The Chancellor told us today that the era of austerity is “finally coming to an end” – note the careful language; not “over”.
The detailed Budget notes strongly emphasise the need for a “fair” tax system. Whilst one can see what the Chancellor is trying to achieve, the missing piece of the puzzle is the transformation to a simpler tax system that encourages international businesses to locate here other than by virtue of the low corporate tax rate. With a tax code already longer than the US, we are alas the global champions in having the most complex tax system in the world. This has a significant impact on the cost of doing business, a cost which shouldn’t be underestimated.
For example, we are back to Industrial Buildings Allowances (IBAs) reinstated for the 21st century and at 2 per cent per year, rather than the 4 per cent of old. But at the same time, relief on special rate spend has dropped from 8 per cent to 6 per cent. The Annual Investment Allowance (AIA) is also increased but only temporarily.
Much will be said about the new digital tax – however the forecast tax raise in 2020/21 is estimated at only £275 million – it sounds like a lot but doesn’t even scratch the surface when compared to the £60 billion the government raises through corporate taxation. Was this worth the UK taking a position ahead of the rest of the world at a time when we will be leaving the EU?
The business tax world of tomorrow is more complex than it was yesterday. This continues a trend over the last few years. It may be good for tax advisers but it is not so great for the UK economy.
The following are the key measures announced by the Chancellor in the 2018 UK Budget:
Digital Services Tax
The government has announced a new 2 per cent tax on revenue of businesses with earnings from UK based users, specifically targeted at search engines, social media platforms and online marketplaces. The Chancellor was very clear that the rules will not extend to the online sale of goods and services.
The new tax will apply from April 2020 but will be revisited if international consensus is reached on how to tax digital services. It is notable that the 2 per cent rate is lower than the 3 per cent rate currently being considered by the EU.
The tax will only apply to companies with global revenues (in the relevant businesses) of over £500 million and only where the participation of UK users generates more than £25 million. There will be a safe harbour provision to exempt loss-making businesses and to provide relief for businesses with very low profit margins.
A detailed consultation is expected shortly.
Changes to “IR35” legislation
The long heralded changes to the Personal Service Company, or IR35 rules, have finally been announced. The Government intends to extend the public sector rule changes that came into effect in 2017 to the private sector from April 2020. From April 2017, public sector engagers are required to undertake a status assessment of workers/contractors that it engages via a personal service company. They can do this using an online status test tool that HMRC has developed. Those found to be working in a similar way to employees are required to have income tax and employee National Insurance withheld from the payments made to them, and for the engager to pay employer National Insurance. However, there are plans to reflect aspects of the recent consultation in future legislation on how the current rules apply and to limit the scope of the rules to medium and large businesses only.
Further consultation and details are awaited before we can evaluate the extent to which this targeted implementation will lead to complexities for IR35 businesses with more than one client/engager, or for engagers that move from being small, and therefore not required to operate the extended rules, to medium/large either through growth or acquisition, therefore having to adopt the rules for the first time. HMRC are anticipating this will be a significant tax and, in particular, National Insurance raising measure, helping towards future NHS funding needs.
Tax in insolvency
From 6 April 2020, HMRC will be a preferred creditor in relation to taxes the business has collected on behalf of other taxpayers (VAT, PAYE, Income Tax, employee NICs and CIS deductions). The rules relating to taxes owed by the business themselves (i.e. Corporation Tax and employer NICs) will not be affected by these measures. There are limited details at this stage but presumably this will revert back to the position prior to the 2002 Enterprise Act which removed HMRC’s preferred creditor status and made them unsecured creditors.
In addition, the government has announced that following Royal Assent of Finance Bill 2019-20 directors and other persons involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities, where there is a risk the company may deliberately enter insolvency. This is another measure to stop individuals from participating in tax avoidance and using insolvency as a means of starting again with a clean sheet and no liability.
Other corporate tax measures
Corporate capital loss restriction
The government has announced that it will extend the recently introduced loss relief restriction rules to capital losses. From 1 April 2020, only 50 per cent of capital gains can be relieved by brought forward capital losses. There will be an allowance that gives companies unrestricted use of up to £5 million of capital or income losses each year (or presumably a mixture of both). There will be a consultation before any legislation is introduced in Finance Bill 2019-2020. Certain anti-avoidance rules are effective immediately, although these have not been published yet – presumably we will see these when the Finance Bill is published in early November. Investors with a property portfolio of investment assets held in corporate structures are likely to be most adversely affected by these proposed changes as losses may not be available to completely eliminate any gains on future disposals.
Various measures have been announced by the government in respect of capital allowances. As a stimulus to business investment, the Annual Investment Allowance (AIA) will temporarily increase from £200,000 to £1 million on qualifying plant and machinery expenditure incurred between 1 January 2019 and 31 December 2020.
This benefit will be partially offset by the reduction in the rate of capital allowances on expenditure in the special rate pool which will reduce from 8 per cent to 6 per cent from April 2019.
The government has also introduced measures to extend first-year allowances for expenditure incurred on electric charge-point equipment but also intends to end first-year allowances and first-year tax credits from April 2020 for items listed on the Energy Technology List (ETL) and Water Technology List (WTL).
With effect from 7 November 2018, the de-grouping charge rules for intangibles created since March 2002 will be aligned more closely with similar rules elsewhere in the tax code. This should remove the anomaly that currently exists in the tax treatment of selling a business that contains ‘new’ intangible assets as compared with selling a business that pre-dates the intangibles regime.
With effect from April 2019, targeted relief will be introduced for the cost of goodwill in the acquisition of businesses, with eligible intellectual property (currently no tax deduction is available for the amortisation of acquired goodwill, unlike most other intangibles).
In principle both changes are welcome, but we will need to wait for publication of detailed provisions to assess the full benefit.
Offshore receipts in respect of intangible property
Draft legislation was released today following the consultation on Royalties Withholding Tax. From April 2019, UK income tax at 20 per cent will apply to income received by a company in a low tax territory for the use of intangible property referable to UK sales.
The draft law is aimed at groups which have transferred intangible property into a low tax territory which does not have a double tax treaty with the UK containing a non-discrimination clause. The tax will apply even if UK sales are made through independent intermediaries.
Where the intangible property income is derived from sales in more than one jurisdiction, UK income tax will be levied on a straight-line apportionment of the UK sales compared with the other sales unless an alternative just and reasonable apportionment can be proved.
Anti-avoidance measures were also announced with immediate effect to ensure arrangements (such as transfers of the intangible property) to avoid the charge will not be effective.
Diverted Profits Tax
Amendments were announced to the Diverted Profits Tax (DPT) to better align time limits for amending corporation tax returns with the review and time limit periods for DPT. The changes are being made effective from 29 October 2018 to eliminate double taxation and opportunities for avoidance.
As announced at Autumn Budget 2017, effective from April 2019, the government will introduce targeted legislation that aims to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. The rules are complex and come in addition to the UK’s existing DPT legislation and proposed amendments to the permanent establishment legislation in CTA 2010. Broadly, the rules can apply where there is a “material provision” which transfers value from the UK resident party to the overseas party (whether by transfer of income or payment of expenses) which is not arm’s length and results in a “tax mismatch”. The transfer can be traced through any chain of entities, however long and complex that chain may be. The tax mismatch includes an 80 per cent test that looks at the UK tax reduced in comparison with the overseas tax increase, and there are also notification obligations to consider.
Hybrid capital instruments
As a result of changes to regulation governing the types of instruments institutions can issue and need to hold to meet certain regulatory capital requirements, the government intends on introducing new rules for the tax of such instruments to ensure they are taxed in line with their economic substance – i.e. genuine debt like instruments get relief for any associated coupon. The new provisions will also eliminate mismatches between instruments used to raise funds externally and then passed down the group to ensure the tax treatment is consistent on both the external and internal arrangements.
Real estate taxation
Structures and Buildings Allowance (SBA)
A new Structures and Buildings Allowance (SBA) is to be granted in respect of eligible construction works on new commercial structures and buildings where the associated construction contracts are entered into on or after 29 October 2018. The new relief is limited to the costs of physically constructing new structures and buildings as well as converting and renovating existing structures. Relief is available at an annual rate of 2 per cent on a straight-line basis from the time the building is first brought into use and continues to be available to subsequent owners. SBA expenditure is not eligible for the annual investment allowance and expenditure on integral features and fittings that are currently eligible for capital allowances will continue to be relieved under existing rules.
Non-resident landlord (NRLs)
The draft legislation for taxing UK property income or profits of a UK property business of non-UK resident companies to corporation tax has now been published. The legislation largely mirrors the announcements made in July 2018. The provisions will be introduced in Finance Bill 2018-19 and will apply from April 2020. As expected, the key provisions amend Corporation Tax Act (CTA) 2009 to extend the scope of corporation tax to those non-UK resident companies and clarify that existing NRLs are not required to notify HMRC of its chargeability to corporation Tax and that the change in regime should not give rise to a disposal event for capital allowances. There are also transitional provisions to enable existing Income Tax losses to be offset only against future UK property business profits chargeable to corporation tax and for applying Disregard Regulations to hedging derivatives in relevant cases with the appropriate modifications.
The government confirmed that the outstanding rules relating to the taxation of capital gains realised by non-resident fund vehicles will be included in a technical note to be published on 7 November 2018.
Stamp Duty Land Tax (SDLT) changes
The government will extend first time buyers relief in England and Northern Ireland so that all qualifying shared ownership property purchasers can benefit, whether or not the purchaser elects to pay SDLT on the market value of the property. This change will apply to relevant transactions with an effective date on or after 29 October 2018 and will also be backdated to 22 November 2017 so that those eligible who have not previously claimed first time buyers relief will be able to amend their return to claim a refund.
The government has also announced it will publish a consultation in January 2019 on an SDLT surcharge of 1 per cent for non-residents buying residential property in England and Northern Ireland. No further details have been published at this stage.
The Chancellor confirmed that Entrepreneur’s Relief (ER) is to remain despite calls for this to be abolished to help with NHS funding. Changes have however been made to the qualifying conditions that come in with immediate effect. The two new tests require shareholders to have a 5 per cent interest in both the distributable profits and the net assets of the company, as well as the current requirements on share capital and voting rights. The conditions must be met throughout the specified period in order for relief to be due, so potentially having a backdated effect on the capital gains tax payable on imminent and future sales of shares. These changes are in addition to the headline announcement of an increase in the minimum holding period to 24 months, from the current 12 months for disposals that take place after April 2019.
Personal allowance, tax bands and National Insurance Contributions
The proposed increase in the personal allowance from £11,850 to £12,500 has been accelerated to April 2019. The government will also increase the higher rate threshold to £50,000 from £46,350. The National Insurance Upper Earnings and Profits Limits are also aligned to the higher rate threshold and will increase accordingly. The Scottish, and Welsh, assemblies under devolved powers may need to determine how they might reflect these changes to their own incremental income tax bands.
As previously announced, Class 2 NICs will not be abolished for the self-employed. National Insurance on termination payments still remains outstanding, and is now proposed to be introduced from April 2020, along with extending the use of short term business visitor payroll easements for overseas branches.
From April 2020 the employment allowance (£3,000 deducted off April PAYE remittances) will be restricted to businesses with an employer NIC obligation of £100,000 or less in their previous year.
VAT registration threshold
The Chancellor announced that the VAT threshold is to be maintained at the current level of £85,000 for a further 2 years until April 2022. This is to be revisited once the terms of Brexit are clear.
The rules concerning VAT grouping are to be extended to permit the inclusion of certain non-corporate entities. This will have effect after the date of Royal Assent to the Finance Bill 2018/19 and should make life easier for groups that include partnerships and similar vehicles.
VAT Treatment of vouchers
Legislation is to be introduced relating to the VAT treatment of vouchers issued on or after 1 January 2019. Vouchers, in this context, are gift cards and gift tokens. The changes do not apply to discount vouchers or money-off tokens. Under current UK VAT legislation, the customer is deemed to be receiving two supplies being a voucher; and an underlying supply of goods or services. There will no longer be a separate supply of a voucher. Instead the rules will be simplified so that there is only the supply of those underlying goods or services that will be provided in exchange for the voucher at a later date.
VAT recovery relating to intermediary insurance services
With effect from 1 April 2019, VAT Specified Supplies Order will be amended to restrict the use of offshore ‘loops’ by insurance intermediary companies to supply UK based customers. The offshore loop currently allows VAT recovery where the final consumer is in the UK, and puts users of the scheme at an advantage compared with UK based competitors who are unable to reclaim.
Other anti-avoidance measures
R&D tax relief cap for SMEs
From 1 April 2020, a PAYE/NIC cap will be restored. The amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This is designed to protect against identified abuse, including fraud. The government will consult on this change.
International tax enforcement: disclosable arrangements
The government will enact new legislation to allow the introduction of international disclosure rules about offshore structures that could avoid tax, or could be misused to evade tax. This clause enables the government to implement directive 2018/822 amending Directive 2011/16/EU regarding mandatory automatic exchange of information. This aligns with the OECD model and the UK will continue to implement EU law during the withdrawal agreement. The purpose is to give tax administrations early access to information about taxpayers and cross-border activities that rely on secrecy.
The government will consult on aligning the consideration rules of stamp duty and stamp duty reserve tax. There will also be a general market value rule for transfers between connected persons. An anti-avoidance rule applies with effect from today’s date to prevent forestalling.