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Business tax

Capital allowances in the spotlight

The Budget included a raft of initiatives involving capital allowances, designed to stimulate business investment and encourage a thriving modern economy.  

First in the spotlight is the Annual Investment Allowance (AIA). In order to help stimulate business investment, the Government will increase the AIA to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020.

This dramatically reverses the previous cut in the incentive. Although the maximum amount of the AIA was temporarily increased to £500,000 in the 2014 Budget, the 2015 Summer Budget set the AIA permanently at £200,000 from 1 January 2016. 

This latest about -turn will provide significantly faster tax relief for plant and machinery investment between £200,000 and £1 million, helping businesses to invest and grow.

Structures and buildings allowance (SBA)
New non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018. This will address a gap in the current capital allowances regime and improve the international competitiveness of the UK’s tax system. 

The aim of the SBA is to relieve the costs of physically constructing new structures and buildings. This will encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity. 

Neither land nor dwellings will be eligible for relief. Where there is mixed use – for example, between commercial and residential units in a development – relief will be reduced by apportionment. Premises used as hotels and care homes will qualify for the allowance.

Capital allowances special rate reduction
From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6%. Businesses will thus continue to receive full tax relief to reflect the depreciation of plant and machinery assets, but over an extended timeframe. This measure does not change the writing down allowance on the main pool, which is currently 18%, nor does it change the writing down allowance on the special rate pool for ring fence trades (i.e oil extraction activites), which is currently 10%.

Enhanced Capital Allowances 
The Government will end Enhanced Capital Allowances (ECAs) and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List from April 2020. The savings will be reinvested in an Industrial Energy Transformation Fund, to help significant energy users to cut their energy bills and transition UK industry to a low carbon future.

ECAs for electric vehicle charge points
The Government will extend the ECA for companies investing in electric vehicle charge points to 31 March 2023. This is to help achieve the Government’s ambition for the UK to become a world leader in the ultra-low emission vehicle market.

Changes to corporate capital loss relief
The Government is proposing to harmonise the tax treatment of corporate capital losses with income losses from 1 April 2020.

As the proposal stands at the moment, the relief for brought forward capital losses would be restricted to 50% of the annual capital gains that can be relieved by such losses. The measure includes an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year, meaning that a large proportion of companies will be unaffected.

The aim of the proposal is to ensure that large companies pay tax when they make significant capital gains.

A consultation process will be launched later this year or early in 2019 on the detailed design of this change and legislation will be introduced in Finance Bill 2019/20. The measure will be subject to anti-avoidance rules.

R&D SME scheme
SME companies that invest in R&D are entitled to surrender  tax losses arising from R&D expenditure in exchange for payable R&D Tax Credits. 

In order to prevent abuse, including fraud, the Government will introduce a new safeguard whereby the payable tax credits will be restricted to three times the company’s total PAYE and NIC liability for that year. Losses that cannot be surrendered for tax credits would be carried forward for offset against future profits. 

The intention is for R&D companies to pay workers using UK payroll rather than external contractors or non-UK group companies. 

This measure is forecast to save the Government £20 million in 2020/21 and £45 million per year thereafter.

If enacted, this measure would partly reverse the 2012 abolition of the link with PAYE and NIC.

As part of the Government’s intention to raise total R&D investment to 2.4% of GDP by 2027, the Budget is committing an extra £1.6 billion to R&D through new grant funding opportunities in a number of sectors including:
  • digitally-enabled technologies including the Internet of Things and virtual reality;electric motor technologies;
  • quantum technologies;
  • computing, sensing and communications;
  • artificial Intelligence and data-driven innovation;
  • blockchain and cryptoassets;
  • cyber security.

UK pushes ahead with a Digital Services Tax
The Chancellor has made good his promise on leading the reform of international tax systems and how they should apply to the digital economy. Targeting ‘global giants’ and ensuring they contribute to a ‘fair and sustainable’ UK tax system, the new Digital Services Tax is the first step towards wider long-term global tax reform.

The announcement of the new tax is not unexpected; it follows the Government’s position paper last year on corporate taxation and the digital economy, as well as the EU’s proposals published in March 2018. The Government’s position paper recognised the need for a temporary measure, such as a revenue-based tax. Frustrated by the slow progress towards reaching a global agreement on how to tax digital businesses, the Chancellor has now confirmed the Government’s commitment to introducing a 2% tax on the revenues generated by large digital businesses from April 2020.

The new Digital Service Tax will be narrowly targeted to search engines, social media platforms and online marketplaces that are linked to value generated by the participation of UK users. It will only affect large businesses generating global revenues in excess of £500 million a year from the targeted activities. There will also be a £25 million annual allowance for taxable revenues linked to UK users.

Safe harbour provisions will be included to ensure that the introduction of the new tax does not adversely impact start-ups. These will exempt loss-making businesses and give relief where the activities generate very low profit margins.

The Government recognises that the most effective way of dealing with the taxation of global digital businesses is through international agreement. The Digital Services Tax is therefore designed to be a temporary measure until a global long-term solution is identified.

Further consultation on the introduction of the rules will follow in due course, with legislation being included in the Finance Bill 2019/20.

Diverted Profits Tax (DPT)
The Government has tightened some of the rules in relation to the DPT. The changes halt a planning opportunity where a return can be amended after the DPT time limits have passed. The proposed legislation also clarifies the point that the diverted profits will only be subject to either the DPT or UK corporation tax, not both.

Business rates
The Government is further lowering business rates for those on the high street, with reductions of 33% on properties with rateable values below £51,000. The Chancellor claims this will save 90% of all independent shops, pubs, restaurants and cafes up to £8,000 per year until the next revaluation in 2021. This measure is in addition to the other announcements in respect of business rates on public lavatories and office space occupied by local newspapers.

Hybrid Capital Instruments
The Government is to introduce rules for the taxation of certain corporate debt instruments, known as hybrid capital, which have equity-like attributes. The rules will ensure the instruments are taxed in line with their economic substance, whilst eliminating mismatches between the tax treatment of instruments.

Profit fragmentation and permanent establishments
Changes to the definition of when an overseas company creates a taxable presence in the UK, through a ‘permanent establishment’, are being introduced to combat circumstances where business activities are artificially fragmented. These changes mirror amendments to the UK’s double tax treaties which are already due to take effect in 2019.

Matters previously announced

Intangibles: new relief and new income tax charge
Intangibles featured in the Budget in a number of ways.

Intangible fixed assets regime
Following amendments to the tax treatment of goodwill over a number of years, a further change is now on the horizon. Targeted relief for the cost of goodwill will be introduced from April 2019. It is uncertain whether pre-2002 goodwill will be included or not.

Concerns over the lack of relief  for pre-2002 goodwill were raised  during preceding consultation.    

Currently, intangible fixed assets do not get relief when a de-grouping charge arises on the sale of a group entity. Relief is, however, given for tangible assets under the Substantial Shareholding Exemption rules. The Government is aiming to bring the intangible regime in to line with these rules and a response to the consultation process is expected to be published on 7 November 2018.

Income from intangible property
The Chancellor announced that UK income tax will be levied on amounts received in a low tax jurisdiction in respect of intangible property, to the extent that those amounts refer to the sale of goods or services in the UK.
The measure will apply equally to income receivable from connected or unconnected parties and will be effective from 6 April 2019.

The measure was originally announced in the Autumn 2017 Budget and consulted upon. Since then the income in scope has broadened. Legislation will be introduced in Finance Bill 2018 and a consultation response document issued.

Anti-avoidance provisions will apply from 29 October 2018 to counteract arrangements entered into with a main purpose of avoiding a charge under this measure.

Corporate interest restriction: amendments
As announced at Autumn Budget 2017 and following consultation on draft legislation, the Government will legislate in Finance Bill 2018/19 to make technical amendments to the corporate interest restriction rules to ensure the regime works as intended. The draft legislation and a briefing were published on 6 July 2018. Following consultation, these have been revised.

Corporate Interest Restriction: tax responses to accounting standards for leasing

As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018/19 to ensure that tax legislation, including the long funding lease and corporate interest restriction rules, continue to operate as intended after the introduction of the new accounting standard for leases, IFRS 16.

Corporation tax: UK property income of non-UK residents
As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018/19 so that non-UK resident companies that carry on a UK property business or have other UK property income will be charged to corporation tax, rather than to income tax as at present.

Draft legislation and a briefing: ‘UK property income of non-UK resident companies’ were published on 6 July 2018.

Following consultation, the legislation has been revised to provide further clarity on how the loan relationship and derivative contract rules will apply. In addition, a targeted anti-avoidance rule is introduced from 29 October 2018.

The draft legislation, explanatory note and an updated briefing were published on 29 October 2018. The changes will have effect from 6 April 2020.

Guidance on the transitional rules, as well as general guidance on corporation tax aimed at non-UK resident companies, will be published during 2019 and before the change takes effect.

Transferable tax history and petroleum revenue tax
As announced at Autumn Budget 2017, the Government will introduce in Finance Bill 2018/19 a transferable tax history mechanism for oil and gas companies that will remove tax barriers to new investment in the North Sea.

Corporation tax: amendments to reform of loss relief
As announced on 6 July 2018, the Government will legislate amendments to the loss relief legislation in Finance Bill 2018/19 to ensure that it prevents relief for carried-forward losses being claimed in excess of that intended.

Anti Tax Avoidance Directive: Controlled Foreign Companies (CFC)
As announced on 6 July 2018, the Government will legislate in Finance Bill 2018/19 to make two changes to the CFC rules. These changes relate to the definition of control and the treatment of certain profits generated by UK activity, and will ensure that UK CFC rules comply with Council Directive (EU) 2016/1164, also referred to as the EU Anti Tax Avoidance Directive (ATAD). The changes will take effect from 1 January 2019.

ATAD: hybrids
As announced on 6 July 2018, legislation will be introduced in Finance Bill 2018/19 to make two changes to the hybrid mismatch rules. These changes relate to the treatment of certain permanent establishments and the treatment of regulatory capital, and will ensure that the UK hybrid mismatch rules comply with the ATAD. These changes take effect from 1 January 2020.

Offshore receipts in respect of intangible property (previously royalties withholding tax)

As announced at Autumn Budget 2017, legislation will be introduced in Finance Bill 2018/19 to tax income from intangible property held in low-tax jurisdictions to the extent that it is referable to UK sales. Following consultation, which ran from 1 December 2017 to 23 February 2018, the Government is making changes to ensure that the policy is effective, applies as intended and is not open to abuse.

Capital gains tax entrepreneurs’ relief: where shareholding ‘diluted’ below the 5% threshold

As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018/19 to allow individuals whose shareholding is ‘diluted’ below the 5% qualifying threshold for entrepreneurs’ relief as a result of a new share issue to obtain relief for gains up to that time. The measure will have effect for shares held at the time of fundraising events which take place on or after 6 April 2019.

Taxing gains made by non-residents on UK immoveable property
As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018/19 to broaden the UK’s tax base to include disposals of all forms of UK land made by non-residents. This will include both direct disposals of UK land, and indirect disposals of entities that predominantly derive their value from UK land. Non-resident companies will be chargeable to corporation tax on their gains. The changes will take effect for disposals made on or after 6 April 2019.

Capital gains tax payment window
As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018/19 to introduce a requirement for UK residents to make a payment on account of capital gains tax following the completion of a residential property disposal. The new legislation will also replace and extend the existing reporting and payment on account rules for non-UK residents.

Draft legislation and a briefing ‘Capital gains tax payment window for residential property gains’ were published on 6 July 2018.

Following consultation, the legislation has been changed to:
  • allow reasonable estimates of valuations and apportionments needed to compute the gain, where this information is not available before the payment deadline;
  • remove disposals by UK residents of non-UK properties from the rules;
  • remove non-UK resident companies from the reporting requirement.
The above changes will apply to disposals by non-UK residents on or after 6 April 2019. For UK residents the changes will have effect for disposals on or after 6 April 2020.

Landfill tax rates 2019/20
As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018-19 to increase the standard and lower rates of Landfill tax in line with RPI, rounded to the nearest 5 pence. The change will have effect from 1 April 2019.

HGV road user levy
As previously announced, from 1 February 2019 HGVs that meet the latest Euro VI emissions standards will be eligible for a 10% reduction in the HGV levy.

Those HGVs that do not meet the latest emissions standards will see their liability increase by 20%, except where the rate is already set at the maximum allowable under European legislation.

Stamp duty, stamp duty reserve tax (SDRT) and stamp duty land tax (SDLT): resolution of financial institutions
As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018/19 to ensure that stamp duty, SDRT and SDLT are not chargeable on exercise of resolution powers under the UK special resolution regime for managing failing financial institutions.

Profit fragmentation
As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018-19 to introduce targeted legislation that aims to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. The taxable UK profits will be increased to the actual, commercial level.

Draft legislation and a briefing ‘Profit fragmentation’ were published on 6 July 2018. Following consultation, changes have been made to the draft legislation to remove the duty to notify HMRC of relevant arrangements meeting certain criteria, to clarify the adjustments required to be made under this legislation, and to make a number of small technical changes.

The measure will have effect from 1 April 2019 for corporation tax and from 6 April 2019 for income tax and class 4 national insurance contributions, and will apply to all profits diverted on or after those dates.

Extension of security deposit legislation
As announced at Budget 2017, the Government will legislate in Finance Bill 2018/19 to extend existing security deposit legislation to include corporation tax and Construction Industry Scheme deductions.

Amendment to interest provisions for late payment, repayments and penalties
As announced on 19 July 2018 the Government will amend the legislation dealing with the interest charged on unpaid corporation tax and Diverted Profits Tax to confirm existing policy. The Budget also announces similar changes to clarify legislation for the interest charged on PAYE penalties. Both these changes apply retrospectively and will be included in the 2018/19 Finance Bill.

Extension of offshore time limits
As announced at Autumn Budget 2017 the Government will legislate in Finance Bill 2018/19 to increase the assessment time for offshore non-compliance to 12 years for income tax, capital gains tax and inheritance tax. Where there is deliberate behaviour the time limit remains at 20 years.