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UK Announces Digital Tax, Corporate Tax Reforms In New Budget

Friday, November 2, 2018

The UK's 2018 Budget includes changes to tax rules for companies, and notably for multinational groups to conform with the EU's Anti Tax Avoidance Directive. Most significantly, the UK has decided to move ahead of the EU in announcing that it will apply a tax on the turnover of certain digital businesses.

The Budget announces that from April 2020 the UK will introduce a two percent tax on the revenues of certain digital businesses that derive value from their UK users. The tax will apply to revenues generated by search engines, social media platforms, and online marketplaces. It will apply to revenues from those activities that are linked to the participation of UK users, subject to a GBP25m-per-year allowance; and apply only to groups that generate global revenues from in-scope business activities in excess of GBP500m per year. The regime will include a safe harbor provision that will exempt loss-making businesses and will reduce the effective rate of tax on businesses with very low profit margins.

Legislation for the tax will be introduced in Finance Bill 2019-20 after a consultation on the levy's design.

Corporate tax relief measures

The Budget includes the introduction of new corporate tax reliefs and amendments to existing provisions. The Government proposes:

  • The introduction of a new Structures and Buildings Allowance (SBA), which will provide relief for qualifying capital expenditure on new non-residential structures and buildings. Relief will be available for eligible expenditure incurred where all the contracts for the physical construction works are entered into on or after October 29, 2018. Relief will not be available for the costs of land or dwellings.
  • The extension of the first-year allowance for electric charge-points for vehicles for four years, until March 31, 2023, for corporation tax, and to April 5, 2023, for income tax purposes.
  • A change to the special rate of writing down allowances for qualifying plant and machinery from eight percent to six percent for businesses claiming capital allowances from April 2019.
  • An increase temporarily to the Annual Investment Allowance from GBP200,000 to GBP1m, with effect from January 1, 2019, to December 31, 2020.

The Government has also announced a number of integrity measures concerning corporate tax breaks. Namely, it has announced that it will restrict companies' use of carried-forward capital losses to 50 percent of capital gains from April 1, 2020. The measure will include an allowance that allows companies unrestricted use of up to GBP5m capital or income losses each year, which, according to the Government, will mean that 99 percent of companies will be financially unaffected. An anti-forestalling measure will have effect on and after October 29, 2018.

The UK will introduce a limit on the amount of payable tax credit that can be claimed by a company under the R&D SME tax relief. The limit will be set at three times the company's total PAYE and National Insurance contribution (NICs) payment for the period, with effect for accounting periods beginning on or after April 1, 2020.

The Government will also consult on aligning the Stamp Duty and stamp duty reserve tax (SDRT) consideration rules and introducing a general connected party market value rule. Reforming the consideration rules is intended to simplify stamp taxes on shares and prevent contrived arrangements from being used to avoid tax.

Finally, changes are to be legislated for in Finance Bill 2018-19 to make technical amendments to the long funding lease and corporate interest restriction rules to ensure they function as intended, including following the introduction of the new accounting standard for leases, IFRS 16, and loss relief legislation will also be amended to ensure the law works as intended and to prevent relief for carried-forward losses being claimed in excess of that intended.

International tax measures

The Government will legislate in Finance Bill 2018-9 to make two changes to the Controlled Foreign Company (CFC) rules. These changes relate to the definition of control and the treatment of certain profits generated by UK activity, and will ensure that the UK CFC rules comply with the EU Anti-Tax Avoidance Directive (ATAD) from January 1, 2019.

Legislation will be introduced in Finance Bill 2018-19 to make two changes to the hybrid mismatch rules. These changes relate to the treatment of certain permanent establishments and the treatment of regulatory capital, and will ensure that the UK hybrid mismatch rules comply with the ATAD, effective from January 1, 2020.

Further, the Government will legislate in Finance Bill 2018-19 to introduce new rules for the taxation of hybrid capital instruments to ensure that they are taxed in line with their economic substance, taking into account new Bank of England requirements for loss absorbency, known as MREL. The new rules will also eliminate mismatches between the tax treatment of instruments used to raise funds externally and those used to lend funds internally within a group. The rules cover issues by companies in any sector and replace current rules covering regulatory capital instruments issued by banks and insurers.

The Government will also legislate in Finance Bill 2018-19 to amend the Diverted Profits Tax rules. The legislation is intended to close tax planning opportunities, make clear that diverted profits that are subject to DPT will not also be subject to corporation tax, and introduce modifications to the mechanics of the DPT legislation. This includes extending the DPT review period and permitting taxpayers to amend their corporate tax return during the first twelve months of the review period. These amendments will generally apply from Budget or Royal Assent of Finance Bill 2018-19, but will be deemed to have always had effect where they are wholly relieving.

The Government will also legislate in Finance Bill 2018-19 to give full effect to changes being made to its tax treaties through the OECD's BEPS Multilateral Instrument. The legislation tackles the erosion of the tax base by multinationals by changing the definition of the term "permanent establishment." It removes access to the exemption from having a UK permanent establishment when non-resident companies artificially fragment their business operations to avoid coming within the charge to UK corporation tax.

The Budget also announces that the Government intends to reform the corporate intangibles regime. The Government will:

  • Publish detailed proposals on how the government intends to partially reinstate relief for acquired goodwill in the acquisition of businesses with eligible intellectual property; and,
  • Alter the regime's de-grouping charge rules so that a charge will not arise where de-grouping is the result of a share disposal that qualifies for the Substantial Shareholding Exemption.

The changes to the de-grouping rules will have effect in relation to de-groupings occurring on or after November 7, 2018.

The Government has confirmed that it will also legislate for its profit fragmentation proposals that were announced at Autumn Budget 2017. This will involve the introduction of targeted legislation to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. It is proposed that the taxable UK profits will be increased to the actual, commercial level.

Oil and gas sector

A number of measures affecting the oil and gas industry will be legislated for in Finance Bill 2018-19. As announced at Autumn Budget 2017, these will include the introduction of a transferable tax history mechanism for oil and gas companies, intended to remove tax barriers to new investment in the North Sea, and the Government will amend the petroleum revenue tax rules on retained decommissioning costs to simplify the way older fields can be sold to new investors. Both of these measures will apply for transactions that receive Oil and Gas Authority approval on or after November 1, 2018.

Real property taxes

As announced at Autumn Budget 2017, the Government will legislate in Finance Bill 2018-19 to broaden the UK's tax base to include disposals of all forms of UK land made by non-residents. This will include both direct disposals of UK land, and indirect disposals of entities that predominantly derive their value from UK land. Non-resident companies will be chargeable to corporation tax on their gains.

This measure extends the rules introduced in April 2015 applying to non-residents' disposals of residential UK land. As part of the measure, the rules relating to Anti-Tax Avoidance Directive-related gains will be abolished.

The Budget also announces that a requirement will be introduced for UK residents to make a payment on account of capital gains tax following the completion of a residential property disposal. The new legislation will also replace and extend the existing reporting and payment on account rules for non-UK residents.

Further, the Government will extend first-time buyers' relief to include qualifying shared ownership property purchases, whether or not the purchaser elects to pay SDLT on the market value of the property. The first GBP300,000 of an initial share purchased will not be liable to SDLT. The remainder of the initial share will be chargeable at five percent on amounts over GBP300,000.

Last, a targeted market value rule for Stamp Duty and Stamp Duty Reserve Tax (SDRT) will be introduced for listed securities transferred to connected companies. Where the rule applies, the transfer will be chargeable based on the higher of the amount or value of the consideration (if any) for the transfer or the market value of the securities. Legislation will be published on Budget Day. The rule will come into force on Budget Day.

Environmental taxes

The Government has announced that, in light of Brexit, it will introduce a new Carbon Emissions Tax to meet its carbon pricing commitments, which would be introduced in the event of the UK leaving the EU without a negotiated deal in 2019. It will would apply to all stationary installations currently participating in the EU Emissions Trading Scheme. For 2019, a rate of GBP16 would apply to each tonne of carbon dioxide (or other greenhouse gas on a carbon equivalent basis) emitted over and above an installation's emissions allowance.

Next, the Government has confirmed that there will be no changes to the VAT or Air Passenger Duty regimes in Northern Ireland at this time.

Last, the Government has announced it will introduce a tax on the production and import of plastic packaging from April 2022. Subject to consultation, this tax will apply to plastic packaging that does not contain at least 30 percent recycled plastic.

Individual tax measures

The Budget features few significant changes for individual income taxpayers, other than in relation to Entrepreneurs' Relief. Otherwise, the two notable announcements were an increase to the tax-exempt income allowance – the so-called personal allowance – to GBP12,500 for 2019-20, and an increase to the basic rate limit to GBP37,500 for 2019-20, above which income is subject to the 40 percent income tax rate, rather than 20 percent. These thresholds will be retained in 2020-21 also, after which both will be indexed with the Consumer Price Index.

The Government has announced the following changes to Entrepreneurs' Relief. Two new tests will be added to the definition of a personal company for Entrepreneurs' Relief. These tests will require the claimant to have a five percent interest in both the distributable profits and the net assets of the company. The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be due. The Government has also announced that it will increase the minimum period throughout which certain conditions must be met to qualify for Entrepreneurs' Relief, from one year to two years. Last, the Government intends to allow individuals whose shareholding is "diluted" below the five percent qualifying threshold for Entrepreneurs' Relief as a result of a new share issue to obtain relief for gains up to that time.

Offshore tax avoidance

As announced at Autumn Budget 2017, 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 behavior the time limit remains at 20 years. The extended time limits will apply unless international agreements mean HM Revenue and Customs already has the information needed to assess the tax due.

As further announced at Autumn Budget 2017, legislation will be introduced in Finance Bill 2018-19 to tax income from intangible property held in low-tax jurisdictions to the extent that it is referable to UK sales. Following a consultation between December 2017 and February 2018, the Government is making changes to ensure that the policy is effective, applies as intended, and is not open to abuse. Namely it will:

  • Collect the tax by directly taxing offshore entities that realize intangible property income in low-tax jurisdictions, rather than through applying a withholding tax;
  • Broaden the income in scope of the measure to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties; and
  • Introduce a de minimis UK sales threshold of GBP10m, 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.

The measure will take effect from April 6, 2019, with an anti-avoidance rule that will apply from October 29, 2018.

The Government has also announced that it will publish an updated offshore tax compliance strategy, which was last updated in 2014.

Finally, the Budget announces that the rate of Remote Gaming Duty will rise from October 1, 2019, to 21 percent from 20 percent.