WITH MOST BUDGETS, it’s possible to discern a theme to the updates and changes announced. But George Osborne’s statement on 16 March is incomprehensible and to some extent even contradictory.
Take the point to encourage the young (or rather the middle-aged) to save to buy a house using a Lifetime ISA coupled with an attack on non-resident housebuilders who build houses to sell rather than to let, for example. Or what about the 25% SDLT increase on most commercial property described as a help to small businesses?
But perhaps the biggest surprise was the attack on non-residents who trade in UK land. This rides roughshod over most of our double tax treaties – as, of course, does the new withholding tax rules on royalties.
Taxing non-residents on UK trading income is not in itself controversial, although encompassing within the legislation ancillary services which may be provided overseas could be. We normally tax profits arising in the UK. Osborne may feel that his predecessors were ill-advised to cede taxing rights to the developer’s home country when it does not have a UK permanent establishment (although treaties negotiated during his own tenure also contain such a provision), but to override treaties in relation to one type of trade is likely to create a concern in the minds of foreign businessmen as to which other type of trade he is going to target next. And, of course, there is not a lot of point in lowering corporation tax to try to attract foreign businesses while at the same time creating uncertainty as to how much of the tax system a foreign business can rely upon.
The proposed change to IR35 in relation to public sector workers is another oddity. If HMRC believe that there are such people who work through service companies and whose engagements fall within IR35, they should enforce the legislation. It is not reasonable to absolve HMRC of their duty to enforce the law by turning potential disputes with HMRC into civil disputes with another part of government. Moving the responsibility from the service company to the public sector body to determine whether or not IR35 applies cannot change the facts. If factually an engagement is not within IR35, the service company will have a claim against the public body if it incorrectly deducts the tax. The worker will not treat the incorrectly categorised amount as income on his own tax return, so the dispute with HMRC will still arise, albeit a few months later – meaning, in effect, that the change will achieve nothing other than to create ill-will between the public body and its sub-contractor.
Unless the public body is the BBC, of course. In which case, the new provisions will make it more difficult for the BBC to attract talent away from competitors such as ITV and Sky because they will fall under a different tax regime. It seems unlikely, however, that is the chancellor’s objective.
Capital gains tax reduction
The surprise reduction in the rate of capital gains tax is welcome, but having different rates of capital gains tax for different types of asset is a complication that the system could have done without. And to treat a commercial property as residential because the owner initially bought a dwelling and demolished it to erect his commercial building on the site, as the chancellor appears to be proposing, beggars belief.
The number of provisions that are being introduced to correct mistakes made in 2014 and 2015 is also depressing. People will have rearranged their affairs unnecessarily to seek to minimise the impact of changes that the chancellor is now retrospectively reversing. It doesn’t feel as if this is a good way to run a tax system.
Also depressing is the £100,000 cap on employee shareholder shares. This was an inspired move by Osborne in 2013 that was an attractive bargain to talented youngsters: show your commitment to the business by giving up some employment rights and you can get a tax-free gain when the business floats. So now an EIS investor can make £10m tax-free in return for putting in money, but his neighbour who puts in his far more valuable employment rights can only make £100,000.
Perhaps the most astounding impact of this year’s Budget is the amendment to the estate duty provisions of the Finance Act 1940. This has come about because the chancellor has discovered that in some cases inheritance tax is chargeable on the crystallisation of tax that was deferred under the estate duty rules instead of the, higher, estate duty. As the latter was abolished over 40 years ago (in 1975), the amount of extra tax must be tiny. You can almost hear the sound of the fiscal barrel being scraped when the chancellor also adds an estate duty charge on an asset on which estate duty was deferred but has subsequently been lost – unless the taxpayer can prove that the loss was outside his control. Presumably the charge will apply only where it is lost after Budget day, so it will be interesting to see how the chancellor legislates to define when something is lost.
All in all, this year’s Budget holds many an oddity we could well live without. George Osborne’s greatest achievement on March 16 appears to have been to pave the way for what many thought impossible: making Jeremy Corbyn electable. We’ll have to wait and see how successful he’s been.
Robert Maas is a tax specialist at Carter Backer Winter
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