“Coronavirus” Budget 2020
In this episode, we analyse and comment on the recently announced 2020 Budget, identifying the key changes and outlining the practical implications for you and your business.
A 4-minute budget Q&A with Daniel Casali, Chief Investment Strategist:
- It was termed as a coronavirus budget and Chancellor Rishi Sunak didn’t disappoint
- announce was a total stimulus for the fiscal year 2020-2021 of £30 billion
- broken down into £12 billion for the coronavirus and an additional £18 billion which was announce in the spending review the last autumn
- Rishi Sunak also announced there will be £600 billion spent by 2025 on infrastructure projects such as rail and road, the details will come out in the spring budget
- the budget was coordinated with the Bank of England and will cut interest rates by 50 bases points to 25 bases which was more than expected
- The Bank of England announced other policies that increase the supply of liquidity into markets and companies such as a new term funding scheme for smaller to medium enterprises which will expect to last 12 months
- The Financial Policy Committee reduced the counter-cyclical capital buffer rate to 0% on banks’ exposure to UK borrowers with immediate effect, this will allow banks to lend up to £190 billion in corporate credits
- that is the Bank of England’s view, the rate has been 1% and was due to be reduced to 2% by December 2020, but they cut it to zero.
How the fiscal policy is made up?
- if you look at the breakdown of the fiscal policy, it's driven by spending more than taxes, for example: going out over the next five years, we see more or less 1% of GDP boost to the economy over the next five years
- such as; we have the £30 billion which I've talked about in fiscal year 2021 and that's going to rise up to minus £40 billion in terms of more fiscal loosening in 2021 to 2022, that will increase steadily over the coming couple of years
- this will more than offset some tax increases that the government will also introduce, we're going have the biggest sustained fiscal loosening by any Chancellor for more than 30 years.
Will this lead to greater borrowing?
- It will, if we look at the figures from the March spending forecast, we have for example for 2020 £140 billion expected in public sector net borrowing
- that will rise to more than £55 billion for this coming fiscal year, that gives you an idea of the increase of government borrowing from the markets.
What will this do for growth?
- taken the Office of Budget Responsibility figures, we can see that GDP growth for 2020 will be 1.1%, that's lower than 2019 for 1.4%
- however there are downside risks because of the coronavirus growth projection
- looking further to 2021, the OPR expects growth to be 1.8% we should start to see a recovery probably in the second half of this year.
Entrepreneurs Relief (ER)
- The announcement that was most significant was on the change to entrepreneurs’ relief.
- ER provides a 10% rate of Capital Gains Tax (CGT) when you sell your businesses, if certain conditions are met. This is subject to a lifetime limit which was £10 million – this is now reduced to £1 million – so a significant reduction. This change is effective immediately
- business owners could be up to £900,000 worse off than they were expecting
- there are also what we call anti-forestalling rules, and these are there to disrupt any attempts made to create a transaction to ‘bank’ ER at the 10% rate in advance of the Budget, unless it was really by a genuine sale
- two specific areas that may be caught by these anti-forestalling rules are:
1. contracts entered before the Budget in order to ‘bank’ ER, which have not yet completed
2. the other one involves company reorganisations. This is where there’s been a share for share exchange between 6 April 2019 and the Budget, and an election for Entrepreneurs’ Relief is claimed on the reorganisation
- if you’re caught by these anti-forestalling rules, then you’ll be within the new £1million lifetime limit, even if contracts were entered unconditionally before budget day
- taxpayers might need to review any transactions entered prior to the budget, to consider whether the anti-forestalling rules could apply.
Capital Gains Tax (CGT)
- No new announcements on this
- worth mentioning the CGT changes to UK residential property that we were already expecting, and discussed in a previous episode are coming in as expected
- from 6 April 2020 the final period exemption will be reduced from 18 months to 9 months and lettings relief will only apply where a landlord shares a property with a tenant
Inheritance Tax (IHT)
- This received lots of attention over recent years, particularly in relation to the complexity of the rules and their perceived impact on social equality
- but nothing in the budget, perhaps it’s something we’ll see in the autumn budget.
- There are two threshold measures that are used to test whether an individual's annual pension contribution allowance will be tapered down from the standard £40,000, these will both increase by £90,000
- what that means is that taxpayers with income below £200,000 will not be affected by the tapering, so can contribute £40,000 annually into their pension, assuming they have enough earnings
- currently the minimum amount that a taxpayer’s annual allowance can be tapered down to is £10,000, this is also set to decrease to £4,000
- broadly anyone with income over £312,000 will see their annual allowance tapered down to £4,000.
Digital Service Tax (DST)
- In the absence of a consensus on a global or EU measures, the UK is introducing a unilateral 2% digital service tax, from 1 April 2020, as first announced in Budget 2018.
- This is targeted at large multinationals with global turnover in excess of £500 million per annum and will apply to revenues generated from social media platforms, search engines and online marketplaces by users located in the UK
- DST will be reportable and payable on an annual basis, regardless of whether the business has a UK presence or not
- the introduction of this long-anticipated measure is no surprise, as it’s proving difficult for jurisdictions to reach consensus over a combined solution for allocating taxable profits fairly in a digital economy
- it is intended to be a temporary measure which will be repealed when a more appropriate global solution is in place.
- These rules are designed to counteract arrangements that seek to exploit the differences in tax treatment between two jurisdictions.
- the objective of the consultation is to ensure that the hybrid mismatch rules ‘work proportionately and as intended’
- this is welcome given the complexity of these rules and the positions some international groups are having to take in tax returns
- businesses should continue to view HMRC’s continued focus on compliance and avoidance measures as being of paramount importance when conducting business in the UK.
- Remains at 19% from this April 2020
- by maintaining the rate, the Government expects this measure to increase tax take by £930 million in year one, and £4.6 billion in year two
- the rate remains one of the lowest in the G20 and is also in line with the Government’s aim of being attractive to business
- businesses will also need to ensure that their deferred tax calculations reflect the change in tax rate, as appropriate, for their accounts.
- The Chancellor confirmed the Government’s commitment to ‘unleashing’ the potential of UK businesses, by announcing several tax measures that encourage investment and strengthen economic activity
- an increase in the R&D expenditure credit rate from 12-13% and the SBA’s increasing from 2% to 3%
- a welcome delay in the introduction of the PAYE cap for the SME R&D scheme until 1 April 2021, giving the Government more time to design the cap appropriately
- a new consultation on data and cloud computing expenditure to see if more software development costs should qualify for R&D tax relief.
- Increase in the structures and buildings allowance to 3% from April 2020 will accelerate relief for construction costs on new non-residential structures, from 50 years to 33 years
- various other changes to capital allowances to encourage sustainable investment and incentivise use of low emission vehicles
- simplification of the intangible fixed asset regime is also welcomed to allow companies to achieve accelerated relief on old but well-established intellectual property, under a single tax regime
- EMI scheme is to be reviewed to ensure it is achieving its objective of supporting high-growth companies recruit and retain the best talent and to see if more companies can access the scheme.
In conclusion, the Budget did not provide any huge surprises. The focus on compliance and anti-avoidance continues but that was also expected. We had confirmation of things we knew were happening, such as off-payroll working, the loan charge and the corporation tax rates remaining the same. And there were things that some might have expected to change, but didn’t, such IHT and CGT rates.
We are however expecting a budget in the autumn and IHT changes might make an appearance then.
Visit our 2020 Budget hub here for analysis and commentary from Smith & Williamson’s team of experts https://smithandwilliamson.com/en/campaigns/budget-2020/
If you have a podcast query, Please contact:
Media & Advertising Assistant Manager
This episode was recorded on 13/03/2020
Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.
Smith & Williamson LLP is a member of Nexia International, a leading, global network of independent accounting and consulting firms. Please see https://nexia.com/member-firm-disclaimer/ for further details.
Smith & Williamson LLP is part of the Tilney Smith & Williamson group.
Registered in England No. OC 369631.
Smith & Williamson Fund Administration Limited is authorised and regulated by the Financial Conduct Authority.
This S&W The Pulse podcast is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said. The views expressed are not necessarily those of the presenter or of Smith & Williamson or any of its affiliates. No reproduction of this podcast may be made in whole or in part for professional or recreational purposes. No action should be taken based on this podcast and we accept no liability if we change your views on any of the subjects mentioned.
Please remember the value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
The Pulse from Smith & Williamson
"Coronavirus" Budget 2020
Broadcast on Smith & Williamson at 09:00, 17th of MARCH 2020
Available online from 10:00 on the same day .
Entrepreneurs' relief - avoiding the pitfalls
Entrepreneurs’ Relief reduces the rate of capital gains tax to 10% on certain disposals of business assets. The new rules impose stricter tests of eligibility, it's important to consider the capital and debt structures of a business to avoid losing this valuable relief.
International tax reporting changes: Directive on Administrative Cooperation 6 and the Mandatory Disclosure Rules
The Directive on Administrative Cooperation 6 (“DAC6”) is a response to the OECD’s Mandatory Disclosure Rules aiming to strengthen tax transparency across the EU and counter aggressive tax planning. On 31 December 2020, HMRC confirmed that the application of DAC6 will be severely limited in the UK to align with the OECD’s Mandatory Disclosure Regime (“MDR”). This means that only those arrangements that meet Hallmark D of DAC6 will need to be reported in the UK. DAC6 continues to apply in full across the EU.
VAT and the reverse charge – tough times in the construction sector
Those involved in property contracting may be grimly aware of some important VAT changes due to be introduced with effect from 1st October of this year. However, it seems many are still blissfully unsuspecting of the changes about to hit.