Click on the headlines below to navigate our corporate tax analysis from the Autumn Budget:
Annual Investment Allowance
Structures and Buildings Allowance
Capital Allowances special rate pool relief reduced to 6%
Ending Enhanced Capital Allowances
R&D regime review
Corporate capital loss restriction
New “Approved” Fund for Knowledge Intensive Companies delayed to 2020
Real estate investment trusts
The Chancellor has announced a temporary increase in the Annual Investment Allowance (AIA), raising the limit from £200,000 to £1m for a period of two years. The Chancellor acknowledged that this increase is in response to a long-standing request of the British Chamber of Commerce (BCC), reflecting the views of its members to encourage investment in plant and machinery.
Legislation will be introduced in the Finance Bill 2018-19 to increase the limit for a period of two years from 1 January 2019, with transitional rules in place where a business has a chargeable period that spans either the operative date of the introduction, or the operative date of the reversion on 1 January 2021.
The Chancellor has announced the introduction of a Structures and Buildings Allowance (SBA) for new non-residential structures and buildings, allowing the eligible costs of construction to qualify for relief at the rate of 2% per annum on a straight-line basis.
This follows recommendations from the Office of Tax Simplification (OTS) and long-standing requests from various business groups to provide tax relief on the cost of buildings and structures in addition to the capital allowances already available for plant and machinery within those assets, thereby incentivising capital investment in new commercial buildings.
The relief will be available for qualifying expenditure on projects where construction costs are incurred on or after 29 October 2018. Where a contract for physical construction works has been entered into before 29 October 2018, the relief will not be available. The relief will be limited to the original construction or renovation cost of the property across a fixed 50-year period, regardless of ownership changes, periods of disuse or periods where the building is being used for non-qualifying purposes. The benefit will simply pass between owners at the written-down value.
Expenditure on residential property and other buildings that function as dwellings will not qualify for the SBA. The definition of dwelling for the purpose of this relief broadly follows the interpretation used for capital allowances, although the Government has invited views as to the appropriateness of this interpretation. Expenditure on land or acquiring rights over land and the associated legal and stamp duty costs will also not qualify for the relief.
Structures and buildings include offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses and so goes significantly beyond the limits of the old Industrial Buildings Allowance (IBA) which was phased out from 2008. SBA expenditure will not qualify for the Annual Investment Allowance (AIA), so businesses seeking to maximise tax relief are still encouraged to identify separately the construction costs of such structures and buildings that will qualify for capital allowances.
The Government has announced that the writing down allowance of plant and machinery that qualifies for capital allowances at the special rate will reduce from 8% to 6%. Special rate expenditure includes that qualifying as a long-life asset; thermal insulation; integral features and expenditure on cars with CO2 emissions of more than 110 grams per kilometre.
Writing down allowances for expenditure on assets in the main pool (currently 18%) and special rate pool allowances for ring-fenced trades (currently 10%) remain unchanged by this measure. The new 6% rate will be effective from:
- 1 April 2019 for businesses within the charge to corporation tax.
- 6 April 2019 for businesses within the charge to income tax.
Where businesses have a chargeable period that spans the relevant effective dates, a hybrid rate will be used based upon the proportion of the chargeable period falling before and after the effective date.
The Government has announced that the Enhanced Capital Allowance (ECA) for energy- and water-efficient plant and machinery will end from April 2020. The measure will also end the first-year tax credit available on such qualifying technologies from April 2020.
The ECA was introduced in 2001 to promote investment in energy- and water-efficient technologies by granting a 100% first-year allowance against the cost of qualifying plant and machinery, with the products qualifying for the allowance being listed on the Energy Technology List (ETL) and Water Technology List (WTL). Where loss-making businesses invest in qualifying items, the first-year relief could instead be surrendered for a First-Year Tax Credit (FYTC).
The ETL and WTL were regularly updated to reflect the changes in technology, with a further Statutory Instrument announced at Budget 2018 to amend the current technology lists, ahead of the removal of ECAs that will feature in the Finance Bill 2018-19.
The Government observes that the qualifying expenditure will still qualify for plant and machinery allowances available at the 18% main rate and 8% special rate (now reducing to 6%). Furthermore, much of the qualifying expenditure will be covered by the extended Annual Investment Allowance (AIA), which for two years from 1 January 2019 allows up to £1m of plant and machinery expenditure to qualify for a first-year allowance. Notably, however, the measure removes the FYTC, which was available to loss-making businesses, potentially removing the incentive for such businesses to focus on environmentally beneficial plant and machinery.
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The Government has sought to prevent abuse of the R&D tax relief for loss-making Small and Medium-sized Enterprises (SMEs) by re-introducing a PAYE and NIC limit from 1 April 2020. This could restrict total cash tax credits claimed from HMRC.
No amendments were made to the rates of R&D relief to either the SME or R&D expenditure credit regimes. However, the SME payable tax credit available to loss-making SMEs will be subject to a restriction of three times the company’s total PAYE and NIC liability for accounting periods beginning on or after 1 April 2020.
The change is likely to impact loss-making SMEs where they outsource the majority of their R&D activities offshore and have limited UK staff. Also, companies may be affected where a major proportion of their R&D claim arises from sub-contractor, temporary staff, consumables or software costs. Therefore, it will be important to consider team structures going forward to ensure R&D claims are not restricted by the PAYE and NIC cap.
The Government has confirmed it will consult on how the cap will be applied to ensure the focus is on the prevention of abuse and any wider impact on UK businesses is managed.
Reform of the UK Intangible Fixed Assets provisions
Earlier this year, the Government issued a consultation document on the potential reform of the UK’s regime for the taxation of intangible assets in order to make the regime more competitive and easier to administer. There are two notable changes arising from that consultation in this year’s Budget that will be welcomed.
Reform of the amortisation rules for goodwill
A restriction on the ability to amortise goodwill for UK corporation tax purposes on the acquisition of a business was introduced with effect from July 2015. The Budget confirms that tax relief will be available for the amortisation of goodwill on the acquisition of businesses with eligible intellectual property with effect from 1 April 2019.
Reform of the de-grouping rules
In common with the chargeable gains regime, the intangible fixed asset regime provides for a de-grouping charge if a company leaves a group holding an asset that was transferred to it on a tax neutral basis in the prior 6-year period. However, the intangibles fixed asset regime had not been reformed at the same time as the chargeable gains regime. This was to enable the exemption of this de-grouping charge from tax where the company that holds the asset at the time of the de-grouping qualifies for the substantial shareholding exemption. The Budget has confirmed that the rules will now be aligned, which should enable a more flexible approach to transact the carve-out, sale and purchase of businesses.
Taxation of offshore receipts in respect of intangible property
At Autumn Budget 2017, the Government had announced an intention to tax income derived from intangible property held in low-tax jurisdictions to the extent that it related to UK sales. This Budget confirms that these provisions will have effect from 1 April 2019. However, the mechanism for the collection of tax will be via a direct assessment to tax on the owner of the intangible property, rather than the application of a withholding tax on payments made to the intangible property-owning company by other persons.
Also, the scope will be broadened to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties. De minimis thresholds and exemptions will be introduced, including a de minimis threshold for UK sales of £10m, an exemption for income that is taxed at what is deemed to be an acceptable rate and an exemption where the intangible property owner is considered to have sufficient local substance. In common with other similar provisions introduced in recent years, there will be anti-avoidance provisions targeted at arrangements that seek to circumvent the application of these rules.
From 1 April 2020, the Government will restrict the proportion of annual capital gain that can be relieved by brought forward capital losses to 50%.
In order to ensure the measure applies only to larger companies, as with the earlier change from April 2017, the restriction will not apply to the first £5m of carry forward loss utilisation (whether capital or income-type losses). However, capital losses will continue to be streamed against chargeable gains, with the existing s171A mechanism being retained to transfer gains/losses intragroup.
Companies will be required to split their 2020 accounting period into two notional periods, with net chargeable gains arising in the period up to 1 April 2020 notional period not subject to restriction. Where there is a net chargeable gain in one notional period and a net capital loss in another notional period, these are aggregated before applying the carry forward loss restriction rule to the whole period.
The government proposes anti-forestalling legislation to counteract arrangements designed to defer capital losses beyond the start date, or to accelerate capital gain crystallisation before the start date. Genuine third party transactions should not be caught by this, but artificial de-groupings or uncompleted contracts are likely to be counteracted.
A consultation is open for comment until 25 January 2019, and legislation is intended for Finance Bill 2019-20.
Following a consultation exercise last spring, the Government has decided to delay introducing a new Enterprise Investment Scheme (EIS) fund structure for Knowledge Intensive Companies (KICs) until 2020. Rather than being an entirely new structure, it will essentially be an update of the existing, but out-of-favour, Approved EIS Fund.
The new Approved Fund will allow investors to claim income tax relief either in the year the fund closes, or the year before. Normally, the tax year in which a claim can be made is determined by when a Fund manager invests in the underlying companies. The new fund will allow investors more control over when their EIS relief can be claimed. Calls for income tax relief to be given at the time the fund closes were ignored.
Fund managers will need to:
- Invest at least 80% of the fund in KICs
- Invest the funds within two years
- Invest at least 50% of the fund in the first 12 months, keeping the balance in cash
- Submit an annual statement to HMRC.
Whether or not the tax incentives are sufficient to attract substantial additional investment into innovative, entrepreneurial companies remains to be seen. Fund managers, particular those who already invest heavily in this sector, may feel that the administrative burden and investment requirements are too restrictive.
The Chancellor has announced new measures which will have an impact upon UK REITs and their investors. Under the proposals, from April 2019 UK REITs will, subject to certain exemptions, be able to sell special purpose UK property owning companies without triggering a UK tax charge. Previously UK REITs generally would sell the property to fall within the REIT exemption for gains.
However, from April 2019 non-resident investors in UK REITs who are not taxable only by virtue of non-residence may, if treated as investing in a UK property rich collective investment vehicle, be subject to UK taxation on the disposal of their shares. Further details on the implementation of these changes are expected when the 2018-19 Finance Bill is published on 7 November.
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