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Business tax

Good news on business rates

Following the recent widespread outcry about the impact of business rate increases, the Chancellor announced new reliefs to help those worst affected.

Currently businesses can get small business rate relief if:
  • their property’s rateable value is less than £12,000 (£15,000 from April 2017);
  • they use one property (although they may still be able to get relief if using more than one property).
The relief means that businesses will not pay business rates on a property with a rateable value of £6,000 or less until 31 March 2017. The rate of relief reduces gradually from 100% to 0% for properties with a rateable value between £6,001 and £12,000.

However, revaluations of properties from 1 April 2017 may result in an increase in the rateable value of many business properties, leading to a decrease in those businesses benefitting from the small business rate relief.

In addition to the £3.6 billion transitional relief announced in November 2016, the Spring Budget 2017 includes further support for firms affected by increases in business rates through the following measures:
  • rate rises for businesses losing existing relief will be capped at £50 a month;
  • there will be a £300 million hardship fund allowing local authorities to provide discretionary relief and support to individual hard cases in their local area;
  • pubs with a rateable value of less than £100,000 will receive a £1,000 discount on rates they would have paid.
NIC change for the self-employed

One of the most far-reaching changes announced in the Budget was the increase to the national insurance rate paid by the self-employed.

Taxpayers affected by the move include partners and members of limited liability partnerships. The Chancellor justified these changes by highlighting the reduced rate paid by these workers compared to employees earning the same amount.

In the current 2016/17 tax year, the self-employed pay Class 4 national insurance contributions (NICs) at a rate of 9% on income between £8,060 and £43,000, and 2% over £43,000. In addition, Class 2 national insurance is paid at a flat rate of £2.80 per week where income for the year is above £5,965. These rates are in keeping with recent years.

As previously announced, Class 2 national insurance will be abolished from April 2018. However, the main Class 4 rate will now increase to 10% from April 2018 and to 11% from April 2019.

The changes to Class 4 national insurance are expected to raise £325m in 2018/19, increasing to £645m in 2019/20, before dropping back to £595m and £495m in 2020/21 and 2021/22 respectively.

Whilst being a source of increased revenue for the Government, the measure will have the biggest impact on the self-employed individuals incomes under the 40% higher-rate tax band. Higher earners will be proportionally less affected, as the 2% higher rate remains unchanged. This could therefore be viewed as a regressive tax increase. Immediate media reaction has also focused on how this measure appears to contradict the Conservative Party manifesto at the last General Election, which promised not to increase a range of taxes, including national insurance.

However, if the measure is judged a success, there is plenty of scope to increase the Class 4 NIC burden further. The equivalent rate of Class 1 national insurance for employees is currently 12%; it would be tempting for the Government to increase Class 4 further to harmonise the rates. In addition, the Budget made no mention of the 13.8% national insurance rate paid by employers on their employees’ income and how this could possibly be replicated for the self-employed in the future.

Investment boosts for business 

The Chancellor aims to make the UK the “best place in the world to start and grow a business”. He has therefore accepted industry calls for a “reduction in administrative burdens” for the Research & Development Expenditure Credit scheme. The Treasury has also announced that it will improve awareness of the availability of the scheme, aiming to drive up investment in science, research and innovation.

A review of Patent Box cost-sharing arrangements will also be undertaken to ensure that where R&D activities are collectively undertaken by two or more companies, neither will be penalised nor able to gain a tax advantage.

As previously announced, the Government will undertake a review to identify the barriers businesses face in accessing longer-term finance. The Patient Capital Review will focus on businesses with large growth and bring the likes of the Enterprise Investment Scheme (EIS) into the spotlight. The ultimate aim is to assess what policy changes may be needed to support growing, innovative firms in need of long-term capital.

Property tax reforms

Amid a range of property tax measures, the Government will legislate in Finance Bill 2017 to amend the law on profits from trading in and developing land in the UK.
The new legislation will aim to ensure that all profits realised by offshore property developers developing land in the UK – including those on pre-existing contracts – are subject to tax with effect from 8 March 2017.

As announced in August 2016, the Government will also legislate in Finance Bill 2017 to allow most unincorporated property businesses (other than limited liability partnerships, trusts, partnerships with corporate partners or those with receipts of more than £150,000) to calculate their taxable profits using a cash basis of accounting. Landlords will continue to be able to opt to use Generally Accepted Accounting Principles (GAAP) to calculate their profits for tax purposes. There will be consistent treatment across the two systems of the initial and replacement cost of items used in a dwelling house, and of the treatment of interest expense. The changes will have effect from 6 April 2017.

As announced in the Autumn Statement 2016, the Government will consult on the case and options for bringing non-UK resident companies within the scope of corporation tax. Currently they are chargeable to income tax on their UK taxable income and to non-resident capital gains tax only on certain gains. Under such a move, these companies would be subject to the rules that apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and the loss relief rules, which are to be included in the Finance Bill 2017. It is not clear whether the intention is to bring such companies within the scope of capital gains tax more widely in the same way as UK-resident companies.

The Government consulted in 2016 on a reduction in the stamp duty land tax (SDLT) filing and payment window from 30 days to 14 days, and on the SDLT filing and payment process generally. After considering responses, the Government will delay the reduction in the filing and payment window until after April 2018.

Transferring assets to stock 

The Government will introduce legislation with effect from Budget Day to prevent businesses obtaining a tax advantage by converting capital losses into more flexible trading losses.

Under previous legislation if fixed assets or investments were appropriated to stock, this was deemed to take place at market value for tax purposes and the transfer could generate a chargeable gain or an allowable loss. An example would be where, following a change of intention, a property held as an investment to generate rental income was transferred to stock.

Businesses could previously generate a capital loss and then elect for this to be treated as a trading loss, usually resulting in greater flexibility. The new legislation prevents an election being made when a capital loss is generated in this way. The loss will remain a capital loss and subject to associated restrictions. An election can still be made if a chargeable gain is generated on the transfer, with the effect that the gain is taxable as a trading profit.

The previous rules also applied to property within the Annual Tax on Enveloped Dwellings (ATED) regime, but only to the non-ATED related element. Similar changes will apply to such an election, so that it cannot be made in respect of a loss but only in respect of a gain.

A raft of tax consultations

As announced in the Budget, a large number of tax topics will be subject to consultation. Most consultations will be launched on 20 March 2017.

The tax treatment for employees is dependent on the form in which employers choose to remunerate them. The Government considers that the disparity in tax treatment here is unfair and inconsistent. The various consultations and calls for evidence on the taxation of benefits in kind, accommodation benefits and employee expenses seek to address this issue.

Other consultative documents address a wide range of areas, covering both personal taxation and the corporate sphere. Following the conclusion of the consultations later this year, we should expect numerous changes to the tax system.

The list of consultation documents is as follows:
  • Tackling disguised remuneration avoidance schemes
  • Rent-a-room relief
  • Employer-provided accommodation
  • Plant and machinery leasing – response to lease accounting changes
  • Withholding tax exemption for debt traded on a multilateral trading facility
  • Non-resident companies chargeable to income tax and non-resident capital gains tax
  • Landfill tax – extending the scope to illegal disposals
  • Alcohol duty rates and bands
  • Heated tobacco consultation
  • VAT: fraud in the provision of labour in construction sector
  • Digital tax administration
  • HMRC large business risk review
In addition, the following calls for evidence and other consultation exercises were announced:
  • Employee business expenses
  • Taxation of benefits in kind
  • Oil and gas: tax for late life oil and gas assets
  • HGV road user levy
  • Red diesel
  • VAT: split payment model
Additional points

  • The Substantial Shareholdings Exemption regime will be reformed and simplified to remove the existing investing company requirement. The changes will take effect from 1 April 2017.
  • Loss relief reform will mean greater flexibility for companies to use corporate losses arising on or after 1 April 2017 that are carried forward. However, relief will be restricted to 50% of company or group profits in excess of £5 million arising on or after 1 April 2017. New provisions for oil and gas companies and oil contractors are now included.
  • Minor revisions to the existing hybrid mismatch regime will be made following discussions with stakeholders. The need to make a formal claim in relation to the permitted time period will be removed, and deductions for amortisation will not be treated as relevant deductions. The changes will have effect from 1 January 2017.
  • Museums and galleries will benefit from a new tax relief for the development of new exhibitions (25% for touring exhibitions and 20% for non-touring exhibitions, subject to limits). The measure will take effect from 1 April 2017.
  • The amount of corporate interest expense that a company can deduct will be restricted to a fixed ratio, although groups will have the option of applying a group ratio instead. Both options will be subject to a modified debt cap. All groups will be able to deduct up to £2 million per year without restriction. A few changes, including removing unintended consequences, have been made to the draft legislation previously published. The legislation will take effect from 1 April 2017.
  • The Government will simplify the process for opting fields out of the petroleum revenue tax regime. The reporting requirements for participators in the regime will also be simplified. The changes will have retrospective effect from 23 November 2016.
  • The Government will make changes to allow small and medium enterprises trading in Northern Ireland to benefit from the Northern Ireland corporation tax regime. Changes include more robust anti-abuse measures. 
  • The Government will broaden the circumstances in which companies can get tax relief for contributions to grass roots sports. The treatment of a sport governing body is now extended to include its 100% subsidiaries. The new measure will take effect from 1 April 2017. 
New announcements
  • The Government will further simplify the administrative requirements of the Double Taxation Treaty Passport scheme, which gives corporate lenders and corporate UK borrowers access to reduced withholding tax rates on interest. Furthermore, the scheme will be made available to all types of overseas lenders and UK borrowers from 6 April 2017. Guidance will be published on 6 April 2017.
  • An exemption from withholding tax will be introduced for interest on debt traded on a multilateral trading facility. A consultation on implementation will commence in Spring 2017.
  • Partnership taxation: the Government will soon publish a response document and draft legislation to clarify and improve some areas of partnership taxation.
  • Plant and machinery leasing: in response to new accounting standard IFRS16, which applies from 1 January 2019, the Government will consult on consequential tax changes. The Government intends to maintain the current system of lease taxation.
  • Oil and gas taxation: with retrospective effect for expenditure on or after 8 October 2015, the Government will lay regulations to extend the scope of the investment and cluster area allowances to include some operating and leasing costs.