Budget 2018 – Tricks or Treats…

Chancellor of the Exchequer, Philip Hammond announced the 2018 Budget on Monday 29 October.

Tricks or Treats? Take a look at our Budget summary which analyses what the Chancellor’s announcement means for you and your business.

Restriction to Private Residence Relief claims

As many are aware, when an individual sells a property that has been their main home at some point during ownership PRR relief not only exempts the part of the capital gain arising during occupation, but also the last 18 months of ownership. In addition, an element of relief is due for any period of letting (Lettings Relief).

The 18-month rule is to be restricted to 9 months and Lettings Relief is being abolished (except in unusual circumstances). These changes could increase tax bills significantly.

These measures are due to come into force from 6 April 2020, giving individuals a 17 month window to review their circumstances. If you would like to see how much your capital gains tax liability will increase by in April 2020, please contact us.

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Entrepreneurs sigh with relief

Despite all the speculation that the time of Entrepreneurs’ Relief (ER) might be over, Philip Hammond today confirmed that it will remain, albeit with a slight tweak which is aimed to tackle the apparent misuse of ER and support longer-term business investments.

With capital gains tax rates remaining at the low rates of 10%/20% many believed that the 10% tax rate secured by ER, where entrepreneurs’ have held more than 5% of their personal trading companies for a 12-month period, could easily have been withdrawn. Instead Mr Hammond has confirmed that the beneficial tax treatment will remain, but only for those who have held their shares for an extended 24-month period.

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Temporary increase in the Annual Investment Allowance to £1m

The Chancellor announced that in order to stimulate business investment, the Annual Investment Allowance will increase from £200k to £1m between 1 January 2019 to 31 December 2020.

If fully utilised, this will create a significant tax savings over the two years.

In addition to the increase in AIA’s, a new “structures and Buildings” allowance will be introduced whereby new, non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018.

However, everything is not good news, the allowances available on special rate qualifying assets will reduce from 8% to 6% from April 2019.

As such, businesses that are potentially affected by these measures should fully consider the timing of any planned purchases of qualifying assets.

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Corporate capital loss restriction

Following the reform of the corporate losses regime (which has been in effect since April 2017), the government will bring the tax treatment of capital losses into line with the treatment of income losses.

From 1 April 2020, the proportion of annual capital gains that can be relieved by brought-forward capital losses will be restricted to 50%. The measure will include an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year.

The government will consult on the detailed design of this change and legislate in Finance Bill 2019-20. The measure will be subject to anti-avoidance rules that are to apply with immediate effect.

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Tax in the digital age

In the 2018 Budget, Philip Hammond introduced a new UK digital services tax (DST) which will look to target established tech giants (such as search engines, social media platforms and online marketplaces) with global revenues of over £500m. This is not aimed at tech start-ups or consumers.

This is not intended to take away from the government’s commitment to the OECD discussions, however it feels as though an interim measure is required until a long-term solution has been found.

The government will now start the consultation process with detail intended to be published in the Finance Bill 2019 – 20, however we understand that a 2% tax charge is intended to apply to revenues generated by or related to UK users.

The proposal is due to come in to effect from April 2020 and earn the Chancellor an estimated £400m per annum.

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Backdated Stamp Duty Landlord Tax relief!

Stamp Duty Land Tax relief for first-time buyers is being extended so that all shared ownership property purchases will qualify (in England and Northern Ireland). In addition, this extended relief is being back-dated to 22 November 2017, giving home-buyers that did not previously qualify for the relief the opportunity to claim a refund of SDLT.

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Environmentally friendly plastic tax to be introduced

Little is known about this initiative at this stage although we are due to see further detail in the Resources and Waste Strategy which is to be announced later this year.

A consultation process will now take place in order to discuss how this new tax on plastic packaging will be applied prior to its intended start date of April 2022, so continue to watch this space!

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Changes to R&D tax relief for SMEs

The Chancellor announced during his Budget Statement, that measures will be introduced from 1 April 2020 to prevent the abuse of R&D tax relief for SMEs.

The amount of repayable R&D tax credit that a qualifying loss-making company can receive in any tax year, will be restricted to three times the company’s total PAYE and NICs liability for that year.

Since 2012, PAYE limits have not applied to R&D claims, which has been great news for start-up businesses who spend money but do not employ people directly.

The new measures are aimed at targeting identified abuses, including fraud, following the prevention by HMRC of fraudulent claims worth £300 million. The government have confirmed that there will be consultation prior to implementing any changes.

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The burden of IR35 to move to employers

The burden of IR35 has long fallen on contractor companies, who have been responsible for determining whether a contract is one of employment or for the supply of services. Where they have failed to meet the criteria laid down by IR35 they have had to pay the appropriate taxes.

In the long history of IR35, HMRC have done little to ensure that these measures were enforced. This has led to the wholesale failure of the IR35 legislation to deliver the expected level of tax revenue, despite numerous initiatives and reviews.

From 6 April 2017, the public sector became responsible for properly determining employment status and taxing their employees accordingly – removing the burden from contractor companies.

From 6 April 2020 all large and medium sized businesses will be responsible for ensuring that PAYE is deducted where their contractors are employees. It will no longer be possible for businesses to avoid PAYE and other employer obligations by engaging with companies rather than individuals.

There is a long lead time to this change, but businesses should start to consider their contracts with consultants and others who could be considered employees.

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Personal allowance and higher-rate threshold increases

This is the vote-winner; the Chancellor’s giveaway at the end of his speech. The promised £12,500 personal allowance and £50,000 higher-rate threshold will be delivered on 6 April 2019, a year earlier than expected.

This not only benefits those in employment, but those whose family receive income from trusts and shareholdings in family companies. More income can be paid to minor children, adult children at university, and spouses before higher rates of tax become due, reducing the overall tax burden of a family.

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Government again attacking foreign property investors with Stamp Duty

The Government are to consult on a 1% SDLT surcharge being levied on UK non-residents purchasing residential property, further deterring non-residents investing in UK property. This could push SDLT up to 16% for some purchases.

As with all SDLT measures, this applies only to property in England & Northern Ireland, with Scotland and Wales having their own Land Tax regimes.

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Craig Nicholson
Craig joined Wilson Wright in February 2012 as our tax partner, heading up the twenty strong personal tax department. He will further enhance the taxation services that we provide with his in depth experience of personal, corporate and international tax matters.