The theme of the Budget 2018 for large corporates and international businesses was of continually increasing regulation and a focus on reducing perceived avoidance of tax by multinational corporates. This is not surprising, given the recent trend in a more globalised tax system, with tax authorities across the world being able to share and access data more readily than ever before, and increased reliance on tax payers to self-assess and self-report. Over the last few years the introduction of Country by Country Reporting, increased emphasis on the Senior Accounting Officer rules and the requirement for companies to publish their tax strategies all demonstrates the direction of travel for larger and multinational companies.
Many of the measures announced in the Budget focused solely on larger corporates. For instance, the introduction of the Digital Services Tax is targeted specifically at large global digital organisations with global turnover in excess of £500m per annum, with an exemption available for the first £25m of revenue. This tax is not anticipated to bring in a large amount of tax revenues and the tax rate is indeed lower than the rate first suggested by the EU. It will also be interesting to see how this new tax interacts with double tax treaties. More detail will be revealed in the consultation process.
The changes to the way the private sector is able to engage with contractors and personal service companies has again been restricted to medium and large businesses, though we are yet to have confirmation of what is meant by 'medium and large'.
Focus was also placed on ensuring that large companies pay tax when they make significant capital gains (in excess of £5m), with an extension of the corporation tax loss restriction rules (of 50%) to capital losses; meaning that the use of brought forward capital losses will be restricted only where large capital gains are made by a company.
With effect from 6 April 2019, income from intangible property that is held in low-tax jurisdictions will be taxed in the UK to the extent it relates to UK sales. This will be regardless of whether there is a UK taxable presence. A de minimis of £10m was included in the rules,which again suggests that this is aimed at tightening up tax for big businesses. Targeted anti-avoidance measures are in place with effect from 29 October 2018.
There were some positive announcements that will benefit the sector, including the introduction of a targeted relief for goodwill in the acquisition of businesses with eligible intellectual property (IP) and the relaxation of taxation when intellectual property leaves a group. This will be welcomed by those investing in IP in the UK, and is consistent with the UK’s drive to make the UK a more attractive location for investment in IP-rich businesses.
Changes to capital allowances including the temporary increase in the Annual Investment Allowance to £1m and the new Structures and Buildings Allowance will be a great incentive to large scale investment by businesses. The reduction in the rate of special rate pool allowances will result in a longer period over which relief can be claimed to more closely match average accounts depreciation.
Minor changes were announced to the Corporate Interest Restriction rules to ensure the regime operates as intended, specifically after the introduction of IFRS 16. Modifications and clarifications to the existing Diverted Profits Tax rules are being made as part of HMRC’s mandate to tackle erosion of the UK tax base.
From an employment tax perspective, relaxation of the eligibility criteria for Short Term Business Visitors (STBVs) by increasing the UK workdays limit to 60 days also means that fewer STBVs will need to be reported through payroll on a monthly basis, which will help to ease the administrative burden for businesses.
A new Digital Services Tax will be introduced from April 2020
The Digital Services Tax (DST) will apply a 2% tax on certain revenues for large digital businesses.
It will only apply to revenues from intermediating sales, as opposed to the online sales themselves, and where value is derived from UK users.
Search engines, social media platforms and online marketplaces will be caught, whereas financial and payment services, provision of online content, sales of software or hardware, and TV and broadcasting services are not within scope.
The introduction of the DST is designed to ensure that digital businesses pay UK tax that reflects the value they derive from UK users.
The DST is targeted specifically at large businesses, and is designed to be a temporary measure pending a more comprehensive global solution. The DST includes the following features to support this intention:
- two financial thresholds- global revenues from in-scope activities must be at least £500m a year and the first £25m of relevant UK revenues are also not taxable.
- safe harbour - allowing businesses to elect to calculate their liability on an alternative basis, which will be of benefit to those with a very low profit margin.
- review clause- the DST will be subject to formal review in 2025.
DST will be an allowable expense for UK corporation tax purposes under ordinary principles.
A consultation on the design of the DPT is expected in the coming weeks, and will then be legislated for in the 2019/2020 Finance Bill.
"It was widely anticipated that a tax on the digital economy would be announced, so the introduction of the DST is not a surprise. This measure pre-empts the OECD discussions centred around the ‘Interim Report 2018’ which has not provided a clear consensus to bridge the gap between the perceived advantage for digital businesses over traditional models.
Businesses will be pleased that this only targets the largest businesses operating in specific sectors and with specific business models, rather than the digital economy as a whole. It will be interesting to see the consultation papers and further detail on the design in due course."
When will it apply?
To apply from April 2020
Draft legislation on various corporate tax reform measures to be legislated with minor amendments
The Government confirmed that previously released draft legislation regarding the corporate interest restriction, the reform of corporation tax loss relief and the charging of non-UK resident corporate landlords to corporation tax rather than income tax will be included in Finance Bill 2018-19.
Amendments are being made to the existing corporate interest restriction rules to ensure the regime operates as intended, both now and after the introduction of the new accounting standard for leases, IFRS 16.The amendments to the corporation tax loss relief rules are also in order for the legislation to operate as intended, and in particular to prevent excessive relief for carried-forward losses.
From April 2020 non-UK resident companies that carry on a UK property business or have other UK property income will be brought within the charge to corporation tax rather than income tax, which is currently the case. Targeted anti-avoidance is to be introduced from 29 October 2018.
Whilst draft legislation covering these changes was published in the summer, some revisions have been made following periods of consultation.
"The need for technical amendments to recently introduced legislation in order for it to operate as intended highlight the challenge of drafting complex tax rules to fit in with an already complex corporation tax regime."
When will it apply?
Although some of the amendments to existing corporate interest restriction and loss relief legislation will have effect from 1 April 2017 when the rules commenced, others are effective from later dates between 1 January 2018 and 1 April 2019.
The changes to the Corporate Interest Restriction rules as a result of the introduction of IFRS 16 will generally have effect for periods of account beginning on or after 1 January 2019, although certain amendments to the long funding lease rules will only have effect for leases entered into on or after 1 January 2019.
The changes for non-UK resident companies will have effect on and after 6 April 2020.
Corporate intangible fixed assets regime reform
The Government intends to reform the corporate intangibles fixed asset regime, following the policy consultation that was published in February 2018 to support intangible investment by UK companies.
The Government has announced that it intends to reform the intangible fixed asset regime following the consultation in Spring 2018. The consultation reviewed whether there was scope to make the regime more effective in supporting economic and business growth and if any targeted changes were required to encourage companies investing in intellectual property.
The regime was originally introduced to provide corporation tax relief for the amortisation of intangibles, making the UK an attractive location for holding intangible assets. The benefits of the regime, which is now 15 years old, were narrowed in 2015 to deny relief generally in relation to goodwill and other customer-related intangibles.
In Finance Bill 2018-2019, the Government intends to legislate:
- a relief for the cost of acquired goodwill in the acquisition of businesses with eligible intellectual property from April 2019;
- a reform to the de-grouping charge rules, which apply when a group sells a company that owns intangibles, to ensure that a de-grouping charge will not arise where the de-grouping is the result of a share disposal that qualifies for the Substantial Shareholding Exemption. This will take effect from 7 November 2018.
"These provisions will be welcomed by those investing in intellectual property in the UK. This is a further indication of the UK’s willingness to review and reform existing legislation to make the UK a more attractive location for investment in intellectual property-rich businesses."
When will it apply?
The new tax relief will apply from April 2019 with the de-grouping reform to apply from 7 November 2018
Amendments proposed to the Diverted Profits Tax rules
Rules will be introduced in Finance Bill 2018-19 to close tax planning opportunities and make clarifications and modifications to the mechanics of the Diverted Profits Tax (DPT) legislation.
DPT was introduced to counter specific arrangements designed to erode the UK tax base, either by seeking to artificially avoid creating a UK permanent establishment that would bring a foreign company into the charge to UK corporation tax, or by using arrangements or entities which lack economic substance to artificially divert profits to low tax jurisdictions.
The Government is proposing to:
- Close a tax planning opportunity whereby tax returns can be amended after the review period has ended and the DPT time limits have expired;
- Make clear that diverted profits will only be taxed under either the DPT or corporation tax rules, but not both; and
- Extend the review period during which HMRC and the company should work together to determine the extent of diverted profits and increase the period of time during which companies can amend their corporation tax returns for diverted profits.
"These amendments have been introduced to clarify the DPT provisions as part of HMRC’s mandate to tackle erosion of the UK tax base. The announcements do not come as particular surprise, especially given HMRC's recent interest in this area."
When will it apply?
These measures will have effect on and after 29 October 2018.
Restriction on use of corporate capital losses
Use of carried-forward capital losses to be restricted to 50% of capital gains from 1 April 2020.
The Government will legislate in Finance Bill 2019-20 to restrict companies’ use of carried-forward capital losses to 50% of capital gains from 1 April 2020.
The measure will include an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year.
A consultation paper was published on 29 October 2018 and draft legislation will be published in the summer. The measure will be subject to anti-avoidance rules that are to apply with immediate effect.
"These capital loss restriction rules are being introduced to ensure that large companies pay tax when they make significant capital gains. This will bring the tax treatment of such corporate capital losses into line with the treatment of carried forward income losses and therefore brings forward tax revenues arising from gains arising in groups with large capital losses."
When will it apply?
The change will apply from 1 April 2020
Payroll and employee incentives
Changes to the taxation of contractors and Personal Service Companies will increase risk of PAYE and NIC exposure for many companies
From April 2020, medium and large private sector organisations will be responsible for assessing the employment status of any contractors whose services are provided under a contract with a Personal Service Company (PSC) or intermediary, accounting for any Pay As You Earn (PAYE) and employees’ and employers’ National Insurance Contributions (NICs) due.
From 6 April 2020, private sector organisations will potentially become liable for PAYE and employer NICs in respect of payments to contractors engaged through an intermediary company or a PSC. This is an extension of the so-called IR35 rules, so that the obligations to correctly operate PAYE and account for NICs will now fall on the engaging company in most circumstances. The rules will apply to all engagements that are in place on or after 6 April 2020 in medium and large organisations. Small companies will be exempt.
The organisation that makes payments to the contractor or intermediary will be responsible for determining the status of the contractor and assessing whether or not PAYE and NICs will apply even where there is no direct contract between the individual and the company making payments.
No details have yet been provided on where exactly responsibility will lie in more complex cases where there are multiple intermediaries in a chain between the end user of services and a contractor. Nor has there been any confirmation of what the definition of a small company will be for these purposes. A further consultation on the detailed operation of the reform will be published in the coming months.
"It will be welcome news to the organisations affected that the changes have been delayed until 6 April 2020. Given the extent of the preparations required, however, many companies will already be considering their risk exposure and putting appropriate procedures in place. Significantly, the rules will apply to contractor arrangements already in place at 6 April 2020 as well as new arrangements; therefore, these rules will need to be considered when entering into or extending contracting arrangements over the coming year. For example, twelve-month contracts beginning on or after 6 April 2019 will be affected by the new rules.
This measure will have a significant impact for all companies that do not meet the small company exemption. There will be increased administration required when taking on contractors, increased costs for engagers and decreased net income for contractors where the new rules are applicable. Even a single contractor can easily lead to tens of thousands of pounds of possible exposure, so interest and penalties for non-compliance could also be significant.
In advance of the changes, organisations will need to undertake a review of the contractor relationships already in place, to ensure they will be compliant come April 2020. It will also be necessary to design and implement processes both for assessing new contractor engagements and for reviewing existing engagements on an ongoing basis; HMRC will consider these processes when testing for non-compliance."
When will it apply?
The changes will come into effect from 6 April 2020.
PAYE special arrangements for short-term business visitors to the UK: An extension of the PAYE payment deadline and an increase in the UK workdays threshold
The payment deadline for settling employers’ PAYE liabilities in respect of short term business visitors (STBVs) under a special arrangement will be moved back from 22 April to 31 May following the tax year-end. The number of UK workdays permitted for STBVs to be eligible for the special arrangement will be increased from 30 to 60.
The PAYE special arrangement is used by UK employers who host STBVs from overseas employers and whose earnings are not eligible for exemption from UK tax under a double taxation agreement. These STBVs commonly do not qualify for tax exemption because they are from an overseas branch of a UK company, or from a country with which the UK has not entered into a double taxation agreement.
The arrangement enables the employer to make one single PAYE payment for all STBVs, rather than through monthly payroll reporting for each STBV.
The extension of the payment deadline from 22 April to 31 May following the tax year-end will give more time for employers to collate the necessary information required to make the return. The increase in the UK workday limit from 30 to 60 will enable PAYE to be settled for more STBVs under the special arrangement.
"The PAYE payment deadline extension will be welcome news for employers operating PAYE special arrangements, who will have longer to collate the requisite information and to calculate the amounts subject to PAYE.
Also welcome is the relaxation of the eligibility criteria for STBVs by increasing the UK workdays limit to 60, as fewer STBVs will need to be reported through payroll on a monthly basis.
The above changes will increase the appeal of the PAYE special arrangement.
It is, however, disappointing for employers that the recommendations in the consultation to exempt STBVs from overseas branches of a UK company are not being taken forward."
When will it apply?
These changes will apply from 6 April 2020.
Changes to the National Insurance treatment of termination payments delayed to 6 April 2020
The Chancellor announced the Government still intends bring in legislation broadly to align the National Insurance treatment of termination payments with the treatment that already applies for income tax. This change was initially proposed at Budget 2017, but its implementation was delayed and it will now come into effect from 6 April 2020.
From 6 April 2020, only the first £30,000 of any qualifying termination payment will be free from employer’s National Insurance. Any excess over £30,000 will be subject to employer’s National Insurance at the usual rate, but will remain free from employees’ National Insurance.
"This measure will increase the National Insurance costs for any employers paying termination payments of more than £30,000 to any one individual but will simplify the administration for all employers making termination payments.
The complexity that exists in assessing whether or not a payment made at the end of an employment qualifies as a termination payment or is considered as any one of a range of other types of payment taxed as earnings will remain. It will be this technical distinction that employers will need to be aware of when making payments to employees ending their contracts."
When will it apply?
The changes will now apply where the employment contract is terminated on and after 6 April 2020.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on www.smithandwilliamson.com prior to the launch of Evelyn Partners.