Autumn Statement 2013: Treasury takes aim at tax loopholes

George Osborne is delivering his Autumn Statement (Getty Images)

Foreigners to be liable for capital gains tax on sale of UK properties:

The Chancellor on Thursday launched what was quickly dubbed an “oligarch tax” by slapping capital gains tax on foreigners when they sell UK properties.

The move could take some of the heat out of the London property market, which has been substantially driven by wealthy foreign investors. Foreign investors have been big buyers both at the premium “One Hyde Park” end of the market and in the purchases of blocks of flats for rental purposes.

George Osborne specified it would not be enacted until April 2015. That means there could be an increase in sales of properties in the coming year.

The taxable gain would only be counted from increases in the value after that date.

Cormac Marum, tax adviser at Harwood Hutton, said: “This could be a boon for property valuers. But we have to see yet whether these people will be able to make their UK property their main residence and get around the new tax. That way they would not have to pay the CGT.”

The tax may prove tricky, and expensive, to collect from investors living in Monaco and elsewhere, tax experts cautioned.

Wealthy non-doms:

Non-doms – generally wealthy foreigners living in the UK but also earning income from abroad - were clobbered by the Autumn Statement’s closure of a loophole allowing them to avoid UK taxes by splitting their employment contracts between the UK and overseas.

From April, earnings from the overseas work, if it is in a low-tax jurisdiction, will be subject to UK tax. The move will end a common trick of setting up a second employment contract in a low tax country like Monaco and arranging for the bulk of pay to be made there.

The chancellor expects the move to fetch £270m in the first four years.

Non-doms came under fire in the recession amid public anger about their effective low tax status and often wealthy status. In 2008, the Labour government slapped a £30,000 annual fee on all non-doms who have lived here for seven out of the last nine years. It was extended by the Coalition government to rise to £50,000 for longer term residents.

Millionaire tax advisers:

You just know that the millionaire tax advisers will find a way around some loophole closures. The one that stands out in this Autumn Statement is the one optimistically aimed at the tax advisers themselves.

The Treasury is clamping down on a clever wheeze in which partners of firms like accountants and lawyers reduce their tax bills.

The partners create a company through which they employ their staff. That company then charges the costs – salaries, National Insurance and PAYE – back to the partnership.

Through canny working of the so-called transfer pricing rules – which govern the way related companies deal with each other – the partners get a tax deduction.

“It is a complete tax fiction,” said one tax accountant speaking in confidence.

One adviser quickly spotted that the proposed clampdown could be in breach of EU rules and predicted an appeal.

The Treasury expects to make a saving of £550m over the next five years. Until the lawyers find a way around it, of course.

“Get on their bikes” tax loophole:

MPs will be hit by a clampdown on a tax loophole brought in by the previous Conservative government aimed at encouraging people from the north to “Get on their bikes” in search of work down south.

In the early 1990s recession, the government brought in a measure aimed at removing one of the main obstacles to moving: the fact that when they moved to the south, their old house in the north technically became a second home, so they would have to pay 40 per cent capital gains tax on part of the profit when they sold it. (Second homes are eligible for CGT).

Many thousands of people were stuck in that trap as the property market was so slow at the time that they had no choice but to keep both their northern and southern properties. It made it harder for them to follow the urging of Norman Tebbit for them to “get on their bike” in search of work.

The Government brought in a 36-month grace period where they could continue to treat their northern property as their prime residence, and therefore not face CGT when they finally got to sell it.

Now, however, they are reducing that period to 18 months.

MPs have commonly exploited the Get on Your Bike loophole for their London flats by declaring them to be their main residence – known as “flipping” - sometimes for as little as one month, in order to qualify for exemption from CGT when they come to sell it. From now on they will only be able to claim the relief for 18 months, meaning they will either have to sell their flats before 18 months is up or face paying CGT, now at 28%.

Cormac Marum, tax adviser at Harwood Hutton, said: “This 50 per cent cut in the relief will make it more difficult for the job market to remain fluid around the country. People will think twice before getting on their bike to find work in other parts of the country.”

The move is expected to save £360m over the four years.

Clamp down on contractors:

In major project-based industries like construction, security and oil and gas, big contractors generally use recruitment companies to find them the workers they need.

The workers are generally self-employed, meaning the contractor does not have to pay their National Insurance and PAYE. They are also denied employment rights such as holiday pay and redundancy notice terms.

The government believes that, in many of these cases, the workers are, to all intents and purposes, employees and should be treated as such for tax and employment rights purposes.

Aidan Sutton, director at PWC, said: “These kinds of arrangements put companies who directly employ their workforce at a competitive disadvantage. I certainly welcome the government cracking down on abuse in this area, but I hope it doesn’t catch innocent commercial arrangements.”

While the Treasury was thin on detail, it declared that it was going to tackle “contrived contracts” – in other words, those most obviously created for the purpose of avoiding tax rather than genuinely reflecting the work undertaken.

Despite the lack of concrete proposals, the government claimed the measures will raise £2bn in taxes in the next five years.

Murky hedge funds:

The billionaire partners of Mayfair’s shadowy hedge funds are to see their taxes rise by more than £3bn over the next six years under a clampdown on avoidance measures.

Hedge funds are generally structured as limited liability partnerships, with the fund managers treated as self-employed. The arrangement means some of the most profitable business in the country pay no employers’ national insurance, allowing them to make even more money.

Fund managers in LLPs are also allowed to defer paying their income tax to the end of the financial year, allowing them to earn interest before handing it over to the Treasury.

While details will not emerge until next week’s Draft Finance Bill, these salaried partner structures are likely to be banned.

Aidan Sutton, tax adviser at PWC said: “The devil is in the detail on this one. But the huge amount the Treasury is trying to raise clearly indicates they are going to make some swingeing changes. But they need to watch out for collateral damage: many of these arrangements are totally bona fide.”

The move will not only strike out many hedge funds’ arrangements. Although the Treasury press release specifically referred to “alternative investment funds”, it will also capture a range of other industries where the tax avoidance technique is used, from fruit picking to seemingly respectable law firms in which huge numbers of employees are made salaried partners.