A speech for what the Chancellor described as a “defining moment”, but what is the real impact for multinationals?
In a highly political speech clearly pitching itself as a ‘good news’ Budget, the Chancellor had relatively little to say directly to multinational businesses, but with spending increases to be funded there are inevitably some points to take note of.
The most dramatic announcement – sure to generate headlines - was the promised introduction of a Digital Services Tax of 2 percent on the revenues of certain digital businesses: search engines, social media platforms and online marketplaces. The decision of the UK to take unilateral action ahead of any clear international consensus on the thorny issue of digital taxation is an important statement of intent which should be taken note of. But with the tax only forecast to raise £400 million per annum (less than the announced additional spending on repairing potholes) it is unlikely to spell a quick end to the often vocal public concerns about the level of tax paid by the digital sector.
With the measure already dubbed a ‘Google tax’ in some media reporting, business will draw some comfort that there were signs in the announcement that lessons may have been learnt from the UK’s last attempt at a ‘Google tax’, officially known as the Diverted Profits Tax. That was and is widely criticised for being too hastily drawn up and poorly targeted; the Chancellor was keen to emphasise that this time round there will be detailed consultation and careful targeting – all of which will be watched with interest by business and campaigners alike. With confirmation that the Government is also going ahead with (now significantly amended and rebranded) plans to tax income from IP held offshore referable to UK sales, the debate about how the territorial scope of UK tax should function in the digital age is clearly high on the Government agenda.
For the time being, however, rather more revenue is to be raised in consequence of the slightly more mundane (and widely expected) confirmation that the Government will extend its new approach to ‘off-payroll working’ to the private sector. This new approach broadly shifts the obligation for applying the tax rules for workers operating through personal service companies (IR35) from the workers themselves to large businesses making use of their services. Whilst the additional tax to be raised falls on the workers involved, the additional administrative burden for business could be significant – reflected by the decision to push out the implementation of the new regime to April 2020.
Continuing the trend of recent Budgets, the broad heading of ‘Avoidance, evasion and unfair outcomes’ provides a key source of funding, but with the focus now broadening beyond the usual direct tax concerns. A number of measures proposed to crack down on perceived VAT avoidance, notably including planned changes to guidance on the treatment of ‘bought in services’ in VAT groups intended to ensure that these are subject to UK VAT. A reform of the rules on calculating consideration for stamp taxes on shares is also proposed, with anti-forestalling measures taking immediate effect.
The Chancellor may have carefully timed his speech to avoid too many Halloween puns, but could the spectre of Brexit be so easily escaped? Despite regular references throughout the speech, the Chancellor resisted pre-Budget calls for dramatic tax cuts (e.g. to the banking surcharge) in a bid to boost post-Brexit investment. Explicitly Brexit-related tax changes were instead largely limited to technical measures intended to ensure existing legislation continues to function regardless of outcome of negotiations. Speculation as to the contents of a possible ‘no deal’ Budget in spring 2019 will therefore continue.
That is not say that other tax changes announced in the Budget will not in part be viewed through a Brexit lens. A significant change – only briefly alluded to in the speech itself – will see the existing rules restricting the use of income losses extended to capital losses from April 2020, broadly meaning that only 50 percent of capital gains crystallised after that date can be sheltered by brought forward losses.
A newly published consultation on the changes identifies banking, insurance, pharmaceuticals and property as the principally affected sectors. A key question for these businesses will be whether the change has the potential to push up the cost of any longer-term enforced exit from the UK as a result of Brexit.
More positively, a change to align the treatment of de-grouping charges under the intangibles regime with that under the chargeable gains regime, expected to take effect from the publication of the Finance Bill on 7 November, removes a long-standing ‘bear trap’ which had the potential to cause similar groups undergoing Brexit restructuring to experience significantly different tax treatments.
A package of capital allowances changes has been announced, most notable for including a two percent allowance for construction expenditure on non-residential structures and buildings. Whilst that might be seen as incentivising investment in new commercial buildings post-Brexit, it is largely paid for by reductions in existing allowances creating the prospect of businesses being split between winners and losers depending on the timing of their expenditure.
More broadly than Brexit, the UK’s membership of the EU continues to exert an influence on tax policy beyond the now ritual complaint at the UK’s ability to grant new VAT exemptions.
For example, concerns that the existing rules were incompatible with State Aid obligations, although not explicitly mentioned, are widely believed to lie behind significant changes to the UK’s regime for the taxation of capital instruments issued by regulated businesses. These will in particular see the reliefs offered by the regime extended beyond the regulated financial sector - a move long requested by utilities businesses in particular. Banks will welcome the fact that the opportunity has also been taken to update the rules to reflect regulatory changes taking effect from 1 January 2019, although questions will inevitably be asked about why this update has been left until so close the regulatory deadline.
Technical changes to UK legislation to comply with the EU’s anti-tax avoidance directive (ATAD) have been confirmed, but businesses hoping for new insight into the UK implementation of EU Mandatory Disclosure Regime (DAC 6) – expected to impact the banking sector particularly - will have been disappointed. For this, as for so much in a political climate dominated by Brexit, businesses will need to wait until 2019 to get the full picture.
The changes in respect of capital allowances show a welcome commitment to businesses that invest in their physical capital asset base.
The amount of capital gains that can be relieved by carried forward capital losses will be limited to 50 percent from 1 April 2020.
The Chancellor has announced the introduction of a new Digital Services Tax in the UK from April 2020.
A fundamental rewrite of the tax rules governing regulatory capital, extending access to the regime beyond the regulated financial sector.
The Government has listened to concerns raised over the competitiveness of the tax rules for intangibles.
The Chancellor confirmed the UK will introduce an expanded set of taxing rights in relation to intangible property connected with UK sales.