This week’s Budget contained some interesting technology focused measures. Please find below a summary of the key tax announcements relating to the technology and other sectors:
1. Taxing the Digital Economy
The government has published a position paper on the measures it intends to pursue to combat the challenges of effectively taxing profits from the digital economy. Broadly, the government intends to:
• push for international tax reform to ensure value created by the participation of users in digital businesses feeds in to where the digital businesses’ profits are taxed;
• explore interim UK measures to raise revenue from digital businesses that generate value from UK users; and
• take more immediate action against multinational groups in the digital sector that hold valuable IP in low tax jurisdictions.
2. R&D Tax credits
The Research and Development expenditure tax credit has been increased from 11% to 12%. This will take effect from 1 January 2018. A new Advanced Clearance Service will also be introduced for R&D expenditure claims to give businesses confidence to make R&D investment decisions.
3. Enterprise Investment Scheme (EIS)– Knowledge Intensive Companies
The EIS regime offers tax breaks to individual investors that subscribe for shares in qualifying growing companies, improving access to funding for those companies. The regime has more generous conditions for “knowledge intensive companies” (KICs). Broadly, a KIC must be significantly engaged in R&D activities. In today’s Budget, the annual amount that an investor can invest in a KIC has doubled from £1 million to £2 million. The annual amount a KIC can raise has increased from £5 million to £10 million.
4. VAT for online trading platforms
A crackdown on online VAT evasion was announced. Existing powers that make online marketplaces responsible for the unpaid VAT of their sellers are being strengthened and extended and will cover both UK and non-UK traders using online platforms. The measures are expected to come into force in Spring 2018.
From April 2019, withholding tax obligations will be extended to royalty payments and payments for certain other rights made to low or no tax jurisdictions in connection with sales to UK customers. This is a fairly radical new regime as it is significantly different from most of the UK’s existing withholding tax rules.
The government has announced plans to unlock £20 billion to finance the growth of innovative businesses. These plans include the launch of a £2.5 billion investment fund, amongst other initiatives. A consultation will also be launched on the tax treatment of IP to determine whether the tax regime can better support companies investing in IP.
General Corporate Tax Measures
Despite speculation that corporation tax rates might change, the main rate of corporation tax is unchanged at 19%and will decrease to 17% from April 2020 (as previously announced). The amount of tax corporates pay on chargeable gains will effectively be increased from 1 January 2018 onwards as “indexation allowance” (a deduction currently available to reflect inflation) will no longer be applied to gains that accrue from January onwards.
Despite speculation that the VAT registration threshold might decrease, it has been maintained at £85,000 for the next two years.
Alongside the welcomed EIS enhancements for KIC companies referred to above, restrictive EIS measures have been introduced to prevent investors accessing the reliefs in circumstances where their capital is not truly ‘at risk’. These rules will apply to investments made from 6 April 2018.
The Government will also consult on changes to the Entrepreneurs’ Relief rules to remove the disincentive to accept external investment.
Real Estate Tax
The major SDLT announcement was an abolition of duty for first time buyers purchasing a home for up to £300,000. Where a first time buyer acquires a home for up to £500,000, the first £300,000 is exempt from duty, reducing the SDLT charge on such acquisitions by a maximum of £5,000. These rules apply to transactions from today onwards.
Also hidden in the Budget documents is a statement that all gains on the disposal of UK property by non-UK residents will be brought within the scope of UK tax (subject to some carve-outs for institutional investors). This will apply to all gains on UK real estate that accrue from April 2019. This is a major shift as, previously, only UK residential property was subject to tax in the hands of non-residents.
The annual income tax personal allowance will increase from £11,500 to £11,850 from April 2018. The ‘higher rate’ threshold (above which, income tax is charged at 40%), will increase from £45,000 to £46,350.