The Damp Squid Budget?
22 November 2017
Yes, yes, I know the phrase is “damp squib”. Call it pedant bait if you like. And the Chancellor (like everyone else) seems to be Blue Planet crazy, so you may detect a salty theme in this Budget update. Anyway, let’s dive into the icy waters of the latest Budget and see what monsters lurk beneath.
The Chancellor’s position already seemed weak before the 2017 election, given the rapid U-turn he made on NICs mere months ago. Now as Chancellor for a minority Conservative government, and with sharks in his own party circling, it’s not surprising that the Budget didn’t contain many bold moves. Nonetheless the Budget did contain lots of small changes. As ever I will focus on some of the key tax changes for business.
As businesses encounter increasingly choppy seas, and OBR forecasts plunge, making sure that investment remains buoyant is quay.
There were rumours of potential limits to the existing tax schemes designed to encourage venture capital (EIS, Seed EIS and Venture Capital Trusts). And sure enough, this Budget announced plans to refine some of the rules and target money raised a bit better. In particular:
- a new “risk to capital” condition designed to eliminate certain investment schemes which shelter investors from capital risk – most EIS and VCT-qualifying companies shouldn’t need to worry;
- rules specifically targeted at VCTs to eliminate historic anomalies about how the money can be used, increasing the proportion of VCT money which needs to be invested in qualifying investments, and requiring money to be invested at a faster rate.
However these changes are somewhat overshadowed by the increased limits for investment in so-called “knowledge-intensive companies” (KICs). If individuals invest in KICs they will (from 6 April 2018) be able get EIS reliefs on up to £2m per year (up from the £1m per year limit which remains for non-KICs). At the same time, the amount of investment that a KIC can receive per year with tax-favoured EIS and VCT treatment will go up from £5m to £10m. KICs already get preferential treatment in some of the venture capital rules, and this will really place focus on whether a company is a KIC or not. In order to be classified as a KIC there are conditions which must be met around (1) the proportion of company expenditure on R&D, and (2) the degree of business dependence on innovative intellectual property or high-skilled R&D employees.
The Budget also seeks to encourage investment by companies in research and development – the rate of R&D tax credit for large companies will go up from 11% to 12%. Smaller companies get some help too; the Government will pilot awareness campaigns and advance clearance systems to increase uptake of the valuable R&D tax credits available to SMEs.
Non-resident property investors
Recent tax changes have been aimed at reducing the discrepancies between UK and non-UK investors in UK property. The tax treatment of those two groupers used to be oceans apart. Following the introduction of capital gains tax for (most) non-residents on the disposal of UK residential property, it seemed only a matter of time before the Chancellor would look to cast his net wider.
The Budget has therefore announced a major consultation into how non-resident property ownership is taxed. In particular the Government will look into widening the existing tax which some non-resident companies pay, bringing non-residential property within scope and taxing “indirect disposals” – e.g. the disposal of a property-holding company rather than the property itself. These proposals aren’t expected to come into effect until April 2019, but the Government has simultaneously announced some anti-forestalling rules intended to head off certain kinds of restructuring that investors might undertake in the meantime.
Business Rates and SDLT
The revaluation of property for business rates has caused a tremendous amount of upheaval for many businesses (see my Spring Budget update here). While the Government has sought to address concerns, business rates are a fixed cost which still give many a sinking feeling. The Chancellor has therefore thrown out a few life rafts. Business rate increases between revaluations will be aligned to the kinder CPI measure, not RPI, from April 2018. The revaluation schedule itself will switch from every five years to every three years, reducing the shock value of each revaluation. And the Government is also going to address the so-called “staircase tax” whereby businesses might get higher tax bills if their premises were linked by communal (rather than private) staircases within a single building.
Stamp Duty Land Tax (SDLT) remains a prime area for tinkering, and the Chancellor’s announcement that seemed to garner the loudest welcome in the House of Commons was SDLT relief for first-time buyers. In short, first-time buyers won’t have to pay any SDLT on purchases of £300,000 or under, and will get relief on the first £300,000 of purchase price as long as the total property price is under £500,000. This all sounds like a commendable inter-generational rebalancing until you read the Office for Budget Responsibility’s warning. Their analysis strongly points to such SDLT reliefs mainly benefiting the seller of the property, not the buyer, as they lead to higher prices. So one has to ask: what’s the porpoise behind it all?
Employers and Employees
How to tax employees (and how even to decide who is an employee) in a fast-changing economy remains a considerable source of g-reef for the Government. There were no grand announcements today, although the Government did push back the introduction of a package of NIC measures (including abolition of Class 2 NICs, and changes to how termination payments are subject to NICs) to April 2019, presumably to give people more time to prepare for the changes.
More significant is the Government’s plan to consult on possible employment status test changes in response to Matthew Taylor’s review, and a separate consultation on the possibility of extending the recent IR35 changes (which currently only apply to the public sector) to the private sector. This could herald significant change, time will tell.
There were also a handful of tweaks to the benefit in kind system, including:
- simplifications and added clarity for certain travel and subsistence expenses, and a commitment to consult on making the system easier to administer
- changes to the “Van Benefit Charge” and van/car fuel benefits
- expanding some of the exemptions for employer-financed premiums on life assurance products
- exemption from benefit in kind taxation of electricity provided for employees’ electric, and hybrid, cars (although it has been pointed out that this is an exemption from something that would have been fiendishly hard to tax in the first place!)
Adapting to Modern Business Practices
The Chancellor reiterated the Government’s commitment to international efforts to reform the global tax system (the Base Erosion and Profit Shifting – or BEPS – Project). Legislation will be introduced to enable the Government to give full effect to some of the intended changes to how double tax treaties work. However the Government also committed to taking unilateral action where appropriate. In that spirit the Government has announced plans for a new royalty withholding tax which (in broad terms) could apply UK income tax to payments of royalties made to non-residents if they relate to UK sales. A lot of question marks hang over the structure of such a tax, and in particular how it will square with existing double tax treaties. A consultation will be published in December.
The VAT system also came in for some scrutiny. Some small businesses trading through digital marketplaces (Amazon, eBay etc…) have been having a whale of a time not charging VAT. The Chancellor has decided to deal with the whole fishy business by making the platforms jointly liable with traders for the VAT in certain circumstances. The rules will vary depending on whether the trader is UK-based or offshore, but in short the platforms will no longer be able to turn a Nelsonian blind eye to their traders’ tax affairs. Additional checks will need to be instituted.
and on top of that the Government also published a position paper on its proposed direction of travel for taxing modern digital businesses. They want to wave goodbye to outmoded systems better suited to the 19th Century, but this is likely to be a long haul.
The constant rumours of this relief's death seem to be greatly exaggerated. Far from limiting it though, the only related announcement in this Budget might even expand it. The Chancellor will consult in 2018 about whether it might change the law preserve entrepreneurs’ relief for shareholders who are diluted below the required 5% threshold by subsequent investment. It would be a shame if the system encouraged companies to turn away the oppor-tuna-ty to receive investment. Shorely a solution can be flound(er).
And that’s it for Budget 2017. Sorry if you don’t like puns. However you probably receive a lot of Budget updates, so you can’t say you don’t have a choice. In fact I dare say you’re drowning in them.