The Chancellor of the Exchequer, Philip Hammond, delivered his Budget on 22 November 2017. It was not a scintillating Budget but it was not designed to be that. Many business people are just grateful that it did not contain a lot of unwelcome measurers and so far the fine print has not revealed nasty surprises for which some former Chancellors were well known!
Key tax announcements
The eye catching part of the Budget was, and was meant to be, the abolition of SDLT for the first £300k of the house price for first time buyers but only if purchasing a property up to £500k. The measure will though cause some inflationary pressure in that section of the market. Consultation on the threshold for VAT registration is of interest. There is some tinkering with business rates. The increase in the tax incentive for R&D expenditure will be of benefit to larger companies not smaller ones. From next April, diesel cars that don’t meet air quality standards will be hit by additional tax. But “no white van man, and no white van woman” will be hit by the measures the Chancellor says. Mr Hammond also unveiled extra funds and tax incentives for electric car drivers, including a new £400m charging infrastructure fund.
The real story from the Budget was slower growth not just this year but every year up until 2022. The announcement of the downgrade in growth forecasts by the OBR did not make for pleasant reading. The economy will grow by an average of just 1.4pc across each of the five years ahead, down from the 1.8pc average forecast by the Office for Budget Responsibility (OBR) in March. Poor productivity growth is the main reason. Officials had hoped, in every forecast from 2010 onwards, that productivity growth would bounce back to its pre-crisis levels.
But instead it has remained sluggish since the financial crisis, growing at a pace that was typically seen before the industrial revolution. The OBR has now conceded output per hour worked will not suddenly surge back, and this undermines Britain’s growth outlook, as well as the public finances and wage growth.
The Chancellor has responded to the OBR’s gloomier forecasts by increasing spending and borrowing to see the economy through what is expected to be a rocky period when the UK leaves the EU in 2019.
The Chancellor has managed to do this by once again pushing back the date by which Britain’s public finances will be back in the black. In 2010, George Osborne promised he could get on top of the UK’s budget deficit in one five-year parliamentary term. That soon became two parliaments and now, it would appear, the earliest date for budget balance will be the middle of the next decade.
Mr Hammond has also deployed some creative accountancy to deliver a fall in the national debt – the sum of all the UK’s budget deficits – as a share of economic output. In order to ensure the ratio falls in every year, the chancellor is planning to sell shares in RBS and take housing association debt off the government’s balance sheet. Even so, debt will remain at double its level before the financial crisis.
The Chancellor said that over the next five years the government will provide a £44bn capital investment to boost the housing market. By the mid-2020s there should be 300,000 homes being built every year – the highest level since the 1970s. Mr Hammond also announced plans to allow councils to charge a 100pc premium on council tax on empty properties.
The key tax announcements in the Budget are:
Position paper: corporate tax and the digital economy – A position paper has been published setting out the challenges posed by the digital economy for the international corporate tax framework and the UK Government’s proposed approach for addressing those challenges.
Research & Development expenditure credit (RDEC) – The RDEC rate will increase from 11% to 12% effective from 1 January 2018. Also, a new Advanced Clearance Service will be introduced for RDEC.
Withholding tax: royalties – With effect from April 2019, withholding tax obligations will be extended to royalty payments, and payments for certain other rights, made to low or no tax jurisdictions in connection with sales to UK customers. The rules will apply regardless of where the payer is located.
Corporate capital gains – The Government will amend the Substantial Shareholding Exemption legislation and the Share Reconstruction rules to avoid unintended chargeable gains being triggered where a UK company incorporates foreign branch assets in exchange for shares in an overseas company.
Hybrid mismatch rules – Some aspects of the corporation tax rules which apply to arrangements involving hybrid structures and instruments will be amended to clarify how and when the rules apply, and to ensure that the rules operate as intended.
Interest deductibility restriction – There are minor changes including a relaxation of the deadline for Public Benefit Infrastructure companies to elect for the special regime, and other minor changes in order to ensure the rules operate as intended.
Intangible Fixed Asset regime – The Government will consult in 2018 on the tax treatment of intellectual property.
Transferable tax history for oil and gas – The government has published a paper on enabling oil and gas companies to transfer tax histories to facilitate the transfer of late life oil and gas assets. Draft legislation will be published in spring 2018 and will legislate to make transferable tax histories available from 1 November 2018.
Corporate indexation allowance – The corporate indexation allowance on chargeable gains will be frozen from 1 January 2018.
Taxing gains made by non-residents on immovable property – All gains on non-resident disposals of UK property will be brought within the scope of UK tax. This will apply to gains accrued on or after April 2019. Targeted exemptions will be introduced for institutional investors such as pension funds.
UK property income and certain gains for non-resident companies – From April 2020, income that non-resident companies receive from UK property and gains that arise in the disposal of UK property by non-resident companies will be chargeable to corporation tax.
Stamp duty land tax – The price at which a property becomes liable for SDLT will rise to £300,000 for first-time buyers. The relief will not apply for purchases of properties worth over £500,000.
Business rates – A raft of measures to support business will be introduced including:
- bringing forward to 1 April 2018 the planned switch in indexation from RPI to CPI.
- retrospective legislation to address the so-called “staircase tax”. Affected businesses will be able to ask the Valuation Office Agency (VOA) to recalculate valuations so that bills are based on previous practice backdated to April 2010.
- continuing the £1,000 business rate discount for public houses with a rateable value of up to £100,000, for one year from 1 April 2018.
- increasing the frequency with which the VOA revalues non-domestic properties by moving to revaluations every three years following the next revaluation, currently due in 2022.
Personal allowance and higher rate threshold – In 2018-19 the personal allowance and higher rate threshold will increase, to £11,850 and £46,350 respectively.
Off-payroll working in the private sector – Off-payroll working rules (often known as IR35) was reformed for engagements in the public sector in April 2017. The Government will consult on extending the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company.
Employment status discussion paper – A new discussion paper will be published as part of the response to Matthew Taylor’s review of employment practices in the modern economy, exploring the case and options for longer-term reform to make the employment status tests for both employment rights and tax clearer.
Pensions lifetime allowance – The lifetime allowance for pension savings will increase in line with CPI to £1,030,000 for 2018/19.
National living wage (NLW) – The NLW will increase from £7.50 to £7.83 from April 2018.
Enterprise investment scheme (EIS) & Venture Capital Trusts (VCTs) – The annual allowance will be doubled for people investing in knowledge-intensive companies. The changes will apply to shares issued on or after 6 April 2018. Also new rules will be introduced to EIS and VCT’s to focus on long-term investment in higher risk companies.
VAT registration threshold – The threshold will be maintained at the current level of £85,000 for two years from April 2018. A consultation will be released on the design of the threshold.
Online VAT fraud – A range of measures are to be introduced covering:
- Extending powers to UK businesses – Legislation in Finance Bill 2017-18 will enable HMRC to hold online marketplaces jointly and severally liable for the unpaid VAT of overseas traders on their platforms to include all (including UK) traders.
- Extending powers on overseas businesses – Legislation in Finance Bill 2017-18 will enable HMRC to hold online marketplaces jointly and severally liable for any VAT that a non-UK business selling goods on their platforms fails to account for, where the business was not registered for VAT in the UK and that online marketplace knew or should have known that the business should be registered for VAT in the UK.
- VAT number display – Legislation in Finance Bill 2017-18 will require online marketplaces to ensure that VAT numbers displayed for businesses operating on their website are valid and they display a valid VAT number when they are provided with one by a business operating on their platform.
- Split payments – To reduce online VAT fraud and improve how VAT is collected, the Government is looking at a split payment model.
Taxation of single use plastics – A call for evidence will be launched in 2018 on how the tax system or charges could reduce single use plastic waste.
Avoidance and evasion provisions
Intangible fixed assets: related party step-up schemes – With immediate effect the Intangible Fixed Asset rules will be updated, so that a licence between a company and a related party in respect of intellectual property is subject to the market value rule, and to ensure that the tax value of any disposal of a company’s intangible assets is correct, even if the consideration is in something other than cash.
Depreciatory transactions – The 6-year time limit will be removed within which companies must adjust for transactions that have reduced the value of shares being disposed of in a group company. This change will take effect for disposals of shares or securities in a company made on or after 22 November 2017.
Carried interest – With immediate effect, the transitional commencement provision are removed. This means that asset managers receiving carried interest pay CGT on their full economic gain.
Double Taxation Relief – From 22 November 2017 a restriction will be introduced to the relief for foreign tax incurred by an overseas branch of a company, where the company has already received relief overseas for the losses of the branch against profits other than those of the branch. This ensures the company does not get tax relief twice for the same loss. The Double Taxation Relief targeted anti-avoidance rule will also be amended to remove the requirement for HMRC to issue a counteraction notice, and extend the scope to ensure it is effective.
Double taxation arrangement: multilateral instrument – With effect from the Royal Assent of the Finance (No. 2) Act 2017, the powers giving effect to double taxation arrangements will be amended to allow the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting to be implemented.
NICs Employment Allowance – Due to some employers abusing the Employment Allowance to avoid paying the correct amount of NICs, often by using offshore arrangements, HMRC will require upfront security from employers with a history of avoiding paying NICs in this way.
Disguised remuneration – A new close companies’ gateway and measures to ensure liabilities from the new loan charge are collected from the appropriate person will be introduced to tackle disguised remuneration avoidance schemes used by close companies.
Profit fragmentation – A consultation will be released on the best way to prevent UK traders or professionals from avoiding UK tax by fragmenting their UK income between unrelated entities.
Tax evasion and the hidden economy – Consultations and consultation responses will be published in 2018 regarding: offshore structures; offshore time limits; VAT fraud in labour provision in the construction sector; and conditionality for public sector licences.
Making Tax Digital (MTD) – As legislated no business will be mandated to use MTD until April 2019, and even then it is only those with turnover over the VAT threshold at that point and only for VAT obligations. The system will need to show it works before MTD scope is widened, and this will not be before April 2020 at the earliest.
Investing in HMRC – Funds of £155 million will be invested in additional resources and technology for HMRC. HMRC will utilise these funds to tackle:
- the hidden economy through new technology;
- those who market tax avoidance schemes;
- enablers of tax fraud and hold intermediaries accountable for the services they provide using the Corporate Criminal Offence;
- non-compliance among mid-sized business and wealthy individuals; and
- tax debts more than nine months old.