INSIGHT: Business Tax Measures in the First U.K. 2020 Budget

Rishi Sunak has been U.K. Chancellor for barely one month, and he has wasted no time in turning the spending tap on—despite funding the emergency support for businesses and individuals 30 billion pounds ($37 billion) is a big number in spending terms. But it wasn’t all about capital spending, there were a number of tax measures that will directly affect companies.

Business Rates Relief

The good news on business rates relief was limited to small businesses—although there are many smaller businesses in cities which will not qualify for the 100% relief given to those using premises with a rateable value of less than 51,000 pounds. Businesses using premises with a rateable value of less than 15,000 pounds don’t pay any business rates anyway but will get a 3,000 pounds cash grant. Another promise of a business rates review later this year may not impress businesses that don’t qualify for this support.

Similarly, there was good news that statutory sick pay employers pay for the first 14 days of absence from work will be refundable. However, this will again be limited to smaller businesses—those with fewer than 250 employees as at February 28, 2020. However, at least when it comes to paying taxes the good news was universal: HM Revenue & Customs (HMRC) will be improving its time-to-pay services with a dedicated Covid-19 helpline and 2,000 more call handlers. Unusually, where a time-to-pay agreement is reached with HMRC, there will be no interest charged on the installment payments.

Corporation Tax Rate

As already announced by the Prime Minister, the main rate of corporation tax will remain at 19% for 2020–21 and the rest of this Parliament: the existing legislation that reduces the rate to 17% will be repealed. The effect of this will be to raise 4.635 billion pounds by 2021—all of which has been earmarked to support government spending on the national health service (NHS).

IR35 Changes

Although this did not feature in the Chancellor’s speech, the Budget notes confirmed that reform of the off-payroll working rules for private sector businesses, the IR35 changes will be going ahead from April 6, 2020. A recent implementation review was undertaken by HM Treasury which then announced some amendments and clarifications, in particular around contractors operating outside the U.K. There was also a promise of further HMRC guidance. However, despite the other support announced to help businesses through the Coronavirus crisis, this new burden on businesses will be introduced unaltered.

Digital Services Tax

The government has also confirmed that its new Digital Services Tax (DST) will come into force from April 1, 2020 as planned: albeit that the government still intends to revoke the DST once an appropriate OECD-developed solution is in place.

In broad terms, DST will apply to a group’s businesses that provide a social media service, search engine or an online marketplace to U.K. users where the group’s worldwide revenues from these digital activities are more than 500 million pounds, and more than 25 million pounds of these revenues are derived from U.K. users. Where these thresholds are exceeded, gross revenues derived from U.K. users will be taxed at a rate of 2% with no ability to reduce or credit this. DST will only be directly relevant for a fairly small subset of large businesses. However, businesses affected may pass on this cost to their clients and customers.

The concept of a DST has been the subject of much discussion internationally. DSTs are perceived by the U.S. to target U.S. tech companies and the U.S. has often threatened to apply tariffs in retaliation. We can expect a “fluid” approach from the government as negotiations over a U.S. trade deal progress.

Carried-Forward Capital Losses

In another tax-raising measure, from April 1, 2020, the government is widening the loss restrictions applying for corporation tax to bring in a restriction on the use of carried-forward capital losses. The impact of this is that the amount of chargeable gains that can be relieved with carried-forward capital losses will be restricted to 50% in excess of the annual deductions allowance. The deductions allowance of 5 million pounds of profits per group which previously applied only for carried-forward income losses will now apply to all losses.

However, a relief announced in Budget 2020 will mean that certain companies which are insolvent and are being liquidated will be able to offset carried-forward capital losses against chargeable gains without restriction during the period of official liquidation.

In a further extension, companies which have one-day tax accounting periods purely as a result of chargeable gains will be able to claim the full 5 million pound deductions allowance over an accounting financial year in addition to being able to offset allowable losses against other chargeable gains accruing during the same accounting financial year without restriction. This is likely to be most relevant to nonresident property owning companies which have made multiple capital disposals in the period April 6, 2019 to April 5, 2020.

R&D Tax Credit Regime

The Chancellor announced changes to the research and development (R&D) tax credit regime introduced as part of measures intended to increase economy-wide investment in R&D to 2.4% of GDP by 2027. As advertised in the Conservative election manifesto, R&D Expenditure Credits (RDEC) are increasing to 13% from 12% for expenditure incurred after April 1, 2020. This benefits the largest companies in the U.K. and means that with the corporation tax rate remaining at 19%, the effective value of the relief increases to 10.53% from 9.72%.

Anti-avoidance measures that were to be introduced to the small and medium-sized enterprises (SME) R&D regime on April 1, 2020 are being deferred by one year to April 1, 2021 following the 2019 consultation process. The government also accepts that the proposed paye-as-you-earn and national insurance contributions cap requires additional consultation. There will also be a new consultation during 2020 on extending categories of qualifying R&D costs to cover cloud computing.

Structures and Buildings Allowance

Another election promise was confirmed with an increase in the rate of tax relief on the Structures and Buildings Allowance (SBA) to 3% per year over 33.3 years on a straight-line basis for capital investments in non-residential structures. The government acknowledged that the record-keeping necessary to claim this relatively new relief creates administrative costs and there were some technical announcements intended to help limit them.

Other Measures

While there was no mention of increasing the Annual Investment Allowance (AIA) for investment in plant and machinery, the 100% first year capital allowances for plant and machinery investment within enterprise zones will be extended until at least March 31, 2021.

Similarly, the 100% first year capital allowance for businesses incurring expenditure on low-emission cars and zero-emission goods vehicles is extended until April 2025 (rather than ending in April 2021 as previously planned). Of course, as with all tax policy on vehicles, the CO2 emissions thresholds which are used to determine the rate of capital allowances granted will reduce: from April 2021, 100% first-year allowance (FYA) will only be available for purchases of zero emissions cars (previously 50g/km), and the 18% rate will apply to vehicles with emissions not exceeding 50g/km (previously 100g/km). Helpfully the Chancellor did announce a 500 million pound fund to support installation of electric vehicle charging points across the country.

Intangible Fixed Assets

There was good news on intangible fixed assets, the government will remove the distinction that currently exists in the taxation of pre-Finance Act 2002 intangible assets, called “pre-FA-02 assets,” and assets created or acquired after April 1, 2002, “post FA-02 assets”). The changes will apply for assets acquired on or after July 1, 2020. This will mean that intangible assets acquired from then on may be capable of amortization for U.K. corporation tax purposes. This will be subject to anti-avoidance measures, and existing rules that govern the restriction of relief for amortization in respect of goodwill and other similar assets.

The pre/post FA-02 distinction was becoming increasingly irrelevant given the ongoing development that many intangible assets are subject to. However, it was often challenging in practice to determine the extent to which an asset fell within the chargeable gains or IFA regime if it had been developed over time, or from prior intangible assets. This welcome change will remove much of that administrative burden, and better aligns the U.K. tax treatment of intangible assets with the tax treatment in other countries.

As always, government action to reduce the ‘tax gap’ between the revenues it expects U.K. tax law to generate and what is actually collected continues. From April 2021, large businesses will be required to notify HMRC when they take a position which HMRC is likely to challenge. The policy draws on international accounting standards which, under IFRIC 23, already require companies to consider any uncertain corporate income tax positions. The definition of “large” will be turnover above 200 million pounds or a balance sheet total of more than 2 billion pounds, matching that used in the Senior Accounting Officer regime.

New legislation will tighten the rules for the U.K. bank corporation tax surcharge which applies an 8% corporation tax surcharge on the taxable profits of banks in addition to existing corporation tax at 19%. The surcharge applies to banks and building societies that are within the charge to U.K. corporation tax, meet certain definitions of a bank, and have annual profits relating to banking activities over 25 million pounds. A technical amendment has been made to ensure that surcharge taxable profits are not reduced by allowable losses surrendered by non-banking companies in the same group.

The Chancellor’s plan to reduce the scope of Entrepreneur’s Relief (ER) from 10 million pounds to 1 million pounds was a small surprise—many expected ER to be scrapped totally. However, the change is effective immediately, and means that business owners making disposals on or after March 11, 2020 will only be eligible to claim ER on the first 1 million pounds of gains.

As expected, this limit will be reduced by any previous claims, so serial entrepreneurs or those who have previously sold part of their business may have already exceeded the reduced lifetime limit. Anti-forestalling provisions have also been introduced which may apply the new 1 million pound limit to arrangements entered into before March 11, 2020: for example, when an unconditional contract has been entered into prior to March 11, 2020, but the conveyance or transfer of the asset does not take place until on or after that date. In this case, the date of disposal will be deemed to be the date when the asset is conveyed or transferred—unless the individual concerned is able to demonstrate that they did not enter into the contract to obtain a tax advantage by accelerating the date of the tax point.

The change to ER will affect employees holding Enterprise Management Incentive (EMI) shares if they make gains above 1 million pounds but, interestingly, the government is to consult this year on widening the number of businesses that can use EMI shares to incentivize senior staff.

Looking Ahead

Looking ahead to the end of the Brexit transition period, the Budget document confirmed that from January 1, 2021, postponed accounting for value-added tax will apply to all imports of goods into the U.K., including from the EU. The government recently confirmed that the policy easements put in place for a potential “no-deal” Brexit would not be reintroduced. Happily we now know this does not include postponed accounting for import VAT, so businesses will not face a cash flow hit at the start of next year.

Overall, this first Budget of 2020 will probably be remembered most for its Coronavirus measures. It seems quite clear that a number of tax and funding measures were delayed: for example there was nothing about funding social care and little about Brexit. Assuming the Coronavirus crisis is over by the Autumn, I would expect the next Budget to contain many more tax measures and for many of them to be revenue raising.

Paul Falvey is a Corporate Tax Partner at BDO LLP. He may be contacted at paul.falvey@bdo.co.uk.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.