The Chancellor has confirmed the Government's commitment to 'unleashing' the potential of UK businesses, announcing tax measures to encourage investment and strengthen economic activity. Research & development relief has been increased, and several aspects of the capital allowances regime have been extended. The anticipated digital services tax will be introduced from April 2020, and the Government is planning to review several regimes within corporation tax.
The corporation tax rate will remain at 19% from 1 April 2020
As expected, the corporation tax rate will remain at 19% for the financial year beginning 1 April 2020. Legislation will also be introduced to keep this rate at 19% for the following year.
The Government announced that the main rate of corporation tax for the financial year beginning 1 April 2020 will remain at 19%, rather than falling to 17% as was previously legislated.
Finance Bill 2020 will include this amendment and will also set the main rate at 19% for the financial year beginning 1 April 2021.
The Government expects this measure to increase tax take by £930 million in year one, and £4.6 billion in year two, while still noting that the corporation tax rate remains one of the lowest in the G20.
It comes as no surprise that the corporation tax rate will remain at 19%, and businesses will no doubt have already planned for this outcome.
Once this change has been substantially enacted under the Finance Bill 2020, businesses will need to ensure that their deferred tax calculations reflect the change in tax rate, as appropriate.
When will it apply?
To apply from 1 April 2020
Increase to the annual rate of the structures and buildings allowance to 3%
The structures and buildings allowance (SBA) will be increased from 2% to 3%. The rate change will take effect from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes.
The SBA was introduced in 2018 to support business investment into new non-residential structures and buildings as well as improving existing ones. The allowance, which provides a writing down allowance on the cost of new non-residential structures and buildings, will increase from 2% to 3%. The time it takes to relieve qualifying expenditure will reduce from 50 years to 33 and one third years. A number of technical changes have also been introduced, some with retrospective effect and others effective from 11 March 2020.
The Government remains keen to encourage capital investment in the UK and support those businesses that are investing in new non-residential structures and buildings. The increase in rate shows commitment to improving the international competitiveness of the UK’s capital allowances system. For businesses investing in non-residential buildings, this rate increase will be welcome news.
When will it apply?
It will apply from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes.
Large businesses will be required to tell HMRC if they take a tax position that is likely to be challenged
From April 2021, large businesses must notify HMRC when they take a tax position that HMRC is likely to challenge. A consultation will follow on the mechanism for notification.
Disclosures of tax positions that HMRC is likely to challenge will only be required by large businesses. No further detail has been provided on what the threshold for a 'large' business will be, or how a business should determine whether or not HMRC is likely to challenge a tax position. The Government has, however, confirmed that this policy will reflect international accounting standards, which many large businesses already follow.
A consultation will be held to inform the development of the notification mechanism.
Very little information is currently available on what could be a significant change to tax planning for large corporate entities. It will be interesting to see how the rules develop throughout the consultation period and the level of information the Government is expecting to be disclosed. The mechanism for reporting could potentially impose a substantial administrative burden on large businesses. Once it is implemented, it will also be interesting to see if it is subsequently expanded to smaller entities or non-corporate taxpayers.
Affected businesses will be likely to see this as yet another heavy reporting burden following closely behind the reporting of cross-border arrangements required by the International Tax Enforcement (Disposable Arrangements) Regulations 2020, also known as DAC6. Clear guidance and plenty of time to implement internal systems will be essential for a smooth introduction of these rules.
When will it apply?
To apply from April 2021
Employment allowance increases from April 2020
The increase in the employment allowance from £3,000 to £4,000 will take effect from April 2020.
The Government will increase the employment allowance, which is available to smaller businesses, from £3,000 to £4,000. As a result, eligible businesses and charities will be able to reduce their secondary class 1 national insurance liabilities.
It is estimated that this measure will increase the number of businesses and organisations with a nil national insurance bill by 65,000.
The Government anticipates that this measure will enable small, growing businesses to increase employment without incurring additional national insurance liabilities.
While this is good news for smaller enterprises, this measure is unlikely to have a significant impact on medium and large employers.
When will it apply?
Time to pay arrangements: a concession for COVID-19
Time to pay (TTP) arrangements extend tax payment deadlines for taxpayers in financial distress. HMRC has set up a dedicated helpline to support businesses and the self-employed whose finances are affected by COVID-19, including the option to agree TTP arrangements where appropriate.
TTP arrangements can be applied for by any taxpayer unable to meet a tax payment deadline. HMRC reviews applications and, if satisfied as to the taxpayer’s circumstances, will agree terms for an extended deadline, normally collecting regular instalments of tax over the extension period. The extension is rarely more than one year. Penalties are waived if the TTP deadlines are met, though interest generally applies.
The dedicated HMRC helpline can be used by any business or self-employed individual affected financially by COVID-19. The aim is to support taxpayers through temporary financial challenges, and TTP arrangements will be offered where appropriate.
The Government has confirmed that, if a business has administrative difficulties in contacting HMRC or paying tax, late payment penalties and interest will be waived.
We welcome this announcement, part of a programme of measures to mitigate the economic impact of COVID-19. Many businesses do not have significant cash reserves, and can easily get into difficulties if cashflow is reduced. TTP arrangements can help otherwise viable businesses to survive relatively short term issues, ultimately assisting the economy.
We would encourage any business or self-employed individual who believes that they may have difficulty paying their next tax bill to contact HMRC as far in advance of the deadline as possible, with estimates of how much time they will need to raise the funds, and what instalments they can realistically pay.
Previously, TTP arrangements have been used to support businesses affected by flooding and the 2008 financial crisis, as well as those with individual issues, so the mechanism is well established.
When will it apply?
Changes to tax relief for pre-Finance Act 2002 intangible fixed assets
Pre-Finance Act 2002 intangible assets acquired from related parties on or after 1 July 2020 will be brought within the intangible fixed asset regime, rather than corporate chargeable gains.
Under existing law, the corporation tax rules which apply to intangible assets only apply to those assets that are created on, or after 1 April 2002, or to intangible assets acquired from an unrelated party on, or after 1 April 2002.
Assets created prior to 1 April 2002 or acquired from a related party post this date (pre-FA 2002 intangible assets), were instead taxed under the corporate chargeable gains rules.
From 1 July 2020 companies who acquire pre-FA 2002 intangible assets from related parties will bring these assets within the intangible fixed asset regime. This means that corporation tax relief will now be available for the cost of these assets, where previously it was not.
This measure is welcome news and supports UK investment in intangible assets by allowing a company’s pre-FA 2002 intangible assets acquired from 1 July 2020 to be relieved and taxed under a single regime.
When will it apply?
The measure will be effective from 1 July 2020
Increase in the rate of research and development expenditure credit
The rate of research and development expenditure credit (RDEC) is to increase from 12% to 13% from 1 April 2020.
Research and development (R&D) tax credits support the private sector by allowing companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs. Incentivising additional R&D activity is an essential part of the Government's objective to increase productivity and promote growth through innovation within the UK economy.
In order to achieve this objective, the Government has increased the rate of RDEC from 12% to 13%. This increase means that large companies will obtain more financial support from Government when undertaking R&D activities.
This rate increase continues the Government’s investment in innovation. It indicates the global competition in relation to innovation funding and the pressure on the UK to match the innovation funding available from other jurisdictions in the European Union, and further abroad.
In 2018, the rate of RDEC increased from 11% to 12%, which generated a net cashflow benefit of 9.72%. The current increase to 13% will result in a net benefit of 10.53% and may further incentivise the private sector to undertake innovative projects.
Despite this increase, some uncertainty about the determination of eligible and non-eligible R&D activities remains. Whether or not this increase in RDEC is sufficient to attract multinational company investment into the UK, when compared to other jurisdictions, remains to be seen.
The UK continues to make positive strides in its investment into innovation and with a well-managed R&D claim process RDEC can add unexpected levels of value to companies and their shareholders.
When will it apply?
The increase in the RDEC rate will have effect for expenditure incurred on or after 1 April 2020.
Review and consultation announced of the UK funds regime
A review of the UK funds regime to cover both direct and indirect tax will take place in 2020. This will begin with a consultation on whether or not changes could be made to make the UK a more attractive location for companies used by funds to hold assets.
The Government has announced a review of the UK funds regime, covering both direct and indirect taxes as well as relevant current regulations. The initial consultation seeks to gather evidence and explore the attractiveness of the UK as a location for those entities that hold fund assets. In addition, the VAT treatment of fund management fees will be reviewed. The consultation closes on 20 May 2020.
This review will be welcomed throughout the fund sector. The hope is that, following consultation, policy changes will make the UK market more competitive in a similar way to current structures based offshore. One such example is the lobbying for an alternative fund structure aimed at holding real estate assets for specific investors, that would make the UK a more viable and competitive jurisdiction going forward. We look forward to the outcome of the consultation.
Consultations on research and development tax relief
The implementation of the PAYE cap for small and medium enterprises will be delayed until 1 April 2021. A further consultation will be issued on the design of the cap. The Government will also consult on whether or not expenditure on data and cloud computing should qualify for R&D tax credits.
The PAYE cap sought to prevent abuse of R&D tax relief by limiting the payable tax credit for SMEs to three times the PAYE liability of a company. The Government has decided to delay the implementation of the PAYE cap. The cap was initially planned to come into force in April 2020 but has been delayed until 1 April 2021. This is to allow for further consultation to ensure it prevents abuse of the scheme, while continuing to incentivise R&D activity within eligible companies.
The Government will also consult on the eligibility of data and cloud computing expenditure qualifying for R&D tax credits. These costs are not currently qualifying R&D expenditure under the current R&D relief schemes.
It is with some relief we see that the Government has responded to the private sector’s concerns regarding certain nuances of the R&D tax relief schemes for SMEs and large companies.
While the delay to the introduction of the cap is a positive step, more work lies ahead to develop workable legislation.
Areas that continue to cause concern include the stringent rules relating to categories of eligible and non-eligible expenditure. Restrictive expenditure categories have resulted in many companies over- and under-claiming the R&D tax reliefs available. One such area is expenditure on software development and data and cloud computing, which are required in facilitating R&D activities. The Government has made a promise to consult on these areas. This should be seen as positive by the industry, however, it may only be a short-term solution, given the rapid evolution of this sector.
When will it apply?
The PAYE cap will apply from 1 April 2021
Consultation on hybrid mismatch rules
The Government will publish a consultation on the UK hybrid mismatch rules. The rules, which have been in effect since 1 January 2017, are intended to counteract tax mismatches arising from the exploitation of different tax treatments in different jurisdictions.
The details of what questions are to be posed by the consultation, and the timeframe for response, are not yet known.
Introduced as the UK’s response to the OECD’s Base Erosion and Profit Shifting (BEPS) workstream on neutralising the effects of hybrid mismatch arrangements. The UK rules extend beyond those stipulated by the EU Anti-Tax Avoidance Directive 1 and 2. It will be interesting to see if the Government perceives the rules as impacting arrangements that are not exploiting economic mismatches and are not intended to be within the remit of the regime.
Unilateral digital service tax to be introduced
In the absence of consensus on a global or EU measure addressing the taxation of the digital economy, the UK is proceeding with the introduction of a unilateral digital service tax (DST), as first announced in the 2018 Budget. It imposes a 2% tax on certain revenues derived by large multinationals from social media platforms, search engines and online marketplaces with UK users.
Legislation is being introduced with the objective of correcting a perceived misalignment of the taxation rights on the profits of large multinationals with the value derived from online users.
The DST is designed to be a temporary measure pending a more comprehensive global solution. The DST will apply a tax of 2% of revenues generated from users normally located in the UK by businesses which operate:
- social media services;
- search engines;
- provision of online marketplaces; and
- online advertising associated with any of the above. Advertising revenues are in scope where the advertisement is viewed or otherwise ‘consumed’ by a user normally located in the UK.
To ensure that only the largest businesses are affected, the measure will include:
- two financial thresholds: global revenues from in-scope activities must be at least £500m a year and the first £25m of relevant UK revenues are also not taxable; and
- a safe harbour: allowing businesses to elect to calculate their liability on an alternative basis, which will be of benefit to those with a very low profit margin.
The introduction of this long-anticipated measure is no surprise as it continues to prove difficult for jurisdictions to reach consensus over a combined solution to the widely-recognised problem of allocating taxable profits fairly in a digital economy and a digital age. The UK follows France, Australia, Austria and Poland in the introduction of similar unilateral rules, ultimately increasing the complexity and administrative burden for the affected multinationals. Most businesses will, however, continue to be unaffected by the rules, which should impact only the largest of businesses. This suggests that the £2bn of anticipated tax revenues generated would be raised by a small number of companies. The tax is likely to impact US technology businesses and it is anticipated that retaliatory measures may be adopted by the US, similar to those imposed on French businesses.
ATED annual chargeable amounts increase with inflation
The annual tax on enveloped dwellings (ATED) charges automatically rise with inflation each year. From 1 April 2020, the ATED charges will increase by 1.7%.
Tax relief for housing cooperatives
New reliefs from the annual tax on enveloped dwellings (ATED) and stamp duty land tax (SDLT) have been announced for qualifying housing cooperatives. These changes are intended to make the taxation of housing cooperatives fairer.
Housing cooperatives are currently subject to both ATED and SDLT on dwellings worth at least £500,000. A consultation on relief from these taxes will be carried out in summer 2020, and legislation is expected in Finance Bill 2020/21.
These changes will provide a welcome relief from ATED and SDLT for qualifying housing cooperatives.
It has been considered by some that housing cooperatives should not have been made subject to these taxes, which were initially intended to combat tax avoidance through enveloping property in corporate structures.
As such, the changes should protect qualifying housing cooperatives while ensuring no new opportunities for tax avoidance are inadvertently created.
When will it apply?
The SDLT relief will be included in the 2020 Autumn Budget, and the ATED relief will come into effect on 1 April 2021.
Capital allowances changes to encourage sustainable investment
One year extension of 100% first year allowances for qualifying investment in designated areas within enterprise zones.
Enhanced capital allowances in enterprise zones were introduced to encourage investment and economic growth. Legislation will be introduced so the 100% first year allowances remain available for qualifying plant and machinery expenditure in all designated areas within enterprise zones. These measures, originally introduced in 2012, will now be available until at least 31 March 2021.
The extension of the availability of enhanced allowances in enterprise zones shows continued support to encourage investment and economic growth in these areas by the government.
When will it apply?
The extension to the enhanced allowances in enterprise zones will apply through to 31 March 2021.
Extension of 100% capital allowances for zero emission business cars
The 100% first year capital allowances for zero emission cars and goods vehicles and equipment for gas refueling stations are to be extended. The carbon dioxide emission thresholds for capital allowances on business cars will also be reduced to incentivise the use of low-emissions vehicles.
To encourage businesses to acquire ultra-low and zero-rated emission cars for business use, the carbon dioxide emissions thresholds for cars is to be reduced. From April 2021, the main rate of writing down allowance of 18% will only be available to cars with carbon dioxide emissions up to 50g/km. This will also apply to the car lease rental restriction.
The period for which 100% first year allowances will be available on zero emissions vehicles is to be extended from April 2021 to April 2025.
First year allowances are also currently available on zero emission goods vehicles and natural gas and hydrogen refueling equipment. The Government has committed to extending the period these allowances are available to 2025.
These proposals are in line with the Government’s commitment to act on climate change and are designed to incentivise businesses to acquire ultra-low emission and zero-rated cars.
When will it apply?
The changes to emission thresholds for capital allowances will apply from April 2021.
The extension of the existing first year allowances for zero emission good vehicles and gas refuelling equipment will be to the end of 2025.
Restriction on use of corporate capital losses
Confirmation that relief for carried-forward capital losses is to be restricted to 50% of chargeable gains arising in the period. An annual group allowance of £5 million will be available for unrestricted income and capital loss relief.
As previously announced in Budget 2018, the Government will introduce legislation to restrict companies’ use of carried-forward capital losses to 50% of chargeable gains from 1 April 2020.
The measure will include an allowance of up to £5 million of profits before the 50% restriction is applied. This allowance can be offset by capital or income losses.
These rules will be legislated in Finance Bill 2020.
The capital loss restriction rules are being introduced to ensure large companies pay at least some tax when they generate significant chargeable gains. These rules will bring the tax treatment of capital losses in line with the treatment of carried forward income losses. It will effectively bring forward tax receipts generated from gains arising in groups with large capital losses. The availability of the £5 million deductions allowance should ensure that most companies are unaffected by this restriction. Albeit, it is important to note the £5 million allowance covers both income and chargeable gains.
When will it apply?
1 April 2020
Clarification of treatment of Limited Liability Partnership (LLP) tax returns
The Government will legislate to put beyond doubt that LLPs should be treated as general partnerships under income tax rules.
The new rules will ensure that HMRC can continue to amend LLP members’ tax returns where the LLP operates without a view to profit. This will only apply where an LLP has delivered an LLP partnership tax return on the basis that is operating ‘with a view to a profit’ and is subsequently found to be operating ‘without a view to a profit'.
A recent First-tier Tribunal decision drew attention to the validity of the income tax return enquiry process where an LLP was found not to be trading with a view to a profit.
If HMRC had issues with the trading status of the LLP it could, and should have, opened concurrent enquiries into the individual members' returns. In this case, and presumably many others, it failed to do so.
The legislative change will, and is intended to, have a retrospective impact to rectify the issue for HMRC.
New measures for non-UK resident companies with property income
Changes are being introduced to ensure that Finance Act 2019 rules, enacted to bring non-UK resident companies that carry on a UK property business into the charge to UK corporation tax from 6 April 2020, work as intended.
These measures are intended to ensure a smooth transition for non-UK resident landlord companies from income tax to corporation tax. The specific points addressed include:
- clarification to ensure that the taxation of income from non-trading loan relationships and derivatives held by UK permanent establishments is not limited;
- new amendments to the corporate debt and derivative contract rules to bring into account net financing costs incurred in the 7 years prior to carrying on the property business;
- ensuring time limits for electing into the Disregard Regulations are not accelerated solely as a result of the company disposing of an asset where the gain is subject to corporation tax. This will be relevant where the disposal occurs prior to April 2020; and
- amendments to the exception from notifying chargeability to corporation tax, where tax is deducted at source from rental profits.
Although these changes seem complex, they are intended to align the tax treatment of non-UK resident corporate landlords with that of other UK companies. This includes ensuring the same reliefs for pre-trading finance costs and the same time limits for making elections are made available to them.
When will it apply?
From 6 April 2020
Additional HMRC powers to combat promoters of tax avoidance schemes
As announced in its response to the loan charge review, HMRC has committed to take further action against promoters of tax avoidance schemes. This will include the publication of a new strategy and legislation to strengthen HMRC's powers.
HMRC is to be given new powers to clamp down on businesses and individuals that promote tax avoidance schemes. These powers will complement the existing anti-avoidance regimes by allowing HMRC earlier access to information and strengthening penalties for promoters. New rules will also prevent promoters from using corporate structures to avoid the promoters of tax avoidance scheme.
In addition, the General Anti Abuse Rule (GAAR) will be changed so that it addresses avoidance through partnership structures.
HMRC will set out its plan to tackle promoters in a new, 'ambitious' strategy. This approach will include policy, operational and communications interventions to disrupt the market for tax avoidance schemes.
Announcements of new measures to tackle tax avoidance have been standard fare for Budgets for many years, but the particular focus on promoters is a slight variation on the theme. One of the major criticisms of the loan charge was the focus on the taxpayer without any action being taken to penalise the promoters that marketed these schemes to them. HMRC's new strategy seems to be in line with these recommendations, but the expansion of powers does not appear to be limited to disguised remuneration schemes. The wider effect, then, is yet another extension to HMRC's ability to gather information and an extension of the GAAR.
When will it apply?
Draft legislation will be included in Finance Bill 2020/21, and the rules will come into effect when Royal Assent is received.
Other business tax measures included in the Budget
The other business tax measures announced by the Chancellor include changes on which draft legislation has previously been published.
- a new type of Enterprise Investment Scheme (EIS) fund is to be introduced, called the ‘approved knowledge-intensive fund’;
- loss relief on share disposals by investment companies will no longer be limited to shares in UK businesses;
- corporation tax liabilities arising on cross-border transfers may be paid by instalments; and
- the rules for spreading the tax impact of adopting IFRS 16 lease accounting have been clarified.
While none of these announcements comes as a surprise, businesses will be glad that these measures have not been cancelled or delayed. The new type of EIS fund will enable more businesses to access valuable investment, and more certainty will be provided in relation to the complex rules for spreading IFRS 16 adjustments.
The changes in respect of share disposals and instalment payments for cross-border transfers bring the UK tax treatment into line with EU law. It is not, therefore, clear if the rules will remain the same after the transitional period is over. For now, however, they will be of benefit to UK business, particularly those involved in cross-border activities.
When will it apply?
The measures will take effect when Finance Bill 2020 is enacted.