It was my birthday recently, so I was delighted when the Chancellor told me he had got me a present. A Budget! It was a little late, distinctly homemade, and wrapped in a spreadsheet (natch) - but I was fascinated to find out what was inside. In other words, here is a selection of key tax changes for business that were announced in the Budget.
The biggest change which will affect the M&A market, and the one which may require most urgent attention by independent private companies, is a significant tightening of the eligibility criteria for entrepreneurs’ relief that has effect from today, plus a further change expected to come in from April 2019. If you’re eligible for entrepreneurs’ relief then you pay just 10% CGT on a sale of your shares (up to a lifetime gain allowance of £10m) rather than 20%.
The immediate change is to the 5% test which most shareholders must meet to qualify for entrepreneurs’ relief. The current test is refreshingly simple: hold 5% of the share capital, and be entitled to 5% of the votes in the compay. Easy! However for all share sales after today the Chancellor has added two new conditions. You must also be entitled to (a) 5% of all dividend income, and (b) 5% of the assets of the business on a hypothetical winding up. This final condition in particular could present problems for all but the most vanilla of shareholder structures. Start-ups often tempt investors with preferential investment terms, while maintaining a healthy percentage of the ordinary shares for founders. It would be extremely unfortunate if that sort of investment meant that founders with 5%+ of the ordinary shares might not now qualify for entrepreneurs’ relief. That the measure has been brought in so hastily only increases the risk of unintended consequences.
Fortunately, shares obtained from EMI options continue to be exempt from the 5% holding requirement, either in its old or its new incarnation.
The other change, which we have all of five months to prepare for, is to the qualifying holding period for entrepreneurs’ relief. Currently you need to have held shares (or in some cases options) for at least 12 months. From April 2019 that increases to two years, and the change will apply equally to the holding period for EMI options.
This means that – more than ever before – private companies need to think about their shareholder structure long before an exit. Otherwise they could be facing disgruntled senior managers paying 20% CGT rather than 10% CGT on a sale. “If only we had sorted out the paperwork for Geoff and Laura’s equity incentives sooner!” the CEO will howl in anguish. OK, that’s perhaps a bit over-dramatic, but you get the idea.
Tech, IP and goodwill
Another widely trailed reform is the announcement of a new Digital Services Tax. This shows that the Chancellor is clearly prepared to take unilateral action to rebalance how digital businesses are taxed, and shift taxes slightly more towards where customers are rather than where the business is based. The change is focussed on certain kinds of multinational tech business only – search engines, social media platforms, and online marketplaces only. He also signalled a preference for globally coordinated change, and a willingness to abandon these plans if something else comes along. By acting in this way, it’s just possible that the UK will shift the agenda for global reform of corporate profit taxes.
There was also a welcome announcement that some of the (frankly odd) ways in which intangible assets are taxed differently to other kinds of asset in corporate group structures will be reformed, and also that certain kinds of goodwill acquisition (e.g. on business and asset purchases) might get tax relief. Further detail is awaited, but in broad terms we expect the change to give corporate groups much greater flexibility to arrange the
Employment tax Reform to the IR35 rules has been widely expected, and here it is. The Chancellor confirmed that he intended to widen the rules which have applied to the public sector since last year, and apply them to medium- and large- sized private sector organisations from April 2020. Affected businesses will, from April 2020, take on the responsibility of assessing when IR35 rules apply and taking the PAYE/NIC risk of getting their assessment wrong. Focussing these new rules on larger businesses, and giving business until April 2020 to implement, is a welcome act of restraint on the part of the Chancellor. Victoria Goode, our employment tax guru, has more to say here.
While aiming anti-avoidance at larger business, the Chancellor also restricted the Employment Allowance – currently available to all businesses – to smaller businesses. This allowance gives employers £3,000 off their annual employer NIC bill. In future, the allowance will only be available to businesses with an annual employer NIC bill of no more than £100,000.
The Chancellor also announced plans to ease some of the administrative PAYE burdens on businesses with short-term visitors on business trips to the UK.
Like that questionable item of clothing in your wardrobe, wait long enough and more or less anything comes back into fashion. Returning like old friends in this Budget were the following measures:
- A temporary increase to the annual investment allowance, from £200k to £1m, for two years. The annual investment allowance accelerates tax deductions on certain kinds of capital expenditure. Such a colossal increase is only really going to help larger businesses – there aren’t many mom and pop outfits with annual capex of £1m!
- Structures and buildings allowance. A “new” (cough) relief for certain commercial buildings. On a completely unrelated note, there used to be a relief called Industrial Buildings Allowance which was phased out entirely in 2011.
- HMRC preference in insolvency. In 2003 HMRC lost its preferential creditor status if a business went into insolvency. It was trumpeted triumphantly as a huge leap in fairness in business and enterprise. However the Chancellor regrets to tell us that it was in fact a betrayal of all those customers and employees of the business who had paid PAYE and VAT in good faith, and wouldn’t everyone prefer it if HMRC got that money as intended?
- A long time ago, in the R&D tax credit system for SMEs, payable cash credits were restricted if a business wasn’t paying PAYE and NIC. Then in 2012 the previous Chancellor lifted that restriction. It was trumpeted triumphantly as a stimulus for start-ups and the entrepreneurs and innovators who are the lifeblood of UK PLC. The current Chancellor regrets to tell us that actually such a profligate approach opened the system up to all kinds of abuse, and wouldn’t we all like to ensure that taxpayer’s money is appropriately targeted? Accordingly, payable cash credits will from April 2020 be capped at three times the business’ PAYE and NIC bill.
Business Rates Business rates revaluations continue to be extremely unpopular with some businesses, and the latest easing of the pain came in the form of a (temporary) relief for retail businesses with properties that have a rateable value below £51,000. Those businesses will get a one-third discount to their business rates bill for two years. Non-barking dog
The Chancellor confirmed that some of the more radical ideas floating around to reduce the VAT registration threshold, and bring within the VAT system even very small businesses, have been deferred until at least 2022. VAT compliance is a tough enough area at the moment, with digital reform rapidly approaching.
Reform to the IR35 rules has been widely expected, and here it is. The Chancellor confirmed that he intended to widen the rules which have applied to the public sector since last year, and apply them to medium- and large- sized private sector organisations from April 2020. Affected businesses will, from April 2020, take on the responsibility of assessing when IR35 rules apply and taking the PAYE/NIC risk of getting their assessment wrong. Focussing these new rules on larger businesses, and giving business until April 2020 to implement, is a welcome act of restraint on the part of the Chancellor. Victoria Goode, our employment tax guru, has more to say here.