ICAS reacts to UK Budget 2018
The end of austerity? The Chancellor began by reporting to the British people that ‘their hard work is paying off’ and ‘the era of austerity is finally coming to an end’.
His speech was full of announcements of additional spending – two of the main beneficiaries being the NHS and the armed forces – but there was also £1 billion over five years to smooth the introduction of universal credit.
Contrary to much of the speculation before the Budget, which predicted frozen personal allowances and restrictions on pensions tax relief, there were also some tax giveaways – most notably the earlier than promised introduction of the £12,500 personal allowance and the £50,000 higher rate threshold.
In part these and the increased spending commitments were being paid for with a predicted windfall from better public finances, particularly better employment and tax receipts. However, there were also some tax increases – the one attracting the most attention being the announcement of a new Digital Services Tax. Other increases and some anti-avoidance measures were tucked away in the Red Book.
It is worth noting that the optimistic picture of the public finances depends on a successful outcome to the Brexit negotiations. The Chancellor expressed confidence that the government would secure a good deal – but also noted ongoing planning for all eventualities. More money was set aside for Brexit preparations and intervention was promised if the economy needs more support in the coming months.
Finally, if the economic or fiscal outlook changes materially in-year the Chancellor noted that he would, if necessary, upgrade the Spring Statement to a full Fiscal Event.
Susan Cattell, Head of Tax Technical Policy, said:
“There had been speculation that the personal allowance and the higher rate threshold might be frozen in order to help fund increased NHS spending. However, the Chancellor moved in the other direction by speeding up the increases in both, so that the Conservative manifesto pledges will now be met one year earlier than planned.
“The personal allowance had already reached £11,850 for 2018/19 and will now increase to £12,500 for 2019/20 and 2020/21. This applies to the whole of the UK. Subsequently, it will increase in line with inflation.
“The point at which people start paying the higher rate of tax (40%) is £46,350 for 2018/19 (outside Scotland where it is £43,430). The Chancellor announced that it will increase to £50,000 for 2019/20 and 2020/21 – for England, Wales and Northern Ireland. It will also apply for savings and dividend income in the whole of the UK. Like the personal allowance it will increase in line with inflation after 2020/21.
“Income tax rates and thresholds on non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament – with the Scottish Budget due in December. From April 2019 the Welsh Government will set a Welsh rate of income tax for non-savings, non-dividend income for Welsh taxpayers.
The annual exempt amount for Capital Gains Tax increases to £12,000 for individuals and personal representatives and £6,000 for trustees of settlements for 2019/20.
“There are also two changes in the pipeline to CGT private residence relief – to take effect from April 2020. The final period exemption will be reduced from 18 months to 9 months (but there will be no change to the 36 months available to disabled persons or those in care homes). Lettings relief will be reformed so that it only applies in circumstances where the owner of the property is in ‘shared-occupancy’ with a tenant.”
Pensions and savings
Christine Scott, Head of Pensions said:
“This was a quiet Budget for pensions and savings – something which will be welcomed by those trying to plan for the future, following a series of changes to pensions taxation in recent years. However, we may see more radical changes to pensions tax relief in a future Budget.
“Contrary to much pre-Budget speculation the annual allowance was not reduced – nor was relief for pension contributions restricted to the basic rate. The lifetime allowance for pensions will increase in line with CPI for 2019-20, rising to £1,055,000.
“The announcement of regulations to ban pensions cold calling is to be welcomed. 2019 is shaping up to be a busy year for pensions, with a consultation on the legislative framework for collective defined contribution pensions expected in the next few months and a Pensions Bill already anticipated in the next Queen’s Speech.
“On savings the band of savings income that is subject to the 0% starting rate will be kept at its current level of £5,000 for 2019-20. The adult ISA annual subscription limit for 2019-20 also remains unchanged at £20,000. The annual subscription limit for Junior ISAs for 2019-20 will be uprated in line with CPI to £4,368.”
Multinationals and the Digital Economy
Susan Cattell, Head of Tax Technical Policy, said:
“Large digital businesses will be disappointed (but not surprised) that whilst the Chancellor expressed support for ongoing international efforts to achieve consensus on how to tackle the taxation of the digital economy, he nonetheless decided to go ahead with the unilateral introduction of a new 2% UK tax from April 2020. The Red Book noted that it will only apply until an appropriate long-term international solution is in place.
“The new Digital Services Tax will apply to revenues of certain digital businesses which derive value from their UK users. There will be a consultation on the details of the tax but essentially it will apply to revenues generated from the provision of search engines, social media platforms and online marketplaces – and to revenues from these activities that are linked to the participation of UK users (subject to a £25m per annum allowance). It will only apply to groups that generate global revenues from in-scope business activities in excess of £500m per annum – and loss makers will be exempted.
“It was also confirmed that the Royalties Withholding Tax announced in last year’s Budget will go ahead from April 2019 – but it will now be a tax on offshore income from intangible property held in low-tax jurisdictions (to the extent that the income is referable to UK sales). The offshore entities will be directly taxed – rather than adopting the withholding approach. Other changes have also been made to the original proposals, so affected companies will need to have a close look at the details.”
Large corporate taxation
Susan Cattell, Head of Tax Technical Policy, said:
“Large corporates have already had to get to grips with the hugely complex restrictions on the use of carried forward losses, which took effect from April 2017. They will now have to wrestle with further complexity because the restrictions will be extended to cover capital losses.
“From 1 April 2020, the proportion of annual capital gains that can be relieved by brought-forward capital losses will be restricted to 50%. The measure will include an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year. According to the Red Book this should mean that 99% of companies are unaffected. An anti-forestalling measure will have effect on and after 29 October 2018.
“On a more positive note, companies will welcome the announcement that the government will go ahead with some of the changes to the corporate intangibles regime which were the subject of a consultation earlier this year.
“Detailed proposals will be published on how the government intends to partially reinstate relief for acquired goodwill in the acquisition of businesses with eligible intellectual property; and, to alter the regime’s de-grouping charge rules so that a charge will not arise where de-grouping is the result of a share disposal that qualifies for the Substantial Shareholding Exemption. Legislation will be included in Finance Bill 2018-19, and the changes to the de-grouping rules will have effect in relation to de-groupings occurring on or after 7 November 2018.”
Owner managed businesses
Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes), said:
“Entrepreneurs’ Relief was the subject of some key changes affecting OMBs in the Budget.
On the one hand, it was confirmed that the potential greater availability of Entrepreneurs’ Relief (ER) for businesses issuing new shares would go ahead (originally announced at Autumn Budget 2017) – but on the other there will also be a tightening up of the rules.
“Looking to benefit the entrepreneurs for whom the relief was designed, who ran the risk of losing ER when raising finance to expand, from April 2019 ER can be claimed even if an individual’s shareholding is diluted below the critical 5% threshold as a result of the external investment. ER will only apply to the gain arising up to the point of dilution.
“The minimum qualifying period for ER goes up from one to two years, with special provisions for cases where the business ceased before 29 October 2018. It will otherwise have effect for disposals on or after 6 April 2019. The rationale given is that this will help foster longer term involvement in business, rather than ‘simple investment or speculation’. It is also suggested that the change ‘will not affect 95% of ER claimants.’
“The definition of a personal company is also changed, with two new tests being added for ER. To claim ER, there will now have to be a 5% interest in both the distributable profits and net assets of the company – in addition to meeting the existing share capital and voting rights conditions – for disposals on or after 29 October 2018.
“Ever since the Office of Tax Simplification reported on the VAT registration threshold, there has been speculation that it will be reduced. Many SMEs will therefore be relieved that the Budget announced that the VAT registration threshold will stay at the current £85,000 mark for at least two more years – taking us up to April 2022.
“Businesses of all sizes will welcome the announcement that the Annual Investment Allowance will rise to £1m for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020.
“There is also a new Structures and Buildings Allowance (SBA) to come. With this, new non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018.
“However, there is also a capital allowances reduction: from April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to more closely match average accounts depreciation.”
Employment taxes and taxable benefits
Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community), said:
“There will be new qualifying criteria for the employment allowance. From April 2020 the government will only allow employers with an employer National Insurance contributions (NICs) bill below £100,000 in their previous tax year to claim the Employment Allowance (EA). Currently, the EA provides businesses and charities with up to £3,000 off their employer NICs bill. According to the Office for Budget Responsibility, more than 99% of micro-businesses and 93% of small businesses will still be eligible to claim EA.
“It was widely expected that the IR35 changes which have already been brought in for the public sector from 2017 would be extended to the private sector – but this has been delayed to 2020 and qualifying criteria will apply.
“The government will introduce legislation which will take effect from April 2020, relating to IR35 ‘off-payroll’ working in the private sector – following the consultation over the summer of 2018. The new regulations will require large and medium sized organisations, or agencies or other third parties paying personal service companies on behalf of large and medium sized organisations to operate the rules and deduct income tax and NICs. Small engagers will remain unaffected at this time.
“There will be some increases to the tax on certain employee benefits. The van benefit charge is to be increased by the Consumer Price Index and the car and van fuel benefit charges by the Retail Price Index from 6 April 2019. The flat-rate van benefit charge will increase to £3,430, the CO2 multiplier for the car fuel benefit charge will increase to £24,100, and the flat-rate van fuel benefit charge will increase to £655.
“Finally, the Chancellor announced that the National Living Wage will increase by 4.9% from April 2019, rising from £7.83 an hour to £8.21 an hour for those over 25. This equates to an additional £690 pa for a full-time worker.”
HMRC Preferential Creditor Status
David Menzies, Director of Practice, said:
“In a surprising move, from 6 April 2020 HMRC will be given preferential creditor status in business insolvencies – but this will only apply to taxes collected and held by businesses on behalf of others i.e. VAT, PAYE income tax, employee NICs and Construction Industry Scheme deductions. It will not apply for taxes owed by businesses themselves, such as Corporation Tax and employer NICs.
“The Red Book notes that this will mean that more of taxes paid by employees and customers and temporarily held in trust by the business ‘will go to fund public services rather than being distributed to other creditors’. However, coupled with another measure intended to tackle tax abuse and insolvency there could be a risk of adverse consequences for the UK’s highly respected insolvency and restructuring regime. For example, the re-establishment of HMRC preference (which had been removed in 2002) could affect the appetite and pricing for lending given that there will be less available for floating charge creditors.”