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Budget 2011 – Social Housing
The Chancellor announced reforms to the “cumbersome planning system” and the funding of 21 new Enterprise Zones in a bid to increase the amount of land brought forward and boost the supply of affordable new homes. In addition a new £250 million shared equity scheme, “FirstBuy”, will be launched to support first-time buyers and the temporary changes to the Support for Mortgage Interest scheme will be extended to January 2013.
Several SDLT measures were announced which are likely to impact on social housing providers, particularly where they are involved in large-scale regeneration projects with private developers.
The previously announced Tainted Charity Donations rules will be introduced in Finance Bill 2011. This marks the end of almost two years of consultation over the shape and substance of the new rules. The new rules remain broadly as set out in the draft clauses published in December 2010, however, following consultation, the final legislation has been amended to ensure that the new rules will operate as intended and minimise the impact on charities. A welcome amendment for the social housing sector is the carve-out for relevant housing providers linked with the charity to which the donation is made.
We have summarised below key taxation proposals which could affect social housing providers arising from the Budget Report delivered on 23 March 2011. KPMG’s general commentary on the 2011 Budget Report can be found at the following link:
http://www.kpmg.co.uk/budget/
Tainted Charity Donations rules
VAT registration and deregistration thresholds
The Tainted Charity Donations rules remain broadly as set out in the draft clauses published in December 2010 and will apply to donations made on or after 1 April 2011. The rules will apply to treat an otherwise relievable charitable donation as “tainted” where certain conditions are met.
There are three conditions each of which must be met before a donation is considered to be tainted and these can be summarised as follows:
- Condition A – there is a donation and arrangements which would not have been made or entered into independently of one another.
- Condition B – the main purpose, or one of the main purposes, of the arrangements is to obtain a financial advantage directly or indirectly from the charity for the donor (or any person connected with them at the relevant time).
- Condition C – the donor is not an excluded donor.
Following consultation on the draft clauses, the final legislation has been amended so that Condition B now focuses on “financial advantages”, whilst Condition C has been broadened to not only include a company wholly owned by one or more charities, but also relevant housing providers linked with the charity to which the donation is made. The period for which the transitional provisions apply has also been shortened so that the existing Substantial Donor legislation will be repealed in full from April 2013 instead of April 2015. These are all welcome amendments and are a positive example of how HMRC’s consultation on draft legislation can work effectively.
HMRC have also announced that they will continue to consult with the charity sector on the practical impact of the Tainted Charity Donation rules, and it is expected that HMRC guidance on the new rules will be issued in due course.
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Tax policy
Following the report from the Office of Tax Simplification (OTS) published on 3 March 2011, the Government is to abolish 43 tax reliefs. The list of reliefs to be abolished includes a number of reliefs that are now redundant, for example Millennium Gift Aid and transitional relief for charities on distributions, and their abolition will therefore have no impact. However, the list also includes the abolition from 2012 of other tax reliefs that, whilst not redundant, are considered by the OTS to be poorly targeted or too costly to administer as compared to the benefits. As a result of the OTS review, Land Remediation Relief and Flat conversion allowances will be abolished.
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Corporation Tax
It is common place for Housing Associations to own non-charitable subsidiary companies; the following announcements made in the Budget will be applicable to such companies and may therefore be of interest.
Rate of corporation tax
The standard rate of corporation tax will decrease to 26 percent from 1 April 2011 which is a further 1 percent reduction to the announcement at the June Budget 2010. There will be subsequent annual reductions in the standard rate of 1 percent per annum to 23 percent by 1 April 2014. The small profits rate will be reduced to from 21 percent to 20 percent from 1 April 2011 as previously announced.
Capital allowances
Legislation will be introduced in Finance Bill 2011 to increase the period over which assets can be given Short Life Asset (SLA) treatment. Currently the SLA provisions apply to assets which will be sold or scrapped within four years; this will be changed to a period of eight years. The list of assets qualifying for energy-saving enhanced capital allowances will also be updated during summer 2011.
A consultation document will be published in May 2011 to consider the appropriate capital allowances treatment of expenditure used for FiT (Feed in Tariff) and RHI (Renewable Heat Incentive) generation businesses.
The Business Premises Renovation Allowances scheme will be extended for an additional five years from 2012 and a 100 percent business rate discount will be available to businesses that move into an Enterprise Zone. There may also be enhanced capital allowances for Enterprise Zones, although this is likely to be where there is a strong focus on high value manufacturing and so have limited scope.
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VAT
Cost Sharing Exemption
The Government has said that it will continue to consult on the implementation of a VAT exemption for services shared by VAT exempt bodies, including charities. We understand that the formal consultation document will be issued this summer.
VAT registration and deregistration limits
With effect from 1 April 2011, the taxable turnover limit which determines whether a person has to be registered for VAT will be increased from £70,000 to £73,000. Whilst the taxable turnover limit which determines whether a person may apply for deregistration will be increased from £68,000 to £71,000.
Public Bodies
Public sector bodies carry out statutory activities on which VAT is not chargeable, and on occasions these activities can be in competition with the private sector who would need to charge VAT.
With effect from 2012 the UK VAT law is to be changed to more closely reflect EU law, which states that where the public sector carries out the same kind of activities as the private sector, and the different VAT regimes would lead to a significant distortion of competition, then equal VAT treatment would apply.
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Stamp Duty Land Tax (SDLT)
Relief for bulk purchases
The first change introduces a relief which will apply where there is a bulk purchase of residential properties. Previously, SDLT would have been calculated with reference to the aggregate amount or value of the consideration given for all of the properties. If the aggregate was over £500,000 then the four percent rate applied. The change announced yesterday will mean that the SDLT on the consideration will be calculated with reference to the average price of all of the properties purchased ie the aggregate consideration divided by the number of dwellings. If therefore 10 housing units are purchased each with a price of £150,000, then the one percent rate would apply resulting in a charge of £15,000 compared to the charge of £60,000 charge which would have applied on the same transaction previously.
This is not expected to impact on Registered Providers purchasing development land, as in the majority of cases they should be able to claim relief on the purchase of land for affordable dwellings, either under the Registered Provider relief or charity relief. It will however impact of development subsidiaries buying a number of existing residential properties from a developer or investor, or those Registered Providers who are not able to benefit from relief on multiple purchases from the same vendor.
This is expected to have a significant knock-on effect on the housing market. It will encourage large-scale investors like pension and life funds to purchase large numbers of unsold properties for private rent and provide much-needed high quality rental property. It will also stimulate activity by bringing investors back into the market since the tax cost of setting up residential property funds will be much lower.
The construction industry should also benefit. With many developers trying to sell large numbers of completed properties it should make it more attractive for investors to buy up this unsold housing stock, enabling many distressed builders to release much-needed capital to begin new projects or pay off debt. Even those developers who are struggling to keep afloat should see some benefit as the inherent value of their property portfolios will increase because of the reduction in tax-cost.
The new relief applies to residential property only and will take effect when the 2011 Finance Act comes into force during the summer.
Changes to the exchange rules
A further measure was introduced which is also expected to impact on housing associations undertaking development projects and regeneration schemes. This often involves the transfer of land to a Registered Provider (or its development subsidiary) in return for the transfer of a land interest back to the vendor – often a Local Authority. This represents an exchange and special charging provisions apply.
New anti-avoidance measures have been introduced which changes the way the consideration is calculated on exchanges. The chargeable consideration for exchanges of land will now be the greater of a) the market value of the land or b) the chargeable consideration under the normal rules.
This is likely to result in a higher charge to SDLT on many transactions, as the chargeable consideration will now include any VAT actually paid, as well as any other forms of consideration given such as building works undertaken on land which the purchaser does not own.
This will not impact on the majority of acquisitions of land for affordable homes undertaken by a Registered Provider, as these transactions should benefit from Registered Provider relief or charity relief. It will however impact on transactions where land is being acquired by a development company or a joint venture vehicle where no relief can be claimed.
This measure came into effect on 24 March 2011 and will apply to all transactions entered into after this date.
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Employment Tax
Company car tax rates and Fuel benefit charge
Where employees and directors are provided with a company car, they are subject to the company car benefit charge. The value of this benefit is determined by multiplying the car’s list price by a set percentage, which is based on the car’s CO2 emissions.
Legislation will be introduced in Finance Bill 2011 to reduce the appropriate percentages by one percent for all vehicles with carbon emissions between 95g and 220g with effect from April 2013. Zero emissions cars will remain at zero percent and ultra low emissions cars with emissions up to 75g will remain at five percent.
In addition where employees and directors provided with a company car also receive free fuel from their employers, they are subject to the fuel benefit charge. The value of the taxable benefit in relation to fuel is determined by multiplying a set figure (currently £18,000), by the appropriate percentage for the car, which is based on the car’s CO2 emissions. The level of the set figure or multiplier will be increased from £18,000 to £18,800 with effect from 6 April 2011.
Approved mileage allowance payment rates (AMAPs)
Where employees use their own cars for business mileage they can claim reimbursement from their employers through the approved mileage allowance payments rates. No tax or NIC is due on these reimbursements up to certain limits. There is currently a higher rate limit of 40p per mile for the first 10,000 miles of business use and 25p limit per mile thereafter. Where individuals are paid less than those amounts by their employer, they can claim mileage allowance relief (MAR) for the residual amount.
The higher rate of AMAPs will be increased to 45p per mile with effect from 6 April 2011. The rate will also apply to Mileage allowance relief (MAR).
Volunteer drivers may reclaim the actual cost of motoring expenses from the relevant voluntary organisation as long as they keep records to demonstrate that no taxable profit has been made, but, for administrative ease, they are allowed to use the AMAPs rates if preferred.
Abolition of exemption from benefit charge for late night taxis
The Government has announced that, subject to consultation, they intend to abolish tax relief on the cost of late night taxis for employees who work late, with effect from 6 April 2012. The rules currently stipulate that, subject to certain conditions, employees avoid paying income tax and national insurance on infrequent taxi journeys home taken by employees working after 9pm, where such journeys occur less than 60 times in a year.
Merging of tax and National Insurance Contributions (NIC)
The Government is to consult on merging the operation of income tax and NIC. These plans are expected to take years to implement.
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Contacts
If you have any queries regarding any of the announcements in the 2011 Budget Report please contact one of the Public Sector Tax team below or your local KPMG contact.
Corporation Tax
Jasmin Bryan jasmin.bryan@kpmg.co.uk 01293 652 149
Martin Dye martin.dye@kpmg.co.uk 01293 652 096
Simon Robinson simon.robinson4@kpmg.co.uk 0117 905 4369
Adrian Wills adrian.wills@kpmg.co.uk 0161 246 4545
Kamaljit Takhar kamaljit.takhar@kpmg.co.uk 0121 232 3965
Jane Grimley jane.grimley@kpmg.co.uk 0141 300 5633
VAT
Parul Anand parul.anand@kpmg.co.uk 0121 232 3402
Andy Rogers andy.rogers@kpmg.co.uk 01293 652 078
SDLT
Pauline Hudd pauline.hudd@kpmg.co.uk 0117 905 4538
Employment Tax
Caroline Laffey caroline.laffey@kpmg.co.uk 0191 401 3849
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