The main announcements affecting private equity and the businesses backed by PE are mainly those related to the changes to Entrepreneurs’ Relief (ER).
- The most significant change is the requirement for individuals to have a right to 5% of the profits available for distribution and 5% of the assets on a winding up (ie a 5% ‘economics’ test). These tests apply in addition to the 5% of votes and 5% of nominal value tests that have applied throughout the life of ER. These new tests apply for disposals from 29 October 2018.
- The limits (£10m lifetime limit of gains) and the 10% rate are untouched. However, the qualifying conditions must apply for two years for disposals from April 2019.
The first change means that anyone without a 5% economic interest will no longer qualify for ER and will suffer CGT at 20%. Even for those who have a ‘natural’ 5% interest, consideration will need to be given to the other financing instruments in the structure to ensure that their 5% interest meets the new qualifying criteria.
Additional measures which may be of interest include:
- Changes to the de-grouping charges for intangible fixed assets. There has historically been a different treatment for goodwill in businesses which were in existence prior to 1 April 2002 as compared with those started on or after that date. This has led to potentially differing treatments for corporate carve outs where trades and assets have been moved intragroup. The announcement states that the regimes will be aligned, although there is no draft legislation as yet.
- The off-payroll working rules (IR35) will be changed for the private sector in line with the changes applying from April 2017 for the public sector. These changes will apply from April 2020 and will shift the onus of determining employment status for businesses engaging Personal Service Companies (PSCs) to the engaging business rather than the PSC/contractor behind it. Where the relationship is one of employment then the engager will have to pay payroll taxes. This change may significantly increase the admin burden for businesses which engage large numbers of contractors via PSCs. The change will not apply to small companies, although the definition of small for these purposes is not clear in the announcement.
- A new relief for non-residential structures and buildings is to be introduced on expenditure wholly contracted after 29 October 2018. This will be at a straight line rate of 2% of spend a year. This gives a cash benefit (at the current 19% corporation tax rate) of £3,800 per £1m of qualifying spend (current plant & machinery spend would give a £34k annual benefit for £1m of qualifying spend). This was somewhat set off by the reduction in the rate of allowances on longer life assets from 8% to 6%.
Please contact me or your usual BDO contact if you would like to discuss any of these points or if there are particular topics you'd like to hear more about in the future.
Jennifer Wall, Partner
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