Over recent months and years, there has been much publicity about the unfair competitive advantage allegedly gained by multinational businesses utilising UK tax rules in a way which is not always available to purely domestic businesses, culminating in the bizarre spectacle of the town of Crickhowell exploring the scope for moving itself offshore. In Tuesday’s Budget, Mr Osborne did more, perhaps, than any other chancellor in recent years to redress the balance in favour of small to medium enterprises vis-à-vis their larger competitors, especially those operating internationally. Six measures in particular have this flavour. Some give a relief which will particularly help SMEs; others benefit SMEs indirectly by aiming to ensure that multinationals in future pay something closer to the elusive ‘fair share of tax’.
Large multinationals will no longer be able to shelter UK profits by injecting large amounts of tax-deductible interest: relief for net interest will be restricted to 30% of the UK EBITDA (or, where higher, the worldwide group’s net interest to EBITDA ratio).
The circumstances in which withholding tax will need to be applied to royalties on intellectual property will be extended, making it harder for multinationals to suck profit out of the UK by way of payment for use of brands and other IP.
Although the increased flexibility on the use of corporation tax losses from 2017 is available to all companies, the provision restricting set-off to 50% of profits will apply only to companies or groups with profits in excess of £5m, and so will not affect most owner-managed businesses.
Overseas developers of or dealers in UK land will be brought fully within the charge to UK tax, regardless of their place of residence or whether there is a permanent establishment in the UK.
The replacement of the ‘slab’ basis of charging SDLT on commercial property with a ‘banded’ system will see SDLT reduced on all commercial property up to about £500,000 (while increasing it on more expensive property).
The proposal that the additional 3% SDLT surcharge on most residential property would not apply to companies with large portfolios will not proceed. The surcharge is of course an unwelcome burden; but it is now at least an unwelcome burden that applies on the same terms to everyone in the marketplace.
In addition, the extension of entrepreneurs’ relief to external investors in unquoted trading companies who retain the shares for at least three years is a very clear sign that government wants to encourage investment in such companies. The extended relief is not quite as advantageous as the unlimited CGT exemption afforded to investments made under the enterprise investment scheme (EIS); but given the restrictions and conditions of the latter and its byzantine anti-avoidance rules, you have to wonder whether EIS is really going to be worth the candle in future.
Entrepreneurs’ relief is further amended by reversing (with retrospective effect) the worst of the ill thought out amendments introduced last year. In particular, relief is restored, subject to conditions, for shares in companies which are members of a trading partnership or co-owners of a trading joint venture company (relief which, as the government tacitly concedes, should never have been removed in the first place).
Relief is also restored for ‘associated disposals’ in some circumstances from which the over-enthusiastic 2015 changes removed it. Taxpayers who, over the past 12 months, have unnecessarily restructured disposals to take account of the changes introduced last year, or worse still have needlessly passed by opportunities to realise assets because of the tax cost, are surely entitled to feel aggrieved that last year’s changes were so badly handled.
The failure by some internet-based foreign businesses properly to account for VAT on goods sold from UK-based fulfilment centres has also been a point of contention for their UK-based competitors. This too is to be remedied by giving HMRC the power to forcibly register such businesses for VAT and to appoint UK representatives with joint and several liability for VAT.
The pre-Budget whisperings to the effect that use of personal service companies (PSCs) was to be attacked (again) proved over-cautious. The change proposed is simply that where a PSC is engaged by a public sector body, the onus of deciding whether IR35 applies is to shift from the PSC to the customer; and if it does, the customer is required to operate PAYE and NIC on the payment to the PSC.
A less welcome change, but one which was not unexpected in the light of the 7.5% increase in the tax rate on dividends, is the increase to 32.5% of the rate of tax chargeable under s 455 on ‘loans to participators’. But compared to the major policy shift in favour of SMEs, the additional charge is a minor inconvenience.
Finally, class 2 NICs is to be abolished from April 2018. Few will mourn its passing except with a touch of nostalgia: it was a hangover from the days when a self-employed person physically bought a weekly stamp and affixed it to his contribution card every week, presumably before popping down to the saloon bar at his local for a mild and bitter or two at 3d a pint and back in time to watch Dixon of Dock Green on a flickering black-and-white TV purchased on the never-never. It has no place in the brave new online world that is today’s HMRC.
Over recent months and years, there has been much publicity about the unfair competitive advantage allegedly gained by multinational businesses utilising UK tax rules in a way which is not always available to purely domestic businesses, culminating in the bizarre spectacle of the town of Crickhowell exploring the scope for moving itself offshore. In Tuesday’s Budget, Mr Osborne did more, perhaps, than any other chancellor in recent years to redress the balance in favour of small to medium enterprises vis-à-vis their larger competitors, especially those operating internationally. Six measures in particular have this flavour. Some give a relief which will particularly help SMEs; others benefit SMEs indirectly by aiming to ensure that multinationals in future pay something closer to the elusive ‘fair share of tax’.
Large multinationals will no longer be able to shelter UK profits by injecting large amounts of tax-deductible interest: relief for net interest will be restricted to 30% of the UK EBITDA (or, where higher, the worldwide group’s net interest to EBITDA ratio).
The circumstances in which withholding tax will need to be applied to royalties on intellectual property will be extended, making it harder for multinationals to suck profit out of the UK by way of payment for use of brands and other IP.
Although the increased flexibility on the use of corporation tax losses from 2017 is available to all companies, the provision restricting set-off to 50% of profits will apply only to companies or groups with profits in excess of £5m, and so will not affect most owner-managed businesses.
Overseas developers of or dealers in UK land will be brought fully within the charge to UK tax, regardless of their place of residence or whether there is a permanent establishment in the UK.
The replacement of the ‘slab’ basis of charging SDLT on commercial property with a ‘banded’ system will see SDLT reduced on all commercial property up to about £500,000 (while increasing it on more expensive property).
The proposal that the additional 3% SDLT surcharge on most residential property would not apply to companies with large portfolios will not proceed. The surcharge is of course an unwelcome burden; but it is now at least an unwelcome burden that applies on the same terms to everyone in the marketplace.
In addition, the extension of entrepreneurs’ relief to external investors in unquoted trading companies who retain the shares for at least three years is a very clear sign that government wants to encourage investment in such companies. The extended relief is not quite as advantageous as the unlimited CGT exemption afforded to investments made under the enterprise investment scheme (EIS); but given the restrictions and conditions of the latter and its byzantine anti-avoidance rules, you have to wonder whether EIS is really going to be worth the candle in future.
Entrepreneurs’ relief is further amended by reversing (with retrospective effect) the worst of the ill thought out amendments introduced last year. In particular, relief is restored, subject to conditions, for shares in companies which are members of a trading partnership or co-owners of a trading joint venture company (relief which, as the government tacitly concedes, should never have been removed in the first place).
Relief is also restored for ‘associated disposals’ in some circumstances from which the over-enthusiastic 2015 changes removed it. Taxpayers who, over the past 12 months, have unnecessarily restructured disposals to take account of the changes introduced last year, or worse still have needlessly passed by opportunities to realise assets because of the tax cost, are surely entitled to feel aggrieved that last year’s changes were so badly handled.
The failure by some internet-based foreign businesses properly to account for VAT on goods sold from UK-based fulfilment centres has also been a point of contention for their UK-based competitors. This too is to be remedied by giving HMRC the power to forcibly register such businesses for VAT and to appoint UK representatives with joint and several liability for VAT.
The pre-Budget whisperings to the effect that use of personal service companies (PSCs) was to be attacked (again) proved over-cautious. The change proposed is simply that where a PSC is engaged by a public sector body, the onus of deciding whether IR35 applies is to shift from the PSC to the customer; and if it does, the customer is required to operate PAYE and NIC on the payment to the PSC.
A less welcome change, but one which was not unexpected in the light of the 7.5% increase in the tax rate on dividends, is the increase to 32.5% of the rate of tax chargeable under s 455 on ‘loans to participators’. But compared to the major policy shift in favour of SMEs, the additional charge is a minor inconvenience.
Finally, class 2 NICs is to be abolished from April 2018. Few will mourn its passing except with a touch of nostalgia: it was a hangover from the days when a self-employed person physically bought a weekly stamp and affixed it to his contribution card every week, presumably before popping down to the saloon bar at his local for a mild and bitter or two at 3d a pint and back in time to watch Dixon of Dock Green on a flickering black-and-white TV purchased on the never-never. It has no place in the brave new online world that is today’s HMRC.
