The UK’s Chancellor of the Exchequer, Philip Hammond, has delivered his 2018 Budget. As the Chancellor previously moved away from separate Autumn and Spring budgets, this was supposed to be his final Budget before the United Kingdom leaves the European Union on 29 March 2019. That said, depending on whether a “No Deal” Brexit prevails, he has signalled that he might well squeeze another one in.
The Chancellor described his budget as one for hard-working families, which will “pave the way forward for a brighter future”; as such, many of the changes relate to personal rather than corporate taxation, funded in part by a populist new tax on multinational technology companies. There are, however, a few important points for wholesale financial services firms to note.
From April 2019, personal allowances will increase to £12,500 and higher rate taxes will commence at £50,000. These rates will be set until 2021, and thereafter the personal allowance and basic rate threshold will be indexed with the Consumer Price Index (“CPI”). Also from 6 April 2019, the annual exemption for Capital Gains Tax increases to £12,000 for individuals and personal representatives and to £6,000 for trustees of settlements, and the lifetime allowance for pension savings will be increased to £1,055,000 in line with CPI. On residential real estate, the Government is consulting on plans to reduce the final period exemption under the Principal Private Residence rules to nine months and restrict Lettings Relief such that it will rarely be available.
Of significantly more interest to owner-managers of financial services firms are the changes to Entrepreneurs’ Relief (“ER”) - a longstanding relief which enables individuals to benefit from a 10% capital gains tax rate on qualifying disposals. ER continues to apply, however, from 6 April 2019, the minimum period throughout which the qualifying conditions for relief must have been met will be extended from 12 to 24 months.
Further, in relation to disposals of shares in a company, a new condition has been added for claims relating to gains made on or after the date of the 2018 Budget; for ER to apply in this case, the taxpayer must also have interests of at least 5% in both the distributable profits and the net assets of the company.
Owner-managed businesses structured as limited companies with multiple share classes should take care – where interests in profits and assets are not aligned with voting rights – that a planned future exit involving ER is still possible, and consider whether it is appropriate (having regard to current tax implications and anti-avoidance legislation) to restructure the rights of share classes.
Use of personal service companies (IR35) – implications for LLP members?
To bring private sector organisations in line with the public sector, responsibility for determining the employment status of individuals working through personal service companies will move from the individual to the party engaging the worker. These rules will apply to large and medium-sized organisations and will therefore not affect smaller owner-managed businesses.
What is interesting to us is the continued focus on the question of employment status, and although IR35 is designed to police contractor-company relations, we would not be surprised to see HMRC extend the thinking behind this to take a more aggressive approach to the status of members of LLPs where there could be some doubt over the level of influence held.
Businesses planning for significant outlay on plant and machinery (including the costs of refurbishing of office premises) will be pleased to hear that the Annual Investment Allowance (“AIA”) will increase from £200k to £1 million for the calendar years 2019 and 2020.
Mixed Partnerships are not eligible for the AIA, and so if an LLP is already considering moving their business to a limited company in light of the Salaried Member rules, AIA may be an added incentive to make the change. Existing limited companies may wish to consider accelerating the timing of planned office refurbishment projects to capture the additional benefit before the opportunity expires.
For Mixed Partnerships choosing to maintain their current structure, a further disadvantage is coming as the writing down allowance on the Special Rate Pool (covering items such air-conditioning, heating, lifts and lighting) reduces from 8% to 6% from April 2019.
Research and Development (R&D) tax relief
The Government has noted abusive and fraudulent R&D tax credit claims by small and medium-sized enterprises in recent years, but has not – to our knowledge – pointed to any such claims by fund managers utilising an algorithm and claiming relief on the costs of developing and refining their intellectual property. Nonetheless, such fund managers are not scoped out of a new consultation announced in the 2018 Budget, which proposes that from 1 April 2020 the amount of credit be limited in any tax year to three times the claimant’s PAYE and NICs liability for that year. Fund managers with algorithm-based trading, may wish to consider changing their resource mix to maximise the in-house proportion to maximise the value of claims should this progress to legislation.
Large multinational corporate groups continue to be on the Government’s radar with new restrictions on the use of capital losses and further anti-avoidance rules to tackle tax avoidance through hybrid structures, offshore royalty payments and disguised permanent establishments. The change in the definition of permanent establishment is designed to thwart blatant abuse by manufacturing companies, amongst others, and we see no impact on the operation of the Investment Manager Exemption on which many managers of offshore funds rely.
Non-resident landlord companies
From 6 April 2020, profits of non-resident landlord companies directly or indirectly carrying on a UK property business will be taxed under Corporation Tax rules (at a rate of 17%). Currently, tax is levied under Income Tax rules at a flat rate of 20%, so this previously-announced change represents a small reduction in the tax burden on funds investing in UK real estate (via non-resident landlord companies), which does little to offset the effect of the introduction of capital gains tax on non-resident landlord companies (from 2015 for residential property and 2019 for commercial property). Indeed, funds that are heavily leveraged may see an increase in their tax burden from the switch to Corporation Tax rules due to the operation of corporate interest restriction rules.
Short-term Business Visitors
Firms with overseas operations or parent entities will benefit from an extension of the PAYE special arrangement for overseas staff visiting the UK. From 6 April 2020, such personnel will only need to be included on a UK payroll should they spend more than 60 workdays in any tax year.
For More Information
Should you wish to discuss any of the above or other matters arising from the 2018 Budget, please contact Sutha Kanagarajah, Head of Corporate Tax, or your usual ACA tax contact.
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The information contained herein is generic in nature and provided for informational purposes only. It does not constitute advice specific to any recipient and may not be tailored to your needs or circumstances. You should consult your ACA tax advisors before engaging in any transaction based on the contents of this briefing.
About the Author
Sutha is Head of Corporate Tax, responsible for all tax compliance and advisory work undertaken by his team. He has over 15 years of tax experience. Prior to the acquisition by ACA, Sutha was Head of Corporate Tax at Cordium, with which he had been with for over 7 years. Before joining Cordium, he was Tax Manager at BDO LLP where he managed tax advisory and corporate tax compliance projects. Preceding that, Sutha was an Audit and Tax Senior at RSM Robson Rhodes LLP. Sutha received a BSc (Hons) in Mathematics with Economics from the University College London.