Given the level of Government focus on the financial services (FS) sector in recent years, it is perhaps then welcome news that relatively few tax changes for FS businesses were announced by the Chancellor in the 2018 Budget. This is not surprising in view of Brexit and the government trying to position the UK as a global leader in the FS sector.
A lot of headlines have been created by the introduction of the new Digital Services Tax (DST). This tax will apply to revenue from search engines, online market places and social media platforms, and it is worth noting that financial and payment services are specifically scoped out of the rules, so the good news is that the impact on FS businesses is expected to be relatively limited at this stage.
There were changes to the hybrid rules that are aimed at maintaining the minimum standards as set out in the Anti-tax Avoidance Directive. One such change which is being brought in with effect from 1 January 2019 involves amending the definition of regulatory capital for the purposes of the hybrid mismatch rules. Further changes are also proposed to the taxation of hybrid capital instruments in order to reflect their economic substance. These changes will affect a number of FS businesses including insurers and banks alike and may increase tax costs.
The Government intends to reform the corporate intangibles regime in order provide partial relief for the cost of goodwill on the acquisition of a business with eligible intellectual property, and removal of de-grouping charges in certain share disposals. These should have a positive impact on the FS sector generally and in particular with the restructuring of businesses in light of Brexit uncertainties.
From 1 April 2020, the Government intends to align the utilisation of brought forward capital losses with the existing 50% restriction on corporate income losses. In overview, if FS companies make chargeable gains after 1 April 2020, the offset of brought forward capital losses against these gains could well be restricted up to 50% of the gains.
Changes are being made to ease the burden of operating PAYE on short term business visitors and to extend the anti-avoidance rules around the taxation of contractors and personal service companies to the private sector with effect from 6 April 2020. In short, if FS businesses have employees working cross borders, and/or are using freelance workers, then consideration should be given to these changes now.
There were a number of new VAT measures announced, including one that will specifically impact the insurance sector. New rules are being introduced in order to prevent UK intermediaries from recovering input VAT where supplies are made to off-shore brokers or insurers but the underlying contract is with a party in the UK. Accordingly, where an off-shore insurer has UK insureds, and contracts with a UK insurance intermediary, the VAT position and impact will need to be considered in more detail. This measure has been introduced to counteract perceived VAT avoidance in cross border structures, though could ultimately increase the cost of operating insurance businesses going forward.
VAT and indirect taxes
VAT anti-avoidance measures announced
Further measures are being introduced to combat VAT avoidance.
A number of new VAT measures have been announced as follows:
- VAT grouping - the definition of ‘bought in services’ from outside the UK will be amended to ensure that VAT under the reverse charge provisions is not avoided. The new measure will come into effect from 1 April 2019;
- VAT and vouchers – legislation will be brought in for vouchers issued on or after 1 January 2019, which will prevent non-taxation or double taxation where the vouchers are used in the UK and EU;
- insolvencies – from 6 April 2020, the Government will effectively become a preferential creditor;
- unfulfilled supplies – the Government will amend the rules from 1 March 2019 to bring all prepayments for goods and services into the scope of VAT where customers have been charged VAT and have not received the supply or a refund;
- insurance – this measure restricts the ability of UK service providers to recover VAT on supplies to off-shore brokers or insurers where the underlying contract is with a party in the UK. This will come into effect on 1 March 2019.
"These announcements will not come as a surprise to businesses given recent communications from HMRC."
When will it apply?
The measures will apply variously from 1 January 2019 to 1 April 2019, except for the changes concerning HMRC preference in insolvencies, which will come into effect from 6 April 2020.
Payroll and employee incentives
Changes to the taxation of contractors and Personal Service Companies will increase risk of PAYE and NIC exposure for many companies
From April 2020, medium and large private sector organisations will be responsible for assessing the employment status of any contractors whose services are provided under a contract with a Personal Service Company (PSC) or intermediary, accounting for any Pay As You Earn (PAYE) and employees’ and employers’ National Insurance Contributions (NICs) due.
From 6 April 2020, private sector organisations will potentially become liable for PAYE and employer NICs in respect of payments to contractors engaged through an intermediary company or a PSC. This is an extension of the so-called IR35 rules, so that the obligations to correctly operate PAYE and account for NICs will now fall on the engaging company in most circumstances. The rules will apply to all engagements that are in place on or after 6 April 2020 in medium and large organisations. Small companies will be exempt.
The organisation that makes payments to the contractor or intermediary will be responsible for determining the status of the contractor and assessing whether or not PAYE and NICs will apply even where there is no direct contract between the individual and the company making payments.
No details have yet been provided on where exactly responsibility will lie in more complex cases where there are multiple intermediaries in a chain between the end user of services and a contractor. Nor has there been any confirmation of what the definition of a small company will be for these purposes. A further consultation on the detailed operation of the reform will be published in the coming months.
"It will be welcome news to the organisations affected that the changes have been delayed until 6 April 2020. Given the extent of the preparations required, however, many companies will already be considering their risk exposure and putting appropriate procedures in place. Significantly, the rules will apply to contractor arrangements already in place at 6 April 2020 as well as new arrangements; therefore, these rules will need to be considered when entering into or extending contracting arrangements over the coming year. For example, twelve-month contracts beginning on or after 6 April 2019 will be affected by the new rules.
This measure will have a significant impact for all companies that do not meet the small company exemption. There will be increased administration required when taking on contractors, increased costs for engagers and decreased net income for contractors where the new rules are applicable. Even a single contractor can easily lead to tens of thousands of pounds of possible exposure, so interest and penalties for non-compliance could also be significant.
In advance of the changes, organisations will need to undertake a review of the contractor relationships already in place, to ensure they will be compliant come April 2020. It will also be necessary to design and implement processes both for assessing new contractor engagements and for reviewing existing engagements on an ongoing basis; HMRC will consider these processes when testing for non-compliance."
When will it apply?
The changes will come into effect from 6 April 2020.
PAYE special arrangements for short-term business visitors to the UK: An extension of the PAYE payment deadline and an increase in the UK workdays threshold
The payment deadline for settling employers’ PAYE liabilities in respect of short term business visitors (STBVs) under a special arrangement will be moved back from 22 April to 31 May following the tax year-end. The number of UK workdays permitted for STBVs to be eligible for the special arrangement will be increased from 30 to 60.
The PAYE special arrangement is used by UK employers who host STBVs from overseas employers and whose earnings are not eligible for exemption from UK tax under a double taxation agreement. These STBVs commonly do not qualify for tax exemption because they are from an overseas branch of a UK company, or from a country with which the UK has not entered into a double taxation agreement.
The arrangement enables the employer to make one single PAYE payment for all STBVs, rather than through monthly payroll reporting for each STBV.
The extension of the payment deadline from 22 April to 31 May following the tax year-end will give more time for employers to collate the necessary information required to make the return. The increase in the UK workday limit from 30 to 60 will enable PAYE to be settled for more STBVs under the special arrangement.
"The PAYE payment deadline extension will be welcome news for employers operating PAYE special arrangements, who will have longer to collate the requisite information and to calculate the amounts subject to PAYE.
Also welcome is the relaxation of the eligibility criteria for STBVs by increasing the UK workdays limit to 60, as fewer STBVs will need to be reported through payroll on a monthly basis.
The above changes will increase the appeal of the PAYE special arrangement.
It is, however, disappointing for employers that the recommendations in the consultation to exempt STBVs from overseas branches of a UK company are not being taken forward."
When will it apply?
These changes will apply from 6 April 2020.
A new Digital Services Tax will be introduced from April 2020
The Digital Services Tax (DST) will apply a 2% tax on certain revenues for large digital businesses.
It will only apply to revenues from intermediating sales, as opposed to the online sales themselves, and where value is derived from UK users.
Search engines, social media platforms and online marketplaces will be caught, whereas financial and payment services, provision of online content, sales of software or hardware, and TV and broadcasting services are not within scope.
The introduction of the DST is designed to ensure that digital businesses pay UK tax that reflects the value they derive from UK users.
The DST is targeted specifically at large businesses, and is designed to be a temporary measure pending a more comprehensive global solution. The DST includes the following features to support this intention:
- 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.
- 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.
- review clause- the DST will be subject to formal review in 2025.
DST will be an allowable expense for UK corporation tax purposes under ordinary principles.
A consultation on the design of the DPT is expected in the coming weeks, and will then be legislated for in the 2019/2020 Finance Bill.
"It was widely anticipated that a tax on the digital economy would be announced, so the introduction of the DST is not a surprise. This measure pre-empts the OECD discussions centred around the ‘Interim Report 2018’ which has not provided a clear consensus to bridge the gap between the perceived advantage for digital businesses over traditional models.
Businesses will be pleased that this only targets the largest businesses operating in specific sectors and with specific business models, rather than the digital economy as a whole. It will be interesting to see the consultation papers and further detail on the design in due course."
When will it apply?
To apply from April 2020
Changes to capital allowances and a significant boost of the Annual Investment Allowance limit
A number of changes to capital allowances have been announced, the most significant being the temporary increase in the Annual Investment Allowance (AIA) to £1m. A new Structure and Buildings Allowance will be introduced, as well as a reduction in the allowance rate for the special rate pool.
The AIA will be increased from £200,000 to £1m for two years from 1 January 2019 to stimulate business investment.
In addition, a new allowance, the Structures and Buildings Allowance (SBA), was announced, which essentially provides for a 2% capital allowance on the cost of any new non-residential structures and buildings. The allowance will apply where all the contracts for the physical construction works are entered into on or after 29 October 2018.
The special rate of writing down allowances for qualifying plant and machinery will reduce from 8% to 6% from April 2019.
The Government will also update the Energy Technology List and the Water Technology List for the qualifying criteria to qualify for First Year Allowances.
"The Government is keen to stimulate capital investment and improve the international competitiveness of the UK's tax system. These changes will provide significantly faster tax relief for qualifying investment and is a welcome change for businesses."
When will it apply?
The AIA will increase from 1 January 2019. The SBA will apply from Budget Day for appropriate contracts. The special rate of writing down allowances for plant and machinery will apply from April 2019.
Draft legislation on various corporate tax reform measures to be legislated with minor amendments
The Government confirmed that previously released draft legislation regarding the corporate interest restriction, the reform of corporation tax loss relief and the charging of non-UK resident corporate landlords to corporation tax rather than income tax will be included in Finance Bill 2018-19.
Amendments are being made to the existing corporate interest restriction rules to ensure the regime operates as intended, both now and after the introduction of the new accounting standard for leases, IFRS 16.The amendments to the corporation tax loss relief rules are also in order for the legislation to operate as intended, and in particular to prevent excessive relief for carried-forward losses.
From April 2020 non-UK resident companies that carry on a UK property business or have other UK property income will be brought within the charge to corporation tax rather than income tax, which is currently the case. Targeted anti-avoidance is to be introduced from 29 October 2018.
Whilst draft legislation covering these changes was published in the summer, some revisions have been made following periods of consultation.
"The need for technical amendments to recently introduced legislation in order for it to operate as intended highlight the challenge of drafting complex tax rules to fit in with an already complex corporation tax regime."
When will it apply?
Although some of the amendments to existing corporate interest restriction and loss relief legislation will have effect from 1 April 2017 when the rules commenced, others are effective from later dates between 1 January 2018 and 1 April 2019.
The changes to the Corporate Interest Restriction rules as a result of the introduction of IFRS 16 will generally have effect for periods of account beginning on or after 1 January 2019, although certain amendments to the long funding lease rules will only have effect for leases entered into on or after 1 January 2019.
The changes for non-UK resident companies will have effect on and after 6 April 2020.
Corporate intangible fixed assets regime reform
The Government intends to reform the corporate intangibles fixed asset regime, following the policy consultation that was published in February 2018 to support intangible investment by UK companies.
The Government has announced that it intends to reform the intangible fixed asset regime following the consultation in Spring 2018. The consultation reviewed whether there was scope to make the regime more effective in supporting economic and business growth and if any targeted changes were required to encourage companies investing in intellectual property.
The regime was originally introduced to provide corporation tax relief for the amortisation of intangibles, making the UK an attractive location for holding intangible assets. The benefits of the regime, which is now 15 years old, were narrowed in 2015 to deny relief generally in relation to goodwill and other customer-related intangibles.
In Finance Bill 2018-2019, the Government intends to legislate:
a relief for the cost of acquired goodwill in the acquisition of businesses with eligible intellectual property from April 2019;
a reform to the de-grouping charge rules, which apply when a group sells a company that owns intangibles, to ensure that a de-grouping charge will not arise where the de-grouping is the result of a share disposal that qualifies for the Substantial Shareholding Exemption. This will take effect from 7 November 2018.
"These provisions will be welcomed by those investing in intellectual property in the UK. This is a further indication of the UK’s willingness to review and reform existing legislation to make the UK a more attractive location for investment in intellectual property-rich businesses."
When will it apply?
The new tax relief will apply from April 2019 with the de-grouping reform to apply from 7 November 2018
Amendments proposed to the Diverted Profits Tax rules
Rules will be introduced in Finance Bill 2018-19 to close tax planning opportunities and make clarifications and modifications to the mechanics of the Diverted Profits Tax (DPT) legislation.
DPT was introduced to counter specific arrangements designed to erode the UK tax base, either by seeking to artificially avoid creating a UK permanent establishment that would bring a foreign company into the charge to UK corporation tax, or by using arrangements or entities which lack economic substance to artificially divert profits to low tax jurisdictions.
The Government is proposing to:
- Close a tax planning opportunity whereby tax returns can be amended after the review period has ended and the DPT time limits have expired;
- Make clear that diverted profits will only be taxed under either the DPT or corporation tax rules, but not both; and
- Extend the review period during which HMRC and the company should work together to determine the extent of diverted profits and increase the period of time during which companies can amend their corporation tax returns for diverted profits.
"These amendments have been introduced to clarify the DPT provisions as part of HMRC’s mandate to tackle erosion of the UK tax base. The announcements do not come as particular surprise, especially given HMRC's recent interest in this area."
When will it apply?
These measures will have effect on and after 29 October 2018.
Restriction on use of corporate capital losses
Use of carried-forward capital losses to be restricted to 50% of capital gains from 1 April 2020.
The Government will legislate in Finance Bill 2019-20 to restrict companies’ use of carried-forward capital losses to 50% of capital gains from 1 April 2020.
The measure will include an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year.
A consultation paper was published on 29 October 2018 and draft legislation will be published in the summer. The measure will be subject to anti-avoidance rules that are to apply with immediate effect.
"These capital loss restriction rules are being introduced to ensure that large companies pay tax when they make significant capital gains. This will bring the tax treatment of such corporate capital losses into line with the treatment of carried forward income losses and therefore brings forward tax revenues arising from gains arising in groups with large capital losses."
When will it apply?
The change will apply from 1 April 2020
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.