The Budget included relatively few new announcements on business taxes, the most significant being in relation to a new tax on the UK revenues of large digital businesses. The introduction of a digital services tax is in line with comments made by the Chancellor at the Conservative party conference.
Various changes to the capital allowances rates have also been announced with a temporary significant increase of the annual investment allowance.
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 Profit 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
Limit on R&D Tax Credit
A new limit will be introduced on the amount of payable tax credit that a company can claim under the R&D scheme for SMEs. The limit will be set at three times the company's total PAYE and National Insurance Contributions for the period.
There will be a limit on the tax credit payable under the R&D tax relief scheme for SMEs. The limit will be set at three times the company’s total PAYE and National Insurance Contributions payment for the period.
If there is any loss that a company cannot surrender for a payable credit, the loss can be carried forward and used against future taxable profits.
The Government is entering into a period of consultation in respect of these changes before implementation in April 2020.
"Prior to 2012, there was a limit in place that set the amount of credit payable to the PAYE and employer and employee National Insurance Contributions paid by the company during the period. To tackle perceived abuse of the R&D tax credit regime, HMRC now appears to be re-instating this limit but at a higher level. The limit may cause a problem where a company does not employ anyone directly, and therefore does not have PAYE/NIC liabilities."
When will it apply?
The changes will have effect for accounting periods beginning on or after April 2020.
Reform of Enterprise Investment Scheme rules for approved funds
The Government has proposed reforms to the Enterprise Investment Scheme (EIS) rules for approved funds from 6 April 2020. The rules will concentrate the focus of investment for approved EIS funds into Knowledge Intensive Companies, as well as permitting a longer time period within which monies raised can be deployed. The reforms also include changes for individual investors who will be able to set their income tax relief against liabilities in the year before the fund closes.
Following a policy consultation, the Government is seeking to reform the Enterprise Investment Scheme (EIS) rules and improve the current structure for approved EIS funds. The new approved EIS fund structure is intended to be rolled out in April 2020, at which point the current approved fund structure will be withdrawn.
The reforms will require approved funds to focus on investments in Knowledge Intensive Companies (KIC’s) by requiring a minimum of 80% of funds raised to be invested in KIC’s.
There will also be increased flexibility for fund managers, through increasing the time period within which fund capital must be deployed. The proposal is that approved funds will now have two years within which to deploy capital, with at least 50% of each raise to be invested within the first 12 months (with monies not yet invested held in cash). By way of comparison, the previous rules for approved EIS funds stipulated that 90% of each raise had to be deployed within the first 12 months.
In addition, investors will be allowed to set their relief against income tax liabilities in the year before the fund closes, whereas previously this was only permitted in the same year the fund closes.
Furthermore, HMRC has digitised the certificates and paperwork associated with these investments and eliminated the need for signed paper documents.
"These reforms appear to be a welcome step for approved EIS fund managers and investors alike.
The increased emphasis on investment in KIC’s is of little surprise, whilst the relaxed time period for deploying capital will be beneficial for approved fund managers and their investment opportunities.
Investors should also benefit from the reforms by being able to claim relief earlier through offsetting their relief against income tax liabilities in the year before the fund closes.
The digitisation of the certificates and paperwork will also be welcomed for all parties involved through reducing the administrative burden previously involved with Venture Capital Schemes."
When will it apply?
The Government plans to publish draft legislation for consultation in Summer 2019. The changes will have effect from 6 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.