Yesterday, Philip Hammond presented his 2018 Budget. While filled with positive announcements about the UK economy the speech also came with an early warning that, if required, the Spring Statement in March 2019 may turn into a further Budget.
What follows is a more detailed review of the key tax changes announced in the speech written by our Tax Partner Richard Grimster.
When your home can become your tax liability
The rules on the exemption from Capital Gains Tax (CGT) on your main home has always been littered with complexity, and there was another change proposed in the Budget yesterday. The exemption will only apply to sales of your main residence within nine months of moving out.
It is common in cases of divorce or indeed ‘rent to buy’ and bridging arrangements for persons to be clawed into paying CGT on their home because of the time taken to make an onward disposal or settle the matrimonial dispute.
We expect with the changes last year to Stamp Duty Land Tax (SDLT) with an increased 3% at all banding this makes advising in the area of divorce from a tax perspective yet more complex.
A consultation will be undertaken to determine the way in which the policy will be implemented but there is unlikely to be a distinct change in the sentiment of this, simply the detail to be pored over.
Annual Investment Allowance (AIA) – a capital idea
Many businesses have deferred significant capital expenditure because of the economic outlook, political uncertainty or fluctuating currencies since mid-2016. The proposals to increase AIA five-fold for two years from 1 January 2020 to £1million presents another good reason to hold fire.
This 100% allowance for the purchase of plant is available for vans, agricultural machinery, fittings in buildings and office furniture and equipment writing off the cost of the assets against taxable profits. While it only represents a favourable timing advantage it is real cash saving now which will benefit some businesses.
The timing of an acquisition for capital allowances is complex and care must be taken to gain the full advantage of this extension even after 1 January. Key things to watch are: when an unconditional obligation to pay arises under a contract for plant, and tax years spanning the date of change.
There will be an increased tax benefit to pre-April 2020 purchases for companies which have a 19% tax rate until then and a 17% tax rate afterwards.
IR35 – what is a medium and large business and when must it comply
It was confirmed yesterday that the off payroll avoidance net will be cast over the private sector from April 2020. The public sector has had these rules which are fairly intuitive at the vanilla end but complex for some structures. The target remains those who disguise their employment by using a personal service company to bill their ‘would be employer’ realising some tax saving for the person providing their services in this way, and some NIC saving for the user of those services.
IR35 has existed as an anti avoidance tool for many years, and in our experience appears to have been lightly policed until recently. Some high profile cases with BBC presenters and some image rights cases for footballers have shone a light on the practice of diverting earned income into a Company and we expect that the pressure on this part of the tax gap will increase over time. However, HMRC have been relatively unsuccessful in taking and winning cases on this and many commentators consider this extension into the private sector is premature given HMRC struggles to interpret the legislation well enough to be consistently successful in the tribunals.
For now, small companies can breathe a sigh of relief as the implementation in 2020 is aimed only at medium and large enterprises. We expect this will be a short reprieve and remain hopeful that there will be more clarity around the currently large gap between being clearly caught by IR35, and clearly not.
Entrepreneurs’ relief, an already complex relief providing up to £1million in tax savings to a classic business owner has seen a two pronged attack in the recent budget.
With immediate effect the 5% of ordinary share capital test is enhanced to include the requirement to also hold entitlement to 5% of profits and 5% of assets in a winding up which could exclude some smaller employee shareholders to lose the benefit of this relief. Given the work around for holders of Enterprise Management Incentive (EMI) option shares it is our view that there may be a push into exploring other ways of employee ownership going forward.
Another requirement of the shareholder in order to achieve this 10% CGT rate is a 12 month holding period which is being doubled to a 24 month holding period where all of the conditions are met. This means that there must be due consideration made to an exit event well in advance of marketing a business in order to maximise entrepreneurs’ relief.
Research and Development (R&D) changes to bite buyers
The SME scheme for R&D is a very lucrative incentive for innovation and the scheme is relevant to a wide range of industries, as its application is broadly drafted to include any company seeking to address an uncertainty in the field of science or technology.
From April 2020 there will be a cap on the amount of tax credit (currently worth 33p for every £1 spent) if that credit exceeds three times the PAYE and NIC paid to staff. This is unlikely to affect employers of R&D teams but in the case of a company undertaking R&D with the vast majority of that outsourced or with agency workers brought in to undertake the work, we expect to see restrictions on the cash credit for them.
There could also be unexpected consequences for employees working across groups of companies and advice should be sought to ensure the valuable incentive can still be retained and maximised.
Hello, Goodbye, Goodwill
Two obscurities in the tax system were addressed in the Budget 2018 having had consultations earlier in the year.
Firstly, the changes to Goodwill have been many and go back to April 2002 when it became an income type asset rather than a capital gains type asset for new but not old businesses. The change is in this case very welcome, because since July 2015 the amortised cost of Goodwill acquired in an acquisition has not been a tax deductible expense. From April 2019 this will be addressed for some eligible intellectual property (IP).
The proposals ensure that IP rich companies will benefit from the writing down of their purchased assets going forward, with detail to be released with the draft legislation in due course.
The second, and often very expensive, problem with intangibles had been the seemingly obvious inconsistency between the pre 2002 intangible regime and post 2002 regime in the case of a business leaving a group – the degrouping tax charge inconsistency being addressed from 7 November 2018 will be welcomed within merger and acquisitions sphere where commercial transactions can proceed with less friction in this part of the tax analysis.
This post was written by Richard Grimster, a Tax Partner at Price Bailey.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.