Rate of corporation tax remains at 19%
Jacquelyn Kimber takes a look at how corporation tax and other related areas of tax feature in this year's Budget.
Rate of Corporation Tax
As previously announced, the standard rate of corporation tax will remain at 19% for the financial years commencing 1 April 2020 and 2021. Budget 2016 had included a commitment to reduce the corporation tax rate to 17% from April 2020, however, this was considered costly and unnecessary given the relatively low existing UK rate in comparison to the G7 and G20.
Corporate capital losses
From 1 April 2020, companies with brought forward capital losses will be restricted in their ability to offset those losses against chargeable gains. Only 50% of net chargeable gains may be sheltered through the offset of brought forward capital losses, subject to the allocation of a company’s (or group’s) £5m annual ‘deductions allowance’, introduced when the corporate income loss restriction regime was first implemented in 2017. The £5m deductions allowance can, therefore, be used by companies to access either income or capital losses. Where a company’s accounting period straddles 1 April 2020, the period will be split into two separate notional accounting periods for the purposes of the corporate capital loss restriction.
The government anticipates that this change will have minimal impact for all but the largest of companies owing to the £5bn deductions allowance.
Anti-forestalling provisions have applied since 29 October 2018, the date the proposed corporate capital loss restriction was first proposed.
Research & Development
The chancellor’s speech was heavily focussed on research and development in both the public and private sector. To stimulate private investment, the rate of the Research and Development Expenditure Credit (RDEC) is increased from 12% to 13% from 1 April 2020. RDEC is claimed by large companies (and certain SMEs) carrying on qualifying research and development activities. Whilst the RDEC regime is less generous than that applying to most SMEs, the increase in rate will be a welcome boost to businesses carrying out qualifying R&D activities.
In a further positive step, a consultation is to be held into widening the definition of qualifying R&D expenditure to include data and cloud computing.
Finally, the government announced that the proposed cap on the R&D payable credit for SMEs to three times the level of the company’s PAYE and NIC costs will be deferred until 1 April 2021. A further consultation exercise was undertaken on the cap’s design to ensure that it targets abusive behaviour. This follows a consultation last year on ‘Preventing abuse of the R&D tax relief for small and medium enterprises’.
Intangible Fixed Assets – pre FA 2002 assets
FA 2002 introduced a new regime for assets created or acquired from an unrelated third party on or after 1 April 2002. Intangibles acquired before 1 April 2002 continued to be dealt with under the capital gains tax regime, so many companies were effectively required to operate two different tax regimes depending on when intangible assets were acquired. In a measure announced at the Budget 2020, from 1 July 2020, companies acquiring pre-FA 2002 intangible assets from a related party will be able to bring those assets into the new regime, subject to anti-avoidance provisions.
Tax relief on goodwill and other related intangible assets has had a complex past, with relief being withdrawn and then partially reinstated from 1 April 2019. Depending on the date the intangible asset was acquired, and also its nature, expenditure may be treated as a capital asset (pre FA 2002 rules), under the intangibles regime (post 1 April 2002), an ineligible cost (expenditure between 8 July 2015 and 31 March 2019) or eligible on a restricted basis (expenditure after 1 April 2019). The multiplicity of rules in this area make a correct identification of treatment difficult, and even a minor change such as that announced at Budget 2020 is welcome if it leads to more streamlined treatment.
Structures & Buildings Allowance
The annual allowance for businesses incurring qualifying expenditure on the construction or renovation of commercial structures and buildings on or after 29 October 2018 will increase from 2% per annum to 3% per annum from 1 April 2020 (for companies) or 6 April 2020 (for individuals). Where the business’s accounting period straddles the 1 or 6 April 2020, a time apportionment is made based on the number of days in each period.
Whilst an increase in the rate of structures and building allowance is to be welcomed, the level of tax relief offered is still relatively low. There also appears little evidence that it is encouraging businesses to make a significant capital investment.
ECAs in Enterprise Zones
Enhanced capital allowances (ECAs) at the rate of 100% for expenditure on plant and machinery in designated enterprise zones will be extended until at least 31 March 2021. The allowances were due to lapse on 31 March 2020, but will now survive for at least one further year.
Digital Services tax
The government is pressing ahead with the introduction of a Digital Services Tax (DST) from 1 April 2020 despite widespread criticism from the US, the country most likely to be affected by the new tax. The DST will apply to businesses providing social media services, search engines or online marketplaces to UK customers, where the group derives revenues from these activities of £500m or more on a worldwide basis, and £25m or more of which is derived from UK users. The tax will be levied at the rate of 2% per annum above a £25m threshold. Whilst the government has been under pressure to raise more taxes from digital businesses, the anticipated yield from DST is relatively low – £515m in 2025. The position is expected to be kept under review, in particular in view of the OECD’s ongoing work on the potential introduction of a global digital tax.
Large business notification
From April 2021, ‘large’ businesses will be required to notify HMRC if they adopt a tax filing position which is likely to be challenged by HMRC. The policy will be based on international accounting standards, and the government is to consult on these proposals in the coming months. It is not yet clear how HMRC intends to define ‘large’ businesses for this purpose.
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Jacquelyn Kimber is a tax partner at Newby Castleman LLP in Leicester, where she advises on a range of tax issues affecting individuals and businesses, including offshore matters and trusts. She can be contacted on 0116 254 9262 or by ...