On 11 March, the Chancellor delivered the 2020 Budget. Unsurprisingly, the focus of the Budget was on “emergency” measures surrounding the minimisation of the economic impact of Covid-19. However, there were numerous tax-related announcements, including some new and potentially significant developments. While, predictably, anti-avoidance measures featured, the government was keen to emphasise that it is committed to a competitive tax regime post-Brexit.
We have summarised those measures that are likely to be most relevant to our clients. It is not a comprehensive summary and does not cover (in particular) many measures primarily relevant to individuals, small businesses, or specific industries. More detail on certain measures will be available when the Finance Bill is published on 19 March 2020.
Key new announcements
1. Reduction in entrepreneurs’ relief lifetime limit: Contrary to media speculation, entrepreneurs’ relief was not abolished. However, the lifetime limit on gains qualifying for the lower capital gains tax rate of 10% has been reduced from £10 million to £1 million for qualifying disposals made on or after 11 March 2020. This effectively resets the cap to what it was when the relief was first introduced in 2008. Certain targeted arrangements entered into before today that were designed to trigger an early disposal (which might include share-for-share exchanges into related companies and unconditional sale contracts) will also be subject to the £1m cap, even though the disposal took place before the rule change.
2. Review of enterprise management incentive (“EMI”) scheme: The government has announced that it will review the EMI scheme and examine whether it should be expanded. Currently, companies with assets up to £30 million and less than 250 full time employees, may grant tax-advantaged share options to employees under the scheme. Further details of the review are awaited, and a consultation has not yet been announced.
3. Review of the UK funds tax regime: The Government is reviewing the tax regime for “asset holding companies” (i.e. holding companies for credit, real estate and private equity funds) to ensure the UK is competitive in this area. This is part of a wider initiative to review the UK funds regime, including the VAT treatment of fund management fees. Some interesting potential proposals are floated in the consultation document, including: (i) bringing credit funds within the securitisation tax regime; (ii) reforming the substantial shareholdings exemption so that real estate funds which are investing (rather than trading) can more easily benefit from the exemption; (iii) extending the REIT regime to apply to a broader class of property investment company; (iv) reviewing UK withholding tax on interest; (v) considering how the anti-hybrid rules are negatively affecting investments; and (vi) a special regime for asset holding companies which would “switch off” certain corporation tax rules. The consultation document is careful in noting that any reforms will need to be consistent with the Government’s international tax obligations (including BEPS) and will not discriminate between legally comparable operators. It remains to be seen as to whether any changes will actually materialise following the consultation.
4. Transfer of unlisted securities to connected companies for stamp duty and SDRT: Following on from the changes for listed securities announced in the 2018 Budget and a subsequent consultation, for instruments executed after the Finance Act 2020 receives Royal Assent, certain transfers of unlisted securities will be caught by the market value rule such that the transfer will be chargeable to stamp taxes (stamp duty or SDRT) based on the higher of: (i) the consideration for the transfer (if any); and (ii) the market value of the securities. The transfers expected to be caught are those made to a connected company where some or all of the consideration consists of the issue of shares. In addition, certain changes are proposed to remove the potential double stamp duty charge arising on partition demergers where specified conditions are met.
5. Intangibles reform: Currently, where intangible fixed assets (“IFAs”) (e.g. IP and goodwill) which were created before 1 April 2002, fall outside the scope of the UK IFA regime and are taxed instead under the UK capital gains regime, unless the pre-April 2002 IFA in question has been acquired from an unrelated party since April 2002. As such, there are currently two separate taxing regimes applicable for companies with IFA assets, with companies unable to claim corporation tax relief for IFAs within the capital gains regime. As part of the Finance Bill 2020, the government will legislate to remove the pre-April 2002 IFA exclusion from the IFA regime with the result that, from 1 July 2020, companies will be able to claim tax relief on the acquisition of IFA (regardless of when that IFA was created and from whom the IFA was acquired), subject to tax avoidance provisions.
6. Non-UK resident SDLT surcharge: A 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland will be introduced from 1 April 2021.
Avoidance, evasion, non-compliance and disclosure
7. Targeted measures at promoters and intermediaries: The trend over recent years of policing tax avoidance through targeting intermediaries (such as tax planning boutiques, accountants, lawyers and banks) is continued in this Budget. The existing enabler, disclosure and promoter regimes are all to be enhanced. In addition, HMRC have promised to publish a “new ambitious strategy” for tackling promoters, with a view to driving promoters of tax avoidance schemes out of the market and deterring taxpayers from taking up the schemes. There will also be a call for evidence on raising standards for the provision of tax advice.
8. Additional compliance resources for HMRC: The government is investing in additional compliance officers and new technology for HMRC. This investment is forecast to bring in £4.4 billion of additional tax revenue up to 2024-25 by enabling HMRC to reduce the “tax gap” through additional compliance activity and expanding debt collection capabilities. Further details are awaited.
9. GAAR: Hidden amongst the detail is an announcement that the GAAR is to be amended so it is effective in tacking avoidance using partnership structures.
10. Large business notification/uncertain tax positions: From April 2021, large businesses must notify HMRC when they take a position likely to be challenged by HMRC. The policy draws on international accounting standards already followed by many large businesses. A consultation process will shortly be launched in relation to the notification process.
Reconfirmation of measures previously announced
11. Changes to the off-payroll working rules (IR35): As announced in the Autumn Budget 2018, reforms to IR35 will come into effect from 6 April 2020. These reforms extend rules which already apply in the public sector to medium and large private sector businesses. The business ultimately engaging a contract worker will become responsible for determining whether the rules apply, and the business or fee-paying entity (if different) will need to deduct and account for income tax and National Insurance contributions. Limited concessions have recently been made on enforcement in the first year. Businesses should assess their use of contractors ahead of 6 April 2020.
12. Corporation tax rate: The government has confirmed that the corporation tax rate will remain at 19% for the financial year beginning 1 April 2020. The rate will also be set at 19% for the financial year beginning 1 April 2021.
13. Digital services tax (“DST”): As announced in the Autumn Budget 2018, a new DST will be levied on global groups which operate social media services, internet search engines, online marketplaces, and associated online advertising services. The tax will only apply where a group’s worldwide revenue from these activities exceeds £500 million, and more than £25 million of that revenue is derived from UK users (which includes where any one party to an online marketplace transaction is a UK user, or where the transaction involves accommodation, land or buildings in the UK). The DST rate will be 2% of revenues derived from UK users, and the first £25 million will not be subject to the DST. The government has indicated that it wishes to negotiate the taxation of digital businesses with other countries and will repeal the DST once “an appropriate global solution is in place”. It remains to be seen whether DST concessions will be included in anticipated trade negotiations with the US, but so far it looks like the UK will not back down.
14. Corporate capital loss restriction: As announced at Budget 2018, for accounting periods ending on or after 1 April 2020, companies making chargeable gains will only be able to offset up to 50% of those gains using carried-forward capital losses, subject to a £5 million deduction allowance. However, certain companies (including (i) companies with a ring-fence trade from oil-related activities where chargeable gains accrue within that ring-fence, (ii) insolvent companies in the process of liquidation, and (iii) life insurers) will be excluded from the scope of the restriction. The legislation will include anti-avoidance and anti-forestalling provisions.
15. Crown preference: From 1 December 2020, HMRC will become a secondary preferential creditor in relation to certain debts owed to it by businesses entering insolvency; this alters the current position, whereby HMRC is an unsecured creditor for all debts owed to it. The measure applies in relation to taxes collected and held by businesses on behalf of other taxpayers, namely VAT, PAYE income tax, employees’ National Insurance contributions, student loan deductions and Construction Industry Scheme deductions. The intention underpinning the change in legislation is for more of the taxes paid in good faith by employees and customers, and only temporarily held by businesses, to be available to fund public services rather than distributed to other creditors. Despite industry backlash, the proposal is generally proceeding as intended, but the Government has shown certain concessions in delaying the start date for the measure, which was originally intended to take effect from 6 April 2020.
If you have any questions on this matter, please do not hesitate to contact Oliver Walker, Jenny Doak or Aron Joy, or speak to your regular contact at Weil, Gotshal & Manges LLP or to any member of Weil’s UK Tax Team.