The two main fears evinced before the Budget seem to have been in relation to entrepreneurs’ relief (ER) – would it be cut back or even abolished? – and the VAT registration threshold – would it be reduced? In the event, neither happened.
Entrepreneurs’ relief
There are, however, some less drastic changes to ER. As already announced, machinery will be introduced to allow relief to be preserved when a shareholding is diluted below 5% by a cash-raising share issue (see Tax Journal, 12 July 2018, for full detail). Monday’s Budget added three new changes.
The first was to strengthen the definition of ‘personal company’ by requiring that, as well as amounting to at least 5% of the ordinary share capital giving you 5% of the company’s voting rights, your holding must now in addition give you beneficial entitlement to at least 5% of the profits available for distribution to equity holders of the company and to at least 5% of the assets of the company available for distribution to equity holders on a winding-up. For this purpose, the group relief definition of ‘equity holder’ applies, with some modifications. The change, which applies from Budget day, is said to have been made to counter some imaginative uses of special share classes created specially to exploit the relief; but it appears to catch apparently inoffensive structures. In particular, ‘alphabet’ shares, where there is discretion as to payment of differential dividends will not on the face of it meet the new test. Even where the position can be rescued by enhancement of share rights, the damage has already been done and ER status will not be restored until a further qualifying period has elapsed.
As a result of the second change, that qualifying period is now increased from one year to two, for disposals taking place on or after 6 April 2019. However, to avoid what would effectively be retrospective taxation, where a business has ceased (or a company ceased to be a trading company) before Budget day, the one-year qualifying period is preserved for disposals made within the three years after cessation.
The two-year period may cause a problem where shares (or EMI options) have been acquired between 5 April and 29 October 2017. Until 6 April 2019 gains will potentially qualify for ER, but thereafter ER will not be available until the shares or options have been held for two years. In some cases, bringing forward a disposal to before 6 April 2019 will be worth considering.
The third change, also from 6 April 2019, is an aggregation provision that affords relief where within the two-year qualifying period a business has been carried on first as a sole trade or partnership and then through a company. Logically, this should always have been the case: its introduction now is welcome.
Capital allowances
The new and unexpected ‘structures and buildings allowance’ giving tax relief at 2% a year for the cost of constructing commercial (non-residential) buildings and structures, will remove one of the ‘tax nothings’ that has rankled for years since the abolition of industrial buildings allowances and agricultural buildings allowances. It will apply only where contracts are entered into on or after 29 October but extends to buildings and structures in the UK or overseas, provided they are used for a trade, a profession or vocation, or a property letting business to the extent that (in each case) the profits of the activity are, broadly, subject to UK tax. Draft legislation is not yet available: there will be consultation on the detailed rules.
For most SMEs, the reduction from 8% per annum to 6% of ‘special rate’ writing-down allowance will be more than compensated by the temporary increase (for two years from 1 January 2019) of annual investment allowance from £200,000 to £1m. As always with changes in the rate, some careful timing of expenditure may be needed to ensure that the relief is maximised.
In other news...
Following concerns at the level of fraudulent claims to R&D relief, HMRC will reintroduce a cap on the ‘payable credit’ part of the relief. From April 2020, this will be capped at three times the claimant company’s total PAYE and NICs liability for the relevant year. For most legitimate SME claimants, PAYE and NIC costs are significant and limiting the claim by reference to them will usually have no impact. HMRC does, however, promise consultation on further minimising if possible the effect on genuine businesses.
Other changes (such as extension to capital losses of the £5m corporate loss restriction or the restriction of NICs employment allowance to employers with NICs liability below £100,000) are perhaps even less likely to trouble most SMEs.
Finally, following a (suspiciously short) period of consultation, HMRC confirms that the tendentiously-named ‘off payroll working’ rules that were introduced to public sector contracts in 2017 will indeed be extended to the private sector. This will affect both SMEs that are themselves personal service companies (PSCs) and those that engage PSCs. There is, however, some welcome rowing-back from HMRC’s previous position. First, the extension will be deferred until 6 April 2020 and, in the meantime, HMRC promises to provide ‘extensive guidance and support’ to affected businesses. Second, the rules will apply only to end users that are ‘medium’ or ‘large’ businesses (apparently using Companies Act criteria). This is probably less of a concession than it appears to be: probably few ‘small’ businesses regularly engage PSCs other than in circumstances in which IR35 plainly does not apply.
The two main fears evinced before the Budget seem to have been in relation to entrepreneurs’ relief (ER) – would it be cut back or even abolished? – and the VAT registration threshold – would it be reduced? In the event, neither happened.
Entrepreneurs’ relief
There are, however, some less drastic changes to ER. As already announced, machinery will be introduced to allow relief to be preserved when a shareholding is diluted below 5% by a cash-raising share issue (see Tax Journal, 12 July 2018, for full detail). Monday’s Budget added three new changes.
The first was to strengthen the definition of ‘personal company’ by requiring that, as well as amounting to at least 5% of the ordinary share capital giving you 5% of the company’s voting rights, your holding must now in addition give you beneficial entitlement to at least 5% of the profits available for distribution to equity holders of the company and to at least 5% of the assets of the company available for distribution to equity holders on a winding-up. For this purpose, the group relief definition of ‘equity holder’ applies, with some modifications. The change, which applies from Budget day, is said to have been made to counter some imaginative uses of special share classes created specially to exploit the relief; but it appears to catch apparently inoffensive structures. In particular, ‘alphabet’ shares, where there is discretion as to payment of differential dividends will not on the face of it meet the new test. Even where the position can be rescued by enhancement of share rights, the damage has already been done and ER status will not be restored until a further qualifying period has elapsed.
As a result of the second change, that qualifying period is now increased from one year to two, for disposals taking place on or after 6 April 2019. However, to avoid what would effectively be retrospective taxation, where a business has ceased (or a company ceased to be a trading company) before Budget day, the one-year qualifying period is preserved for disposals made within the three years after cessation.
The two-year period may cause a problem where shares (or EMI options) have been acquired between 5 April and 29 October 2017. Until 6 April 2019 gains will potentially qualify for ER, but thereafter ER will not be available until the shares or options have been held for two years. In some cases, bringing forward a disposal to before 6 April 2019 will be worth considering.
The third change, also from 6 April 2019, is an aggregation provision that affords relief where within the two-year qualifying period a business has been carried on first as a sole trade or partnership and then through a company. Logically, this should always have been the case: its introduction now is welcome.
Capital allowances
The new and unexpected ‘structures and buildings allowance’ giving tax relief at 2% a year for the cost of constructing commercial (non-residential) buildings and structures, will remove one of the ‘tax nothings’ that has rankled for years since the abolition of industrial buildings allowances and agricultural buildings allowances. It will apply only where contracts are entered into on or after 29 October but extends to buildings and structures in the UK or overseas, provided they are used for a trade, a profession or vocation, or a property letting business to the extent that (in each case) the profits of the activity are, broadly, subject to UK tax. Draft legislation is not yet available: there will be consultation on the detailed rules.
For most SMEs, the reduction from 8% per annum to 6% of ‘special rate’ writing-down allowance will be more than compensated by the temporary increase (for two years from 1 January 2019) of annual investment allowance from £200,000 to £1m. As always with changes in the rate, some careful timing of expenditure may be needed to ensure that the relief is maximised.
In other news...
Following concerns at the level of fraudulent claims to R&D relief, HMRC will reintroduce a cap on the ‘payable credit’ part of the relief. From April 2020, this will be capped at three times the claimant company’s total PAYE and NICs liability for the relevant year. For most legitimate SME claimants, PAYE and NIC costs are significant and limiting the claim by reference to them will usually have no impact. HMRC does, however, promise consultation on further minimising if possible the effect on genuine businesses.
Other changes (such as extension to capital losses of the £5m corporate loss restriction or the restriction of NICs employment allowance to employers with NICs liability below £100,000) are perhaps even less likely to trouble most SMEs.
Finally, following a (suspiciously short) period of consultation, HMRC confirms that the tendentiously-named ‘off payroll working’ rules that were introduced to public sector contracts in 2017 will indeed be extended to the private sector. This will affect both SMEs that are themselves personal service companies (PSCs) and those that engage PSCs. There is, however, some welcome rowing-back from HMRC’s previous position. First, the extension will be deferred until 6 April 2020 and, in the meantime, HMRC promises to provide ‘extensive guidance and support’ to affected businesses. Second, the rules will apply only to end users that are ‘medium’ or ‘large’ businesses (apparently using Companies Act criteria). This is probably less of a concession than it appears to be: probably few ‘small’ businesses regularly engage PSCs other than in circumstances in which IR35 plainly does not apply.
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