Budget 2018: Corporate and Business Tax
The main rate of corporation tax will still fall to 17% in 2020 so the Chancellor has kept in reserve the ability to reduce it further pending the outcome of the Brexit negotiations. Entrepreneurs may be relieved that the changes to Entrepreneurs’ Relief may not affect them even though the change announced was unexpected. Large digital businesses such as Google, Facebook and Amazon are targeted with a new Digital Services Tax and other large companies are due to suffer further restrictions on how they can claim relief for their losses.
The measures to encourage businesses to make investment include a temporary increase to the Annual Investment Allowance to £1m per year will be welcome. Included alongside the main announcements were the targeting anti-avoidance measures we have come to expect but businesses will be more concerned by what will happen in the New Year if the Chancellor feels the need to have another Budget in the spring.
After continued speculation about whether entrepreneurs’ relief will be reduced or abolished, the Chancellor has announced two changes.
Extension of qualifying period from 12 months to two years
This change, generally effective for disposals on or after 6 April 2019, means that where there is:
- A disposal of shares, the qualifying period for meeting the qualifying conditions is now two years. This new limit also applies to shares acquired under EMI options.
- A disposal of a business or assets used for a business, the qualifying period is two years.
The existing qualifying period is one year. The Chancellor justified this measure by saying that this is to target the relief at “genuine entrepreneurs”.
If a sale is contemplated or in progress, ensuring the disposal takes place before 6 April 2019 is essential for any sellers that could qualify for entrepreneurs’ relief under the existing rules, but will not meet the new extended ownership period if the sale is delayed.
Another major impact of this change will be in the provision of share incentives, mainly through EMI options, to employees. Often this is considered ‘late in the day’ when a company’s shareholders have a definite plan to sell. Considering shares for employees at a late stage can often give problems with the timing if they are to benefit from entrepreneurs’ relief. Doubling the qualifying period only increases the need to plan well in advance if employees are to be incentivised through some form of shareholding with a potential 10% capital gains tax rate on exit.
Tightening up the definition of ‘personal company’
To qualify for entrepreneurs’ relief on shares, the company must be the individual’s personal company for what will become 24 months prior to the disposal. The old definition of a personal company is that the individual must own at least 5% of the ordinary shares that give the holder at least 5% of the votes.
This definition is being extended for disposals on or after 29 October 2018 so that the shareholder must be entitled to both at least 5% of the distributable profits and 5% of the net assets to qualify. This is to prevent the use of shares with non-standard share rights just to bring the shares within entrepreneurs’ relief.
As an addendum, care must be taken with ensuring that shares held are in fact ordinary shares. A recent confirmation from HMRC sets out examples of what is and what is not an ordinary share. In any case where entrepreneurs’ relief is desired, care should be taken where the share capital comprises anything other than plan ‘vanilla’ ordinary shares.
The Budget includes a number of changes to the capital allowances regime. The main ones are below:
- Annual investment allowance (AIA)
The Chancellor announced a temporary increase in the maximum AIA available to businesses, from £200,000 to £1 million for capital expenditure on plant and machinery incurred in each of the two years commencing on 1 January 2019.
The effect of the measure is to accelerate the tax relief on qualifying expenditure, which would otherwise be subject to annual writing down allowances. Transitional rules will apply for chargeable periods (usually the business’s accounting year) spanning 1 January 2019
- Capital allowances for structures and buildings (SBA)
Since the phasing out of capital allowances for industrial buildings, and agricultural buildings there has been no relief under the capital allowances code for expenditure on buildings or structures.
The SBA regime will commence in relation to newly constructed commercial structures and buildings, where all the contracts for the physical construction works are made in writing, and are entered into from 29 October 2018.
Unlike its forerunners the new regime applies to all commercial buildings in use for a qualifying purpose, and will provide relief for “tax depreciation” at an annual rate of 2% of qualifying expenditure.
- Ending enhanced allowances (ECAs) for energy and water-efficient plant and machinery
Capital expenditure on certain specific environmentally beneficial technologies currently attract 100% ECA, and in some cases a repayable tax credit. These reliefs will be withdrawn for expenditure on listed energy-efficient and water technologies from 1 April 2020 (companies) and 5 April 2020 (unincorporated businesses). The additional tax revenues generated from the withdrawal will be used to fund the Industrial Energy Transformation Fund.
- Capital allowances special rate reduction
There are broadly two rates of annual writing-down allowances for capital expenditure on machinery and plant, dependent on to which “pool” of expenditure an asset is allocated. The main rate is currently 18% on the reducing balance of the pool, and the “special rate” is currently 8%, but is to be reduced to 6% from April 2019. Special rate expenditure includes expenditure on long-life assets, thermal insulation, integral features and expenditure incurred on or after 1 April 2018 on cars with CO2 emissions of more than 110 grams per kilometre driven.
The package of changes to the capital allowances regime includes some welcome fiscal stimuli to businesses to invest in capital assets. The introduction of Structures and Buildings Allowance to provide a measure of relief for commercial buildings that would otherwise not qualify for allowances is a response to one of the requests from businesses. From a planning perspective businesses should be reviewing their capital expenditure programmes with a view to optimising the allowances available taking note of when the new allowances will apply from.
Research and development (R&D) relief
For small and medium-sized entities, the repayable credit from a qualifying R&D claim made by a loss-making company in any year will be limited to three times the company’s total PAYE and NIC liability for that year.
This is designed to prevent abuse of R&D tax relief and apparent fraud.
This change will apply from 1 April 2020 and there will be a consultation on its implementation.
The UK provides very generous tax credits for R&D, especially for SMEs.
The above restriction is unlikely to adversely affect genuine claims for tax relief.
Digital services tax
A new Digital Services Tax (DST) is to be introduced from April 2020. It will be charged at 2% on revenues over £25 million, linked to the participation of UK users, and generated from the provision of search engines, social media platforms and online marketplaces. It will only apply to groups generating global revenues from these activities of over £500 million a year.
This is a unilateral measure born of frustration with the speed at which the G20 and OECD are moving with their own version of this reform. A consultation on the design of the DST will be published shortly, with a view to legislation in Finance Bill 2019/20.
Corporate capital loss restriction
With effect from 1 April 2020 the government intends to align the treatment of capital losses arising to companies with the existing treatment of income losses.
The rules will provide, broadly, that companies will enjoy unrestricted relief for losses carried forward up to £5 million. Over that figure losses will be capable of offset only against 50% of chargeable gains, with the unused balance being available to carry forward, subject to the same restriction in subsequent years.
For most SMEs the rules relating to the restriction of relief for losses from earlier periods will be of academic interest, given the £5 million de minimis, although property investment businesses may suffer disproportionately.
Intangible fixed assets
Restrictions were introduced in 2015, aimed at preventing perceived abuse of the intangible fixed assets rules, denying tax relief for amortisation of purchased goodwill and other customer-related intangibles. In the Budget we are promised, from April 2019, a partial reinstatement of the relief for purchased goodwill included in the acquisition of a business with eligible intellectual property, and some welcome changes from 7 November 2018 to the “de-grouping” charge that arises when a group sells a company owning intangibles.
Although there is no detail yet available it appears that the government has responded to criticism that the 2015 restrictions put the UK out of step with typical international practice in denying relief for accounts based amortisation of goodwill.
Offshore receipts in respect of intangible property
As announced in the 2017 Budget (as “Royalties Withholding Tax”), from April 2019, a UK income tax charge will be introduced on income from intangible property referable to UK sales.
The legislation is targeted at multinational groups diverting income from intangibles from the UK to low tax jurisdictions. The revised legislation will impose the charge on the offshore entity realising the income, rather than applying a withholding tax, but with the ability to collect unpaid tax from UK connected companies.
There will be a de minimis UK sales threshold of £10 million, and an exemption where the income is subject to local tax at a rate exceeding 50% of that in the UK.
These provisions represent a further assault on the armoury of tax structures employed by multinationals to minimise their global tax expense.
Reforming stamp taxes on shares consideration rules
We are promised a consultation on the future shape of Stamp Duty/Stamp Duty Reserve Tax on the transfer of shares, including, ominously, a general market value rule on transfers between connected persons.
Stamp Duty (not to be confused with Stamp Duty Land Tax) is a duty payable at 0.5% on the consideration for the transfer of shares, both quoted and unquoted. There has long been pressure for its abolition, as it is considered a restraint on the market for shares, but the Chancellor appears to be unmoved.
Although no detail is yet available, the proposal for a market value charge on transfers between connected persons is potentially concerning for owner mangers looking to transfer shares to, for example, family members.