In this article we look at recent tax changes in the UK and across Europe that could impact US businesses currently trading in the UK and Europe or are looking to do so.
It is difficult at the moment to look beyond Covid-19 and the impact that it is having on our lives and the economy. Like all sections of the economy, taxes need to be considered when responding to this crisis. In the UK, the government has announced a range of emergency tax measures designed to help businesses deal with the fallout from the outbreak. These include a deferral of VAT payments and a relaxation of Time to Pay rules with HMRC. Also, a deferral until next year of measures to change the UK IR35 rules, which relate to the taxation of personal service companies (PSCs), will see tax obligations falling on companies contracting with PSCs. We set out these changes in more detail in the article here: Tax assistance | COVID-19 and emergency support measures
We are seeing similar measures being taken across Europe. The Dutch government has relaxed the rules for deferral of certain tax payments and has announced a dramatic temporary reduction to the default payment interest rate on all taxes. Meanwhile, the Italian government has adopted a raft of measures in the form of the "Decreto Liquidità", while a generalized suspension of business activities remains in force across the country. For further detail on these measures and others in Spain and Germany, please see the articles below.
- The Netherlands: Dutch tax measures in response to COVID-19
- Italy: Guide to the ‘Decreto Liquidità’ decree Tax issues
- Spain: Main measures provided for by Royal Decree-Law 8/2020, of 17 March, on urgent extraordinary measures to deal with the economic and social impact of COVID-19
- Germany: FAQ Coronavirus: How companies secure their liquidity during the coronacrisis
In addition, the travel restrictions being placed on individuals in light of the Covid-19 crisis are going to have unintended and, in some cases, significant implications for tax purposes. For example, in many jurisdictions corporate tax residence is based upon the place of effective management of the company, and in the UK our domestic law provisions treat non-UK incorporated companies as tax resident in the UK if they are centrally managed and controlled here. This depends to a large extent on the place where board meetings are held. In an environment where directors are not able to travel to meetings this could have significant issues for corporate residence. Even if residence is not affected, businesses may create unexpected taxable permanent establishments as a result of having its workers based at home. This could apply to US companies with employees based in the UK and UK companies with employees based in the US. Additionally, travel restrictions may impact the residence of individuals if they breach the number of days spent in a particular jurisdictions in any year. We highlight some of these UK tax issues arising from the crisis in this article: COVID-19 | The Tax Fallout
Budget 2020 changes
On a more business-as-usual basis, the UK government held its Budget on 11 March 2020. Given the raft of emergency Covid-19 related measures announced since , this is now a lifetime away in terms of economic forecasting. However, there are still some important tax changes which are going to have a significant impact on US businesses. Notable announcements include:
- Confirmation that the UK will retain its 19% corporation tax rate for the foreseeable future.
- An increase in R&D expenditure credits for large companies carrying out R&D to 13% of qualifying expenditure.;
- A restriction on entrepreneurs' relief for UK investors in trading companies. Subject to certain conditions, including a two-year holding period, Entrepreneurs' Relief (which is now to be called Business Asset Disposal Relief) provides a 10% tax rate for gains on selling business assets including shares in companies in which an investor holds at least 5% of the shares and is an officer or employee, or for shares acquired through Enterprise Management Incentive (EMI) scheme options. The new restriction limits lifetime gains subject to business asset disposal relief to £1m. Even with this limitation, the relief is still very useful for incentivizing employees through share ownership, whether through direct investment in shares or growth shares or through an EMI share option scheme.
- Confirmation that the UK will push ahead with the proposed digital services tax ("DST") with effect from 1 April 2020. This is likely to be controversial given the US government's antipathy to unilateral measures in this area, rather than countries awaiting the outcome of the OECD's proposals for taxing digital businesses. We have already seen France bowing to pressure from the US by deferring collection of their DST until the end of 2020. The UK tax will be a new 2% tax on the UK-derived revenues of certain digital businesses, in particular social media platforms, search engines and digital market places. The rules are aimed only at large businesses - those that generate:
- More than £500m in global annual revenues from in-scope business activities; and
- More than £25m in annual revenues from in-scope business activities linked to the participation of UK users.
This means that most digital business, although they will need to check the details of the rules, are likely to be outside the scope of these rules.
More detailed guidance on the tax measures in the Budget and the UK's DST rules are set out in these articles:
Tax continues to be a complex subject, and more than ever, it is important for US businesses to be compliant and proactive with the recent measures imposed by the UK and the EU. Applying a global outlook will also help navigate this minefield and ensure that businesses are in a position to tackle tax issues early on.
If you have any questions on how tax changes can impact your European operations, please feel free to get in touch with our team.