Although the Chancellor’s 2013 Budget speech did not contain many new measures directly aimed at the education sector, the Government has reiterated that the UK Guarantees Scheme ('UKGS') is available to help meet the financing gap for infrastructure projects. Broadly the Government can provide guarantees of up to £40 billion through the UKGS for such projects as university accommodation developments.
The Government is also providing support to the creative industries in the UK, including educational research facilities and training providers, through the Technology Strategy Board which will design and launch a new competition of up to £15 million to attract investment in the sector.
We have summarised below key taxation proposals which could affect education institutions arising from the Budget Report delivered on 20 March 2013.
It is common place for education institutions 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 to charities.
The current rate of corporation tax is 24 per cent, falling to 23 per cent on 1 April 2013. From 1 April 2014 the main rate of corporation tax in the UK will be reduced to 21 per cent, and it was announced that from 1 April 2015 this will now fall to 20 per cent.
The 100 per cent first year allowance available for expenditure on cars with low carbon dioxide emissions and electrically propelled cars will be extended until 31 March 2018. In addition it was announced that the list of designated energy-saving and water-efficient technologies qualifying for enhanced capital allowances will be updated during summer 2013, subject to state aids approval.
As part of his pledge to make the UK “one of the most internationally attractive places to innovate”, the Chancellor confirmed an ‘above the line’ R&D tax credit will be introduced from April 2013 with a minimum rate of 10 per cent before tax. Loss-making companies will be able to claim a payable credit. The Government will be consulting on the detailed design of the R&D tax credit shortly and final rates will be decided following consultation. In addition, as previously announced, the Patent Box tax regime will come into effect from 1 April 2013, allowing companies to elect to apply a 10 per cent corporation tax rate to qualifying profits from patents and intellectual property. Both the R&D tax credit and the Patent Box tax regime may be beneficial to those subsidiary companies that wish to retain profits rather than pay out all cash via Gift Aid, and to spin out companies.
Following the publication of the “Tax and Procurement” consultation document on 14 February 2013, HMRC has now confirmed that the new rules will come into effect from 1 April 2013.
The consultation document proposed that, from 1 April 2013, tenders for contracts being issued by Central Government (which would include the NHS) and Non-Departmental Public Bodies (which include, for instance, HEFCE and the Research Councils) would need to include a requirement for “occasions for non-compliance” to be disclosed as part of any tender submission. The purpose of this requirement was to enable Government to consider the tax compliance profile of potential suppliers as part of its procurement process.
KPMG had asked for clarification of whether these rules would extend to other “public sector” bodies, such as universities and colleges, where they tender to supply services to relevant governmental bodies. Since the announcement issued by HMRC on 20 March 2013 has not excluded such bodies, it can only be assumed that they will need to consider these rules. However, the proposed rules have been changed in a number of ways that will reduce the potential effect on the education sector, in particular:
- A new de-minimis limit, so that only contracts over £5 million are included;
- The definition of occasions of non-compliance has been clarified, with the reference to “targeted anti-avoidance”, which was not defined, being removed;
- Only occasions of non-compliance occurring from 1 April 2013 will be considered, and is in respect of a tax return submitted after 1 October 2012, so past activities are not included.
Universities and colleges will, of course, need to consider whether any of their activities will be subject to these new rules, which will to some extent depend on how the relevant commissioning bodies implement the rules, but the potential implications in relation to Government contracts of any tax planning entered into in the future will clearly need to be considered. We will be considering further the impact of these new rules for the education sector, and will be in touch with you again soon to follow up.
HMRC have announced that they will need to consult further on the proposal to extend the VAT exemption for the provision of education by for profit entities providing University level qualifications. In last year’s Budget there was a proposal that the VAT exemption be extended to include provision by profit making entities. Following consultation HMRC will further consider how such an exemption may be applied, including the option to apply a similar exemption to further education.
Subject to the outcome of a current consultation, the Government intends to withdraw the VAT exemption for business research supplied by one eligible body to another. This withdrawal is planned to come into effect from 1 August 2013.
From April 2014 all UK employers (businesses and charities) will be eligible for a new £2,000 Employment Allowance. The effect of this allowance is that it will reduce the overall amount of Employer’s NIC payable to HMRC each year. Each business will be able to employ one individual on an annual salary of £22,400, or four staff on the National Minimum Wage (£12,070 per annum), without having to pay any Employer’s NIC at all.
The scheme will be administered through payroll reporting and Real Time Information and employers will be
required to opt in to confirm eligibility for the allowance. It is not yet known how the new Employment Allowance will operate in relation to companies with multiple payrolls, more than one PAYE scheme reference or Group structures.
Public sector pay awards in 2015-16 will be limited to an average of up to 1 per cent.
As announced in the Government White Paper in January 2013, a single-tier state pension is to be introduced with one effect being that employees will no longer pay contracted-out rates of National Insurance Contributions (NIC) – the current rate is 10.6 per cent, with all other employees paying 12 per cent (for earnings below £40,040). The employer rate is 10.4 per cent, compared with 13.8 per cent for 'contracted-in' employments.
The new pension was to be introduced in April 2017; the Chancellor announced in the Budget that this will be brought forward to April 2016. From that point, employees and employers currently paying contracted-out rates of NIC will see their NIC costs increase.
The personal allowance is to increase by £560 to £10,000 from 6 April 2014 – one year earlier than expected.
A new scheme will be introduced in autumn 2015 extending the availability to tax efficient childcare. The scheme will be available to all parents that work over 16 hours a week and earn less than £150,000 per tax year for children under 5 (phased increase to children under 12). It will be administered via an online account whereby for every 80p put in by the individual, HMRC will add a further 20p up to a maximum of £6,000 per child. Total tax relief will be available up to £1,200 per annum.
Current employer supported childcare will still be available for those businesses that operate it; however it is proposed that these arrangements will be phased out in time.
A consultation document is to follow in the spring 2013 when it should become clearer how this scheme will operate in practice e.g. can it work in conjunction with salary sacrifice as most current childcare voucher arrangements do.
The Finance Bill 2014 will contain legislation which seeks to increase the tax free amount an employer can loan to its staff without giving rise to a benefit in kind. The current beneficial loan limit is £5,000 and it is expected that this will be doubled to £10,000 with effect from the 2014/15 tax year.
From April 2015, two new Company Car Tax bands will be introduced for Ultra Low Emission Vehicles ('ULEV') at 0-50g/km and 51-75g/km of CO2. The appropriate percentage of the list price subject to tax for 0-50g/km vehicles will be 5 per cent in 2015/16 and 7 per cent in 2016/17. For vehicles in the 51-75g/km category the appropriate percentages will be 9 per cent in 2015/16 and 11 per cent in 2016/17.
From 6 April 2014 the fuel benefit charge multiplier will increase by reference to the Retail Prices Index for both company cars and vans.
The Government intends to create the health and work assessment and advisory service for those at danger of long-term sickness absence. It will also introduce tax relief provisions so that amounts up to a cap of £500 paid by employers on health-related interventions recommended by the service are not treated as a taxable benefit in kind. The Government will consult on implementation later in 2013.
Personal service companies – IR35
As announced in the Autumn Statement 2012 the Government have confirmed they will amend the existing IR35 legislation, applicable to intermediaries such as personal services companies to equalise the tax and NIC treatment of office holders.
Offshore intermediaries are corporate entities put between UK workers and a UK business based in jurisdictions where tax is lower than in the UK. HMRC now estimate that at least 100,000 workers are being employed through an offshore intermediary.
The Government is proposing to give HMRC the powers to collect full employment taxes for UK workers. A consultation document will be published in May on measures to ensure that employment taxes will be payable for all employees in the UK, irrespective of where their payroll is located. It is expected that the new measures will apply from April 2014.
It is estimated that this will benefit the Exchequer by an extra £100 million a year. HMRC will consult after the Budget on the design and operation of these measures.
To ensure that the first £2,000 of share value received by those adopting the new employee shareholder status is free from income tax and NICs, the Government will legislate to deem that employee shareholders have paid £2,000 for shares they receive from 1 September 2013, when the new status comes into force.
A statutory residence test (SRT) will be introduced with effect from 6 April 2013. Draft legislation was published on 11 December 2012 and the Government has continued to consider representations on the detail of the legislation. No specific changes to the draft legislation published in December have been announced in the Budget, but it is likely that the Finance Bill will take account of some of these representations. The broad outline of the tests is not expected to change and consists of:
- Automatic tests for non residence;
- Automatic tests for UK residence; and
- Sufficient ties tests for individuals who are not automatically considered not UK resident or UK resident.
Amendments to the legislation are, however, expected to clarify the meaning of the legislation and make corrections where the draft does not reflect the Government’s intended policy. In particular changes are expected regarding the ‘split years’ of residence and the operation of the SRT in the year of death.
Another area where change is likely is that of Overseas Workday Relief (OWR). The abolition of ordinary residence has resulted in the need to redraft the rules regarding OWR (so that it is not based on being not ordinary resident). A Statement of Practice on calculating remittances when claiming OWR is also being included in legislation. As originally drafted this legislation had a number of practical difficulties which the Government is likely to address, and it has been announced that “amendments will be made to the transitional rules to better align with the current position”.We will need to wait and see what this means.
Any internationally mobile individuals, or employers with assignees, should carefully consider the revisions when they are published as they may greatly impact on an individual’s residence status and the resultant tax liability.
In addition to the changes in UK tax law set out above, there have been recent changes in some key overseas jurisdictions which may affect the current or envisaged activities of a number of UK universities.
We previously reported that a new double tax treaty with China was announced back in 2011 and the key changes that affected UK universities were:
- Withdrawal of the teachers’ exemption, which gives teachers a period of up to three years in China before they are subject to income tax there; and
- Introduction of a new 183 day de-minimis for staff activity in China (on the same or connected projects) before a permanent establishment is created.
It had originally been expected that this treaty would become effective from 1 January 2012 as far as the Chinese tax implications were concerned, but it had still not come into force on 1 January 2013. We understand that the delay had been caused by ongoing negotiations regarding the dividend article, and a further protocol containing a newly agreed dividend article was issued on 27 February 2013 which allows a 5% withholding tax on dividends where a UK company “holds directly at least 25% of the capital of the Chinese company paying the dividends”.
We have still not received confirmation that the new treaty has been ratified in China, or any expected date from which the treaty might now become effective, so there may still be opportunities to establish the application of the teachers’ exemption if any of your staff are starting a relevant assignment in China. However, the potential benefits of the new permanent establishment definition are clearly still not available.
Malaysia’s government has announced a moratorium on the setting up of tertiary providers (including universities, university colleges and colleges) for two years beginning on 1 February 2013.
It has been reported that the moratorium does not affect institutions whose applications are currently being processed, existing institutions that have applied to upgrade their status and foreign branch campuses that “rate highly in international rankings”. However, if you have activities with or interests in Malaysian institutions, or any current plans to develop activities in Malaysia, you will need to clarify how this moratorium may affect you.
The Indian Finance Minister presented the Union Budget 2013 -14 before the Parliament on 28 February 2013. On the education front, increased planned expenditure in education was announced, which will hopefully translate into an increased need for UK expertise.
Unfortunately it was not all good news, as there were a couple of key tax changes that may affect UK universities with current or planned activities in India:
- The underlying domestic withholding tax rate on royalties and technical fees was increased from 10 per cent to 25 per cent. The whole impact of this increase should not be suffered by UK universities, as the UK/India double tax treaty limits the withholding tax rate that can be applied to UK recipients to 15 per cent, but this will still represent a 50 per cent increase in the amount of tax incurred. It will of course be necessary to ensure that the university is in a position to have tax withheld at only the treaty rate, so it is recommended that a Permanent Account Number (“PAN”) is obtained from the Indian tax authorities, if this is not already been done, and that you confirm with any relevant parties the rates of tax that they intend to apply.
- The surcharge on Indian branches/project offices/PEs of foreign companies is increased to 5 per cent, bringing the effective corporate income tax rate (including surcharge and education cess) up to 43.26 per cent (compared to the current 42.23 per cent).
In addition the proposal put forward by the Indian University Grants Commission (UGC) that a Foreign Educational Institution would have to be ranked in the top 500 institutions in the world to enter into an academic collaboration with an Indian institution has now been dropped. However, there are still restrictions on foreign entities establishing universities in India and we are awaiting the final UGC Regulations.