Refreshed by nothing stronger (unfortunately) than the nation’s favourite brew, the team at Claritas Tax have been in lock-down since the Budget Statement was delivered – to bring you the sanitised tax issues to ensure your business doesn’t catch a cold!
Today’s headline for many of our clients will be the dramatic scaling back of Capital Gains Tax Entrepreneurs’ Relief (ER). In fact, the news is spreading faster than the Coronavirus!
What the measure is
The lifetime limit for ER has been reduced from £10 million to £1 million with effect from 11th March. ER reduces the capital gains tax rate from 20% to 10% and has been amended in most Budgets since we were worrying about swine flu. The speculation regarding ER had been relentless since the general election, with business groups lobbying for its retention as a vital tool for encouraging entrepreneurs whilst politicians and think tanks decried it as ineffective and expensive. Boris even referred to it as a tax relief to make rich people “even more staggeringly rich”. The flurry of deal activity in the first ten days of this month is testament to the effectiveness of the publicity campaign on both sides.
Whilst an immediate change to a valued tax relief would be unwelcome and relatively unusual, the sting in the tail is the additional complexity introduced to frustrate business owners who have already triggered sales this tax year. This feels dangerously like retrospective legislation. This government’s record has not been good in this respect.
The additional complexity is the anti-forestalling provisions:
- The first of these applies the reduced lifetime limits to disposals where a seller has made arrangements to enter into an unconditional contract before Budget Day with completion occurring afterwards. The normal rule in such a scenario is that the gain is triggered when the unconditional contract is entered into. However, the reduced lifetime limit will apply to such disposals unless the parties to the contract demonstrate that they did not enter into the contract with the purpose of benefiting from this timing rule and, if the parties are connected, that they entered into the contract for commercial reasons.
This will catch the situation where companies have been sold to related parties with a view to later selling it on once a buyer has been found but any shareholder who obtained a tax clearance from HMRC for a transaction which occurred before 11th March will not be caught.
- The second rule concerns transactions where a seller exchanges shares in one company for shares or loan notes in another, normally on a management buyout. The default position, for which clearance is normally sought from HMRC, is that the gain is not taxed until the new shares are sold or the loan notes are redeemed. However, an election can be made to tax the whole exchange at the time of the disposal. Clients often make this election in order to preserve ER when they will not qualify for it when loan notes are redeemed.
What this means for you
If you qualify for ER and are looking to sell your shares and realise a gain in excess of £1m, this measure has cost you up to £900,000.
The anti-forestalling rules only apply to exchanges between 6th April 2019 and 10th March 2020 and will only hit sellers who have retained shares and/or loan notes in the acquiring company.
The rules are most likely to apply to buyouts where junior shareholders have bought out senior shareholders and to buyouts where any new investors have fewer than 50% of the shares.
Off-payroll working rules (IR35)
What the measure is
The off-payroll working rules were introduced in 2000 to try to ensure that individuals who work like employees, but through their own company, pay broadly the same Income Tax and National Insurance Contributions (NICs) as individuals who are employed directly. The complexity of the old (2000) rules created a large amount of uncertainty and did not generate the additional tax revenue anticipated. HMRC have now washed their hands of the existing rules and have introduced new rules as set out below.
The rules were amended for the public sector in 2017 and will be extended to cover medium and large private sector companies with effect from 6 April 2020.
What this means for you
The changes will affect businesses that engage workers through Personal Service Companies (PSCs) or any other intermediary. Under the new rules, it is the engager’s responsibility to identify whether the individuals who make up the off payroll “workforce” should be considered employees for income tax, NIC and Apprenticeship Levy charge purposes or not. To do this, they need to make an employment status determination on the actual working arrangements under which each individual worker provides their services.
Where the engager determines IR35 applies, the person or business paying the PSC (the fee payer) must apply PAYE/NIC deductions to the payment for the worker’s services. Effectively, they must treat the worker as a deemed employee for tax purposes. In addition, the fee payer must also account for employer’s NIC (at 13.8%) and potentially the Apprenticeship Levy.
These changes could result in an increase to the operating costs of your business either:
- directly, as a result of being the fee payer or
- indirectly – as those organisations lower down the supply chain seek to increase their charges to mitigate the potential increases in their tax and NIC obligations.
The government has indicated that it will take a light touch approach to penalties for errors in the first year of the new rules. However, businesses need to review their procedures to avoid enquiries and penalties in future years.
It may be necessary to introduce updated contracts in the event that IR35 will apply to a particular arrangement. Processes must be put in place to guarantee that an employment status assessment is completed before engaging with a worker supplied via a PSC. The reforms could dramatically increase operating costs and have a significant impact on your operating model.
Pensions – changes to income limits in calculating the tapered annual allowance
What the measure is
In the healthier, happier time of 2016, when supermarket shelves were stacked high with Andrex and masks were just part of Hallowe’en costumes, the government introduced the tapered annual allowance for pension contributions (the gross amount an individual can contribute to a pension scheme tax-free).
Under those rules, the annual allowance was tapered for individuals with income of over £150,000. For every £2 that the income exceeds £150,000, the £40,000 annual allowance was reduced by £1 down to a minimum allowance of £10,000.
In today’s Budget, the Chancellor announced that from 6 April 2020, the tapering of the annual allowance will not be triggered until income including pension contributions exceeds £200,000.
What this means for you
Individuals will now lose £1 of the annual allowance for every £2 they earn in excess of £240,000. Individuals with net income of £312,000 or higher will have an annual allowance of £4,000.
Individuals with income between £150,000 and £240,000 will receive the full £40,000 annual allowance.
This will be welcome news for many higher paid people including doctors valiantly battling coronavirus (and senior Treasury officials) who are looking to stockpile cash in their pension pots.
Increase in the Research and Development Expenditure Credit (‘RDEC’) from 12% to 13%
What the measure is
For tax purposes, R&D tax relief goes far beyond the activities of ‘men in white coats’ (who may or may not be responsible for the creation of a virus for which there is no known cure). Qualifying R&D is a key feature of companies operating in many sectors, and who wish to “go further” and ‘get their research done’.
The relief provided by the RDEC is less generous than that available under the small or medium entity ‘SME’ scheme. But it’s still welcome.
What this means for you
The increase will increase the effective rate of relief under the Large company R&D scheme from 9.72p per £1 of qualifying expenditure to 10.53p. This will be welcome news to those companies and groups with large workforces and/or high turnovers and asset bases. Smaller companies that routinely carry out sub-contracted R&D activities may also benefit.
Postponement of PAYE restriction for R&D tax credits
What is the measure?
Companies claiming R&D relief under the ‘small or medium sized entity’ (SME) scheme are entitled to claim a repayable credit where the 130% enhanced deduction for qualifying R&D expenditure either creates or increases a trading loss.
The government had previously announced that the credit – i.e. the cash that companies receive – is to be capped at a multiple of three times the claimant company’s PAYE and NIC liabilities for the period. The cap was to take effect from 1 April 2020, but the government has now announced that it will be delayed until 1 April 2021.
What this means for you
The cap was originally framed as a fraud prevention measure. But it’s become apparent that it may harm those ‘genuine’ companies undertaking R&D who, for whatever reason, have low employment tax costs.
The delay in the introduction of the PAYE cap should be a reprieve if nothing else. Hopefully it will also allow for changes to be made so that its impact is balanced and does not spread beyond the intended target.
Implementation of recommendations for Disguised Remuneration Loan Charge
What the measure is
Individuals, companies and employers that fall within the disguised remuneration loan charge legislation (such as contractor loan schemes).
In 2016 a new Loan Charge regime was introduced to deal with disguised remuneration loans outstanding at 5 April 2019. Scheme users were given until April 2019 to repay their disguised remuneration loans, reach a settlement with HMRC, or be subject to the new charge.
Following an independent review on the Loan Charge regime, a number of changes were recommended. See link to our previous article:
Significant changes to loan charge legislation
The government now fully accepts all but one of the recommendations. The government has also agreed to repay certain voluntary payments made to HMRC on or after 16 March 2016.
What this means for you
If you had a relevant disguised remuneration arrangement prior to 6 April 2019, this is an opportunity to review any settlement with HMRC and whether any refund of tax is due to you.
Structures and Buildings Allowance
What the measure is
Businesses that incur qualifying expenditure on the construction, renovation or conversion of non-residential structures and buildings may claim Structures and Buildings Allowances (SBA). From April 2020, businesses may claim an increased annual allowance of 3%. Previously the annual allowance was 2%.
What this means for you
The measure affects businesses who incur (or have incurred) qualifying expenditure on new non-residential structures and buildings on or after 29 October 2018. This reduces the time it will take to relieve qualifying expenditure from 50 years to 33 and one third years.
Employment Allowance
What the measure is
The Employment Allowance will be increased from £3,000 to £4,000 from April 2020. The Employment Allowance is a reduction in employers’ National Insurance (NI). Only small businesses are eligible for the allowance. From 6 April 2020, businesses with an employer’s NI liability of £100,000 or more in the previous year will not be able to claim.
What this means for you
Employers who are eligible for the Employment Allowance will receive an annual reduction in their employer’s NI bill.
Time to pay measures
What the measure is
Clearly concerned by the impact that Coronavirus may have on the economy, the Chancellor introduced a raft of measures to help businesses survive the pandemic. These include a promise to provide ready access to ‘time to pay’ (TTP) arrangements for businesses whose cashflows suffer as the virus spreads. A TTP ‘helpline’ is going live, with 2,000 staff available to discuss businesses’ requirements and assist in agreeing TTP arrangements. No need for a sicknote here!
What this means for you
This is a sensible and welcome move. With it being estimated that at least 20% of workers may be off sick at any one time, the last thing a business needs is HMRC breathing down its neck and threatening insolvency measures to recover unpaid taxes. Hopefully HMRC will be pragmatic and empathetic in its approach to TTP requests, and healthy businesses will be able to survive the outbreak.
Wondering what to do if any of this affects you?
Don’t self-isolate, contact us immediately to stop the spread of negativity!
Lawyer’s note – other brands of tea are available!
