Against a backdrop of significant Coronavirus-related economic uncertainty, the Chancellor promised a raft of measures to help UK businesses and individuals through a period of temporary disruption.
The commitments made, both in relation to Coronavirus and to significant investment in the country’s infrastructure, will be financed by significant borrowing rather than through raising taxes. This is a clear reversal of previous Tory strategy but has become acceptable because of the current low interest rates. This should stimulate growth at a difficult time but could be more problematic in the long-run if interest rates increase in the future.
Probably distracted by the immediate issues at hand, many of the predictions made over recent weeks and months proved to be unfounded. However, it is likely there will be another Budget later this year and, as such, we should assume that further changes are still to come.
Private Client tax
As widely anticipated, changes were announced to Entrepreneurs’ Relief (which provides for a reduced rate of capital gains tax of 10% on qualifying disposals of interests in businesses or shares in companies). Rather than completely abolishing the relief, the total entrepreneurs’ relief allowance has been reduced from £10 million per person to £1 million for disposals on, or after, 11 March 2020. Whilst this is unwelcome news for a number of business owners, companies should be aware that the £1 million entrepreneurs’ relief allowance would still mean that qualifying share option plans using ‘Enterprise Management Incentive’ share options can continue to work very effectively.
The Chancellor also introduced anti-avoidance measures targeted at business owners who undertook planning prior to the Budget to protect their access to the £10m entrepreneurs’ relief lifetime limit. Those who created disposals to connected persons are likely to find that their planning has been ineffective and they are instead subject to the new £1m entrepreneurs’ relief limit. Those impacted should discuss with their advisers as soon as possible.
Whilst the lifetime limit for Entrepreneurs’ Relief is reduced for disposals made on or after 11 March, it is interesting to note that the less well-known investors’ relief has not been targeted.Caroline Le Jeune, Partner
Whilst the lifetime limit for Entrepreneurs’ Relief is reduced for disposals made on or after 11 March, it is interesting to note that the less well-known Investors’ Relief has not been targeted.
Investors’ Relief applies to ordinary shares held in unlisted trading companies (or the holding company of a trading group) subscribed for and held for at least three years from 17 March 2016. Where shares qualify, the rate of Capital Gains Tax on the gain is reduced to 10% and a lifetime limit of £10m applies.
It will be interesting to see if there is an increase in the take-up of Investors’ Relief following the reduction in Entrepreneurs’ Relief.
Pensions and the Annual Allowance
Individuals with income in excess of £150,000 have had their annual allowance tapered since 2016/17. The maximum annual allowance is £40,000 and the allowance is reduced by £1 for every £2 of income in excess of £150,000.
We noted that this impacted a significant number of individuals in 2018/19 as, by this time, they had exhausted previously unused brought-forward annual allowances, as a result many were unaware that by continuing to make pension contributions, they were exposed to a claw-back of the tax relief on excess pension contribution over the annual allowance.
It is good to see that the government has responded to feedback and will increase the threshold from £150,000 to £240,000. However, it should be noted that the annual allowance is now reduced to £4,000 (rather than the previous £10,000) where individuals earn more than £300,000. This further reduction for those higher earners seems unlikely to generate any significant tax increase and disproportionally penalises high earners.
Family Investment Companies (FIC’s) and Inheritance Tax
Despite huge speculation in the financial press, no changes have been announced impacting FIC’s. As we are aware, HMRC have confirmed that they are considering the use of FIC’s with a focus on Inheritance Tax implications. We should anticipate further developments in this area but, for the time being, FIC’s remain unaffected.
Also, following on from the current Inheritance Tax Review it is perhaps surprising that no Inheritance Tax changes were announced. We should wait and anticipate changes in the future.
Stamp Duty Land Tax (SDLT) surcharge for non-residents
As has been anticipated, the SDLT surcharge for non-residents buying UK property will be introduced and a 2% surcharge will apply with effect from 1 April 2021. It is good news that the surcharge will be 1% lower than previously anticipated and will be introduced a year later.
This gives non-resident investors an opportunity to purchase property in advance of this date. It will be interesting to see if there is a rush by non-residents to buy residential property prior to its introduction, especially in prime Central London. We will also see how this impacts on investment in the build-to-rent or private rented sector. Draft legislation on the non-resident surcharge will be released “in a few weeks” and consulted on over the summer.
SDLT higher rate and annual tax on enveloped dwellings relief
A new relief from the flat 15% SDLT anti-enveloping rate will be introduced in the Finance Bill 2020/21 for qualifying housing co-operatives. This is likely to refer to residential buildings purchased by companies that are lived-in by an association of members. The 15% rate is meant to deter against the practice of ‘enveloping’ i.e., owner-occupiers using companies to buy and hold dwellings. Housing co-operatives are outside that target. Qualifying housing co-operatives will also benefit from a relief from the annual tax on enveloped dwellings, a tax that is aligned to the incidence of the 15% rate.
There were only minor changes in relation to employment tax. From April 2020, there will be an increase in the primary and secondary rate threshold for Class 1 National Insurance contributions (NIC) from £8,632 to £9,500. The employment allowance will increase to £4,000 from April 2020. Helpfully, this means all businesses and charities with NIC liabilities of less than £100,000 will be able to claim a greater reduction on their Secondary Class 1 National Insurance contributions liability.
Additionally, the tax-free homeworking allowance will increase from £4 to £6 a week from April 2020 – employers will be able to pay eligible employees with an additional £2 per week to cover business costs when working from home.
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 changes were already due to take effect from 1 April 2020 and there were no delays to this announced in this Budget. Small organisations will be exempt and 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.
Corporate and business taxes
Rate of Corporation Tax
The rate of Corporation Tax will remain at 19% until 30 March 2022. Although it was previously intended that the rate would reduce to 17% from 1 April 2020, the 19% is competitive and provides companies with certainty.
Structures and buildings allowance (SBA)
The SBA was introduced in the 2018 Budget and has provided tax relief via an annual allowance of 2% in respect of eligible non-residential structures and buildings expenditure (where contracts were entered into on, or after, 29 October 2018). With effect from 1 April 2020 (for companies or 6 April 2020 for unincorporated businesses), this relief will be increased to 3%. Companies and businesses should continue to consider whether investing in new premises or renovations could qualify for SBA.
Annual Investment Allowance (AIA)
No changes were announced in this Budget and so the extended AIA of £1 million per annum for expenditure incurred on qualifying plant and equipment is still due to revert to £200,000 per annum from 1 January 2021. The uplifted AIA may get extended further in future Budgets, but in the meantime businesses which are capital-intensive may wish to consider bringing forward their investment plans to accelerate the tax relief available.
Research & Development (R&D) tax relief
From 1 April 2020, the taxable credit payable to large companies in respect of qualifying R&D activities increases from 12% to 13% of the eligible R&D expenditure. As the rate of Corporation Tax is to remain at 19%, this means that the relief will be worth up to 10.53% of the eligible R&D expenditure from 1 April 2020 (versus up to 9.72% prior to this date). In addition to large companies reviewing their expenditure on R&D, smaller ‘SME’ companies who have grant funded R&D or are subcontracted by large companies to carry on R&D, should also benefit from the increase. No changes have been announced to the SME scheme itself other than the proposed PAYE cap has been deferred a year, to April 2021, and the government intends to consult on the design of the cap.
Intangible fixed assets (IFAs) regime
Corporation Tax relief is to be extended for companies that acquire IFAs (e.g. intellectual property rights, patents, trademarks) so that the relief also applies to companies that acquire older (pre-2002) IFAs from related parties from 1 July 2020. This will enable the cost of acquiring such assets to qualify for Corporation Tax relief where prior to this change it would not have done. Companies that are part of larger groups with overseas entities that hold IFAs should consider whether it could be worthwhile to acquire these from 1 July 2020 to benefit from the new rules.
Digital Services Tax (DST)
Following previous announcements and subsequent consultations, 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, online marketplaces and search engines) will be subject to a 2% Digital Services Tax on revenues which are linked to UK users. However, it has been reinforced that the DST will not apply once a permanent international measure is introduced.
Large businesses will be required to notify “uncertain tax treatment” to HMRC, highlighting where they have taken a position which is unlikely to be accepted by HMRC. Companies are already required by International Financial Reporting Standards to identify such items.
There will be a consultation on the hybrid mismatch rules, which apply to arrangements that seek to exploit cross-border tax differences. The aim of the consultation will be to ensure that the rules work proportionately and as intended.
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