Budget 2018—Tax analysis
A summary of the key business tax announcements made in the Chancellor’s Budget on 29 October 2018.
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The Chancellor of the Exchequer, Philip Hammond, delivered his Budget on 29 October 2018. Breaking with tradition, this Budget was delivered on a Monday afternoon rather than the usual Wednesday lunchtime slot (with the government having denied that the move to Monday was to avoid a Halloween Budget and the inevitable gift to headline writers, although the Chancellor couldn't resist squeezing in a few Halloween jokes into his speech). This was also earlier in the year than usual for an Budget in the autumn, in order, we understand, to avoid a clash with the final stages of Brexit negotiations.
In the midst of the rising political pressure surrounding the Brexit negotiations, the Chancellor hadn’t been expected to announce any major new tax initiatives in this Budget. However, the well-publicised ‘end of austerity’ heralded at the Conservative Party conference and increased spending commitments to the NHS had fuelled some speculation about revenue-raising moves that the Chancellor might take.
Contrary to what some had speculated, however, the Chancellor announced that the government would not be scrapping or even pressing pause on the Conservative Party’s manifesto pledge to further increase both the tax free personal allowance and the higher rate tax threshold. On the contrary, in characteristically upbeat delivery, and boosted by the latest OBR forecasts, the Chancellor announced that the government would meet its pledge to increase the tax-free personal allowance to £12,500 and the higher-rate tax threshold to £50,000. Furthermore, it would do so in 2019–20, one year earlier than planned. In addition, despite rumours circulating around entrepreneurs’ relief and calls for the relief to be scrapped, the Chancellor chose to emphasise the importance of encouraging entrepreneurship. Accordingly, entrepreneurs’ relief is being retained but there has been significant tightening of the qualifying conditions aimed at ensuring the relief is targeted at genuine entrepreneurs who have a true material stake in a business.
Other key tax announcements included confirmation that the government will be pushing ahead with its planned reforms to off-payroll working in the private sector, although implementation of these reforms will now be delayed until April 2020 and small businesses will be exempt. Perhaps more controversially, the Chancellor also announced that the government will be taking unilateral action on taxation of the digital services economy pending developments at the international level, and will be introducing a digital services tax from April 2020.
As expected, the government also used the Budget to confirm its intention to enact various tax changes that it previously announced and published in draft on 6 July 2018 in Finance Bill 2019 (strictly, the Finance (No 3) Bill 2017–19). These include measures extending the taxation of non-residents on UK property, new profit fragmentation rules, technical amendments to the corporate interest restriction and various amendments to tax provisions in order to comply with EU directive 2016/1164 (known as the Anti-Tax Avoidance Directive, or ATAD). Previously announced changes to the late payment and late submissions penalty regimes will however now be delayed. The Finance Bill 2019 will be published on 7 November 2018.
Finally, it would be remiss not to mention the Chancellor’s warning that in the event of a ‘no deal’ Brexit, and as part of planning for ‘all eventualities’, next year’s Spring Statement would be upgraded to a full fiscal event ‘if necessary’.
- BUSINESS AND ENTERPRISE
- EMPLOYMENT TAXES AND SHARE INCENTIVES
- REAL ESTATE TAXES
- INDIRECT TAX
- TAX ADMINISTRATION AND COMPLIANCE
- TAX AVOIDANCE AND EVASION
- ENERGY AND ENVIRONMENT
- INCENTIVISED INVESTMENT
KEY BUSINESS TAX ANNOUNCEMENTS
• a new structures and buildings allowance
The following abbreviations are used in this analysis:
- Budget 2018: the main document published by HMRC
- OOTLAR: the overview of tax legislation and rates published alongside the main document
- FB 2019: Finance Bill 2019 (also known as the Finance (No 3) Bill 2017–19, or sometimes as the Finance Bill 2018–19), ie the Finance Bill which will be published on 7 November 2018 and which will be enacted as the Finance Act 2019
- FB 2020: Finance Bill 2020 (also known as Finance Bill 2019–20), ie the Finance Bill which will be published in 2019 and is anticipated to be enacted as Finance Act 2020
- TIIN: tax information and impact notes, also known as policy papers
BUSINESS AND ENTERPRISE
Digital services tax
Pending reform at the international level and following consultation over the last year, the government announced that it will introduce a new 2% tax on the revenues of certain digital businesses in order to ensure that the amount of UK tax those businesses pay is reflective of the value they derive from their UK users.
The new digital services tax (DST) will apply from April 2020 and will:
- apply to revenues generated from the provision of the following business activities: search engines, social media platforms and online marketplaces—the government considers that these business models derive significant value from the participation of their users
- apply to revenues from those activities that are linked to the participation of UK users, for example where a social media platform generates revenues from targeting adverts at UK users the tax will apply to those revenues—the Chancellor emphasised in his Budget speech that the DST is not an online sales tax
- only apply to groups that generate global revenues from in-scope business activities in excess of £500 million per annum
- exempt the first £25 million of relevant UK revenues per annum, taking small businesses outside the scope of the tax
- include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins, and
- be subject to formal review in 2025 (if it is still in place at that time) to ensure that it is still required following further international discussions
The government made it clear that the DST is intended to be a temporary, interim measure pending a global solution being reached and confirmed its commitment to the ongoing G20 and OECD discussions on potential future reforms to the international corporate tax framework.
The government will be consulting on the detailed design of the rules and expects to legislate for the new tax in FB 2020 although further information is set out in a Brief published alongside Budget 2018. For the background to the proposed DST, including information on the government position paper published at Spring Statement 2018, see News Analysis: Taxation and the digital economy—Update.
Corporate capital loss restriction
The government has published a consultation paper on a new measure to restrict companies’ use of carried-forward capital losses to 50% of their capital gains arising in an accounting period. Companies will have an allowance permitting them unrestricted use of up to £5 million of capital or income losses per year. There will be anti-forestalling measures taking effect from 29 October 2018, to prevent companies from artificially accruing capital gains before the new rules are due to come into effect. The consultation paper includes examples as to how this anti-forestalling rule would work.
The new restriction will not apply to in-year capital losses: these will continue to be available to be offset in full against capital gains made in the same year. The restriction will also not apply to capital losses within the ring-fenced oil and gas regime.
The new rules build on the corporate income loss restriction (CILR) introduced from 1 April 2017 (see Practice Note: Corporation tax loss relief for carried-forward losses). Definitions of groups and the method for allocating deductions allowance between group members will follow the model in the CILR. There will also be a targeted anti avoidance rule, in line with the targeted anti avoidance rules in the CILR. The £5 million annual allowance in the CILR will be extended so that it includes capital as well as income losses.
The consultation runs until 25 January 2019. Draft legislation will be published in summer 2019 for inclusion in FB 2020. The changes take effect from 1 April 2020.
See: Budget 2018 (para 3.28), OOTLAR (para 2.16), and Corporate capital loss restriction: consultation on delivery.
Entrepreneurs’ relief: minimum qualifying period
To ensure entrepreneurs’ relief is focussed on supporting longer-term investment, the government announced that the minimum period, throughout which certain conditions must be met to qualify for entrepreneurs’ relief (see Practice Note: CGT—entrepreneurs' relief), will be extended from one year to two years.
The change will come into effect for disposals made on or after 6 April 2019, except where a business ceased before 29 October 2018. Where the claimant's business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group), before 29 October 2018, the existing one year qualifying period will continue to apply. The legislation will form part of FB 2019.
See: Budget 2018 (para 3.25), OOTLAR (para 1.25), TIIN: Entrepreneurs’ Relief: extending the minimum qualifying period from 12 months to 2 years, and draft legislation and guidance.
Tackling misuse of entrepreneurs’ relief
To ensure a person claiming entrepreneurs’ relief has a true material stake in a business, the government has introduced two new tests to the definition of personal company which apply for entrepreneurs’ relief purposes (see Practice Note: CGT—entrepreneurs' relief).
The new tests (which must be met throughout the specified period in addition to the existing tests (holding 5% of the ordinary share capital of the company and 5% of the voting rights) in order for relief to be due) require the claimant to be:
- beneficially entitled to at least 5% of the profits available for distribution to the equity holders of the company, and
- beneficially entitled on a winding up of the company to at least 5% of the assets of the company available for distribution to equity holders
The measure will be legislated for in FB 2019 and will have immediate effect for disposals on or after 29 October 2018.
See: Budget 2018 (para 3.77), OOTLAR (para 1.24), TIIN: Capital Gains Tax: Entrepreneurs’ relief: definition of a ‘personal company’ and draft legislation and guidance.
Reforming stamp taxes on shares consideration rules
FB 2019 will include legislation to introduce, with immediate effect, a targeted market value rule for stamp duty and SDRT for instruments transferring or agreements to transfer listed securities (ie stock or marketable securities that are regularly traded on a regulated market, multilateral trading facility or recognised foreign exchange) to connected companies. For such transfers, the consideration chargeable to stamp duty or SDRT will be the higher of the consideration (if any) given for the transfer or the market value of the listed securities.
A consultation will also be published on 7 November 2018 on aligning the stamp duty and SDRT consideration rules (one of the recommendations made by the Office of Tax Simplification in 2017) and introducing a general connected party market value rule, both of which are intended to simplify the stamp tax rules applicable to shares and to prevent contrived arrangements being used to avoid stamp tax on share transactions. The aim of the targeted market value rule that takes effect on 29 October 2018 is to prevent forestalling.
See: Budget 2018 (para 3.79), OOTLAR (para 1.47) and TIIN, draft legislation and explanatory notes: Stamp duty, SDRT transfer of listed securities and connected persons.
Reform of the corporate intangible fixed assets regime
FB 2019 will include legislation reforming the corporate intangibles regime (see Practice Note: How intangible fixed assets are taxed—basic principles). The announcement follows a consultation published earlier this year which focussed on the exclusion of pre-2002 assets, the exclusion of goodwill and customer-related intangibles, the de-grouping charge and the election for fixed rate relief at 4% per year (for which, see: News Analysis: Reviewing the IFA regime—a targeted approach). The government has now announced that it will:
- introduce targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property from April 2019, and
- with effect from 7 November 2018, reform the de-grouping charge rules so a charge will not arise where de-grouping arises from a share disposal that qualifies for the substantial shareholdings exemption
Capital allowances: new structures and buildings allowance
The government is introducing a new structures and buildings allowance (SBA) for qualifying capital expenditure on new non-residential structures and buildings. The SBA applies at a rate of 2% per annum on a straight line basis, and has immediate effect, applying to expenditure incurred on projects for which all the construction contracts are entered into on or after 29 October 2018. The SBA will not apply to expenditure on land or on dwellings.
There will not be a system of balancing charges or balancing allowances on a subsequent disposal of the structure or building. Instead, a purchaser will continue to claim the annual allowance of 2% of the original cost. The amount eligible for relief will not increase where a structure or building is purchased and has appreciated in value as this does not represent the cost of construction. The SBA will extend to the cost of new renovations and conversions.
The SBA is intended to improve the UK’s competitiveness and is designed to address a gap in the current capital allowances rules, under which no relief is available for investment to construct most structures and buildings.
FB 2019 will include a power to introduce the SBA, with detailed secondary legislation to follow. More information about the measure is included in the technical note published with Budget 2018.
See: Budget 2018 (para 3.23), OOTLAR (para 1.6) and Technical note: Capital allowances for structures and buildings.
Capital allowances: temporary increase in annual investment allowance
The annual investment allowance (AIA) will increase to £1 million for two years for expenditure incurred from 1 January 2019.
The AIA provides a 100% tax deduction for qualifying expenditure on plant and machinery up to a fixed annual limit. The limit is currently £200,000, having been reduced from £500,000 from 1 January 2016. See Practice Note: Plant and machinery allowances—types and rates — Annual investment allowance.
As with previous changes to the AIA, there are detailed transitional rules governing businesses with chargeable periods that straddle 1 January 2019 (when the limit increases to £1 million) and 1 January 2021 (when the limit reverts to £200,000).
See: Budget 2018 (para 3.22), OOTLAR (para 1.11) and TIIN: Temporary increase in the Annual Investment Allowance.
Capital allowances: reduction in special rate plant and machinery allowances
The special rate of plant and machinery allowances will be reduced from 8% to 6%, with effect from 6 April 2019 for income taxpayers and 1 April 2019 for corporation tax payers. A hybrid rate will apply for chargeable periods spanning the implementation dates.
The main rate of capital allowances for plant and machinery is 18% per annum on a reducing balance basis, but there are some categories of asset that only qualify for a ‘special’ rate, currently 8% per annum, again on a reducing balance basis. These special rate assets include integral features, long-life assets, thermal insulation and solar panels (see Practice Note: Plant and machinery allowances—types and rates).
See: Budget 2018 (para 3.24), OOTLAR (para 1.9) and TIIN: Reduction of rate of special writing down allowance for capital allowances.
Capital allowances for the cost of altering land
Expenditure on altering land does not qualify for plant and machinery allowances unless the purpose of the alteration is to install plant and machinery (see Capital Allowances Act 2001, ss 22(1)(b), 23(4), list C, item 22, and Practice Note: Plant and machinery allowances—definition of plant and machinery). The legislation is being amended to clarify that land alteration expenditure only qualifies for plant and machinery allowances where the plant or machinery itself qualifies for allowances.
This change takes immediate effect, applying to claims on or after 29 October 2018.
- Protecting your taxes in insolvency: the government has announced that, from April 2020, when a business enters insolvency, certain taxes, such as VAT, income tax and employee NICs collected through PAYE and construction industry scheme deductions, that are paid in good faith by the business’s customers and employees and are temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors. This change does not affect taxes owed by the business itself, such as corporation tax. See: Budget 2018 (para 3.87) and OOTLAR (para 2.51), and
- Trusts consultation: as announced at Budget 2017, the government intends to publish a consultation on the taxation of trusts. The stated aim of the consultation and any subsequent changes to the rules relating to the taxation of trusts is to make trusts simpler, fairer and more transparent. It is not clear if the consultation will cover all taxes relating to trusts. See: Budget 2018 (para 3.15) and OOTLAR (para 2.3)
- Entrepreneurs’ relief: where shareholding ‘diluted’ below the 5% threshold: this measure extends entrepreneurs' relief so that individuals can continue to access this CGT relief where their shareholdings are diluted below the qualifying 5% level as a result of raising equity finance. The measure (enacted as a new Chapter 3A to the Taxation of Chargeable Gains Act 1992) will have effect for shares held at the time of fundraising events taking place on or after 6 April 2019. Draft legislation was previously published on 6 July 2018 and, following consultation, changes have been made to clarify and improve the computational and qualifying rules in the legislation, although the legislation has retained the controversial restriction that the external investment must be made wholly in cash. For the background to this measure, see News Analysis: Draft Finance Bill 2019—entrepreneurs’ relief and external investment and Practice Note: CGT—entrepreneurs' relief. See: OOTLAR (para 1.26) and draft legislation and guidance
- Corporation tax relief for carried-forward losses: FB 2019 will amend the rules on corporation tax relief for carried-forward losses to ensure that the original policy objective of the regime is met, ie preventing excessive claims for relief. The draft legislation published on 6 July 2018 has been amended to include changes to the group relief cap on profits (applying from 1 April 2017). Changes to the meaning of relevant profits and BLAGAB changes apply from 6 July 2018 and other changes apply from 1 April 2019. For the background to this measure, see News Analysis: Legislation day: Draft Finance Bill 2019—Corporation tax loss relief rules. See: Budget 2018 (para 3.29) and OOTLAR (para 1.16)
- Stamp duty and SDRT—financial institutions bail-in exemption: FB 2019 will contain provisions that, with effect from Royal Assent, exempt certain transfers of shares from failing financial institutions to public bodies and creditors from stamp duty and SDRT. The exemption will be limited to the temporary transfer of shares to a bridge entity, and the transfer of shares in exchange for temporary certificates issued to creditors that identify their entitlement to the shares. In addition, changes have been made since the draft legislation was published on 6 July 2018 to extend the exemption to other types of financial institutions in resolution and certain transfers covered by the resolution regime. Similar provisions will apply for SDLT. See: OOTLAR (para 1.44)
- Corporate interest restriction: FB 2019 will make technical changes to the corporate interest restriction rules to ensure that the rules operate as intended. Following consultation on the draft legislation published in July 2018, it was announced at Budget 2018 that the legislation and accompanying policy paper have been revised. For background information, see News Analysis: Legislation day: Draft Finance Bill 2019—Corporate interest restriction (CIR) rules and Practice Note: Corporate interest restriction. See: OOTLAR (para 1.12)
- Accounting changes for leasing: FB 2019 will amend existing tax rules, including the long funding lease and corporate interest restriction rules, so that they continue to work as originally intended when the new accounting standard for leases, IFRS 16, takes effect from 1 January 2019. It was announced at Budget 2018 that minor changes have been made to the draft legislation published in July 2018 following consultation, including to the rules for structured finance arrangements, writing down allowances for finance lessors, the treatment of long funding leases on adoption of IFRS 16, and to the computational rules for the spreading of transitional adjustments on adoption of the new accounting standard. For the background to this measure, see News Analysis: Legislation day: Draft Finance Bill 2019—Accounting changes for leasing. See: OOTLAR (para 1.13 and Annex C)
Offshore receipts in respect of intangible property (previously royalties withholding tax)
As announced at Autumn Budget 2017, FB 2019 will introduce legislation to tax a non-UK resident person that is also not resident in a full treaty jurisdiction (ie not resident in a jurisdiction with which the UK has a double tax treaty that contains a non-discrimination provision) on gross income from intangible property (IP) held in low-tax jurisdictions to the extent that it is referable to UK sales. The meaning of IP for this purpose is widely defined and includes goodwill but excludes financial assets, shares and interests in land. The aim is to ensure a level playing field for all businesses, large and small, operating in UK markets. The measure will apply regardless of whether there is a UK taxable presence. The proposed changes include:
- collecting the tax by directly taxing offshore entities that realise IP income in low-tax jurisdictions, rather than through applying a withholding tax—according to HMRC, collecting this tax directly (rather than through a withholding tax) should reduce compliance burdens and the likelihood of economic double taxation
- broadening the type of income in scope of the measure to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties—the measure applies to all types of gross income, whether or not it is described as royalties, provided it is referable to IP and for this purpose the amount of income liable to UK tax will normally be determined by reference to the ratio of UK sales to total sales, and
- introducing a de minimis UK sales threshold of £10 million, an exemption for income that is taxed at appropriate levels (ie at least 50% of the UK income tax charge that would otherwise have arisen under this new provision), and an exemption for income relating to intangible property that is supported by sufficient local substance
Any person who is at any time in the relevant tax year in the same control group as the intended taxpayer can be required to pay this tax if it remains unpaid for more than six months after the due date.
The draft legislation will take effect from 6 April 2019, although anti-forestalling provisions and a TAAR will apply from 29 October 2018 where businesses enter into arrangements designed to avoid the charge by transferring ownership of intangible property to another group entity resident in a full treaty jurisdiction.
HMRC intends to publish draft guidance on this new regime by April 2019.
See here for the response to the consultation which ran from 1 December 2017 to 23 February 2018 and for the draft legislation published on 29 October 2018.
See: Budget 2018 (para 3.32), OOTLAR (para 1.21), and TIIN: Income Tax: offshore receipts in respect of intangible property.
Corporation tax: change to the definition of a permanent establishment
A non-UK-resident company will be subject to corporation tax if it carries on a trade through a UK ‘permanent establishment’. The definition of permanent establishment contains an exemption at CTA 2010, s 1143 where what would otherwise be a ‘permanent establishment’ conducts certain ‘preparatory or auxiliary’ activities. From 1 January 2019, that exemption is being restricted, to give effect in UK double tax treaties to the OECD BEPS programme which states that the exemption for preparatory or auxiliary activities should not apply where activities have been artificially fragmented in order to fall within that exemption. The UK accepted this BEPS conclusion when it signed, in June 2017, the OECD Multilateral Instrument (MLI). That instrument took effect in the UK on 1 October 2018.
The legislation restricting the exemption for preparatory or auxiliary activities will apply where the non-UK resident company, either alone or together with other related entities, carries on a cohesive business operation at one or more places in the UK and either one of those entities has a ‘permanent establishment’ carrying on a complementary business operation or all the actvities together would amount to a ‘permanent establishment’ if they were in a single company.
See: OOTLAR (para 1.19) and TIIN: Corporation Tax: Change to the definition of permanent establishment.
Diverted profits tax: amendments
The government will amend the diverted profits tax (DPT) rules in FB 2019. The new legislation closes down a tax planning opportunity whereby amendments can be made to a corporation tax return after the DPT review period has ended and the DPT assessment time limits have expired. It will also make clear that diverted profits that are subject to DPT will not also be subject to corporation tax. In addition, the DPT review period, during which the taxpayer and HMRC are expected to work together to establish any DPT liability, will be extended from 12 to 15 months. Taxpayers will be permitted to amend their corporation tax return during the first 12 months of the extended review period, but only to bring diverted profits into the corporation tax charge. These amendments will generally apply from 29 October 2018 or from Royal Assent of FB 2019, but will be deemed to always have had effect where they are wholly relieving.
Anti-tax avoidance directive: controlled foreign companies
As announced in July 2018 (alongside the publication of draft legislation for FB 2019), the government will legislate with effect from 1 January 2019 to align the UK CFC rules in TIOPA 2010, Part 9A with EU directive 2016/1164 (known as the Anti-Tax Avoidance Directive, or ATAD). Legislation for this measure has now been published. For background information, see News Analysis: Legislation day: Draft Finance Bill 2019—International.
The first required change relates to the definition of control in the UK CFC rules. This is narrower than that required by ATAD. Accordingly, the UK CFC control rules will be amended so that any interests held by associated enterprises, whether or not UK-resident, are taken into account when assessing control.
The second required change relates to the UK CFC charge in respect of non-trade finance profits. To comply with ATAD, non-trade finance profits, because they are the product of ‘significant people functions’ carried out in the UK, will no longer be eligible for full or partial relief from the CFC charge under the special group finance company rules.
See: OOTLAR (para 1.17).
- Reporting rules for cross-border tax arrangements: FB 2019 will empower the Treasury to make regulations to comply with international rules on the disclosure of cross border tax arrangements, specifically EU directive 2018/822 and the OECD’s model mandatory disclosure rules. For the background to this measure, see News Analysis: Legislation day: Draft Finance Bill 2019—Implementation of international tax disclosure rules and Practice Note: EU reporting rules for cross-border tax arrangements. See: Budget 2018 (para 3.90) and OOTLAR (Table 1)
Hybrid capital instruments
The government announced at Budget 2018 that it is reforming the rules governing the tax treatment of so-called hybrid capital instruments in order to provide tax certainty for issuers and holders of such instruments and to reduce tax volatility.
The new rules will replace the Taxation of Regulatory Capital Securities Regulations 2013, SI 2013/3209 (RCS Regulations), which currently provide certainty for the tax treatment of hybrid capital instruments issued by banking companies and insurance companies pursuant to the loss-absorbency requirements of Basel III and Solvency II, respectively. The new rules are intended to apply across all sectors for accounting periods beginning on or after 1 January 2019. The move has been prompted by the Bank of England’s new approach to loss absorbency minimum requirements for own funds and eligible liabilities (known as MREL), which permits banks to issue types of hybrid capital instruments that are not covered by the existing RCS Regulations.
Hybrid capital instruments are debt instruments that have equity-like features. These often include rights for the issuer to cancel or defer interest payments, they are often long-dated or perpetual, and may provide for release or conversion into shares in certain circumstances. Such features can lead to uncertainty as to whether payments under such instruments are taxed as interest (which is typically deductible) or as distributions (which are not).
A technical note published alongside Budget 2018 explains that:
- new provisions will be introduced into the loan relationships rules in Part 5 of the Corporation Tax Act 2009 to provide coupon deductibility for ‘hybrid capital instruments’ that meet certain conditions (aimed to ensure that they are, in essence, genuine debt instruments), provided the debtor makes an irrevocable election into the rules within six months of issue
- coupon deductibility will be precluded where there is a main purpose of obtaining a tax advantage for any person (the technical note lists the things HMRC will take into consideration when applying this test)
- the Disregard Regulations (SI 2004/3256) will be amended to ensure that exchange gains or losses arising on loan assets or derivative contracts intended to hedge exchange rate risks on a hybrid capital instrument that is equity accounted are disregarded for tax purposes
- section 162 of the Corporation Tax Act 2010 will be amended to confirm that hybrid capital instruments will constitute ‘normal commercial loans’ for the purposes of group relief and the definition of qualifying corporate bonds
- the distributions rules in Part 23 of the Corporation Tax Act 2010 will apply to hybrid capital instruments with certain modifications
- the normal loan relationships rules dealing with write downs (releases) of debts will apply to hybrid capital instruments—the note provides an explanation of how those rules are expected to apply in practice
- the quoted Eurobond exemption from the obligation to withhold tax will be available for payments under hybrid capital instruments
- transfers of hybrid capital instrument will be exempt from all stamp duties, and
- new provisions will align the tax treatment of linked loan relationships to eliminate tax mismatches where a company issues debt externally and then lends the funds raised to fellow group companies
Transitional rules will be provided for loan relationships falling within the RCS Regulations immediately before 1 January 2019. Accounting periods beginning before, and ending after, 1 January 2019 are treated as two separate accounting periods for the purposes of the new rules with the latter accounting period beginning on that date.
- Changes to hybrid and other mismatches to implement ATAD: FB 2019 will make changes to the hybrid mismatch rules (see Practice Note: Hybrid and other mismatches), to comply with ATAD). For background information, see News Analysis: Legislation day: Draft Finance Bill 2019—International. See: OOTLAR (para 1.18) and TIIN: Corporation tax: Hybrid and other mismatches regime, two minor changes
EMPLOYMENT TAXES AND SHARE INCENTIVES
Off-payroll working in the private sector
The government has announced that from 6 April 2020 it will extend to certain medium-sized and large private sector businesses the changes which it made from April 2017 to the off-payroll working rules (IR35) to those working for public sector bodies. The government has been concerned for some time about the overall level of non-compliance with the IR35 rules (first introduced in 2000). The 2017 changes were a first step in addressing this, by shifting to the public sector body the responsibility for assessing whether the worker which it has engaged would be an employee if that worker were working directly for the public sector end-user, instead of being contracted to work for a ‘personal service company’ intermediary. Shifting the IR35 exposure so that it falls on the end-user of the worker’s services creates a significant extra compliance burden for those using services provided by workers who claim to be ‘self employed’ and who act via personal service companies.
Following representations, the government will carry out a further consultation in 2019 in order to refine the extension of IR35, from 6 April 2020, to private sector businesses engaging workers. Draft legislation will be published in summer 2019. To reduce the compliance burden of this change, the April 2020 change will not apply to ‘small businesses’, as defined in CA 2006. Therefore, where a small business engages a worker, responsibility for deciding whether the IR35 legislation applies and, if it does, for paying the relevant income tax and NICs in respect of that worker’s activities, will remain with the ‘personal service company’ intermediary under the IR35 rules as they have existed since 2000 and will not shift to the engaging business under the change taking effect in 6 April 2020.
The government intends to find ways to deal with situations where there is disagreement between the engaging business and the worker/intermediary about whether IR35 applies. As part of this process, it will look further at its online Check Employment Status for Tax (CEST) evaluation tool which was intended to help taxpayers decide whether a worker was effectively an employee for IR35 purposes if one ignored the intermediary personal service company. However CEST’s accuracy has attracted considerable criticism.
The government is not proposing at this stage to make any more fundamental changes to the different income tax and NICs regimes which apply to employees versus the self-employed.
See: Budget 2018 (para 3.8), OOTLAR (para 2.8) and TIIN: Off-payroll working in the private sector (IR35): Budget 2018 brief.
Taxation of self-funded work-related training
Following a consultation, the government does not propose to change the tax rules regarding self-funded, work-related training because making such reliefs more generous is unlikely to increase the take-up of training opportunities.
Employment allowance reform
The government has decided to restrict the employment allowance (EA) to those employers whose employer NICs bill is less than £100,000. The EA provides employers with reductions of up to £3000 from their NICs bill. It is intended to incentivise employers to hire and the government considers that it has only a marginal impact on the hiring decisions of larger businesses. The government wants to target the EA at those businesses on whose hiring behaviour it is likely to have the greatest impact. The change will take effect from April 2020. Where employers are connected, their employer NICs liabilities will be aggregated for the purpose of applying the £100,000 limit.
Short term business visitors
Following a consultation earlier in 2018, the government will relax some of its policies when short-term business visitors to the UK become subject to the PAYE rules for withholding income tax from employees. Such visitors are potentially taxable in the UK because they are performing services in the UK. Under the employment article of most UK double tax treaties, the UK will have the primary UK taxing right in respect of those short-term business visitors who are employees of a non-UK permanent establishment of a UK-resident company. HMRC does not propose to change this position e.g. by exempting such visitors from UK tax. However, it is proposing to allow employers to operate PAYE on an annual basis (rather than at more frequent intervals) if the employee spends no more than 60 (previously 30) working days in the UK in a given tax year. In addition, the employer will have until 31 May after the end of the relevant tax year to satisfy its PAYE reporting and payment obligations. Where such short-term visitors are employees of a non-UK-resident subsidiary of the UK-resident company, the visitor is likely to be exempt from UK tax under a UK double tax treaty. In such cases, the employer can agree with HMRC not to operate PAYE in recognition of the treaty-based tax exemption. The government’s proposals do not change that. The changes will have effect from 6 April 2020. For background on this measure, see News Analysis: HMRC consultation on tax treatment of short-term business visitors.
Legislating the existing tax treatment of expenses for unpaid office-holders
The government will legislate in FB 2020 so that expenses paid or reimbursed to unpaid office-holders are exempt from income tax when incurred because of their voluntary duties. This places the existing concessionary treatment onto a statutory basis, providing certainty for those organisations engaging unpaid office-holders. Corresponding legislation will also be introduced to mirror the income tax exemption for NICs. This change will have effect from Royal Assent of FB 2020.
See: OOTLAR (para 2.5).
Stamp duty relief for share incentive plans
FB 2019 will make a minor correction to section 95 FA 2001 concerning stamp duty and SDRT relief for share incentive plans. The amendment will remove any reference to ‘approved share incentive plans’ or ‘approved SIPs’ and replace it with ‘Schedule 2 SIPs’. This will ensure consistency across all legislation for share incentive plans and confirms that the existing stamp duties relief continues to apply to them. The amendment will have retrospective effect from 6 April 2014, when similar changes were introduced to ITEPA 2003.
- National Insurance Contributions Bill: The government has confirmed that two measures contained in the National Insurance Contributions Bill (published in December 2016) will take effect from April 2020. These are the reforms to the NICs treatment of termination payments and income from sporting testimonials. See: Budget 2018 (para 3.12) and OOTLAR (para 2.14)
REAL ESTATE TAXES
SDLT higher rates for additional dwellings
The government has increased the time limit for reclaiming the higher 3% rates of SDLT where a taxpayer has bought a new main residence and subsequently sells their old main residence within three years of buying the new one. Tax payers must make a claim within:
- 12 months of the sale of the old main residence, or
- 12 months of the filing date of the SDLT return for the new main residence
(whichever date comes later).
The government has also amended the definition of a ‘major interest’ for the purpose of the higher 3% rates to make it clear that a major interest includes an undivided share in land.
These changes have effect from 29 October 2018.
See: OOTLAR (para 1.48) and TIIN: Changes to the higher rates of Stamp Duty Land Tax for additional dwellings.
SDLT: first-time buyers relief—extension of relief to all purchasers of qualifying shared ownership property
The government has announced that it will extend first-time buyers relief to include qualifying shared ownership property purchases.
The first £300,000 of an initial share purchased will not be liable to SDLT. The remainder of the initial share will be chargeable at 5% on amounts over £300,000. The relief does not apply to property purchases valued over £500,000. Any further shares purchased will not be granted relief.
This change came into effect immediately, applying to relevant transactions with an effective date on or after 29 October 2018. It is also backdated to 22 November 2017, so a refund of tax will be due to those who have paid SDLT after 22 November 2017 and now qualify for the relief. They will have 12 months from 29 October 2018 to amend their return to claim the relief.
The ATED (annual tax on enveloped dwellings) charge will rise by 2.4% from 1 April 2019 in line with the September 2018 Consumer Prices Index. The charge for properties with a value of £500,001 to £1,000,000 will be £3,650 rising to £232,350 for properties with a value of £20,000,001 or more. A Treasury Order will be published shortly after Budget confirming the charges.
See: OOTLAR (para 2.44).
- SDLT for non-residents: the government will consult on an SDLT tax surcharge of 1% for non-residents buying residential property in January 2019. See: Budget 2018 (para 3.40) and OOTLAR (para 2.45)
- Taxing gains made by non-residents on UK immovable property: FB 2019 will extend the scope of the UK’s taxation of gains, from 6 April 2019, to catch disposals by non-UK residents of non-residential UK property, and extend the existing charge on gains on disposals of residential property to diversely held companies, widely held funds and life assurance companies. The new legislation will also tax non-UK residents’ gains on interests in UK property rich entities. Following draft legislation that was published on 6 July 2018, the full legislation will be introduced at FB 2019, including how the rules will work for collective investment schemes. A new schedule 5AAA will treat collective investment schemes (within the meaning of section 235 of the Financial Services and Markets Act 2000) and alternative investment funds (within regulation 3 of the Alternative Investment Fund Managers Regulation 2013 (SI 2013/1773), other than partnerships, as companies for the purpose of TCGA 1992 and chargeable to corporation tax. For the background to this measure, see News Analysis: Draft Finance Bill 2019—any surprises for non-resident property owners? and Practice Note: Non-residents and tax on chargeable gains from 6 April 2019—gains and UK immovable property. See: OOTLAR (para 1.27) and TIIN: Changes to taxing gains made by non-residents on UK immovable property
- Capital gains tax payment window: FB 2019 will introduce a requirement for UK residents to make a payment on account of CGT following a residential property disposal on or after 6 April 2020. Non-UK residents will also be subject to new reporting and payment on account rules from 6 April 2019. For background to this measure see: Non-residents and tax on chargeable gains from 6 April 2019—gains and UK immovable property — Compliance—filing and payment window. See: OOTLAR (para 1.28) and TIIN: Capital Gains Tax payment window for residential property gains
- Corporation tax (UK property income of non-UK residents): From 6 April 2020 non-UK resident companies will pay corporation tax in respect of UK property income. Following draft legislation that was published on 6 July 2018, the government has published revised draft legislation, an explanatory note and an updated TIIN. The revised draft legislation provides further clarity on how the derivative contract and loan relationship rules will apply and also extends the definition of ‘UK related’ company to ensure that non-UK resident companies within the charge to corporation tax can be regarded as a UK member of a group of companies for group relief purposes. The change to the definition of ‘UK related’ company applies from 5 July 2016 to ensure that those companies that were brought within the charge to corporation tax as a result of the transactions in UK land rules can also make a claim for group relief. A TAAR applies to arrangements entered into on or after 29 October 2018. For the background to this measure see News Analysis: Changes planned to taxing non-residents’ gains on UK immovable property. See: OOTLAR (para 1.14) and TIIN: Corporation tax: UK property income of non-UK resident companies, draft legislation and explanatory notes
- SDLT filing window: FB 2019 will reduce the filing and payment window for SDLT from 30 days to 14 days for transactions with an effective date on or after 1 March 2019. For background information, see News Analysis: Draft Finance Bill 2019—SDLT filing and payment time limit. See: OOTLAR (Table 1: Unchanged Measures)
- Financial bail in exemption: FB 2019 will contain provisions that exempt certain transfers of property made after Royal Assent of FB 2019 from failing financial institutions to public bodies and creditors from SDLT. The exemption will be limited to the temporary transfer of land to a bridge entity under the UK special resolution regime for managing failing financial institutions. Changes have been made since the draft legislation was published on 6 July 2018 to extend the exemption to other types of financial institutions in resolution and certain transfers covered by the resolution regime. Similar provisions will apply for stamp duty and SDRT. See: OOTLAR (1.44)
VAT registration threshold
Following the call for evidence on the VAT registration threshold that was published on 13 March 2018, the government announced that the VAT registration and de-registration thresholds will remain unchanged at £85,000 and £83,000 for two years from 1 April 2020.
The government also published a summary of responses to the call for evidence. As the responses did not provide a clear option for reform, the government has decided to freeze the thresholds in order to provide businesses with certainty, and will review the possibility of introducing a smoothing mechanism once Brexit terms are clear.
See: Budget 2018 (para 3.70), OOTLAR (para 2.25), TIIN: VAT: maintain thresholds for 2 years from 1 April 2020.
It was announced at Budget 2018 that HMRC will revise its guidance for VAT groups to clarify which overseas services can be classified as bought-in services to ensure that such services are subject to UK VAT. The draft guidance will be available to businesses in November 2018 and the changes will take effect from 1 April 2019.
There is little detail at this stage but this measure appears to refer to sections 43(2A)–43(2E) of the Value Added Tax Act 1994. This contains an anti avoidance rule under which a supply within a VAT group is subject to a reverse charge if the supplier is outside the UK and has itself received services which it has used to make an onward supply of the same services to a UK member of the group. The guidance in question is presumably VAT Notice 700/2 on group and divisional registration. Section 7 of this notice is about the intra-group reverse charges on supplies of services, and paragraph 7.2.1 defines a bought-in service for these purposes.
The guidance will also be amended to ‘provide clarity to businesses on HMRC’s protection of revenue powers and treatment of UK fixed establishments’.
The government also confirmed that the draft legislation published on 6 July 2018 amending the rules on eligibility for membership of a VAT group will be introduced in FB 2019 unchanged.
VAT reverse charge
The government has confirmed that FB 2019 will introduce a general VAT domestic reverse charge for supplies of construction services with effect from 1 October 2019. This follows a consultation on draft legislation earlier in 2018 (see News Analysis: Fraud on provision of labour in construction sector—consultation on VAT and other policy options). As a result of the consultation, the government has amended the draft legislation, aligning it to payments reported through the construction industry scheme.
FB 2019 will also contain a regulation-making power relating to the anti avoidance rules in section 55A(3) of the Value Added Tax Act 1994. These rules impose a reverse charge on supplies of certain goods and services at risk of missing trader fraud. As part of the consultation on the reverse charge for construction services, the government identified that this rule can have unintended consequences for small businesses trading below the VAT threshold, who may become obliged to register for VAT. The new power will enable section 55A(3) to be disapplied by secondary legislation in relation to any specified reverse charge.
This measure takes effect from Royal Assent to FB 2019 but will have no practical effect unless secondary legislation is made.
Alternative method of VAT collection: split payment
The government will publish a response document to its consultation on a split payment mechanism on 7 November 2018. It has announced an industry working group to explore next steps as it believes that a split payment model could improve the way VAT is collected and reduce fraud. For background to this measure see: Spring Statement 2018—Tax analysis — Alternative method of VAT collection—split payment.
VAT: input tax—specified supplies
The government has announced that a restriction on the application of the Value Added Tax (Input Tax)(Specified Supplies) Order 1999 (the Order) will apply from 29 March 2019. This follows a consultation on draft legislation that ran from July 2018 to 28 September 2019. The Order allows companies that export certain financial services from the EU to reclaim VAT incurred on providing those services. The Order has been exploited by companies that form arrangements with organisations outside the EU who then re-supply those services to UK customers (offshore looping). Following the consultation, the restriction will only apply to insurance intermediary supplies and VAT recovery will be restricted when the principal supply is made to consumers located in the UK only (rather than in the UK and EU). A statutory instrument will be laid before parliament in December 2018.
VAT: unfulfilled supplies
The government has announced that it will amend the rules from 1 March 2019 on the VAT treatment of prepayments. The change will bring all prepayments into the scope of VAT where customers have failed to collect what they have paid for and have not received a refund. The government will publish a Revenue and Customs Brief detailing the changes before the end of 2018.
VAT: adjustments to regulation 38
The government will introduce new rules for adjustments to VAT following retrospective reductions in the price of goods or services. Secondary legislation will ensure that credit notes are issued to customers and VAT returns are adjusted by businesses. These changes will come into force from September 2019 and draft legislation is expected in 2019.
- VAT and vouchers: FB 2019 will transpose the EU vouchers directive 2016/1065 into UK law for vouchers issued on or after 1 January 2019. The rules will set out when VAT is due and aim to prevent double taxation or non-taxation of goods and services which are provided in exchange for vouchers. For background information, see News Analysis: A new regime for the VAT treatment of vouchers. See: Budget 2018 (para 3.71), OOTLAR (Table 1: Unchanged Measures), and TIIN: treatment of vouchers from 1 January 2019
Soft drinks industry levy (SDIL)
Legislation will be included in FB 2019 with effect from 1 April 2019:
- allowing penalties to be imposed on businesses who fail to submit a quarterly return or do so out of time. See: OOTLAR (para 1.34) and TIIN: Penalty for late submission or failure to submit a return Soft Drinks Industry Levy, and
- making SDIL a common duty with the Isle of Man, See: Budget 2018 (para 3.69), OOTLAR (para 1.33) and TIIN: Movement of soft drinks between the Isle of Man and UK under Soft Drinks Industry Levy
The following gambling tax measures were announced:
- Gambling taxes: remote gaming duty increase: the rate of remote gaming duty (see Practice Note: Taxation of gambling in the UK) will increase from 15% to 21%. The new duty rate will apply for accounting periods that begin on or after 1 October 2019 and will be chargeable on profits from remote gaming from that date onwards. Where this date falls part-way through an accounting period, the increased rate will be charged only on the profits that arise between 1 October and the end of that accounting period. Legislation will be introduced in FB 2019. See: Budget 2018 (para 3.68), OOTLAR (para 1.38 ) and TIIN: Gambling taxes - Remote Gaming Duty increase
- Gaming duty accounting periods and bands: as announced in HMRC’s consultation response in July 2018, the government will legislate in FB 2019 to remove the requirement for casinos to pay gaming duty on account and to allow the carry forward of losses between accounting periods. The return period for gaming duty will remain 6 months. The bands to determine payment of gaming duty will be frozen from April 2019 while the changes to gaming duty accounting periods are implemented. The changes made by this measure will have effect on 1 October 2019. See: Budget 2018 (para 3.67) and OOTLAR (Annex C)
TAX ADMINISTRATION AND COMPLIANCE
Voluntary tax returns
FB 2019 will include retrospective legislation putting tax returns that are submitted voluntarily on the same footing as those that are submitted in response to a formal notice to file. This places HMRC’s existing practice, of treating voluntary returns as legally equivalent to those sent in response to a formal notice, on a statutory basis.
The measure is described as providing reassurance to taxpayers that returns submitted voluntarily will be treated as valid returns, although there is also a reference to recent legal challenges. These challenges may include cases such as Patel  UKFTT 185 (TC), in which the taxpayer argued successfully that HMRC cannot open an enquiry into a return unless it has previously served a valid notice requiring that return to be made (see Practice Note: HMRC compliance checks, enquiries and discovery — Enquiries).
The measure will have effect from Royal Assent to FB 2019 and will apply retrospectively, potentially to the introduction of self assessment in 1996.
See: OOTLAR (para 1.53) and TIIN: Income tax, capital gains tax and corporation tax voluntary tax returns.
Extension of offshore time limits for assessment of tax
As announced at Autumn Budget 2017, the government will legislate in FB 2019 to increase the assessment time limit for offshore tax non-compliance to 12 years for income tax, CGT and IHT. Where there is deliberate behaviour the time limit remains at 20 years. A public consultation opened on 19 February 2018 and closed on 14 May 2018. The response document, draft legislation and TIIN: Extension of offshore time limits for assessment of tax were published on 6 July 2018. Following consultation in summer 2018, the legislation will now clarify that the extended time limits will apply unless international agreements mean HMRC already has the information needed to assess the tax due.
See: OOTLAR (para 1.55).
- Amendments harmonisation: The government will publish a call for evidence on how tax returns are amended. The government is keen to modernise and simplify the process. See: OOTLAR (para 2.52)
HMRC interest rates: FB 2019 will include the draft clause that was published on 19 July 2018 (ie shortly after other draft legislation was published on 6 July 2018) containing a number of detailed amendments relating to interest charged and paid by HMRC. This includes a retrospective provision regularising the Parliamentary procedure under which interest was imposed under previous legislation. It also includes provisions setting rates of interest for the diverted profits tax, and the rules on the promoters of tax avoidance schemes (POTAS). See: OOTLAR (paras 1.52) and TIIN: Changes to interest provisions for late payment, repayment and penalties
- Security deposits: FB 2019 will extend the scope of the existing security deposits regime to include corporation tax and construction industry scheme deductions. There have been minor amendments to the draft legislation published on 6 July 2018 and detailed provisions will be published in regulations for comment. For background information, see News Analysis: Legislation day: Draft Finance Bill 2019—Extension of security deposit legislation. See: OOTLAR (para 1.50)
- Penalties reform: FB 2019 was expected to introduce a points based model for late submission penalties, to change the approach to late payment interest for VAT, and to replace the current late payment penalties for corporation tax, income tax and VAT with a hybrid regime of penalties and penalty interest (see News Analysis: Legislation day: Draft Finance Bill 2019—Tax administration). However, the government has announced that the reform of the penalties regime will be delayed and implemented in a future Finance Bill. See: OOTLAR (para 2.54)
TAX AVOIDANCE AND EVASION
Preventing abuse of R&D tax relief for SMEs
In response to fraudulent claims for R&D SME relief, the government has announced that it will introduce a limit on the payable tax credit that a qualifying loss-making company can claim. The limit, to be legislated for in FB 2020, will restrict the amount of the credit to three times a company’s total PAYE and NICs liability for the year. The limit will apply in respect of accounting periods beginning on or after 1 April 2020 and any losses that cannot be surrendered for a payable credit will be available to carry forward against future profits. The government will consult on this limit.
- The role of online platforms in ensuring tax compliance by their users: the government announced that it will be publishing a response to its call for evidence on the role of online platforms in ensuring tax compliance by their users (launched at Spring Statement 2018). The response will set out the government’s intention to improve guidance for people and businesses earning money through online platforms and to explore how greater use of data can further support sustainable compliance with the tax rules. For information on the call for evidence, see News Analysis: Spring Statement 2018—Tax analysis — The role of online platforms in ensuring tax compliance by their users. See: OOTLAR (paras 2.46)
- Tackling the hidden economy: public sector licensing and conditionality: following the results of its consultation on making compliance with certain tax obligations a condition of holding certain public sector licences (launched in December 2017), the government announced that it is considering introducing legislation at FB 2020 that would require applicants for some public sector licences to provide proof that they are correctly registered for tax. See Budget 2018 (para 3.89) and OOTLAR (para 2.48)
- Offshore tax compliance strategy: the government announced that it will be publishing an updated offshore tax compliance strategy, which will build on the progress the UK has made in tackling offshore tax evasion and non-compliance since the government’s previous strategy was published in 2014. See Budget 2018 (para 3.91) and OOTLAR (para 2.50)
- Amendments to the general anti-abuse rule (GAAR): FB 2020 will introduce legislation, to take effect from Royal Assent, that will make minor procedural and technical changes to the GAAR. See OOTLAR (para 2.53)
- Tax abuse and insolvency: the government is tackling avoidance and evasion through abuse of the insolvency regime by introducing legislation in FB 2020, to take effect from Royal Assent, that will allow HMRC to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency. See News Analysis: Assessing the tax abuse and insolvency consultation proposals. See: Budget 2018 (para 3.88) and OOTLAR (para 2.49)
- Profit fragmentation: FB 2019 will include rules to tackle tax avoidance involving fragmentation of business profits. The measures target arrangements involving some or all of the profits of a UK business being moved to an overseas entity where little or no tax is paid. For background information, see News Analysis: Draft Finance Bill 2019—avoidance involving profit fragmentation arrangements. See: Budget 2018 (para 3.78) and OOTLAR (para 1.49)
ENERGY AND ENVIRONMENT
The government has announced that it will introduce a tax on the production and import of plastic packaging in a future Finance Bill with the tax taking effect from April 2022. The tax will apply to plastic packaging which does not contain at least 30% recycled plastic and the government intends to launch a consultation on the proposed new tax and the reform of the Packaging Producer Responsibility System in the coming months.
The government also announced its intention to take action on the problem of single-use plastics waste following the government's response to a call for evidence published on 18 August 2018 (see: Tax weekly highlights—23 August 2018), with further detail to be published in the Resources and Waste Strategy later this year.
Carbon emissions tax
The government has announced that it will legislate in FB 2019 to introduce a new carbon emissions tax in order to meet its carbon pricing commitments. The new tax will only take effect in the event of a ‘no-deal’ Brexit scenario, applying from 1 April 2019 to all stationary installations currently participating in the EU Emissions Trading System.
For 2019, a rate of £16 would apply to each tonne of carbon dioxide (or other greenhouse gas on a carbon equivalent basis) emitted over and above an installation’s emissions allowance.
The government further announced that a consultation would take place on the detailed provisions in 2019, with the intention of laying legislation before Parliament in early 2020.
Abolition of enhanced capital allowances for energy and water efficient plant and machinery
Enhanced capital allowances for expenditure on energy and water efficient plant and machinery, and the associated first year tax credit, are being abolished with effect from 6 April 2020 for income tax payers and 1 April 2020 for corporation tax payers.
According to the government these allowances have only benefitted a small number of businesses that have fully used their annual investment allowance. For information on the current rules, see Practice Note: Enhanced capital allowances.
The abolition does not extend to enhanced allowances for certain other types of environmentally beneficial expenditure, such as on low carbon cars, zero carbon goods vehicles and gas refuelling stations. The allowances for electric vehicle charging points is being expressly extended for another four years, until 2023.
See: Budget 2018 (paras 3.53–3.54), OOTLAR (paras 1.7–1.8), TIIN: Ending enhanced capital allowances for energy and water efficient plant and machinery and TIIN: First-year allowance for electric charge-points.
Other environmental taxes
The following environmental measures were also announced:
- Aggregates levy rates: the government will freeze the aggregates levy rate for 2019–2020, but intends to return the levy to index-linking in future. See: Budget 2018 (para 3.60) and OOTLAR (para 2.31)
- Landfill tax rates: the government will increase the standard and lower rates of landfill tax for tax years 2019–20 and 2020–21 in line with the Retail Prices Index, rounded to the nearest 5 pence. The changes will be implemented by FB 2019 and FB 2020, taking effect from 1 April 2019 and 1 April 2020, respectively. See: OOTLAR (paras 1.32 and 2.32) and TIIN: Increase of the Landfill Tax rates
- Climate change levy main rates: the government will legislate in FB 2020 to continue to re-balance the electricity and gas main rates of the climate change levy, by lowering the electricity rate in 2020-21 and 2021-22, and increasing the gas rate in these years so that it reaches 60% of the electricity main rate by 2021-22. See: Budget 2018 (para 3.52) and OOTLAR (para 2.34)
- Oil and gas: FB 2019 will introduce a transferable tax history mechanism for oil and gas companies operating on the UK continental shelf, and amend the petroleum revenue tax rules on retaining decommissioning expenditure to facilitate the sale of oil and gas fields. Both changes take effect from 1 November 2018. For the background to this measure, see News Analysis: Legislation day: Draft Finance Bill 2019—Oil and gas: transferable tax history and retention of decommissioning expenditure. See: Budget 2018 (para 4.105) and OOTLAR (paras 1.15)
Enterprise investment scheme (EIS) knowledge-intensive fund structure
Following consultation in spring 2018, FB 2020 will contain revised legislation (to be pre-published in summer 2019) regarding approved investment funds for the purposes of the EIS scheme. These new rules will take effect from 6 April 2020. They will require approved funds to focus on ‘knowledge-intensive investments’ for EIS purposes. Approved funds will be given a longer period to invest fund capital in permitted investments, while investors in such funds will be able to set their income tax relief against liabilities arising in the year before the fund closes.
See: OOTLAR (para 2.2).
- Social investment tax relief review: In 2019, the government will call for more evidence on why there has been limited take-up of the Social Investment Tax Relief scheme. See: OOTLAR (para 2.1)
Consequential minor amendments to tax legislation to reflect EU exit
The government has announced that it will legislate in FB 2019 to introduce a power permitting the government to make small, essential changes to UK tax law to keep it working as it does now if the UK leaves the EU without a deal. In particular, the power will allow amendment of FA 2006, s 173 and FA 1997, Sch 5, para 2A. It is also intended to ensure that HMRC can continue to co-operate with other tax administrations to the widest possible extent, whilst ensuring that UK information is only used for specified legitimate purposes and remains confidential.
The measure provides for three types of change:
- minor amendments to tax legislation for the purpose of maintaining the effect of any tax legislation, eg replacing references to the ‘EU’ with references to the ‘EU and UK’ and changing values in euros into values in sterling
- amending an existing power which permits the government to bring international tax agreements into effect in EU law. This measure will ensure that public authorities are able to share information with HMRC for the purpose of enabling compliance with international tax agreements and for HMRC to disclose that information to other countries for that purpose, and
- the introduction of a measure which removes reference to EU legislation when HMRC is considering whether, and the extent to which, a taxpayer is unjustly enriched by repayment of insurance premium tax, landfill tax or excise duty
This measure will have effect from Royal Assent of FB 2019.
See: Budget 2018 (para 3.75), OOTLAR (para 1.51) and TIIN: Amendments to tax legislation to reflect EU exit.
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