Tax rates and allowances
The rate of corporation tax will remain at 19% in 2019/20. The Government has previously announced its intention to reduce the rate to 17% in 2020/21, although the Chancellor took the opportunity to reconfirm this reduction in Budget 2018.
For a table of the main tax rates and allowances for 2019/2020, see below.
Digital services tax
The Government has announced plans to unilaterally introduce a digital services tax (DST) from April 2020. Draft legislation is expected in the 2019/2020 Finance Bill. The measure will apply to companies with in-scope revenues of greater than £25m in the UK and £500m globally. Where multilateral reform of the international corporate tax framework is achieved prior to 2025 then the Government will disapply the DST. This will create uncertainty for affected businesses.
The DST is intended to be narrowly-targeted at specific digital business models where the revenue is linked to the participation of UK users. The revenue streams that the tax will apply to are: advertising from search engine results; advertising on social media platforms; and the facilitation of transactions via online marketplaces. The direct sale of goods and services (including goods, software, online content and broadcasting services) is excluded.
The DST rate on in-scope revenue will be 2%. An alternative basis of calculation will be available for businesses operating on a low profit margin. Under this calculation, loss making companies will not have any DST liability and those with very low profit margins will have a reduced rate. The DST will be an allowable expense for UK corporate tax purposes; however, it will not be within the scope of the UK’s double tax treaties.
The Government will be issuing a consultation on the design of the measure, the specific exemptions and the alternative calculation basis in the next few weeks, prior to the issue of draft legislation.
Extension to permanent establishment definition
As part of its package of measures targeting multinational businesses, the Government has announced that it will extend the scope of a “permanent establishment” (PE) under UK domestic law, with effect from 01 January 2019.
Under the current definition, certain preparatory or auxiliary activities carried on in the UK, such as the storage of goods or the collection of information for the non-resident company, are deemed not to give rise to a PE. The Government is concerned that multinationals have taken advantage of this exemption by splitting their activities between related companies or locations, with a view to minimising their UK tax footprint. The legislation will therefore be changed to deny the exemption from PE treatment where activities form part of a fragmented business operation, for example where:
- a company, either alone or with related entities (whether UK or non-UK), carry on a cohesive business operation from one or more locations in the UK;
- at least one of the entities concerned has a PE where complementary functions are carried on; and
- the activities together would create a PE if undertaken in a single company.
The Budget 2018 announcement costs the Exchequer impact of these proposals as negligible, which is perhaps surprising given the strength of the tax avoidance rhetoric used in the release, but no doubt reflects the low value attributable to the (future) non-exempt functions that will be included within the UK PE. However, despite this apparent limited impact, the Government notes that the new measures will be an additional aspect for HMRC to consider when undertaking its annual Large Business risk review. The changes complement international tax developments, in particular the introduction of anti-fragmentation rules to double tax treaties through adoption of the Multilateral Instrument (MLI).
Offshore receipts in respect of intangible property
Few will mourn the passing of the Royalties Withholding Tax proposals from December 2017. Budget 2018 confirms that the Government has listened to feedback on the impact that such a withholding tax would have, including the significant risk of economic double taxation. The proposals have been recast, therefore, as a new primary income tax charge, coming into effect from 06 April 2019, and which will bring income from cross border arrangements adopted by certain multinationals within the charge to UK tax.
The UK income tax charge will apply to owners of intangible property (IP) or those that are otherwise entitled to income from IP that is referable to the sale of goods or services in the UK in relation to that IP and who are not resident in a full treaty territory, i.e. a jurisdiction that has a double tax treaty with the UK that contains an appropriate non-discrimination provision. The scope of the charge is narrowed through a number of exemptions, including where the value of UK sales is less than £10m in a given tax year; where all, or substantially all, of the business activity in relation to the IP has always taken place in the relevant territory; and where the tax paid in relation to the relevant income is at least 50% of the UK income tax that would otherwise arise under this measure. It should be noted, however, that the charge will apply to gross income referable to the sale of goods or services in the UK, so that the 50% exemption may be less generous than it may initially seem (particular where a jurisdiction offers an IP box or similar regime to mitigate local taxation). The charge will cover income referable to UK sales made through both related and unrelated parties, to prevent the use of third party distribution arrangements to circumvent the charge.
Whilst the proposed UK income tax charge would typically be displaced where a full double tax treaty applies, the measures also contain a targeted anti-abuse rule, effective from 29 October 2018, that will protect against arrangements designed to avoid the charge, for example through the transfer of relevant IP to a group entity in a full treaty jurisdiction. Given the potential difficulty in imposing the charge on a non-resident IP owner, the measure will also provide for any person within the same control group during the relevant tax year to be jointly and severally liable for the UK income tax, and it will be interesting to see whether this may catch certain joint venture arrangements, a point flagged to the Government in the consultation responses. More interesting, however, will be whether the proposed charge leads multinationals to onshore relevant business activities to the UK, particularly when combined with measures such as the diverted profits tax and the proposed digital services tax.
Diverted profits tax
A number of administrative amendments will be made to the diverted profits tax provisions, which will take effect on and after 29 October. These will:
- prevent a planning opportunity which allows a company’s tax return to be amended (presumably to reflect reduced taxable profits due to DPT arrangements) which HMRC can no longer challenge on the basis that the review period has ended and the time limits for a DPT assessment have expired;
- make clear that diverted profits will be taxed either under the DPT code or the corporation tax code but not both;
- extend the review period, being the period during which HMRC and the taxpayer are intended to work collaboratively to determine the amount of diverted profits, from 12 to 15 months;
- extend a company’s right to amend the corporation tax return during the first 12 months of the 15 month extended review period, but only to include the additional diverted profits into a corporation tax charge; and
- make clear that the diverted profits (liable to DPT at 25%) can be reduced and taxed at the current corporation tax rate by amendment to the corporation tax return during the first 12 months of the review period.
Taxing gains by non-residents from UK residential and non-residential property
The Government has confirmed it will be implementing previously announced proposals to bring non-UK residents into the charge to UK tax on gains from direct, and certain indirect, disposals of UK immovable property – whether residential and non-residential – from 06 April 2019. The announcements accompanying the Budget add nothing significant to the detailed proposals published in July this year, except to confirm that funds, other than partnerships, which meet the definitions of a “collective investment scheme” or an “Alternative Investment Fund” under applicable regulatory definitions will be treated as companies for capital gains purposes. Detailed further rules specific to funds have been developed by the Government in consultation with stakeholders since July, but not yet published. The outcome of this exercise is expected to be made public on 07 November 2018.
Bringing UK property income of non-residents into UK corporation tax
The Government has confirmed that it will be implementing previously announced proposals to bring non-UK resident companies into the charge to UK corporation tax on UK property income from 06 April 2020. A number of transitional arrangements have also been announced today, including the confirmation that some form of non-resident landlord scheme will continue after April 2020, with income tax being withheld on gross rental income.
Amendments to the hybrid mismatch rules
Pending the UK leaving the EU, the Government has announced two changes to the UK hybrid and other mismatches rules to ensure they are aligned with the EU Anti-Tax Avoidance Directive (ATAD) with an implementation date of 01 January 2020. These changes will be introduced by Finance Bill 2018-2019 and relate to certain mismatches involving disregarded permanent establishments and the treatment of regulatory capital.
The first will counteract a scenario where a company in an EU Member State makes a deductible payment to a foreign permanent establishment of a UK company that is not included in the charge to tax (because the UK company recognises the permanent establishment but claims the foreign branch exemption and the permanent establishment is not recognised by the jurisdiction in which it is located). The mismatches that arise in relation to ‘disregarded’ permanent establishments are counteracted by bringing amounts back into charge for corporation tax purposes. The second change gives the power to amend the scope of the exemption for regulatory capital (which are not treated as financial instruments for the purpose so of the UK hybrid and other mismatches rules) by regulations to cover certain requirements of ATAD.
Taxation of hybrid capital instruments
Finance Bill 2018/19 will introduce new rules for the taxation of hybrid capital instruments to ensure that they are taxed in line with their economic substance. Hybrid capital instruments are debt instruments with certain limited equity-like features, including features enabling the debtor to defer or cancel the interest payments. The changes are intended to provide tax certainty to all issuances of hybrid regulatory capital that meet the relevant conditions, that they will be treated as genuine debt instruments.
The main measures ensure certainty that interest on such hybrid capital instruments are deductible by the issuer and taxable for the holder, and no stamp duty or stamp duty reserve tax will be payable on the transfer of such instruments. The new rules will also eliminate mismatches between the tax treatment of instruments used to raise funds externally and those used to lend funds internally within a group. The rules cover issues of hybrid capital instruments by companies in any sector and replace current rules covering regulatory capital instruments issued by banks and insurers, prompted by new Bank of England loss absorbency requirements that take effect from 01 January 2019. Most of the measures will have effect for accounting periods beginning on or after 01 January 2019, with accounting periods straddling that date split into two periods and the latter accounting period treated as starting on that date. The provisions relating to stamp taxes and certain transitional provisions relating to the duty to deduct income tax will take effect from Royal Assent to the Finance Bill.
R&D tax relief anti-avoidance
Broadly, where a “small or medium-sized enterprise” (SME) is loss-making after deduction of R&D tax relief, it can choose to surrender to HMRC all or part of the loss relating to the R&D expenditure and SME tax relief, and then take the credit as an immediate cash repayment from HMRC. HMRC has identified fraudulent attempts to claim this SME payable tax credit, worth £300m in total.
As such, from April 2020, the amount that a qualifying loss-making SME can receive in R&D payable tax credit in a given year will be capped at three times its total PAYE and National Insurance contributions (NICs) liability for that year. The cap aims to ensure that the relief goes to companies that have a real UK presence.
Where a genuine company with UK R&D activity has low PAYE and NICs liability relative to its R&D spend, it will still be able to claim this payable credit from HMRC up to the cap, with any unused losses carried forward to be set against future profits.
The Government will consult on the application of the cap in due course.
Changes to the corporation tax loss relief rules
Corporation tax loss relief rules changed from 01 April 2017, increasing the flexibility over the profits against which carried forward losses can be offset, while restricting (generally to 50%) the proportion of profits in an accounting period that can be offset by carried forward losses. The Budget announced that the Government will extend the scope of the restriction to carried forward capital losses with effect from April 2020. A “consultation on delivery” document was published which considers how (but not whether) to implement the additional restriction. In particular, from 2020, there will be one single £5m allowance for the relief of up to £5m of carried forward losses (both capital and income). Anti-forestalling measures will be included in the eventual legislation, having effect from the Budget announcement and covering “bed and breakfast” arrangements and sales to connected parties, as well as anti-avoidance rules to prevent the restriction being side-stepped during the operation of the new regime. The consultation runs until 25 January 2019 and businesses likely to be affected by the changes, such as investment companies and property holding entities, should consider responding before the deadline.
Budget 2018 also announced the introduction of various technical amendments in Finance Bill 2018/19, with effect from 01 April 2019. These include, among other things, preventing acquisition by a group of a new member, boosting the amount of deductions that group can claim for carried forward losses and changing the terminal relief rules so that where a 3 year terminal relief period begins part way through an accounting period, the terminal relief can only be offset against a proportionate part of the profits for that period. The Budget also confirmed some specific changes to carried forward losses in the context of Basic Life Assurance and General Annuity Business (BLAGAB) profits, which were previously announced and apply from 06 July 2018.
This year's Budget included a bumper crop of changes to the UK’s capital allowances regime. Some of the announced changes favour the taxpayer and some are detrimental, so it is appropriate to view the measures as a package.
The eye-catching headline is that Government will legislate in Finance Bill for introduction of a “Structure and Buildings Allowance” or SBA, which those with longer memories might rightly conclude represents the return of the old Industrial Buildings Allowance in a new guise. There will be a technical consultation on the detail of the new allowance, but it will apply where written contracts for physical construction are entered into on or after 29 October 2018 (subject to the various qualifying criteria and anti-avoidance provisions). The key features of the SBA are that it will be a straight line 2% per year relief on the original construction costs of commercial buildings and other “commercial” structures (not land nor dwellings and other similar buildings used primarily for long-term residence), with no uplift reflecting increases in market value or balancing charge/allowance system where there is a change of ownership. The stated intention is to increase the attractiveness of the UK as a place to do business, and to offer tax relief where accounting relief is often already given. The proposed scope of the SBA is described in more detail below.
The remainder of the capital allowances changes are a rag bag of changes to existing capital allowances measures:
- The rate of allowances that can be claimed on plant and machinery in the “special rate pool” will reduce from 8% to 6% with effect from 01 April 2019 for corporation tax payers and 06 April 2019 for income tax payers. For businesses with a chargeable period straddling the date of change a hybrid rate will apply to unrelieved expenditure in the pool, calculated on the basis of the proportion of the period falling before and after the change.
- It will be clarified that allowances for the cost of altering land for the purposes of installing plant and machinery will only be available where the plant and machinery in question itself qualifies for capital allowances. The amendment to the relevant provisions will be treated as always having had effect, but only actually have effect in relation to claims for capital allowances made on or after 29 October 2018 (i.e. the retrospective effect does not affect claims made before the clarification was announced.
- Enhanced capital allowances providing 100% first year allowances for specified energy and water efficient plant and machinery will be withdrawn from April 2020, as will the tax credit available to loss-making businesses investing in the same items. The delay in implementation is intended to allow businesses to prepare; the Government states that the revenue raised from these changes will fund the Industrial Energy Transformation Fund.
- There will be a temporary two-year increase in the rate of the annual investment allowance (AIA), from the current permanent limit of £200,000 to £1,000,000. This will apply from 01 January 2019 to 31 December 2020, with specific arrangements for calculating a hybrid AIA where a chargeable period straddles either the date of the introduction of the temporary increase or its later withdrawal. This measure should, in the short term, offset some of the negative impact of the “bad news” measures outlined above.
- The existing 100% first year allowance for electric charge point equipment, which was due to expire on 31 March 2019 for corporation tax payers and 05 April 2019 for income tax payers, will be extended for another four years and will now expire on 31 March / 05 April 2023.
SBAs - the detail
The principal features of the new relief will be as follows:
- SBA is a flat rate relief of 2% per year over a 50-year period;
- the claimant must have an interest in the relevant land;
- for a business whose chargeable period is less than one year, relief will be reduced on a proportionate basis;
- assets within the scope of the relief include buildings (offices, retail and wholesale premises, factories, warehouses) and other structures such as walls, bridges and tunnels;
- SBA will be applicable to new commercial structures and buildings, but will also extend to the costs of conversions and renovations (where the expenditure will be relievable over a separate 50-year period from the date of the works, even where this overlaps with relief being claimed for original construction);
- there is no “pool”: costs which qualify for relief will be calculated separately for each building or structure;
- relief is limited to physical costs of construction, including demolition or land alterations, but will not extend to planning costs or the cost of land;
- the 50-year period for claiming relief will commence when the building or structure first comes into use for a qualifying activity, but relief will not be available if the expenditure was incurred more than seven years before the qualifying use commences;
- where relief is not claimed at the point at which the building or structure first comes into use for a qualifying activity, this relief cannot be carried forward to a later period and will be lost;
- relief will be available on a pro rata basis for mixed use developments;
- the relevant commercial building or structure can be outside the UK, as long as the business claiming relief is within the charge to UK tax: the relief will apply to the extent that profits of the qualifying activity are subject to UK tax (this aspect is subject to consultation);
- all the contracts for physical construction works must be entered into on or after 29 October 2018, including where the contract relates to preparatory work on the land (unless the preparatory work is not connected to the eventual structure or building). Anti-avoidance measures will apply to ensure that projects which commenced before Budget Day cannot come within the scope of the relief, for example by amending contracts;
- expenditure on integral features which would under existing rules qualify for plant and machinery writing down allowances will remain within the existing capital allowances regime (including the AIA) and will not be within the scope of the SBA;
- where there is a change of ownership, the acquirer has the right to claim 2% relief per year for the remainder of the 50-year period assuming that the asset remains in use for a qualifying activity, including where the original owner was not a taxpayer (the original owner is deemed to have claimed 2% per year even where this was not factually the case); and
- where an unused asset is acquired from a developer, the qualifying expenditure is the price paid, less the cost of land.
There will be specific rules governing both (a) disuse or change of use, and (b) leasing transactions.
The Government will consult on the detail around aspects including:
- the meaning of “dwelling”, which it is proposed will not include hotels and care homes but will include long-term residential accommodation such as university or school accommodation, military accommodation and prisons
- any issues regarding overseas assets
- the detail of when lessors and lessees will be entitled to relief, and
- periods of disuse
The SBA is likely to be welcomed by many, and can no doubt be seen as one of many manoeuvres being made with an eye on impending Brexit.
Exit charges on unrealised capital gains
The rules applying exit charges to companies on unrealised capital gains when companies cease to be UK tax resident or transfer assets out of a UK permanent establishment are being revisited in the light of the EU Anti-Tax Avoidance Directive. The changes are largely technical and focus principally on replacing the current system for deferral of payment of exit charges on moves within the EU or EEA with a single deferral system allowing exit charges to be paid over a maximum of 5 years (or earlier if an asset is sold or ceases to be used in the relevant business). These changes apply from 01 January 2020.
Exit charge deferral rules are also being introduced for the capital gains tax charge on trusts ceasing to be UK tax resident or non-resident individuals trading in the UK through a branch or agency removing capital assets from that branch or agency, again where the move is to elsewhere in the EU or EEA. The new deferral regime gives these persons the option of paying the exit charge over six years in equal instalments (with interest on the deferral). This change applies from 06 April 2019.
Intangible fixed assets
Following a review of the tax treatment of acquired intangible assets, the Government has announced that it will seek to introduce targeted relief for the cost of goodwill (the amount paid for a business that exceeds the fair value of its individual assets and liabilities) in the acquisition of businesses with eligible intellectual property from April 2019.
In addition, with effect from 07 November 2018, the Government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.
Lease accounting changes
After a lengthy consultation process concerning the impact of IFRS 16 and the impact of lessees ceasing to recognise the difference between operating and finance leases, the broad outcome of that process is to maintain the tax status quo.
A finance lease and an operating lease will continue to be taxed depending on their legal and contractual terms not by reference to the accounting treatment. There will be some modifications to the definition of a long funding lease and the long funding lease rules themselves where capital allowances are claimed by the lessee rather than the lessor.
The requirement for businesses to prepare their tax calculations based on old accounting treatment will be repealed. Where this leads to a change in the basis of taxation, any additional profits and tax will be spread over the average remaining life of the leases that gave rise to the adjustment.
Consequential amendments are also to be made to other areas of legislation where the leasing rules have an impact, including the corporate interest restrictions rules, REITs and the sale of lessor company rules.
The changes will take effect for accounting periods beginning on or after 01 January 2019.