The Chancellor announced cuts to Entrepreneurs’ relief, with the lifetime allowance reduced from £10m to £1m with immediate effect. The move followed a review, which found the relief was “expensive, ineffective and unfair” and cost the Government over £2bn a year, with 75% of the relief being given to 5% of the claimants.
By reducing the relief to £1m the Chancellor believes that 80% of entrepreneurs will not be affected but what does it mean for the other 20% and will these cuts deter aspiring entrepreneurs from starting new businesses and taking financial risks?
For those already owning shares, there are other commercially driven alternatives – and we expect the use of Employee Ownerships Trusts , which in some cases be an alternative route to a CGT-free exit for shareholders, to increase. Interestingly, investors’ relief has remained untouched, which allows investors to access the 10% rate up to £10m so this could be another area for entrepreneurs to explore.
For those owners who haven’t hit the lifetime allowance for pensions (increased to £1,073,100 for 2020/21) the Chancellor announced an increase in the threshold income and adjusted income for the purpose of calculating the tapered annual allowance. Individuals with a threshold income of below £200,000 or adjusted income below £240,000 will not be affected by the tapered annual allowance. For individuals who continue to be affected by the tapered annual allowance, the minimum tapered annual allowance will be reduced to £4,000 (currently £10,000) in line with the money purchase allowance.
There were several other measures announced by the Chancellor which are important for owner managed businesses:
- Research & Development - Delaying the implementation of the PAYE cap on the payable tax credit in the SME R&D scheme until 1 April 2021. The Government will also consult on changes to the design of the PAYE cap and whether expenditure on data and cloud computing should qualify for R&D tax credits.
- Capital allowances – Increasing the rate of the structures and buildings allowance (SBA) from 2% to 3% with effect from April 2020. The allowance provides relief for eligible construction costs for new non-residential structures and buildings incurred on or after 29 October 2018 and is given on a straight-line basis.
- Corporation tax rate – Confirmation that the rate of corporation tax will remain at 19% from 1 April 2020. This measure (cancelling the enacted cut to 17%) is likely to be substantively enacted for UK GAAP on the passing of the resolution, though it will not be enacted for the purpose of IFRS and US GAAP until Royal Assent.
- Off-payroll working rules in the private sector: The Government confirmed that its reform will be implemented on 6 April 2020. Unless covered by the small company exemption, businesses engaging off-payroll workers will need to ensure that their systems are set up correctly to deduct PAYE and NIC from 6 April.
- Other employment tax changes: The Chancellor announced a new national insurance holiday from April 2021 for employers employing veterans in their first year of civilian employment. The government confirmed the rise in the employment allowance from £3,000 a year to £4,000 a year which should take a significant amount of businesses out of paying NICs entirely.
- Business rates: The Government has announced several measures to assist businesses in this area and support businesses through COVID-19. These include an increase in the business rates retail discount from 50% to 100% and an increase in the business rates pub discount from £1,000 to £5,000. The government will undertake a business rates review in the Autumn.
Review of changes to the off-payroll working rules (IR35)
The Government has responded to the recent review of changes to the implementation of the off-payroll working rules, and confirmed that the changes will be implemented on 6 April 2020.
At Budget 2018, the Government announced that it would reform the off-payroll working rules in the private sector from April 2020.
The reform shifts the responsibility for both assessing and communicating the employment status of a worker operating through an intermediary to medium and large clients. The aim of the reform is to ensure individuals who work like employees, but through their own personal service company (PSC), pay the same income tax and national insurance contributions (NIC) as individuals employed directly.
The Government has recently reviewed the proposed reform and concluded the off-payroll working rules will be extended to medium and large businesses in the private and third sectors from 6 April 2020, as originally planned.
However, the Government announced in its review that it is making a number of changes to support the successful implementation of the rules. These include:
- the rules apply to services provided from 6 April 2020 but not to payments made after this date that related to pre-6 April 2020 services;
- HMRC will take a lenient approach for the first 12 months and will not levy penalties for inaccuracies but businesses must be able to show that reasonable care has been taken;
- group determinations are permitted if terms for groups of workers are identical;
- HMRC will not use the new rules to open compliance checks into PSCs for tax years before 6 April 2020; and
- HMRC has published further guidance and promises additional support.
In addition, the Government will continue to monitor and evaluate the operation of the rules following implementation.
Prior to the review there was a lot of uncertainty and lack of guidance regarding the application of the rules. It will be disappointing for a number of companies that the off-payroll working rules will be implemented from 6 April 2020 and businesses will not be given more time to prepare.
In addition, following the review, there remain several uncertainties in respect of the application of the rules. For example:
- there is uncertainty surrounding the application of ‘employment status indicators’, particularly in respect of ‘mutuality of obligation’. The correct interpretation of mutuality of obligation is a matter of dispute, and HMRC’s position has been criticised. Recent case law has highlighted the importance of the mutuality of obligation indicator, however, HMRC’s CEST (Check Empoyment Status for Tax) tool will continue to disregard mutuality of obligation; and
- the Government review suggests that use of the CEST tool might not be sufficient to demonstrate reasonable care, which exposes businesses to risk of PAYE and NIC liabilities.
Although the lenient approach and additional guidance from HMRC is welcome, further sector specific guidance would be helpful to ensure businesses understand the changes to the legislation and contractors do not inadvertently pay more tax than is needed.
When will it apply?
From 6 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.
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
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
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.
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
Entrepreneurs' Relief (ER) lifetime limit reduced to £1 million
The ER lifetime limit is the overall amount of qualifying capital gains on which an individual can claim ER during their lifetime. The limit, previously £10 million, has been reduced drastically from 11 March 2020 to £1 million.
ER is a valuable relief reducing the capital gains tax (CGT) rate from 20% to 10% on qualifying disposals, commonly unlisted shares in a trading company for which the shareholder was an employee or director.
The reduction of the lifetime limit means that only the first £1 million of gains realised on qualifying disposals during an individual’s lifetime will qualify for the reduced rate of CGT.
The reduction to the lifetime limit will affect qualifying disposals made on or after 11 March 2020. Anti-avoidance rules will accompany the changes, however, and these rules aim to counteract attempts to plan in advance of the changes and will apply broadly in two scenarios:
- contracts entered into before the Budget in order to ‘bank’ ER, which have not yet completed. This is unless it can be shown that the contract was not entered into to exploit the rules governing the timing of a disposal and, where the parties to the contract were connected, that the contract was entered into for wholly commercial reasons; and
- company reorganisations involving a share for share exchange between 6 April 2019 and 11 March 2020, where specific conditions are met and an election is made for Entrepreneurs’ Relief to apply on the reorganisation.
It was widely expected in the run-up to the Budget that a significant change would be made to ER. This was amid concerns and growing pressure from within and outside the Government, calling for the relief to be abolished entirely.
In this context, the continuing commitment to maintaining the relief and the acknowledgement of its value in supporting the role that entrepreneurs play in the economy is heartening.
The substantial reduction to the lifetime limit, however, significantly limits its benefit to taxpayers. The fact that the ER claimed in respect of previous qualifying gains must be taken into account means that many individuals will now find they are no longer entitled to claim the relief.
It is recommended that a review is carried out of any transactions entered into prior to the Budget, to consider whether the anti-forestalling rules could apply.
When will it apply?
It will apply to disposals from 11 March 2020, with possible wider application to some disposals prior to this date.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.