The Budget brought a surprise benefit for businesses holding property- the rate of Structures and Buildings Allowance (SBA) is to increase from 2% to 3% from April 2020 providing a further benefit for businesses investing in assets that had not attracted allowances since the phasing out of Industrial Buildings Allowances.
There was also a further boost for the high street yesterday where the previously announced discount on business rates for retail business premises in England with a rateable value below £51,000 will be at 50%, rather than one third. This will not only be expanded to cover cinemas and music venues; it will be increased to 100% and include hospitality and leisure businesses. There are also enhanced rates discounts for pubs and the government has committed to a fundamental review of business rates which we should expect in the autumn.
As expected, the Finance Act 2019 measures to transition non-UK resident companies that carry on a UK property business, to corporation tax from 6 April 2020 remains largely unchanged. Interestingly, the Government has gone further than expected following the consultation. It is to introduce a non-resident Stamp Duty Land Tax surcharge on acquisitions of residential property in England and Northern Ireland at 2% for all purchases by non-UK residents from 1 April 2021 an increase from the 1% originally proposed. Transitional rules may apply for contracts which exchange but do not complete between now and 1 April 2021.
From 6 April 2020, the reporting window for individuals and trustees disposing of residential property will be reduced to 30 days and the anticipated changes to principle private residence relief for letting relief and automatic exemption will also be introduced.
While the Annual Tax on Enveloped Dwellings (ATED) annual chargeable amounts for 2020 /2021 will rise by 1.7% from 1 April 2020 (in line with the September 2019 CPI) there is proposed relief for housing co-operatives. The Government will consult on, and have committed to introducing, new reliefs from the ATED and the 15% rate of SDLT for certain qualifying housing co-operatives.
In the past the Construction Industry Scheme (CIS) has been subject to abuse and we will see legislation introduced in Finance Bill 2020/21 to prevent non-compliant businesses from using the CIS to claim tax refunds to which they are not entitled.
There has been no change to the delay to the introduction of the VAT domestic reverse charge for building and construction services which will come into force on 1 October 2020.
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
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
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.
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.
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
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.