Further announcements in the Budget that affect businesses.
Corporation tax rate
As expected, the rate of corporation tax will remain at 19 percent instead of being reduced to 17 percent from 1 April 2020 as previously announced. The rate will also be maintained at 19 percent for the year commencing 1 April 2021.
Increase in Structures and Buildings Allowance (SBA) rate
The Chancellor has announced an increase in the rate of the Structures and Buildings Allowance (SBA) from two percent to three percent per annum, effective from 1 April 2020 for the purposes of corporation tax and 6 April 2020 for the purposes of income tax.
All taxpayers bringing a non-residential structure or building into qualifying use, where all the contracts for construction works were entered into on or after 29 October 2018, will be able to claim the new rate of three percent per annum, meaning full relief will be available over a period of 34 years rather than 50.
Taxpayers entitled to claim the SBA for structures or buildings that were brought into use between 29 October 2018 and 1 April 2020, for corporation tax, or 6 April 2020, for income tax, can claim the new three percent rate from the operative date.
Similarly, taxpayers whose chargeable period spans the operative date may claim two percent per year for days in that period before the operative date and three percent for days thereafter.
The increase in the SBA will proportionally increase the capital gain on disposal of the asset in question on a disposal event.
The SBA was introduced at the 2018 Autumn Budget so it is a relatively new form of tax relief. This increase in the rate reflects the fact that the Government is hoping it will encourage taxpayers to invest in commercial buildings and structures, including infrastructure.
Business car capital allowances rates
There has been a change in emphasis to give 100 percent first year allowance (FYA) relief only on cars emitting zero CO2 rather than cars with low CO2 emissions, and the period for which the relief is available has been extended from April 2021 to April 2025. In addition, the CO2 emission thresholds which are used to determine the rate of capital allowances available for other business cars have been reduced.
This will mean that business cars acquired from April 2021 with CO2 emissions of 0g/km will be eligible for the FYA (100 percent) while those business cars with CO2 emissions not exceeding 50g/km will be eligible for writing down allowances (WDA) at the main rate (18 percent) while cars with CO2 emissions exceeding 50g/km will be eligible for WDAs at the special rate (6 percent).
Equipment for gas refuelling stations and zero-emission goods vehicles will also continue to benefit from the FYA.
This change is likely to incentivise taxpayers to invest in zero or lower emission vehicles which is part of the wider initiative to move towards electric only cars.
Enhanced Capital Allowances in Enterprise Zones
100 percent FYAs will remain available for expenditure incurred on qualifying plant and machinery within all enterprise zones, until at least 31 March 2021.
Given that this relief was due to lapse on 31 March 2020 for a number of enterprise zones, the Government’s extension provides an attractive tax benefit for taxpayers investing in these designated areas.
Annual Investment Allowances (AIA)
The Government has not extended the period in which the annual AIA will be at £1,000,000, it will revert to £200,000 per annum from 1 January 2021. The AIA is an annual relief on plant or machinery expenditure and allows all qualifying expenditure up to the limit to be relieved in the chargeable period it is incurred.
Corporation tax treatment of Intangible Fixed Assets (IFAs) from 1 July 2020
From 1 July 2020 corporation tax relief can be claimed for pre-FA 2002 IFAs acquired from related parties.
For IFAs not within the charge to corporation tax prior to acquisition there will be no need to consider when the IFA was created or whether the IFA was a pre-FA 2002 IFA in the related party’s hands.
The treatment of pre-FA 2002 IFAs already within the charge to corporation tax will be preserved. Relief for the cost of pre-2002 IFAs acquired from a related party who is not a company will only be available when the IFAs are sold.
In practice therefore this measure will allow relief to be claimed for pre-FA 2002 IFAs acquired from overseas group companies.
UK property businesses coming within the charge to corporation tax from 6 April 2020
Non-UK resident companies that carry on a UK property business, or have other UK property income, will come within the scope of corporation tax from 6 April 2020.
Currently such companies are chargeable to income tax and changes have been announced to make sure that the rules will work as intended as the transition is made from income tax to corporation tax.
Consultation on hybrid and other mismatch rules
A consultation has been announced on certain aspects of the hybrid and other mismatch rules.
These rules were introduced with effect from 1 January 2017 to implement OECD recommendations known as BEPS Action 2. Mismatches within the scope of the rules are counteracted by disallowing tax deductions or requiring taxable income to be recognised. The rules, as currently drafted, can apply more widely than the intended scope and it is to be welcomed that HMRC are reviewing the application. It is hoped that the consultation will be as wide as possible.
HMRC will be seeking evidence and views on problem areas (including potential solutions) in relation to:
We understand that there is scope to comment on other issues but HMRC will prioritise which are taken forward. The consultation will run from publication on 19 March to 29 May 2020.
Surcharge on banking companies for transferred-in losses
An eight percent surcharge applies on the profits of certain banking companies, including building societies, within the charge to corporation tax. Existing rules restrict the ability of banking groups to shelter chargeable gains subject to the surcharge using capital losses which were transferred to banking companies from non-banking companies in earlier periods. These rules do not explicitly block losses transferred for offset in the current period leaving HMRC to challenge relief for these losses under broader anti-avoidance provisions.
An amendment has therefore been made to prevent gains subject to the surcharge being reduced by any capital losses surrendered by non-banking companies in the same group. This change applies to allowable losses deducted from chargeable gains arising on disposals made on or after 11 March 2020.
Consultation announced on the tax impact of the withdrawal of LIBOR
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate which is commonly used in loans, derivatives and other financial instruments. It is expected to be withdrawn at the end of 2021.
A consultation has been announced to ensure that where tax legislation makes reference to LIBOR it continues to operate effectively and to identify any significant tax issues that arise from the reform of LIBOR and other benchmark rates.
We understand the consultation document will be published on 19 March with a 10 week consultation period ending on 29 May. HMRC will also publish an updated version of the guidance that they have been working on alongside the consultation document. This explains their view on the main tax implications for businesses of changes to financial instruments in the context of the reform of LIBOR and other benchmark rates.
UK funds tax reform
A consultation into the tax treatment of asset holding companies in alternative fund structures has been opened by HM Treasury. This is an initial component of a wider review of the UK’s funds regime, which the Government will undertake during 2020.
The consultation seeks to gather evidence and explore the attractiveness of the UK as a location for the intermediate entities through which alternative funds hold fund assets. It will be of interest to alternative funds and managers which use structures to invest in real estate, infrastructure, private equity, and credit investments.
The consultation is an exciting development for the UK asset management industry and arrives as a consequence of the Government’s Asset Management Taskforce, and the Investment Association’s 2019 UK Funds Regime Working Group Report.
The wider review will cover direct and indirect taxation of funds, as well as relevant areas of regulation.
Tax and Insolvency – Preferential HMRC debts
The Government has announced that it will go ahead with its plan to give preferential status to certain tax debts owed by insolvent companies including PAYE, VAT, employee NICs and construction industry scheme deductions. The implementation of the measure has been delayed from 6 April 2020 to 1 December 2020.
Priority will be given to these tax debts, with the new rules requiring them to be repaid to HMRC in advance of debts secured against ‘floating charge’ assets. Under the current rules, HMRC debts are treated as unsecured claims in insolvency. The Enterprise Act 2002 previously abolished preferential status for HMRC debts as part of its focus on business recovery.
This measure will impact asset backed lenders and the borrowing capacity of companies in many traditional sectors looking to secure finance against floating charge assets such as work in progress, stock, and raw materials. Unsecured creditors such as customers, suppliers and contractors will also be impacted by this measure.
Businesses should consider the potential impact of this measure on any current or prospective asset backed financing arrangements.
VAT: applying a zero rate to e-publications
Originally electronically supplied services were specifically excluded from the reduced VAT rate. This led to the European Commission taking infringement proceedings against certain countries, such as Luxembourg and France that applied the reduced rate. In 2016 the Commission consulted and agreement was subsequently reached that essentially allowed Member States the option of applying lower rates of VAT to electronic books, newspapers and periodicals from early December 2018.
Despite calls for its introduction the UK had kept its position under review. It is worth noting the on-going News Corp UK & Ireland Ltd case. The Upper Tribunal (UT) decided that digital newspapers could be zero rated and that digital newspapers always qualified for zero rating under UK law. This was on the basis that the zero rate is not just limited to goods, the products were newspapers, and that the pre December 2018 EU reduced rate prohibition is irrelevant to the construction of the UK zero rating law. HMRC have appealed to the Court of Appeal. The new zero rate will apply from 1 December and will provide a welcome pre-Christmas boost to suppliers of e-books and other e-publications.
Plastic packaging tax remains on target for introduction in April 2022 at £200 per tonne
The Chancellor confirmed that the UK’s ambitions to introduce a world-leading plastic packaging tax will be realised in April 2022. Draft legislation will be published later this year and the rate will be £200 per tonne, slightly more than some had predicted.
The tax will apply to plastic packaging produced or imported to the UK where that packaging contains less than 30 percent recycled material. Based upon feedback from last year’s consultation, it was announced that:
A further consultation document was published alongside the Budget. It includes more detail on the scope of the tax and offers definitions of:
There is also some consideration of an exemption for medical packaging, which has been of great concern to industry.
Last year’s consultation exercise resulted in more than 160,000 responses. The new consultation exercise might be regarded as a final opportunity to make any unintended consequences clear to the legislators, and to suggest refinements to the proposed structure of the tax.
Postponed VAT accounting
Postponed VAT accounting refers to the mechanism whereby import VAT payment is deferred until the same time as it is claimed on a VAT return. This avoids the cash flow cost of having to pay VAT on import and wait to claim the amount back on the VAT return.
During negotiations and the possibility of a ‘no deal’ Brexit the Government drew up plans for a number of easements such as ‘Transitional Simplified Procedures’ (delayed customs declarations and tariff payments) and ‘Postponed Accounting’ (deferred Import VAT). It was widely considered that Postponed Accounting would also apply at the end of the transition period. However, a Government press release in February on a speech by Michael Gove confirmed “that the policy easements put in place for a potential no deal exit will not be reintroduced as businesses have time to prepare.”
However, at the Budget the Government has now confirmed that from 1 January 2021 registered businesses will be able to account for VAT on goods they import from all countries, including the EU, on their periodic VAT return.
This will be a welcome reassurance to businesses who could have faced significant cash flow costs.
Introduction of a zero rate of VAT for women’s sanitary products
The UK had historically taxed sanitary products at the standard rate of VAT. Following a campaign to abolish the so called ‘tampon tax’, at the 2000 Budget it was announced that the VAT rate on these products would be reduced from 17.5 percent, the then standard rate, to 5 percent. Whilst the campaign had been to remove the tax altogether, 5 percent was the lowest rate permitted under EU law.
Whilst the UK has left the EU, the UK is still bound by EU law until the end of the transition period, so this measure implements a zero rate for such products at the earliest opportunity and comes into effect from 1 January 2021.
Retailers of such products will no doubt want to be seen to pass on the VAT saving to customers, therefore this should see a reduction in the retail price of these products.
© 2021 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.