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Regulatory Tax Advisory
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On October 29, 2018, the Chancellor delivered his last Budget before Britain leaves the EU. His Budget was for ‘hard working families’ so that they can look ‘confidently to the future’. The main theme was that ‘Austerity is coming to an end’. Lower than expected borrowing enabled him to bring forward several proposed tax cuts and in addition, the widely touted changes to the rules on pension allowance and lowering of VAT threshold were not introduced.
Many of the measures the Chancellor did introduce are seen as a ‘clean up’ prior to an expected big Budget in Spring 2019, when the impact of Brexit is clearer.
A summary of the key tax proposals as they impact the asset management and wider financial services industries can be found below.
Targeted legislation will be introduced effective from April 1, 2019 which will prevent profits from UK businesses being fragmented and accrued in overseas countries with a lower tax rate. Where this occurs, the UK taxable profits will be increased to their commercial level. Draft legislation for comment was published in July including a disclosure requirement. Consultation was invited, and we should have more detail on November 7 when the Finance Bill 2019 is published. Businesses with offshore operations need to carefully consider the final legislation to see if they fall within it and what their disclosure requirements may be come April 2019.
Two additional tests will need to be met from October 29, 2018 for the definition of a personal company to be satisfied in addition to 5% share capital and 5% voting rights which must be met;
New legislation will be introduced to revise the minimum holding period requirement for individuals who dispose of all or part of their business or individuals who dispose of shares in their personal company on or after April 6, 2019. The current legislation sets out that for an individual to qualify for Entrepreneur’s Relief the period for which the qualifying conditions to be met is 12 months. This period will increase from 12 months to 24 months for any disposals from April 6, 2019. There will be grandfathering provisions where an individual’s personal company ceased to be trading (or holding company of a trading group) or the individuals business ceased before October 29, 2018 then the existing one-year qualifying period will continue to apply. These revisions will be important to consider when considering future group restructurings or allocations of partnership interests as it may mean that additional rights need to be given to shareholders or members for a longer period to satisfy the tests for relief.
We expected an increase in taxes, a lowering of the VAT registration threshold and removal of pension reliefs. None of which materialized. Instead the increase of the personal allowance and basic rate band promised for 2020 has been bought forward to apply from 2019.
A number of changes to capital allowances were announced. In particular, with effect from January 1, 2019 the annual investment allowance will increase from £200,000 to £1,000,000 per year for two years. Also, a new Structures and Buildings Allowance will be introduced for new non-residential structures and buildings at a rate of 2% pa (regardless of ownership changes) on eligible construction or renovation costs incurred on or after October 29, 2018.
Anti-Avoidance and Restrictions
The IR35 legislation which applies to public sector will be rolled out to apply to the private sector from April 2020 imposing the obligation of the business to determine whether someone is in fact an employee. The intention is to tax contractors and consultants in the same way as employees when the relationship is the same. Small organisations will be exempt from this requirement. Those businesses that use consultants and contractors will need to make sure they understand their obligations towards operating payroll, levying national insurance and disclosure in advance of April 2020.
R&D relief for SME’s will be restricted to three times the PAYE and NIC liability for the business with effect from April 2020.
Companies’ use of capital losses will be restricted to 50% of the capital gains from April 1, 2020, subject to the company being able to utilize up to £5m of losses each year.
Specific stamp duty anti avoidance measures aimed at listed securities which are transferred to connected persons will be introduced. Effective immediately, the market value of the securities will be used to calculate stamp duty or stamp duty reserve tax, if the transfer is between connected persons if group relief does not apply.
Digital Services Tax
A Digital Services Tax (DST) will have effect from April 2020 and will apply a 2% tax on revenues from specific digital businesses which are linked to the participation of UK users and have a global turnover of at least £500m. Businesses will be taxed on the revenues earned from in-scope business models, irrespective of where the business is based. For example, if a social media platform generates revenue from targeted adverts at UK users, this revenue will be taxed at 2%. Fiscal Phil did note that the UK Treasury would continue to work with the OECD and G20 to tackle this global tax issue and will fall in line with their recommendations should these be released prior to 2020. This shouldn’t impact UK entrepreneurial tech companies such as UK based Fin Tech providers but should be reviewed in light of future growth and expansion of these businesses.
Non-residents and property
Currently, non-resident companies with UK property income are chargeable to Income Tax and non-resident Capital Gains Tax on their gains. From April 6, 2020, corporation tax will be charged for non-UK resident companies and not income tax. This will bring non-resident companies’ UK property income and gains in line with UK companies, hence the tax return and tax payment due dates will be different from the normal income tax return and tax due dates.
Non-UK residents disposing of UK land directly or indirectly (via an entity holding UK Land) are currently being taxed on any gains on residential properties. From April 2019, new rules will be introduced that will extend the scope of the UK tax on gains from non-residential UK properties i.e. commercial properties.
The Government has been consulting on the imposition of an income tax charge on multinationals who receive amounts in non-treaty jurisdictions from intangible property where those amounts are received with reference to goods or services sold in the UK. The new rules will apply from April 2019 but following consultation only where the UK sales are more than £10m per year. If you make payments to entities in non-treaty jurisdictions for intellectual property for example, trading technologies, these rules when published on November 7 should be examined to see if they are applicable to your business.
From April 2019, the Government has confirmed it will change the corporate intangible fixed assets regime to partially reinstate goodwill relief on eligible intellectual property and improve the de-grouping provisions where the disposal would qualify for the substantial shareholding exemption. In businesses looking to acquire other businesses this could make the case more compelling. The output from the consultation will be published on November 7 but not the draft legislation.