Important Tax Points from the UK's 2016 Budget Announcement
By Lee Curthoys, Corporate Tax Lead, Radius
Today UK Chancellor of the Exchequer George Osborne announced the UK Budget for the financial year 2016-17. A useful summary of the announcement is available on the UK government website, but it’s worth taking a closer look here at the Budget’s important tax-related points.
At a macro-level, the Budget announced relatively good growth for the UK economy compared to other developed nations, though growth did fall slightly behind expectations. Osborne’s speech to Parliament also alluded to the importance of Scotland remaining in the UK following last year’s independence referendum, and reiterated the government’s support for the UK remaining in the European Union ahead of this year’s EU referendum.
The key tax themes for the Budget are supporting small business and, in the language of the Budget, ensuring that multinationals in the UK pay their “fair share of tax.”
For most businesses in the UK, the messages are positive. The UK Corporation Tax rate will be further reduced to 17% by 2020, giving the UK one of the lowest corporate income tax rates of any developed country. In addition, greater flexibility will be given on loss relief, while business rates and stamp duty on commercial premises will be cut.
These announcements are good news for small businesses in the UK and for those businesses considering expanding into the UK for the first time.
The picture is not so rosy for larger businesses, however, particularly those that have been under intense public scrutiny in recent years for supposed aggressive tax avoidance strategies. Particular Budget measures that may affect these organizations include: restrictions on the use of losses, and restrictions on the deductibility of interest payments to 30% of earnings, for large businesses; a strengthening of the hybrid mismatch rules (which prevent a tax deduction in one country and no corresponding taxable income in another); and restrictions on the deductibility of royalty payments (a common method of diverting profits from one country to another).
The government will also be looking to address a loophole that allows non-UK-based electronic retailers to sell goods in the UK without paying UK VAT by requiring them to appoint a local representative.
For individuals in the UK, there is some good news. Personal allowances (the income that can be earned before tax is levied) will increase by about 5% to £11,500, and the higher 40% rate of personal income tax will only apply to people earning over £45,000. In a big boost for entrepreneurs, the main capital gains tax rate is being reduced from 28% to 20%, while low income earners will see their capital gains tax rate cut to 10%, with the lower rate also applying to gains on unlisted shares.
Overall, the Budget announced today does contain some significant changes to the way the UK tax system affects larger multinational businesses, though the overall package of measures is likely to have a fairly neutral effect and should be beneficial for smaller businesses, even those which are foreign-owned.
Here is a summary of the new Budget’s key points.
Key Points for Businesses
- Reduction in Corporation Tax rate to 17% by April 2020
- Interest deductions restricted to 30% of EBITDA where interest payments exceed £2m
- Previously announced hybrid mismatch rules will apply to branches of overseas companies
- Withholding tax rules on royalties to be widened
- Flexibility on use of losses in groups and against different income streams, but a restriction to 50% of losses used against profits over £5m from 2019
- Reform of stamp duty on commercial property
- Threshold for tax on property income and online business income
Key Points for Employers
- Some simplification of the National Insurance (social security) rules, but these rules have also been expanded to include certain termination payments
Key Points for Non-UK-Based Electronic Retailers
- E-retailers based overseas may have to appoint a local tax representative, which in turn could trigger UK VAT requirements
Key Points for Individuals
- Personal allowance increased to £11,500 effective 2017, and higher rate tax threshold increased to £45,000
- Abolition of certain National Insurance (social security) payments for self-employed people
- Reduced capital gains tax rates
- Incentives to encourage saving