Finance Bill 2014: your essential guide

First published in the May 2014 UK edition of Accounting and Business magazine.

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The chancellor, George Osborne, delivered his Budget on 19 March 2014 and the Finance Bill 2014 was published on 27 March. Many of the provisions had been previously published in the draft bill following the 2013 Budget and Autumn Statement, with the 2014 Budget announcements now being included.

The Bill contains some interesting new measures, much of them focusing on anti-avoidance, and will now be subject to the usual parliamentary processes before receiving Royal Assent in late July. Many of the clauses, if not amended during this process, apply now.

The Bill and explanatory notes run to 408 pages and are far too voluminous to cover in one article; here, we take a look at some of the highlights.

Tax rates and allowances

The headline changes to tax rates and allowances are: 

Corporation tax The government continues to seek to make the UK an attractive place for companies to do business and the corporation tax rate continues its downward path. The main rate of corporation tax decreases to 21 percent from 1 April 2014 and to 20 percent from 1 April 2015. This will bring it into line with the small companies rate and will lead to a single rate of corporation tax.

Personal allowance This will increase to GBP 10,000 from 6 April 2014 with a firm commitment to increase to GBP 10,500 from 6 April 2015.

Other key changes to personal tax include: 

Higher rate threshold For the first time since 2009/10, the higher rate threshold, i.e. the point at which tax becomes payable at the higher rate, has increased. The level of income at which a taxpayer becomes liable to higher rate tax is GBP 41,865 for 2014/15 compared with GBP 41,450 in the previous year.

Annual Investment Allowance (AIA) AIA enables businesses to claim 100 percent capital allowances on plant and machinery and integral features. Since its introduction in 2008, the threshold has changed several times. An increased limit of GBP 250,000 was introduced for a temporary two-year period, for qualifying capital expenditure incurred in the period from 1 January 2013 to 31 December 2014, after which time the allowance would revert back to GBP 25,000.

However, Clause 10, Schedule 2 of the bill sees AIA increased to GBP 500,000 per annum from 1 April 2014 for companies and 6 April 2014 for unincorporated businesses, up to 31 December 2015. The explanatory notes explain the clauses and impact, with a basic example stating: 'a company with such a straddling period might have a chargeable period that ran from 1 January 2014 to 31 December 2014. It would calculate its maximum AIA entitlement based on:

• the portion of the period from 1 January 2014 to 31 March 2014, that is, 3/12 x GBP 250,000 = GBP 62,500, and
• the portion of the period from 1 April 2014 to 31 December 2014, that is, 9/12 x GBP 500,000 = GBP 375,000. 

The company's maximum AIA for its first straddling period would therefore be the total of (a) + (b) = GBP 62,500 + GBP 375,000 = GBP 437,500.'

Pensions

Individuals will benefit from changes to withdrawals from registered pension schemes. Saving was a theme of this Budget and the reform of pensions was a headline measure.

A number of changes are being made affecting individuals and the benefits that can be taken from registered pension schemes, covering the following:

• capped drawdown
• flexible drawdown
• trivial commutation
• small pots
• lump sum withdrawals.

The detailed measures are beyond the scope of this article but the new rules afford pensioners greater flexibility over their retirement funds. Most importantly, pensioners will no longer be forced to buy an annuity when taking their pension and may invest the funds themselves directly.

Anti-avoidance

There is a strong tax avoidance theme running through the Finance Bill. The main focus is on mixed partnerships and limited liability partnerships (LLPs), with further legislation aimed at salaried partners/LLP members.

Mixed partnerships A mixed partnership or LLP is one that contains a combination of individuals and 'non-individuals', principally companies.

The legislation will reallocate excess profits allocated to a non-individual partner to an individual partner where the following conditions are met:

• A non-individual partner has a share of the firm's profit.
• The non-individual's share is excessive.
• An individual partner has the power to enjoy the non-individual's share or there are deferred profit arrangements in place.
• It is reasonable to suppose that the whole or part of the non-individual's share is attributable to that power or arrangement.

Legislation will also be introduced to deny certain income tax loss reliefs and capital gains loss relief.

Salaried members of LLPs Salaried members will become employees under certain conditions.

The new rules will apply at any time when an individual (M) is a member of an LLP and three conditions are met:

• Arrangements are in place under which M performs services for the LLP, in M's capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of M's performance of those services will be wholly or substantially wholly fixed; or, if variable, variable without reference to, or in practice unaffected by, the overall profits or losses of the LLP ('disguised salary').
• The mutual rights and duties of the members and the LLP and its members do not give M significant influence over the affairs of the LLP.
• M's contribution to the LLP is less than 25 percent of the disguised salary which it is reasonable to expect will be payable by the LLP in a relevant tax year in respect of M's performance of services for the LLP.

If these conditions are met, the salaried member will be treated as an employee and PAYE will need to be operated on the 'disguised' salary. HMRC has issued revised guidance, including Partnerships: A review of two aspects of the tax rules. Salaried Member Rules: Revised Technical Note and Guidance. It provides guidance on the new rules and examples showing how the salaried member test is applied as a whole.

Other anti-avoidance measures introduced include: 

Anti-avoidance involving dual contracts for non-domiciliaries New measures will tax the overseas employment income of non-domiciles on the arising basis, rather than on the remittance basis, in the case of artificially arranged contracts with the same or associated employers.

In particular, the new legislation will apply to income of an overseas employment where all the criteria below are met:

• An individual has both UK and overseas employment(s) either with the same employer, or where the UK employer is 'associated' with an overseas employer.
• A UK and an overseas employment are 'related' to each other.
• The foreign tax rate that applies to the income associated with an overseas employment, calculated in accordance with the amount of foreign tax credit relief available against that income under section 18 of the Taxation (International and Other Provisions) Act 2010, is less than 65 percent of the UK's additional rate of tax (currently 45 percent).

Annual tax on enveloped dwellings and stamp duty on UK residential property owned by non-natural persons (NNPs)

The measures aimed at the taxation of high-value residential property held by non-natural persons extends to properties with a value of more than GBP 500,000; previously GBP 2,000,000.

This includes:

• stamp duty land tax (SDLT) at 15 percent on acquisition of a residential property from 20 March 2014
• annual tax on enveloped dwellings (ATED). Up to 31 March 2015, this affects properties with a value of more than GBP 2,000,000 as at 1 April 2012. The tax payable is a banded tax and the rates are as follows:

• capital gains tax (CGT) at 28 percent on any gain on disposal.

Tax avoidance schemes, tax 'follower' cases and upfront payments Taxpayers will be required to pay upfront tax disputed under schemes that fall within the Disclosure of Tax Avoidance Schemes (DOTAS) rules or are counteracted under the General Anti-Abuse Rule (GAAR).

If the taxpayer fails to make the upfront payment then they are liable to penalties. If the scheme is subsequently found to be effective, the taxpayer will receive a refund.

Other measures

Research and development (R&D) tax credit for loss-making companies improved Loss-making SMEs that incur expenditure on qualifying R&D can claim a repayable tax credit. Finance Bill 2014, Clause 31 increases the rate of credit from 11 percent to 14.5 percent. For example:

SME Ltd has the following results for the year ending 31 March 2015:

• trading loss = GBP 200,000
• qualifying R&D expenditure = GBP 60,000.

The surrenderable loss is the lower of:

• GBP 200,000, and
• GBP 60,000 x 225 percent = GBP 135,000.

The repayable tax credit is therefore GBP 135,000 x 14.5 percent = GBP 19,575.

The trading loss of the company to carry forward is GBP 200,000 - GBP 135,000.

Employment allowance for GBP 2,000 for National Insurance From April 2014, most businesses and charities will be eligible for a new GBP 2,000 Employment Allowance to set off against their employers' (secondary) national insurance contributions.

Seed Enterprise Investment Scheme (SEIS) made permanent The excellent SEIS initiative to get equity investment into start-up companies has been extended. SEIS was originally announced in the 2012 Budget and offers would-be investors generous tax breaks for investing in small, start-up-type businesses. The scheme was originally intended to run until 5 April 2017 and has now been made permanent. Under the scheme:

• taxpayers who invest up to GBP 100,000 in a qualifying new start-up business will be eligible for income tax relief of 50 percent of their investment
• the 50 percent tax 'reducer' applies irrespective of the rate at which the investor pays tax
• investors may hold-over 50 percent of any capital gain against the base cost of the SEIS investment.

Split-year treatment extended to include capital gains A taxpayer coming to or leaving the UK can claim split-year treatment so that only the income received while in the UK is liable to UK tax. This did not previously apply to capital gains but will now do so. The measure is backdated to apply from 6 April 2013.

Beneficial loans threshold increases from GBP 5,000 to GBP 10,000 This is effective from 6 April 2014 and for subsequent years. It applies to all loans, no matter when they were taken out.

Finally, pay attention to the detail as there are measures that are easy to forget. For example, Clause 25 states: 'With effect from 6 April 2014, any payment which an employee is required to make for the private use of a car or van needs to be made before the end of the tax year in which the private use was undertaken.'

Glenn Collins is head of technical advisory and Simon Wood is a technical adviser, both ACCA UK