There were several welcome short-term measures for businesses that may be affected by COVID–19. The Government was cautiously optimistic regarding growth in the UK’s ‘modern and dynamic’ economy. It is hoped that the intended reduction of 50 basis points in interest rates to 0.25% announced by the Bank of England will help reverse the slowing economy, while the focus on R&D and technology along with increased funding for infrastructure will help boost both the financial services sector and the wider economy across the UK.
For banks, clarity has been given on the inconsistency of the application of the bank surcharge (currently charged at 8% on profits) on losses transferred within a group to offset qualifying profits. For disposals made after 11 March 2020, the rules that disregard allowable losses being transferred into a bank from a non-banking company to reduce future chargeable gains will be extended disregard losses utilised in the current year. Bank levy rates will decrease to 0.05% for longer-term chargeable liabilities and equity and 0.01% for short-term liabilities from 1 January 2021. While the reduction in the bank levy rate is positive, the clarification on the bank surcharge is likely to be of greater consequence to the banking sector. Banks should consider the impact of these rules and model these into cash flow and financial forecasts.
The Government will review the UK Funds regime in relation to direct and indirect taxes and associated regulations, with a consultation launched into the tax treatment of companies used by funds to hold assets and the VAT treatment of fund management fees. These are topical issues and it will be interesting to see the outcome of the consultation. Further consultation will also be run on the corporation tax rules applying to hybrid mismatch arrangements on lending to ensure the rules operate as intended.
As expected, the corporation tax rate will remain at 19% from 1 April 2020 despite original plans for a reduction to 17%. The new rate will be treated as substantively enacted for UK GAAP and IFRS on the passing of the Budget resolutions. It will not be enacted for GAAP purposes until Royal Assent later in 2020. Once substantively enacted, this will impact deferred tax assets and liabilities currently valued for accounting purposes at the 17% rate previously enacted. While the rate has not been reduced, maintaining 19% is in line with the Government’s aim of being attractive to business and it remains one of the lowest in the G20.
The announcement of an independent review of UK FinTech, chaired by Ron Kalifa OBE is a positive focus on a sector that is in a crucial growth phase. The £200m injection into British Business bank for increased support of venture capital and growth finance and a further £130m to assist with the extension of start-up loans alongside the review of the EMI scheme will continue to encourage growth in both the FinTech and InsurTech sectors. It is also worth noting that alongside the positive news, the Government announced that the lifetime limit for Entrepreneurs Relief is reduced from £10m to £1m, which will impact owner-managed businesses within these sectors.
An increase in the R&D expenditure credit rate from 12% to 13% will help drive innovation, along with a consultation into whether or not expenditure on data and cloud computing should qualify for R&D tax relief. Historically, the financial services sector has claimed less qualifying R&D expenditure than other sectors. Activities in the financial sector that could be eligible for relief include software development around compliance with regulation - for example, Solvency II, Basel III, etc.
Unsurprisingly, HMRC continues to focus on avoidance schemes and tax evasion. The financial services sector has recently seen a number of Corporate Criminal Offence investigations opened. The Budget included announcements on further non-compliance measures, including the large business notification requirement. Large businesses will need to notify HMRC when they take a tax position that HMRC is likely to challenge. The interaction between these new measures and the HMRC Risk Review for large businesses remains to be seen but it demonstrates that the importance of general compliance and best practice continues to be paramount, especially throughout the financial services sector. The increased measures could be an added burden for businesses in this sector and we must wait to see how HMRC approaches the new rules going forward.
Overall, there were few surprises for financial services in the Budget. The continued focus on anti-avoidance was expected and further reforms and reviews into areas that are complex or in need of modernisation are welcomed. It is positive to see the Government acknowledges the important contribution that FinTech has within the financial services sector and on the future growth of the economy. This is against the backdrop of new consultations to make the UK a more positive and competitive jurisdiction.
The corporation tax rate will remain at 19% from 1 April 2020
As expected, the corporation tax rate will remain at 19% for the financial year beginning 1 April 2020. Legislation will also be introduced to keep this rate at 19% for the following year.
The Government announced that the main rate of corporation tax for the financial year beginning 1 April 2020 will remain at 19%, rather than falling to 17% as was previously legislated.
Finance Bill 2020 will include this amendment and will also set the main rate at 19% for the financial year beginning 1 April 2021.
The Government expects this measure to increase tax take by £930 million in year one, and £4.6 billion in year two, while still noting that the corporation tax rate remains one of the lowest in the G20.
It comes as no surprise that the corporation tax rate will remain at 19%, and businesses will no doubt have already planned for this outcome.
Once this change has been substantially enacted under the Finance Bill 2020, businesses will need to ensure that their deferred tax calculations reflect the change in tax rate, as appropriate.
When will it apply?
To apply from 1 April 2020
Increase in the rate of research and development expenditure credit
The rate of research and development expenditure credit (RDEC) is to increase from 12% to 13% from 1 April 2020.
Research and development (R&D) tax credits support the private sector by allowing companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs. Incentivising additional R&D activity is an essential part of the Government's objective to increase productivity and promote growth through innovation within the UK economy.
In order to achieve this objective, the Government has increased the rate of RDEC from 12% to 13%. This increase means that large companies will obtain more financial support from Government when undertaking R&D activities.
This rate increase continues the Government’s investment in innovation. It indicates the global competition in relation to innovation funding and the pressure on the UK to match the innovation funding available from other jurisdictions in the European Union, and further abroad.
In 2018, the rate of RDEC increased from 11% to 12%, which generated a net cashflow benefit of 9.72%. The current increase to 13% will result in a net benefit of 10.53% and may further incentivise the private sector to undertake innovative projects.
Despite this increase, some uncertainty about the determination of eligible and non-eligible R&D activities remains. Whether or not this increase in RDEC is sufficient to attract multinational company investment into the UK, when compared to other jurisdictions, remains to be seen.
The UK continues to make positive strides in its investment into innovation and with a well-managed R&D claim process RDEC can add unexpected levels of value to companies and their shareholders.
When will it apply?
The increase in the RDEC rate will have effect for expenditure incurred on or after 1 April 2020.
Consultations on research and development tax relief
The implementation of the PAYE cap for small and medium enterprises will be delayed until 1 April 2021. A further consultation will be issued on the design of the cap. The Government will also consult on whether or not expenditure on data and cloud computing should qualify for R&D tax credits.
The PAYE cap sought to prevent abuse of R&D tax relief by limiting the payable tax credit for SMEs to three times the PAYE liability of a company. The Government has decided to delay the implementation of the PAYE cap. The cap was initially planned to come into force in April 2020 but has been delayed until 1 April 2021. This is to allow for further consultation to ensure it prevents abuse of the scheme, while continuing to incentivise R&D activity within eligible companies.
The Government will also consult on the eligibility of data and cloud computing expenditure qualifying for R&D tax credits. These costs are not currently qualifying R&D expenditure under the current R&D relief schemes.
It is with some relief we see that the Government has responded to the private sector’s concerns regarding certain nuances of the R&D tax relief schemes for SMEs and large companies.
While the delay to the introduction of the cap is a positive step, more work lies ahead to develop workable legislation.
Areas that continue to cause concern include the stringent rules relating to categories of eligible and non-eligible expenditure. Restrictive expenditure categories have resulted in many companies over- and under-claiming the R&D tax reliefs available. One such area is expenditure on software development and data and cloud computing, which are required in facilitating R&D activities. The Government has made a promise to consult on these areas. This should be seen as positive by the industry, however, it may only be a short-term solution, given the rapid evolution of this sector.
When will it apply?
The PAYE cap will apply from 1 April 2021
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 Smith & Williamson prior to the launch of Evelyn Partners.