After less than one month in the job and in the middle of the Coronavirus crisis the Chancellor of the Exchequer, Rishi Sunak, presented his “get it done” Budget to the UK Parliament earlier today. Despite the short period of time in the job, and in stark contrast to recent UK Budgets, this Budget contains a vast amount of content – not least on the spending side where the UK Government is proposing a 2.8% real growth increase in current public service spending (before taking into account the increase in investment spending).
On the taxation side, the UK Government appears to have followed through on the key proposals in their recent manifesto being holding corporation tax at 19%, increasing the NIC threshold and cutting business rates for small retailers. Aside from these measures, this Budget makes very little difference to the UK Government’s income line – however the devil will be in the copious amount of detail.
KPMG in the Channel Islands is continuing its analysis of how the proposed taxation measures/consultation documents outlined in this Budget might impact businesses and individuals in the islands and are delighted to set out our initial thoughts on the key measures below:
UK Funds regime
Review of the tax treatment of asset holding companies in alternative fund structures
Following the Spring Budget 2020, the Government will undertake a review of the UK’s funds regime throughout 2020, looking at both direct and indirect tax, as well as relevant areas of regulation to determine if there is a case for policy changes.
The review will begin with a consultation, which will run to 20 May 2020, on whether there are targeted and worthwhile tax changes that could help to make the UK a more attractive location for companies used by funds to hold assets. The review will also consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime.
The Government is prepared to make legislative changes in response to this consultation, which will be underpinned by the UK’s continued commitment to adhere fully to international tax standards.
Depending on the outcome of the consultation, the Channel Islands may see increased competition from the UK in the funds space.
Changes to Corporation Tax for Non-UK resident companies
As announced in the prior budget, non-resident landlord companies are moving from the income tax regime to the corporation tax regime with effect from 6 April 2020. This will have an impact on many Channel Island companies that operate UK property rental businesses. Key aspects will include the additional complexity of compliance that comes with the UK Corporation Tax regime from an administrative perspective, as well as specific technical differences around loss relief and loan interest deductibility.
Non-UK resident companies holding UK property should not delay in considering the impact of the transition to Corporation Tax, particularly where companies have lending arrangements in place or losses.
KPMG in the Channel Islands is working to ensure our clients are up to date with the latest changes and are on hand to support them through the transitional period from Income tax to Corporation tax.
Annual Tax on Enveloped Dwellings (“ATED”)
Although the ATED CGT regime is no longer applicable, ATED annual charges still apply. The Budget has announced that there will be changes in line with inflation to the annual charges such that properties valued from £500,000 will be subject to higher charges for the tax year 2020-21.
However, there are some welcome changes to housing co-operatives. The Government has announced it will introduce an ATED relief for qualifying housing co-operatives along with a 15% flat rate on Stamp Duty Land Tax on purchases of dwellings over £500,000. The UK ATED relief will apply from 1 April 2021 with a refund available to qualifying housing co-operatives for the 2020-21 period.
Stamp duty for non-UK residents
The announcement also introduced a 2% SDLT surcharge to apply to non-resident purchasers of UK residential property from April 2021. This will apply in addition to the 3% additional rate that already applies to second properties resulting in a potential top rate of 17% SDLT in some circumstances. Where contracts have exchanged prior to 11 March 2020, there may be transitional rules in certain circumstances.
The Chancellor was critical of the current Entrepreneurs Relief scheme calling it ‘expensive, ineffective and unfair’ suggesting the scheme would be abolished. However, Entrepreneurs Relief will remain with the following changes:
— the lifetime limit will be reduced from £10 million to £1million for qualifying disposals made on or after 11 March 2020.
The changes are in line with the Government's focus on supporting small businesses suggesting the current scheme was not targeted to small businesses.
Digital Service Tax
As announced in the Budget 2018, from April 2020, the Government will introduce a new 2% tax on the revenues of certain digital businesses to ensure that the amount of tax paid in the UK is reflective of the value they derive from their UK users. The tax will:
— apply to revenues generated from the provision of the following business activities: search engines, social media platforms and online marketplaces;
— apply to revenues from those activities that are linked to the participation of UK users, subject to a £25 million per annum allowance;
— only apply to groups that generate global revenues from in-scope business activities in excess of £500 million per annum; and
— include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins.
Large Channel Island entities considered ‘digital businesses’ operating in the UK may feel the pinch with an additional 2% tax on their UK revenues.
And finally, for those who partake of duty free when traveling to the UK, we will of course monitor the UK’s thinking around duty free amounts for passengers arriving into UK as they are no longer bound by EU rules.