Tax briefing: significant features from the recent UK and Scottish Budgets include the divergence of income tax rates, relief for first time house buyers and new incentives for oil and gas investment

November saw the Chancellor’s first Autumn Budget and December the first Scottish budget to introduce a divergence in the income tax rates applying in Scotland when compared to the rest of the UK. The headline Autumn Budget announcement was the introduction of SDLT relief for first-time buyers, with the Scottish Government following suit with its own LBTT relief announcement.

Another key announcement from a Scottish perspective in the Autumn Budget 2017 was the proposed introduction of “world first” transferable tax history (“TTH”) in the oil and gas sector, allowing buyers of oil fields to claim greater tax relief on decommissioning costs. 

“Progressive” income tax increases

Scottish taxpayers earning more than £33,000 a year will pay a “proportionate” amount of additional income tax under proposals set out in the draft Scottish budget.

Its proposals include a new 19% “starter rate” of income tax for earnings between £11,850 and £13,850, and a new 21% “intermediate rate” for earnings over £24,000. If implemented, they will raise an additional £164 million in public finances in 2018-19, according to estimates by the Scottish Government.

The draft budget envisages an increase in the number of income tax “bands” from three to five, by introducing the “starter” and “intermediate” rates. The “basic rate” of income tax, on earnings between £13,851 and £24,000, will remain at 20%. The “higher rate”, on earnings between £44,274 and £150,000, will increase by one percentage point, to 41%, while the “additional rate”, on earnings over £150,000, will increase from 45% to 46%.

The Scottish Government has had powers over income tax since April 2016, although it has not previously chosen to introduce different rates from those applicable elsewhere in the UK. The proposed changes add complexity to the system. They may also cause difficulties for employers who have employees moving between England and Scotland. Employees may expect to be recompensed if a move to Scotland would increase their tax bill.

Tax relief for first-time buyers

The abolition of SDLT for first-time buyers in England & Wales was a welcome Budget announcement. From 22 November 2017, first-time buyers will be relieved from SDLT on the first £300,000 paid for their property, so long as the value of the property does not exceed £500,000. The measure is expected to benefit 95% of first-time buyers, saving them an average of £1,660 each.

In a similar move, the Scottish Government announced in its Budget that it will be introducing LBTT relief on the first £175,000 paid by first-time buyers in Scotland. Although considerably less than the SDLT relief, this is expected to cover most properties in Scotland, and will exclude 80% of first-time buyers from LBTT entirely. Additionally, as there is no upper limit on the value of the property, the tax paid by all first-time buyers will be reduced.

“World first” transferable tax history

The TTH policy, announced as part of the 2017 Autumn Budget, will mean that purchasers will be able to offset some of the costs of decommissioning against tax paid by the previous owner. This will in turn encourage the purchase of late life oil and gas assets, bringing new entrants and fresh investment to the UK Continental Shelf (UKCS), the Government said.

Draft legislation on TTH will be published in the spring, so that the new regime can come into force on 1 November 2018, according to the Government. The announcement has been welcomed by the oil and gas industry, which has been lobbying for such a proposal in recent years.

The current oil and gas tax system disadvantages more recent entrants to the UKCS when they are bidding for mature assets. At present, tax relief for decommissioning costs is restricted to the amount of tax a company has paid in periods to 2002, which therefore discourages newer investors who could bring the necessary innovation to extend the life of mature assets and ultimately decommission the fields more cheaply. 

TTH would permit the seller of late life assets, such as oil platforms and related infrastructure, to transfer a portion of their ring fence corporation tax payment history to the buyer alongside the asset, which would be used later to offset some of the costs of decommissioning. The proposal is welcome, though the situation is complex and the legislation must be carefully thought through and sufficiently detailed in order to ensure it has the desired effect. TTH may not solve all of the tax difficulties in this area, but it is a welcome start in encouraging investment to further the extracting of Scotland’s natural resources. 

The Author
Christine Yuill, partner, Pinsent Masons LLP
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