What tax measures are in store for businesses in the Budget 2020?

Budget 2020 will take place on 11 March 2020. With this being the first Budget in nearly a decade to be presented by a government with a large majority, we can expect that many of the tax policies announced by the Conservatives in the run up to the General Election will be taken forward.

We highlight some of the key business tax issues we expect to be announced in Budget 2020, along with measures that we expect to be included in the Finance Bill 2020.

Restriction of Entrepreneurs' Relief

Entrepreneurs' Relief (ER) was introduced under Gordon Brown's Labour government in 2008 in order to encourage the establishment and growth of individual-owned businesses. ER was the successor to previous capital gains tax (CGT) relief aimed at entrepreneurs, such as taper relief and before that, retirement relief.

The ER requirements in relation to a company are, very broadly, that the individual is an employee or an office holder of a company in a trading business or group who owns at least 5% of its shares for at least two years immediately prior to the disposal. Where that test is met, the rate of CGT on a disposal of shares in that company is reduced to 10% (compared to a CGT rate of 20%) on qualifying lifetime gains of up to £10 million.

In the context of employee share schemes, ER is a highly valued relief – particularly for tax-advantaged enterprise management incentive (EMI) options, where special rules apply. Incentivising employees is also an important consideration for businesses.

The effectiveness of ER has been under the microscope for several years now, with many questioning whether the relief is delivering on its objectives. Significant restrictions on the availability of ER on the sale of shares of companies were introduced in Finance Act 2019, which sought to align the availability of the relief with economic ownership and extend the ownership period from 12 months to two years. Notwithstanding these changes, the former executive chair of HMRC, Sir Edward Troup, gave a damning opinion of ER and recently called for ER to be scrapped in its entirety, saying that the regime cost the UK £2 billion per year in lost tax, without providing an incentive for "real" entrepreneurship.

Despite this criticism Jesse Norman, Financial Secretary to the Treasury, stated last October that the government had no current plans to abolish ER, but would keep all taxes and reliefs under review. The Conservative manifesto stated that the party would "review and reform" ER, rather than promising to scrap the relief (which was the approach favoured by Labour and the Liberal Democrats) - such changes could include an increase in the 10% rate, or a decrease in the lifetime relief limit which has stood at £10 million since 2011.

If any changes are to be introduced to ER, this might be from the day of the Budget itself or instead could be linked to the start of the new tax year (6 April). In view of this uncertainty, entrepreneurs who currently expect to benefit from ER on a sale of their shares would be wise to consider their options in advance of Budget day. In the event that significant changes to ER are made, selling shareholders may in the future look more closely at employee ownership trusts (which are increasing in popularity) as a way of achieving a tax efficient exit.

Improvements to tax reliefs for research and development

Research and development (R&D) tax reliefs support business investment by allowing companies to claim corporation tax relief or credits on their R&D costs. As things stand, large companies can claim a R&D expenditure credit (RDEC) for working on R&D projects. The RDEC is currently 12% of the qualifying R&D expenditure but the Conservative manifesto pledged to increase this to 13%. This should increase the incentive for large companies to undertake R&D in the UK.
The Conservative manifesto also promised to "review the definition of R&D so that important investments in cloud computing and data, which boost productivity and innovation, are also incentivised."

Implementation of Digital Services Tax

There is a big question mark over whether the government will push ahead with the implementation of the planned Digital Services Tax (DST). The DST is a turnover-based tax which will apply to large businesses that provide a social media platform, search engine or an online marketplace to UK users. Many tech giants (a large percentage of which are US-headquartered) fall within the remit of the new tax.

The DST is intended to help tackle the problem, which is currently being discussed at a global level at the OECD, around the taxation of the digital economy (see this Insight for further detail). Various countries have already implemented, or like the UK are considering implementing, unilateral measures ahead of a global solution which it is hoped the OECD will reach.

The UK rules are broadly in line with the OECD proposals and there is an expectation that UK rules will be revoked if and when the OECD proposals are agreed. However, the US has been outspoken in its dislike of unilateral measures (given the disproportionate number of US companies that would be affected by the DST). Given the importance to the UK of getting a beneficial post-Brexit trade deal with the US, the US attitude to the introduction of the DST will be important.

The scope of the DST and the timing of its introduction is also likely to be influenced by any deal agreed between the US and France on France's own DST (see this Insight for further detail). Press reports have suggested that France has agreed to delay collection of the tax until the end of this year, but repeal would require the US to agree to some form of international action on DST. It seems unlikely that the UK would come to a radically different deal with the US than that agreed by the French.

With Sajid Javid having asserted at Davos (on 22 January) that "we plan to go ahead with our digital services tax in April", all eyes will be on the Chancellor on 11 March to see if he continues to press ahead with its introduction or whether the government will defer its introduction on the basis of a similar agreement with the US as that reached with France.

Corporation tax

As widely trailed, the government has committed to keeping the current corporation tax rate at 19%. As legislation has already been enacted to reduce the rate to 17% from 1 April 2020, further legislation is expected to reverse this.

We are also expecting the Finance Bill to include the final legislation to restrict the carry-forward of capital losses for accounting periods ending on or after 1 April 2020 (draft legislation for which was published for consultation last July). The measure will ensure that companies making chargeable gains will only be able to offset up to 50% of those gains using carried-forward capital losses. The changes will also align the rules for the carry-forward of capital losses with rules for the carry forward of income losses which were introduced in 2017.

Off-payroll working reforms for the private sector

The changes to extend the off-payroll working rules (IR35) to medium and large private sector organisations which the Government announced in Autumn Budget 2018 (and draft legislation for which was released last July for consultation), are expected to proceed as planned. Despite widespread criticism of the extension of the rules to the private sector and a government review into its implementation, which was announced on 7 January 2020, the changes look set to be rolled out from 6 April 2020 as planned.

Our latest Insight on IR35 looks at the recently published draft rules dealing with how end users, managed service providers and others may be liable for IR35.

Changes in real estate taxes

We do not expect to see any material changes to the rules on SDLT on commercial property. At some point, the government may consider whether it is appropriate to extend SDLT to the acquisition of interests (for example shares or units) in UK property-rich entities. That would be a material change in approach and considering such a change soon after the introduction of changes to the taxation of non-resident capital gains on UK real estate may not seem politically or economically palatable. It is possible that a consultation on changes to SDLT could be announced as part of the Budget.

On the residential side, the Conservatives committed during the election campaign to introduce a 3% surcharge for overseas buyers of English residential property (the previously announced rate was 1%). This measure is designed to curb inflated prices and to increase housing supply. The government might also be minded to offer a rate reduction at the top of the range for UK buyers to boost the volume of sales at the top end of the residential housing market which had slowed over recent years.

The Conservative's costing document (issued alongside its manifesto) also committed to increasing the Structures and Buildings Allowance (SBA) by 1% (from 2% to 3%). The SBA is a new capital allowance which benefits companies investing in new or renovated commercial premises for certain costs incurred in purchasing, constructing or renovating commercial structures and buildings. For further information on the SBA see this Insight.

Tax administration

It is likely that new anti-avoidance measures will be announced in the Budget (as has been a common theme for several years). The government is expected to include in Finance Bill 2020 final legislation aiming to reduce tax abuse using company insolvencies (with the ability to issue joint liability notices on directors and other persons involved in tax avoidance if there is a risk that the company may deliberately enter insolvency). We also expect the Finance Bill to include final legislation giving HMRC secondary preferential creditor status in respect of taxes due from insolvent businesses. Draft legislation for both these measures was published in July 2019.

OC comment

Notwithstanding the manifesto pledge that there will be no increases in the rates of income tax, national insurance contributions and VAT, this Budget looks set to be a bumper one – setting the direction of travel for the next five years of Conservative government. The Chancellor will have to balance a number of competing interests such as the desire to encourage further investment by offering tax incentives (including ER and R&D) against the need to secure the public finances and tackle climate change.

It will, no doubt, throw into the mix a number unexpected measures alongside those which have been promised and as always for taxpayers the devil will be in the detail. For further information on any of these measures and how they might affect your business please get in touch with one of the contacts below.