Digital Services Tax
This is a ‘hot topic’ in the tax world that has been the subject of much debate over the past six months. There are ongoing global efforts to come up with a world-wide solution to the issue of effectively taxing large digital businesses, but the UK has decided to ‘go it alone’, bringing in a new tax effective from April 2020. Broadly, a 2% tax will be levied on certain revenue (not profits) of digital businesses with global revenue of £500 million or more (and UK revenue of £25 million or more). The charge will be levied on:
- revenue generated by targeting social media adverts at UK users;
- commission generated by online marketplaces facilitating transactions between UK users; and
- advertising revenue generated by search engines from displaying adverts as a result of search terms inputted by UK users.
Key IP tax measures
As announced at last year’s Budget, legislation will take effect on 6 April 2019 to tax income from IP held in low-tax jurisdictions where that income is referable to UK sales. The key changes are: the tax will now be collected directly from the offshore entity (rather than operating as a withholding tax) and the scope of the measure has been extended to capture additional income from the indirect exploitation of IP in the UK. There is also now an exemption for income derived from a place with ‘sufficient local substance’ and a threshold of £10 million UK sales revenue before the new rules will apply.
The Chancellor also announced that a new targeted relief for the cost of goodwill (the amount paid for a business that exceeds the fair value of its individual assets and liabilities) in the acquisition of businesses with eligible IP will be introduced from April 2019.
Corporate/business tax highlights
The “Annual Investment Allowance” (AIA) – The tax relief available on certain qualifying capital expenditure is being increased from £200,000 to £1 million per year for the next two tax years. This is a pretty significant tax break for lots of small/medium sized businesses.
- Entrepreneurs’ Relief (ER) – ER reduces capital gains tax for founders and certain other employee shareholders on the disposal of shares and some other business assets from 20% to 10%. There are various qualifying conditions, including a minimum holding period and a minimum 5% shareholding (in most circumstances). The minimum holding period will be extended from 12 months to 2 years from 6 April 2019 but there will also be a relaxation to the 5% rule so that qualifying shareholders can keep part of their tax relief where the company takes on external investment and their holding is reduced below 5%.
- Stamp duty changes – A targeted market value rule for stamp duty and SDRT has been introduced (effective from 29 October 2018) for listed securities transferred to connected companies. Such transfers will be chargeable based on the higher of the amount or value of the consideration (if any) for the transfer or the market value of the securities. Government will also consult on aligning the stamp duty and SDRT consideration rules and introducing a general connected party market value rule to prevent perceived stamp duty avoidance.
- Insolvency related tax measures – Legislation will be introduced in 2019-20 to allow HMRC to make directors and other persons involved in tax avoidance or evasion jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency. In addition, from 6 April 2020, when a business enters insolvency, HMRC will become a preferred creditor for taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE income tax, employee National Insurance contributions and Construction Industry Scheme deductions).
- ‘Off-payroll working’: private sector roll-out – This will be of interest to all businesses that regularly engage freelancers/contractors. Government has long been concerned that individuals who should really be treated as employees but are engaged by organisations through ‘personal service companies’ (“PSCs”) are able to pay lower overall tax than someone performing the same function as an employee (by avoiding PAYE and National Insurance contributions). The ‘IR35’ rules were introduced some time ago to try and combat the perceived abuse by requiring PSCs to account for payroll taxes. However, PSCs are notoriously hard to police and HMRC consider that a vast number of PSCs have not been complying with the IR35 requirements.
Last year, changes were introduced to move the payroll tax burden from the PSC to the ‘end user’ of the individual’s services, where the end user is in the public sector. The idea was that large organisations (particularly public sector organisations) would take a more conservative approach to the employee/consultant classification and therefore more effectively police payroll tax reporting and collection. As was widely anticipated, the Chancellor confirmed that these rules will now apply in both the private and the public sector so all businesses will need to exercise much more caution when contracting with PSCs. There is a little breathing space though: the rules were expected to come into force in April 2019 but have been pushed back to April 2020.
Real estate tax highlights
- Structures and Buildings Allowance (SBA) – SBA is a new form of capital allowances providing relief (at 2% per year over 50 years) for construction expenditure on new residential structures and buildings where construction contracts have been entered into after 29 October 2018. Although positive news, it is unlikely to alleviate widespread concerns in the real estate sector that the changes announced at the last Budget (to bring offshore entities holding UK commercial property within the scope of UK tax on disposal proceeds) will act as a significant deterrent to overseas real estate investors. Today’s Budget confirmed that those changes will take effect for disposals made on or after 6 April 2019.
- Collection of capital gains tax on residential disposals – The Chancellor confirmed that both UK and non-UK residents will need to make a payment on account of capital gains tax following the completion of certain residential property disposals. This requirement will be in force from 6 April 2019 for non-UK residents and 6 April 2020 for UK residents. This measure does not impact on Principal Private Residence relief (“PPR”) so sales of a person’s main home should still be exempt from capital gains tax, subject to the application of the PPR rules (which were also subject to some slight tweaks in the Budget).
- Anti-avoidance measures – A response to the consultation on ‘The Role of Online Platforms in Ensuring Tax Compliance by Their Users’ was published, confirming the intention to improve guidance for people and businesses earning money through online platforms, and explore how greater use of data can support compliance with tax rules. Government is also considering bringing in a tax registration check linked to licence renewal processes for some public sector licences, making it more difficult to operate in the ‘hidden economy’.
- Personal allowance and income tax bands – The personal allowance will increase to £12,500 and the threshold for higher rate tax will increase to £50,000 from April 2019.
Finally: be prepared for all of the above to change. The Chancellor stated he would turn the Spring Statement in March into a full Budget, pending the Brexit outcome.