Against the backdrop of the Coronavirus COVID-19 crisis, the 2020 Budget on 11 March 2020 was relatively light on tax announcements affecting businesses. As it has been heralded as being the first in a trilogy of fiscal events (with the comprehensive spending review and the autumn Budget to come), we expect many more tax announcements later this year. We highlight below some of the main business tax measures, many of which we had covered in our Budget predictions Insight.
Despite the pendulum looking like it was swinging towards complete abolition of Entrepreneurs' Relief (ER) in the weeks leading up to the Budget, it was a welcome surprise in the business community that ER was not abolished. Instead, the Chancellor, Rishi Sunak, decided to reform ER by reducing the lifetime limit on capital gains that can be subject to ER: from £10 million to £1 million. The change applies to disposals on or after Budget day, meaning that the value of ER for individuals sitting on large capital gains which would have benefitted from ER was slashed from £1 million to £100,000 overnight.
Taxpayers who qualify for ER and expect to realise lifetime gains of less than £1 million, such as small business owners, management shareholders and EMI option holders, will be especially relieved as they will be largely unaffected by this change. For more detail on what the Budget means for employee share plans more generally, please see our Insight here.
Some "anti-forestalling" measures were also announced as part of the ER changes. These measures can retrospectively apply the £1 million lifetime limit to certain transactions entered into before 11 March 2020. Individuals who entered into certain types of transactions in anticipation of the Budget will need to carefully consider the detail of the anti-forestalling measures.
While the Chancellor in this Budget did not abolish ER in its entirety, he did call the relief "expensive…ineffective…and unfair" and we can expect yet further reform of the relief in future budgets.
Improvements to tax reliefs for research and development
It was encouraging that the government made announcements to support business investment in R&D, thereby helping UK businesses to invest and innovate. As we predicted, the R&D expenditure credit (RDEC) for companies working on R&D projects will increase from 12% to 13% for expenditure incurred on or after 1 April 2020, and the government will consult on whether expenditure on data and cloud computing should qualify for R&D tax credits. Both measures should help improve the reach and extent of the tax relief for companies carrying out R&D in the UK.
Additionally, following last year's consultation, there will be a delay in the implementation of the PAYE cap on the payable tax credit in the SME R&D scheme until 1 April 2021. It was also announced that the government will consult further on the change to the cap's design to ensure it targets abusive behaviour as intended and does not penalise genuine R&D activity.
Digital Services Tax
The Chancellor confirmed that the proposed introduction of Digital Services Tax (DST) in the UK will go ahead from 1 April 2020 as originally envisaged. Although this announcement is wholly consistent with the government's previous position on DST (apart from a slightly stronger statement that this is a temporary measure that will be repealed when a global solution is reached), it is surprising that there is no mention of the complex international negotiations which have dogged the proposed introduction of DST in other jurisdictions. In particular it does not mention how the US's implacable dislike of unilateral DST measures, and the UK's desire to agree a beneficial trade deal with the US as soon as possible, might impact on the Chancellor's plans. We may yet see a delay in the collection of DST, as has occurred in France, in order to prevent the introduction of punitive US tariffs on UK goods.
As previously announced, the Budget confirmed that the current corporation tax rate of 19% will remain for the financial year beginning 1 April 2020, and it will remain at 19% for the following financial year, beginning 1 April 2021.
The Finance Bill will restrict the carry-forward of capital losses for accounting periods ending on or after 1 April 2020, meaning that companies making chargeable gains will only be able to offset up to 50% of those gains using carried-forward capital losses. The Budget has confirmed that this measure will not apply to companies in liquidation, which is a helpful change to the draft legislation published last summer.
In light of the Coronavirus COVID-19 outbreak, the Budget confirmed that businesses (and self-employed individuals) in financial distress due to the current crisis will receive support with their tax affairs, for example through bespoke Time to Pay arrangements. HMRC will also waive late payment penalties and interest where businesses cannot pay their taxes due to COVID-19.
Legislation will be introduced in the Finance Bill on the tax treatment of intellectual property, which will allow all pre-Finance Act 2002 intangible assets acquired from 1 July 2020 to come within the intangible fixed asset regime (subject to some transitional provisions). This should be a useful simplification measure. The question will be how complicated the transitional measures will be.
Off-payroll working reforms for the private sector
As expected, the Budget confirmed the extension of the off-payroll working rules (IR35) to medium and large private sector organisations from 6 April 2020. For more detail, please see our Insight here.
Review of UK funds regime
The government will undertake a review of the UK funds regime during 2020. The review will cover direct and indirect taxes as well as relevant areas of regulation. It will also consider the VAT treatment of fund management fees and other aspects of UK's funds regime. As an initial component of this wider review, on Budget day the government published a consultation on the tax treatment of asset holding companies in alternative fund structures, the closing date for which is 19 May 2020. This consultation will explore whether changes to the tax treatment of companies used by funds to hold assets could make the UK a more attractive location for these companies.
Changes in real estate taxes
It was a relatively quiet budget on the property tax side, which is no bad thing as the industry has had a lot of change over the last few years..
One announcement was the expected positive increase in rate of the annual structures and buildings allowances to 3%. There was also good news in relation to business rates discounts, with retail and leisure businesses whose premises have a rateable value below £51,000 benefitting from a temporary increase in the Business Rates Retail Discount to 100% for 2020-2021. The discount has also been extended to many additional small leisure and hospitality businesses. A fundamental review of business rates (which has been discussed for many years) will also take place, with reporting anticipated in the autumn.
The SDLT surcharge (at a rate of 2%) for non-residents acquiring UK residential property is also finally set to come in – albeit from April 2021, some two and a half years since it was first announced. The Budget has confirmed that the money raised from the surcharge will be used to help address homelessness.
The government is also to introduce measures to prevent non-compliant businesses from using the construction industry scheme (CIS) to claim tax refunds that are not due to them, although what is really needed is a full review of CIS to make it fit for purpose as it captures many transactions at present which simply do not pose a risk of tax underpayment in the way that the CIS was intended to catch.
The government intends to introduce new reliefs from the Annual Tax on Enveloped Dwellings and the 15% rate of SDLT for certain housing co-operatives. There will be a consultation over the summer on this.
In welcome news, the Budget announced that the Employment Allowance will be increased from £3,000 to £4,000 from April 2020. The government will also extend from April 2020 the scope of non-taxable counselling services to include related medical treatment when provided to an employee as part of an employer's welfare counselling services. For other Budget announcements to support employers affected by the Coronavirus COVID-19, see our Employment Insight here.
A new Plastic Packaging Tax to incentivise the use of recycled plastic in packaging will be introduced in next year's Finance Bill, with the measure taking effect from April 2022. A further consultation was also launched on the design of the new tax.
The Budget announced that e-books, e-newspapers, e-magazines and academic e-journals are to be zero rated for VAT purposes. This levels the playing field from a VAT perspective between e-books and hard copy books. However, book retailers may question whether there really is a level playing field given the physical costs of selling from stores and the heavy business rates burden suffered by bricks and mortar retailers. Although this latter cost has been helped this year by extending Business Rates relief to a 100% discount for 2020/21, this discount is aimed at SMEs and not larger retailers.
Tax avoidance and administration
As has been a common theme for several years, the Budget announced some new anti-avoidance measures, including measures to tackle promoters of tax avoidance schemes (including a new HMRC strategy). The government will also publish a call for evidence in the Spring on raising standards in the market for tax advice.
The Budget also announced that from April 2021 large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. It will be interesting to see the detail when the consultation is published shortly although it is expected that the policy will draw on international accounting standards which many large businesses already follow and so may not have much practical impact.
The Budget has delayed from 6 April 2020 to 1 December 2020 the commencement of rules designating HMRC as a preferential creditor over certain taxes in insolvency and the measure has also been extended measure to include Northern Ireland.
The Budget has also announced the launch of a call for evidence on pensions tax administration. For other pensions-related announcements in the Budget, please see our Insight here.
Osborne Clarke comment
This Budget was always going to be a challenging one, even more so for a chancellor new to the job. Businesses, on the whole, will be relieved that not all the measures mooted in the press (notably the abolition of ER) were pursued. It is also understandable that in the current health crisis, the Chancellor prioritised keeping the country and its people healthy and financially secure. The tax measures were a mixture of supporting businesses, encouraging entrepreneurial activity, driving the green tax agenda and laying down the ground work for the UK to take its own post-Brexit approach (especially on the VAT and funds side), once it comes out of the transitional period. The government acted on many of its manifesto promises and there will no doubt be more tax announcement to come later this year.