Owner Managed Businesses – Budget 2018 Update
Capital allowances
The Chancellor announced a number of changes to the capital allowances regime.
Annual investment allowance
From 1 January 2019, the Annual Investment Allowance (AIA) is to be increased to £1,000,000 for a two-year period. This temporary increase in the relief given for qualifying capital expenditure means that there will be transitional rules detailing how the AIA of a business is to be calculated where its accounting period straddles the change in rate, for example those with a 31 March year-end. The current annual allowance is £200,000.
Action – if your accounting year closes before 1 January 2019, or accounting period straddles the rate, consider delaying qualifying capital expenditure until the next accounting period, if the expenditure will be more than the current allowance of £200,000.
Structures and buildings allowance
The Chancellor announced the introduction of a new capital allowance, the structures and building allowance (SBA). SBAs will be available for both corporation tax and income tax purposes.
This relief broadly aims to fill the gap left by the abolition of industrial buildings allowances and agricultural buildings allowances. However, the scope of SBAs is much wider than the previous reliefs, as it will provide relief for capital expenditure on offices, retail and wholesale premises, and other commercial premises that would not have qualified as an industrial or agricultural building.
Broadly, SBAs will be given on a straight-line basis through an allowable deduction of 2% of the original eligible cost per annum. Expenditure qualifying for SBAs will not be eligible for AIA.
Capital expenditure on new structures and buildings incurred on or after 29 October 2018 will be eligible, provided that no contract for the physical construction work was entered into prior to this date. Relief will be available on structures and buildings constructed overseas, as well as the UK, provided that the business is within the scope of UK tax. SBAs will only be available on the cost of physical construction. The cost of land, alterations to land and any demolition works will not be eligible.
A claim may only be made once the property comes into use for a qualifying activity, which includes a trade, profession or vocation, and managing investments of a company with investment business. Dwellings and workplaces that are an integral part of a dwelling will not be eligible, although the Government will consult on the exact definition of a dwelling for this purpose.
For situations where qualifying assets are subject to lease, there will be bespoke rules determining the lessor and lessee’s entitlement to SBA.
Action – For any planned building projects, contractors need to be instructed to prepare invoices/costs such that it is easy to identify costs which do not qualify for any tax relief, those qualifying for SBA and fixtures & fittings which are integral features (see below) or AIA.
Special rate of writing down allowance
Although there was good news in the capital allowance space as detailed above, the Chancellor also announced that the lower rate of writing down allowances (WDAs) that applies to assets allocated to the special rate pool is to be reduced from 8% to 6%. This measure will take effect from 1 April 2019 and 6 April 2019 for corporation and income tax purposes respectively.
Expenditure subject to the special rate includes:
- integral features
- long life assets
- thermal insulation of buildings
- cars with CO2 emissions of more than 110g/km (if purchased since April 2018)
- solar panels
Where a business has an accounting period straddling the change in rate, a hybrid rate will be calculated spanning the entire chargeable period.
The main rate for WDAs of 18% is unchanged, as is the 10% special rate for ring fence trades.
Environmentally beneficial plant and machinery and electric car charging points
The Government has confirmed that the enhanced capital allowances and first year tax credits available for certain environmentally friendly plant and machinery will end in April 2020. These reliefs are currently available for capital expenditure that is listed on the Energy Technology List and the Water Technology List.
Both lists will be updated to reflect advances in relevant technologies.
In contrast, the Chancellor announced that availability of 100% first-year allowances on electric vehicle charging points will be extended until 31 March 2023 and 5 April 2023 for corporation and income tax purposes respectively.
Action– The change in policy for environmentally beneficial capital expenditure means that businesses considering qualifying expenditure need to take advantage of the environmental allowances before they expire.
Costs of altering land
The Government has said that it will be clarifying legislation to ensure that the alteration of land will only be eligible for capital allowances where it is done for the purpose of installing qualifying plant and machinery. This appears to be in response to a recent first-tier tribunal decision, SSE Generation Ltd v HMRC, which HMRC considered to be merely alterations to the land itself.
The amendments to CAA 2001, ss21–23 will limit the scope of relief on alterations to land to the extent that they are for the installation of plant and machinery. These measures took immediate effect from Budget Day.
Entrepreneurs’ relief
A number of changes were announced to entrepreneurs’ relief, the very generous capital gains tax relief, enabling those selling part or all of their qualifying business or qualifying shares, to be charged 10% on the chargeable gain.
Definition of a personal company
With immediate effect, the Government has introduced two new criteria for a company to be considered an individual’s personal company for entrepreneurs’ relief purposes. For disposals on or after 29 October 2018, a shareholder must be entitled to a 5% interest in:
- the company’s distributable profits
- net assets of the company available on winding up
These requirements are in addition to the current condition in respect of voting rights. This means that in order to claim entrepreneurs’ relief on a disposal, a shareholder must hold 5% of ordinary shares, voting rights, rights to distributable profits and net assets in the event of winding up.
Action– For most shareholders, this change should not jeopardise their entitlement to entrepreneurs’ relief, however we have seen cases where shares only have voting rights, or have no rights on a winding up, as there is preferential treatment for another shareholder and if this is the case, then share rights need to be updated, which may not be straightforward. For example, for those shareholders with an alphabet share structure whereby typically the payment of dividends under the separate classes are purely discretionary, technically there is an argument under the proposed new legislation that those alphabet shares are not entitled to 5% of the distributable profits and therefore will not qualify for ER.
Minimum qualifying period
With effect from 6 April 2019, the minimum qualifying period that applies for entrepreneurs’ relief will be extended from one year to two years. This will apply to material disposals of business assets, associated disposals and disposals of trust business assets.
It is rare for us to see disposals with less than two years ownership, but business owners will have to consider their ownership period, for example where they are changing from a sole trader to a limited company and looking to trigger a capital gain event for tax planning purposes.
However, in respect of the new ER conditions above, there appears to be no grandfathering rights so that if share rights need to be enhanced it appears the two-year clock starts ticking following the change.
We were worried about the changes to ER and Enterprise Management Incentive (“EMI”) share option plans. The option will now need to be held for two years before they can qualify for ER, however we have confirmed in direct correspondence with The Treasury, that EMI share options with limited rights (eg no dividend rights or rights on winding up), will still qualify for ER despite the changes. In addition, in respect of share rights, the change only applies to 5% shareholders, not EMI share options, where the employee can have less than 5% of the shares to qualify.
Dilution of shareholdings
The Government has reaffirmed its commitment to introducing the draft measures announced to protect shareholders whose holdings are diluted below the 5% threshold. This often occurs when options are exercised by employees or a major new investor is taken on board.
Broadly, this will allow shareholders to crystallise a gain (taxed at 10%) at the point their shareholding falls below the minimum qualifying level without the need to make a disposal. Furthermore, as this gives rise to a dry tax charge, the individual will be able to defer the point that the gain is taxed until the actual disposal of the shares.
Corporate tax
Research and development relief for SME
For accounting periods beginning on or after 1 April 2020, a limit will apply to the amount of payable tax credit that can be claimed by a company under the R&D SME tax relief. The limit will be set at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period. Any loss that a company cannot surrender for a payable credit can be carried forward and used against future profits.
This reintroduces a restriction that used to exist when R&D relief was first introduced. The Government will consult on this change, this is however likely to adversely impact early stage businesses who tend not to be able to pay salaries and therefore will have limited PAYE and NIC costs.
Intangible fixed assets regime
In February 2018, the Government launched a consultation into possible reform of the corporate intangibles regime, tax relief for intangibles such as goodwill.
The purpose of the consultation was to examine whether there was scope to simplify the existing regime and to make it more effective in supporting the competitiveness of the UK in attracting international businesses. When first introduced, corporation tax relief was available for goodwill acquired on or after 1 April 2002, provided it was purchased from an unrelated party. However, changes were made in the July 2015 Budget, the relief for any amortisation or impairment of goodwill where the goodwill was acquired on or after 8 July 2015, was abolished with immediate effect.
It appears that the relief will partially re-instate relief for goodwill purchased as part of a business acquisition from April 2019. Detailed proposals are due to be published to confirm how the rules will operate.
Action – If you are intending to acquire intangible assets, consideration should be given if the transaction can be delayed until the detailed proposals are published, and thereafter following April 2019, in case a valuable tax relief is missed.
The Government also intends to align the application of the de-grouping charge provisions for corporate intangible fixed assets with those that apply to corporate capital gains. With effect from 7 November 2018, de-grouping charges on intangible assets will be removed where they arise as a result of a share disposal, provided the disposal qualifies for the substantial shareholding exemption (ie a tax-free disposal by a corporate shareholder provided certain conditions are met).
Corporate loss relief reform
Draft legislation was published on 6 July 2018 to amend the corporate loss relief rules that were introduced last year. These amendments are intended to ensure that the legislation operates as originally intended and that excess relief for carried forward losses cannot be claimed.
At Budget 2018, it was announced that changes will be made to this draft legislation in relation to the group relief cap on profits which applies from 1 April 2017.
Capital losses
Under current legislation, companies are able to carry forward unused capital losses and set them against capital gains arising in future periods indefinitely. Finance Bill 2020 will contain provisions which will restrict the use of carried forward capital losses by companies to 50% of annual capital gains. This is to ensure that large companies pay corporation tax when significant chargeable gains are generated. This change also brings the treatment of capital losses in line with the treatment of other losses, such as trading losses. This change, should only impact companies or groups, with chargeable gains exceeding £5 million, per year.
Other measures
Off-payroll working in the private sector
As expected, it has been announced that the off-payroll rules (known as IR35) already introduced to the public sector from April 2017 will be applied to the private sector, but not until April 2020, giving engagers, employment intermediaries (including agencies and umbrella companies) and contractors time to prepare for the changes.
In summary, these changes will move the requirement to assess whether a contractor is employed or self-employed, and responsibility for operating PAYE. Currently, where a contractor works through their own limited company (known as a personal service company), the limited company will need to assess whether the worker would be employed or self-employed according to the relevant case law and operate IR35 as necessary. When the new rules come in, the person paying that personal service company will be required to make the decision on whether the engagement falls inside IR35 or not and operate PAYE if IR35 applies.
Details of how this will operate have not been announced; however, it is likely to be similar to the rules for the public sector. The Budget states that small organisations will be exempt, but no details of the definition of ‘small organisations’ have yet been given. However, support and guidance for those organisations affected has been promised.
Action – Business engaging contractors need to consider the position of those contractors as to whether they are genuine contractors or disguised employees.
National Living Wage / National Minimum Wage
The Chancellor announced that the National Living Wage will be increased to £8.21 per hour from April 2019.
Company Car & Van Benefit in Kind
From April 2019, the multiplier for the car fuel benefit charge will increase to £24,100 from £23,400.
The flat rate van benefit charge will increase to £3,430 from its current rate of £3,350, and the flat rate van fuel benefit charge will increase to £655 from £633.
NIC Employment allowance reform
From April 2020, in order to better target the employment allowance, it will only be available to small businesses, which are defined as those employers with an annual NIC bill in the previous tax year of less than £100,000, who will continue to benefit from the employment allowance. The employment allowance currently applies to all employers so that they do not pay the first £3,000 of NIC.
Based on the Government’s numbers, 99% of micro-businesses and 93% of small businesses will continue to be eligible for the employment allowance.
Note that from 6 April 2016, limited companies where the director is the only employee have not been able to claim Employment Allowance.
PAYE special arrangement for Short Term Business Visitors from overseas branches
Two changes are proposed to simplify the tax and administrative treatment of short term business visitors (STBV) from foreign permanent establishments (‘overseas branches’) of UK companies.
Currently, for STBVs from overseas branches with 30 or fewer workdays in the UK in a tax year, the UK company can operate an annual PAYE scheme and does not have to report payments to HMRC in real time. From 6 April 2020, the workday limit will be extended from 30 days or less to 60 days or less.
Expenses for unpaid office-holders
Legislation will be introduced to exempt from income tax and NIC expenses paid or reimbursed to unpaid office-holders when incurred because of their voluntary duties. This places the existing concessionary treatment onto a statutory basis.
