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Budget 2020 Sector Commentary


Read time: 14 minutes


The 2020 Budget covered a range of changes as well as introducing new rules across the world of tax. From increased investment in R&D, freezing in certain customs duties and a temporary removal of business rates, we analyse how certain sectors will be affected.

 

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Private Equity

Ed Nevens, Partner and PE Tax lead

Of particular note to private equity executives and managers in portfolio companies are the reduction in lifetime allowance for entrepreneur’s relief to £1m effective 11 March 2020 and a further reduction in pension annual allowance for high earners to £4k.

Portfolio companies in certain sectors may benefit from the increase in the research and development expenditure credit (RDEC) rate from 12% to 13% and the increase in the structures and buildings allowances rate from 2% to 3%.

In addition to these changes in UK tax law, the UK government has also launched several consultations which relate to the financial services industry and are planning further work streams in this area.

In particular, the consultation around the ‘Tax treatment of asset holding companies’, which will run to 20 May 2020, seeks to establish whether there are targeted and merited tax changes that could make the UK a more attractive location for companies used by funds (such as private equity funds) to hold assets.

This is the first stage of a review of the UK funds regime as the 2020 Budget red book, further phases are promised to  consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime.

We will issue further updates in due course as we work through the details and further consultations are announced but please do get in touch with me or your usual BDO contact if you would like to discuss any of these points.

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Life sciences

Carole Le Page, Life Sciences Tax lead

There was a lot of positive news for the life sciences sector in Budget 2020. 

As expected, it was clearly a Budget focussed on significantly increased spending, and the sector should be a major beneficiary. The general theme was very much one of providing funding to encourage investment in research and innovation within the UK, including in higher risk and “blue skies” research. Coronavirus also featured heavily, and £1.4bn is to be invested over 10 years into the animal health science facility in Weybridge that is currently key to our understanding of the virus.

Overall, there were some big headline numbers, but further clarity is needed in terms of exactly how certain aspects will be delivered in practice.  In particular, from a funding perspective:

  • The Chancellor announced that he would increase public R&D investment to £22bn per annum by 2024/25, which is an increase of £4bn above the manifesto pledge. This investment will be used to support the “levelling up” of research by encouraging innovation across the country, as well as investing to establish a new “blue skies” funding agency to focus on high risk, high reward science. There was also reference to experimenting with “new funding models”.
  • It was, however, interesting to see that there will also be investment in the ‘OxCam’ arc, for example to improve connectivity to the Cambridge Biomedical Campus via a new rail station at Cambridge South.
  • The British Business Bank is being given £200m of funding to invest in “equity commitments” over the next 5 years, in a new life sciences investment programme. This is intended to enable £600m of investment once private capital is included in the equation. The Bank will also be provided with an additional £200m for UK VC finance in 2020/21.

From a tax perspective, there were perhaps few surprises, with most changes trailed to some degree, including the current corporate tax rate staying at 19% rather than reducing to the long expected 17% from April 2020.  The proposed cap on R&D tax credit cash reclaims for SMEs has been postponed until next year to enable a wider consultation to take place on its impact.  As expected, the Research and Development Expenditure Credit rate has increased from 12% to 13%.

We were of course expecting some changes to Entrepreneur’s Relief and the Chancellor announced a reduction of the lifetime limit from £10m to £1m, with immediate effect. This change applies to gains from EMI options too, which many life sciences companies use to incentivise their teams. The Budget included an announcement that EMI option plans will be reviewed to ensure that they are providing the intended support for high growth companies and also consider whether more companies should be entitled to operate EMI plans, so we await this review with interest.

We will issue further updates in due course as we work through the details and further consultations are announced but please do get in touch with me or your usual BDO contact if you would like to discuss any of these points.

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Professional Services

Neil Williams, Tax Partner, Professional Services

What are the key Budget 2020 changes for professional services firms to consider?

In difficult times for the economy, there was some good news for companies seeking to invest and there were no major shocks from the Chancellor. As expected, corporate tax rates have been held at 19% rather than decreasing to the previously announced rate of 17%. More detail on specific corporation tax changes, including an increase from 2% to 3% in the Structures and Building Allowance, can be found here. The introduction of the new Digital Services Tax (DST) that will come into force from 1 April 2020 as planned is unlikely to apply to professional services firms, but could become an international tax blueprint for firms if the thresholds are lowered in the future.

Firms operating through partnerships and limited liability partnerships (LLPs) will continue to benefit from a lower effective rate of tax on full annual profit extraction compared to companies. However, the announcement of an increase in the research and development expenditure credit (RDEC) rate from 12% to 13%, together with the ability of companies to retain profits, contributes to the myriad of factors that make choosing the best operating structure a complex decision.

Following much speculation, it was announced that the lifetime limit for Entrepreneurs Relief has reduced from £10m to £1m. This means that potentially only £1m of any gain that qualifies would be subject to 10% tax, with the balance being subject to 20%. This change is effective for business owners making a disposal on or after 11 March 2020 and with anti-forestalling provisions those taking action before this date will need to consider the effectiveness of their arrangements. Our Budget 2020 analysis has further details as well as details of the change to top slicing relief.

Changes to the annual allowance for pension contributions will affect business owners and highly paid individuals. The fully tapered annual allowance has reduced from £10,000 per year to £4,000 but will now apply at a higher income level – read more details. These changes will be welcomed by many and pensions remain part of a sensible future financial plan. Those who have a reduced ability to pay into their own plan can still consider whether the pension pots of family members would be an effective solution for them.  

For those firms operating through LLPs, HMRC looked to provide certainty for the filing of partnership tax returns following the Inverclyde judgement last year. This will also apply to those who might have been questioning the validity of previous and open tax enquiries. In summary, the Inverclyde ruling cast doubt on the way in which tax returns and enquiries into LLPs should be treated in the legislation. The announcement by the Government that new legislation will be introduced to put the position beyond doubt is considered to be retroactive: time will tell if this is challenged and if the legislation is as clear cut once it is released.

Other changes to be aware of

  • Employment taxes: The planned changes to IR35 will be going ahead, the Government has made changes to Statutory Sick Pay and the Employment Support Allowance in response to coronavirus.  A review of EMI is planned.
  • Indirect taxes: A number of changes to VAT and other indirect taxes were announced. VAT was abolished on e-publications and women’s sanitary products, a plastic packaging charge was introduced, as was postponed accounting for import VAT.
  • Other taxes: The most important measure is the introduction of the temporary business rates relief to help a range of businesses deal with the impact of coronavirus. Other measures includes changes to SDLT for non-resident companies and relief for some housing associations.

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Leisure and Hospitality

Can the Budget help offset the disruption faced by the hotel industry?

James Welch – Tax Partner 

Small leisure and hospitality businesses, such as hotels, will be exempt from paying business rates as part of an emergency measure to protect the economy from the impact of the coronavirus outbreak, as announced in this week’s Budget.

This will be a welcome relief for all small independent hoteliers trading from properties with a rateable value of less than £51,000 as they will now have their rates bill suspended for 12 months. This could help alleviate some of the liquidity and cash-flow challenges that dealing with the virus outbreak and the wider economic backdrop currently presents for hoteliers.

Regrettably, there was no announcement of any reform to business rates affecting larger hotels where the majority trade from properties with rateable values in excess of £51,000 pa. Whilst these larger hotels are fewer in number than the small independent hotels, they do account for the vast majority of the rates burden borne by hotels. The only Government assistance for large groups will be the introduction of a Time-to-Pay helpline for those who are concerned about being able to pay tax liabilities on time due to the pandemic. This could be of real help; however we reserve judgment until we see how HMRC implements this.

As the news of the coronavirus continues to spread, many hoteliers will feel the impact of reduced revenue. Flight restrictions/cancellations, general nervousness around travel and uncertainty have already affected the sector. Large reservations from conference and leisure groups have been cancelled. For example, we have seen ITB (Internationale Tourismus-Börse), the IHIF (International Hotel Investment Forum) and MIPIM events cancelled; all major events associated with travel, tourism, hospitality and associated real estate. Events like these have previously brought in excess of 165,000 visitors to hotels and demonstrates how vital these conferences are to the hotel market during this time of year. With ITB being seen as the ‘world’s largest travel fair’, it will be interesting to see what impact it has on the bottom line of the major hotel chains.

The key corporate market that fills hotels during the critical midweek period is already subject to some travel restrictions thus further depleting occupancy levels. We will see what will happen to the individual leisure market, but, inevitably, situations such as travel lock-downs will have a serious impact.

The regional picture

For the regions, the only silver lining is that people wishing to go on holiday will likely choose to stay at home, enabling hoteliers in the regions to enjoy the benefit of staycations. We have however seen regional hoteliers suffer continually as reflected in our Monthly Hotels Trends Report. We reported in January that although the beginning of 2020 delivered a 1.8% rise for the UK hotel market, the weak display from regional hotels continues, falling 1.6% from January 2019. Of the individual regional sectors, all three experienced losses at the beginning of this year, ranging from -0.4% (Scotland) to -1.9% (Wales).

Read our full Budget 2020 breakdown here including analysis of the effects of the announcements on other sectors. You can also sign up to receive all of our economic updates.

For more insights into the sector, explore our leisure and hospitality services and our tax offerings. We keep our clients up to speed with the latest issues and movements of the market, both nationally and internationally, presenting our findings through our comprehensive annual publications, Hotel Britain and Hotel Quarters which contain all the key data and statistics for the hotels sector.

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Financial Services

David Britton, Partner and Head of Banking Tax

While there were some changes specifically aimed at the financial services industry, there are a number of changes which will have an impact on companies and individuals in the sector and these are set out below.

Corporation tax rate - It has been confirmed that the rate of corporation tax will remain at 19% in 2020. Companies should consider the impact not only on cash flow but also on the deferred tax position for accounting purposes. This will be of particular relevance for March year ends.

Bank corporation tax surcharge - 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.

Entrepreneurs relief - From 11 March 2020 there is a reduction in the lifetime allowance on gains eligible for entrepreneur’s relief from £10m to £1m. There is also a further reduction in pension annual allowance for high earners to £4k.

Research and Development - For companies carrying out research and development there is an increase in the research and development expenditure credit (RDEC) rate from 12% to 13%. A new consultation on extending categories of qualifying R&D costs to cover cloud computing and data feed will be carried out during 2020. This could be of significant benefit to the financial services industry who will have significant spend in this area.

Partnership tax returns The government has announced that it will introduce legislation in Finance Bill 2020 with retrospective and prospective effect to confirm that LLPs are to be treated as partnerships for tax administration purposes. Although draft legislation is yet to be published, it is envisaged that this will reverse the decision in the Inverclyde case – read more.

Government consultations - The UK government has launched several consultations which relate to the financial services industry and is planning further work streams in this area. There is to be a consultation around the ‘Tax treatment of asset holding companies’ to identify tax changes that could make the UK a more attractive location for companies used by alternative funds to hold assets.

There will also be a consultation into the operation of Insurance Premium Tax (IPT). The government are expected to publish responses to a recent call for evidence on the operation of IPT and provide information on a forthcoming consultation into reforming how the tax operates.

Finally, the government will also consult on a levy to fund action on money laundering. The Budget 2020 document indicates that this levy will be applied to firms that are subject to the money laundering regulations - a definition which includes banks and a large number of financial services institutions. 

If you think the changes will affect you, please get in touch with your usual BDO contact to discuss.

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Retail and Wholesale

No respite in the Budget for UK’s high street?

Neil Stockham, Tax Partner

As mentioned in Wednesday's Budget, the Chancellor of the Exchequer Rishi Sunak announced that business rates will be suspended for small businesses for one year as part of the efforts to minimise the impact from the coronavirus outbreak.

This will be a welcome relief for all small independent retailers trading from properties with a rateable value of less than £51,000 and will hopefully help them to alleviate some of the liquidity and cash-flow challenges that both dealing with the virus outbreak and the wider economic backdrop present.

Regrettably, despite the well-publicised requests for change, there was no announcement of any reform to business rates affecting mid-market high street retailers. The majority of these traditional retailers trade from properties with rateable values in excess of £51,000 pa. and, whilst they are fewer in number than the small independents, this group does account for the vast majority of the rates burden borne by retailers.

In my view, this was a missed opportunity for a long awaited and much called for structural change to positively support a key cog in the engine room of the economy.

It has been well publicised that high-street retailers are already struggling to make ends meet against the backdrop of rising rents, staff costs, volatile exchange rates and are now dealing with the implications of the coronavirus which impacts both their supply chains and consumer confidence.

These struggles have been reflected in our High Street Sales Tracker which shows in-store like-for-like sales dropped –0.9% in February 2020 against an already low base -3.7% for the same month last year.

The challenges are even more pronounced in certain subsectors eg year-on-year lifestyle sales were down -2.9% in February from an extremely poor base of -4.9% last year; a result which is the third straight February of negative in-store sales for the category.

Whether viewed for the sector as a whole or individual subsectors, the LFL results indicate that shoppers are still exercising extreme caution. While some of last year’s uncertainty starts to dissipate, there seems to be an endless supply of new volatility and challenges for these retailers to navigate.

Join and contribute to our High Street Sales Tracker which outlines the weekly sales changes of more than 85 retailers with some 10,000 individual stores.

Read our Retail Forecast Report where we highlight five key areas of focus for all retailers entering 2020, areas that continue to grow in importance to enable retailers to differentiate and attract the consumer purse.

Explore our retail services and our tax service offerings.

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