Budget 2018: four key business tax changes

31 October 2018

Looking behind the headlines from the Chancellor’s speech, the UK Government’s Budget sets out a number of important tax changes for business.

  1. Tax compliance for off-payroll workers (when freelancers contract through service companies) will become the responsibility of large employers, from April 2020. 

    This will represent a significant transfer of risk to large businesses that use self-employed workers.  Businesses will need to test whether their contractors should be treated as employees for tax purposes, and if so operate PAYE on their income.  Under the existing rules, the risks attaching to non-compliance sit with the personal service companies operated by individual contractors.

    Even though the detail of these rules is not yet settled – as the government will continue to consult – businesses should take steps now to familiarise themselves with the new requirements and plan for implementation.  For some companies this is likely to be a significant undertaking, so it is reassuring that there is some lead time before the new regime takes effect. 
  2. The qualifying conditions for entrepreneurs’ relief are being tightened up. 

    The headline point is that shares will need to be owned for at least two years (rather than the current 12 months) in order to qualify.  In addition, a new economic ownership test will mean that holding five per cent or more of the shares (by number) will no longer be enough to qualify unless shares also carry at least five per cent of the economic rights in the company.  In practice, this may mean that there are some companies where fewer individual shareholders will qualify for entrepreneurs’ relief on future disposals.
  3. The UK is pressing ahead with its own digital services tax from April 2020.

    This will be a surprise for some, as the UK government has consistently said that it would prefer to seek consensus on a multilateral solution amongst OECD or G20 members rather than going it alone on a new tax.

    According to the Treasury announcement, under the new regime “Digital tech giants will be taxed at two per cent on the money they make from UK users”.  This new tax is likely to face some tricky design issues, and it will be interesting to see whether multilateral efforts to tax digital services will catch up with, or possibly overtake, the UK’s own proposal.

    It is not easy to see how the UK government can be sure that it will catch all those businesses within the intended scope (primarily the largest US tech businesses that have a significant UK user base) without also taxing some of the online activities of UK-based businesses. There will also be some high profile online businesses which are outside the scope of the tax, since a number of tech giants remain loss making and the new tax expressly excludes businesses that do not make a profit.

    It is worth keeping this new measure in context.  Total corporation tax receipts for the 2017 / 18 tax year are estimated at £55bn.  Projections for the new digital services tax look rather modest by comparison, starting at £275m in the first year and projected to rise to £400m in 2022-23.
  4. Capital losses will become subject to the same fifty per cent restriction as income losses.

    The set off of historic corporate income losses is already restricted to fifty per cent of profits for corporation tax purposes (above a £5m annual group threshold), but until now capital losses have rolled forward to relieve future capital gains in full.  From April 2020 the fifty per cent rule will apply to capital losses as well, which means groups will no longer be able to rely on historic losses to fully shelter tax arising on the disposal of capital assets.

Taken together, these measures add additional complexity to the UK’s business tax code, and will require groups to develop an informed approach to ensure they are managing the extent of their UK taxable activities and their exposure to UK tax risk.

This article originally featured on Bloomberg Tax.

Reproduced with permission from Copyright 2018 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.