26 January 2018 by Russell Cockburn
Tax practitioners must take stock after the UK's autumn budget and a delayed payments system rollout
Last November’s autumn budget saw several developments that will interest those involved in tax, including reform on venture capital trusts, disguised remuneration, and research and development (R&D) expenditure credit.
New rules will be introduced this year to limit the application of an anti-abuse rule relating to mergers of venture capital trusts (VCTs). The rule restricts relief for investors who sell shares in a VCT and subscribe for new shares in another within six months, when those VCTs merge.
This rule will no longer apply if those VCTs merge more than two years after the subscription, or do so only for commercial reasons.
Additionally, new rules will be introduced in 2018 to ensure the enterprise investment scheme (EIS), the Seed EIS and VCTs are targeted at what the government terms ‘growth investments’.
Relief under the schemes will in future be focused on companies where there is a real risk to the capital being invested, and will exclude companies and arrangements intended to provide ‘capital preservation’.
The changes will have effect for investments made on and after royal assent of the Finance Bill 2017–18, and detailed guidance will be issued shortly after the bill is published.
Perhaps most importantly, HMRC will stop providing advance assurances for investments that appear not to meet this condition on the date of guidance publication ‘where it would be reasonable to conclude that a company appears to be intending to carry out capital preservation activities’.
More anti-avoidance legislation will come in 2018, aimed at tackling existing disguised remuneration tax avoidance schemes and preventing the use of such schemes in future.
The majority of the changes announced in the 2016 budget have now been enacted, including a new charge on loans made after 5 April 1999 through disguised remuneration schemes that remain outstanding on 5 April 2019.
The government is to legislate in the finance bill to introduce the ‘close companies’ gateway’, to tackle disguised remuneration avoidance schemes used by close companies to pay their employees and directors who have a material interest. This change will have effect on 6 April 2017.
“Legislation aims to ensure individuals who effectively work as employees are taxed as employees”
The same bill will require all employees and self-employed individuals, who have received a disguised remuneration loan, to provide information to HMRC by 1 October 2019. This information will help HMRC ensure the loan charge is complied with. This change will take effect on royal assent of the finance bill.
The government will also legislate to put beyond doubt that Part 7A of Income Tax (Earnings and Pensions) Act 2003 applies regardless of whether contributions to disguised remuneration avoidance schemes should previously have been taxed as employment income. This change took effect on 22 November 2017.
Lastly, the bill will ensure the liabilities arising from the loan charge are collected from the appropriate person where the employer is located offshore, the change taking effect on royal assent of the finance bill.
In an expected announcement, we now know the government will consult on tackling what it perceives as non-compliance with the intermediaries legislation (commonly known as IR35) in the private sector.
The legislation aims to ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a personal service company.
HMRC has now identified that its ‘possible next step’ would be to extend the recent public sector reforms in this area to the private sector. Any company that uses the services of individuals
via personal service companies could be affected by this change. Hopefully the proposed consultation takes all issues into account.
The government will legislate in the finance bill to increase the diesel car benefits supplement from 3% to 4%. The diesel supplement is used to calculate company car tax and car fuel benefit charge, where the employer provides staff with a diesel car that is made available for private use.
This will apply to all diesel cars registered on and after 1 January 1998 that do not meet the Real Driving Emissions Step 2 (RDE2) standards. This increases the level of taxable benefit for diesel cars, which produce more harmful particulates such as nitrous oxide, and is intended to improve air quality.
There is also a change to the current position that the diesel supplement does not apply to hybrid cars. The changes will take effect on 6 April 2018.
The government will also legislate shortly to give unincorporated property businesses the option to use a fixed rate deduction for every mile travelled by car, motorcycle or goods vehicle for business journeys. This will be as an alternative to claims for capital allowances and deductions for actual expenses incurred, such as fuel, with the changes taking effect on 6 April 2017.
The government will now legislate in the finance bill to increase the rate of the R&D expenditure credit from 11% to 12%, ‘in order to support business investment in R&D’, with the change taking effect on 1 January 2018.
In a surprise announcement, the government decided the finance bill will include provisions to freeze indexation allowance on corporate capital gains for disposals on and after 1 January 2018.
The allowance for subsequent disposals will be frozen at the amount that would be due based on the retail price index for December 2017. The change will take effect for disposals on 1 January 2018.
In other developments, HMRC has recently confirmed it will delay implementing the new payments by instalments system for the UK’s largest companies until 1 April 2019. The new system could significantly affect cash flow for some these companies, so this small delay is welcome.
Less commendable is the lack of any signs of transitional relief, surely necessary in any reasonably constructed corporation tax payment system.
The new regime applies to businesses with annual profits for corporation tax purposes of more than £20 million and effectively requires the firms to pay some instalments four months earlier than they otherwise would have.
From 1 April 2019, for any year-long corporation tax accounting period, a company within the new instalments regime will need to make its corporation tax payments in months three, six, nine and 12 of the current accounting period, meaning the period to which the specific liability relates.
“The new system could significantly affect cash flow for some these companies, so this small delay is welcome”
Under the existing payments regime, such companies must make their corporation tax payments in months seven and ten of the current accounting period to which the computed liability relates, and in months one and four of the next accounting period.
Thus the new regime will arguably speed up the corporation tax instalment payments, and in the year of the change this could significantly affect cash flow for such companies, if this interpretation is right.
Firms are waiting for clarification from HMRC on whether there will be any mitigating transitional relief, such as spreading of the accelerated liability. It is also important to note that for a company that is a member of a 51% group of companies, the £20 million threshold will be divided by the total number of group companies.
Although the stated aim of the new payments regime is ‘to ensure that the largest companies pay their tax closer to the point at which the earn their profits’, we await the cash flow impacts. Affected companies will have to plan the impact on their treasury function carefully over the next year.