A safe Budget for businesses

Whilst there were not many significant Budget announcements, in a way this was good as any further unfavourable surprises for businesses, such as some that we have had in the last couple of years, would not have been welcomed at all.

It is fairly accepted that taxes need to be increased at some point somewhere as money needs to be raised, but with the Brexit deal/no-deal still in the balance and indeed the balance of power at Westminster, Mr Hammond no doubt felt that he could ill afford to announce too many significant adverse measures at this stage.

Having said that, we do not think that some of the talked about measures to raise more revenue have gone off the radar completely, such as those relating to personal service companies in the private sector for example.

The main points relevant to businesses at this stage are:

  • For “large” companies and some SMEs that have specific types of grant funding, there is to be an increase in the research and development tax credit from 11% to 12%, with effect from 1 January 2018. But note in broad terms, because this credit is taxable, as such the real net benefit of the 12% credit will be just under 10p for every £1 of R&D expenditure.

We have not heard any announcements of changes to R&D tax credits rates for small companies, which continue to be relatively attractive for qualifying companies, but hidden away in the Budget documents to provide businesses with the confidence to make R&D investment decisions, the government intends to introduce a new Advanced Clearance Service for R&D expenditure credit claims.

And whilst not specifically announced in the speech, continuing the technology theme, the government will consult in 2018 on the current tax treatment of intellectual property and this will consider whether there is an economic case for targeted changes to the intangible assets regime, so that it better supports UK companies investing in intellectual property.

  • From January 2018, after many years of being given, relief for indexation when companies sell certain chargeable assets such as property will be frozen. This basically means that any inflationary effect on the real cost of an asset from that date cannot be deducted to reduce the company’s capital gain when it sells the asset.

However, whilst inflation remains at the sort of levels we have been accustomed to recently, in practice this may not have a material impact for some companies, although for longer term property investment businesses it could possibly reduce the attractiveness of operating through a company.

Also, despite not being announced in the speech, a change to how non-resident companies’ UK property income and certain gains are taxed is planned from April 2020, with the income that these companies receive from UK property being chargeable to corporation tax rather than income tax. Also from that date, gains that arise to non-resident companies on the disposal of UK property will be charged to corporation tax rather than Capital Gains Tax (CGT).

  • For “knowledge intensive” businesses (we await the definition) that require particularly large amounts of risk capital, the proposed increase in the Enterprise Investment Scheme (EIS) limit for individuals investing in these companies will increase from £1m to £2m might help some sectors.

However, as the current £1m is probably sufficient for many businesses in their early stages, time will tell as to what extent this increase may benefit many businesses in practice.

Furthermore, the intention is to restrict all EIS tax relief to riskier businesses through the application of anti-avoidance measures, and we understand that a new set of tests will be introduced in the Finance Bill to reduce funds flowing to “low risk” (to be defined) investments.

As a result, some of the relatively established companies that seek large rounds of funding might face increased challenges in attracting investment from wealthy individuals, as the EIS relief is often the incentive needed to reduce the net cost for the investor. It is difficult at this stage though to see how easily such anti-avoidance measures might be policed and enforced, and so we will have to wait to see the detailed legislation once the Finance Bill is passed.

Commentators had expected EIS and Venture Capital Trusts (VCTs) to be targeted by the chancellor for reductions in tax relief in the Budget and so perhaps this increase in investment limit, albeit tamed by the narrowing towards high risk businesses only, will perhaps be welcomed by many.

  • A continuation of the £1,000 business rate discount for public houses with a rateable value of up to £100,000, subject to state aid limits for businesses with multiple properties, for one year from 1 April 2018

  • As a first step to raise some revenue from (effectively) UK sales by digital businesses that are then sheltered from UK tax by paying out a royalty to a low tax haven based entity, such businesses will be subject to UK income tax on those royalties, even if not subject to UK taxes under other existing measures. We will need to see more detail behind this announcement before we can fully understand the mechanics of how it will work.

  • The VAT registration threshold was expected by some to be reduced. Whilst it remains unchanged for now, it is only frozen for two years from April 2018. It seems that a change in the future could coincide with the introduction of Making Tax Digital, and so could feasibly mean that smaller businesses than currently anticipated will now be brought within the quarterly digital filing requirements.

In summary

Finally, reflecting on the impact for businesses, there were no major adverse announcements and so it could be a lot worse.

Perhaps though, landlords running genuine large property businesses, such as those serving students in the Bath area for example, would have liked to hear some relaxation perhaps of the interest restrictions or the 3% stamp duty land tax surcharge on second homes charge, but alas nothing was announced.

But, on the plus side, there had been talk of capital taxes rising to be in line with income taxes, which could have been very detrimental to business owners when valuing or selling their business, and so for now at least no change on that front is good news.