Encouraging investment and moving to a more territorial tax regime.
Encouraging investment and moving to a more territorial tax regime.
For the past decade, the UK Government has sought to make the UK one of the most attractive locations in the world for international business.
International business investment strategy is not always about tax. An array of commercial factors are relevant in attracting foreign investment, including a skilled workforce, access to capital markets, a stable legal system and modern infrastructure. However, the picture would not be complete without a competitive tax policy.
With the objective of promoting international investment into the UK, the Government has steadily moved from that of worldwide taxation system to a principally territorial system, seeking to only tax those profits and gains arising in the UK.
Early measures introduced included the wide ranging dividend exemption, the foreign branch exemption, a participation exemption (recently improved) and enhanced R&D tax incentives.
More recent measures have been targeted at protecting the UK tax base through the introduction of diverted profits tax, strengthened anti-hybrid rules, corporate interest restriction rules, widening the scope of withholding tax on royalties and ensuring profits generated from UK land are taxable in the UK.
In this context, Mat Scott, partner, and Roger Campbell, Associate Director, of KPMG’s Belfast Tax practice consider announcements within the Autumn 2018 Budget on 29 October 2018 which are included in the draft Finance Bill (No. 3) 2017-19 (for which Royal Assent is expected to be received in March 2019).
In our previous edition of TaxWatch, we took an in depth look at the UK measures announced to target the taxation of the Digital Economy, which can be viewed here.
One of the measures to encourage investment in the UK is a Structures and Buildings Allowance (SBA) to provide tax relief for the costs of the physical construction of new structures and buildings intended for commercial use. This includes the improvement of existing structures and buildings. Land and private dwellings are excluded from the relief.
Relief is provided at 2% per annum on a straight line basis where the contracts for the construction works were entered into on or after 29 October 2018. Claims for allowances can only be made from when the structure or building first comes into use. A sale of the structure or building will also not result in a balancing adjustment to claw back any relief already obtained. Instead, the buyer will be eligible to continue claiming the SBA available.
Perhaps as a method of funding the new SBA, the Chancellor also confirmed a reduction in the rate of special rate writing down allowances from 8% to 6% from 1 April 2019, as well as the removal of enhanced capital allowances for energy and water efficient plant and machinery from 1 April 2020.
Finally, the Chancellor announced a temporary increase in the Annual Investment Allowance, which provides for 100% tax relief in the year of addition of qualifying plant and machinery, to £1million from its current level of £0.2million from 1 January 2019 for two years. The impact of this for small and medium sized businesses can be significant.
While the Chancellor has reduced certain capital allowances reliefs, overall the announcements should be positive for most companies. In addition, while the reduction in certain reliefs merely creates a timing effect, the introduction of the SBA represents a permanent increase in future tax relief available.
All of the above measures can be found in the draft Finance (No. 3) Bill 2017-19.
Through these announcements, the government appears to have listened to businesses who have continually called for tax relief to be available on such construction expenditure. Introduction of the SBA should increase the UK’s competitiveness, helping to align the tax incentives available with other countries such as Ireland who already have an annual capital allowance of 4% for industrial buildings on a straight line basis.
The Chancellor also announced two significant amendments to the current intangible fixed asset (IFA) regime. Firstly, a partial reinstatement of tax relief for acquired goodwill with a strong link to acquired Intellectual Property (IP) from 1 April 2019.
This is a partial reinstatement of tax relief for acquired goodwill withdrawn from 8 July 2015. The Chancellor’s announcement echo’s responses to the Government’s recent consultation and review of the corporate Intangible Fixed Assets tax regime. Many respondents to the consultation asked for greater tax relief and stressed that the goodwill restriction introduced in 2015 significantly disadvantaged the UK’s competitiveness in the global market, particularly when compared with comparable jurisdictions such as Germany, the Netherlands and Ireland.
Secondly, the Chancellor also announced a change that prevents a de-grouping charge from arising where post-2002 Intangible Fixed Assets leave a UK tax group as a result of a share sale that qualifies for the substantial shareholding gains exemption. It is widely known that the current disparity between the capital gains and the de-grouping rules under the intangibles regime creates increased complexity in the context of M&A transactions.
It is without doubt that both measures have been welcomed. However, some practitioners have expressed disappointment that there was no suggestion of bringing pre-2002 intangible assets within the current regime which would simplify the tax analysis on transactions. Also, the reintroduction of limited relief for goodwill assets only goes so far in restoring the pre-2015 tax treatment.
Turning to announcements in respect of capital gains tax for individuals, the UK’s Entrepreneurs’ Relief (ER) has worked successfully for many years to incentivise entrepreneurial activity. The 2018 Budget (and draft Finance (No. 3) Bill 2017-19) brought the following amendments to deal with two specific matters:
While these changes represent a tightening of the condition to avail of the ER 10% capital gains tax rate, it is not expected to have a significant impact on investment into the UK. ER itself continues to be a valuable tax relief, allowing individuals who meet all qualifying criteria to reduce the amount of capital gains tax on a disposal of a qualifying business or business asset.
ER’s continued availability serves as an encouragement to M&A activity and the UK regime continues to be very competitive relative to other countries, such as Ireland in which a similar reduced capital gains tax rate allows only a lifetime limit of €1million of capital gains. In the UK, where a husband and wife both work in a business (and meet all qualifying conditions), a total lifetime limit of £20million (taxed at 10% as opposed to the standard capital gains tax rate of 20%) exists.
Some relaxations were announced in respect of employment taxes. The current rules on Short Term Business Visitors (STBV) allow employers not to apply Pay as You Earn (PAYE) on the earnings of STBVs. There are various conditions to be met, including that the individual must be resident in a country with which the UK has a relevant Double Tax Agreement (DTA).
Where the individual may be from a country with which the UK does not have a DTA (or from an overseas branch of the UK company), the UK employer can instead include them in a special annual PAYE scheme, where they have 30 or less UK work days. This allows the UK employer to make a single annual payroll submission (and make payment) by 19 April following the tax year end. This simplified approach removes the burden of monitoring employee movements and making real time PAYE submissions for employees who spend very short periods working in the UK.
As well as giving the STBV rules a statutory footing, the Autumn 2018 Budget brought two relaxations in respect of the special annual PAYE scheme, to operate from 6 April 2020 (although they have not been included in the draft Finance (No. 3) Bill 2017-19):
These relaxations will both allow more employees to qualify (reducing the need for strict monthly payroll reporting) and longer time to evaluate and process information for the annual filing.
It is hoped that these updates will continue to support inward investment by reducing the administrative red tape relating to tax compliance associated with the cross border movement of employees.
The 2018 Budget announcements have continued a trend of moving towards a territorial tax regime and encouraging investment into the UK.
However, these changes have to be balanced against the general economic uncertainty surrounding Brexit which is having a much more significant impact on inbound investment and M&A activity.
If you would like to discuss the impact of the UK Autumn 2018 Budget announcements on your business, please contact Mat Scott, Roger Campbell or your usual KPMG contact.