Rolling back from Theresa May's announcement that austerity was over, the Chancellor conceded today that "austerity was coming to an end" with a budget that was targeted at a new post-Brexit, digital economy. The headlines will be full of the new digital services tax ("DST"), to be introduced in April 2020 for tech companies with global turnover of more than £500 million. But the DST is about keeping the UK ahead of the game and trying to force the G20 and OECD countries to agree to a new global approach to taxing the tech giants. Weighing this up against protection for the "old" economy of bricks and mortar retailers including a high street rejuvenation fund and rates relief for public loos and a story develops of an economy looking to the future but struggling to hold on to the past.
Again, Brexit was barely mentioned, although a brief nod to cabinet disunity hinted at some of the difficulties surrounding this budget. From a tax perspective, there was a surprising number of important and unexpected announcements which will have implications for all of our clients.
IP tax changes
Intangible fixed assets regime
In early 2018, the Government reviewed how the tax treatment of acquired intangible assets could be made more competitive and administrable. Following a short consultation, it has announced that, from April 2019, it intends to reform the corporate intangibles regime by the introduction of a targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property. With effect from 7 November 2018, the Government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.
Offshore receipts in respect of intangible property (previously Royalties Withholding Tax)
As announced at Autumn Budget 2017, the Government is introducing legislation in Finance Bill 2018-19 to tax income from intangible property held in low-tax jurisdictions to the extent that it is referable to UK sales. This measure will come into effect from April 2019 and will reduce the opportunities for large multinationals to gain an unfair competitive advantage by holding their intangible property in low tax offshore jurisdictions, levelling the playing field for businesses operating in UK markets.
This measure includes:
- collecting the tax by directly taxing offshore entities that realise intangible property income in low-tax jurisdictions, rather than through applying a withholding tax
- broadening the income in scope of the measure to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties
- introducing a de minimis UK sales threshold of £10 million, an exemption for income that is taxed at appropriate levels, and an exemption for income relating to intangible property that is supported by sufficient local substance
- anti-avoidance provisions will apply from 29 October 2018 to counteract arrangements entered into with a main purpose of avoiding a charge under this measure.
Preventing abuse of R&D tax relief for small and medium-sized enterprises (SMEs)
To help prevent abuse of the payable credit, from 1 April 2020, 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.
Entrepreneurs and Consultants
The Chancellor chose to make ER less attractive with two measures. For disposals after 5 April 2019 the minimum holding period during which individuals must satisfy the conditions is extended from 12 to 24 months. For a summary of the existing rules click here. Tucked away in the "avoidance" measures, however, was a much more significant change. From 29 October 2018, shareholders must meet an additional "economic test" by being entitled to at least 5% of distributable profits and net assets of the company (in addition to holding at least 5% of the ordinary share capital when tested by nominal value and 5% of the voting rights). The new economic test blocks long standing ER planning techniques which involved creating a new class of share with less than 5% economic rights but which still satisfied the tests. ER is still attractive, however, as it allows office-holders and employees to save tax of up to £1 million by being taxed at 10% on lifetime gains of up to £10 million.
Off Payroll Working – "IR35"
From 5 April 2020 larger private sector organisations will be subject to the same off payroll working rules (known as IR35) as public sector bodies and agencies. These rules state that where an individual provides their services through a personal services company ("PSC"), if the underlying relationship with the end user (ignoring the PSC) is one of employment, the tax and NIC saved is imposed on the PSC. For smaller private sector organisations, however, it will remain advantageous to engage consultants through PSCs so as to pass on compliance risks.
Removing enhanced capital allowances from energy and water technologies
Enhanced capital allowances (ECAs) and First Year tax credits for energy saving and water saving technologies will be scrapped from April 2020. The Government sees this favourable tax treatment as too complex and expensive to manage, but will use the savings from its removal in an Industrial Energy Transformation Fund, a scheme supporting big energy users to cut their energy usage.
Extending enhanced capital allowances for electric vehicles
The ECA for investments into electric vehicles charge points will be further extended to 2023, which will continue to encourage companies to invest into ultra-low emissions vehicles industry.
HMRC to become preferential creditor
The Chancellor announced that, from 2020, HMRC will become a preferential creditor in respect of the taxes of an insolvent business. This change will apply only to taxes paid by the customers and employees of the company (e.g. VAT and PAYE Income Tax), not on taxes owed by the insolvent business itself (e.g. Corporation Tax).
Directors' liability for company taxes
From next year, directors will be jointly and severally liable for the company's tax liability if there is a risk that the company is deliberately going into insolvency to avoid tax. The liability will only apply to directors or other persons involved in the company's tax avoidance or evasion.
Real Estate Tax
Consultation on SDLT charge for non-residents
Acting on Theresa May's promise to the Conservative party in September to "help UK taxpayers buy a property", the Chancellor revealed that the Government will publish a consultation in January 2019 on a SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland. If applied in conjunction with all other stamp duty payable on second home and buy-to-let purchases, we could see SDLT rates of up to 16% on the highest value residential property.
The consultation will need to answer key questions such as:
- the test used to determine non-residency for both companies and individuals, including ex-patriates
- how this would impact upon companies resident in multiple jurisdictions including the UK
- how this is going to affect persons who become UK residents after completion of their property purchase
There has been a consistent decline in the number of overseas landlords in the UK since 2010 and this measure, if implemented, would seemingly only accelerate that.
Structures and buildings allowance (SBA)
New non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018. The Chancellor has put forward that this will address a significant gap in the UK’s current capital allowances regime, and will improve the international competitiveness of the UK’s tax system.
It will provide billions of pounds of relief for firms investing in new buildings - businesses will be able to claim capital allowances on the construction costs, including land alteration and improvement cost, of all new, non-residential structures and buildings.
Capital allowances special rate reduction (8% to 6%)
From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to more closely match average accounts depreciation. The Chancellor also announced an increase in the Annual Investment Allowance to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020, to help stimulate further business investment.
Remote Gaming Duty
The rate of Remote Gaming Duty will increase from 15% to 21%. The intention is to raise the rate of RGD with effect from 1 October 2019, but the increase has been announced at Budget 2018 in order to give remote gaming operators advance notice. This increase follows the Government announcement that the maximum stakes on Fixed Odds Betting Terminals are to be reduced from £100 to £2, with the increase in RGD intended to cover any negative impact of this on the public finances.
Gaming duty accounting periods and bands
As announced in HMRC’s consultation response in July 2018, the Government will legislate in Finance Bill 2018-19 to remove the requirement for casinos to pay gaming duty on account and to allow the carry forward of losses between accounting periods. The return period for gaming duty will remain 6 months. The bands to determine payment of gaming duty will be frozen from April 2019, while the changes to gaming duty accounting periods are implemented.