The Budget 2020 continued a recent theme for large corporates and international businesses, with continued incentives for investment in the UK, while placing increasing focus on where and how they pay their taxes. This is unsurprising, given the continued drive from the OECD with regards to base erosion and profit shifting (BEPS), and the ever-growing presence of the digital economy forcing governments to consider whether their tax regulations are fit for modern purposes.
The introduction of the Digital Services Tax (DST) from 1 April 2020 is going ahead as announced in Budget 2018. Targeted at businesses with global turnover in excess of £500m per annum, this is clearly aimed at the top end of businesses in the UK. The Government wants tax paid by qualifying business to reflect the value these businesses derive from an active user base in the UK. The OECD is pressing for an economic nexus approach to tackling the challenge of taxing the digital economy, and the DST is a first step in moving towards a consumer centric taxation system.
As expected, the corporation tax rate was kept at 19% from 1 April 2020 despite original plans for a reduction to 17%. The new rate will be treated as substantively enacted for UK GAAP and IFRS on the passing of the Budget resolutions. It will not be enacted for US GAAP purposes until Royal Assent later this year.
In a positive move for large corporates, both the Structures and Buildings Allowance (SBA) and the Research and Development Expenditure Credit (RDEC) were increased. The SBA was increased from 2% to 3% on qualifying costs for new non-residential buildings, and the RDEC from 12% to 13% on qualifying research and development expenditure. There will be a consultation on whether expenditure on data and cloud computing should qualify for R&D tax credits, again increasing the value of R&D incentives for businesses in the UK.
Simplifications to the intangible fixed asset regime were also welcome and may allow for companies to achieve accelerated relief on old but well established intellectual property. Under the proposed revision, from 1 July 2020 companies who acquire pre-FA 2002 intangible assets could bring these assets within the intangible fixed asset regime, subject to anti-avoidance provisions.
There will be a consultation on the corporation tax rules that apply to hybrid mismatch arrangements. The consultation seeks 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.
As could be predicted, one of HMRC’s focus areas continues to be mitigation of the use of avoidance schemes and a clamp down on anti-avoidance and evasion more generally. We have recently seen a number of Corporate Criminal Offence investigations opened, and announcements today look to introduce further non-compliance measures.
In this regard, the Government announced the large business notification, whereby from April 2021, large businesses will be required to notify HMRC when they take a tax position that HMRC is likely to challenge. This is consistent with the ever growing reporting requirements for large businesses, but given we are yet to see how HMRC plan to deal with the influx of data expected to arrive by virtue of Directive on Administrative Cooperation 6 (DAC 6), it will be interesting to see what comes out of the upcoming consultation regarding the detail of the notification process.
Further measures have also been outlined to tackle the promoters of tax avoidance. A new, ambitious strategy from HMRC will outline the range of policy, operational and communications interventions both underway and in development to drive those who promote tax avoidance schemes out of the market, disrupt the supply chain to stop the spread of marketed tax avoidance and deter taxpayers from taking up the schemes. This increasingly targeted anti-avoidance, plus the complexity of the UK tax legislation, means that large international businesses should take great care when ensuring they are compliant in the UK.
In conclusion, the Budget did not provide any huge surprises for large international businesses, though perhaps the DST represents the beginning of a shift towards a more modern approach to tackling the challenges of the digital economy. The focus on compliance and anti-avoidance measures is a trend that is set to continue, and businesses should continue to view this as of paramount importance when conducting business in the UK. Keeping up to date on the various consultations will be important for businesses to get their voice heard and keep up to date with any changes to legislation that will affect them.
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.
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
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.
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.
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.