on the property ladder, buy-to-let owners have once again been cast in the role of fall guy.

New ISA

Another group fearing the future after the Budget was the pensions industry after the Chancellor unveiled a plan to introduce a ‘Lifetime ISA’.

This is basically a vehicle for the under-40s to save for either a house or a pension.

Barely a year after pensions freedom forced annuity providers to overhaul their entire business model, this Budget could eventually come to be regarded as the beginning of the end for the conventional pension.

The new ISA will be open to anyone under 40 when it launches in April 2017. Anyone eligible and over 18 can save up to £4,000 per year, to which the Government will contribute 25 per cent each year. So for every £4 they put in, the Government will add an extra £1. The extra 25 per cent applies until savers are 50.

Savers can use the Lifetime ISA to buy their first home, or wait until they are 60 to withdraw cash and their bonus tax-free. They will face fairly stiff penalties if they dip into their funds at other times.

The pensions industry was anxious, and not without reason. Barely a year after pensions freedom forced annuity providers to overhaul their entire business model, this Budget could eventually come to be regarded as the beginning of the end for the conventional pension.

The Lifetime ISA’s simplicity, clarity and supposed flexibility could make it appear nothing less than a pension killer. But the later minimum retirement age and a 5 per cent penalty charge for withdrawing funds for anything other than buying a first home or retiring may dull its headline lustre.

The Chancellor also announced changes to income tax for those on both lower and higher incomes. There will be another rise to the personal tax-free allowance to £11,500 – due in April 2017. And the higher rate threshold will increase to £45,000, also in April 2017.

The Chancellor described this as being a “Budget for small business,” and the reaction from small business lobbies was broadly positive. Whether the other claim, of providing for the next generation, is equally valid is yet to be seen: The Lifetime ISA isn’t as flexible as may have been hoped for and the higher rate of CGT on residential property may result in reluctance for older landlords to sell their investment property, leading to lower supply in the market for sale, maintaining prices.

But the resignation of the Work and Pensions Minister, Iain Duncan Smith, at the Chancellor’s proposed cuts to welfare payments, distracted from a Budget that aimed to be largely pro-small business at the expense of tax-avoiding big business.

Tim Walford-Fitzgerald, Tax Principal
T 020 7380 4927
E twfitzgerald@hwfisher.co.uk


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