Spring Statement 2018: Corporate and Business Tax
Many of the consultation documents published alongside the Spring Statement may ultimately have implications for businesses. Taxes on turnover and taxes on single-use plastics have both been in the offing for a while, and these are now going to be the subject of more serious consideration. Certain businesses might also see an increase in their obligations under proposals relating to online platforms, and those that don’t pay their suppliers as quickly as the government might wish may also be the target for government intervention. On the other hand there was more positive news for those that own and invest in businesses, with possible extensions to Entrepreneurs’ Relief and the Enterprise Investment Scheme.
Online platforms and taxing their users
The government is concerned that some of those that use online platforms to sell services, or to sell or rent goods, are not fully aware of – or compliant with – their tax obligations. Although not specifically mentioned, the government appears to have in mind eBay traders, Airbnb landlords, and Amazon marketplace sellers amongst others.
The government wants to consider whether the platforms themselves should have a role in tax administration. As a first step, it has published a call for evidence, seeking to understand more fully the relationship between platforms and their users, the users’ relationship with the tax system, and what obligations other tax administrations around the world impose in this area.
Online platforms and their users are extremely varied so a single solution is unlikely to be capable of applying to all of them. The government has raised the possibility that platforms could have obligations to withhold tax in a similar way employers, and this could well be one result of the current process.
Corporate Tax and the Digital Economy
The government’s view is that the tax system has not kept pace with the development of the digital economy. It believes that the participation and engagement of users in digital business models is an important aspect of value creation, and that accordingly user participation should play some role in the taxing of these businesses.
The government wants an international approach to updating the tax framework, but in the absence of this it will consider measures such as a tax charge that is based on turnover.
The introduction of a UK tax charge based on turnover will present a number of challenges, and it could well mean for example that loss making companies face substantial tax bills, or that global businesses are subject to tax in two countries without the possibility of double tax relief.
Some reform of the way in which digital businesses are taxed is overdue but, as these businesses operate globally, this is an issue which needs to be tackled on a global level.
Entrepreneurs’ Relief and diluted shareholdings
Entrepreneurs’ Relief results in a 10% rate of capital gains tax (compared with the standard 20% rate) where an individual disposes of certain business assets. These include shares in trading companies where the individual has owned at least 5% of the shares, and been a director or employee, in the 12 months prior to sale.
Individuals who start companies may initially own more than 5% of the shares, but subsequent fundraising may well mean that they fall below this threshold and that, on an eventual sale, they do not qualify for this relief.
In a welcome proposal, the government is suggesting that, at the point an individual falls below the 5% threshold, they will be able to choose to crystallise their gains, giving rise to a tax charge at 10%; they will then be able to either pay the tax at that point, or defer the tax until the subsequent sale.
This would be a helpful relaxation of the rules but early indications from the Autumn Budget 2017 were that Entrepreneurs’ Relief would be preserved in full rather than just up to the point of the dilution.
EIS Knowledge Intensive Funds
The government is looking to explore possibilities for a new “EIS fund model” which it is hoped would help to attract long-term high-risk investment in “knowledge intensive companies” (i.e. those with a strong focus on R&D or innovation).
The government is considering a range of options that would build on the current EIS rules, adapting or enhancing the current EIS tax reliefs in situations where individuals invest with a fund manager, who then invests substantially all of the funds in the knowledge-intensive companies.
Anything which aids investment in knowledge intensive companies is welcomed. But the EIS rules are already overly complex, particularly those that already apply to knowledge intensive companies, and it is hoped that the output of this initiative will be a workable set of rules and not something so complicated that it is not fit for purpose.
The government will launch a call for evidence to understand how it can “eliminate the continuing scourge of late payments”.
Larger businesses are now responsible for reporting on their payment practices, and over the last few months – as the rules have come into effect – substantial amounts of data will have been collected. It is only to be expected that the government will start to use this data, and many businesses may find that it is much harder to squeeze their suppliers through delayed payments in the future.
The impact of the failure of Carillion on its suppliers has brought this issue into sharp focus and we can expect more government intervention in this area.
As anticipated, the government announced its intention to reduce the use of “single-use plastics”, and it has now published a call for evidence into how changes to the tax system, the introduction of new charges, or incentives, could change the behaviour of companies and individuals in this area.
In its call for evidence, the government has asked for information on the production, retail, consumption, and disposal of plastics. No specific policy proposals have been floated, but for each stage in the process the government wants to understand why plastics are used as they are, and how taxes or charges might be used to change behaviour.
The government has also confirmed that some of the money raised from any tax changes will be used to encourage new, greener products and services, and that an additional £20m will be reallocated to fund research into reducing the impact of plastics on the environment.
The government will be hoping to build on the success of the charge for plastic bags in order to further reduce plastic waste.