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Next month Parliament is due to enact a series of tax measures announced by the Government in the March 2020 Budget and previously. The timetable for passing this tax legislation was blown off course by last December’s general election with the result that most of the measures in question have already taken effect. Highlights of the main changes affecting businesses are set out below. Our summary of changes for individuals can be found here.

Corporation tax rates

The mainstream rate of corporation tax is to remain at 19 per cent for the financial year 2020 and the rate for 2021 has also been set at 19 per cent.

Non-UK property businesses – new regime

From 6 April 2020, non-UK resident companies in receipt of income from UK real estate will be subject to corporation tax on this income, rather than the basic rate of income tax as was previously the case.

Property businesses with existing income tax losses may carry these forward into the corporation tax regime to be offset against future UK property business profits (but not capital gains). Additionally, finance costs incurred during the seven-year period prior to the commencement of a new letting business will be tax deductible.  

Non-resident companies will not have to register for corporation tax and file a company tax return if their liability to corporation tax is fully offset by tax deducted under the Non-Resident Landlord Scheme and the company has no chargeable gains for the period.

Structures and buildings allowances – rate change

Structures and buildings allowances (SBAs) relieve qualifying expenditure incurred on the construction, renovation or conversion costs for non-residential structures and buildings.

With effect from 1 April 2020 for corporation tax, or 6 April 2020 for income tax, the annual rate for SBAs is increased to 3 per cent a year (from 2 per cent a year).

The increased rate will mean that full relief will be obtained over a period of 33.33 years instead of the current 50-year period.

There are further changes which clarify the rules, including an amendment to ensure that relief is not available if research and development allowances are also claimed, preventing double relief. 

Research and development credit – rate increase

Companies expenditure on developing new products, processes or services; or enhancing existing ones, are eligible for Research & Development (R&D) tax relief.

The rate of the R&D tax credit is being increased from 12 per cent to 13 per cent for expenditure incurred on or after 1 April 2020.

The R&D credit can be set off against a corporation tax liability, alternatively, for companies with no corporation tax liability it can be taken as a cash payment or credited against other tax or duties.

Intangible fixed assets – corporation tax changes

Until now, intangible assets that were either created on or after 1 April 2002 or acquired from an unrelated party on or after that date, were taxable under the intangible fixed asset regime for corporation tax purposes. So-called ‘pre-2002 intangibles’ continued to be taxed under the less advantageous capital gains tax rules. 

This is changing. All intangible assets which are acquired on or after 1 July 2020 will now be taxed under the corporation tax regime meaning that a single tax regime will apply to all corporate intangibles. This will allow pre-2002 intellectual property to be amortised, in particular where intangibles are acquired from non-UK companies,

Transitional rules will:

  • preserve the existing tax treatment for companies in the UK that hold pre-2002 assets which are dealt with under the capital gains or other rules, and
  • introduce a targeted restriction on the amount of relief related parties can claim where they enter into transactions involving pre-2002 assets.

Entrepreneurs’ relief - reduction of allowance and change of name

The lifetime limit for Entrepreneurs’ Relief has been reduced from £10m to £1m for qualifying disposals made on or after 11 March 2020.

In order to counteract attempts to lock-in to the previous £10m allowance, there are special provisions for contracts for disposals entered into before 11 March 2020 that have not been completed and for certain corporate reorganisations and exchanges of shares or securities made before 11 March 2020.

The relief is being renamed “Business Asset Disposal Relief” with effect from 6 April 2020.

Stamp duty – technical changes

A new market value rule is being introduced for certain transactions between connected companies.  

When a company transfers (unlisted) securities to a connected company in return for an issue of shares, stamp duty will be now be charged on a minimum of the market value of the securities transferred and likewise for stamp duty reserve tax.

This change will bring to an end a technique known as “swamping” which enabled connected companies to transfer shares free from stamp duty where group relief was not available. A similar rule already exists for transfers of listed securities.

A further change to stamp duty legislation involves the extension of relief available for certain demerger transactions.

As part of a corporate reorganisation it is often necessary, as a preliminary step, to insert a new holding company above a target company. Relief from stamp duty is available for this step, but it will not be granted where there are arrangements for the change of control of the new holding company. This condition is being relaxed so that provided the persons who obtain control of the new holding company have held at least 25 per cent of the target for the previous three years the relief will continue to apply. This relaxation will assist in situations where a company is being demerged into the ownership of some, but not all, of the original shareholders where a double stamp duty charge could have otherwise applied.

Both stamp duty changes will take effect from the date that the 2020 Finance Bill receives Royal Assent.

Off payroll taxation – extension to private companies

The off-payroll tax legislation which previously only applied to the public sector is being extended to private companies. The legislation was originally due to take effect from 1 April 2020, but this has been postponed until April 2021.

The new rules require private companies of a certain size to assess whether individuals who supply services to the company via an intermediary, should be taxed as employees via PAYE. Depending on the circumstances, the ‘client’ company may then be obliged to account for payroll taxes on the fees paid for the services.

Where an employment agency engages the individual and places him or her at the client company, responsibility for deducting employment taxes will lie with the agency. The new off payroll rules are summarised in more detail here

Since the initial publication of the legislation, it has been amended to clarify that the following are outside the remit of the rules:

  • clients with no UK ‘connection’, and
  • payments made after 1 April 2021, but which relate to services provided before that date.

The publication of regulations outlining HMRC’s powers to recover unpaid PAYE is expected in the coming months.

Enterprise Investment Scheme – changes to approved funds

The Enterprise Investment Scheme (EIS) provides tax reliefs for individuals who make share investments in qualifying companies. EIS tax relief is also available for interests in so-called ‘EIS funds’, where an investment fund manager acts as nominee for the investors. It is possible to obtain HMRC approval for these funds and in so doing secure tax relief at an earlier stage.

The rules governing approved EIS funds are being amended to require investments to be ‘wholly, or substantially wholly’, in ‘knowledge-intensive’ companies. In addition, the new rules:

  • give approved funds a longer period over which to invest fund capital (requiring 50 per cent investment within one year of the fund closing and 90 per cent within two years, compared to the current requirement of 90 per cent within one year), and
  • allow investors in an approved fund to set their Income tax relief against liabilities in the tax year, or against their liability of the previous tax year, before the fund closes.

The changes take effect for funds which close from 6 April 2020 onward.

Taxes due at the time of insolvency

A new measure will amend insolvency legislation to move HMRC up the creditor hierarchy for the distribution of assets in the event of insolvency.

The measure, which applies to all businesses whether operated by companies, individuals or through partnerships, will make HMRC a secondary preferential creditor in respect of certain tax debts held by a company on behalf of customers and employees (e.g. VAT, PAYE). The changes come into effect on 1 December 2020.

Additionally, with effect from the passing of the Finance Act, a new anti-avoidance law will give HMRC the power to make directors of companies, together with shadow directors and certain others connected to a company, jointly and severally liable for a company’s tax liabilities in the following limited scenario:

  • A tax liability arises or is expected to arise from tax avoidance, tax evasion, repeated insolvency or a penalty for facilitating avoidance or evasion; and the company begins insolvency proceedings, or is expected to do so, so that some or all of the tax liability will be lost to HMRC.

Office holder’s expenses

Unpaid directors and other voluntary office holders of a company are not liable to income tax or NICs on payments for reasonable private expenses incurred in carrying out the duties of their office. It does not matter whether the payment is an advance payment or a re-imbursement. This new measure formalises HMRC’s existing concession on the point.

Changes affecting large companies

Digital services tax

A new digital services tax (DST) takes effect from 1 April 2020. The tax applies to group companies worldwide which provide a social media service, internet search engine or an online marketplace to UK users.

The rate of DST is 2 per cent and it is levied on the group revenues which are derived from UK users of the digital services activity. There is an alternative calculation to reduce the effective rate of taxation where the UK operating margin is very low.

The tax only applies where the group receives £500m of revenue from the relevant digital services activity, of which £25m is from UK users.

Plastic packaging tax

A new plastic packaging tax will be introduced from 1 April 2022 to incentivise the use of recycled plastic in packaging.

The rate was announced at £200 per tonne of plastic packaging which contains less than 30 per cent recycled plastic but this will be kept under review.  The tax will apply to the production and importation of plastic packaging.

Corporation tax instalment payments

Previously, if a company is brought within the UK corporation tax regime solely by reason of a taxable disposal (for example a foreign company selling a UK property) and the company consequently had a short (sometimes single day) accounting period, it was treated as ‘very large’ under the corporation tax instalment rules triggering an immediate liability to pay the tax. With effect from 11 March 2020 such companies will be permitted to account for tax under the quarterly instalment timetable for large companies.

Corporate capital loss restriction

For accounting periods ending on or after 1 April 2020 companies making chargeable gains will only be able to offset up to 50 per cent of those gains using carried-forward (allowable) capital losses. However, the restriction is subject to the existing £5m deductions allowance (which a group will now have to allocate between capital and income losses) from which losses can be offset before the 50 per cent restriction is applied.

The restrictions will not apply to current year capital losses. Companies will still be able to set these against gains in the same year without restriction.

Companies which are insolvent and are being liquidated will be able to offset carried-forward capital losses against chargeable gains without restriction during the period of official liquidation.

Deferral of corporation tax following certain European transfers

A new deferred payment plan is being introduced for corporation tax charged on profits or gains arising from certain transactions between a UK company and a corporate member resident in another EU or EEA state. 

In order to benefit from the deferral, the transaction must be a transfer of an asset, loan relationship or derivative contract which would have been treated as tax neutral if the recipient company had been resident in the UK or otherwise within the charge to UK corporation tax in respect of the asset after the transaction.

Payment can be deferred over a period of up to five years. The tax will be payable in six annual instalments, or earlier in specified circumstances such as insolvency, disposal of the asset or the transferee leaving the group. The change has effect from 11 July 2019 for transactions occurring in accounting periods ending on or after 10 October 2018.

If you require further information about anything covered in this briefing, please contact Charlotte Black, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2020

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