UK Budget - November 2018
13 Nov 2018
Written by Paul Hotchkiss
On Monday 29 October 2018 Philip Hammond delivered his third Budget as Chancellor. Mr Hammond did admit that a no-deal Brexit would require a new Budget that “set out a different strategy for the future”. The main tax points of this Budget were as follows:
UK personal tax
- Increase in the personal allowance threshold (the point at which you start paying tax) in April 2019 from £11,850 to £12,500.
- Higher rate income tax threshold (the point at which you start paying tax at 40%) to increase in April 2019 from £46,350 to £50,000.
- These thresholds were raised a year earlier than anticipated and following April, these thresholds will then rise with inflation.
- No changes to NIC rates and Class 2 contributions will not be abolished.
The increase in personal allowances and tax bands will mean that anyone moving from the UK to the IOM will need to earn a larger salary on island to maintain their net take home pay. Of course, historically the Manx Budget raises similar bandings and provided this happens the salary threshold over which a taxpayer is better off on-island will be maintained or improved.
IR35, personal service company’s
- Anticipated changes will not come into effect until April 2020
- Changes will apply to large and medium businesses
- PAYE risk to be shifted to the private sector end client to make them responsible for assessing whether a contractor should be added to pay-roll or not.
This is a very similar stance to the IOM’s take on such arrangements. It is a good approach but puts the ‘employing’ entity in a very difficult position in that they must become experts in employment tax or take advice.
- No stamp duty for first time buyers purchasing shared equity homes of up to £500,000.
- Government to publish a consultation in January 2019 on a SDLT surcharge of 1% for non UK residents purchasing residential property in England and Northern Ireland.
Gains made by non UK residents from UK residential and non-residential property
- Confirmation that such gains will be brought into scope of capital gains tax
- Deadlines for reporting and paying tax to be extended
- Effective 6 April 2019 but subject to anti-forestalling for arrangements after 21 November 2017.
- Gains in diversely held companies will also be taxed on non-residents.
- Gains on interests in UK property rich entities (eg shares in companies that derive at least 75% of the value from UK land) will be taxable.
This was to be expected. The non-resident owners of non-residential property will need to balance this possible charge with the future inheritance tax charges.
Short-term business visitors
- Eligibility for PAYE and administration to be widened for STBV from overseas branches of UK Headquartered companies. UK workdays in the tax year will be extended from 30 days or less to 60 days or less.
- Effective from April 2020.
This may effect employees of IOM branches of UK companies (in a positive way) where employees overseas work in the UK on occasion.
Inheritance tax (IHT) - trusts settlement definition
- the Government will introduce legislation in Finance Bill 2019-20 to reflect HMRC’s established legal position in relation to the IHT treatment of additions to existing trusts.
- The legislation will confirm that additions of assets by UK-domiciled (or deemed domiciled) individuals to trusts made when they were non-domiciled are not excluded property.
- The legislation will apply to IHT charges arising on or after the date on which Finance Bill 2019-20 receives Royal Assent, whether or not the additions were made prior to this date.
- Legislative amendments will also be made to ensure that transfers between trusts made after the date on which Finance Bill 2019- 20 receives Royal Assent will be subject to additional excluded property tests.
This broadly legislates for the current practice set out in Revenue Interpretation 166.
Capital Gains Tax (CGT)
- No change to rates.
- Entrepreneurs relief:
o The qualifying period has been extended from 12 months to 2 years.
o Shareholders must be entitled to 5% of the distributable profits and assets as well as 5% of the voting rights and nominal capital.
- UK residents disposing of residential property will have to report their disposals and make a payment on account within 30 days, effective 6 April 2020 – note this does not include cases where the gain is not chargeable to CGT e.g. where private residence relief is available
- Funds (other than Partnerships which meet the definition of “alternative investment funds” or “collective investment scheme”) to be treated as companies for the purpose of capital gains tax
- Exit charges on unrealised capital gains when a company or trust leaves the UK amended for company’s and introduced for trusts, allowing charges to be paid over 5 or 6 years respectively
The charge to CGT on exit being spread over 5/6 years is a sensible move and will allow some breathing space relating to tax charges for such entities wishing to ‘relocate’ elsewhere.
- Temporary two-year increase in the annual investment allowance to £1m to stimulate business investment in the economy.
- Structure and buildings allowance (SBA) for contracts entered into on or after 29 October 2018 to allow 2% annual relief on the original construction costs of commercial buildings (subject to qualifying criteria and anti-avoidance provisions).
- 100% allowance for electric charge point equipment will be extended to 2023.
- Rate will remain at 19% in 2019/20 but will fall to 17% in 2020.
Non-UK resident property income
- Non-UK resident company’s receiving UK property income to be brought into charge to UK corporation tax.
- Effective 6 April 2020.
- Non-resident landlord scheme (NLRS) will be available to withhold the income tax on gross rental income.
This is likely to have a significant impact on the CSP sector. Many CSPs prepare their own tax returns under the NRLS. Now a knowledge of the corporation tax acts will be required to prepare returns which significantly broaden the matters which will require consideration, e.g. loan relationship rules and similar.
Permanent establishment (PE)
- Legislation to be changed to extend the definition from January 2019.
- Activities from part of a fragmented business to be brought into scope where for example:
o A company, either alone or with related entities, whether they be UK or not, carry on a combined business operation from one or more UK location(s);
o At least one of the entities has a PE; and
o The activities together would have created a PE had they been undertaken by a single entity
Many businesses have tried to fragment their business to avoid creating a PE. This measure in some respects mirrors the anti-fragmentation rules in the measures introduced relating to land trading.
Amendments to hybrid mismatch rules
- Two anti-avoidance changes announced relating to certain mismatches involving disregarded PE’s and the treatment of regulatory capital.
Intangible property (IP) – offshore receipts
- Proposals for Royalties Withholding Tax scrapped
- Instead, a UK income tax charge to apply to owners of IP or entitled to income from IP which relates to the sale of goods or services in the UK (including via 3rd parties) and who are not resident in a full treaty territory.
- Effective 6 April 2019 with anti-avoidance rule from 29 October 2018
- A number of exemptions available.
IP owning companies will need to consider both these rules and the proposed draft IOM substance rules which may see such entities migrating or increasing their presence in treaty jurisdictions. The new IOM-UK treaty is not yet in force but hopefully this is good news for IP developed locally and exploited in the UK.
Digital services tax (DST)
- To be introduced from April 2020
- Draft legislation expected as part of the 2019/20 Finance Bill
- Intended to target specific digital business models where:
o The revenue is linked to the participation of UK users;;
o The revenue derives from advertising from search engine results and on social media platforms and the facilitation of transactions via online marketplaces; and
o The direct sale of goods and services is excluded.
- Will apply to companies achieving revenues greater than £25m in the UK or £500m globally
- Rate on in-scope revenue to be 2%, although alternative calculation available for businesses with a low profit margin
- DST will be an allowable expense for corporation tax but will be outside the scope for double tax relief.
This is an interesting measure and may affect certain IOM businesses in this sector.
Diverted profits tax (DPT)
- Effective immediately. i.e. on and after 29 October.
- Measures to prevent planning opportunities allowing companies to amend their returns and allow HMRC more time to review DPT.
R&D tax relief anti-avoidance
- The amount that a qualifying loss making small or medium-sized enterprise (SME) can receive in R&D payable tax credit in a year will be capped at three times its PAYE and NIC liability for that year.
- Effective from 6 April 2020 and is being brought in to ensure that companies receiving the relief have a real UK presence.
- Genuine R&D companies with relatively low PAYE and NIC may be able to carry unused losses forward.
VAT and vouchers
The Government will implement the EU Directive concerning the VAT treatment of vouchers, effective 1 January 2019. This concerns vouchers which are used as consideration or part consideration for supply of goods or services and the nature of the voucher will affect the VAT point date.
Changes to the VAT specified supplies anti-avoidance
- Insurance intermediary services made in respect of a principle supply, where its customer is in the UK will no longer have the right to recover input tax.
- Effective 1 March 2019
International tax enforcement: disclosable arrangements
- Legislation will be enacted to allow the introduction of international disclosure rules about offshore structures that could avoid tax or be misused to evade tax.
Offshore tax compliance strategy
- The Government will publish an updated offshore tax compliance strategy
Extension of offshore time limits
- the government will legislate in Finance Bill 2018-19 to increase the assessment time limit for offshore tax non-compliance to 12 years for Income Tax, Capital Gains Tax and Inheritance Tax.
- Where there is deliberate behaviour the time limit remains at 20 years.
Consultation on the taxation of trusts
As announced at Autumn Budget 2017, the government will publish a consultation on the taxation on trusts, to make the taxation of trusts simpler, fairer and more transparent.
The above is intended as a brief overview of the Budget and is in no way a comprehensive review of the proposed changes. There ae quite a number of changes which will impact business on island. If you think any of the above may affect you or your business, please do not hesitate to contact Paul Hotchkiss (email: firstname.lastname@example.org or call 01624 872140).