Company taxation

Tax rates and allowances

The rate of corporation tax will remain at 19% in 2020/21, following the Conservative Party Manifesto pledge to scrap the planned reduction to 17%.

However, the Budget announced an adjustment to the rules for the 8% additional corporation tax surcharge for banks, so that in all cases losses surrendered into a banking company by a non-banking company are disregarded for the purpose of calculating the 8% surcharge. Accordingly, losses surrendered from a non-banking company can only offset a banking company’s profits for its mainstream corporation tax calculation (currently 19%), not the 8% additional surcharge.

See our table of the main tax rates and allowances for 2020/2021.

Digital services tax

The Digital Services Tax will be introduced from 1 April 2020, despite some prior uncertainty with the appointment of the new Chancellor and the possible impact of the tax’s introduction on the negotiation of a UK-US trade deal. The 2% tax on revenues of search engines, social media services and online marketplaces which derive value from UK users is intended to address the perceived misalignment between the place where profits are taxed and where value is created by businesses operating in the digital economy.

The government expects DST to impact a small number of large multinationals and has exempted financial service providers from the online marketplace definition. With the rise of similar unilateral measures in a number of countries including Italy, Austria, Turkey and Spain etc. there is a risk of double taxing the same revenue. To address this, where one of the users is not a UK user but instead a user of a jurisdiction which applies a similar DST in the case of marketplace transactions, the revenues from the transaction will be reduced by 50%. Of course, it is a matter for the other jurisdiction whether they have a similar relieving provision, and no account is taken of transactions involving more than two jurisdictions.

Nevertheless, the increased compliance burden associated with familiarising with the new rules, ongoing costs and, most importantly, having the systems in place to extract the revenue referable to UK users will be some of the key concerns businesses will continue to face as DST is implemented.

The impact of this legislation on the Exchequer has been estimated up to 2025, starting from £70 million in 2019/2020, rising to £515 million in 2024/2025. Compared to other recent high profile measures introduced by HMRC such as the Diverted Profits Tax legislation, this will not be the most significant tax revenue generator but is politically important.

Estimating the impact over a five year time frame is also interesting – DST is intended to be an interim measure until international consensus is reached on long-term reform to international corporate tax rules through the G7, G20 and OECD discussions. This is a challenging target. On the one hand, the OECD’s revised definition of businesses in scope to explicitly refer to automated digital services which include the categories covered by most unilateral DST measures tries to appease the jurisdictions taking these actions. On the other hand, whilst the OECD’s workplan expects to deliver a final report on recommendations this year, the timing of implementation of global measures and the repeal of unilateral actions is uncertain, particularly given the US’s views on the subject.

Review of the UK funds regime

Budget 2020 announced a broad review of the UK funds regime during 2020, covering direct and indirect taxes as well as regulation, with a view to considering the case for policy changes, one would assume to come into effect after the end of the transition period.

In addition to VAT proposals discussed elsewhere, the review begins with a consultation on whether there are changes that could help make the UK a more attractive jurisdiction in which funds could establish asset holding entities. As matters stand, there are tax barriers to the use of onshore UK vehicles as “below the fund” holding entities for credit, real estate and PE funds. The consultation covers a smorgasbord of topics, from an expansion of the UK securitisation company tax regime (the Government seems cool on this aspect) to reforms to the substantial shareholdings exemption and a possible extension of the REIT regime (potentially through a removal of the listing requirement) through to a possible review of withholding taxes on interest and the application of the hybrid mismatch rules to fund structures.

The fact that the Government is reviewing the position is positive, acknowledging as it does that the UK tax regime needs to remain competitive, and indeed that there may be benefits (in light of BEPS, ATAD, economic substance requirements and other developments) for structures to be brought onshore. It should though be remembered that this is only a consultation for now, and as ever, the devil will be in the detail of what emerges in due course.

Overseas fund regime

The brave new post-Brexit world will require a rewriting of the rule book for the marketing of EU-domiciled funds into the UK. As part of Budget 2020, a consultation has been announced on how the more than 8,000 UCITS that are currently passported into the UK (together with certain other funds) can continue to access the UK market from the end of the transition period, when passporting ceases, under the proposed Overseas Fund Regime (OFR). This will cover both retail and money market funds.

Although focussing on the regulatory aspects, the consultation also acknowledges the impact that the OFR will have on relevant areas of tax legislation. For example, as matters stand, relevant passported funds qualify as eligible investments for UK tax wrappers such as Individual Savings Accounts. The expectation is that retail funds recognised under OFR will continue to qualify for inclusion in these wrappers. The consultation does not specifically address VAT, although one might expect that a similar approach may be taken to include such funds within the scope of the UK VAT exemption for management of “special investment funds”, although this will no doubt form part of the review discussed elsewhere.

Maintenance of a stable UK financial services sector despite the current headwinds is key, given the significant contribution made to the UK economy, as acknowledged in the consultation, and no doubt the Government hopes that the proposed OFR will be reciprocated by EU Member States.

Business rates

One of the most contentious tax issues in recent years has been the impact of business rates on the high street. All parties pledged to review or reform business rates in the run up to the 2019 General Election and so it was no surprise to see the Chancellor return to this theme.

Some of the measures are short term in response to the impact of the coronavirus and include the temporary increase in the business rates retail discount to 100% for one year from 1 April 2020, as well as expanding it to include hospitality and leisure businesses. The measures do not, however, benefit the larger retailers, who have borne the brunt of the current business rates system.

However, in the longer term, the Government has announced that it is launching a fundamental review of business rates in autumn 2020.

Taxation of LLPs

The Government’s Budget notices included a rather opaque announcement on the tax treatment of UK limited liability partnerships (LLPs). No draft legislation was published alongside the announcement, but it is intended that the change will have both retrospective and prospective effect.

Having overcome the immediate wave of despair which can arise at the prospect of yet more tinkering with partnership taxation, it is a relief to discover that, on its face, the change is narrow and would not seem to be of wide relevance to the majority of LLPs. The announcement confirms that where an LLP filed a partnership tax return on the basis that it was carrying on a trade or profession with a view to profit, but it subsequently transpires that the LLP is not in fact operating with a view to profit, HMRC is nonetheless able to amend the tax returns of the LLP’s members on a basis consistent with the adjustments made to the original partnership tax return. This is presented as a clarificatory non-change which simply affirms how everyone thought LLP taxation worked, but the tone of the announcement is otherwise coy, and no background is provided.

It is safe to assume that a change of this type must have been prompted by something specific. If one were to speculate about the background, it is possible that this could relate to recent suggestions that the deeming provisions which make LLPs (which are by default bodies corporate) transparent for tax purposes might not work as intended in all circumstances, in particular with respect to tax administration. Whilst more may become clear when draft legislation is published, as the announcement itself notes, it seems unlikely that this will have a practical impact on most LLPs.

Corporate capital losses

In an anticipated sequel to the corporate income loss restriction (CILR) comes the corporate capital loss restriction (CCLR). For accounting periods ending on or after 1 April 2020, companies will only be able to set off carried-forward capital losses against up to 50% of their chargeable gains. Aimed at large companies, the objective of the measure is to prevent companies from paying no tax in an accounting period where they realise substantial chargeable gains but can carry forward capital losses to reduce the chargeable gains to nil. The £5 million deductions allowance under the CILR will be shared under the CCLR, meaning that companies with profits of less than £5 million should be unaffected by the measure, which the Government estimates should be 99% of all companies.

Withdrawal of LIBOR

A major forthcoming change in the banking industry is the withdrawal of LIBOR – which to date has been the main benchmark interest rate used by market participants for floating rates of interest. This is to be replaced by alternative reference rates based on objective actual transactions, instead of subjective judgements of market interest rates. Budget 2020 announced a consultation on the tax implications of this change. At present little detail is available of what issues this consultation will cover, or the timeframe for its launch or response window. But some possible issues include changes to tax legislation which currently makes reference to LIBOR, or the tax implications where securities need to be (or are automatically deemed to be) amended or replaced as a result of the withdrawal of LIBOR.

R&D tax reliefs

The Government has announced that the rate of “above the line” research and development expenditure credits (RDEC) will be increased from 12% to 13% in relation to expenditure incurred on or after 1 April 2020. This is the R&D tax relief which replaced the former “large company” relief in 2013, and which is available to large companies / non-SMEs and SMEs which either have been subcontracted to do R&D work by a large company or have received a grant or subsidy for their R&D project. The stated intention is to boost productivity, promote growth and drive innovation, and the increase certainly won’t be unwelcome (especially if challenging economic waters lie ahead).

As promised in the Conservative Manifesto, it was also announced that the Government will be consulting on extending the scope of R&D tax reliefs to cover expenditure on data and cloud computing. This is aimed at companies whose primary R&D activity is not software-related, but which are using data and cloud computing in other areas of research (including, for example, vaccine development).

Following a 2019 consultation on capping the payable tax credit under the SME R&D tax relief scheme to prevent abuse, the Government has now announced that implementation will be delayed until 1 April 2021 following representations from industry, and that further consultation will take place on the design of the cap.

Rate of Structures and Buildings Allowance

Although only announced in the 2018 Budget, and later introduced in July 2019, this year’s Budget included an increase in the rate of Structures and Buildings Allowance, or SBA.

The rate of the SBA currently stands at an annual flat 2% rate of relief on qualifying expenditure, such as construction costs on non-residential commercial structures, incurred on or after 29 October 2018. The newly announced increase will raise this annual rate to 3% per year and will be effective from April 2020. It remains the case that qualifying expenditure must be incurred on construction contracts entered into on or after 29 October 2018. Where the relevant structure is brought into a qualifying non-residential use by a business prior to April 2020 that business will be entitled to claim the annual rate of 2% for days up to the relevant effective date and 3% for days following the relevant effective date. Businesses claiming in respect of structures brought into a qualifying use following the relevant effective date will be entitled to claim the annual rate of 3% from the date that qualifying use begins.

The Government also intend to make various technical changes to the Capital Allowances Act, which are set to be included in the Finance Bill 2020. These include, among other things, prohibiting the double recovery of allowances where both the SBA and R&D allowances apply to the same structure, allowing the SBA to be claimed by a contributor where a structure is first brought into a qualifying use by a public body and allowing the SBA to be claimed for the day on which the structure is brought into a qualifying use, as well as the days following it.

This announcement is likely to have a significant impact for those claiming the SBA. Whilst businesses will need to incur the cost of familiarising their staff with the new rate of relief and updating their systems to account for the change, the increase in the rate will significantly shorten the period of time required to relieve the full amount of the qualifying expenditure on a property. Where a business owns a property from the date it is brought into a qualifying use and continues to hold on to that property, applying the annual 3% rate, the relevant qualifying expenditure will be relieved in 33 and one third years. This is significantly shorter than the 50 years it would take to relieve the relevant qualifying expenditure were the rate of 2% to be applied annually for the life of the property.

Intangible fixed assets

The Government has announced the removal of restrictions currently applicable to pre-2002 intangible fixed assets acquired from related parties. Any such assets acquired on or after 1 July 2020 will now be within the regime for the taxation of intangible assets set out in Part 8 of Corporation Tax Act 2009, bringing the tax treatment of this class of assets into line with intangible fixed assets created after 2002 and pre-2002 intangible fixed assets acquired from unrelated third parties. (At present pre-2002 intangible fixed assets acquired from related parties are either within the capital gains regime or taxed under Part 9 of Corporation Tax Act as IP.) Anti-avoidance provisions will apply to prevent abuse between related parties and will limit debit relief available under Part 8 by deducting the market value of the asset at the date of acquisition from any costs incurred on acquisition, with relief for remaining costs being available on later realisation.

This is a welcome change which will allow companies to claim relief for older intangible fixed assets that they acquire and simplifies compliance, with a single regime for tax and relief applying for acquisitions after 1 July 2020.

Construction industry scheme

The Construction Industry Scheme (CIS) was introduced to combat tax avoidance in the construction industry through requiring “contractors” to deduct tax at source from payments for construction services to “sub-contractors” which are not appropriately registered with HMRC. The Government is concerned that certain non-compliant sub-contractors are exploiting this anti-avoidance measure through claiming credit for amounts which have not actually been deducted. To counter this abuse, the Finance Bill 2020/21 will contain legislation to reduce or deny a credit for a CIS deduction where the sub-contractor cannot evidence that a deduction has been made.

The Government will also legislate to simplify the rules covering deemed contractors, to clarify the rules on allowable deductions for expenditure on materials, and to expand the scope of the penalty for supplying false information when registering for CIS.

Alongside these legislative changes, the Government will be consulting on how to promote supply chain due diligence, including how to tackle fraud in supply chains.

Non-residents with UK property income

As legislated for in the Finance Act 2019, on 6 April 2020, non-resident companies with UK property income will come into the charge to UK corporation tax on their UK property income and profits from loan relationships and derivatives to which they are party for the purposes of generating that income.

The Finance Act 2019 contained a myriad of changes dealing with the transition from income tax to corporation tax. In view of the complexity of this transition, the amendments made by the Finance Act 2019 inevitably had some unintended consequences, which the Government intends to address in the Finance Act 2020. These changes include, amongst other things, allowing net financing costs incurred prior to a non-resident company commencing its UK property business being recognised for UK corporation tax purposes when that business commences.

Review of enterprise management incentives

The Government has announced that it will review the EMI scheme to ensure it provides support for high‑growth companies to recruit and retain the best talent so they can scale up effectively and examine whether more companies should be able to access the scheme.

Under the EMI scheme, options enjoy favourable tax treatment and are specifically targeted at small, higher-risk trading companies. A number of statutory requirements must be met in order for a company to qualify to grant EMI options. In particular, a company must be an independent trading company with gross assets of no more than £30 million and fewer than the 250 full-time employees, as well as carrying on certain approved categories of business.

Hybrid mismatch rules

UK corporation tax payers have struggled for more than three years with the complexities and idiosyncrasies of the UK’s hybrid mismatch legislation. It is widely acknowledged that these rules are burdensome and overreach their aims of combatting mismatches in the tax treatment between different jurisdictions.

The Government will be publishing a consultation seeking to ensure that these rules work proportionately and as intended. Taxpayers, advisers and other stakeholders should take this opportunity to highlight the issues raised by the existing rules.

Extending enhanced capital allowances in Enterprise Zones

Secondary legislation will be introduced to ensure that 100 per cent First Year Allowances (FYA) remain available for expenditure incurred in relation to all designated areas, whenever designated, until at least 31 March 2021. First Year Allowances are available to companies investing in qualifying plant and machinery for use in designated areas within EZs.

Enhanced FYAs were first introduced in 2012 and were extended to apply for 8 years. Since the 8 year period will expire from the introduction of the measure, the Government is taking this step to ensure that the allowances remain available. These changes will have effect from 1 April 2020.