Entrepreneurs’ Relief: Lifetime allowance reduced to £1 million from £10 million

Prior to the Budget, there was real concern (and in some quarters an expectation) that Entrepreneurs’ Relief would be scrapped entirely. Certain sections of the media fuelled, bizarrely enough, by Prime Minister Johnson’s own hyperbole that the relief was really only being availed of by the already “staggeringly rich” rather than by budding entrepreneurs, gleefully jumped on the bandwagon.

Thankfully, the Government saw sense and announced that the lifetime allowance is reduced from £10 million to £1 million for any disposals made on or after 1 March, bringing Entrepreneurs’ Relief back down to its pre-2011 lifetime allowance level. This is to be welcomed, but in our view the reduction sends the wrong message to entrepreneurs who, in our experience over the years, are very much motivated by the relief to set up new ventures.

Given the speculation around Entrepreneurs’ Relief and the changes that may have been coming before this Budget, some taxpayers entered into unconditional contracts as a way to secure ‘pre-Budget’ rates and make use of the £10 million lifetime allowance. The date of disposal for an unconditional contract is the date of the contract rather than the date of completion, the aim of the planning being to trigger a disposal for tax purposes pre-Budget, with completion occurring at some time in the future.

To combat the planning, the Government included an anti-avoidance measure whereby the taxpayer must demonstrate to HMRC that they did not enter into the conditional contract arrangement with the purpose of gaining a tax advantage.

Pensions: Further tapering of the annual allowance for high earners

Since 2014/15, the annual allowance for pension savings has been £40,000 (with the exception of 2015/16 where the allowance was split), which is tapered down to £10,000 for those earning over a threshold of £110,000 a year.

Over the past year, it came to light that NHS GPs and consultants have been turning down extra shifts as a result of receiving surprise tax bills on their pension contributions, where earnings from these shifts have meant their pension contributions exceed their tapered allowance.

To combat this, the Government has increased the earnings threshold from £110,000 to £200,000 (excluding pension contributions). This means that those earning up to this amount will be entitled to the full annual allowance of £40,000. From £200,000 of earnings, the annual allowance begins to be tapered down to a minimum annual allowance of £4,000, for any individual who earns £272,000 a year or more.

Stamp Duty Land Tax (SDLT): 2% surcharge for non-UK residents

From 1 April 2021, any non-UK resident purchasing residential property in the UK will be subject to a 2% SDLT surcharge, in addition to the current SDLT rates and surcharges (3% on the purchase of a second home). This will apply to both non-UK resident individuals and companies. This raises the maximum rate of SDLT to 17% which will apply where:

• the foreign purchaser already owns one or more residential properties globally; and
• the purchase price of the UK property being acquired is in excess of £1,500,000.

Whilst it is not yet clear how this surcharge will operate, there will be refunds available to individuals who subsequently become UK residents after purchasing the UK property. We expect further updates on this from the Government in due course.

Consultation on the tax treatment of asset holding companies in alternative fund structures

The Government has announced a review of the UK funds regime, to include taxation and relevant areas of regulation to ensure ongoing sustainability and competitiveness of the UK regime.

The first part of this is a review of the VAT charged on fund management fees. Currently there is no VAT charged on annual management fees; however, individual clients of discretionary fund management companies are charged VAT when they pay their fees. Investment trusts, Open-Ended Investment Companies (OEICS) and UK unit trusts are considered ‘special investment funds’ under EU law and, as a result, are exempt from VAT. New legislation will need to be in place by the time the UK’s transition phase with the EU is over. However, it is not yet clear what the Government’s intentions are, as the consultation is only in the early stages of fact finding for the time being.

The second area of the review is a consultation to gather information on the appeal of the UK as a location for intermediary entities holding assets within alternative fund structures (e.g. real estate, private equity). The Government recognises that whilst the UK is, on the whole, an attractive holding company location, there are certain aspects (e.g. hybrid mismatch rules and withholding tax on corporate interest) that make it less competitive than other jurisdictions (Luxembourg, Malta, Cayman etc).

This consultation will run until 20 May 2020, at which point the Government will decide on what action is to be taken and any legislative timetable (if relevant).  We will be submitting representations in due course.

Corporation Tax

At Budget 2016, the Government announced that the Corporation Tax main rate (for all profits except ring fence profits) would be reduced to 17% for the year starting 1 April 2020. However, in his speech to the Confederation of British Industries on 18 November last year, Boris Johnson pledged to scrap this cut if he won the election. The rest is history and so is the rate cut.

Digital Services Tax (DST) – 2% tax on revenues where value derived from UK users

From 1 April 2020, the Government will introduce a new 2% DST on the revenues of search engines, social media services and online marketplaces that derive value from UK users. This follows the introduction by France of its 3% digital services tax as of July last year.

The DST is being implemented as the Government believes that under the current corporate tax rules there is a misalignment between the place where profits are taxed and where the value is created. We have questioned the merits of the DST and its timing given the importance of securing a post-Brexit trade deal with the U.S. However, the impact of the DST is such that it should not materially impact those it is targeted at which suggests that this is a “gesture tax”, rather than one that is intended to raise billions of revenue and / or change taxpayer behaviours.

Research & Development Expenditure Credit (RDEC) – increase from 12% to 13%

The Government is looking to support business investing in research & development (R&D), by increasing the rate of RDEC available to large companies and others in the RDEC scheme from 12% to 13%, from 1 April 2020.

Prior to the Budget there had been discussions around the re-introduction of a PAYE cap on the tax credit for SME R&D schemes, however, this has been pushed back to April 2021. Whilst this is good news for those using the SME R&D scheme, it may be seen as a bittersweet moment given the focus of the Government’s announcement has been large companies rather than looking to support smaller businesses through a period of economic uncertainty.

Finally, the Government is also consulting on the current qualifying costs for R&D purposes and how these could be expanded due to the fact that current legislation is limited in areas such as cloud and data computing, where R&D relief is not available.