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Budget 2020: Corporate aspects

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For good or for ill, the new chancellor seemed largely content to adopt the corporate tax policies and proposals he inherited from his predecessors although there were some targeted tax relief increases to encourage investment. A series of consultations on future actions will also keep taxpayers and their advisers engaged for some time to come. 

The first Budget of a new government is typically seen as an opportunity for it to set out a vision for both the country and the economy over its term of office. In the wake of Boris Johnson’s emphatic general election victory in December 2019 and the UK’s formal exit from the European Union in January 2020, most commentators were predicting that this Budget would do just that and seek (however successfully) to move the UK into a post-Brexit era. Just a few short weeks later the picture looks very different: a new chancellor of the exchequer delivered the Budget against the background of a public health emergency and severe global economic disruption. Underlining the economy’s precarious position, on the morning of the Budget the Bank of England announced an emergency cut of 0.5% in interest rates taking them back down to 0.25%, the lowest level in history.

In the circumstances, it is unsurprising that the chancellor’s speech, framed around a theme of ‘getting it done’, was split between a series of temporary support measures and longer-term investment promises with relatively scanty coverage of corporate tax measures. However, those hoping that this means limited action on the tax front will soon find the underlying Budget documents confirm that there are plenty of changes in store.

The expected changes

To be fair to the chancellor, many of the most notable changes were well-trailed in advance: restrictions on companies’ use of carried-forward capital losses, reforms to the private sector off-payroll working rules (IR35) and a new market value rule for certain transfers of unlisted securities subject to stamp duty/SDRT have all been known about for many months now and seem set to be legislated in broadly expected form. The proposal to reintroduce a form of ‘Crown preference’ for HMRC in relation to certain taxes in insolvency is in a similar category, albeit that a crumb of comfort is provided by deferring the start date of that measure from April 2020 to December. Also clearly anticipated was the reversal of the planned cut in corporation tax to 17% (the rate is now intended to remain at 19% until at least 1 April 2022) which followed a clear commitment from the Conservative party during the general election campaign.

Having advance notice of a measure does not, of course, guarantee that good law will result: a case in point is the government’s proposed measures tackling tax abuse and insolvency. Broadly speaking, these rules enable HMRC to make individuals liable for tax debts owed by companies that are insolvent (or potentially insolvent). In the version of the rules consulted on, the entry conditions were extremely wide and had the potential to catch situations far removed from the type of deliberate insolvency to avoid paying tax which was purported to be the target. Nevertheless, despite a number of representations on the topic and suggestions of amendments to narrow their scope, the indication in the Budget documents is that the rules are on track to be legislated essentially in the form of the draft legislation published in July 2019.

Areas of speculation

Prior to the Budget there was some speculation that one anticipated measure – the introduction of a digital services tax (DST) from 1 April 2020 – would be withdrawn or at least postponed pending agreement at an international level on the best approach to the taxation of digital businesses. Those listening to the chancellor’s speech may have wondered, given the absence of any reference to a new tax being introduced next month, whether those predictions had come true. Not so; the Budget documents confirm that the DST is indeed to be introduced next month, broadly in the expected form of a 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users. The silver lining is that only groups whose worldwide revenue from these digital activities exceeds £500m, with more than £25m of these revenues deriving from UK users, will be in scope. As other commentators have observed, the measure seems likely to affect a relatively small number of groups many of which are headquartered in the US. Noting the interactions between France and the US in this area, introducing it at a time when the UK is seeking to agree a US-UK trade deal seems an interesting choice.

Sticking with the theme of predictions, a measure which is not directly relevant to corporate taxation but may interest corporate tax practitioners is the reduction in the lifetime limit for gains which can qualify for entrepreneurs’ relief from £10m to £1m. Perhaps the most interesting (and unexpected) feature of this change is that it takes effect for disposals on or after Budget day, but it is still accompanied by some broadly drafted anti-forestalling rules. Anti-forestalling rules would typically be used for the period between announcement and a new rule coming into effect. These rules work retrospectively to capture activity undertaken prior to announcement (for instance, entering into an unconditional contract, or a share for share exchange since 6 April 2019). Taxpayers will neither welcome nor wish to encourage further rules of this type.

The less well-trailed measures

Turning to less well-trailed measures, the news is generally quite positive. There are some welcome extensions of existing corporation tax reliefs: from 1 April 2020, the rate of the structures and buildings allowance is to increase from 2% to 3%, and the rate of research and development expenditure credit (RDEC) will increase from 12% to 13%. Perhaps more interestingly, an unexpected change to the intangible fixed assets regime was announced.

Broadly speaking, the current accounting-based regime in Part 8 of CTA 2009 applies to intangibles which were either created or acquired from an unrelated party on or after 1 April 2002. Intangible assets which do not fall within the Part 8 regime are typically subject to the CGT code. Working out which regime applies to a particular asset is not always straightforward and gets no easier as time passes and records relating to the development of the asset are lost or become inaccessible. In 2018, a consultation into various aspects of the intangibles regime was launched and concluded that there was widespread support for bringing all intangibles within the Part 8 regime, but the government of the day concluded that the costs and complexity of doing so outweighed the potential benefits.

The short summaries in the Budget Red Book and the Overview of Tax Legislation and Rates might be taken as suggesting that the change announced in this Budget will have the effect that all intangible assets acquired from 1 July 2020 (i.e. whether or not from an unrelated party) would come within the Part 8 regime, subject to certain transitional provisions and anti-avoidance. However, the accompanying tax information and impact note (one of the most obscurely written of its kind) suggests that the distinction between pre and post-2002 intangibles is being abolished only in respect of acquisitions from related parties where the asset in question was not within the scope of UK corporation tax prior to the transfer. As such, it is likely that this measure will turn out to be an encouragement to onshore IP. This would be consistent with the modest impact on tax receipts set out in the summary of impacts and was one of the options discussed in the 2018 consultation. (It is fair to say, however, that some of the reasons why taxpayers might previously have preferred assets to remain in the chargeable gains regime, such as use of capital losses and more favourable degrouping rules, are no longer as attractive given recent changes to those rules.) The draft legislation, which is expected to be published as part of Finance Bill 2020 next week, will be eagerly awaited.

Future proposals

Turning to future proposals, the Budget trails a number of measures on which the government will consult or introduce further legislation in due course. A number of these consultations cover topics – the tax impact of the withdrawal of LIBOR; VAT on financial services – which may be of particular interest to financial institutions. Others, such as a consultation on the operation of the anti-hybrids rules, may be of wider interest.

The funds industry is singled out for special treatment: a review covering both direct and indirect tax (as well as relevant areas of regulation) is promised. The VAT treatment of fund management fees is specifically referred to as a subject for future consultation. For the moment, however, the tax aspects of the review are confined to a consultation on whether changes to the tax treatment of companies used by funds to hold assets could make the UK a more attractive location for these companies. There are some quite eye-catching proposals in this document, such as enabling companies holding debt assets to come within the existing regime for securitisation companies, expanding the scope of the substantial shareholdings exemption to make it easier for companies in real estate fund groups to qualify, and reviewing the operation of the interest withholding and anti-hybrids rules for funds generally. While the document is careful to downplay expectations over the likelihood of action, and there must be real doubt over whether some of the more radical proposals will be taken up, it is encouraging that the government is open to discussing these issues. Groups that may potentially be affected will wish to consider carefully whether there may be scope to achieve some targeted reforms.

Two of the most general (and potentially concerning) measures are also described in terms of future consultations. First, the government intends to explore the possibility of introducing a principle of ‘tax conditionality’, i.e. restricting access to government licences, grants, awards and approvals to businesses that are able to demonstrate ‘good tax compliance’. It seems clear that at least a limited version of this measure, tackling the ‘hidden economy’ (e.g. operators of private hire vehicles) will be introduced, but the government intends to publish a discussion document in the spring to seek views on the application of this principle more widely. One key question will be what the government has in mind by being able to demonstrate good tax compliance. Will a DOTAS disclosure or even a tax penalty be regarded as an indicator of poor compliance?

The second such measure is a proposal that large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. It is stated that this policy will draw on international accounting standards, so it appears that HMRC is thinking along the lines of requiring (at least) disclosure of any tax position for which a company considers that it needs to make provision in its accounts. This is likely to furnish HMRC with considerable information that would not already be available to it, and potentially in a way that is targeted at situations where there is more scope for successful challenge. Unfortunately, the forthcoming consultation is expressed to be about the detail of the notification process, so it appears that a firm policy decision to introduce this measure has already been taken. Nevertheless, it is likely that taxpayers will make representations about the scope of the proposal, however receptive HMRC may be.

Finally, of course, a Budget would not be complete without promises of future anti-avoidance legislation and a compliance crackdown. Mercifully, beyond proposals to amend some of the existing legislation dealing with promoters of tax avoidance schemes and a call for evidence on raising standards for tax advice in the market (both of which we can hope will be suitably targeted), there is little of specific note in this category.