Budget 2020 - Corporate Taxes
Read time: 12 minutes
In difficult times for the economy, there was some good news for companies seeking to invest and no major shocks from the Chancellor in Budget 2020.
Jon Hickman - Corporate Tax Partner
Jon has many years of experience dealing with both OMB’s and large international business.
You will find a short analysis of each of the key corporate tax measures and changes announced in Budget 2020.
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The main rate of corporation tax will remain at 19% for 2020/21 and the rest of this Parliament: the existing legislation that reduces the rate to 17% will be repealed.
A number of proposals in the Draft Finance Bill published in July last year have been confirmed. The government’s amendments to UK law to make it compatible with EU rules and allow deferral of corporation tax payments on EU group asset transfers will go ahead unchanged. The use of capital losses brought forward will be restricted to align them with the existing rules to limit use of trading losses. Income tax and corporation tax rules for spreading transitional adjustments on new lease accounting were also confirmed.
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Structures and Buildings Allowance increased to 3% per year from April 2020
The Structures and Buildings Allowance (SBA), which came into effect on 29 October 2018, allows those making capital investments in non-residential structures and buildings to obtain tax relief against costs which would not otherwise qualify for capital allowances.
When introduced, the SBA gave relief at the rate of 2% per year over 50 years on a straight-line basis. The increased rate to 3% per year over 33.3 years came as no surprise to those who remember this measure being proposed by the Prime Minister in the run-up to the general election.
The eroded value of capital allowances over recent years has made property less attractive to investors. The increased SBA demonstrates the value placed by business on the availability of tax relief for capital investment and is a step towards increasing international competitiveness.
Some transitional measures were also included within Budget 2020, with the government acknowledging that the necessary record keeping will create administrative costs.
The measures included are;
- Prevention of double relief when R&D Allowances are also available
- Rules on contribution allowances to Public bodies
- Apportionment of qualifying expenditure on a ‘just and reasonable’ basis
- Aggregation of expenditure to simplify the SBA tracking process
- Inclusion of oral construction contracts within the Allowances Statement
Extension of ECAs in Enterprise Zones
There was no mention in the Budget of extending or replacing the Enhanced Capital Allowance (ECA) regime for energy and water efficient technologies, which surprised and disappointed many given the environmental challenges currently facing the government.
Budget 2020 notes confirm that this tax incentive to invest in efficient technologies will be abolished from April 2020. Instead, the Chancellor has focused his investment priorities on Enterprise Zones, confirming that the enhanced first year capital allowances for plant and machinery investment will be extended until at least 31 March 2021.
Annual Investment Allowance
The Annual Investment Allowance (AIA) which saw a generous increase from £200,000 to £1million for qualifying investments from 1 January 2019 was not mentioned in the Budget. This is despite indications during the general election campaign that this might be extended, or even significantly increased. The AIA is due to return to £200,000 from 1 January 2021.
Extension of First Year Allowances (FYA) for low and zero-emission business cars
The Chancellor has confirmed the extension until April 2025 of the 100% first year capital allowance for businesses incurring expenditure on low-emission cars, zero emission goods vehicles and equipment for gas refuelling stations. This was previously expected to end in April 2021.
The measure also reduces the CO2 emissions thresholds which are used to determine the rate of capital allowances granted for business cars. From April 2021, the following CO2 rates and corresponding writing down allowances (WDAs) will apply:
||100% FYA (previously 50g/km)
|Not exceeding 50g/km
||WDAs at the main 18% rate (previously 110g/km)
||WDAs at the special 6% rate
The reduction of the threshold to 50g/km, from 110g/km, will also be applied to the lease rental restriction for businesses hiring cars for more than 45 consecutive days so reducing the deduction allowable by 15%.
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R&D tax credit regime
The government has announced changes to the R&D tax credit regime introduced as part of measures to increase economy-wide investment in R&D to 2.4% of GDP by 2027. The aim is raise R&D support to businesses to £22 billion.
R&D Expenditure Credits (RDEC) are increasing to 13% from 12% for expenditure incurred after 1 April 2020. This benefits the largest companies in the UK and means that with the corporation tax rate remaining at 19%, the effective value of the relief increases to 10.53% from 9.72%.
Anti-avoidance measures that were to be introduced to the SME R&D regime on 1 April 2020 are being deferred by one year to 1 April 2021 following the 2019 consultation process. The government also accepts that the proposed PAYE and NIC cap requires additional consultation.
A new consultation on extending categories of qualifying R&D costs to cover cloud computing and data feed will be carried out during 2020.
The new IR35 rules covering off-payroll working affects R&D claims to the extent they represent Externally Provided Workers and new legislation will be introduced to preserve the relief going forward.
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Corporation tax on non-UK resident property owners – technical changes
Non-UK resident companies receiving rental income from the letting of UK property will be chargeable to UK corporation tax from April 2020. They have historically been chargeable to UK income tax on their rental profits. To facilitate a smooth transition to the new regime a number of technical changes are to be made to the existing legislation.
The changes will primarily benefit companies that have already incurred financing costs on property that has not yet been let. For example, the property may be undergoing refurbishment in order that it can be in a suitable condition for letting. Without legislative amendment, the costs incurred historically may not be deductible when letting commences after April 2020. Accordingly, the transitional rules are to be amended to allow finance costs incurred during the seven year period prior to the commencement of letting business to be deductible when letting commences.
It was previously proposed that a non-UK resident company which suffered a withholding of income tax by their tenants when rents were paid would not be required to notify chargeability to corporation tax. This will continue to be the case but will be limited to cases where any corporation tax liability would be fully met from the withholding at source.
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Restriction of use of capital losses – relaxation for certain companies
From 1 April 2020, the proportion of annual capital gains that can be relieved by brought-forward capital losses will be restricted to 50%. However, groups have unrestricted use of up to £5 million capital or income losses each year. Following consultation, there is a welcome exclusion for certain companies from the scope of the restriction.
The government has broadened the loss restrictions applying for corporation tax from 1 April 2020 to bring in a restriction on the use of carried forward capital losses. The impact of this is that the amount of chargeable gains that can be relieved with carried-forward capital losses will be restricted to 50% in excess of the annual deductions allowance. The deductions allowance of £5mof profits per group which previously applied only for carried-forward income losses will now apply to all losses.
The relief announced in Budget 2020 will mean that certain companies which are insolvent and are being liquidated will be able to offset carried-forward capital losses against chargeable gains without restriction during the period of official liquidation. This will be a welcome relief.
In a further extension, companies which have one-day tax accounting periods purely as a result of chargeable gains will be able to claim the full £5m deductions allowance over an accounting financial year in addition to being able to offset allowable losses against other chargeable gains accruing during the same accounting financial year without restriction. This is likely to be most relevant to non-resident property owning companies which have multiple capital disposals in the period 6 April 2019 to 5 April 2020.
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Intangible Fixed Assets – Extension of Relief for Related Party Acquisitions
The changes announced in Budget 2020 will remove the distinction that currently exists in the taxation of pre Finance Act 2002 intangible assets, called pre FA-02 assets, and assets created or acquired after 1 April 2002, post FA-02 assets). The changes will apply for assets acquired on or after 1 July 2020.
This will mean that intangible assets acquired on or after 1 July 2020 may be capable of amortisation for UK corporation tax purposes. This will be subject to anti-avoidance measures, and existing rules that govern the restriction of relief for amortisation in respect of goodwill and other similar assets.
This represents a welcome change. The pre / post FA-02 distinction was becoming increasingly irrelevant given the ongoing development that many intangible assets are subject to. However, it was often challenging in practice to determine the extent to which an asset fell within the chargeable gains or IFA regime if it had been developed over time, or from prior intangible assets. This change will remove much of that administrative burden, and better aligns the UK tax treatment of intangible assets with the tax treatment in other countries.
The government wants to strengthen the appeal of the UK as a place for businesses to own and manage intellectual property. The intangible fixed assets (IFA) regime deals in broad terms with taxation of intangible assets that were created, or acquired from an unconnected person, on or after 1 April 2002. Profits on disposal of such assets are taxed as income. Losses on disposal and payments are relievable against income. The tax treatment of amortisation normally follows the accounts treatment. Assets that do not fall within the IFA regime are taxed under the chargeable gains regime. As a result no relief is available for the amortisation of such an asset.
Transitional rules will be introduced to protect companies holding intangible assets that are within the charge to corporation tax immediately before 1 July 2020, including those companies with accrued gains or losses on intangible assets dealt with under the chargeable gains rules.
More background information in intangibles can be found here.
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Uncertain Tax Treatments; Notification to HMRC
From April 2021, large businesses will be required to notify HMRC when they take a position which HMRC is likely to challenge. The policy draws on international accounting standards which, under IFRIC 23, already require companies to consider any uncertain corporate income tax positions. The definition of large will be turnover above £200m or a balance sheet total of more than £2b, matching that used in the Senior Accounting Officer regime.
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The UK bank corporation tax surcharge came into effect on 1 January 2016 and applies an 8% corporation tax surcharge on the taxable profits of banks in addition to existing corporation tax at 19%.
The surcharge applies to banks and building societies, that are within the charge to UK corporation tax, meet certain definitions of a bank and have annual profits relating to banking activities over £25m. A technical amendment has been made to ensure that surcharge taxable profits are not reduced by allowable losses surrendered by non-banking companies in the same group.
Prior to the amendment, banks were able to reduce the amount of their taxable profits subject to the surcharge by utilising allowable losses surrendered by non-banking companies against in-year chargeable gains. The change to the legislation, which applies to allowable losses that are deducted from chargeable gains accruing on disposals made on or after 11 March 2020, addresses this inconsistency.
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Digital Services Tax
The government has confirmed that its new Digital Services Tax (DST) will come into force from 1 April 2020 as planned. The government has also restated its intention to revoke the Digital Services Tax once an appropriate international solution is in place.
The concept of a DST has been the subject of much discussion internationally. DSTs are perceived by the US to target US tech companies and the US has often threatened to apply tariffs in retaliation. France agreed to defer the implementation of its DST following pressure from the US. The UK Government has, nonetheless, confirmed that it will press ahead with the DST from 1 April 2020. We expect a fluid approach from the government as negotiations over a US trade deal progress.
The proposed scope appears to be broadly as previously announced, with some further detail provided on what transactions will be in scope.
In broad terms, DST will apply to a group’s businesses that provide a social media service, search engine or an online marketplace to UK users where the group’s worldwide revenues from these digital activities are more than £500 million, and more than £25 million of these revenues are derived from UK users. Where these thresholds are exceeded, gross revenues derived from UK users will be taxed at a rate of 2% with no ability to reduce or credit this. DST will only be directly relevant for a fairly small subset of large businesses. However, businesses that affected may pass on this cost to their clients and customers.
The OECD is leading efforts to establish an international tax system that is fit for the modern global, highly digital economy. In the meantime, many countries are looking to implement unilateral measures. Alongside this latest announcement in the UK, there is a risk of an increasingly complex compliance web for international businesses to navigate, and businesses will need to monitor these developments closely. See our interactive map on global developments.
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