Today’s Autumn Budget announced some positive reforms to the intangible assets regime, alongside further refinement to recently enacted legislation 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 2018-19 is published on 7 November 2018.
DEGROUPING CHARGES FOR INTANGIBLE ASSETS
The Government has announced degrouping charges on intangible assets will be reformed to align with the existing rules for tangible assets. A degrouping tax charge arises where assets have been transferred intra-group to a company which then leaves the group, within 6 years of the transfer, while it still holds the asset. Unlike the degrouping of tangible assets where the degrouping gain is added to the proceeds eligible for relief in accordance with the Substantial Shareholdings Exemption (“SSE”), degrouping charges on intangible assets currently arise even if the disposal of the company is eligible for SSE. The new rules will apply to any degrouping on or after 7 November 2018.
This is a welcome change in legislation which will bring the treatment of intangible assets in line with tangible assets and will facilitate the commercial disposal of companies holding such assets.
CORPORATE CAPITAL LOSS RESTRICTION
The Government has announced that the use of capital losses carried forward by companies is to be restricted in a similar manner to corporate losses. Therefore, from 1 April 2020 the use of carried forward capital losses will be restricted to 50% of capital gains. The measure will include an allowance where companies can offset up to £5m capital or income losses per annum. A consultation into this restriction was announced on 29 October 2018, and anti-avoidance rules will apply with immediate effect.
It is anticipated that the vast majority of companies will be financially unaffected by this measure. Draft legislation is to be published in summer 2019 and as yet there is no further comment regarding the flexibility of the use of such losses going forwards.
RELIEF ON ACQUISITION FOR IP RICH BUSINESSES
Following the consultation held in Spring 2018, the Government will introduce a specific relief for the acquisition of businesses goodwill alongside eligible intellectual property. The relief will take effect from April 2019. We expect a more detailed proposal to published at a later date.
It appears this measure will look to reinstate, in part, reliefs removed in Finance Act 2015 which removed corporation tax relief for companies who write off the cost of purchased goodwill and certain customer related intangible assets.
INTRODUCTION OF THE NEW ACCOUNTING STANDARD FOR LEASES IFRS 16
Following consultation, HMRC will introduce legislation in Finance Bill 2018-19 to ensure the tax implications of the introduction of the new accounting standard for leases, IFRS 16 are as intended. Amendments will have effect for periods of account beginning on or after 1 January 2019.
In particular, lessee companies will still be required to classify their leases as either ‘finance leases’ or ‘operating leases’ for the purposes of the corporate interest restriction (CIR) rules, even though this will not be required for accounting purposes. Where there is a lease that is classified as an ‘operating lease’ for these purposes, any finance charge that is identified for accounting purposes is not included as tax-interest for CIR purposes.
Changes will also be made to the long funding lease (LFL) regime including the conditions for identifying a LFL, lessees being taxed on the basis that they hold a long funding finance lease and any LFL held on adoption of IFRS 16 retaining its current tax treatment. Other changes were announced in relation to the rules for structured finance arrangements, writing down allowances for lessors and the computational rules for the spreading of the transitional adjustment upon adoption of IFRS 16.
The proposed changes to ensure that IFRS 16 will operate as intended are to be welcomed as HMRC’s initial proposed approach resulted in a number of areas where the status quo would not be preserved for tax purposes or give rise to unacceptable increases in compliance burden for companies. The confirmation that finance charges on leases that would previously have been classified as an operating lease prior to transition will also be a relief for companies with large property lease portfolios.
PAYE CAP FOR SME R&D RELIEF
The Finance Bill 2019-20 will introduce a cap on the payable credit that can be claimed by a company under the R&D SME tax relief in order to counter perceived avoidance. Currently loss-making companies can surrender losses for a payable tax credit. The amount of losses which can be surrendered is the lower of 230% of the qualifying R&D expenditure and the total loss of the trade. The new measure will introduce a further cap, set at three times the company’s total PAYE and National Insurance contribution payment for the accounting period. Losses which cannot be surrendered for the payable credit can be carried forward and used against profits in future periods. This measure will be introduced for accounting periods beginning on or after 1 April 2020 after a consultation is held. This will bring the SME R&D relief in line with the RDEC scheme which already has a PAYE/NIC liabilities cap in place.
The reintroduction of the PAYE/NIC cap lifted in April 2012 is unlikely to be received positively. It is being introduced to prevent perceived abuse of the R&D relief. However, it could severely limit the payable credit receivable by companies which subcontract large parts of their R&D work.
The Government intends to legislate in Finance Bill 2019-20 to make HMRC a preferential creditor in business insolvencies and ensure taxes collected by a company on behalf of HMRC (such as VAT and PAYE) go towards public funds, rather than being distributed to other creditors.
There will be no change to the rules in relation to taxes owed by businesses themselves (such as corporation tax and employer NIC), however the Government plans to legislate to allow HMRC to make directors and other persons involved in tax avoidance or evasion jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.
Structures and Buildings Allowances
A decade on from the announcement of the withdrawal of industrial and hotel building allowances, the Chancellor announced the introduction of a new Structures and Buildings Allowance (“SBA”) for new non-residential structures and buildings.
Business and real estate groups have long lobbied for closure of this gap in the UK capital allowances system and was one of the issues highlighted in the recent OTS review of accounting depreciation and capital allowances.
Broadly, businesses that incur capital expenditure on or after 29 October 2018, on new commercial structures or buildings (including conversions and renovations) used for qualifying activities will be able to claim a deduction at an annual rate of 2% on a straight-line basis over fifty years. However, on a disposal, the base cost of the asset will be reduced by the amount of SBA claimed by an investor during its ownership, meaning that the allowance may only present a temporary benefit.
The allowance is available for both UK and overseas property, where the business is within the charge to UK tax.
The technical note published by HMRC suggests there will be a definition of dwelling for the purposes of SBA and a consultation before it is set out in legislation. The absence of a definition of dwelling of general application in CAA 2001, for plant and machinery allowances for example, has caused problems in the past so it will be interesting to see the new statutory definition and whether its scope will be limited purely to SBA.
The introduction of an allowance for the cost on previously non-qualifying construction costs is welcomed, and brings the UK into line with many other jurisdictions.
Reduction of special rate writing down allowance
There will be a reduction in the special rate of writing down allowance applicable to assets such as integral features (mainly building services) and long-life assets (typically plant and machinery in big infrastructure and utility projects), from 8% to 6% from April 2019.
Treasury forecasts estimate that over the period from 2018/19 to 2023/24 this change will have a £1,000m positive impact on tax revenues, partially offsetting the £1,905m cost of the introduction of SBA.
Temporary Increase in the Annual Investment Allowance
The AIA for investment in plant and machinery will be temporarily increased from £200,000 to £1m from 1 January 2019 to 31 December 2020.
An increase in AIA was not wholly unexpected as it was another item that was recommended for further consideration in the OTS report reference above; but a limit of £500,000 was perhaps thought more likely than £1m.
The measure is trailed as an investment stimulus by incentivising business to accelerate their investment plans to take advantage of the additional deduction available for expenditure on plant and machinery in the year it is incurred.
Treasury estimates the cost in 2018/19 to 2020/21 at £1,240m.
Where a business has a chargeable period that spans the introduction of the increase on 1 January 2019 and the end of the increase on 31 December 2020 similar transition rules will apply as applied to previous changes in the amount of AIA.
Further rules will apply to group companies or businesses under common control, which share a single AIA.
Whilst welcomed, the questions is whether this will be enough of an incentive for businesses to be persuaded to accelerate their investment plans in a 2-year pre and post Brexit window frame.
Ending Enhanced Allowances for Energy and Water Efficient Plant and Machinery
The ECA scheme was introduced in 2001 and has long attracted criticism for the practical difficulties of establishing whether expenditure on an asset qualified for 100% first year allowance or the associated first year tax credit.
The OTS recommended that the scheme be withdrawn several years ago as one of numerous suggestions to simplify the tax system, but the recommendation was not acted upon for fear of undermining the government’s green credentials.
It has now finally been decided to abolish the scheme from April 2020 and use the money to fund the Industrial Energy Transformation Fund.