The knives were being sharpened on both sides of the House as Philip Hammond stood up to make his first Autumn Budget Statement. With the papers full of headlines about the remoaning Chancellor and this "make or break" budget, predictions of a tax giveaway were high. And the Chancellor delivered with a stamp duty land tax saving for first time buyers worth up to £5,000.
But perhaps the biggest news from today's budget was what the Chancellor did not say. Other than announcing he was allocating £3bn for "Brexit preparations", there was no mention of the B-word or how it would affect the UK economy after 2019.
The focus instead was on "technological revolution" with various spending plans announced to support industries in these key areas, and therefore, opportunities for clients in our key sectors.
Taxing the digital economy
The Government published a position/consultation paper in which it set out its position on taxing the digital economy and seeking views on that approach. It is specifically looking to tax "value" created by a foreign digital company eg from user data created by social media platforms and online market places introducing UK users. Broadly speaking the Government suggests that long term changes here should be made at an international level, specifically they should be dealt with (along with suggested unilateral actions) in the OECD's interim report on the digital economy to be delivered in mid-2018.
Online marketplaces - additional VAT compliance burdens
Online marketplaces will face additional obligations to ensure businesses are complying with UK VAT rules. Currently, online marketplaces can be held jointly and severally liable for the VAT they owe from the date of any liability notice issued by HMRC. HMRC will usually seek to resolve the matter with the online marketplace before issuing the notice, and can withdraw any notice issued if the seller settles their VAT liability. The liability notice requires that the online marketplace remove the seller from the online marketplace within a specified time. If it does not do so within this time, it can be assessed for the seller's VAT liability.
The effect of the extension of the rules will be that online marketplaces will be jointly and severally liable for:
any future VAT that a UK business selling goods via the online marketplace fails to account for after HMRC has issued a notice to the online marketplace; and
any VAT that a non-UK business selling goods via the online marketplace fails to account for, where the business was not registered for VAT in the UK and that online marketplace knew or should have known that that business should be registered for VAT in the UK.
In addition, online marketplaces will be required to display the valid VAT number for all sellers using their platform, and they will be obliged to ensure the validity of those numbers.
Taxation of IP and R&D
Changes to the taxation of intangible fixed assets
The Government will consult in 2018 on the corporation tax treatment of intangible fixed assets. It will consider whether there is an economic case for targeted changes to this regime to provide better support to UK companies investing in intellectual property.
We have been suggesting for a while that there are a number of areas where the rules are unduly complicated, if not illogical. We would welcome this consultation but would also note that in Autumn Statement 2015 the Government announced it would consider a review of the Intangible Fixed Assets regime as part of the Business Tax Roadmap. The 2016 Business Tax Roadmap was silent on the subject which leaves us wondering why this was important in 2015, unimportant in 2016 and now back on the radar.
R&D expenditure credit
On the positive side, the Chancellor has increased the rate of the R&D expenditure credit from 11% to 12% (effective on or after 1 January 2018), to support business investment in Research & Development (R&D). In addition to promoting growth and productivity among larger companies, the Government has also announced that it will pilot a new Advanced Clearance Service for R&D expenditure credit claims to provide pre-filing agreement for three years. Alongside the pilot, the Government is planning a campaign to increase awareness among SMEs as to the availability of R&D tax credits.
New withholding tax on royalties
A new withholding tax will be introduced in the UK to digital services sold to UK customers by a foreign entity (in Country A), which does not have a permanent establishment in the UK, which then passes on that income to a low tax entity (in Country B) through a royalty. It is not clear how this will work in line with double tax treaties the UK would have with Country A and it is also not clear why this was not dealt with through an extension of the diverted profits tax introduced in 2015 (which catches payments to an entity lacking economic substance from a UK entity or attributable to the UK permanent establishment of a foreign entity).
Step up schemes
Legislation will be introduced to counteract step up schemes under the corporation tax rules for intangible fixed assets. Under these rules, companies are generally taxed on accounting profits. However, even where transfer pricing applies, such profits do not necessarily reflect arm's length value. This issue was dealt with for transfers of intangible fixed assets in 2015 – although the rules are now being clarified to ensure that proceeds of realisation for accounting purposes includes the market value of any non-cash consideration.
Legislation is also being introduced to deal with licences of intangible fixed assets. While it is right that the rules should attack avoidance schemes, we would be concerned as to how this may affect straightforward commercial transactions within groups. The rules which allow tax neutral transfers of intangible fixed assets within a group do not apply to most licence arrangements. Intra-group licences already need to be carefully structured in order to avoid unexpected tax charges and this new anti-avoidance rule may complicate that further.
Venture Capital Schemes
The changes that have been announced in today's Budget are heavily focused on technology and other "knowledge intensive" sectors. The Government recognises the difficulties that these companies face in accessing growth investment and therefore the importance of venture capital schemes to help these types of companies start-up and grow. From April 2018:
the annual investment limit for Enterprise Investment Scheme (EIS) investors will be doubled from £1m to £2m provided that any amount above £1m is invested in knowledge intensive companies
the annual investment limit for knowledge intensive companies receiving investments under the EIS and from Venture Capital Trusts (VCTs) will be doubled from £5m to £10m; and
"knowledge intensive" companies will have greater flexibility in applying the permitted maximum age condition giving such companies the option of using a profits test instead of the first commercial sale test.
In addition, a new "knowledge intensive" EIS approved fund is to be consulted on, which may provide further incentives to attract investment.
The Government has been quite clear in recent months however that too many investments under the venture capital schemes are not pure risk investments, with it being estimated that 62% of investment by EIS funds in 2016-2017 was focused on capital preservation. A new measure is therefore to be introduced to ensure that the EIS and VCT schemes are focused towards investment in companies seeking investment for their long-term growth and development. As such, tax motivated investments where the tax relief provides all or most of the return for an investor with limited risk to the original investment will no longer be eligible. We are expecting a principles based test to be introduced whereby the new "risk to capital" condition will depend on a "reasonable" view being taken as to whether an investment has been structured to provide a low risk return for an investor.
Electric cars and renewable energy
In addition to the new digital economy, the Chancellor focused on the future infrastructure and reiterated the Government's commitment to driverless and electric cars. New legislation will be introduced to ensure employees who charge their electric or hybrid cars at work will not incur a tax charge (as a benefit-in-kind) from next year. This measure sits alongside a new £400m charging infrastructure fund, an extra £100m "Plug-In-Car Grant" and £40m in charging R&D, all aimed at encouraging development and production of electric cars in the UK.
Furthermore, the Government has updated its list of technologies and products (the Energy Technology List) which can benefit from the first year allowances scheme. The scheme allows 100% of the cost of an investment in such energy technology and products to be written off against taxable income therefore improving cash flow for businesses.
Added to the list are:
- Evaporative air coolers
- Saturated steam to electricity conversions and
- White LED lighting modules.
Localised rapid steam generators and biomass fired warm air heaters have been removed from the list.
Loss making businesses which do not have profits to benefit from the allowances can claim first year tax credits ("FYTC") instead when they invest in technologies and products on the Energy Technology List. FYTC will be extended for five years and from April 2018, the percentage rate of the FYTC claim will be reduced to 2/3 of the corporation tax rate (currently 19% and falling to 17% in 2020).
First year allowances are also going to be extended for zero-emission goods vehicles and gas refuelling equipment. This measure provides a three year extension to March 2021 for both schemes which were due to end on 31 March 2018.
Income tax rates
An individual's tax free personal allowance will increase to £11,850 (restricted if taxable income is in excess of £100,000) and the basic rate threshold will increase to £34,500 from April 2018. This means that the threshold for paying higher rate tax will increase to £46,350 in 2018/19
Taxing non-residents on sales of UK commercial property
Following the introduction in 2013 of taxation of non-residents selling UK residential property, the Government has been under pressure to broaden this tax charge to all UK real estate. From April 2019, tax will be charged on all disposals of interests in both residential and non-residential property. The two key changes are that non-UK residents will become chargeable on their gains which accrue on the disposal of interests in commercial property and the current charge on residential property will be extended to include non-close companies. This means that non-UK funds and REITs will be subject to UK tax on disposals of UK real estate, whereas UK pension funds and REITs would be exempt. An anti-forestalling rule will apply to target restructuring simply to avoid this tax charge.
The time limit HMRC will have to assess cases of offshore tax non-compliance will be extended to at least 12 years. Current time limits are usually 4, 6 or 20 years depending on the behaviour that led to the non-compliance. Based on the rationale that offshore cases take longer to investigate, the time limit will therefore be extended, whatever the behaviour involved, to give HMRC more time to investigate. Where the behaviour is deliberate, however, HMRC will continue to have 20 years in cases of both offshore and onshore evasion. The extended time limit will go hand in hand with a new strict liability offence of offshore tax evasion now in force, as well as the new offences of corporate failure to prevent the facilitation of tax evasion and new sanctions for enablers of offshore evasion.
Making tax digital
The Government's Making Tax Digital plans have been kicked a little further down the track. Earlier this year the Government announced that only businesses with a turnover above the VAT threshold (£85,000) will be obliged to use Making Tax Digital for Business (MTDfB) from April 2019 (and then only in respect of VAT obligations). Businesses falling below the VAT threshold can choose whether or not to use MTDfB from April 2019. Further updates concerning the MTDfB's impact are expected in December 2017, but the scope of MTDfB will not be widened before April 2020 at the earliest.
Anumber of revenue raising measures were announced to fund some of the more generous tax cuts and spending increases. Other announcements include changing the way companies calculate their chargeable gains when disposing of assets and restricting the credit for tax paid by overseas permanent establishments.
The Chancellor had been criticised for being too pessimistic about the outlook for the UK economy post-Brexit, so his Budget was intended to present an image of opportunities supported by increased targeted spending and funded by small but significant tax changes. It was interesting to note that following the change to the budget process to make the Autumn budget the single fiscal event of the year, there was a feeling of more substantive tax policy announcements than in recent years. Nevertheless, the main policy announcements that we are desperate to hear are outside the Chancellor's control and await negotiation with the EU.