The Chancellor promised that “austerity will come to an end, but discipline will remain”. This was demonstrated by some of the targeted measures that were announced.
Entrepreneurs’ Relief (ER)
Fears that ER would be reduced or abolished entirely proved to be unfounded. The lifetime limit for ER remains unchanged at £10m. However, changes to the conditions shareholders must meet in order to be eligible to claim the relief and access the 10% rate were announced. These are:
- The minimum period throughout which the qualifying conditions for relief must be met has been extended from 12 months to 24 months. This requirement takes effect from 6 April 2019 (except where a business ceased before 29 October 2018).
- Shareholders must be entitled to at least 5% of the distributable profits and net assets of the company on a winding up. This is in addition to the existing requirements to be entitled to 5% of the share capital and voting rights. This change is effective immediately, i.e. from 29 October 2018.
The above measures are designed to support longer term business investments and to counter a perceived abuse of the current rules.
In light of the above changes, it is increasingly important to ensure that timely advice is sought in advance of any exit to ensure all conditions can be met.
Principal Private Residence relief (PPR)
PPR is a generous long-standing relief that exempts any gain on the sale of an individual’s only or main residence from Capital Gains Tax (CGT). In a bid to target the relief more effectively at owners/occupiers, two key changes in how the relief operates have been introduced:
- The final period of ownership which qualifies for relief (irrespective of how the property is used during this time) will be reduced from 18 months to nine months.
- Lettings relief will be reformed so that it only applies where the owner of the property is in shared occupation with the tenant, i.e. where the homeowner rents a room in their house.
There will be a period of consultation on the above changes which are expected to apply from April 2020.
These changes will increase the number of UK residential properties within the charge to CGT. With this in mind, it is worth highlighting that legislation will be introduced in Finance Bill 2018/19 to require UK residents to make payments on account of CGT on the sale of UK residential property from April 2020. This legislation will replace and extend the existing reporting and payment requirements currently applicable to non-UK residents.
Stamp Duty Land Tax (SDLT) surcharge for non-residents
A consultation will be published in January 2019 on the possible introduction of a SDLT surcharge of 1% for non-residents purchasing UK residential property in England and Northern Ireland. This continues the theme of increasing the costs for non-UK residents purchasing UK residential property.
Personal allowance and higher rate threshold
The commitment to raise the personal allowance and higher rate has been accelerated. These will increase to £12,500 and £50,000 respectively from April 2019 which is one year earlier than expected.
Corporate and business taxes
Along with these commitments the Government sought to introduce a number of measures which reflect the way in which large global businesses operate to ensure that they pay their ‘fair share’ of tax.
Rate of Corporation Tax
The rate of Corporation Tax will fall from 19% to 17% from 1 April 2020. There had been speculation that the reduction would be delayed or even cancelled. By going ahead, this provides greater certainty for UK companies.
Investment incentives for businesses:
Temporary increase in the Annual Investment Allowance (AIA)
A temporary increase in the AIA was announced. This is the upfront 100% allowance that applies to expenditure incurred on qualifying plant and equipment up to a specified cap. The AIA will increase from £200,000 to £1m per annum for a period of two years from 1 January 2019. Businesses which are capital intensive may wish to consider bringing forward their investment plans to accelerate the tax relief available.
Structures and Buildings Allowance (SBA)
In a measure which harks back to industrial buildings allowances, new non-residential structures and buildings will be eligible for tax relief at a rate of 2% for contracts entered into on or after 29 October 2018. Businesses which are considering investing in new premises or qualifying renovations should evaluate whether they could qualify for SBA. Although SBA expenditure will not qualify for AIA, for large infrastructure projects this could be a significant amount of relief and should be a boost to future investment.
Capital allowance special rate reduction
In less welcome news, from April 2019, the ‘special rate’ of capital allowances will decrease from 8% to 6%. This measure will largely affect expenditure incurred on ‘integral features’ within commercial property such as lighting and electrical systems. Businesses should use AIAs against special rate additions in preference to ‘main pool’ expenditure which will continue to attract allowances at 18%.
Intangible fixed asset (IFA) regime
From 1 April 2019, new rules will be introduced to establish a targeted relief for the cost of goodwill in the acquisition of a business with eligible intellectual property, which is good news. Whilst the detail on how the relief will operate is sparse, this measure should encourage investment in UK businesses.
In another welcome move, a further reform will be introduced on 7 November 2018: Going forward, de-grouping charges should not arise in respect of the disposal of a trading company to which post 2002 intangible assets have been transferred by another member of the group. Aligning the IFA regime with the capital gains regime will help to promote investment and should mean that the tax costs associated with transferred IFAs leaving a group are reduced.
Research & Development (R&D) tax relief
From 1 April 2020, a limit will be placed on the cash credit which a small or medium-sized company can receive for surrendered losses. This will be restricted to three times the company’s total PAYE and NICs liability for the tax year. Whilst remaining R&D losses will still be available for relief against future profits, this is likely to affect start-ups which engage third parties to carry out a part of their R&D activity.
Digital Services Tax (DST)
From 1 April 2020, very large groups that generate global revenues of more than £500 million per annum from the provision of certain digital services, such as social media platforms and online marketplaces, will be subject to a 2% DST on revenues which are linked to UK users. Consultation on these measures will follow and digital businesses will want to review their business structures and transfer pricing policies. Whilst DST will not apply once a permanent international measure is introduced, this may be some time in the future.
Offshore receipts in respect of intangible property
Legislation will be introduced from 6 April 2019 under which tax will be collected directly from offshore entities which realise income from intangible property related to UK sales. There will be a de minimis threshold of UK sales of £10m and there will be exemptions for income which is taxed in the overseas jurisdiction at an appropriate level or where the income is supported by sufficient local substance. Administration of these rules will be complex and businesses should consider the impact on them as soon as details are available.
Changes to the definition of permanent establishments
The UK will adopt changes in its double tax treaties which aim to ensure that certain ‘preparatory or auxiliary activities’ may not be classed as exempt from Corporation Tax in the UK or the overseas jurisdiction. These changes will also be incorporated into UK domestic legislation and have effect from 1 January 2019.
Businesses with UK activities may be denied exemption if they are part of a ‘fragmented business operation’ intended to take advantage of the exemption. Businesses should review their UK operations to ascertain whether activities such as storing and purchasing goods or collecting information could give rise to a taxable presence.
IR35 (off payroll working rules) for the private sector
IR35 is designed to combat tax avoidance by workers who supply their services through an intermediary such as a personal service company. As expected, the responsibility for the operation of PAYE and NIC will now pass from the individual to the private sector company engaging the worker.
The proposed changes have been delayed and will not take effect until April 2020. Small organisations will be exempt and HM Revenue & Customs (HMRC) will provide support and guidance to medium-sized and large organisations to assist them with implementation. However, this measure will increase compliance costs for businesses.
Capital loss restriction
From 1 April 2020, it is anticipated that the capital loss rules will be aligned with the revised 2017 corporate income loss rules. It is proposed that the proportion of capital gains which may be relieved by brought forward capital losses will be restricted to 50%. The annual allowance of £5m which was introduced from 1 April 2017 will relate to the use of capital and income losses. This measure could significantly impact companies which have previously incurred significant losses on disposal of assets such as properties.
The Chancellor confirmed that the VAT registration threshold of £85,000 per annum will remain the same for a further two years until 2022. Whilst this gives certainty to businesses it does mean that a greater number of smaller entrepreneurs will become liable to register than would otherwise have been the case had the threshold increased in line with inflation.
Businesses will have to pay VAT on ‘unfulfilled supplies’. These arise where payments have been received but the customer has not received any goods or services and has forfeited the prepayment.
A restriction of input VAT recovery may apply to costs in respect of which service providers invoice insurance companies based outside the EU, but the underlying supply of insurance is in the UK.
There will be a tightening up of the rules to ensure that VAT credit notes are issued when there is a reduction or increase in the value of taxable supply.
A reverse charge mechanism for B2B supplies in the construction industry will be introduced.
These include extending eligibility to join a VAT group to certain non-corporate entities, new rules on the VAT treatment of vouchers and making HMRC a preferred creditor during an insolvency.
For more information, please contact Caroline Le Jeune or Genevieve Moore.