This week's Autumn Budget was not the quiet 'pre-Brexit' Budget that many had predicted. We have set out below a summary of some of the main announcements for businesses. Further details on various measures are expected to be available on 7 November 2018, when the Finance Bill that will become Finance Act 2019 and various consultation and supplementary documents are scheduled to be published.
If you would like to discuss the impact of any of the changes, please get in touch with a member of the tax team or your regular Taylor Wessing contact.
- Various changes to entrepreneurs' relief were announced at Autumn Budget 2018. New tests have been introduced (with immediate effect) for company sales, requiring the claimant to have an entitlement to 5% of both distributable profits and assets available for distribution on a winding up (these apply in addition to the existing tests). In addition, the qualifying holding period for assets or shares will be extended from 12 months to 2 years (with effect from 6 April 2019).
- The two year qualifying period is also expected to apply to holders of enterprise management incentive (EMI) options over shares. Currently holders of EMI options can benefit from entrepreneurs' relief on a disposal of shares acquired on exercise of those options where the sale of the shares occurs at least one year after the grant of the options. This period, as with the conditions for relief for ordinary shareholdings above, is expected to be extended to two years with effect for disposals on or after 6 April 2019. Read our detailed summary on the additional requirements.
- Also in relation to entrepreneurs' relief, amendments will be made to the draft legislation that provides (with effect from 6 April 2019) for individuals whose shareholding is diluted below the 5% threshold as a result of a new share issue to still be eligible for relief for their accrued gains up to that time. The changes are to clarify and improve the computational and qualifying rules in the legislation. Read our summary of the draft legislation that was published on 6 July 2018.
- Following a consultation in spring 2018, changes will be made to the corporate intangibles regime to:
- re-introduce a limited relief for amortisation of acquired goodwill where businesses with eligible IP are purchased (for acquisitions from April 2019); and
- prevent a degrouping charge relating to prior intra-group transfers where the degrouping results from a share disposal that qualifies for the substantial shareholdings exemption (for share disposals on or after 7 November 2018).
- The government confirmed that it will introduce (with effect from April 2019) an income tax charge on amounts received in low tax jurisdictions in respect of intangible property, to the extent that such amounts relate directly or indirectly to the sale of goods or services in the UK (regardless of whether the intangible holder has a UK taxable presence). The charge will apply to entities located in jurisdictions with which the UK does not have a double tax treaty with a non-discrimination provision. Following consultation, changes have been made to the proposals as follows:
- tax will now be directly assessed on the relevant offshore entities, rather than via a withholding tax
- the scope of the income caught by the measure has been broadened to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties
- a de minimis UK sales threshold of £10 million has been introduced, along with exemptions for entities that are subject to tax of at least 50% of the UK income tax that would apply and for entities that have not acquired their intangible(s) from a related party and where all/substantially all of the trading activity of the entity has always been undertaken in the low tax jurisdiction.
- The government will consult on the introduction of a new digital services tax on UK-centric revenues of certain digital businesses (from April 2020). The tax will be a 2% charge on the revenues (not profits) of digital businesses generated from the provision of search engines, social media platforms and online marketplaces, to the extent that they derive from the participation of UK users. Only UK-centric revenues over £25 million would be taxed and only groups with global revenues exceeding £500 million would be caught. There will be a safe harbour for loss making groups and a reduced effective tax rate for low profit margin businesses. The UK may in time align these rules or replace them with any similar digital tax that can be agreed at an international level (noting that OECD and EC discussions continue on introducing such a concept on a multilateral basis).
- Legislation will be introduced to align companies' ability to use carried forward capital losses with that for carried forward trading losses (following changes to the latter made with effect from April 2017). This will mean that companies will only be able to use carried forward capital losses to offset up to 50% of capital gains (with effect from April 2020). Companies will be entitled to unrestricted use of up to £5 million of capital or income losses each year. The government launched a consultation on the proposals alongside Autumn Budget 2018 and draft legislation will be published in summer 2019. An anti-forestalling measure took effect on 29 October 2018.
- The government also announced the introduction of a limit on the amount of payable tax credit that companies can claim under the R&D SME tax relief for accounting periods beginning on or after 1 April 2020. The limit will be set at three times the company's total PAYE and NICs payment for the period. Companies will be able to carry forward losses that cannot be surrendered for a payable credit and use them against future profits. The government will consult on these changes.
- HMRC will be made a preferred creditor in respect of certain taxes when a business goes into insolvency (with effect from April 2020). This will only apply in relation to taxes collected by businesses on behalf of other taxpayers (VAT, PAYE income tax, employee NICs and construction industry scheme deductions). It will not apply to taxes owed by the business itself, such as corporation tax and employer NICs. Financial institutions will remain above HMRC in the creditor hierarchy for fixed charges held over assets.
Real estate and construction
- The government confirmed the extension of the UK tax net to cover gains on both direct and indirect disposals of all types of UK property made by non-residents (from April 2019). Following consultation, the draft legislation confirming how the changes will apply in relation to collective investment schemes will be published on 7 November 2018. REITs which are UK property rich will be exempted from tax on gains on disposals of UK property rich entities in the same way as for direct disposals of UK property. Read our summary of the draft legislation that was published on 6 July 2018.
- The government also confirmed the extension of corporation tax to cover the UK property income of non-resident companies (from April 2020). Following consultation on the draft legislation that was published on 6 July 2018, changes have been made to clarify how the loan relationship and derivative contract rules will apply. The government is continuing to consult in relation to both tax return filing and reporting obligations for non-UK resident companies that invest in UK property only through large collective investment funds. A targeted anti-avoidance rule was also introduced from 29 October 2018. Read our summary of the draft legislation that was published on 6 July 2018.
- Various changes were announced in relation to capital allowances. A new Structures and Buildings Allowance was introduced at Autumn Budget 2018, providing relief for qualifying expenditure on the construction and certain conversions/renovations of non-residential structures and buildings where the eligible costs were incurred on or after 29 October 2018. Relief will be available at a rate 2% per year on a straight line basis. Land and dwellings will not be eligible for relief.
- The government also announced that the special rate of writing down allowances for qualifying plant and machinery will be reduced from 8% to 6% from April 2019. Changes will also be made to existing legislation (with immediate effect) to clarify that land alteration expenditure may only qualify for capital allowances where incurred for the purposes of installing plant or machinery that is itself eligible for capital allowances. The annual investment allowance will be increased from £200,000 to £1 million from 1 January 2019 until 31 December 2020.
- There will be a consultation (in January 2019) on introducing a 1% SDLT surcharge for non-residents buying residential property in England and Northern Ireland.
Personal and employment taxes
- The government confirmed the widely expected extension of the off-payroll working rules (IR35) to the private sector (but from April 2020, not April 2019). This will move responsibility for assessing an individual's employment status, and for deducting any income tax and employee NICs due and paying any employer NICs, from individuals to the organisation, agency or other third party paying an individual's personal service company. There will be an exemption for small companies.