In the 2020 UK Budget, the Chancellor announced a number of changes relevant to companies and their shareholders.
From 11 March individuals may only benefit from the reduced entrepreneurs’ relief capital gains tax rate of 10% on qualifying gains up to a maximum lifetime limit of £1 million (previously the lifetime limit had been £10 million). There are also certain anti-forestalling provisions which prevent certain arrangements intended to forestall the change through contracts or arrangements entered into prior to 11 March.
Entrepreneurs’ relief applies to capital gains on a disposal of, among other things, shares in a trading company or the holding company of a trading group by an individual. The person making the disposal must be an employee or office holder of a trading company or the holding company of a trading group and the company must be that person’s “personal” company (all for a period of, since 6 April 2019, two years ending on the date of disposal). To meet the “personal” company test, individuals have to hold at least 5% of the total nominal value of the ordinary share capital of the company; 5% of the voting rights in the company; and, since 6 April 2019, have satisfied the ‘5% economic test’. Certain holders of shares acquired under Enterprise Management Incentive share options may also benefit from entrepreneurs’ relief subject to certain conditions but without the “personal company” test applying.
Research and Development Tax Credits
The rate of relief for R&D expenditure credits is being increased to 13% (from 12%) from 1 April 2020. This produces an effective cash benefit of 10.5% of qualifying R&D expenditure (up from 9.7%). The Government will also consult on whether expenditure on data and cloud computing will qualify for R&D tax credits.
Intangible fixed assets
The UK’s intangible fixed assets (IFA) regime that applies to intellectual property and goodwill distinguishes between IFAs created before and after April 2002. Broadly speaking, corporation tax relief is currently only available for IFAs created, or acquired from an unrelated party, on or after 1 April 2002.
However, the position will change on 1 July 2020, and corporation tax relief will be available for the cost of acquiring pre-April 2002 IFAs on or after this date from related parties that are outside the scope of UK corporation tax, subject to restrictions to prevent tax avoidance. This is a change that is likely to be welcomed by groups with significant intellectual property and/or goodwill.
“Large Business Notifications” – New Disclosure Requirement
From April 2021, large businesses will be required to notify HMRC when they take a position which HMRC is likely to challenge. The Government notes this will draw on international accounting standards. This is presumably a reference to IFRIC Interpretation 23, which requires estimates and judgements to be made about whether a tax authority will accept the position taken in its tax filings. The Government will consult on the detail in due course.
100% first year allowances for expenditure incurred on new plant and machinery in certain designed Assisted Areas within Enterprise Zones is to be extended at least until 31 March 2021.
100% first year allowances for low CO2 emission cars, zero-emission goods vehicles and equipment for gas refuelling stations is to be extended for four years from April 2021.
Structures and Buildings Allowances
Capital allowances on qualifying expenditure on commercial buildings incurred after 29 October 2018 was introduced in the Finance Act 2019 at an annual rate of 2% on a “straight line” basis. The rate for this relief will increase to 3% from April 2020.
Business rates 'holiday' for retail, leisure and hospitality sectors
The Chancellor announced that the current 50% business rates retail discount, which applies to shops, restaurants, cinemas and live music venues with a rateable value of less than £51,000, will be increased to 100% and expanded to include hospitality and leisure businesses (including small hotels/B&Bs, sports clubs and gyms) for the next financial year.
In addition, the Government will undertake a fundamental review of the business rates regime, reporting in Autumn 2020, which will consider reforms to the current business rates system, its administration and alternatives to business rates.
Employment Allowance increases for NIC
Businesses and charities benefit from an annual allowance that reduces their liability to employer national insurance contributions. Various restrictions apply and from April 2020 it will be a requirement that the previous year’s NIC liability of the business or charity was less than £100,000. However, in the Budget the Chancellor announced a further increase in the allowance from £3,000 to £4,000 per annum.
Some key measures previously announced
HMRC priority in insolvency reintroduced
From 1 December 2020 certain amounts in respect of tax will acquire preferential status (i.e. will rank after fixed charges and expenses of insolvency, but before holders of floating charges and unsecured creditors). The taxes that will acquire this status are VAT, PAYE income tax, employee national insurance contributions, student loan deductions and construction industry scheme deductions. The change will not affect corporation tax and employer national insurance contributions.
Corporation Tax introduced for non-resident companies with UK property income
Up to 5 April 2020 income tax applies to non-resident companies subject to tax on UK property income, but such companies will become subject to corporation tax from 6 April 2020. The Government announced some further changes today addressing issues arising on the transition to corporation tax.
Digital Services Tax
This is a new tax at a rate of 2% of UK revenue of search engines, social media services and online market places. It will apply from 1 April 2020 where a group’s worldwide revenues from these types of service exceed £500 million and more than £25 million is derived from UK users. The first £25 million of UK revenues will be exempt.
Capital Loss Restriction
For accounting periods ending on or after 1 April 2020 carried forward capital losses will be brought within the regime introduced in 2017 to restrict the use of carried forward income losses. Companies accruing chargeable gains will only be able to offset up to 50% of those gains using carried-forward (allowable) capital losses, subject to potential sharing of the £5 million “deductions allowance” which has formed part of the income loss restriction regime since 2017. The change was the subject of consultation and an anti-forestalling provision was introduced to counter act attempts to forestall the effect of this change.