‘Biggest tax rise in 50 years’ after freeze in personal tax thresholds

The UK government’s six-year freeze to Income Tax and National Insurance thresholds is set to raise £40bn a year by 2028, making it the country’s biggest tax rise on incomes in at least 50 years, according to a new analysis by the Resolution Foundation.

A four-year freeze in personal tax thresholds — the Personal Tax Allowance and Higher Rate Thresholds for Income Tax — was first announced in 2021. At that time, it was forecast to raise £8bn a year once fully rolled-out in 2025-26. Last year, the freeze was extended by a further two years together with the addition of an employer National Insurance threshold freeze.

High inflation has vastly increased the size of this tax rise, the think tank said.

Based on the Bank of England’s latest inflation forecasts, the policy will now raise around £40bn a year by the time it is fully rolled out in 2027-28. Had the government uprated the Personal Tax Allowance with inflation over this period, people would have started paying Income Tax at around £16,200, rather the current threshold of £12,570 which is set remain in place until April 2028. This means an additional £720 in Income Tax for most basic rate taxpayers.

“Abandoning the usual uprating of tax thresholds is a tried and tested way for governments of all stripes to raise revenue in a stealthy way,” said Adam Corlett, principal economist at the Resolution Foundation.

“But it is the far bigger than anticipated scale of the government’s £40bn stealth tax rise that stands out.

“The reality of the largest, and ongoing, tax rise on incomes in at least 50 years is why any talk of pre-election tax cuts will inevitably be seen in the wider context of some far bigger tax rises.”

UK government cuts taxes in mini-budget

Chancellor Kwasi Kwarteng has announced a cut in income tax as part of measures aimed at boosting the economy.

The basic rate of income tax will fall from 20p to 19p in the pound from April 2023. As a result, 31 million people will be better off by an average of £170 per year.

In a move benefiting the 629,000 people in the UK who earn more than £150,000 a year, the 45% higher rate of income tax is to be abolished. Instead, they will pay income tax at 40%, a rate that applies to those earning over £50,271.

The government will also reverse the recent rise in National Insurance from 6 November, saving money for businesses as well as workers, and cancel the planned rise in corporation tax from 19% to 25%.

In other changes, stamp duty is to be cut immediately, with nothing to pay on the first £250,000 of property’s value — double the current amount allowed. For first-time buyers, the threshold is rising to £425,000.

Household bills are expected to be cut by £1,000 this year with the energy price guarantee and £400 grant. The most vulnerable households will receive additional payments, taking their total savings this year to £2,200.

Planned increases in the duty on beer, cider, wine and spirits are cancelled.

And in a controversial move, rules which limit bankers’ bonuses will be scrapped as part of efforts to “reaffirm” the UK’s status as a financial services hub.

Shadow chancellor Rachel Reeves said the mini-budget was “based on an outdated ideology that says if we simply reward those who are already wealthy, the whole of society will benefit”.

Islamic banks call for UK tax reforms

Islamic finance firms are putting pressure on the UK government to reform the tax system in order to provide for their growth, according to Reuters.

Islamic rules on finance prohibit interest payments and transactions often involve multiple title transfers of underlying assets, leading to double or triple tax charges.

The UK has been seeking to become a global hub for Islamic finance. Banks are asking for tax parity to enable them to compete with non-Islamic peers, for example in mortgage refinancing.

More than 20 banks offer Islamic finance in the UK, including Gatehouse Bank, Bank of London, Abu Dhabi Islamic Bank and Qatar Islamic Bank. Tax treatment of Islamic bonds and residential mortgages has previously been reformed, leading to the sum of Islamic banking assets in the UK reaching over £5bn in 2016.

Samir Alamad, head of sharia compliance and product development at Al Rayan Bank said “[concerns about refinancing mortgages triggering capital gains tax] is the more pressing issue as it is affecting Islamic banks and their customers.”

Alamad said in the short term, amendment of the Finance Act could help but in the long term a broader framework is needed to address all types of Islamic transactions.

Tax havens required to build public company ownership registers

The government has said it will support a legislative amendment which will force British Overseas Territories to create public registers of company ownership, helping to address the global system of hiding places for ‘dirty money’ according to the Guardian.

Labour MP Margaret Hodge and Conservative MP Andrew Mitchell had tabled an amendment to the Sanctions and Anti-Money Laundering Bill currently going through parliament. Foreign Office Minister Alan Duncan confirmed that ministers would not seek to oppose the amendment.

The Speaker of the House of Commons John Bercow rejected a series of last-minute amendments seeking to dilute the disclosure requirements on the grounds that they were tabled too late.

The Hodge/Mitchell amendment will require the 14 overseas territories to introduce a public register of company ownership by the end of 2020, or face having a register imposed by the UK government. The territories include financial centres such as the Cayman Islands and the British Virgin Islands.

The issue of tax havens was raised with the release of the Panama Papers in 2016. Around half of the secretive companies revealed by the papers were said to be based in offshore structures registered in the British Virgin Islands, according to Transparency International.

Margaret Hodge defended the imposition of new rules on the overseas territories, which also saw interventions to abolish the death penalty in 1991 and decriminalise homosexuality in 2000.

Hodge said: “The areas on which we have intervened… are moral issues. I can’t think of another issue which is more moral than trying to intervene to prevent the traffic in cirrupt money and illicit finance across the world.”

UK government muses tax on tech revenues, not profits

The UK government could be set to change the way technology giants are handled by the taxation system, according to BBC News.

The Treasury has confirmed that a new tax on company revenues is the “potentially preferred option.” Currently taxes are levied on profits recorded in the UK, which are much smaller than the revenues earned.

In 2016 Google made revenues of £1bn in the UK and a pre-tax profit of £149m. It paid taxes of £38m, a much higher figure than it paid in previous years, following publicity over its low contribution to the exchequer.

Financial Secretary to the Treasury Mel Stride said that tech companies should pay a ‘fair’ amount of tax: “At the moment [they] are generating very significant value in the UK, typically through having a digital platform with lots of users interacting with that platform.

“That is driving a lot of value, so you’re looking at the social media platforms, online marketplaces, internet search engines – where at the moment the tax regime is not taxing those activities fairly. We want to move to a situation where we are taxing those activities fairly.”

Tech companies have argued that they abide by the rules on taxation and have no responsibility to pay more than is required by law.

Eileen Burbidge of Tech City UK said: “I don’t think the multi-national tech companies have been any different than any other commercially minded business, in that they’re certainly willing to pay their fair share or their responsible share of tax.”

Thames Water to shed offshore subsidiary structure

Thames Water is reviewing its business structure after controversy over its use of offshore subsidiary companies to reduce its tax burden, according to the Guardian.

The water company has appointed Ian Marchant, formerly of SSE, as chairman with a mission to close its Cayman Islands subsidiary companies. Thames Water has not paid corporation tax in the UK for the last 10 years, but the company maintains that the offshore companies do not provide any tax benefits. Instead, it is claimed the Cayman subsidiaries are used to raise funds through bonds for an infrastructure investment programme.

Thames Water is formed from a structure of nine companies. The firm says subsidiaries “have always been fully registered in the UK for tax purposes but no longer serve their original purpose of enabling smoother access to global bond markets.”

The company says it has not been liable to pay corporation tax for the last decade due to deferments associated with its capital investment in schemes such as a £4.2bn sewer which travels for 15 miles beneath the Thames.

Nonetheless, the company has admitted that its offshore structure “just looks wrong”. Critics have pointed out that the company has paid £1.2bn in dividends in the last decade. Thames Water also faced a £20.3m fine in March 2017 for large-scale leaks of sewage into the Thames and nearby land.

Following privatisation in 1989, Thames Water was sold to a consortium led by Macquarie, an Australian investment bank. The bank sold its final holding in the company in 2017, leaving the company with £10.75bn in debt financing. The biggest shareholder of the company is now Omers, a Canadian pension fund.

HSBC agrees to settle French tax evasion case for €300m

HSBC is to pay €300m (£266m) to French authorities in order to settle a long-running investigation into tax evasion by French customers of the bank, according to BBC News.

The allegation from the French financial prosecutor was that HSBC’s Swiss private banking unit assisted clients who wished to evade tax. The bank has acknowledged to ‘control weaknesses’ and said it was taking steps to address them.

Payment of the fine will conclude action against HSBC but it is still possible that two former legal directors could face further legal claims.

The investigation started in 2014 following the leak of data by a former IT employee. The records detailed transactions involving thousands of French customers. The French prosecutor claimed that €1.6tn of assets were involved in tax evasion schemes.

The settlement is the first deal to be struck under French rules introduced in 2016 which allow banks to settle claims without any finding of guilt. HSBC said it was glad to resolve “this legacy investigation which relates to conduct that took place many years ago.”

EU report: tax Google on revenue, not profits

An EU report claims that online giants such as Google and Facebook could be responsible for lost tax revenues of up to 5.4bn Euros between 2013 and 2015, according to Reuters.

The EU is considering corporate tax reforms which would require internet companies to pay more in tax. Author of the EU report Paul Tang says the companies “minimize the overall tax burden in the EU by routing all revenues to low-tax member states such as Ireland and Luxembourg.”

This week EU finance ministers will hold a two-day meeting in Tallinn, Estonia to discuss how large online companies can be made to pay more tax on to European nations.

The main focus of the EU report is on Facebook and Google, which is now part of the Alphabet parent company. The two US-based companies record their revenues in Ireland, which enables them to avoid higher taxes applicable in other EU member states.

Google pays taxes of up to 9% of its revenue in countries outside the EU, but within the bloc the figure falls to as low as 0.82%.

France, Germany, Italy and Spain have proposed that companies should be taxed on their revenues rather than their profits. Such a move would also increase taxes payable by Amazon, which also has an EU tax residence in Luxembourg and was largely exempt from tax between 2013-2015.


How Might the Chancellor’s Autumn Statement Affect Landlords?

The year 2016 has definitely been a turbulent one for Britons, especially landlords. The property market is still reeling from the result of the EU referendum in addition to some of the new changes made by former Chancellor, George Osborne.

In November’s Autumn Statement, Osborne proclaimed that from April 2016, people in England and Wales will be expected to pay a 3% surcharge on their stamp duty band. The extra charges will be used to raise an excess of £1 billion for the treasury by 2021. This wasn’t received happily by landlords. The other changes revealed by the Chancellor included a prolonged Help to Buy scheme in London, and more funds for the Starter Homes initiative.

Landlords in the UK expressed disappointment at the perceived indifference to their plight from the Chancellor’s office regarding the 3% surcharge. Many believe it would quash investment in buy-to-let property. According to a survey conducted by Towergate, 59.6% of UK adults agreed that the new increase in stamp duty will stop them from buying a second property to let.

How it affects landlords

The stamp duty surcharge raised each band by 3 per cent. This means that if a property has a value between £125,000 and £250,000, and the stamp duty is 2 per cent, landlords of buy-to-let properties will pay 5%. Hence, for the standard buy-to-let purchase of £184,000, prospective landlords will have to pay an extra £5,520. This charge is exempt for commercial property investors with more than 15 properties.

Owners of buy-to-let properties were also hit by changes in the rules of Capital Gains Tax (CGT). According to the new law, starting April 2019, landlords will be expected to pay any CGT that is due within 30 days of selling a property, instead of waiting until the end of the tax year.

In addition to this, landlords will get a reduced rate of tax relief. The chancellor announced that from 2017, they will only be able to claim the basic 20 per cent tax relief – a reduction from the previous 40 per cent – on their mortgage fees.

Already, the fallout of the announcement led banks and other mortgage lenders to increase their lending criteria for buy-to-let homes. In subsequent events following the Brexit result, the property market is currently experiencing a decline in growth of house prices. In reaction to this, some banks have decided to limit buy-to-let lending completely.

According to Richard Sharp, an authority in the Bank of England’s committee on financial policy, the decision by banks is to enable them study the property market carefully before resuming ‘aggressive lending’.

The demand of buy-to-let borrowing has fallen sharply since, no doubt as a result of the additional surcharge.

How landlords will react

Many landlords will likely increase their property rents in a bid to pass on the cost to their tenants. The result of a survey released earlier in the year showed that 40 per cent of landlords intend to increase their rents in the coming months. Three-quarters of that figure admitted that they would do so to offset the reduced tax relief.

Government Help Scheme

In a bid to encourage home ownership and reduce housing benefits bill, the Chancellor announced that funds will be injected into the starter homes scheme. Home builders will receive a 20 per cent discount on prices £450,000 and above in London, and £250,000 in other locations.

HMRC introduces new regulations to curb tax avoidance on high value residential properties

HM Revenue and Customs (HMRC) announced today that new regulations have been established to ensure the disclosure of schemes designed and marketed to avoid paying the Annual Tax on Enveloped Dwellings, which was introduced in April this year to counter avoidance of Stamp Duty Land Tax on UK residential properties valued over GBP2m.

Companies that own high value residential properties are now required to pay an annual charge to HMRC, the UK’s tax authority. For a property valued between GBP2m and GBP5m the tax per year is GBP15,000. The charges rise to GBP140,000 for properties valued at more than GBP20m.

The Disclosure of Tax Avoidance Schemes (DOTAS) will mean that users of schemes that provide an unfair tax advantage must provide details of those schemes to HMRC, which uses the information in its compliance work. Failure to report details of these tax avoidance schemes will result in penalties of up to GBP1m. Users who fail disclose the use of a scheme on a tax return will be fined GBP100 for the first failure, GBP500 for the second and GBP1,000 for subsequent failures.

The changes to DOTAS regulations mean that the Annual Tax on Enveloped Dwellings is added to the regime where current schemes designed to reduce a user’s tax bill for income tax, corporation tax, capital gains tax, inheritance tax, national insurance contributions, stamp duty land tax and VAT must be disclosed. HMRC said these new regulations build on the work from the 2012 Lifting the Lid consultation which looked at tackling avoidance schemes.

A further measures to stop tax avoidance also requires promoters of avoidance schemes to provide HMRC with details of their client’s national insurance number and unique taxpayer reference. The provision of these details will help HMRC to detect and investigate tax avoiders. It will also be more difficult to avoid paying tax by using ‘disguised remuneration’ schemes.

Exchequer Secretary David Gauke commented:

“This Government has been clear – aggressive tax avoidance is unacceptable and will not be tolerated. The regulations we are laying mark a significant strengthening of the rules and build on the considerable work we have done to tackle not only tax avoidance schemes but also the promoters of these schemes.”