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Daily Tax Report: International

U.K. Promises to Keep Digital Tax Plans, Offers Virus Tax Relief

March 11, 2020, 8:17 PM

The U.K. is moving forward with a tax on digital services—despite U.S. warnings that doing so would jeopardize the countries’ trade relationship.

The digital tax, a 2% levy on revenue, will hit companies such as Amazon.com Inc. and Faceboook Inc. but will spare companies like Netlfix Inc., according to a government policy paper released Wednesday as part of its spring budget.

Further details of the planned digital services tax are to be published in the Finance Bill expected on March 19.

The new tax is to go into effect on April 1 and hit companies with more than 500 million pounds ($643 million) of global revenue and 25 million pounds of digital revenue in the U.K. It targets social media platforms, search engines, and online marketplaces.

The U.K.’s plans for a digital tax have emerged as a potential point of tension as it tries to negotiate a post-Brexit free trade agreement with the U.S. The U.S. ambassador to the Czech Republic in February letter warned that countries pushing forward with digital services taxes could face trade retaliation.

Other tax measures included in the budget were:

Business Rates and Coronavirus

The government announced tax deferral measures and freezes on business property taxes, known as business rates, for the retail, leisure, and tourism sectors to reduce the economic impact of the new coronavirus.

Other measures to help companies hit by the Covid-19 outbreak include cash grants and a government-assisted loan program.

“Any eligible retail, leisure or hospitality business with a rate-able value below 51,000 pounds will, over the next financial year, pay no business rates whatsoever,” Chancellor of the Exchequer Rishi Sunak said. “That is a tax cut worth over 1 billion, saving each business up to 25,000 pounds. And it means, over the next twelve months, nearly half of all business properties in England will not pay a penny of business rates.”

Plastics Tax

The government introduce a tax of 200 pounds per metric ton (about $235/ton) on imported plastic packaging that doesn’t contain at least 30% recycled plastic content.

The tax will apply from April 2022 and is meant to encourage the use of recycled plastic in packaging. It will affect any company making imports with plastic packages.

The tax is expected to bring in 240 million pounds in its first year.

“What that means is the plastic packaging on imported goods will now be taxed, subject to a de minimis of 10 tonnes to avoid capturing small importers,” Jayne Harrold, PwC’s U.K. environmental tax leader, said. “This will be welcomed by U.K. manufacturers who were concerned that some production activities might have been shifted offshore if imported goods weren’t taxed.”

Changes to Entrepreneurs’ Relief

The U.K. also promised to cut the lifetime limit of entrepreneurs’ relief—a favorable 10% capital gains tax rate..

Sunak’s decision to reduce the lifetime limit from 10 million pounds to 1 million pounds could mean he also reduces other similar tax breaks, said Caroline La Jeune, a partner at Blick Rothenberg.

“It will be interesting to see, when the detail behind the Budget is revealed, whether the reform of Entrepreneur’s Relief will be mirrored by a similar reform of Investor’s Relief, which also provided a 10% tax rate on the first 10 million pounds of qualifying investments,” she said.

The relief currently costs the government 2 billion pounds. It was originally forecast to cost the government 200 million pounds.

Corporate Tax Cuts on Ice

The government has said it will not carry out a planned cut of the corporate tax rate to 17% from 19%. The decision is expected to save 3 billion pounds in revenue this year.

Zubin Patel, international tax partner at Deloitte, noted that despite not going through with the cuts, the U.K. still has the lowest corporate tax rate in the G-20.

“The Chancellor is possibly keeping his powder dry until later in the year,” Patel said.

“By then, there may be louder calls for business relief which the chancellor may find more difficult to ignore,” he said.

The government also announced several consultations, including a review process for allowing investment funds set up overseas to be marketed in the U.K.

To contact the reporter on this story: Hamza Ali in London at hali@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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