Autumn Budget 2024

30 October 2024 / Insight posted in Budget 2024

Ahead of the Budget the Prime Minister said that it was time for the UK “to embrace the harsh light of fiscal reality”. We now know more – in the short to medium term at least – of who will feel the full glare of that light.

With this Budget the Chancellor has aimed to tread a difficult line between, on the one hand, short term revenue raising and spending cuts, and on the other, longer-term growth and investment. Overshadowing this balancing act were the manifesto tax promises that gave the government limited room to move. Many measures had been hinted at in advance including a significant rise in employer’s National Insurance as well as increases to capital gains tax (CGT) rates and some restrictions to CGT and inheritance tax reliefs for business owners. In some areas, the changes did not go as far as had been suggested which may leave some taxpayers with a sense of relief.

For companies, the new corporate tax roadmap will provide some welcome certainty around the stability of key regimes and reliefs including research and development tax reliefs.

Key manifesto pledges on reform of the non-domicile rules for tax, the taxation of private equity carried interest and VAT on school fees all appeared as expected, along with various measures and consultations intended to close loopholes and strengthen HMRC’s powers. Additional funding for HMRC was also confirmed, albeit with a focus on revenue-raising rather than additional resources to improve customer service. The government is also planning to accelerate HMRC’s move to digital services, with confirmation that Making Tax Digital will go ahead for income tax from 2026 as well as enhancements to the HMRC app. It is to be hoped that HMRC learn lessons from Making Tax Digital and other digital programmes and focus on delivering value and simplification for taxpayers as a priority.

 

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Corporate and business tax

Businesses will welcome the Chancellor’s recognition that stability and certainty are key to encouraging growth, and the Corporate Tax Roadmap published alongside the Budget provides comfort on the availability of key allowances and incentives, including R&D tax relief, across the remainder of this Parliament.

Corporate tax rates

The Chancellor confirmed that the main rate of Corporation Tax will remain at 25%, with the small profits rate also kept at 19%. These rates will be legislated for through to 31 March 2027. The 25% rate applies to companies whose taxable profits exceed £250,000, and the 19% rate applies to companies whose taxable profits are lower than £50,000. Companies making taxable profits between £50,000 and £250,000 pay tax at a blended rate between 19% and 25% depending on the level of profits. Profit limits are proportionally reduced where a company has other associated companies.

Moore Kingston Smith comment

It was no surprise that there have been no changes announced to Corporation Tax rates. The government had already announced that they were expecting to cap the rate at 25% for the term of this parliament. However, it is disappointing that the threshold for the small profits rate remains very low when compared to historical levels.

Corporate tax roadmap

There were no significant measures announced regarding corporate taxation in today’s Budget. Instead, the government used it as an opportunity to publish their Corporate Tax Roadmap, a document outlining their plans for the framework of corporate taxation for the duration of this parliament. Some of the key pillars of the Roadmap include:

  • Rates – capping the main rate of Corporation Tax at 25%, and also maintaining the Small Profits Rate and marginal relief at their current rates and thresholds.
  • Capital Allowances – preserving the Full Expensing regime introduced by the previous government and keeping the other main features of the regime such as the £1 million Annual Investment Allowance.
  • R&D – retaining the existing tax relief regimes as they are now, whilst continuing to improve and develop the administration of the schemes.
  • International taxation – continuing to support global taxation agreements under Pillar 1 and Pillar 2, and possible widening of the scope of the Transfer Pricing rules to SMEs.
  • Other areas – maintaining other structural elements of the corporate tax landscape, such as Patent Box, Intangible Fixed Assets and Creative Sector tax reliefs.
  • Administration – exploring new ways to provide businesses with additional certainty, with developments on technology in the tax system to be published in 2025.

Moore Kingston Smith comment

There is a running theme of stability throughout this Roadmap. It appears in general terms to be an endorsement of the existing structure of corporate taxation. Rather than promoting a case for significant reform, many of the possible changes ahead deal with niche areas rather than the core. Whilst the government is ultimately not tied to anything in this Roadmap, it will likely provide businesses and investors with predictability and certainty in the coming years over the key facets of the UK’s corporate tax system.

The government had originally promised a Business Tax Roadmap, and it is disappointing that the scope has been narrowed just to corporate tax: unincorporated businesses would also benefit from certainly on which to base their business decisions.

R&D tax reliefs

The Budget has confirmed that the rates of R&D relief will be maintained across the remainder of this parliament, meaning that there will be a merging of the two R&D schemes as previously planned. Furthermore, the government will discuss widening the use of advance clearances in R&D, consulting on options in spring 2025.

Technical corrections were also announced for the more generous R&D intensive scheme which reverse unintended consequences of the qualifying criteria, as well as bringing in specific rules for companies with a registered office in Northern Ireland.

Moore Kingston Smith comment

Over recent years there has been a significant number of changes that have undermined investor confidence in R&D tax reliefs. Therefore, we welcome the stability provided through the maintenance of current R&D rates. The potential expansion of advance clearances for R&D claims is another welcome announcement and would help to rebuild confidence in the incentive for businesses making R&D investment decisions. We expect to take part in the planned discussions on this topic.

Audio-visual expenditure credit – additional relief for visual effect costs

Following the consultation earlier in 2024 on the types of expenditure to be covered by the additional tax relief for visual effect costs, the government has confirmed that from 1 April 2025, film and high-end TV productions will be able to claim an enhanced 39% rate of Audio-Visual Expenditure Credit (AVEC) on their UK visual effects costs. This brings it in line with the rate of AVEC which applies to animation and children’s TV. UK visual effects costs will be exempt from the 80% cap on qualifying expenditure.

Costs incurred from 1 January 2025 will be eligible. This measure was previously announced at the 2024 Spring Budget but will be legislated in the Finance Bill 2024/25 now that the consultation has concluded.

Moore Kingston Smith comment

This confirmation will undoubtedly be welcomed by those eligible to claim the AVEC. The fact that the 80% cap on qualifying expenditure is now being removed in one specific area may give hope that it could lead to a relaxation of the rules more widely.

Pillar Two – multinational top-up tax

The UK’s multinational and domestic top-up tax regimes were introduced in accordance with the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) rules and ensure that multinational groups pay a minimal tax rate with UK group members being entitled to collect any top-up tax that is due on UK profits. These rules are effective from accounting periods starting on or after 31 December 2023. It was confirmed that the final measure contained with the Pillar Two rules – the Undertaxed Profits Rule – will be introduced into UK legislation and take effect from 31 December 2024. This rule will serve to bring a share of top-up taxes which accrue to group members not within the scope of Pillar Two rules and which would otherwise not be paid under an equivalent top-up tax regime, into charge in the UK.

Moore Kingston Smith comment

The UK’s adoption of Pillar Two means that UK entities within multinational groups with global revenues over €750 million must prepare for new compliance requirements. The legislation is complex with further detail as to the precise format of the returns required to comply with the rules being awaited. The Undertaxed Profits Rule introduces an additional layer of complexity and UK entities within multinational groups should be mindful of how it may impact their bottom line by enforcing top-up taxes on profits not sufficiently taxed elsewhere. Careful planning will be required to ensure compliance and manage any increased tax liabilities effectively.

Reform of transfer pricing, permanent establishment, and diverted profits tax (DPT) rules

The Corporate Tax Roadmap includes a number of proposed reforms to three key elements of international tax legislation following a consultation on these matters in 2023. With regard to the UK’s transfer pricing rules, the reforms include the potential removal of UK-to-UK transfer pricing and the removal of the exemption from transfer pricing for medium-sized business (whilst retaining a small company exemption).

Further proposed measures aimed at UK members of large multinational groups include the introduction of a new filing obligation that will require businesses within the scope of transfer pricing rules to report information to HMRC on certain cross-border related party transactions. Amendments are also proposed to the UK’s definition of permanent establishment to align with international definitions. Changes are also anticipated to the Diverted Profits Tax, most likely to remove its status as a separate tax and bring any charge within the scope of corporation tax.

Moore Kingston Smith comment

It is hoped that the proposed reforms to transfer pricing, permanent establishment, and DPT rules will, as intended, reduce compliance burdens for businesses. The alignment with international standards should improve transparency and promote a competitive UK tax environment that does not hinder global businesses seeking to invest in the UK.

Capital allowances

The government announced that it will extend the availability of the 100% First Year Allowances (FYA) for qualifying expenditure on zero-emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle charge-points for a further year, to 31 March 2026 for corporation tax purposes and 5 April 2026 for income tax purposes. These were originally due to come to an end on 31 March 2025 for corporation tax purposes and 5 April 2025 for income tax purposes.

The 100% FYA means that a business gets full tax relief the cost of zero-emission cars and electric vehicle charge-points on day one, rather than the relief being spread over a number of years.

The corporate tax roadmap (see separate comments) also set out the commitment of the government to explore extending full expensing to assets bought for leasing or hiring when fiscal conditions allow, and confirmation the £1 million Annual Investment Allowance (AIA) would also be kept in place to provide the certainty businesses need to invest.

Moore Kingston Smith comment

Extending the 100% FYA for electric vehicles and charge-points will be welcomed by businesses and owner-managers who provide their employees and themselves with an electric vehicle through the business. It means they can get the benefit of tax relief as soon as the expenditure is incurred.

The extension of the FYA may give businesses an incentive to refresh their company car fleet or to consider the provision of electric vehicles in the first place. However, there is unlikely to be a significant change in behaviour as a result of this announcement.

Confirmation that the AIA will be kept in place will be welcomed, particularly by capital intensive businesses, as it will give them certainty around the tax treatment of eligible costs. An indication that the previously proposed extension of full expensing to assets acquired for leasing or hiring is still on the table will be welcome to businesses spending significant sums on such assets. However, the fact that the extension is subject to a future decision based on affordability will make some wonder if this will ever come to pass.

Close companies – anti avoidance

Companies which are controlled by five or fewer individuals are known as close companies.

Loans made by a close company to its owners are not initially subject to a tax charge. Where part of the loan is still outstanding more than 9 months after the end of the accounting period in which the loan made there is a 33.75% tax charge (the “s455 charge”) on the company.

Anti avoidance rules already apply to prevent loans that are repaid and reborrowed within 30 days from avoiding the s455 charge.

New legislation is being introduced with effect from 30 October 2024, to prevent loans which are repaid and then reborrowed from associated companies from sidestepping the s455 charge.

Moore Kingston Smith comment

This new piece of targeted anti-avoidance demonstrates the risk of taking a view that the government considers is outside the spirit of the law, even if it falls withing the letter of the law as drafted. It is not surprising that a Budget which has raised taxes and tightened reliefs and exemptions has included measures of this kind.

Liquidation of LLPs

From 30 October 2024, the way capital gains are taxed when a Limited Liability Partnership (LLP) is liquidated has changed for assets disposed of to a contributing member or a company or other person connected to them. This measure has been announced to close a route used for avoidance of tax.

Before this change was announced, assets held by an LLP were treated as if held by its members in a normal partnership. Consequently, no chargeable gains arise when a member contributes an asset to the LLP, but this treatment ceases to apply on appointment of a liquidator. In broad terms, the previous rules then allowed for assets to be distributed back to the contributing member, or a person connected with them, without any tax consequence.

The changes to the rules announced in the 2024 Autumn Statement mean that a deemed disposal arises when an LLP is liquidated and assets a member has contributed are disposed of to the member, or to a company or other person connected to them. If there has been an increase in value of the asset since the date it was contributed, there will be Capital Gains Tax to pay under the new rules.

Moore Kingston Smith comment

This change will be of little interest to most, as the rules will only apply to LLP members who have contributed assets to an LLP that is then liquidated. For those it does impact, LLP members may need to fund a tax bill earlier than they had previously anticipated, so planning cashflow will be important.

VAT

The government’s main manifesto commitments on VAT were that there would be no increase in the main rate of VAT and that private schools would become subject to VAT. The Budget confirmed both of these, and as anticipated, schools now only have until January to prepare for the VAT changes.

There are no changes to the rate of VAT or VAT registration thresholds.

As expected, the government’s well publicised decision to charge VAT on private school fees from 1 January 2025 was confirmed in the Budget. Legislation will also be introduced to remove business rate relief for private schools from April 2025.

While the Chancellor chose not to offer any VAT relief to military or diplomatic families, additional funds are being made available to help offset VAT on private school fees paid by those families.

The Budget also saw a change in the VAT treatment of fee-paying special schools. In the original draft legislation released in July, fees were going to remain VAT-exempt. However, these will now be subject to VAT from 1 January 2025.

Moore Kingston Smith comment

In many cases, the fees of special schools are paid by local authorities, who should be able to reclaim much of the VAT charged. Going forward, the schools will, for the first time, be able to recover VAT on costs, so overall it may be a positive result for the special needs sector.

Private schools are however likely to be disappointed by the decision not to delay implementation beyond 1 January 2025, with the sector continuing to face challenges in dealing with the practical issues that these changes involve.

With an influx of VAT registration applications expected, and a history of delays, it is unclear how effectively HMRC will be able to deal with the added pressure.

Private client

Changes to capital gains tax and inheritance tax had been widely hinted ahead of the Budget so it was no surprise to see increases in CGT rates and a restriction to agricultural and business relief from IHT. The Chancellor also confirmed that the abolition of the non-domicile tax regime will go ahead from April 2025.

Income tax and National Insurance rates and thresholds

Ahead of the general election, the government had made a clear commitment not to increase the rates of income tax or (employee) National Insurance, and this was confirmed in the Budget.

The point at which income tax and National Insurance is levied on income, and the thresholds from which the higher and additional rates apply, were frozen by the previous government until April 2028. The effect of this freeze – known as ‘fiscal drag’ – is that the tax take increases as incomes rise over time. It was widely expected that the existing freeze would be extended in the Budget. However, the Chancellor announced that, from 2028/29, thresholds would be uprated again in line with inflation.

Moore Kingston Smith comment

It is unsurprising that the government has maintained the freeze to thresholds until 2028-29, as the effect was already ‘baked into’ the government’s figures: uprating thresholds now would have increased the alleged fiscal ‘black hole’ that the Chancellor is looking to plug. Whilst the news that the freeze will not be extended is welcome, it does not provide any immediate relief for taxpayers.

Capital gains tax

The main rates of capital gains tax (CGT) have been increased to 18% for basic rate taxpayers and 24% for higher rate taxpayers (from 10% and 20% respectively). They are now aligned with the rates applying to disposals of residential property. The new rates apply to transactions completing on or after 30 October 2024.

Moore Kingston Smith comment

Increases to the CGT have been trailed on multiple occasions since Labour came to power in July 2024, but the timing of when any new rates would apply from and their level had been subject to plenty of speculation.

The rates are not as high as some of the speculation which will be a relief to many. The changes do, however, apply immediately. Different rates will apply to transactions in the same tax year, adding to the complexity when reporting disposals for the 2024/25 tax year.

Mitigation opportunities – such as transferring assets between civil partners or spouses before a sale, or selling other assets standing at a loss to reduce taxable gains – will be more valuable following the increase in rates.

Business asset disposal relief and Investors’ relief

Disposals qualifying for Business Asset Disposal Relief (BADR) currently benefit from a 10% capital gains tax rate on the first £1 million of gain for an individual. Investors’ Relief has a £10 million lifetime limit at the 10% rate.

The lifetime allowance for Investors’ Relief is reducing to £1 million for disposals on or after 6 April 2025, bringing it in line with BADR. In addition, the CGT rate applying to gains within the lifetime limit for both reliefs is increasing to 14% for disposals on or after 6 April 2025 and 18% for disposals on or after 6 April 2026.

Moore Kingston Smith comment

Both these reliefs have been significantly curtailed since they were first introduced, when they benefitted from a lifetime allowance of £10 million at a rate of 10%.

Coupling the increased tax rates for these reliefs with the general increase in capital gains rates (which apply to disposals on or after 30 October 2024), impacting gains over the lifetime allowance, will lead to a significant increase in the amount of capital gains tax payable on the sale of a business in the future.

There has been plenty of commentary about the potential increase in capital gains tax rates, leading to transactions being accelerated to complete before 30 October 2024. The concern is now that future transactions could be put on hold due to the amount of tax that would arise on a disposal.

Carried interest

Some individuals working in the asset management industry have historically been able to benefit from capital gains tax rates on rewards they receive in the form of carried interest.

The Chancellor has announced that from 6 April 2025 the current two rates of capital gains tax of 18% and 28% that apply to carried interest arising to individuals will be replaced with a single rate of 32%.

Looking forward, the government proposes making further changes to the taxation of carried interest arising to individuals by moving the tax regime from capital gains tax to income tax, with these changes intended to take effect from April 2026. As part of these future changes, self-employed rates of national insurance will also become payable on carried interest arising to individuals, which is a significant change from the current position. In recognition of the need to maintain a degree of international competitiveness for the asset management industry in the UK, a discount in the amount of carried interest liable to income tax has been proposed of 72.5% to reduce the effective income tax rate that will apply from April 2026.

Moore Kingston Smith comment

Changes to carried interest tax rules for individuals were expected following a call for evidence that was published shortly after the general election in July, in fulfilment of the Labour manifesto promise to ‘close the carried interest tax loophole’. The increase to a 32% tax rate from 6 April 2025 on carried interest arising to individuals is therefore within the expectations of people working within the private equity industry.

However, there is still more consultation and engagement with the asset management industry and the wider advisers to finalise how the rules will work and who will be able to benefit from the revised income tax regime from April 2026. This will be clearer as we get closer to the April 2026 implementation date. For a financial services industry which has seen significant uncertainty in the past few years, it remains to be seen what the behavioural response will be to these changes and whether they are competitive enough in comparison to other alternative jurisdictions.

Inheritance tax

As widely expected, a number of changes were announced to the inheritance tax regime:

  1. From April 2026, agricultural property relief (APR) and business property relief (BPR) will be restricted. A 100% rate of relief will continue to apply for the first £1 million of combined qualifying agricultural and business assets and, thereafter, relief will be at 50%. The rate of BPR applying to shares designated as not listed on the markets of a recognised stock exchange, such as the AIM market, will also be reduced to 50%.
  2.  From April 2027, the value of unused pension pots and death benefits payable from a pension will be brought within the scope of inheritance tax.
  3. The current freeze on the inheritance tax thresholds will be extended for a further two years to 5 April 2030. The nil-rate band will remain at £325,000 and the residence nil-rate band will remain at £175,000 and continue to taper away for estates worth more than £2 million.

Moore Kingston Smith comment

The restriction to APR and BPR will be a concern for many business owners, whose families may now need to consider how to fund an inheritance tax bill without breaking up or selling the family business. However, there is an option to pay inheritance tax in 10 annual instalments will be available on such assets until they are sold.

The decision to bring pension pots within the inheritance tax net is perhaps no surprise and those that have planned their retirement based on the existing rules may now need to reconsider their financial planning. A further consequence of this measure is that it may now cause some estates to breach the £2 million threshold at which the residence-nil rate band begins to taper away.

Non-UK domiciled individuals

UK tax-resident individuals who are not domiciled in the UK (non-doms) are taxable in the UK on their worldwide income and gains but can choose (unless they are “deemed domiciled” in the UK) to be taxed on their non-UK income or gains only as and when they are brought into the UK. This is known as the ‘remittance basis’ of taxation.

Domicile is also relevant to inheritance tax and non-doms (again, unless they are “deemed domiciled” in the UK) are only liable to UK inheritance tax on their UK assets.

The Chancellor has confirmed previous announcements that the remittance basis of taxation will be abolished from 6 April 2025 and will be replaced by a new foreign income and gains (FIG) tax regime based on UK tax residence. Individuals who are within the FIG regime will be exempt from UK tax on 100% of their foreign income and gains for a maximum of four years after moving to the UK, if they have not been UK resident for any of the ten consecutive years before their arrival. After those four years, such UK resident individuals will be fully taxable in the UK on their worldwide income or gains.

Two transitional arrangements will be introduced. Non-doms who have been taxed on the remittance basis will be able to ‘re-base’ to 5 April 2017 the cost of their foreign assets held on 5 April 2017 to their value on that date, to calculate any gain when they dispose of them. Also, a three-year ‘Temporary Repatriation Facility’ will be introduced under which previously untaxed foreign income and gains can be brought into the UK at a 12% tax rate for the first two years from 6 April 2025 and a 15% tax rate for the final year from 6 April 2027; this is extended to untaxed foreign income and gains within trust structures if they are distributed to individuals.

Domicile will also cease to be relevant for determining who is liable to inheritance tax and will be based on UK tax residence instead from 6 April 2025. Exposure to inheritance tax on personally held non-UK assets will begin after individuals have been ‘long-term resident’ in the UK for at least ten of the last 20 tax years.

The exposure to inheritance tax will be extended to non-UK assets held in trusts settled by such long-term UK resident individuals.

Moore Kingston Smith comment

The remittance basis regime has proved to be controversial, especially in recent years. Basing the new regime on tax residence increases certainty and modernises the system, since it will be based on the Statutory Residence Test which was introduced in 2013. It also removes an incentive for UK resident individuals to leave their wealth outside the UK, since the liability to UK tax will no longer be on a remittance basis.

However, it is disappointing to see that there more has not been done in terms of transitional provisions, especially for currently ‘excluded property’ trusts settled by existing non-doms.

Significant concerns raised by many about the risks of extending inheritance tax charges to existing trusts settled by non-doms and the length of time that individuals may continue to be liable to inheritance tax after leaving the UK have been largely ignored. The tax that the government expects to raise from these changes will be affected by any behavioural change, and many commentators believe that the increased inheritance tax exposure could be a deciding factor for wealthy non-doms who have either already chosen to leave or may now choose to leave the UK.

Overseas Workday Relief (OWR)

In its current form, OWR is an income tax relief available to UK resident non-UK domiciled employees on earnings paid and kept offshore and related to days spent working abroad as part of their UK employment. Currently OWR is available for up to three years.

From 6 April 2025 eligibility for OWR will be based on an employee’s residence and not their domicile.

Other key points are as follows:

The relief is extended to a four-year period, and the need to keep employment related income offshore removed;

  • An individual must qualify under the new Foreign Income and Gains (FIG) rules to be able to claim OWR;
  •  There is a 10 year period of consecutive non UK residence required so an expat who returns to the UK for a second assignment within that period would not be able to claim OWR;
  • Trailing income paid after 5 April 2025 but relating to a period prior to 5 April 2025 will continue to be taxed on the remittance basis;
  • There are specific transitional arrangements in place for individuals already resident in the UK who are claiming Overseas Workday Relief under the current rules; and
  • Earnings that have previously not been taxed in the UK are eligible for the temporary repatriation facility, designed to encourage individuals to remit their previously earned foreign income and gains to the UK by offering preferential tax rates of 12% in 25/26 and 26/27, and 15% in 27/28.

Moore Kingston Smith comment

Being able to claim Overseas Workday Relief can generate significant tax savings for people who do not normally work in the UK. However, the current regime involves some complex bank account structuring with income related to the days spent working outside the UK never being brought to the UK.

With the new residency-based criteria bank account structuring will no longer be necessary as having the income paid and kept offshore is no longer key to claiming the relief.

A further positive step forward is the removal of the need for employers to make a special application to HMRC to operate PAYE on only a proportion of employment income. The time it was taking to process these applications was far too long, meaning that individuals were effectively overpaying the UK tax due and may experience cashflow problems where income tax was also being withheld in another country. Employers and employees alike will heave a sigh of relief that they are able to apportion PAYE without a long waiting period.

Whilst the new rules for claiming OWR are welcome and may encourage investment in the UK the capping of the tax relief available is a potential disincentive. The requirement for a 10 year period of non UK residence before being able to claim the relief may well pose a stumbling block for international groups. Expats often return to the UK for a second assignment within a 10 year period and being able to claim OWR is a big cost saving.

Making tax digital

A key part of the government’s plan to modernise the UK’s tax system, Making Tax Digital, was first announced in 2015. While it has been fully introduced for VAT purposes, its implementation for income tax purposes (MTD for ITSA) has seen multiple delays, and is now due to be introduced for sole traders and landlords with income over £50,000 from April 2026, followed by those with income over £30,000 in April 2027.

The Budget has confirmed that the government is committed to delivering MTD for ITSA and will expand the rollout to those with income of over £20,000 by the end of parliament. The exact timing will be announced in a future Budget.

Moore Kingston Smith comment

This is a clear indication that MTD for ITSA will be going ahead as planned from April 2026 and will enable people to start preparing for the transition to digital record keeping and reporting.

The previous government had carried out a review of whether and how MTD for ITSA should be rolled out to those with income under the £30,000 threshold. That review concluded nothing more than that the position should be kept under review for that group of taxpayers – we now know that the top slice of them will have to move to digital record-keeping and reporting. However, the benefits of ultimately reducing the threshold to £20,000 will only become apparent once the initiative is underway.

High Income Child Benefit Charge

The government has announced that it will not proceed with the reform to base the High-Income Child Benefit Charge (HICBC) on household incomes (planned by the previous government and due to take effect from April 2026) due to the cost of implementing such a measure.

To make it easier for all taxpayers to get their HICBC right, the government will allow employed individuals to pay their HICBC through their tax code from 2025, and will pre-prepopulate Self-Assessment tax returns with Child Benefit data for those not using this service.

Under the current system, a family with both parents earning £60,000 can retain their child benefit in full, whilst a family with one working parent earning £80,000 loses their child benefit entirely.

Moore Kingston Smith comment

The HICBC has been unpopular since it was first introduced in 2013 and has been highly criticised for being unfair and complex. Working families will be disappointed to learn the government is not intending to push forwards with the proposed changes to the HICBC. It was felt by many that basing the HICBC on household income was a fairer way to administer the charge.

It’s good news that the government is taking steps to reduce the administrative burden on paying the HICBC, but this will do little to remove the disappointment of not reforming the HICBC to a more equitable regime.

Stamp Duty Land Tax: increased second property charge

The Stamp Duty Land Tax (SDLT) surcharge for additional properties has been increased from 3% to 5% from 31 October 2024.

The SDLT surcharge typically applies to those purchasing a second home and buy-to-let landlords. It is payable on top of the usual SDLT payable on a residential property purchase in England and Northern Ireland. Increasing the higher rates of SDLT on purchases of residential property is expected to disincentivise the acquisition of second homes and buy-to-let properties, freeing up housing stock for main home and first-time buyers. The government has announced they expect this measure to result in 130,000 additional transactions over the next five years by first-time buyers and other people buying a primary residence.

The single rate of SDLT that is charged on the purchase of residential property costing more than £500,000 by companies will also be increased from 15% to 17%.

Moore Kingston Smith comment

The additional SDLT costs of purchasing a residential property will be disappointing for second homeowners and buy-to-let landlords, as now they will now need to fund an additional 2% on the purchase price giving rise to a maximum SDLT rate of 17% or 19% for non-UK residents. There have been several changes in recent years to disincentivise buy-to-let landlords by increasing the tax burden, namely restricting tax relief on mortgage interest and the initial introduction of the SDLT surcharge in April 2016. This measure will likely deter new landlords from entering the buy-to-let property market rather than seeing existing property holders exit from the market as capital gains tax rates on disposals of residential property remain unchanged.

Whether this measure results in 130,000 additional transactions by first-time buyers over the next five years remains to be seen. Although interest rates on mortgages have generally fallen in recent months, the biggest hurdle for most first-time buyers is getting the financing and deposit in place to purchase a home in the first place.

The fact this change is coming into effect from 31 October 2024 will be frustrating for those who are in the process of purchasing a property and are subject to the SDLT surcharge but have not yet exchanged – overnight their property purchase has become 2% more costly.

Abolition of furnished holiday lettings regime

The abolition of special tax treatment for furnished holiday letting was announced in the July 2024 statement and the Budget has confirmed that legislation for this will be included in the 2024-25 Finance Bill. This will change the treatment for income tax and capital gains tax, but not VAT, from April 2025. If the property continues to be let for short-term holiday accommodation, it will simply be treated in the same way as other let property, in particular, losing the unrestricted loan interest deduction which made the regime attractive to landlords.

Moore Kingston Smith comment

The changes, particularly around the deductibility of loan interest, could have a significant impact on profitability for many landlords letting short-term holiday accommodation. It will be important for those affected to understand the impact that the changes are likely to have and factor in the higher tax bills that they may face in future.

Offshore Anti-Avoidance – call for evidence

HMRC has issued a call for evidence which runs until 19 February 2025, with the aim of improving the operation of existing anti-avoidance rules. Three areas relating to offshore matters are being reviewed; the settlements rules, transfer of assets abroad (TOAA) and anti-avoidance rules around capital gains. In (brief) summary:

  • The settlements rules can apply to a broad array of entities, including structures where the settlor or a minor unmarried child or stepchild can benefit. The rules can create an income tax charge on the settlor for transactions within the entity.
  • TOAA can cause income arising to a non-UK entity to be assessed on a UK resident beneficiary who can benefit from the income.
  • The capital gains rules can attribute gains arising to an offshore entity to a UK resident beneficiary or settlor of the entity.

Each of these areas is complex and not always well understood by settlors and beneficiaries. In some cases there are exemptions to prevent these rules from applying; for example, if there was no motive to avoid UK tax when the structure was created (the “motive defence”).

HMRC is looking for feedback to simplify the rules, the scope for removing inconsistencies, how the “motive defence” is applied and suggestions on improvements for dealing with these matters in the future.

Moore Kingston Smith comment

These rules are currently widely drafted and are at risk of applying to entirely innocent structures which were created by individuals at a time they had no connection with the UK, or any intention of having any connection with the UK.

We welcome the opportunity to engage with HMRC on ways that these rules can be applied on a fair and consistent basis. Individuals who benefit can then have certainty of how their entitlement will be taxed in the UK.

Employment tax

Employers have borne the brunt of this Budget, with increases in employer’s National Insurance and the National Minimum Wage both taking effect from April 2025. The government has also confirmed that payrolling benefits will be introduced as planned from April 2026, so it will be important for employers to focus on the steps they need to take to be ready for this administrative change.

Employer NIC increase

Employer National Insurance Contributions (NICs) are to increase from 13.8% to 15%. This will coincide with a reduction of the threshold at which employers pay NICs on employees’ wages from £9,100 to £5,000 (per annum), starting from April 2025. To offset this impact on small businesses, the Employment Allowance will be increased from £5,000 to £10,500 and expanded by removing the £100,000 NIC bill limit (which currently prevents employers with a higher total NIC bill from qualifying for the allowance), allowing more employers to benefit.

Moore Kingston Smith comment

The employer NIC charge for an employee earning £35,000 will increase by £925 per annum. The cost saving resulting from the increased Employment Allowance will be a welcome relief for the smallest employers, but will have little impact on the overall employer NIC cost increase for employers with large salary bills.

This additional cost to businesses will have an impact on company valuations. For example, if a business with 100 employees paid an average of £35,000 each is valued on a 7 x EBITDA multiple, an additional, this additional cost will reduce the company valuation by nearly £650,000. This means cost cutting productivity increases will be needed just to keep the valuation the same.

National living wage/National minimum wage

From April 2025, the National Living Wage will increase to £12.21 per hour for all eligible employees, and the National Minimum Wage for 18-20 year olds is to increase to £10.00 per hour for all eligible workers, an increase of 16.3%. The government is also increasing the minimum wages for Under 18s and Apprentices to £7.55 per hour, and the Accommodation Offset rate will increase to £10.66 a day.

Moore Kingston Smith comment

These wage increases are likely to put financial strain on employers, especially alongside other Budget measures like the employer National Insurance increase. The hospitality sector is expected to suffer disproportionately from this measure.

Employee Ownership Trusts and Employee Benefit Trusts

The government is introducing a package of reforms to the taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs). These reforms are aimed at tackling perceived abuse and ensuring that the regimes remain focused on encouraging employee ownership and rewarding employees.

An EBT is a trust set up for the benefit of employees of a company. An EOT is a specific type of EBT whereby a controlling shareholding in a company is typically sold to a trust which holds the shares for the benefit of the employees. A package of tax reliefs was introduced in April 2014 to incentivise company owners to transition their companies to EOT ownership included full relief from CGT on the initial sale.

In 2023, a consultation was held on the use and effectiveness of the EOT tax regime, to ensure that the reliefs remain focused on the targeted objectives of rewarding employees and encouraging employee engagement, whilst preventing opportunities for unintended tax planning.

The full list of intended changes are:

  • restrict former owners or persons connected with former owners from retaining control of companies post-sale to an EOT by virtue of control (direct or indirect) of the EOT
  • require that the trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT
  • confirm in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to Income Tax as a distribution
  • ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors necessarily being included
  • extend the period of time within which the relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal
  • require that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value
  • require that individuals provide within their claim for CGT relief information on the sale proceeds and the number of employees of the company at the time of disposal
  • confirm in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the trust
    to only allow the IHT exemption where the shares have been held for 2 years prior to settlement into an EBT
  • require that no more than 25% of employees who are able to receive income payments from an EBT should be connected to the participators of the company

Most of the changes will have effect from 30 October 2024. Importantly, if existing EOTs have been established with non-resident trustees before 30 October 2024, the requirement for the trustees to be UK tax resident does not apply.

The changes to the Capital Gains Tax claim conditions (e.g. additional disclosure in relation to disposal proceeds and the number of employees) will have effect for claims made on or after 6 April 2025.

Moore Kingston Smith comment

EOTs have become an increasingly popular succession planning tool for business owners willing to give up control of their business to their employees. However, the government has felt that the beneficial tax treatment of using an EOT to exit the business has been abused, which has resulted in the rules being tightened. In particular, the use of offshore EOTs allows for a tax free sale to an EOT and then, after a period of time, a tax free disposal by the EOT to a third party purchaser.

Most who use EOTs as a succession planning or exit strategy do so for the genuine benefit of their employees and to see the business they have worked hard to establish continue into the future. For such individuals, this reform will not have a significant impact, other than having to be mindful of stricter rules, a longer potential clawback period and ensuring their claims for Capital Gains Tax are correctly made. However, given the additional complexity, it is likely the time and costs of establishing the EOT and monitoring the conditions will increase.

Mandatory payrolling of benefits-in-kind

The government has confirmed that their previously announced mandatory requirement for employers to collect tax (income tax and Class 1A NIC) due on most benefits-in-kind through payroll will go ahead from April 2026. Currently, employers can payroll benefits on a voluntary basis by registering with HMRC. The government also set out that certain benefits (living accommodation and employer provided loans) will be eligible to payroll on a voluntary basis initially from April 2026. Further details on how these benefits should be treated will be released by the government in due course, including the release of draft legislation.

Moore Kingston Smith comment

Employers should start assessing their benefits and expenses to consider how current processes could be impacted by the mandatory payrolling, and identify which benefits may be impacted. Some employers may wish to voluntary payroll benefits in kind from 6 April 2025, to allow an employer to become familiar with the process before the process becomes mandatory from April 2026.

Umbrella company non-compliance

To address widespread tax avoidance and fraud within the umbrella company market, the government will require recruitment agencies to account for PAYE (income tax and NIC) on payments to workers supplied via umbrella companies (who employ the worker). If no recruitment agency is involved, the responsibility will shift to the end-client business. This will be implemented starting in April 2026.

Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients.

This measure will only change where tax obligations sit when using an umbrella company to pay a worker. The underlying tax and NICs liabilities will not change and PAYE will operate in the usual way.

Moore Kingston Smith comment

While this measure will not prevent businesses from continuing to use umbrella companies, agencies and potentially end-users of the workers’ services will have an additional administration burden in ensuring correct collection of PAYE.

Contrived employee car ownership schemes

Draft legislation is to be produced to address loopholes in car ownership arrangements, with changes to take effect from 6 April 2026. Such schemes involve an employer or a third party selling a car to an employee, often via a loan with no repayment terms and negligible interest, with the employer then buying it back after a short period. This arrangement results in no payment of company car tax.

Moore Kingston Smith comment

Employers using such schemes must review their arrangements, and seek advice on ensuring full compliance with the new rules.

Tax administration

The government has chosen to increase the rate of interest on late-paid tax as part of its efforts to raise revenue which will have a material impact on those already struggling to pay. As expected from the government’s pre-election manifesto, tackling non-compliance is also a key issue: we should expect to see more on this over the course of this Parliament.

Change in the interest rate on unpaid tax liabilities

The government has announced that from 6 April 2025 the rate of interest charged on tax liabilities paid late will increase from7.5% to 9%, an increase of 1.5%.

Moore Kingston Smith comment

It was reported in March 2024 that UK taxpayers owe approximately £38 billion in unpaid tax liabilities and the time taken to recover sums owed was increasing. The increase in the interest rate is presumably aimed at taxpayers that prefer to owe money to HMRC rather than commercial lenders. There are often legitimate reasons why individuals and businesses cannot pay HMRC on time, though, and HMRC has been flexible with the majority of taxpayers to afford them time to pay. The increase in the interest rate will undoubtedly make it more difficult for people to pay what they owe, as interest will continue to accrue over the period the debt is owed.

Tackling offshore tax non-compliance

HMRC has published a policy paper on how it intends to close the tax gap (the difference between the total tax owed and paid) for individuals that have overseas financial assets. The government has announced that it intends to recruit 5,000 more compliance officers to tackle non-compliance and intends to:
• Target and disrupt offshore accountants and agents that set up complex structures to hide assets;
• Improve the automatic exchange of information with other tax authorities;
• Target companies and entities that facilitate avoidance and evasion, by using the information held by Companies House on overseas entities; and
• Scaling up its compliance activity to tackle offshore tax non-compliance and improve how people can voluntarily bring their tax affairs up to date.

Moore Kingston Smith comment

We welcome the move for HMRC to improve and simplify how people can voluntarily disclose tax owed. HMRC published a report on 24 October 2024 into how effective it had been in targeting individuals that had failed to report offshore income and gains on their self assessment tax returns. It is still unclear how much tax is lost each year due to taxpayers either attempting to avoid or evade tax by placing assets overseas. HMRC has stated that it intends to target individuals or ‘ghosts’ that have attempted to evade detection and have not paid any tax to HMRC.

New ways to tackle tax non-compliance

The government has published a consultation that explores how HMRC can modernise and reform its powers where there is an obvious error in a tax return. The paper also considers whether taxpayers should be required to self-correct mistakes.

The number of people filing tax returns has increased by 25% over the past ten years and HMRC estimates that roughly a third of personal and small company tax returns are incorrect. One particular area of concern is the dramatic increase in the number of individuals claiming repayments of tax.

To minimise the risk that incorrect claims are made, HMRC has proposed that it should align its powers so that further information will be required to support claims, such as invoices for expenses. Another proposal is that HMRC should be able to simply correct a return that they consider incorrect, with the taxpayer then needing to provide evidence to support the return if they wish to reject the correction made.

HMRC also proposes that it should be able to have a new power to start a partial enquiry into the tax return or notify a taxpayer that they consider the return is incorrect, with the taxpayer then needing to self-correct the return.

Moore Kingston Smith comment

The extension of HMRC’s powers to tackle the abuse of the tax repayments system should be welcomed by taxpayers, as the system has been exploited by criminal gangs and rogue advisers. The problem is that the genuine claims made by taxpayers for repayments will almost certainly be caught by the extensive new powers being proposed and dissuade people from making a legitimate claim. It will be key that HMRC uses any new powers proportionately.

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