2020 Budget: Corporation Tax
Budget 2020 announced a hold on the current corporation tax rate, further reforms to the intangible assets regime, and additional restrictions placed on the use of brought forward capital losses.
Whilst there are some obvious immediate impacts from the Budget, further details will be available once the Finance Bill 2020 is published on 19 March 2020.
Corporation Tax rate
The Government has announced that it will retain the current 19% corporation tax rate in April 2020.
As expected, the Government has scrapped plans to reduce the corporation tax rate to 17% at least until 31 March 2021. As the legislation has been enacted through the Provisional Collection of Taxes Act, the 19% rate has now been substantively enacted for tax accounting purposes and consequently deferred tax provisions and any associated rate change should be calculated on the basis of a 19% rate for Q1 2020 reporting rather than 17% as previously. This should not impact tax accounting for December 2019 accounts but may require appropriate disclosure.
Intangible Fixed Asset (IFA) Regime Reform
The Government has announced that it will remove the exclusion of pre-2002 assets that were not previously within the corporation tax regime and acquired from related parties from the IFA regime subject to transitional rules to counter avoidance. From 1 July 2020, the cost of acquiring such intangible assets will be provided under a single regime, whether they were created or acquired before or after 1 April 2002. There will be no change to the treatment of pre-2002 assets that were already subject to corporation tax.
For Pre-FA 2002 corporate intangibles that are on-shored from related parties from 1 July 2020, corporation tax relief will be available through the IFA regime for the cost of acquiring these assets. This measure will support UK investment in intellectual property and other intangible assets and builds on the reforms in Budget 2018 where the Government removed degrouping charges on intangible assets.
Corporate Capital Loss Restriction
As previously announced in the 2018 Budget, from 1 April 2020, the use of capital losses carried forward by companies will be restricted to 50% of capital gains in a similar manner to corporate losses. The measure will include an allowance where companies can offset up to £5m capital or income losses per annum prior to any restriction. This measure will not apply to insolvent companies in liquidation who will continue to be able to offset carried forward capital losses without restriction. Additionally, the anti-forestalling provision announced in Budget 2018 has had effect, in relation to the offset of capital losses, from 29 October 2018.
It remains that the vast majority of companies are unlikely to be affected by this measure but where applicable it is likely to result in a tax liability arising on gains where this would previously not have been the case. Additionally, the allocation of the £5m per annum group deductions allowance between carried forward income and capital gains will need to be considered annually where relevant.
Structures and Buildings Allowances (SBA)
The rate of annual allowance will be increased to 3% from 2% from 1 April 2020 for corporation tax (and 6 April 2020 for income tax). SBA will be available at the new 3% rate for any non-residential building or structure brought into qualifying use where contracts for construction works were entered into on or after 29 October 2018. The new rate will also be available to businesses that were entitled to SBA on buildings and structures brought into use between 29 October 2018 and 1 April 2020. Where a chargeable period spans the date of change, SBA may be claimed at the 2% rate per year for days before 1 April and 3% for days thereafter. Some technical amendments are also being made to the legislation. They include changes to prevent double relief where research and development allowances are available and allow claims to SBA on contributions to expenditure incurred by a public body, both of which have effect from 11 March 2020. The remaining minor amendments are deemed always to have effect.
The increase in the rate of annual allowance to 3% from 2% was expected. It reduces the period over which the allowance is given from 50 years to 33 years, which is closer to the typical life of a modern commercial building. However, it does not address a fundamental design flaw which means that, absent any balancing allowance, a tenant holding a 5 to 15 year lease will only obtain a deduction for 15% to 45% of their SBA qualifying expenditure, unless they extend or renew their lease.
R&D Expenditure Credit Rate Increase
As expected, the Government have announced the increase of the R&D Expenditure Credit (RDEC) rate from 12% to 13% for qualifying expenditure incurred on or after 1 April 2020.
The rate increase for the RDEC shows the Government’s intention to support businesses carrying out R&D activities and helping to drive scientific and technological innovation.
Digital Services Tax (DST)
Another measure previously announced in the 2018 Budget, is the introduction of a 2% tax on revenues of certain digital businesses from 1 April 2020. DST will be applicable to the provision of a social media platform, internet search engine or online marketplace by a group and includes the carrying on of any associated online advertising business. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users. Draft legislation was previously published in July 2019 and will be included in Finance Bill 2020.
Businesses are unlikely to fall into the scope of DST simply by the operation of a website and the draft legislation is limited to the larger businesses targeted by this policy. Whilst there is a stated aim to agree and implement a multi-jurisdictional measure to replace this in the future, there is not as yet an international consensus on this and it is likely that other countries, the US in particular, may well object to both a multilateral agreement and also the implementation of the UK measure.
Additional Compliance Resources for HMRC
In an effort to increase tax receipts, extra resource in the form of additional compliance officers and new technology is to be available to HMRC to assist them in tackling tax avoidance, evasion and non-compliance.
How HMRC choose to use the additional resource and the way in which this will impact businesses' interactions with HMRC remains to be seen.
Large Business Notification
A consultation will be launched on large businesses being required to notify, from April 2021, HMRC when they take a tax position which HMRC is likely to challenge.
Further updates will be provided once the details and potential impact of this measure one they become apparent.
The Government announced a series of measures to address the economic impact of COVID-19 to a total cost of £12 billion.
The key business measures include:
- Refunds of statutory sick pay incurred by small and medium sized businesses
- Business rates relief for small businesses in the leisure and hospitality sector
- Extension of the time pay arrangements, covered in more detail below, and
- Business interruption loan scheme.
With predictions that a fifth of the workforce could potentially be impacted at any point in time and disruption expected to both supply and demand, these measures are clearly very welcome.
Time To Pay
As part of the measures aimed at combating negative impacts of COVID-19, tailored time to pay arrangements can be agreed with HMRC in respect of corporation tax liabilities for businesses affected. HMRC will also waive late payment penalties and interest where a business experiences administrative difficulties contacting HMRC or paying taxes due to COVID-19.
Businesses impacted by COVID-19 should contact the HMRC helpline to determine whether this measure can help mitigate the difficulties suffered.
Plastic Packaging Tax
Following the announcement at Budget 2018 of a Plastic Packaging Tax, it was announced at Budget 2020 that a further consultation will be launched on the detailed design and implementation of the legislation which will be introduced in Finance Bill 2020-21 prior to the tax being effective from April 2022. As Part of Budget 2020, it was confirmed that a tax of £200 will apply per tonne of plastic packaging which does not contain at least 30% recycled plastic. The provisions apply equally to packaging produced in the UK or imported into the UK (including filled plastic packaging). The tax will only apply to businesses above the de minimis limit which is currently set at 10 tonnes.
The continued implementation of the Plastic Packaging Tax was expected following its initial announcement at Budget 2018 and is in line with current taxation policy to incentivise environmentally friendly behaviour from business.
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