UK Autumn Budget 2018 – business measures see UK go it alone with digital services tax

Nov 05, 2018

Spread throughout the Chancellor’s Budget speech and the accompanying publications were several measures targeted at business including the increased annual investment allowance of £1 million and the new digital services tax.

Digital services tax

From April 2020, the government will introduce a new 2 percent digital services tax (“DST”) on the revenues of certain digital businesses. The aim of this tax is to ensure that the amount of tax paid in the UK is reflective of the value that digital services businesses derive from UK users.

The tax will:

  • apply to revenues generated from the provision of search engines, social media platforms and online marketplaces;
  • apply to revenues from those activities that are linked to the participation of UK users, subject to a £25 million per annum allowance;
  • ·only apply to groups that generate global revenues from “in-scope” business activities in excess of £500 million per annum; and
  • include a “safe harbour” provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins.

The government has made clear that it remains committed to the work of the G20 and OECD discussions on potential future reforms to the international corporate tax framework including digital taxation. Therefore the UK DST will only apply until an appropriate long-term solution is in place internationally.

The government plans to consult on the detailed design of the DST and legislate for this in Finance Bill 2019-20.

Capital allowances

Annual investment allowance limit

To help stimulate business investment, the annual investment allowance limit of £200,000 will be increased to £1 million for all qualifying investments made between 1 January 2019 and 31 December 2020. Readers are reminded that this increase will mean complex transitional rules will need to be considered by businesses which have an accounting period end straddling the date of this change.

Structures and buildings allowance  

New commercial structures and buildings will be eligible for a 2 percent annual capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018. This addresses a significant gap in the UK’s current capital allowances regime, and is intended to improve the international competitiveness of the UK’s tax system. Further information on this measure is available in a supplementary document published alongside the Budget.  Capital allowances have not been available for expenditure on buildings since the phase out of industrial building allowances was completed in March 2011.

Where there is mixed use, relief will be reduced by apportionment. No relief will be provided for work spaces within domestic settings, such as home-offices. Relief will be limited to the original cost of construction or renovation, relieved across a fixed 50-year period, regardless of ownership changes

Special rate reduction

From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8 percent to 6 percent. This change is designed to more closely match average accounts depreciation.

Enhanced capital allowances for certain technologies

From April 2020, 100 percent enhanced capital allowances (ECA) and first year tax credits will no longer be available for technologies on the Energy Technology List and Water Technology List. The government will extend the ECA for companies investing in electric vehicle charge points to 31 March 2023.

Off-payroll working in the private sector

From April 2020, responsibility for operating the off-payroll working rules (IR 35) will move from individuals to the private sector organisation, agency or other third party engaging the worker. “Small” organisations (the definition of which is not yet clear) will be exempt from this change.

This follows consultation and the roll-out of reform in the public sector from April 2017. The government will be publishing a further consultation early next year to seek views on the detailed operation of rules in the private sector. A summary of responses to the consultation and a new factsheet have been published.

Corporation tax

Corporate capital loss restriction

From 1 April 2020, the proportion of annual capital gains that can be relieved by brought-forward capital losses will be restricted to 50 percent. The measure will include an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year. The government will consult on the detailed design of this change and legislate in Finance Bill 2019-20. This measure is subject to anti-avoidance rules that apply with immediate effect.

This change means that the treatment of brought forward capital losses will match the current treatment of other corporate losses.

R&D tax relief

From 1 April 2020, the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. The government plans to consult on this change.  

Amendments to reform of loss relief rules

With effect from April 2017, the government reformed the rules on how carried-forward corporate losses can be set against taxable profits of a company and its group members. The government plans to make further amendments to the loss relief legislation “to ensure that it works as intended and prevents relief for carried-forward losses being claimed in excess of that intended.”

Intangible fixed assets regime

In early 2018, the government reviewed how the tax treatment of acquired intangible assets could be made more competitive. Following a short consultation, from April 2019, the government will seek to introduce targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property. Relief for goodwill was introduced originally in 2002 as part of the corporate intangibles regime but was removed from 8 July 2015.

With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code. This may mean that if the substantial shareholdings exemption applies to the relevant share disposal, then the intangibles de-grouping charge which currently does not have any direct mechanism for relief may also be exempted.

Employment allowance reform

From April 2020, the employment allowance of £3,000 which can be used against a businesses’ employer’s NIC bill will only be available to employers with an employer’s NICs bill below £100,000 in their previous tax year.

Offshore receipts of intangible property   

As announced at last year’s Autumn Budget, the government is introducing legislation to tax income from intangible property held in low-tax jurisdictions to the extent that relates to UK sales. This measure will come into effect from April 2019. Following consultation, the government is making changes to the draft legislations as follows:

  • the tax will be collected by directly taxing offshore entities that realise intangible property income in low-tax jurisdictions, rather than through applying a withholding tax;
  • the scope of income caught will be broadened to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties;
  • several exemptions will be introduced including a de minimis UK sales threshold of £10 million, an exemption for income that is taxed at appropriate levels, and an exemption for income relating to intangible property that is supported by sufficient local substance; and
  • anti-avoidance provisions will apply from 29 October 2018 to counteract arrangements entered into with a main purpose of avoiding a charge under this measure.