It is always sensible for businesses to take a long-term view and prepare for the most likely tax changes ahead when it comes to business planning and financial forecasts.
With a general election due imminently, it may seem premature to talk about tax changes from April 2020 but there are highly likely to be some tax changes that take effect from April whatever flavor of new government the U.K. has by then. In the main these are changes that address what are perceived as tax avoidance issues, revenue raising measures on which most political parties broadly agree.
Both the main political parties have made commitments about the rate of corporation tax. The Conservatives have abandoned their longstanding commitment to reduce it to 17%—aiming to keep it at 19% for at least 2020–21. The Labour Party is pledging to “restore” the 26% rate that applied some years ago. Many businesses will have factored a lower rate of corporation tax into their long-term forecasts, so these may need to be revised even if there is not a change of government.
Of course, if there is a change of government, long-term forecasts will clearly look considerably different! Businesses with a March 31 year-end are likely to find their deferred tax calculations more challenging than normal because, while the new Labour government may have made clear what the new corporation tax rate will be, the legislation may not be “substantively enacted” before March 31. Therefore, under both international accounting standards (IAS) and U.K. generally accepted accounting practice (GAAP), calculations must be completed using the current 19% rate, but companies must also disclose the effect of applying changes that have been announced but not yet substantively enacted if the impact is expected to be significant.
Another long-term forecasting issue will arise from the use of losses. The corporate income loss restriction (CILR) regime is expected be extended to include a corporate capital loss restriction (CCLR).
This means that from April 1, 2020 capital losses carried-forward can only be used to offset 50% of any net chargeable gains, subject to any allocation of a group’s annual 5 million pounds ($6.4 million) deductions allowance. As this is seen partly as anti-avoidance legislation, it is expected to be enacted whatever government takes office in December.
For smaller companies, a similarly restrictive change is highly likely to be carried forward from the draft Finance Bill clauses published in July 2019.
The government intends to re-impose a cap on the research and development credit for small and medium-sized enterprises (SMEs). The amount of payable tax credit (14.5%) that a qualifying loss-making business can receive through the relief in any one accounting period will be capped at three times the company’s total Pay As You Earn (PAYE) and national insurance contributions (NICs) liability for that year. Companies that have research & development (R&D) projects that start and have expenditure falling within the current tax year will be able to claim a full repayable tax credit.
Nonresident companies letting U.K. property will be liable to U.K. corporation tax on rents from April 2020 rather than income tax at 20%. Apart from the potential tax saving/increase, there are many other implications to falling within the corporation tax regime, for example, the new corporate loss restriction rules will apply and highly geared businesses will fall within the corporate interest restriction rules for the first time.
There are potentially major implications for the long-term viability of property investments and businesses should review their financial forecasts. For an overview of all the possible implications visit BDO’s online tool at bit.ly/NRLCTCGT.
The 100% Enhanced Capital Allowances (ECAs) and first year tax credit for loss making companies for purchases of energy or water-saving plant and machinery on the energy and water technology lists are to be abolished from April 2020.
Where expenditure does not fall within the 1 million pounds annual investment allowance, qualifying expenditure on this technology will still obtain writing down allowances at the 18% main rate and 6% special rate. It will be interesting to see if renewed focus on climate change issues will trigger a change of heart on this proposal.
Despite progress being made by the OECD, both main political parties are committed to pressing on with the introduction of a Digital Services Tax (DST). Draft DST legislation and guidance was published on July 11, 2019 to impose the DST for fiscal years beginning on or after April 1, 2020 applying a new 2% tax on the revenues of large online businesses.
While there is still much political debate over the likely scope of the rules, large businesses that sell to consumers online should be factoring revenue taxes into their future business models.
The key change from April 2020 is that private sector businesses will have to take responsibility for compliance with IR35/off-payroll labor rules (in the same way that public sector businesses have since 2017).
This means that each time a subcontractor is engaged, the end user will need to consider their responsibilities and may have to decide whether or not the worker should be considered a “deemed employee.”
Where a deemed employment relationship exists, the engager may have to deduct PAYE and NIC from the payments made to the worker’s personal service company. Even where an agency is involved in the supply chain, the end-user may have to carry out a “status determination” about the worker and inform the agency.
As these rules are part of a long-term effort to address the loss of revenue through off-payroll labor, they are expected to become law regardless of who forms the new government. Businesses should be reviewing their labor supply arrangements now to assess the administrative and financial impact of the rules—for those that rely on large amounts of contract labor, the new rules could have a significant impact on the future profitability of their business model.
Another long-awaited change is that, from April 6, 2020, a Class 1A NIC liability will be payable on any part of a termination award or sporting testimonial payment that is liable to income tax and not otherwise subject to NIC. This new rule aligns the NIC treatment with the income tax rules for these types of payments and will increase the cost of redundancy programs for some businesses.
Finally, while not a tax as such, businesses should be preparing for a significant increase in the national minimum wage from April 2020. The Conservative Party have pledged to increase it in stages to 10.50 pounds over five years (a 5% increase per year) whereas the Labour Party has pledged to increase it to 10 pounds from April 2020 (a 21.8% increase).
For individuals, the main tax changes that we can be relatively certain of from April 2020 are focused on residential property.
Principal private residence (PPR) relief is a valuable relief from capital gains tax (CGT) on the sale of your main home. Currently, where you sell a property that has been your main home for only part of your period of ownership, the last 18 months of ownership is always deemed a period of qualifying occupation for the purposes of the relief.
The government proposes that this period will be reduced to the last nine months of ownership for property disposals after April 5, 2020. This reduction means that from April 6, 2020, individuals buying a new home before selling their old one, will need to ensure a sale of the old property takes place within nine months to avoid a potential CGT charge. There are no transitional rules, so for those who moved out of their home before July 2019, every month a sale is delayed after April 2020 increases the chances of having to pay some CGT on the proceeds.
Another CGT relief known as lettings relief is also available where the property is let, as long as at some point during ownership the property qualified for PPR relief.
When the property is eventually sold, a time apportionment calculation is carried out looking at the whole period you owned the property. Relief for the letting period is limited to the lower of either that part of the gain for the periods it was your main residence, or 40,000 pounds.
From April 6, 2020, lettings relief will be reformed so that it only applies where the owner is in shared occupation with the tenant (or lodger). The change to lettings relief means that, where the owner is not living in the property, no relief will be available beyond the period for which the property qualifies for PPR.
For owners who have held a property for a long time, perhaps letting it for some periods during their ownership and then reoccupying the house, lettings relief covers that gap in PPR relief. Without lettings relief, owners who sell their home after April 2020 may face a significant CGT charge on the proceeds, even though the period that they let their home may have been many years ago. Again, there are no transitional rules, so affected individuals who are considering moving may want to try to complete the sale before April 6, 2020.
For all U.K. residents who sell a U.K. residential property after April 5, 2020, the CGT reporting regime will change dramatically.
For example, where a property sale is completed on April 2, 2020, the disposal must be reported on their tax return for 2019–20 and any tax paid by January 31, 2021. For sales completed from April 6, 2020 onwards, the reporting (via an online form) and tax payment deadlines reduce to just 30 days. Landlords currently considering rearranging their property portfolios may well wish to ensure any residential property disposals are completed before April 6 to defer any expected tax payment.
Just as there will be changes to the VAT and Incoterms for cross-border trade within the EU from January 1, 2020, regardless of Brexit, some U.K. taxes changes can be expected to roll on regardless of which political party forms the next government.
It is always more important for finance directors to pick up on these changes and trends so that the business can prepare for them rather than just focusing on party political soundbites.
Paul Falvey is a Tax Partner at BDO U.K.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.