News & Insight
Budget 2020: new boy Rishi spends big – what were the tax measures though?
The 2020 Spring Budget – dubbed the “Coronavirus Budget” – provides for unprecedented spending commitments. Nobody thought that a decade of austerity would end quite like this.
The Chancellor has committed £30 billion just to relieve the impact of Covid-19 on the UK economy (including by extending statutory sick pay and business rates reliefs).
Further, investments in excess of £600 billion are set to be spent on infrastructure projects over the next five years.
The Chancellor’s spending plans clearly outweigh the tax measures of this Budget. Nevertheless, many of the tax measures announced are likely to be relevant to businesses and investors in the tech and media space.
Part 1: Personal taxes, business taxes and SDLT
This is the one that UK corporate finance has obsessed over since mention of a review went into the Conservative party’s November 2019 manifesto.
Since 2010, everyone has had access to an annual £10m lifetime allowance to effectively reduce what would otherwise be a 20% capital gains tax rate on the sale of certain shares or assets to 10%. This is called entrepreneurs’ relief.
Many thought that the Chancellor would abolish entrepreneurs’ relief entirely in this Budget, influenced by a survey in which many entrepreneurs said that the relief was not something that influenced them when they had started their venture.
After flirting with abolishment, the Chancellor has kept the relief but has reduced it considerably.
The lifetime allowance goes down from that £10m figure to £1m for qualifying disposals made on or after 11 March 2020 and even to certain disposals made before then.
The changes therefore reduce the benefit of entrepreneurs’ relief to a maximum of £100,000 per person.
The legislation will contain rules that counter arrangements that seek to ‘lock-in’ to the pre-budget day lifetime limit.
CGT – annual exempt amount
The annual exempt amount for individuals (being the amount of capital gains an individual can make per annum before being subject to capital gains tax) will be increased from £12,000 to £12,300, from 6 April 2020.
Changes to research and development (R&D) reliefs
The R&D expenditure credit (also referred to as the ‘above the line’ credit) for large companies (and some SMEs) will be increased from 12% to 13%, from 1 April 2020.
The government will also carry out a consultation on whether expenditure on data and cloud computing should qualify for R&D tax credits.
Non-UK resident Stamp Duty Land Tax surcharge
The government will introduce legislation imposing a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland.
Where contracts are exchanged before 11 March 2020, but complete or are substantially performed after 1 April 2021, transitional rules may apply subject to conditions.
Part 2: venture capital reliefs and funds
EIS, SEIS and VCT reliefs
The Budget did not include any specific reference to EIS, SEIS and VCT reliefs, and so the status quo continues.
For those of us seasoned budget-watchers used to anxiously poring over changes to and further restrictions on the qualifying conditions for those highly complex reliefs, no news is probably good news (and the possibility of relaxing any of the current restrictions was perhaps wishful thinking).
While we remain in the post-Brexit transition period (set to expire at the end of 2020), we are bound to follow EU rules on state aid. Post-transition period might well be the time when some of those fiddlesome and famously unforgiving restrictions are looked at, and the government may then be in a better position to look at a loosening or a re-jigging aimed at improving navigation and compliance for fast-growth companies. We can but hope.
EIS knowledge-intensive approved funds
As previously announced (and confirmed in the 2020 Budget), the Finance Bill 2020 will contain amendments introducing EIS knowledge-intensive approved funds (which will become the only type of approved EIS fund). These are intended to focus investment on knowledge-intensive companies, and to provide additional flexibility for fund managers to make subscriptions in shares and for investors in the timing of tax relief claims.
Review of UK funds regime
The government will undertake a review of the UK’s funds regime during 2020, beginning with a consultation on whether changes to the tax treatment of companies used by funds to hold assets could make the UK a more attractive location for these companies.
The review will cover direct and indirect taxes as well as relevant areas of regulation, with a view to considering the case for policy changes. It will also consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime.
This review is clearly aimed at positioning the UK in a post-Brexit world, so again watch this space.
Part 3: corporation taxes
Corporation tax rate
It has been confirmed that the corporation tax main rate for the financial years beginning 1 April 2020 and 1 April 2021 will remain at 19%. The government had previously announced that the scheduled reduction of corporation tax to 17% would not go ahead for the time being.
Non-UK companies with UK property income
This is not a new measure – the Finance Act 2019 enacted rules under which, from 6 April 2020, non-UK resident companies that carry on a UK property business or have other UK property income, will be charged to corporation tax on its property profits or property income, rather than being charged to income tax as at present. The Finance Bill 2020 will include certain technical changes to the new rules, aimed at providing for a smooth transition.
Corporate capital loss restriction
As announced at the 2018 Budget, the Government will legislate in the Finance Bill 2020 to restrict companies’ use of carried-forward capital losses to 50% of chargeable gains, for accounting periods ending on or after 1 April 2020.
A similar corporate income loss restriction for carried-forward income losses was introduced in 2017. This included an allowance of £5 million of profits per group, which could be offset with carried-forward losses before the 50% restriction is applied.
Going forward, this allowance will be shared between carried-forward income losses and capital losses. Anti-forestalling measures supporting this change have effect on and after 29 October 2018.
Digital services tax
As previously announced, the Finance Bill 2020 will introduce the digital services tax (DST), with effect from 1 April 2020.
The DST has already been the subject of much discussion (and US opposition, since there is a perception that its primary target are US tech companies such as Amazon, Google and Facebook).
In broad summary, the DST is a turnover tax, to be charged at the rate of 2% on businesses that provide a social media service, a search engine or an online marketplace (including, in each case, associated online advertising services) to UK users. If either the total (worldwide) amount of digital services revenues arising to a group for an accounting period does not exceed £500 million or the amount of digital services revenues that are attributable to UK users for an accounting period does not exceed £25 million (in each pro-rated if the accounting period is less than 12 months), there is no charge to DST for that period. Certain exemptions will apply, including for financial services providers.
Part 4: employment taxes and pensions tax relief
Changes to the off-payroll working rules (the (in)famous IR35)
The proposed changes to the off-payroll working rules will be implemented as planned (in the Finance Bill 2020), with effect from 6 April 2020.
Broadly, the off-payroll working rules apply to ensure that individuals providing services through a personal service company (PSC) to a person (the end user), in circumstances where they would be considered employees but for the use of the PSC, pay broadly the same amount of income tax and National Insurance contributions as they would if they were engaged as employees.
In the private sector, responsibility for applying the off-payroll working rules currently rests with the PSC. The changes to come will shift such responsibility from the PSC to the end user (or, if different, the person making payments to the PSC).
In response to industry concerns, the government recently carried out a review and announced some measures to soften the impact of the new rules’ implementation. Those include a light touch on penalties in the first year.
HMRC have also confirmed their previous commitment that information obtained as a result of taxpayers complying with the new rules will not be used to open new investigations into PSCs for previous tax years, unless there is a reason to suspect fraud or criminal behaviour.
National insurance contributions threshold
As previously announced, the National Insurance contributions (NICs) Primary Threshold and Lower Profits Limit, for employees and the self-employed respectively, will be increased to £9,500 from April 2020. This increase is expected to benefit around 31 million people, with a typical employee saving around £104 and a typical self-employed person around £78 in 2020-21. Around 1.1 million people will be taken out of paying Class 1 and Class 4 NICs entirely.
The employment allowance (available to certain businesses and charities to set against their Class 1 secondary NICs) will be increased from currently £3,000 to £4,000, from April 2020. It should be noted that from 6 April 2020 the employment allowance will be classed as a ‘de minimis state aid’, thus reducing the amount of SEIS investment that a company will be able to raise.
Hopefully, this point will be revisited once the post-Brexit transition period has expired. SEIS qualification really does not need to be more complicated.
Review of enterprise management incentive (EMI) scheme
The government has announced that it will review the EMI scheme “to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme”.
Since companies seeking to raise SEIS, EIS or VCT investments often also operate EMI schemes (the qualifying criteria are similar), this development will be of interest to those companies and potential investors, so watch this space.
Pensions tax relief – tapered annual allowance
It is impossible it seems to have a Budget without any measures on pensions tax relief, and the 2020 Budget makes no exception. This time round, changes are made to the thresholds for tapering the annual allowance for pension contributions benefitting from tax relief.
Since the start of the 2016/17 tax year, the annual allowance has been tapered down from its standard amount of £40,000 to a minimum level of £10,000 in the case of a “high-income individual” who has both:
- “threshold income” (broadly, income excluding pension contributions (other than certain contributions made by salary sacrifice)) of more than £110,000; and
- “adjusted income” (broadly, income plus the value of pension contributions made by both employer and employee) of more than £150,000.
Both those thresholds have been increased by £90,000 to £200,000 and £240,000 respectively.
This change is aimed primarily at NHS consultants who are otherwise incentivised to take on less work in order to remain below the thresholds, but it will benefit any individual with comparable levels of income.
As a ‘quid pro quo’ the minimum tapered annual allowance will be reduced from £10,000 to £4,000, so to an extent this change is financed by the highest earners whose income exceeds both those thresholds.
Part 5: VAT
The government will the government will create an industry working group to examine VAT on financial services (in addition to the consultation on the VAT treatment of fund management fees and other aspects of the UK’s funds regime). This is yet another indication that post-Brexit the UK VAT rules may start to divert from the EU VAT rules.
The government has also announced that it will introduce a zero rate of VAT for e-publications (abolishing the ‘reading tax’), taking effect 1 December 2020, and for women’s sanitary products (abolishing the ‘tampon tax’), taking effect on 1 January 2021.
Part 6: environmental taxes
Climate Change Levy (CCL)
The government will legislate to make changes to the CCL main rates for the periods 2020-2021 and 2021-22 in order to re-balance the electricity to gas ratio, starting from 6 April 2020.
The electricity rate will be lowered and the gas rate will increase in these years so that it reaches 60% of the electricity main rate by 2021 to 2022. Other fuels, such as coal, will continue to align with the gas rate.
This change is not expected to have much of an impact on families and private individuals, with energy, gas and electricity suppliers being most affected. It is intended to boost the government’s green credentials by favouring ‘clean’ electricity over other sources of energy.
New plastic packaging tax
Following a consultation in 2019, the government will legislate to introduce a new plastic packaging tax to provide an incentive for the use of recycled plastic in packaging and reducing single-use plastic waste.
The key feature of the new legislation will be a £200 per tonne tax rate for packaging with less than 30% recycled plastic. The government launched a further consultation alongside the Budget on the detailed design and implementation of the new tax. The measure will take effect from April 2022.
Part 7: anti-avoidance measures
The government intends to introduce a levy to be paid by firms subject to the Money Laundering Regulations (which includes thousands of legal practices) to help fund new government action to tackle money laundering. The levy will be additional to ongoing public sector funding. The government will publish a consultation on the new levy later this spring.
Tackling promoters of tax avoidance
The government has announced further action to tackle tax avoidance, evasion and other forms of non-compliance, with the intention of raising an additional £4.7 billion between now and 2024-25. With that in mind, HMRC will publish a new ambitious strategy for tackling the promoters of tax avoidance schemes, which will outline a range of policy, operational and communications interventions aimed at stopping the spread of marketed tax avoidance and deterring taxpayers from taking up the schemes.
The government has introduced regulations which require taxpayers and their advisors to report to HMRC certain cross-border arrangements that could be used to avoid or evade tax. This refers to the implementation of “DAC6”, an EU Council Directive that came into force in June 2018. We wrote about it here.
DAC6 introduced mandatory disclosure rules for intermediaries (and in some cases, taxpayers) in respect of cross-border arrangements that exhibit certain “hallmarks”.
The implementation of DAC6 in the UK (which is going ahead regardless of Brexit) will impose potentially onerous compliance obligations on taxpayers and intermediaries (such as lawyers and accountants). The disclosure obligations are extremely broad and may extend to wholly commercial arrangements. Further, they have retrospective effect by covering arrangements exhibiting the relevant hallmarks where the first step was taken after 25 Jun 2018 (when DAC6 came into force).
This update was researched and prepared by Annette Beresford with input from Jeremy Glover, Henry Humphreys and Friederike Lutz (who joined HLaw as an intern for the whole of March 2020).
All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website. None of the above constitutes legal advice. None of the above should be relied upon. Always seek your own independent professional advice.