Despite the backdrop of the global COVID-19 outbreak, Rishi Sunak, the Chancellor of the Exchequer, delivered the first Budget of the new decade in bold fashion, repeating the current Government's mantra of "getting things done".
With only one month in office before having to deliver his first Budget it is understandable that there were no major surprises. As expected Entrepreneurs' Relief was restricted, corporation tax remains at 19% and the IR35 changes will be implemented. There were no new inheritance tax measures introduced.
Some of the key announcements are highlighted below and the economic effect of those will help the Chancellor balance the books when introducing the significant measures announced in respect to the COVID-19 response and infrastructure.
Capital Gains Tax Entrepreneurs' Relief
The Government announced in its election manifesto that it would review capital gains tax (CGT) Entrepreneurs' Relief (ER) and the speculation that it would be abolished or significantly curtailed was proven in today's Budget.
With effect from today, the lifetime limit on gains eligible for ER (which offers a reduced rate of 10% rate of CGT on qualifying disposals) is reduced from £10M to £1M.
When it was introduced, the ER limit stood at £1M, and thus with this measure the Government has gone full circle. The Government argue that ER has not significantly supported nor incentivised entrepreneurial activity and only assisted the top layer of affluent taxpayers. It is hoped that other measures the Government introduces will provide the incentive entrepreneurs need to take commercial risks.
IR35 changes from 6 April 2020
From 6 April 2020, IR35 will be extended to the private sector and the compliance burden will lie with the end-user client, as previously announced.
IR35 was broadly introduced to prevent consultants who act more like employees from unfairly taking advantage of the reduced national insurance benefits designed for self-employed consultants. It applies where an individual provides their services to a client through an intermediary (such as the individual's personal service company), but that individual would be regarded as an employee of the client if he or she provided those services directly. Where applicable, IR35 treats the service fee paid by the client to the intermediary as employment income of the individual, which would be subject to income tax and NICs under the PAYE system.
The public sector has been subject to these rules since 2017, but the burden to determine whether IR35 applies has to date fallen on the individual providing the services. From 6 April 2020, both public and private sector clients using intermediaries will become responsible for determining whether IR35 applies (and not the individual). If the consultants are deemed to be employees under these rules, the end user will need to operate the PAYE system for those individuals, and will have a liability to account for employer NICs (at 13.8%).
The Government announced at the Budget 2018 that it would implement these reforms, and has now confirmed that the rules will be legislated in Finance Bill 2020, effective from 6 April 2020.
Digital Services Tax – coming into effect on 1 April 2020
A new 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users will come into effect.
This tax will apply to a group’s businesses when the group’s worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users. If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%. There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to digital services tax (DST).
As discussions amongst the G7, G20 and the OECD take considerable amount of time, it is understandable why the Government is enacting this legislation now as it protects the UK's tax base immediately and thus corrects the current misalignment between the place where profits are taxed and the place where value is created.
Non-UK resident Stamp Duty Land Tax surcharge
As announced at the Budget 2018 and following consultation, the Government has confirmed in this Budget that it will legislate in the Finance Bill 2020-21 for a 2% surcharge on non-UK residents purchasing residential property in England and Northern Ireland to take effect from 1 April 2021. 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 – the legislation will need to be reviewed carefully when published. The Government also announced that it will shortly publish a summary of responses to the consultation.
This measure is in line with the Government's focus on housing affordability, with the stated aim of the surcharge being to "help to control house price inflation and to support UK residents to get onto and move up the housing ladder." This widely trailed change means that the rate of SDLT on the "top slice" of the price of high end properties (i.e. the price above £1.5m) will be 17% from April 2021. This will only add to the importance of the residential/mixed use distinction give the divergence in rates between the two.
Value Added Tax reverse charge implementation date confirmed
The Government confirmed today that the VAT domestic reverse charge for supplies of building and construction services will come into force on 1 October 2020. The change means that some developers will have to account for VAT under the so called "reverse charge" rules, rather than paying the supplier in the usual way. However, the measure will not apply to consumers or end users (usually the property owner) of building and construction services, nor to individuals and businesses which are not registered for VAT in the UK.
It should be noted that the VAT domestic reverse charge was due to come into force on 1 October 2019, however its introduction was postponed by a year after lobbying from industry representatives and to prevent a clash with Brexit (which was, at the time, due to occur on 31 October 2019). The Government's confirmation that the implementation date is going ahead means that developers should ensure that their VAT compliance is up to date.
To support small business in 2021, the Government is increasing the business rates retail discount to 100% for 2021 for properties with a rateable value below £51,000, and the category of business which can utilise the relief will be expanded to include hospitality and leisure businesses for 2021. The discount for pubs will also be increased to £5,000 for 2021 where the rateable value is below £100,000.
These measures will be welcomed by small businesses. Of course, the wider issues caused by business rates remain and the Government has announced that a "fundamental" review is being launched, which will be reported on in the autumn.
Stamp duty: transfers to connected persons
The transfer of unlisted shares to a "connected company" will now be subject to stamp duty by reference to market value. The introduction of this rule follows on from the change in 2018, which brought in a market value rule for transfers of listed shares to connected companies.
The Government previously announced that it was considering this change, so its introduction is not a surprise. The detail of the rules in Finance Bill 2020 will need to be reviewed carefully, in order to ensure that plain company reorganisations are not adversely affected by the change.
Value Added Tax
The Chancellor announced zero rating for e-publications (e-books, newspapers, magazines, journals etc.) from 1 December this year, bringing them into line with their physical (paper) counterparts. This seems generous but in fact does no more than clarify what the Tax Tribunal has recently said is the case under existing law.
The removal of the "tampon tax" (so applying zero rating on women's sanitary products from 1 January 2021) is an early example of the freedom from the need to follow EU law which the UK now has.
The review of VAT on financial services announced will, of course, take place exercising the same freedom.
Government announces review of Enterprise Management Incentive Schemes
A review of the Enterprise Management Incentives (EMI) scheme will be conducted by the Government to ensure that it continues to provide the necessary support for high-growth companies to recruit and retain talent. The review will also consider whether the scheme should be extended to a greater number of companies.
The current EMI regime has been around for 20 years so it is perhaps not surprising that the Government is proposing to conduct a review into its suitability in the changing business climate. An EMI scheme allows share options to be granted to employees which brings certain tax benefits to employees and companies. In particular, option gains are subject to capital gains tax (including the potential to qualify for Entrepreneurs' Relief) rather than income tax. The current regime requires companies to meet a number of qualifying conditions including having no more than 250 full time employees, having gross assets of no more than £30million, as well as only carrying on certain types of "approved" activities (for example it excludes finance related activities). In addition, companies must be independent and not controlled by any other company (unless that company is listed on a recognised stock exchange). A review of the EMI regime may lead to a reduction in the level of these restrictions enabling a wider range of companies to use this tax efficient incentive scheme.
Rates and allowances
Whilst there have been no changes to the main personal tax rates (income tax, capital gains tax or inheritance tax) and corporation tax has remained at 19%, the Chancellor did make a few announcements which may be of interest (in addition to the points raised elsewhere in this briefing), in particular:
- The Junior ISA subscription limit will be more than doubled from £4,368 to £9,000;
- The lifetime allowance for pensions will increase to £1,073,100; and
- With effect from April 2020, the annual allowance taper thresholds for pension contributions will be increased by £90,000. This means that taxpayers earning up to £240,000 will get the benefit of the full £40,000 annual allowance. However, the minimum annual allowance will now be tapered down to £4,000 (previously £10,000), reducing the amount of pension savings for those earning over £300,000.
It is also worth remembering that whilst there are no changes to the CGT rate, offshore landlords will be subject to the corporation tax regime from 6 April 2020.
Avoidance, evasion and non-compliance
As with all Budgets in recent times, this year's heralded the work that the Government had undertaken to tackle avoidance, evasion and non-compliance and announced measures designed to raise an additional £4.7 billion between now and 2024-25. These measures include:
- Introducing legislation to prevent non-compliant businesses from using the Construction Industry Scheme to claim refunds to which they are not entitled;
- Tightening VAT compliance in the building and construction sectors through the introduction of a VAT domestic reverse charge from October 2020;
- Investing in additional compliance officers, technology and debt collection capabilities to ensure compliance capabilities are met;
- Accepting and legislating the recommendations of the Loan Charge Review. It was flagged that disguised remuneration schemes continue to be used and therefore the Government will issue a further call for evidence on further action to stamp them out;
- Further measures were also outlined to tackle promoters of tax avoidance, which will be legislated for in the Finance Bill 2020-21. These are the tightening of existing measures designed to make it harder for promoters to successfully use so-called abusive schemes and are to be introduced alongside the introduction of a new "promoter strategy" designed to disrupt those that promote tax avoidance schemes and deter taxpayers from using them;
- From April 2021 large businesses will be required to notify when they take a tax position which HMRC is likely to challenge;
- Legislation both prospective and retrospective to ensure that Limited Liability Partnerships are treated as general partnerships under income tax rules. This relates to loss making LLPs and stops the "Inverclyde" argument for members involved in tax avoidance measures such as film schemes;
- Allied to these measures the Government will publish a call for evidence in the spring on raising standards in the market for tax advice to give taxpayers more assurance over the quality of advice given by tax advisers.
All of these measures continue the Government's determination to raise more taxes by closing loopholes and targeting perceived non-tax compliance.
The Government has introduced some measures which are designed to provide some relief for those that genuinely struggle to meet their tax obligations, which include:
It is good to see the Government recognising that businesses and individuals need support to comply with their taxes when they are struggling financially.
- Ensuring that when a company becomes insolvent that HMRC get preferential creditor status for taxes collected on behalf of its customers and employees i.e. VAT, PAYE, income tax, employee NIC and CIS.
- A welcome measure that allows "breathing space" for people in problem debt that will give a 60-day breathing space whilst they engage with advice and work towards a solution.