In his final Budget before the general election in May, Chancellor of the Exchequer George Osborne has today (18 March) set out his tax and spending plans to MPs, with an agenda including further reforming the pension industry, raising £5.3bn from the banking sector, tackling tax avoidance and evasion, and supporting the North Sea oil industry.
One of the first measures announced was the chancellor’s decision to increase the bank levy rate to 0.21%, raising an additional £900m a year while banks will also be stopped from deducting compensation they make to customers for mis-sold products, such as PPI insurance, from corporation tax. In total the Treasury is expecting these measures to raise £5.3bn.
The chancellor also used today’s budget to pledge further crackdowns on firms who use the Channel Islands to avoid paying tax, to propose new criminal sanctions against those evading tax and to introduce a Diverted Profits Tax which is set to take effect from next month. Those that help tax avoidance will also be targeted with HMRC being given broader powers to pursue connected persons under the promoters of tax avoidance schemes regime.
The government also pushed on with pension changes, building on its announcement to allow pensioners to take savings as a lump sum rather than buy an annuity, by allowing those who are already receiving an annuity to sell it to a third-party from April 2016. In a revenue raising measure, the government also cut the tax relief available for pension pots with the lifetime allowance cut from £1.25m to £1m.
A significant area of interest prior to the Budget announcement was whether there would be help for the North Sea oil industry which has suffered from falling oil prices. The chancellor did have something for the industry, announcing £1.3bn of support for the industry, with expectations that it will boost North Sea oil production by 15% by the end of the decade.
The measures were presented against an improving economic picture for the UK with growth forecasts revised upwards from 2.4% to 2.5% for 2015 and for 2016 from 2.2% to 2.3% while inflation was forecast to remain low for 2015.
Market Reaction: On pensions
Taylor Wessing’s employment and pensions partner Rosalind Connor said: ‘The most interesting thing about the budget is the personal savings allowance. Originally, the life time allowance was something you achieved if you were very wealthy. Why should pensions get special tax treatment? The personal savings allowance reduces that tax differentiation between pensions and other savings benefits. It attempts to encourage the band of middle-income people to save flexible which is not a bad thing.’
Chantal Thompson, pensions partner at Baker & McKenzie, commented on changes to the current pension regime: ‘This is probably the most interesting pensions measure announced in the Chancellor’s Budget but how it’s going to be achieved is the big question – there have been some favourable comments from the providers and it may mean a new market, but there’s an awful lot of detail that needs to be provided first.’
Thompson added: ‘The reduction in the Lifetime Allowance from £1.25m to £1m was well-trailed and may be considered low-hanging fruit as the number of people it affects is likely to be small. But it is another nail in the coffin for Defined Benefit schemes that remain open to accrual as it can catch “ordinary” members with final salary benefits who receive significant promotional or other pay increases.’
Commenting on the tax avoidance and evasion measures, BDO tax disputes partner Dawn Register, said: ‘The Chancellor made a big fanfare for further measures to tackle tax evasion and avoidance, including a new criminal offence and new penalties for those who assist tax evaders and more Accelerated Payment Notices issued to raise an additional £3.1bn from tax avoidance. HMRC currently win 80% of the avoidance cases through the courts allowing the Chancellor to be more bullish about using this area to raise further cash.
‘Legislation next week will herald the introduction of the Common Reporting Standard which will bring global automatic information exchange a step closer. It is a game changer for all tax authorities in the pursuit of further tax revenues.’
Ashley Greenbank (pictured), head of tax, Macfarlanes said: ‘It was a fairly uneventful budget – a lot of it was expected. People have been forewarned. There’s the confirmation that diverted profits tax will be in the Bill next week is big – people will be interested to see what that’s going to look like. There’s the anti-avoidance rule into the UK tax system to prevent loss refreshing – it’s interesting the government is choosing now to look at those arrangements, it’s been around for a long time.’
David Thompson, a tax partner at DLA Piper, said: ‘The diverted profits tax had already been announced by the fact that the government is pushing ahead with legislation to implement country-by-country reporting for transfer pricing by multinational companies is a surprise though. It’s jumping the gun on the OECD. The OECD has been mandated by the G20 to do this already and are coming up with rules which will be developed on a consistent basis across countries. There is a threat to consistency of the rules if countries go and draw up their own laws too early. They just want to look tough before the election.’
White & Case tax partner Prabhu Narasimhan said: ‘There is one place where the chancellor and the government may be seen to have given in to populist pressure and that is on the diverted profit tax regime. This is an extremely short-sighted measure – and when initially released in draft form in December was poorly drafted – that is being introduced in great haste and in advance of the OECD BEPs project which the prime minister himself originally championed. The uncertainty that this measure is inevitably causing to international business risks derailing the otherwise positive “Britain is open for business” story which I would think is a heavy long term price to pay for short term electoral success!’
On the North Sea:
Commenting on North Sea Tax cuts, Ashurst energy partner Michael Burns said: ‘The fact that tax cuts have been offered by the UK Government to the oil and gas industry today does not come as a huge surprise. It’s clear that the Government could not ignore the strong evidence of recent months that substantive fiscal relief is a critical part of sustaining North Sea activity. Ultimately, while the various structural changes being brought about as a result of the Wood Review have been welcomed by the industry, the right fiscal terms are key to the future of the oil and gas industry in the UK. The fundamental question is whether what is being offered is enough to make a real difference.’
Ashurst’s tax partner Richard Palmer added: ‘It should stem the flow of job losses in the UK CS [Continental Shelf], stimulate investment in challenging fields that had been mothballed and lead to an increase in M&A activity on the continental shelf.’
Commenting on the tax measures targeting banks, Ashurst’s Palmer said: ‘The Banks continue to be seen as the bad boys of this Parliament. In addition to another £900m increase in the Bank Levy, and restrictions on the use of their tax losses, they will now also be prevented from taking tax deductions for compensation payments for PPI and other mis-selling claims. These are big numbers. The Chancellor is certainly making disposal of the governments stake in certain banks a less attractive proposition.’
However, DLA Piper’s Thompson said:’The sell-off of the Lloyds shares and the debt of Northern Rock and Bradford & Bingley will be a bonanza for somebody. It’s good timing by the government as it will dump a huge amount of assets when the debt market is bouyant.’