Chancellor plays it safe, for now

Whilst there were not many significant Budget announcements, in a way this was good as any further unfavourable surprises for businesses, such as we have had in the past, would not have been welcome.

It is fairly accepted that taxes will be increased at some point from somewhere as money needs to be raised, but with the Brexit deal/no-deal still in the balance, and the delicate balance of power at Westminster, Mr Hammond no doubt felt that he could ill afford to announce too many significant adverse measures for businesses at this stage. That said, we do not think measures to raise more revenue have gone off the radar completely.

FOR BUSINESSES

As is often the case, there was a lot of detail in the Budget documents that went unannounced, which is of additional interest to businesses. This is a summary of the main points, including some of the less publicised ones:

Research and Development (R&D) Tax Credits Increase

From 1 January 2018, R&D tax credits will rise from 11% to 12% for “large” companies and some SMEs that have specific types of grant funding.

What this means

In broad terms, because the 12% credit is taxable, the real net benefit to companies will be just under 10p for every £1 of R&D expenditure. We haven’t heard any announcements of changes to R&D tax credits rates for small companies, which continue to be relatively attractive for qualifying companies. However, hidden away in the Budget documents, there are plans to introduce a new Advanced Clearance Service for R&D expenditure credit claims, which should give more confidence to businesses making these investment decisions.

Intellectual Property Consultation

The government will consult in 2018 on the current tax treatment of intellectual property.

What this means

The consultation 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. This was another Budget detail that went unannounced. The move shows some commitment towards encouraging investment in technology companies and where advancements in knowledge are genuinely being sought.

Enterprise Investment Scheme (EIS) limit Increase

The EIS investment limit will increase from £1m to £2m for individuals on qualifying investments, planned from April 2018.

What this means

This change applies to investments in “knowledge intensive” businesses (we await the definition) that require particularly large amounts of risk capital. As the current £1m limit is probably sufficient for many businesses, time will tell to see to what extent this increase may benefit 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 to see how such anti-avoidance measures might be policed and enforced, and so we 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 restriction towards high risk businesses only, will be welcomed.

Indexation allowance freeze

Relief for indexation when companies sell certain chargeable assets, such as property, will be frozen from January 2018.

What this means

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. 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.

Change ahead for non-resident property companies

Income received from UK property by non-resident companies will be chargeable to corporation tax rather than income tax from April 2020.

What this means

Despite not being announced by the Chancellor, planned changes to how non-resident companies’ UK property income and certain gains are taxed appeared in the Budget documents. Also from April 2020, 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).

The current basis for taxing this income to income tax, and the more recently introduced regime for taxing gains made by non-resident companies to CGT, should perhaps be simplified by this future intended change. It appears to bring any charge from the property within the scope of corporation tax only, and so making it consistent with other profits, etc., made by companies within the UK corporation tax net. We have not seen the detailed provisions yet, but based on current tax rates of corporation tax, which are below 20%, it could potentially mean that companies end up paying a lower rate of tax than they would if a charge to tax arose under the existing regime.

Business rate revaluation

Plans to set business rate increases by the Consumer Price Index (CPI) measure of inflation rather than the higher Retail Price Index (RPI) have been brought forward to April 2018 according to the Chancellor’s announcement.

What this means

The revaluation of business rates are planned to be implemented two years early, which represents a c.£2.3bn saving for businesses over the period. Future revaluations will also take place every three years instead of the current five. This is an extremely positive move designed to support businesses and is well timed, given the uncertainty surrounding Brexit and the rather gloomy economic forecast from the OBR.

A continuation of the £1,000 business rate discount for public houses was also announced., This applies to those with a rateable value of up to £100,000 for one year from 1 April 2018, subject to state aid limits for businesses with multiple properties. We have some clients that have benefited from this measure over the past year and they should welcome this extension.

Clampdown on diverting UK profits through royalty payments

With effect from April 2019, Withholding Tax obligations will be extended to royalty payments, and payments for certain other rights, made to low or no tax jurisdictions in connection with sales to UK customers.

What this means

Under domestic rules, royalty payments sent abroad are subject to a Withholding Tax deduction of 20%. Changes were introduced in 2016 extending these requirements to payments for the use of intangible fixed assets, such as trademarks and brand names. But, the recipient country has typically been able to rely on the relevant Double Tax Treaty to reduce the tax rate or eliminate it altogether. This has meant in most instances that the UK payer has generally been able to claim tax relief on the payment whilst little or no tax was due in the offshore recipient country.

Broadly, once implemented, this measure will reduce overall tax leakage on certain royalty payments made to low tax havens, where derived from UK sales. The rules will apply regardless of where the payer is located.

The government will publish a consultation document on 1 December 2017 on the design of the rules expanding the circumstances in which the new royalty regime would apply. Companies and their advisers with offshore royalty structures where treaty protection is utilised to reduce or eliminate UK Withholding Tax, should be mindful of these new changes and where applicable, engage with the consultation process.

VAT threshold frozen

The VAT registration threshold was expected by some to be reduced, but it remains at £85,000, which is frozen for two years from April 2018.

What this means

Whilst welcome news for now, it seems that a reduction 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.

Some final thoughts for businesses

Reflecting on the impact for businesses, there were no major adverse announcements and so it could be a lot worse. On the plus side though, there had been some talk of increases to capital taxes, which could have been very detrimental and hugely unpopular for business owners planning for a sale or succession. But for now, no changes were made, which is good news.