March Budget 2020 – business tax measures

Given that Chancellor Rishi Sunak's first Budget was largely focused on helping small businesses to weather the Coronavirus storm, there was very little in the way of new business tax announcements. Instead, the government followed-up on a number of pledges made in its election manifesto, and confirmed various pre-announced tax changes. A summary of these measures is included below. A further Budget is expected in the autumn, so this may well contain greater business tax content.

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.

Manifesto pledges

• Corporation tax: the rate will remain at 19% (and not reduce to 17% as had previously been announced).
• Entrepreneurs' Relief (ER): following a government review (and contrary to some speculation), ER was not abolished. Instead, the lifetime allowance was significantly cut - reducing from £10 million to £1 million (in turn, reducing the potential CGT saving from £1 million to £100,000). This change took effect from 11 March 2020, and included (effectively retrospective) anti-forestalling provisions.
• Research & Development Expenditure Credit (RDEC): the rate of RDEC, the R&D relief available to large enterprises (and an alternative for SMEs), will increase from 12% to 13% of qualifying R&D expenditure from 1 April 2020. The credit is taxable at the normal corporation tax rate which effectively means the benefit is worth 10.53% (previously 9.72%) of expenditure on qualifying R&D.
• Structures and Buildings Allowance (SBA): The SBA was introduced in 2018 to relieve construction costs for new commercial buildings and structures – originally at a flat annual rate of 2% of the expenditure (so qualifying expenditure was fully tax deducted after 50 years). As confirmed on Budget day, a new SBA rate of 3% will apply from 1 April 2020 (for businesses within corporation tax) or 6 April 2020 (for those within income tax). Qualifying expenditure will therefore now be fully deductible in 33 years, four months.

Confirmation of pre-announced tax changes

• Digital Services Tax (DST): In common with other jurisdictions, and the global community as a whole, the UK is concerned that highly digitalised businesses are paying too little tax on profits generated from UK users. It is therefore looking to tax multinational enterprises based on consumer revenue and engagement in the UK, regardless of physical presence. Pending international consensus, a 2% DST will apply from April 2020 on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users as well as advertising revenues connected with such activities (but only where the group’s worldwide revenues from these digital activities exceed £500 million, and more than £25 million of these revenues are derived from UK users). 
• Off-payroll working rules in the private sector (IR35): IR35 is the legislation designed to combat tax avoidance by workers supplying services via an intermediary (such as a personal service company). Despite concerns being raised, the government has confirmed that IR35 will be extended to businesses in the private sector in respect of services provided on or after 6 April 2020. From this date, businesses will become responsible for:
  • assessing an individual's employment status, and
  • deducting any income tax and employee NICs due, and paying employer NICs.

  HMRC has indicated that it will impose a 'light touch' penalty regime during the first year.

• Offshore corporate landlords: Currently, non-UK resident companies holding UK real estate are liable to corporation tax on disposals of UK property, but income tax on UK property income. From 6 April 2020, such companies are brought within the scope of corporation tax on UK property income. Although the rate of corporation tax (19%) is slightly lower than the relevant rate of income tax (20%), the main impact of this change is the transition to a more complex set of rules and compliance obligations. For instance, these companies will be subject to the corporate interest restriction and carry forward loss restriction rules, which may potentially have a significant impact on the level of allowable (tax deductible) expenses. Technical changes announced on Budget day tweak the legislation to ensure it works as intended.
• Enhanced capital allowances in enterprise zones: companies investing in plant and machinery for use in designated sites in enterprise zones benefit from a 100% first year allowance, meaning that expenditure is fully tax deductible in the year in which it is incurred. These enhanced allowances were due to lapse on 31 March 2020, but the government has announced an extension until at least 31 March 2021.
• VAT domestic reverse charge: the government has confirmed that the VAT domestic reverse charge being introduced for certain building and construction services (where the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier) will be delayed until 1 October 2020 (having previously been scheduled for 1 October 2019).
• Corporate capital loss restriction: from 1 April 2020, the proportion of annual capital gains that can be relieved by brought-forward capital losses will be restricted to 50% (but subject to an allowance that gives groups unrestricted use of up to £5 million capital or income losses each year). The government has also announced that companies in liquidation will not be subject to this restriction.

New business tax announcements

• Enterprise Management Incentives (EMI) scheme review: although no specific proposals have been made, the government has promised to review the EMI scheme to ensure it provides support for high-growth companies, and to examine whether more companies should be able to access the scheme. EMI shareholders remain eligible for Entrepreneurs' Relief (subject to the reduced lifetime allowance, noted above).
• Review of UK funds regime: the government has launched a consultation on the tax treatment of asset holding companies in fund structures, focusing on credit funds, real estate funds and private equity funds. Whilst the UK offers an attractive holding company regime, it is not as popular for holding assets in a fund structure, and the government wants to understand why. Legislative changes to support fund structures being brought onshore are possible, provided this would not take significant amounts of UK taxable income/gains outside of the UK tax net.
• Hybrid mismatch rules: a consultation is to be launched into the hybrid mismatch rules that were introduced in 2017 to prevent the exploitation of differences in tax treatment between two jurisdictions. No details are given, although the government has stated that it wants to ensure the rules 'work proportionately and as intended'. It is therefore hoped that the outcome of the consultation will be changes to amend some of the overly-punitive aspects of the existing rules, rather than adding further complexity to the regime.
• Large business notification: from April 2021, large businesses will be required to notify HMRC when they take a tax position which HMRC is 'likely to challenge'. This policy will draw on international accounting standards, suggesting a possible alignment with the reporting of uncertain tax positions for statutory accounting purposes.
• Limited Liability Partnership (LLP) returns: following a recent HMRC loss in the tax tribunal, the government has announced that it will legislate (both prospectively and retrospectively) to clarify that LLPs should be treated as general partnerships under income tax rules, thus allowing HMRC to amend LLP members' tax returns where the LLP operates without a view to profit.
• Intangible fixed asset (IFA) regime: the government has announced that it will allow all pre-2002 intangible assets acquired from 1 July 2020 to come within the IFA regime, thus removing the restriction on pre-2002 intangible assets acquired from related parties and allowing companies to claim corporation tax relief on those assets.
• Tax impact of the withdrawal of the London Inter-Bank Offered Rate (LIBOR): a consultation will be launched to ensure that any tax legislation that references LIBOR will continue to operate effectively. It will also inform the government of significant tax issues that arise from the reform of LIBOR and other benchmarks.