Understandably, the focus of today’s Budget has centred on urgent measures to minimise the impact of coronavirus. However, this was also a critical moment for the Chancellor to outline plans to boost economic activity post-Brexit – and it was one which had British businesses at its heart. The Government is using many of the numerous levers available to position the U.K. as a more attractive place to invest, support domestic business and attract talent, including huge investment into research and development – yet the reintroduction of freeports at least in his speech to the house was notably missing. The good news is the Government is supporting the introduction of new freeports the details of which will emerge post the results of a consultation.

Rishi Sunak has long been supportive of freeports, and confirmation of plans for ten across the country would have been a huge step in accelerating national and regional productivity and prosperity. In fact, according to our research, each freeport would create an average of 13,500 jobs and £800 million of GDP per year, over a 20-25-year period. While there is no magic bullet, the U.K. government should take this unique opportunity to reshape our tax system.

Assuming the introduction of Freeports does come to pass this will represent a return of three out of four policy changes having been implemented by the Government in line with our recommendations for the post-Brexit world - click here to learn more about to our research, in partnership with Capital Economics.

View from Marvin Rust, Head of A&M Taxand U.K.

Five key takeaways from the 2020 Budget

1. Corporate Tax Measures

In our view the most significant measure to be legislated for in the Finance Act 2020 will be the retention of the current 19% rate of corporation tax. Whilst under current law the rate was due to be reduced to 17% from 1 April 2020, this will no longer happen in line with the Conservative Party’s general election manifesto, saving the Exchequer £32.9 billion up to the end of 2024/2025.  Companies will need to consider how this may impact their deferred tax accounting.

The government confirmed its intention to go ahead with the controversial Digital Services Tax (DST). DST will be a 2% tax on revenue of certain digital businesses (search engines, social media platforms and online marketplaces) with earnings from U.K.-based users. The new tax will apply from 1 April 2020 but will be revisited if international consensus is reached on how to tax digital services.

The rate of the Research & Development Expenditure Credit (RDEC) will increase from 12% to 13% from 1 April 2020. This equates to a net benefit after tax of 10.53% compared with 9.72% previously although this will be of cold comfort now that the corporation tax rate is no longer being reduced to 17%. There is also to be a consultation on widening the categories of expenditure that qualify for relief to include money spent on data and cloud computing.

Further reform of the rules dealing with intangible assets will take effect from 1 July 2020.  Intangible assets which were created prior to April 2002 will no longer be excluded from the Intangible Fixed Assets (IFA) regime. This means that it should now be possible to obtain tax relief for assets purchased from non-U.K. resident related parties not withstanding the fact that the assets were created prior to commencement of the IFA regime. This is a welcome simplification.

The government confirmed that the corporate capital loss restriction will apply for disposals taking place on or after 1 April 2020. This will restrict the proportion of capital gains that can be relieved by carrying forward losses to 50%. Whilst this measure is not expected to affect 99% of taxpayers, it is likely to be of particular detriment to companies in the real estate sector where capital gains can be significant.

There is to be an increase in the structures and buildings allowance from 2% to 3% per annum from 1 April 2020. The allowance provides tax relief for the capital costs of construction of new buildings or refurbishment of old buildings. Whilst the increase is welcome, the 3% rate still falls short of that typically permitted in other major economies and is still not aligned with the economic life of most new buildings which is usually less than 33 years.

2. Anti-Avoidance Measures

From an anti-avoidance perspective, the government announced that additional compliance resources are to be made available to HMRC which HM Treasury estimates will generate an additional £4.4 billion of tax revenues by 2024/2025. 

Specific anti-avoidance measures aimed at businesses were thin on the ground. The most ominous measure concerns ‘Large Business Notification’. At this stage, this appears to be a proposal that would require large businesses from April 2021 to notify HMRC of any tax position which HMRC is likely to challenge due to the taxpayer having relied on an uncertain interpretation. Very few details are available at this stage pending a consultation to be announced shortly. There is a reference to the policy drawing on international accounting standards which perhaps suggests an alignment with the reporting of uncertain tax positions for statutory accounting purposes.

3. Employment Taxes

The most significant announcement concerning employment taxes was the government’s confirmation that the reform of the off-payroll working rules (IR35) for the private sector are to be implemented on 6 April 2020 as originally announced. This follows the conclusion of a review and whilst a deferral of commencement of the reform would have been welcomed by affected businesses, there are only to be minor changes designed to support the ‘smooth implementation’ of the new regime.

4. Entrepreneurs Relief

The lifetime limit on gains eligible for Entrepreneurs Relief – which offers a reduced 10% rate of Capital Gains Tax (CGT) on qualifying disposals – will be reduced from £10 million to £1 million with immediate effect. This is likely to have a significant impact on owner-managers looking to exit their business. This move will save the Exchequer up to £1.8 billion per annum by 2024/2025 and has been justified on the grounds that the relief benefits only a small population of affluent individuals.

5. Indirect Taxes

Legislation to apply a zero rate of VAT to e-publications is to be introduced from 1 December 2020.  This will make it clear that e-books, e-newspapers, e-magazines and e-academic publications will be entitled to the same VAT treatment as their physical counterparts. 

If you have questions about any of the tax measures covered in the Budget, and how they will impact your business, please get in touch with a member of the A&M Taxand team.