Budget Notes November 2017
Contents Page 1. Personal taxation 4 1.1 Income tax rates and bands 4 1.2 Income tax allowances 4 1.3 Scottish taxation 5 1.4 Capital gains tax rates 5 1.5 Marriage allowance 5 1.6 Minimum wage increases 6 1.7 Benefit in kind charging electric vehicles at work 6 1.8 Company car tax on diesel cars up 1% 6 1.9 Employee expenses and benefits consultations 7 1.10 National Insurance Contributions 7 1.11 Non resident capital gains tax extended to all gains on immovable property 8 1.12 Capital gains tax payment window reduction delayed to 2020 10 1.13 Enterprise Investment Scheme 10 1.14 Anti avoidance for capital preservation Enterprise Investment Scheme investments 11 1.15 Capital gains tax on carried interest 11 1.16 Taxation of trusts discussion paper 11 1.17 Offshore trusts 11 1.18 Gift Aid reform 12 1.19 Entrepreneurs Relief changes anti dilution 12 1.20 Pensions Lifetime Allowance 13 2. Business taxation 13 2.1 Withholding tax on royalties relating to UK sales 13 2.2 Off payroll working in the private sector 13 2.3 Employment status discussion paper 14 2.4 Business rates 14 2.5 Disincorporation relief 14 2.6 The taxation of partnerships 15 3. Corporate taxation 15 3.1 Corporate capital gains and indexation allowance 15 3.2 Research and Development tax credits 15 3.3 Intangible assets 16 3.4 Depreciatory transactions 16 3.5 Corporation tax on property income of a non resident company 16 3.6 Position paper on the digital economy 16 3.7 Incorporation of foreign branches 17 3.8 Hybrid mismatches and restriction on interest expense 17 3.9 Multilateral instrument 17 3.10 Double tax relief 18 Page 2 of 25
Contents Page 4. Value Added Tax and other indirect taxes 18 4.1 Registration threshold remains unchanged 18 4.2 Tackling online VAT fraud 18 4.3 Construction Sector VAT Reverse Charge 19 4.4 Access to VAT refunds 19 4.5 Other VAT charges and announcements 19 4.6 Other indirect taxes 20 5. Property taxation 20 5.1 Stamp Duty Land Tax exemption for first time buyers 20 5.2 Stamp Duty Land Tax additional rate changes 21 5.3 Annual Tax on Enveloped Dwellings charges 21 5.4 Interest costs for landlords 22 6. Administration and compliance 22 6.1 Additional compliance resource 22 6.2 Insolvency to escape tax debt 23 6.3 Recovery of Pay As You Earn debt through tax codes 23 6.4 Making Tax Digital 23 6.5 Notification of offshore structures 23 6.6 Extended time limit for offshore non compliance 24 6.7 Disguised remuneration 24 6.8 Late submission penalties points based approach 24 6.9 Certificates of Tax Deposit 25 6.10 Hidden economy conditionality 25 Page 3 of 25
1. Personal taxation 1.1 Income tax rates and bands The rates and bands of income tax are set out in the table below. Different thresholds apply in Scotland see below at 1.3. Tax rate 2018 19 Taxable income 2018 19 Taxable income 2017 18 Starting rate for savings only: 0% 1 5,000 1 5,000 Basic rate: Income other than dividend income: 20% Dividend income: 7.5% Higher rate: Income other than dividend income: 40% Dividend income: 32.5% Additional rate: Income other than dividend income: 45% Dividend income: 38.1% 1 34,500 1 33,500 34,501 150,000 33,501 150,000 over 150,000 over 150,000 Dividends are treated as the top slice of income. The trust rate of income tax remains at 45%, with the trust dividend rate at 38.1%, where total trust income exceeds 1,000. 1.2 Income tax allowances There are various tax allowances which are set out in the table below. Allowance 2018 19 2017 18 Personal allowance * 11,850 11,500 Income limit for personal allowance 100,000 100,000 Marriage allowance ** 1,185 1,150 Married couple s allowance at 10% *** For people born before 6 April 1935 8,695 8,445 Minimum amount 3,360 3,260 Income limit for married couples allowance 28,900 28,000 Blind person s allowance 2,390 2,320 Dividend allowance (regardless of level of non dividend income) 2,000 5,000 Page 4 of 25
Personal savings allowance For basic rate taxpayers 1,000 1,000 For higher rate taxpayers 500 500 For additional rate taxpayers Nil Nil *Allowance reduced by 1 for every 2 over limits (where applicable). For those with income over 123,700 in 2018 19 the personal allowance is reduced to nil. ** A spouse or civil partner may transfer up to this amount of their personal allowance to their spouse or civil partner, provided neither is liable to income tax above the basic rate. Only available to people born after 6 April 1935. Relief is restricted to 20%. *** Allowance reduced by 1 for every 2 over limit. 1.3 Scottish taxation The Scottish Government has the ability to vary the income tax rates independently, move thresholds and introduce or even abolish rates. On 21 February 2017, in respect of 2017 18, the Scottish Parliament voted to freeze tax rates but to set a lower threshold for the higher rate of tax than that which will apply for the UK as a whole. We do not yet have confirmation of the figures for 2018 19, but expect to have this in the Scottish Budget on 14 December. 1.4 Capital gains tax rates The capital gains tax rates remain unchanged and are set out in the table below. From 6 April 2017 Capital gains tax Capital gains tax on residential property and carried interest Basic rate 10% 18% Higher and additional rate 20% 28% Trustees 20% 28% The annual exemption for 2018 19 is 11,700 for individuals and 5,850 for trustees. 1.5 Marriage allowance Marriage allowance was introduced in 2015 and allows individuals to transfer 10% of their personal allowance to their husband, wife or civil partner where the recipient is not a higher rate or additional rate taxpayer. Individuals can backdate claims for up to four years. Currently the legislation does not allow transfers of the personal allowance to or from a deceased spouse or civil partner or to or from the surviving spouse or civil partner. However, from 29 November 2017 this will be possible, again with a four year time limit to backdate the claim. Page 5 of 25
The allowance is currently 1,150 and is set to increase to 1,185 in 2018 19. 1.6 Minimum wage increases The Government will implement the suggested increases to the National Minimum Wage and National Living Wage as recommended by the Low Pay Commission. It was also announced that the accommodation offset which reduces the National Minimum/Living Wage payable to employees in receipt of employer provided accommodation will increase from 6.40 to 7 per day from 1 April 2018. Hourly rates 2018 19 2017 18 National Living Wage for workers aged over 25 7.83 7.50 National Minimum Wage for workers aged 21 24 7.38 7.05 National Minimum Wage for workers aged 18 20 5.90 5.60 National Minimum Wage for workers aged 16 17 4.20 4.05 National Minimum Wage for apprentices aged under 19 in their first year of apprenticeship 3.70 3.50 1.7 Benefit in kind charging electric vehicles at work As part of a package of measures designed to encourage the move to electric cars (and away, particularly, from diesel), the Budget included an announcement that, from 6 April 2018, there will be no benefit in kind where an employer allows an employee to charge their electric vehicle at work. It had been hoped, however, that the Government would go one step further and introduce advisory mileage rates for electric cars, to give certainty to employees and employers on the tax position where an electric vehicle is used for business journeys but the charging takes place at the employee s home. As there is no easy way of quantifying the actual cost in these cases, many employers will not currently reimburse employees for these expenses, and it is disappointing that the Government has not taken action here. 1.8 Company car tax on diesel cars up 1% As well as the introducing a Vehicle Excise Duty supplement for some new diesel cars, the Government has also announced an increase in the benefit in kind charge for many diesels. From 6 April 2018, the diesel supplement for company car benefit purposes will increase from 3% to 4% for all cars registered on or after 1 January 1998 which do not meet the EU Real Driving Emissions (RDE) 2 standard. The maximum percentage applicable to diesel cars will, however, remain at 37%, meaning that this measure is likely to hit owners of smaller diesels hardest. RDE testing has only recently been introduced, and the RDE 2 standard will not become mandatory in the EU until 2020. The diesel supplement will be completely removed from any cars which do meet the standard, providing a real incentive for employees to switch to a new, qualifying vehicle as they become available. Page 6 of 25
The Government has also announced increases to the van benefit charge and to the fuel benefit charge for both company cars and vans, all of which will be uprated by RPI inflation. 1.9 Employee expenses and benefits consultations There will be a consultation on the extension to the tax relief currently available for individuals paying for their own training costs. It was also announced that HM Revenue & Customs ( HMRC ) will work with external stakeholders on improving guidance on employee expenses, in particular for travel and subsistence. Of greater interest to employers though is what the Budget did not announce. In the Spring Budget 2017 the Government announced it was to consult on changes to the taxation of benefits in kind more generally and in particular the accommodation benefit. These consultations have not been published and the Budget made no statement on when it can be expected they will be published. 1.10 National Insurance Contributions The Government had previously announced that Class 2 National Insurance Contributions ( NICs ) would be abolished. The Government had also previously announced that the employer s NIC exemption for termination payments and non contractual payments to sport players as part of their testimonial would be capped at 30,000 and 100,000 respectively. The legislation containing all these changes was due to be effective from 6 April 2018. It was however announced in the Budget that this legislation will be delayed by a year and so will not be effective until 6 April 2019. With regards to the NIC treatment of termination payments, the status quo remains; but sports clubs and sports players should be mindful that the equivalent income tax changes affecting testimonials have been effective since 6 April 2017. Following on from the Spring Budget 2017 where the Chancellor announced an annual increase in Class 4 NIC over two years from 9% to 11% which was subsequently dropped the Autumn Budget 2017 confirmed that there will be no rise in Class 4 NIC. While the Employment Allowance of 3,000 was confirmed at the same level for 2018 19, it was also announced that certain employers who have been found to be participating in anti avoidance arrangements using the allowance will be required to pay an up front security with effect from 6 April 2018. Rate/limit 2018 19 2017 18 Employee s Class 1 NIC on earnings between primary threshold and upper earnings limit 12% 12% Employee s Class 1 on earnings above upper earnings limit 2% 2% Employer s Class 1 on earnings above secondary threshold 13.8% 13.8% Primary threshold (weekly) 162 157 Secondary threshold (weekly) 162 157 Page 7 of 25
Upper earnings limit (weekly) 892 866 Self employed Class 4 on profits between lower and upper profits limits 9% 9% Self employed Class 4 on profits above upper profits limit 2% 2% Lower profits limit (annual) 8,424 8,164 Upper profits limit (annual) 46,350 45,000 Class 2 (per week) 2.95 2.85 1.11 Non resident capital gains tax extended to all gains on immovable property Capital gains realised by non residents on disposals of UK residential property have been subject to UK tax since 6 April 2015 but the rules are very likely to be extended to include capital gains realised by non residents on the disposal of interests in all types of UK land and buildings, including UK commercial property, and property held indirectly. HMRC have for now only issued a consultation document, but this is very detailed and indicates a clear intention to implement these new rules. Those who are exempt from all UK capital gains or otherwise not within the scope of UK tax for reasons other than being non resident (for example pensions funds) will continue to be exempt from the charge. The changes will have effect from 1 April 2019 for companies and from 6 April 2019 for individuals and trustees. HMRC have issued a consultation document outlining the intended application of the rules, which can be broken down as follows: a. Direct disposals Non residents disposing of UK property will pay tax at the same rate as an equivalent disposal by a UK resident ie companies will pay corporation tax and individuals and trustees will pay capital gains tax. Relief for capital losses will be available for entities within the charge to corporation tax and can be offset against other company gains or group relieved in the normal way. Relief for losses for individuals and trustees will be allowable but are only available to be offset against certain gains, including other non resident capital gains tax ( NRCGT ) gains and gains on disposal of interests in non residential property. b. Indirect disposals The rules will also apply to disposals by certain non residents of interests in companies and other entities that derive their value from UK property. For a disposal to be within the scope of tax, two conditions must be satisfied. Firstly, the entity deriving its value from property must be property rich and secondly, the non Page 8 of 25
resident must hold an interest of at least 25% at the date of disposal, or at some point within the previous five years. An entity will be regarded as property rich if (broadly) more than 75% of the value of its assets derive from UK property. c. Disposals of residential property The current NRCGT rules only apply to closely held companies but this will be expanded to include widely held companies. This will include the removal of an existing exemption that applied to gains realised by life assurance companies on disposals of residential interests held as part of their investment portfolio. d. Collective Investment Vehicles Disposals by non residents in Collective Investment Vehicles will now be within the scope of UK tax, including indirect disposals, where the property rich and ownership tests are met. If a Real Estate Investment Trust ( REIT ) satisfies the property rich test then any disposal of shares in the REIT by a non resident will be subject to the charge, provided the person making the disposal met the 25% test at some point in the last five years. e. Computational aspects Rebasing will apply so that only gains accruing from 1 or 6 April 2019 will be within the scope of the charge. However there are many potential complexities: i. disposals of direct interests have alternative methods of calculating the gain subject to the charge but disposals of indirect interests are only able to calculate the gain based on the increase in value from April 2019; ii. iii. iv. rebasing does not apply in relation to gains realised on UK residential properties already within the charge to NRCGT ie the existing NRCGT rebasing rules applying to the increase in value from April 2015 will continue to apply to such disposals; the interaction of NRCGT and Annual Tax on Enveloped Dwellings ( ATED ) capital gains tax; if certain strict conditions are satisfied then the Substantial Shareholding Exemption ( SSE ) can continue to be available for companies selling shares; v. the interaction of gains and the existing anti avoidance legislation, such as the legislation applying to gains realised by non resident companies and offshore trusts; and vi. the impact of double tax treaties. Page 9 of 25
f. Reporting and compliance Non residents chargeable to capital gains tax must pay tax within 30 days of the disposal, unless they are already within self assessment, in which case reporting can be deferred until the normal filing deadline. Non residents within the charge to corporation tax will need to register for corporation tax and pay tax within that framework. The normal penalties for non compliance will apply. Anti forestalling rules have been introduced which apply from 22 November 2017 to counteract arrangements entered into to avoid falling within the scope of the charge, including the abuse of double tax treaties. The proposals represent a major change to the taxation of gains on immoveable property and no doubt there will be plenty more written about this subject between now and April 2019. 1.12 Capital gains tax payment window reduction delayed to 2020 In the 2015 Autumn Statement the Government announced that from April 2019 the deadline for paying any capital gains tax on residential property disposals would be shortened to 30 days from the date of completion. The Government has now confirmed that this deadline will be deferred until April 2020. 1.13 Enterprise Investment Scheme From 6 April 2018, the annual limit on Enterprise Investment Scheme ( EIS ) qualifying investments will be increased from 1million to 2million for investments into knowledge intensive companies. The annual limit under the EIS and from Venture Capital Trusts ( VCT s) on the total amount of qualifying investments such a company can receive is increased to 10million from 5million. The lifetime limit on qualifying investments will remain the same at 20million. Greater flexibility will also be provided with respect to the rules for determining whether a knowledge intensive company meets the permitted maximum age requirement. A knowledge intensive company will qualify for EIS up to 10 years from the date from which the company s annual turnover exceeded 200,000, instead of the date of its first commercial sale. A knowledge intensive company is a company whose costs of research and development or innovation are at least 15% of the company s operating costs in at least one of the previous three years, or at least 10% of the company s operating costs in each of the previous three years and either: a. which has created, is creating or is intending to create, intellectual property; or b. which has employees with a relevant Masters or higher degree who are engaged in research and development or innovation and who comprise at least 20% of the company s total workforce. For EIS the changes will apply to shares issued on or after 6 April 2018. For VCTs the changes will apply to new qualifying investments made on or after 6 April 2018. Page 10 of 25
1.14 Anti avoidance for capital preservation Enterprise Investment Scheme investments In response to the Patient Capital Review, which was a Government consultation on increasing the supply of capital to growing innovative firms, the Government will legislate in Finance Bill 2017 18 to ensure the venture capital schemes (the EIS, Seed EIS and VCTs) are targeted at growth investments, where there is a real risk to the capital invested. The Government want investments targeted at long term capital investment with a real degree of risk and therefore excludes companies and arrangements intended to provide capital preservation. The measure introduces a new condition to the EIS, SEIS and VCT rules to exclude tax motivated investments, where the tax relief provides most of the return for an investor with limited risk to the original investment. It will be necessary to take a reasonable view as to whether an investment has been structured to provide a low risk return for investors. The company needs to be a genuine entrepreneurial company where there is a significant risk of loss of capital to the investor. The new condition will apply to all investments made on or after 6 April 2018. 1.15 Capital gains tax on carried interest Finance (No.2) Act 2015 introduced changes to the taxation of carried interest returns intended to ensure that investment managers paid capital gains tax on full economic gains on carried interest and to block base cost shift. This 2015 legislation included transitional provisions, which prevented the new rules applying in relation to certain carried interest payments (such as where the carried interest payment related to an asset disposal which took place before the new rules were announced). HMRC have become aware that some taxpayers are manipulating these rules and, in consequence, the transitional provisions will be removed for all carried interest payments on or after 22 November 2017. In practice, there is likely to be limited impact for the majority of investment managers, as the withdrawal of the transitional provisions will only bite where carried interest relating to a transaction before the relevant dates in 2015 has not yet been distributed. 1.16 Taxation of trusts discussion paper The Government has stated that it will consult in 2018 on how to make the taxation of trusts 'simpler, fairer and more transparent. No further detail on the scope of the consultation is currently available, but any proposals to increase transparency would, presumably, build on the new register of trust beneficial ownership, which is being introduced under the EU s Fourth Money Laundering Directive. Trusts with a relevant UK tax consequence for the 2016 17 tax year (including a liability to inheritance tax, Stamp Duty Land Tax ( SDLT ) or Stamp Duty Reserve Tax) already need to register using the new online service by 31 January 2018. 1.17 Offshore trusts The reforms to the taxation of non domiciled individuals and offshore trusts continue with further changes taking effect from 6 April 2018. Draft legislation was published on 13 September 2017. The changes relate to how income and gains are taxed when beneficiaries of offshore trusts receive capital payments: Page 11 of 25
a. Capital gains realised by offshore trusts will no longer be matched to capital payments received by non resident beneficiaries. This is already the case for trust income. b. Capital payments from offshore trusts that are made to close family members of a UK resident settlor are treated as being made to the settlor. These rules already apply to income from 6 April 2017 but will be extended to capital gains from 6 April 2018. A close family member includes the settlor s spouse, civil partner, cohabitee or minor child. c. Onward gifting rules apply when a capital payment is made from an offshore trust to a beneficiary, which is not taxed in the UK and they make an onward gift. In this case the gift recipient is treated as having received the capital payment and may have the effect that the gift recipient is taxed on any income and gains matched to the capital payment. Most clients with offshore structures should already have reviewed their arrangements to determine whether they are fit for purpose prior to 6 April 2017 but it is important to keep this under review given the amount of legislation being published. It is understood from sources close to the Government that there may be changes to the draft legislation. 1.18 Gift Aid reform The Gift Aid rules include restrictions limiting the value of benefits that a donor can receive in return for their donation. Following consultation, the Government has announced that the existing rules are to be simplified, and made more generous. From 6 April 2019, donors will be able to receive the following benefits: a. First 100 of donation 25% of the amount donated; and b. Donations over 100 25% of the first 100, plus 5% of the amount over 100 (subject to an overall annual cap of 2,500 of benefit). These limits replace the current three tier restriction. Four existing extra statutory concessions ( ESC s) on gift aid will also be legislated, as part of HMRC s wider programme of withdrawing such concessions or converting them to primary legislation. 1.19 Entrepreneurs Relief changes anti dilution Entrepreneurs' Relief ( ER ) allows office holders and employees to benefit from a 10% tax rate on capital gains, if certain conditions are met. For disposals of trading companies, one of the conditions is that the individual must hold at least 5% of the ordinary share capital (when tested by nominal value) and at least 5% of the voting rights. The 5% test must be met for one year prior to the date of disposal. Where a business seeks commercial capital investment, any share subscription made by an investor will dilute the other shareholders in the company. This dilution may result in certain shareholders falling below the 5% threshold, meaning they will no longer qualify for ER and would suffer capital gains tax at 20% rather than 10%. The Government announced they will consult in Spring 2018 on how access to ER might be given to shareholders whose holding in their company is reduced below the normal 5% qualifying level as a result of raising funds for commercial purposes. Under the current proposals, the Page 12 of 25
shareholder will be able to claim ER on the part of their gain that arose before their shareholding was diluted below 5%, even if they dispose of their shares after their shareholding was diluted. This measure would be effective from April 2019. Whether the measure will apply to other dilutions (such as an issue of new shares following an exercise of share options) still requires confirmation. 1.20 Pensions Lifetime Allowance Although there had been speculation ahead of the Budget that Philip Hammond would cut pensions tax relief as part of a drive to rebalance the tax system, we instead saw the announcement of an increase. The Lifetime Allowance will be lifted in line with CPI inflation, rising to 1,030,000 for 2018 19. This is a relatively modest increase over the current 1million, but does mark the reversal of a trend: the Lifetime Allowance reached a high point of 1.8million in 2010 11, and has gradually fallen to its current level since then. 2. Business taxation 2.1 Withholding tax on royalties relating to UK sales A company must withhold 20% income tax on royalties and other annual payments paid to nonresidents, but only if such payments arise in the UK. For example, a UK company which licences a brand name or a customer list from a non resident company is required to withhold tax on the licence payments. The rate of withholding tax can be reduced under double tax treaties, and under UK treaties it is typically reduced to 0%. The UK has a wide network of double tax treaties, but those with low tax jurisdictions are usually limited in scope, and do not cover such payments. From 1 April 2019, the scope of the withholding tax will be extended to cover royalties and other annual payments connected with sales to UK customers, even if the payments do not arise in the UK. For example, an Irish company may make sales to UK customers without having a physical presence in the UK. If it pays a company in (say) Jersey for the right to use a brand name in the UK, this payment could be subject to UK withholding tax. Although little detail has been provided by the Government at this stage, they have confirmed that UK double tax treaties will continue to apply, which should mean that the rate of withholding tax is reduced to 0% in many cases. 2.2 Off payroll working in the private sector A consultation was announced in April 2017 on the perceived issue of tax compliance failure in the private sector through the use of individuals choosing to structure their work through personal service companies ( PSC s). This consultation would draw on the experience of the earlier public sector reforms, in particular the results from research already commissioned from external consultants. The findings of this research are due to be published in 2018 so presumably the consultation will be published shortly thereafter. Page 13 of 25
Clearly the issue of extending the public sector IR35 changes into the private sector are on the Government s agenda but due to the expected consultation it is not expected any changes to IR35 for the private sector will be taking place until at least April 2019. 2.3 Employment status discussion paper Following the publication of Matthew Taylor s report into modern working practices, the House of Commons Work and Pensions and Business committees published a follow up report in the days before the Budget which made further recommendations in respect of worker by default and class action claims. The Government has now announced that it will publish in 2018 a discussion paper which will explore the case and options for longer term reform to workers in the gig economy, with a view to providing greater clarity on employment rights and tax. 2.4 Business rates The Government announced the following measures in relation to business rates: a. It will bring forward to 1 April 2018 the planned switch in indexation from RPI to the main measure of inflation (currently CPI). b. Retrospective legislation to address the staircase tax. Under staircase tax rules, businesses operating over several floors within the same property were given separate business rates assessments for each occupied floor, as opposed to one assessment for the entire premises. Affected businesses will be able to ask the Valuation Office Agency ( VOA ) to recalculate valuations so that bills are based on previous practice backdated to April 2010 including those who lost Small Business Rate Relief. Draft legislation will be published shortly. c. Continue the 1,000 business rate discount for public houses with a rateable value of up to 100,000, subject to state aid limits for businesses with multiple properties, for one year from 1 April 2018. d. Increase the frequency with which the VOA revalues non domestic properties by moving to revaluations every three years following the next revaluation, currently due in 2022. 2.5 Disincorporation relief Finance Act 2013 introduced a specific relief intended to make it easier for small businesses to cease operating through a limited company structure. The relief was time limited, expiring on 31 March 2018 in the absence of further legislation to extend it. A recent discussion paper from the Office of Tax Simplification ( OTS ) noted that there had been very low take up of the relief, with only 50 claims being made between its introduction and March 2016. Although the OTS highlighted possible reasons for this including the relatively low 100,000 limit on the total relief available it is perhaps unsurprising that the Government has decided to allow the relief to lapse. In the Spring Budget, the Government noted the potential (adverse) impact of increasing rates of incorporation on Exchequer receipts. It is, therefore, possible that we will see further attempts to encourage disincorporation as part of a future, more widely aimed, package of measures. Page 14 of 25
2.6 The taxation of partnerships Several changes to the tax rules applicable to partnerships were confirmed in recently released draft Finance Bill 2018 clauses, following a consultation last year. These changes will have a significant impact on the reporting requirements of complex partnership structures such as investment funds. Whilst some changes are intended to clarify the operation of the current rules for partnerships, several are also intended to increase transparency and make it easier for HMRC (and potentially also for taxpayers) to track the flow of profits and losses through partnerships. These changes cover: a. nominee arrangements and disclosure of beneficial interests; b. allocation of partnership profits in line with the accounts; c. reporting of profits in tiered partnerships; and d. disclosure of partners tax reference numbers. 3. Corporate taxation 3.1 Corporate capital gains and indexation allowance Indexation allowance is available to companies but not to individuals, trustees and personal representatives (although it does apply to non UK resident companies where gains are apportioned to UK resident shareholders under anti avoidance rules). The purpose of the allowance is to provide relief for the effect of inflation and it increases the base cost of an asset. Indexation allowance will be abolished for assets acquired from 1 January 2018. For assets currently held, the allowance will be calculated up to December 2017. This measure will impact companies with investment portfolios. For example, buy to let investors who operate their business through a company or family investment companies holding share portfolios and other investments. They will now suffer an increased corporation tax cost on gains arising from future disposals. Companies which dispose of underlying trading subsidiaries, where any gains are exempt under the SSE, will not be impacted. 3.2 Research and Development tax credits There are two Research and Development ( R&D ) tax credits available to companies an R&D tax credit for smaller companies, and the Research and Development Expenditure Credit ( RDEC ) for large groups. Both work in a similar way, and provide payable tax credits for companies involved in qualifying R&D. Under the RDEC, a payable credit equal to 11% of qualifying expenditure is available. This rate will increase to 12% for expenditure incurred on or after 1 January 2018. As the credit is subject to corporation tax (the current rate of which is 19%), this increases the effective rate of the credit from 8.91% to 9.72%. Page 15 of 25
3.3 Intangible assets The transfer of an intangible asset between connected parties is generally recognised at market value for tax purposes. In such circumstances, the transferor may recognise a taxable gain, but the transferee can claim a tax deduction for the amortisation on the market value amount, even if there is no gain in the accounts. However, the amount recognised in respect of a licence (rather than the transfer of an asset) will only be adjusted if the transfer pricing rules apply. In certain circumstances, this leads to a mismatch in the amount recognised by the transferor and the transferee. From 22 November 2017, the market value rule will apply to the grant of a licence in the same way that it applies to the transfer of an intangible asset. This will ensure that the transferor and transferee recognise the licence at the same amount. In addition, if an intangible asset is sold for non cash consideration, the market value of the noncash consideration will be taken into account when calculating the gain. Again, this will ensure that the transferor and transferee recognise the same amount in respect of the non cash consideration. 3.4 Depreciatory transactions A depreciatory transaction is one under which a company reduces the value of shares it holds in a subsidiary (for example by transferring an asset at undervalue to another member of the group). Under current legislation, if the shares are sold at a loss within six years of the transaction, the loss is restricted by such an amount as is just and reasonable to counter the effect of the depreciatory transaction. From 22 November 2017, this period will be extended from six years to 12 years. 3.5 Corporation tax on property income of a non resident company HMRC issued a consultation document on 21 March 2017 on whether to bring non UK resident companies with UK property income into charge to UK corporation tax on that income, in place of UK income tax. HMRC are currently analysing the feedback that they received from the consultation. The motivation for the proposed change is to deliver equal tax treatment to ensure that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief rules. The Government's response to that consultation is due to be published shortly but they have confirmed that from April 2020 non resident companies will be subject to corporation tax on UK property income. This may mean a reduction in the rate of tax fund on property income from 20% (basic rate income tax) to 17% (corporation tax in 2020) but the restriction on corporate interest relief may ultimately mean that many non resident companies pay a higher marginal rate on their UK property income than is currently the case. 3.6 Position paper on the digital economy The Government has been concerned for some time that the current corporation tax system does not adequately deal with the ways in which digital businesses operate; in particular, that foreign businesses can sell goods or services to customers in the UK via a digital platform, the profits from Page 16 of 25
which are not subject to UK tax. Going a step further, a foreign business may earn profits from another foreign business in relation to advertising which is targeted at UK users of a digital platform. Alongside the Budget, the Government has published a position paper which sets out at a very high level the challenges which the digital economy poses to the tax system, and some potential responses. The position paper concludes that co ordinated international action to these challenges is preferred, and encourages this to be considered by the OECD when they produce their own report on the subject. For now, the only unilateral action is the withholding tax on royalties relating to UK sales which is discussed elsewhere in these notes. 3.7 Incorporation of foreign branches A UK company which incorporates a foreign branch (by transferring it to a company in return for an issue of shares) will be treated as making a chargeable gain. The tax arising on this chargeable gain can be deferred until the shares are sold outside the group. Due to an anomaly in the current legislation, certain transfers within the same group (which qualify for both a restructuring relief and the substantial shareholding exemption) lead to the tax arising on the deferred gain. The anomaly will be corrected with effect from 22 November 2017 to ensure that the tax only arises when the shares are sold outside the group. 3.8 Hybrid mismatches and restriction on interest expense Anti avoidance rules have applied since 1 January 2017 to hybrid mismatch arrangements which are broadly transactions which result in a double tax deduction, or a tax deduction without corresponding income (either in the UK or elsewhere). In addition, anti avoidance rules have applied since 1 April 2017 to restrict the amount of tax deductible interest to 30% of a group s UK EBITDA. These rules apply to all groups with interest expense of more than 2million. Minor changes are being made to both sets of rules with effect from 1 January 2018. These changes do not affect the fundamental operation of the rules, but provide clarification and relief in a number of areas. 3.9 Multilateral instrument The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (more commonly known as a Multilateral Instrument) is an OECD initiative to replace double tax treaties with a common set of provisions. More than 70 countries have now signed the Instrument although many (including the UK) have made reservations on Articles, and where as a result existing treaties will continue to apply. The Multilateral Instrument will only apply in situations where both countries have ratified it, and the Government has announced that this will be done in the UK in Finance Act 2018. Page 17 of 25
The Multilateral Instrument may affect the tax position of UK companies receiving income from outside the UK. Such companies will need to consider the provisions of the Multilateral Instrument in addition to any double tax treaties. In addition, the OECD will be able to make changes to the Multilateral Instrument which will automatically apply to all signatories, including the UK. 3.10 Double tax relief A UK company can claim a credit against its UK corporation tax liability for any foreign tax suffered on the same profits. This includes the situation where a UK company has a foreign branch, and the branch pays foreign tax on its profits. If the foreign branch makes a loss, this loss can be used against other profits of the UK company, but foreign tax rules may allow the loss to be used against foreign profits elsewhere within the same group. This would mean that the loss is not available to set against future profits of the branch, so that foreign tax arises in the later period, and credit claimed for this against the UK corporation tax. From 22 November 2017, a credit will not be available where the branch has made a loss which is used against profits of another company. This is an anti avoidance rule which will prevent groups from effectively obtaining relief twice for the same tax. In addition, changes are being made to the double tax relief targeted anti avoidance rule. Under the current rule, HMRC can issue a counteraction notice to restrict a double tax relief credit where arrangements are in place the purpose of which is to reduce the company s UK tax liability. From 22 November 2017, this will also take into account a reduction of a connected person s UK tax liability. Furthermore, from 1 January 2018, HMRC can make an adjustment without issuing a counteraction notice. 4. Value Added Tax and other indirect taxes 4.1 Registration threshold remains unchanged The Value Added Tax ( VAT ) registration will continue to be required where taxable turnover exceeds 85,000. The de registration threshold remains unchanged at 83,000. Following the recent publication by the Office of Tax Simplification report on VAT simplification, the Government will consult on the design of the VAT thresholds and the thresholds will remain unchanged for two years from 1 April 2018. Please remember that these limits now only apply to UK businesses. Since 1 December 2012, there has been no limit for non UK businesses. Such businesses are required to register as soon as they make a UK taxable supply, no matter what the value of that supply. 4.2 Tackling online VAT fraud Further measures have been announced to tackle on line VAT fraud. These are in addition to the Fulfilment House Due Diligence Scheme ( FHDDS ) which will require fulfilment houses to be Page 18 of 25
registered with HMRC by 1 April 2018 and meet a range of record keeping and compliance standards. The following additional measures will be introduced in Finance Bill 2017 2018 and take effect from Royal Assent: a. Extensions of HMRC s powers to make online marketplaces jointly and severally liable for unpaid VAT of non UK (including UK businesses) that are not UK VAT registered and sell goods on their platforms. b. A requirement for online marketplaces to check the validity of VAT numbers displayed by businesses trading on their websites. Online marketplaces will also be required to display VAT numbers provided by such businesses. HMRC also intends to introduce a penalty for non compliance. The Government will report in December on the results of its consultation examining methods of extracting VAT from on line sales using modern technology at the time payment by the customer is made. 4.3 Construction Sector VAT Reverse Charge In response to the consultation launched in the Spring Budget, which explored measures to tackle VAT fraud on labour services provided in the construction sector, the Government has announced that it will be introducing a domestic reverse charge mechanism from 1 October 2019. The reverse charge mechanism will require the customer to account for VAT on labour services received. 4.4 Access to VAT refunds Legislation will be introduced to bring Combined Authorities and certain fire services carrying out statutory duties onto the list of bodies able to recover VAT incurred in carrying out those activities. Grants towards the cost of irrecoverable VAT incurred by accident rescue charities will be made available through the introduction of a new Accident Rescue Charities Grant Scheme. 4.5 Other VAT charges and announcements The Government announced its intention to consult on its plans to make changes to the VAT accounting rules for vouchers from 1 January 2019. The legislation will be aimed at ensuring that businesses accepting payment by voucher will account for the same amount of VAT as they would do on any other form of payment. The VAT accounting rules for vouchers are changing across Europe from 2019 and the new legislation is intended to be in line with these changes. The Government has signalled its intention to replicate the VAT cash flow benefits currently enjoyed by certain businesses importing goods when the UK exits the EU. The Government has announced it will publish the results of its consultation on changes to the VAT grouping rules on 1 December 2017. Page 19 of 25
4.6 Other indirect taxes With effect from Budget Day, there have been the usual rises announced in the rates of Tobacco Duty. Gaming Duty has remained unchanged. The existing Wine, Beer, Spirit and Cider Duty rates have been frozen. Following the consultation on possible changes to White Cider Duty, the Government will introduce a new rate band for still Cider and Perry (6.9% to 7.5% abv), to target White Ciders. This rate will be introduced in 2019, to allow producers time to reformulate and lower their abvs. Aggregates Levy is being held at 2 per tonne in 2018 and Fuel Duty remains unchanged. The Soft Drinks Levy will be introduced in Finance Bill 2017 in line with previous announcements at 18p per litre for the main rate and 24p per litre for the higher rate, effective from 6 April 2018. HMRC anticipates those businesses required to register will be able to apply online from January 2018. Landfill Tax and Climate Change Levy will increase from 1 April 2018 in line with previous announcements. Air Passenger Duty rates for short haul flights remain unchanged until 30 March 2020. Air Passenger Duty for long haul flights will increase in April 2018 in line with RPI. The rate for economy passengers will then be frozen until 2020, whilst the rate applied to all other classes will increase from 2019. 5. Property taxation 5.1 Stamp Duty Land Tax exemption for first time buyers The Chancellor has announced an exemption from SDLT for first time buyers who are purchasing property for 300,000 or less. The exemption will operate as follows: Purchase price of property Effect of new exemption 0 to 300,000 No SDLT 300,001 to 500,000 SDLT at 5% on the excess above 300,000 More than 500,000 No exemption SDLT due as normal A first time buyer is a person who has never owned an interest in residential property (ignoring short leases of less than 21 years), whether in the UK or elsewhere in the world, and who intends to occupy the property as their main residence. The measure will take effect for contracts with an effective date on or after 22 November 2017. Page 20 of 25
Note that unless the Scottish Government follows suit the measure will not apply to properties in Scotland which are subject to Land and Buildings Transactions Tax ( LBTT ). Properties in Wales are only subject to SDLT until 1 April 2018, whereupon the Welsh equivalent, Land Transaction Tax ( LTT ), will have effect. Again, whether or not this exemption will apply to properties in Wales from that date will depend on the Welsh Assembly enacting a similar rule. 5.2 Stamp Duty Land Tax additional rate changes A number of technical changes have been made to the rules for the supplemental 3% higher rate for additional dwellings ( HRAD ). These mainly cover situations where the charge applied unfairly, although HMRC have closed one loophole which allowed spouses to avoid the charge. The changes are: a. The HRAD will not apply where an individual acquires a property from their spouse or civil partner; b. The HRAD will not apply where additional interests are acquired in a person s main residence; c. There are changes to the way that the HRAD applies on divorce or to children under Court of Protection trusts; and d. It is no longer possible to engineer the replacement of main home exemption by gifting your home to your spouse or civil partner. The measure will have effect for transactions on or after 22 November 2017. As before, the rules do not apply in Scotland the Scottish LBTT has its own version of these rules but worded differently and therefore different technical issues arise. The Scottish Budget is due on 15 December 2017. Similarly, Welsh LTT will come into force on 1 April 2018 and also has a differently worded version of the legislation. 5.3 Annual Tax on Enveloped Dwellings charges The ATED charge increases in line with CPI each year. The rates for the 2017 18 and 2018 19 chargeable periods are: Page 21 of 25
Property Value Annual charge for the 2018 2019 chargeable period Annual charge for the 2017 2018 chargeable period 500,001 to 1,000,000 3,600 3,500 1,000,001 to 2,000,000 7,250 7,050 2,000,001 to 5,000,000 24,250 23,550 5,000,001 to 10,000,000 56,550 54,950 10,000,001 to 20,000,000 113,400 110,100 20,000,0001 and over 226,950 220,350 5.4 Interest costs for landlords From 6 April 2017 higher rate tax relief is restricted for buy to let landlords on finance costs. The change is being phased in over three years and from the fourth year all finance costs will be restricted to the basic rate. The rules do not apply to companies, furnished holiday lettings businesses, property dealing or development businesses, and commercial properties. The phased introduction applies as follows: Year % of costs deducted from profits % of costs available as a basic rate deduction 2017 18 75% 25% 2018 19 50% 50% 2019 20 25% 75% 2020 21 100% 6. Administration and compliance 6.1 Additional compliance resource The Government will spend 155million on additional resources and new technology for HMRC. The additional resource is forecast to bring in 2.3billion of additional tax revenue. These new resources will be deployed to tackle the hidden economy through new technology, those engaged in marketed tax avoidance schemes, the enablers of tax fraud and hold intermediaries accountable for the services they provide using the Corporate Criminal Offence. Page 22 of 25