Spring Statement: 11 March 2020

Charter Tax Consulting Ltd

Spring Statement: 11 March 2020

Client Summary Note

Introduction

New Chancellor, Rishi Sunak, was very positive in his first Budget Speech today.  As one may expect, there was much talk of providing support while the (inevitable?) impact of COVID-19 takes its toll.  That said, however, the Chancellor remained buoyant and determined to “Get It Done”!

As widely anticipated, the generosity of Entrepreneurs’ Relief has been significantly curtailed – the lifetime allowance being reduced from £10m to £1m.  Non-residents looking to buy UK residential property will also be disappointed to learn that the SDLT rate will have a 2% supplement added to it from next year.  However, other than that, although there are the usual tweaks we’ve come to expect these days, there were no major game changers.  Indeed, employees earning over £150k and contributing to pensions will be relieved that their ability to contribute will now only start to taper at earnings over £200k (a point that our much-needed NHS doctors have quite rightly driven home of late).

In case you thought this means that there aren’t many changes likely to affect you, don’t forget that, as already announced, a number of changes come in from April 2020 in relation to certain UK property disposals – in particular the requirement to file a tax return within 30 days of a property disposal post 5^th April.

Below is our summary of some of the key detail announced today though, as ever, this is not complete advice and if you think these or any of the recent property tax changes are likely to affect you, then please do not hesitate to contact us for advice.

Yours

The Charter Tax team

Contents:

• Entrepreneurs’ Relief
• SDLT and ATED
• Pensions
• VAT
• CIS Reverse Charge
• Corporation Tax
• Digital Services Tax
• Research and Developments Expenditure Credits
• Employment
• Top Slicing Relief on Chargeable Event Gains
• Nature for Climate Fund
• Anti-avoidance

Entrepreneurs’ Relief

After numerous Budgets where rumours of abolishing Entrepreneurs’ Relief abounded, the Chancellor today confirmed that, with immediate effect, the lifetime limit for the Relief has reduced from £10 million to £1 million.

Entrepreneurs’ Relief allows a 10% rate of Capital Gains Tax (“CGT”) to be applied when disposing of all or part of a business, shares in a personal company, or shares from an EMI scheme, so long as qualifying criteria are met.  Up until today, 11 March 2020, such qualifying gains were subject to a £10 million lifetime limit.

Following the Chancellor’s announcement, qualifying disposals made on or after 11 March 2020 will be subject to a lower lifetime limit of £1 million, with any gains over that amount being charged at the standard higher CGT rate (currently 20%).  This is a “cliff edge” change with no transitional rules available.  The Government comment that over 80% of taxpayers who use the relief will be unaffected.  Little comfort, perhaps, for a taxpayer making a £10 million qualifying gain on a business they have worked hard to build up who will now be £900,000 worse off than if the sale had already taken place. 

As this is a lifetime limit, any individuals who have already claimed more than £1 million of Relief in the past will not be able to get further relief on future qualifying disposals.

For any disposal contracts entered into before 11 March 2020 but not yet completed, anti-forestalling provisions have been included in the legislation to prevent individuals benefitting from the previous, higher lifetime limit.  Although this is likely to have limited impact, it is not impossible that disposals had been brought forward ahead of today’s Budget in anticipation of some change to the Relief.

In such cases, unless the individual can show that they did not enter into the contract with the purpose of benefitting from the previous lifetime limit, nor that the parties to the contract are connected, the lower lifetime limit will apply, although for CGT payment date purposes, the pre 11 March 2020 date will apply, so a “win win” situation for HMRC!

As always, we will be happy to discuss these changes and how they impact your particular circumstances, if requested.

SDLT and ATED

As previously explored in a Government consultation, there will be an additional levy on non-UK residents purchasing UK residential property. This levy will come into force from April 2021 and will be 2% rather than 1% as originally expected. The stated Government position is that funds raised will be used to tackle rough sleeping in the UK.

No additional detail on this measure was published with the Budget today, so the questions raised in the 2019 consultation remain outstanding. One important aspect arising from the consultation is the definition of a resident person for the purposes of the SDLT surcharge. Many will be aware of the Statutory Residence Test whereby an individual can potentially be resident in the UK for tax purposes by spending as few as 46 days in the UK in a tax year (even fewer in some cases). However, Government’s initial proposal to have a strict 183 day test for SDLT purposes could create a great deal of confusion and complexity for internationally mobile clients who might be resident for income tax purposes but not for SDLT purposes! We await clarification from Government on this when they publish the conclusion to the consultation.

Under the consultation document, most non-UK resident companies and other non-natural persons are also subject to the SDLT surcharge. This will include anti-avoidance measures to prevent non-UK resident individuals purchasing UK residential property through a UK resident company.

Separately, housing co-operatives will receive relief from the top 15% rate of SDLT and also from ATED when purchasing properties over £500,000.

Tax Relief for Pension Contributions

At last the Government has reacted sensibly to the damage caused by the unintended consequences of previous tinkering with the tax relief available on pension contributions. There has been much condemnation of a regime that has resulted in many doctors, in particular, having to “pay” to work extra shifts rather than receive payment for their efforts. All this has achieved so far is to reduce the capacity of the NHS at a time when increased capacity is urgently needed.

The proposed changes, which will only take effect from 6 April 2020 onwards and will therefore do nothing to make up for the damage already done, will raise “threshold income” to £200,000 (previously £110,000) and “adjusted income” will increase to £240,000 (previously £150,000).  It is hoped that these measures will reduce the numbers of people leaving the NHS and reverse the trend of previous years.

What this means in practice is that anyone earning up to £200,000 will now be able to obtain tax relief on annual pension contributions up to £40,000. The reduction in annual allowance to £10,000 will only affect those with an “adjusted income” above £240,000. However, there is a small sting in the tail for those with total income (including pension accrual) over £300,000 who will only be able to pay £4,000 a year into a pension.

Lifetime allowance

The maximum amount that can be accumulated in a registered pension scheme will increase in line with CPI for 2020-21 and now stands at £1,073,100.

VAT

The Government today announced some anticipated rules relevant to VAT issues on Brexit, together with various industry specific amendments, including VAT on e-publications and the long awaited zero rating of sanitary products.

VAT Announcements

Leaving the EU:

• Overall, the Government confirms that current systems will remain in place but the UK will review the VAT and Excise system in order to make it more business-friendly.  The Government will also form an industry-working group to review the future of VAT and financial services.  Watch this space to see if this is merely a tweaking of the rules or a major overhaul that many are calling for;
• From 1 January 2021, postponed accounting for VAT will apply to all imports of goods, including from the EU.  This means that importers will be able to declare and recover import VAT in their next VAT return, rather than having to pay VAT at the time of import, only to recover it at a later date.  This should enable business with EU imports to carry on as normal and provide a welcome cash boost;
• The Government will launch an informal consultation over Spring 2020 on the VAT and Excise treatment of goods crossing UK borders after the EU exit transition period;
• The Government has announced simplified rules for the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay accounting for VAT until the goods are called-off. The legislation will apply to goods that are removed from a Member State on or after 1 January 2020.

VAT on e-publications:

• From 1 December 2020, e-books, e-newspapers, e-magazines and academic e-journals will all be zero rated for VAT.  This will bring them into line with the VAT treatment of physical publications of the same nature and was expected as a result of a recent tribunal case,  News Corp UK & Ireland Limited v HMRC.

VAT Partial exemption:

• The Government is currently consulting on the VAT rules in relation to partial exemption and the Capital Goods Scheme.

VAT on sanitary products:

• A long awaited reduction to 0% on women’s sanitary products will be introduced on sales from 1 January 2021.

Other VAT news:

• Following the Government’s announcement on 4 March 2020 clarifying when fund management services are exempt from VAT, the Government has now announced a further review of the VAT treatment of fund management fees during 2020 and presumably will report back in early 2021.

CIS Domestic Reverse Charge

As expected, the Government today confirmed that the domestic reverse VAT charge for building and construction services would commence on 1 October 2020.

The new legislation will mean that certain specified construction services that are reported under the current CIS scheme will be subject to the reverse charge mechanism with the main aim being to tackle VAT fraud and evasion in the sector.  It will only apply to individuals or businesses registered for VAT in the UK.

The effect of the reverse charge is to impose on the recipient of goods or services the requirement to account for VAT, rather than the supplier.  There is no minimum threshold for this to apply.

Supplies in the construction sector that will not be subject to reverse charge include:

• Supplies of specified services between landlords and tenants;
• Supplies of specified services made to customers that are not construction businesses (such as high street retailers);
• Supplies of specified services where the supplier and customer are connected in a specified manner.

Effects on your business

• You should consider how your cash flow will be affected. If your customers are no longer paying you VAT, you will not benefit from this in cash flow terms going forward;
• Make sure your accounting systems and software are updated to deal with the reverse charge;
• Make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate;
• Consider changing to monthly VAT returns, to help stay on top of cash flow.

Corporation Tax 

Rate

In the 2016 Budget, the Government announced that the main rate of corporation tax would be reduced to 17% for the financial years beginning on or after 1 April 2020. Unfortunately, the Chancellor confirmed today that, as expected, this has now been abandoned and the rate will remain at 19% for this year and at least the financial year beginning 1 April 2021.

Corporate Capital Loss Restriction

Significant changes were already made to corporate tax losses in April 2017.  The changes provided more flexibility to companies by allowing certain losses to be carried forward and offset against profits from a different source, rather than simply being able to offset losses against future profits from the same source as was allowed under the previous rules.

The trade-off here was that the Government introduced a Corporate Income Loss Restriction for carry forward losses.  The restriction included a Group Deduction Allowance of £5million which could be used as the group or a standalone company saw fit against profits, but for profits remaining over the £5mllion allowance, the offset of carry forward losses is restricted to 50% of profits.

Corporate capital losses have now been added to the new regime and so, for companies with profits over £5million whose taxable profits include capital gains, they will only be able to offset up to 50% of those gains using brought forward capital losses.

Digital Services Tax (“The Google Tax”)

As announced back in 2018, to try to ensure that large, established, digital services companies are taxed on income derived from the UK, from 1 April 2020 the Government will introduce a 2% tax on sales generated from UK users for search engines, social media platforms and online marketplaces.

Qualifying businesses will have to pay the digital services tax on an annual basis.

The Government has however said that it will keep this new system under review as it is currently the expectation that the OECD will introduce a global digital tax framework in the future that would then replace this.

If you would like further advice on this, or think this may affect your business, please do get in touch.

Research & Development Expenditure Credits

For some time, the Government has been very keen to encourage companies to increase investment in Research & Development (R&D).

In January 2018 the rate of the R&D expenditure credit was increased to 12% and today the Chancellor announced there will be a further increase to 13%.

This standalone credit is taken into account when calculating the trading profit, but businesses can also claim a tax credit if the company is loss-making. 

Employment

The Chancellor announced a number of measures to benefit both employees and employers in his Budget statement today, including immediate measures in response to COVID-19.

Response to COVID-19

The Government had already announced that they will be extending Statutory Sick Pay (SSP) for those with COVID-19 symptoms so that it can be claimed from day one, instead of from day four as would be the case under the usual SSP rules.

In the Budget today, it was announced that SSP will be extended to those who have been advised to self-isolate even without showing symptoms, and for those who are caring for others who self-isolate.

In order to help employers with fewer than 250 employees, the Government will refund eligible SSP costs incurred as a result of COVID-19 for up to two weeks per employee.

Employees

National Insurance Contributions Threshold:

• The threshold before employees are required to pay National Insurance Contributions (NIC) will increase from 6 April 2020 to £9,500 from the current threshold of £8,632. The saving for employees will be at 12% (the primary rate of employee NIC) and will equate to a saving of £104 per year.

National Living Wage:

• The Government has also announced its target to increase the National Living Wage (NLW) to equal two thirds of median wages by 2024, and to extend the NLW to all workers aged over 21 (currently it only applies to workers over the age of 25, with workers under this age instead benefitting from the National Minimum Wage which is set at a lower amount).
• The NLW with effect from April 2020 is £8.72 and, based on the Office for Budget Responsibility’s current forecast, they expect the NLW to reach £10.50 by 2024.

Employers

Employment Allowance:

• The Employment Allowance has been in existence since April 2014, and provides a reduction to employer’s National Insurance costs for many companies (although there are exclusions to be aware of, including payroll schemes where a Director is the sole paid employee).
• From 6 April 2020, it had already been announced that the Employment Allowance could only be claimed by companies (or groups of connected companies) with employer’s National Insurance contributions below £100,000 in the previous tax year.
• On a more positive note, the Employment Allowance has been increased to £4,000 from 6 April 2020, the current allowance being £3,000, saving employers an additional £1,000 per year.

Top Slicing Relief (TSR) on Chargeable Event Gains

In an interesting (and unmentioned) proposal, the Government has announced changes in the way that TSR should be calculated in future. It has been confirmed that the personal allowance should be included within the TSR calculation and that allowances and reliefs within the TSR calculation must be set as far as possible against other income in preference to the chargeable event gain. This is likely to increase the benefit of TSR for many taxpayers.

Whist many commentators have always maintained that this is the correct way to calculate TSR, HMRC’s own software excluded the personal allowance from its calculation and this has resulted in a challenge through the Courts. The decision is still awaited to HMRC’s appeal against the initial judgement in the taxpayer’s favour but it now seems likely that the appeal will fail and many taxpayers will need to submit overpayment relief claims to obtain the additional relief to which they may now be due.

Action: Any clients who have realised chargeable event gains on life assurance investment bonds with income (including chargeable event gains) in excess of £100,000 in 2015-16 or subsequently should contact us and we will check the position to see if any tax repayment might be due.

Nature for Climate Fund

As we leave the EU our farming clients are already concerned by the five year reduction in the Basic Payment Scheme which will significantly reduce the profitability, if not the viability,  of many farms in the South East and elsewhere.  There is therefore some encouragement to be taken from the announcement of a Nature for Climate Fund, which will invest £640 million in tree planting and peatland restoration in England.  Neither of these activities, however, will produce any food; the fundamental objective of farming.  This Fund is one of a number of measures designed to boost the Government’s Green credentials and there are other funds announced such as The Nature Recovery Network Fund and the National Environment Impact Fund which aim to harness private sector support and funding to improve our natural environment generally.

This follows on from the Government’s stated policy that “Public Money should be for Public Good”.  In this context it seems to us that food production should be included within this category but the farming community is once again being encouraged to reduce its impact on the environment, purportedly for the public benefit, rather than to produce food for the public’s consumption and nourishment.  Whilst we applaud the concern and action proposed to protect our environment we are mindful of the plight facing many farmers as public subsidies diminish.

Anti-avoidance

Although the Budget speech indicated that significant funds are to be raised through further measures to crack down on tax anti-avoidance, based on the Budget press notices then issued it is hard to see really how much tax these measures will in fact raise.

The key areas to be subject to further legislation are announced to be as follows:

Hybrid and other mismatches

The “anti hybrids” legislation is relatively recently introduced but already it seems it is not hitting its mark.  Essentially, the point of this legislation is to stop companies exploiting differences between two tax jurisdictions so that, very broadly, a company in Jurisdiction A isn’t considered as making a tax deductible payment unless the recipient in Jurisdiction B is taxable on it.  However, what might be a simple concept is already extraordinarily difficult in practice and one can but hope this will be an opportunity to make sure some of these complications are ironed out!  We are pleased to note also that mention of proportionality is made in the announcement!

EBT Loan Charge Review

Budget 2020 confirms the Government’s response to Sir Amyas Morse’s Independent Loan Charge Review and essentially reverses some of the retrospectivity of certain prior changes.  However, the Government announcement also notes that disguised remuneration schemes continue to be used and it plans to issue a call for evidence on further action to stamp out these schemes.

“Clarifying” the treatment of Limited Liability Partnership (LLP)  returns

Retrospective legislation is to be introduced to ensure that LLPs should be treated as general partnerships under income tax rules.  This is most likely in response to certain tax avoidance cases where non-trading LLPs were considered to be treated like companies instead.

Insolvency and Creditor Priority

As previously announced, the Government will change the rules so that when a business enters insolvency, taxes that businesses are considered as collecting on behalf of HMRC (e.g. VAT and PAYE) become in effect priority creditors.

Tax Avoidance Promotors 

Yet more is to be done to crack down on firms considered to be marketing tax schemes.  In this day and age, we are always shocked whenever we come across a firm trying to sell a tax scheme but yet it does still happen.  However, one hopes that the honest firms giving only proper, reasonable, tax advice aren’t caught in the cross-fire of these further changes!

CHARTER TAX CONSULTING LIMITED
11 ST JAMES'S PLACE
LONDON

SW1A 1NP

advice@charter-tax.com

11 March 2020

Disclaimer

The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information and we will be happy to assist in providing such advice.

Tax legislation changes regularly and the information contained herein is provided based on legislation as at 11 March 2020.

Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law.

We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.