Introduction

The Chancellor has delivered his 2017 Autumn Budget with a focus on sectors that are core to our clients and our business, notably with some interesting changes in the Technology and Property sectors, which we digest below. As well as announcements regarding the government’s investment in the Tech sector and extensions to favourable tax reliefs such as R&D (Research and Development) and EIS (Enterprise Investment Scheme), there was further welcome focus to the smaller businesses in our economy with an announcement that the VAT threshold will not reduce for at least another two years.  One wonders whether the VAT threshold announcement is good news, or a message to smaller businesses that a reduction in the VAT threshold in the future is possible! 

An interesting approach has also been taken by the Chancellor in relation to taxing digital businesses with income tax on royalties (likely to affect large corporates mostly) and joint liability for VAT on digital marketplaces.

Below is a summary of our thoughts on the 2017 Autumn Budget.

Personal Tax

Rates and Allowances

The Chancellor took further steps to meeting the Government’s commitment to raise the personal allowance to £12,500 by 2020 by announcing another increase to the amount which can be earned before paying income tax. The personal allowance will rise to £11,850 in April 2018. 

The higher rate threshold, where an individual begins paying income tax at 40%, is also to be increased from the current level of £33,500 to £34,500 in April 2018. However, this remains £300 lower than the threshold some ten years ago.

The capital gains tax annual exemption will also increase from April 2018, with the first £11,700 of capital gains tax-free for individuals and £5,850 of gains exempt for most trustees.

Implementation delays

As previously announced, the Government will delay implementation of various reforms to the National Insurance system by a further year. Class 2 National Insurance contributions will remain until April 2019, and the proposed increase to the main rate of Class 4 National Insurance has been shelved.

Certificates of tax deposit

The government will not issue any further certificates of tax deposit on or after 23 November 2017.  All existing certificates will remain valid until 23 November 2023 and any that remain unpaid at that date will be repaid to taxpayers soon after.  If HMRC are unable to trace the certificate holder any balance will be forfeited.

Upcoming consultations

Following the introduction of off-payroll working reform for the public sector, the government will consult on the impact of extending this to the private sector.

There will be a call for evidence in relation to rent a room relief to review how this fits with the government’s policy of encouraging longer term lettings.

A consultation on the taxation of trusts to make this simpler, fairer and more transparent will commence in 2018.

Following Matthew Taylor’s review of modern working practices, the government will consult on whether the employment status tests for both employment rights and taxes can be made clearer.

There will be a welcome review of whether entrepreneur’s relief should continue to be available to shareholders if their shareholding falls below 5% where new shares are issued to raise capital.

Corporation Tax – General changes

Indexation Allowance

Whilst the Chancellor announced that the reducing headline corporation tax rate (currently 19% and dropping to 17% by 2020) remain in place, there will be changes to the Capital Gains Tax legislation that will result in a freeze in the indexation allowance on corporate Capital Gains for disposals on and after 1 January 2018. The allowance for subsequent disposals will be frozen at the amount that would be due based on the Retail Price Index for December 2017. 

These changes will result in companies getting less of an inflationary increase in the Capital Gains base cost of assets they acquire, bringing companies in line with individual tax payers, resulting in more corporation tax being due on future disposals.

Non-resident companies

It was announced today that there has been a change in how non-resident companies who hold UK property are to be taxed. Currently non-resident companies are liable to income tax on their UK property profits as well as capital gains tax on any gains made on the disposal of their UK property. From April 2020, profits and gains generated by non-resident companies with UK property will be liable to corporation tax. 

Benefits in Kind

Diesel cars have been hit hard in the Autumn Budget with the increase in the company car diesel supplement from 3% to 4% for diesel cars that do not meet the Real Driving Emissions Step 2 standards.

Electric cars are still an attractive choice for companies looking to provide cars to employees. The Government have today announced an additional incentive by confirming that there will be no benefit in kind for employees who choose to charge their electric vehicles at work.

International Tax

Taking a broader look at the tax system and the digital economy, the government has also published a “positional paper” on how multinationals are taxed, starting with the overriding belief that profits should be taxed in the countries in which value is generated. This builds on the work already done as part of the OECDs BEPS project and states that they believe further action is needed. 

In recognition of this and perhaps as a nod to the recent ‘Paradise Papers’ leak, from April 2019 withholding tax obligations will apply to royalty payments to low or no tax jurisdictions “in connection” with sales to UK customers. It is unclear how this is to be applied but is estimated to raise an additional £200m of tax, suggesting that its application may not be as wide as it could be.

Corporation Tax – the Tech Sector 

The Chancellor used his Autumn Budget speech to provide some insight into the governments’ strategy for digital technology and how the UK intends to lead the world in this area. A white paper on its Industrial Strategy will be published in the next few days providing much more detail, but for now, the key tech-related headlines are:

  • Increase in investment for R&D of £2.3bn and an increase in the main rate of R&D tax credit from 11% to 12% with effect from 1 January 2018. There will also be a new “Advanced Clearance Service” for R&D expenditure tax credit claims. This extends the service that has been available to SMEs since 2015.
  • As part of a drive to improve access to finance for innovative firms, the Chancellor announced the establishment of a £2.5bn incubator Investment Fund. This to be run by the British Business Bank and used for co-investment with the private sector, with the aim of unlocking up to £7.5bn of investment.
  • Through the British Business Bank there will be an additional investment of up to £4bn for investment into the private sector.
  • EIS and VCT allowances for individuals doubled for knowledge-intensive businesses to encourage investment, as well as the amount of annual investment those companies can receive through EIS and the VCT scheme.
  • Tech City UK is to receive investment of £21m over the next four years to become “Tech Nation”, with the creation of regional hubs and a dedicated sector programme for the likes of AI and FinTech.
  • Making Tax Digital – as legislated earlier this year, no business will be required to use MTD until April 2019 and then only for VAT and if they breach the VAT threshold. 

Indirect Tax – The Digital Economy

In a bid to tackle perceived online VAT evasion and non-compliance the Chancellor today announced that the government will seek to extend the scope of existing Joint and Several Liability rules to hold an online marketplace jointly and severally liable for:

  • any future VAT that a UK business selling goods via the online marketplace fails to account for after HMRC has issued a notice to the online marketplace, ensuring that all sellers are in scope; 
  • any VAT that a non-UK business selling goods via the online marketplace fails to account for, where the business was not registered for VAT in the UK and that online marketplace knew or should have known that that business should be registered for VAT in the UK

Online marketplaces will also need to ensure that VAT numbers displayed for third party sellers on their websites are valid and up to date. They will also be required to display a valid VAT number when they are provided with one by a third party seller operating on their platform. 

These measures will hopefully go some way towards levelling the playing field between UK based and offshore sellers.

The Property Sector

Stamp Duty Land Tax (SDLT) – helping first time buyers get on the property ladder

Good news for first time buyers who from today will pay no SDLT on purchasing a property for less than £300,000.

For purchases with total consideration of up to £500,000, the first £300,000 will remain exempt from SDLT. There is no relief for property purchases with consideration of more than £500,000. An SDLT return will still need to be filed to claim the relief. 

Joint buyers will both need to be ‘first time buyers’ to qualify.

Deadlines for the Payment of Stamp Duty Land Tax (SDLT)

Purchasers will be pleased to hear that the proposed reduction of the filing and payment window for SDLT has been postponed until 1 March 2019, after which the current payment and filing deadline of 30 days from completion will reduce to 14 days.

SDLT Higher Rates – some helpful new exemptions

The Budget has announced several new exemptions to the additional 3% SDLT charge for second properties that was introduced in April 2016, granting relief from this widely applicable charge.

The reliefs include situations where a divorce order prevents the disposal of an interest in a property, or a purchaser adds to their interest in their main residence. Importantly, clarification has been added to ensure that relief is also available where a spouse buys property from their spouse, or a person buys a property in a child’s name or on a child’s behalf, where they are doing so in their capacity as the deputy of that child.

Measures have also been implemented to counteract the abuse of the relief for those who change their main residence but do not dispose of their entire interest in the former main residence.

Gains on the Sale of Residential Property – Payment of Capital Gains Tax 

HMRC have delayed the introduction of a shortened deadline for the payment of Capital Gains Tax arising from the sale of residential property. 

The introduction of the new deadline which requires the tax to be paid within 30 days of the disposal has now been postponed until April 2020.

Tax on the sale of UK Land and Commercial Property by Non-Resident Owners 

As part of HMRC’s continued focus on overseas property ownership, HMRC have announced plans to tax non-resident individuals and companies on gains realised on the sale of UK sited land or property, thereby extending the rules currently applying to non-resident owners of UK residential property. 

The new legislation also catches the disposal of interests in “property rich” entities by non-residents, specifically those that derive the majority of their income from UK immovable property.

The new rules will be introduced on 1 April 2019 for companies and 5 April 2019 for individuals.

Housebuilding – looking at small and local projects

As part of the continuing focus on affordable housing, the government have announced support targeted specifically at SMEs rather than the large, dominant housebuilding firms that operate on a national scale. The Budget includes a further £1.5 billion for the Home Building Fund, a source of funding which offers both financial and non-financial support for housebuilding projects that would otherwise be unable to access the funds they need. Loans from the Fund are made to meet development costs, site preparation and infrastructure for building homes for sale or rent, and are charged to interest at commercial rates. 

The government have also committed to creating £8 billion worth of new guarantees to support housebuilding, including SMEs and purpose-built rental housing. Options for rolling this out are currently being explored. 

Business rates – improving the fairness of the reformed system

Over the last two years there have been a number of changes to business rates, in view of the still very recent 1 April 2017 revaluation and the potential for this to impact small businesses disproportionately. The Budget includes a number of provisions to update this system including a critical change whereby revaluation will be completed every three years from 2022, rather than every five years. This is with a view to mitigating the sudden shock that a large rates increase can cause.

In addition, the planned switch in indexation on business rates from RPI to CPI, currently the main measure of inflation, has been accelerated and will take place on 1 April 2018.

The revaluation on 1 April 2017 was particularly newsworthy due to the so-called “staircase tax”, whereby certain businesses’ rates were much higher than expected where they operated from multiple offices connected by private lifts or stairwells. Affected businesses will be able to request a revaluation of rates based on practice backdated to April 2010. 

Planning permissions – closing the gap

The government are developing a central register of residential planning permissions to progress towards a higher rate of build out. A review panel has been announced to make recommendations on closing the substantial gap between land which is permissioned, and housing completions. A full report will be due at Budget 2018, but Philip Hammond strongly referenced the potential for intervention by the local authority, where there is a failure to progress by the local authority.

Additionally, the government are consulting on a new policy to ensure that local authorities’ permission land outside their plan on the condition that a high number of the homes permissions are offered for affordable rent, or discounted sale to first-time buyers.

Enterprise Investment Scheme and Venture Capital Investments

As alluded to above, there was a double edged focus in the budget from the Chancellor, with a positive move to encourage investment in knowledge-intensive companies under the EIS and VCT schemes by: 

  • Doubling the limit on the amount that can be invested in such companies under EIS in a tax year to £2 million, and
  • Doubling the annual investment that knowledge-intensive companies may receive under EIS and from VCTs to £10 million. Although the lifetime limit will remain at £20 million.

However, whilst the above is welcome news for knowledge-intensive companies, in a bid to ensure that the Venture Capital schemes are targeted at growth investments the chancellor announced that legislation (expected in draft form in December 2017) will be introduced to ensure that the relief is focused on companies where there is a real risk to the capital being invested.   It will also introduce conditions to exclude investments where there is limited risk to the original investment and the tax relief provides most of the return to the investor.

Initially it would appear that these new legislative conditions will be subjective and we will need to wait to see how they will be applied in practice.

Other reforms will also be introduced to move VCTs towards higher risk investments and to bring in anti-abuse rules relating to mergers of VCTs.