Autumn Budget 2018
This update summarises tax announcements made in the UK Budget on Monday 29 October 2018 that are likely to be most relevant to our clients. It is not a comprehensive summary and does not cover (in particular) many measures primarily relevant to individuals, small businesses, or specific industries. More detail on certain measures will be available when the Finance Bill is published on 7 November 2018.
The Budget has the distinction of being the final Budget before the UK is expected to leave the European Union. While it sticks to the Chancellor’s themes of stability and simplicity in some respects (for example, there are no changes to headline tax rates as was feared by some commentators), there are a number of significant reforms which were not trailed.
Oil and Gas Tax measures
There were no major announcements relating to the oil and gas industry, which was welcome news amidst fears that the rising oil prices might cause the Chancellor to target the industry for additional tax revenues. The Government confirmed that it will maintain the headline tax rates that apply to the UK North Sea at their current level to help the industry continue its recovery from the recent downturn and announced that it will launch a call for evidence to strengthen the UK’s position as a global hub for decommissioning.
The Government also officially confirmed that long-awaited legislation introducing transferable tax history (“TTH”) and amending the petroleum revenue tax rules on retained decommissioning costs will be included in this year’s Finance Bill. The policy aim behind the new legislation is to facilitate transfers of late life North Sea assets to “new entrants” (generally financial investors). Until now, such transactions have faced tax barriers because those new entrants have been unable to access effective tax relief for decommissioning expenditure.
The announcement follows extensive consultations between industry and Government on the TTH mechanism. A number of technical and practical issues were identified in the course of the consultations and industry will be watching closely to see whether these are addressed in the upcoming Finance Bill.
Although the TTH legislation is not expected to be enacted until the first quarter of next year, it will apply to North Sea licence transfers that receive Oil and Gas Authority approval from 1 November 2018.
Business Tax measures
The Budget confirmed that a number of measures announced and consulted on earlier in the year will be incorporated in the upcoming Finance Bill, including amendments to the corporate interest restriction rules, the introduction of an anti-profit fragmentation rule and bringing UK property income of non-residents within the scope of corporation tax. However, there was no shortage of new measures either, of which key ones are outlined below.
Digital Services Tax
As trailed, from April 2020, the Government will levy a new 2 per cent tax on the revenues of certain digital businesses which derive value from their UK users. The tax will only apply to groups that generate global revenues from relevant business activities in excess of £500 million per annum and will not be applicable to loss making businesses. At this stage, there is little further detail regarding the proposed tax but the Government has indicated that it will consult on it with a view to introducing legislation in next year’s Finance Bill.
Reform of the corporate intangible fixed assets (“IFA”) regime
As foreshadowed in a consultation carried out in the Spring, the corporate IFA regime will be overhauled. From 7 November 2018, the de-grouping rules in the corporate IFA regime will align with the chargeable gains regime, so a de-grouping charge referable to an intra-group transfer of IP will be tax-exempt on a share sale if the substantial shareholding exemption is available. Certain types of goodwill will also benefit from relief under the corporate IFA regime.
Entrepreneur’s relief (“ER”)
Two surprising measures were announced: (i) effective immediately, if an individual wishes to claim ER on a disposal of his shares, he must also be beneficially entitled to at least 5% of distributions and assets on a winding-up, and (ii) he must meet the ER conditions for two years (rather than 12 months as the law currently stands) from 6 April 2019. The additional 5% conditions may have material ramifications, e.g. where shares are issued to managers with no rights of return until certain events take place.
Market value rule for stamp taxes in respect of listed securities
Prior to Budget Day, any transfer on sale of (or an agreement to transfer) securities for nil consideration did not attract stamp duty or stamp duty reserve tax (“SDRT”). In an unannounced measure, that is no longer the case where the securities in question are listed and the parties are connected, as the consideration is deemed to be the higher of market value and the agreed value. The Government will consult on reforming the rules around consideration for the purposes of stamp duty and SDRT more generally where connected parties are involved.
Real estate continues to be a focus for the Government. The Government has confirmed that it will legislate in the upcoming Finance Bill to bring the profits of UK residential and commercial property businesses within the charge to corporation tax (rather than income tax), regardless of the residence status of the taxpayer, with some amendments. The change will have effect from 6 April 2020. In addition, the Government will consult on introducing a 1 per cent stamp duty land tax surcharge for non-UK resident purchasers of residential property in England and Northern Ireland.
Capital allowances – new structures and buildings allowance
The Government will introduce, with immediate effect, a new “Structures and Buildings Allowance” (“SBA”) for new commercial structures and buildings (and notably not land or residential buildings). The relief will be applicable to eligible capital expenditure incurred from Budget Day onwards and applied at an annual rate of 2 per cent on a straight-line basis across a fixed 50-year period.
Corporate capital loss restriction
The Government intends to introduce a measure which will, from 1 April 2020, align the treatment of carried forward capital losses with that of ordinary corporate losses. Therefore, companies making capital gains will only be able to use carried-forward capital losses to offset 50% of their capital gains in an accounting period and any unused capital losses would then be available to carry forward against capital gains arising in future accounting periods. It is not proposed that this restriction will be applicable to oil and gas companies making ring-fenced gains. Draft legislation is expected to be published in next year’s Finance Bill, following consultation.
Other noteworthy measures include the following:
- The Government is considering legislating to introduce a tax registration check which is linked to renewal processes for certain public sector licences (which have not yet been announced).
- Medium and large businesses in the private sector will become responsible for assessing the employment status of an individual working through a personal service company, and paying any tax and National Insurance Contributions due.
- From 1 April 2019, guidance for VAT groups will be tightened to ensure VAT is paid on services bought through non-UK establishments.
- The Chancellor announced the introduction of a new ‘Carbon Emissions Tax’ that will take effect only in the event of a ‘no deal’ Brexit and apply to all UK permit holders operating stationary installations currently participating in the EU Emissions Trading System.
- The Finance Bill will also include legislation that allows the Government to make minor amendments to ensure that tax legislation continues to operate in the same manner as it does currently in the event of a ‘no deal’ scenario.
Anti-avoidance and anti-evasion measures
Tax Abuse and Insolvency
Following a consultation earlier this year, the Government has announced that it will introduce legislation in next year’s Finance Bill which will allow HMRC to make directors and certain other persons jointly and severally liable for a company’s tax liabilities where they have been involved in tax avoidance, evasion or “phoenixism” and there is a risk that the company may deliberately enter insolvency. In addition, in the event of an insolvency, legislation will be enacted to ensure that more of the taxes collected and held by businesses on behalf of other taxpayers (e.g. VAT, PAYE etc) will go to HMRC rather than other creditors.
Corporation tax changes to the definition of permanent establishment
The Government will legislate in the upcoming Finance Bill to change the definition of permanent establishment so that foreign businesses operating in the UK cannot take advantage of exemptions applying to “preparatory or auxiliary activities” by artificially fragmenting their operations between different locations and/or between related companies.
Diverted Profits Tax (“DPT”)
This year’s Finance Bill will include a number of amendments to the DPT legislation to, among other things, close certain tax planning opportunities (in particular, to prevent corporation tax amendments being made to a return after the review period has ended and the DPT time limits have expired) and clarify that diverted profits are only taxed under corporation tax or DPT (but not both).
Offshore receipts in respect of Intangible Property
The Government had previously announced an extension of withholding tax to cover royalties that are connected with sales to UK customers where such payments are made to low or no tax jurisdictions. Following consultation, the Government has now announced that, instead of a withholding regime, a tax will be directly levied on offshore entities that realise intangible property income referable to UK sales in low-tax jurisdictions. There will be a number of exemptions from this charge, including where the value of UK sales is less than £10 million in a given tax year or where the income is supported by sufficient substance.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.