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Taxing issues

20 December 2018 by Russell Cockburn

Taxing issues

A round up of how the 2018 autumn budget affects tax matters

This month’s article provides a brief review of the chief business and corporate tax proposals of practical interest from last month’s autumn 2018 budget speech by the Chancellor.

Mr Hammond began by declaring that the ‘age of austerity is apparently coming to end’ and indeed went on to announce one or two changes to the corporate tax regime which suggest that he is indeed relaxing the purse strings, even if just a little in some areas.

Business rates are to be cut by one third for those with rateable values of £50,000 or less after the next planned revaluation of business properties. The intention apparently is that this should benefit 90% of independent firms.

Probably the biggest surprise was the announcement that there is to be a significant increase in Annual Investment Allowance for capital allowances purposes from the current £200,000, (which some readers may recall Mr. Hammond said was to be the ‘permanent’ allowance), from January 2016), to £1 million for the next two years.

The new allowance comes into force from 1st January 2019 so as always there are transitional rules which apportion the old and the new thresholds around that date.

There is also to be a 2% Annual Allowance for businesses on expenditures they incur on new ‘non-residential structures and buildings.’ This new allowance, to be known and the Structures and Buildings Allowances, (SBA) is set at a flat rate 2% allowance on construction or conversion costs over 50 years. This relief was introduced immediately for eligible constructions costs incurred on or after 29 October 2018.

On the downside there is also to be a reduction in the rate of writing down allowances on assets in the capital allowances special rate pool from 8% to 6% per annum from April 2019.

Finally on capital allowances the Chancellor confirmed that it is intended to completely end the extra 100% capital allowances which are currently available for qualifying plant items that are on the ‘energy-saving’ lists – (known as ETL and WTL), with effect from April 2020 onwards.

Mr. Hammond also announced that the qualifying period for capital gains tax entrepreneurs’ relief will increase from 12 months to two years. There are also to be some new rules to clarify that qualifying individuals will need to control at least 5% of the voting rights in a company to secure this valuable relief.

As regards companies making R&D tax credit claims, from April 2020 the amount that a loss-making company can receive in R&D tax credits will be capped, (as it used to be some years ago), at three times its total Pay As You Earn (PAYE) and National Insurance contributions (NICs) liability.

“The Chancellor confirmed that HM Revenue & Customs will become a preferred creditor following insolvency

Confirming a proposal that had already been expected it was announced that subcontractors working through personal service companies for medium-sized and large businesses, (as defined under the Companies Acts), will effectively be subject to the IR35 rules in future as the ‘Off-payroll-working’ rules introduced in April 2017 for the public sector are to be extended to the private sector in the medium-term future. This change is not now to be introduced until April 2020, instead of April 2019 as originally planned.

This represents a major shift in emphasis for end-users and subcontractors alike and for many will mean a real drop in their incomes unless they personally have significant negotiating power with their customers. In law it means that the end-user businesses will need to determine for themselves whether any subcontractors they should be treated as employees for tax purposes and then subjected to the extended ‘off-payroll’ working rules. In practice it will probably mean that the majority of large private sector contracting organisations will move the majority of their subcontractor PSC operatives over to the new form of PAYE as a defensive measure rather than invest the significant time and money to will take to review every one that they use.

Making a general comment about the introduction of the Making Tax Digital (MTD) project by HMRC it was confirmed that the VAT threshold is to remain at £85,000 for the next two years, so that from April 2019, when the VAT part of MTD is to come into effect, a business will only be within this new regime for VAT if turnover exceeds the threshold. 

In an extension to the revised corporate tax regime for trading losses introduced for UK companies from April 2017 it was also announced that corporate capital losses carried forward are henceforward to be subjected to an equivalent £5 million restriction to that introduced in 2017 for trading losses carried forward.

Some tax relief for purchased intangibles, (which readers will recall was withdrawn for acquisitions after 8 July 2015), is to be reintroduced for certain intangible assets from April 2019, with a consultation to take place on the detail. There will therefore now effectively be three intangible regimes for expenditures incurred before 31 March 2002, after April 2002 up to 8 July 2015, and for costs incurred after 6 April 2019.

One new tax to be introduced which had been widely rumoured is the ‘UK Digital Services tax’ which is to be imposed at a proposed rate of 2% on incomes earned from UK users with effect from April 2020. At the moment the proposed new tax charge is intended only to apply to businesses with revenues of £500 million or more and only if a good global alternative is not approved. The stated intention is that this tax will be ‘narrowly targeted on the UK-generated revenues of specific digital platforms’ such as search engines, social media platforms and online marketplaces.

There is also to be a period of consultation on the introduction of a new ‘plastic tax’ where product packaging contains less than 30% recycled plastic.

In a reversion to history the Chancellor confirmed that HM Revenue & Customs
will become a preferred creditor following insolvency.

There is also to be a new tax charge on receipts by businesses from their intellectual property where it is ‘held offshore.’ The charge is to be introduced in the Finance Act 2019 and will have an effective date of 6 April 2019. However there is also to be a targeted anti-avoidance rule which will take effect from 29 October 2018. This new legislation will impose an income tax charge on the overseas owner of intellectual property where they receive a payment for its use from someone outside the UK which ‘relates to sales generated in the UK’ but only where the recipient of the payment is a resident in a country with which the UK does not have a double tax treaty.

Finally, following a period of consultation, it was announced that government is widening eligibility for the Short Term Business Visitors Pay As You Earn tax scheme (available to businesses that bring workers into the UK for short term assignments) and will also extend its deadlines for reporting and paying tax under these arrangements so as to ‘reduce administrative burdens on UK employers’ with effect from April 2020. 

Russell Cockburn is an independent tax consultant

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