A digital services tax for "tech giants", additional conditions for Entrepreneurs' Relief, amendments to the loss relief rules, and a host of tax-avoidance measures: we outline the key tax proposals from the Autumn Budget applicable to companies and investors in the tech sector.
2% Digital Services Tax
From April 2020, a digital services tax (DST) will apply at a rate of 2% to the revenues of digital business models that are generated from the participation of UK users. Businesses will only be taxed to the extent they are performing one of the "in-scope" business models, meaning the provision of a search engine, social media platform or online marketplace. The tax is aimed at "tech giants" that generate revenues from such in-scope business models of at least £500 million globally. The first £25 million of relevant UK revenues will not be taxable, which should preclude small tech companies from being subject to the DST. However, it remains to be seen whether applying different levels of taxation to different digital businesses will lead to a legal challenge of the DST under State Aid rules.
This proposal emanates from the OECD's discussions of the international corporate tax framework and will only apply until an appropriate long-term solution is in place.
The government will be issuing a consultation on the design of the DST in the coming weeks.
It was confirmed in the Budget that Entrepreneurs' Relief (ER) will not be abolished, as had been suggested in the pre-Budget press. However, the following new conditions will now apply:
- For disposals made on or after 6 April 2019, the minimum qualifying period has been extended from 12 months to two years;
- In addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of the company; and
- The protection against dilution that was announced in the Autumn Budget 2017 will apply from April 2019.
All of the other qualifying conditions for ER remain the same.
R&D Tax Reliefs for SMEs
To help prevent the abuse of research and development (R&D) SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D tax credits will be capped at three times its total Pay As You Earn (PAYE) and National Insurance contributions liability. For companies that have genuinely low PAYE and NICs liabilities, these companies will be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits.
Intangible Fixed Assets Regime
Tax relief for the acquisition of goodwill in the acquisition of a business with eligible intellectual property will be introduced from April 2019. With effect from 7 November 2018, the government will also reform the degrouping charge rules which apply when a group sells a company that owns intangibles.
Amendments to Reform of Loss Relief Rules
The government intends to make amendments to the loss relief legislation introduced in 2017 (which stipulated how carried-forward corporate losses can be set against taxable the profits of a company and its group members). The amendments will be designed to prevent relief for carried-forward losses being claimed in excess of the amount intended.
Corporate Capital Loss Restriction
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 restriction is aimed at groups with carried-forward losses in excess of £5 million. The proposals will bring the tax treatment of corporate capital losses into line with the treatment of income losses. The rules for the treatment of income losses were reformed in April 2017 and enable companies to carry forward income losses to set against the total profits of the company, or a company within the same group, with a limit of 50% and an annual deductions allowance of £5 million per group.
It was confirmed that the VAT threshold of £85,000 will remain until April 2022.
The Budget and Brexit
Prior to Monday's Budget, Philip Hammond, the Chancellor of the Exchequer, had already confirmed another Budget in the event that the UK leaves the EU without a deal on 29 March 2019. This may be why little was said about how the Chancellor's proposals in this Budget will sit alongside whatever the final Brexit deal may be. For example, it could be surmised, by virtue of their omission from the Autumn Budget, that EU-derived tax reliefs (such as the Enterprise Investment Scheme, Enterprise Management Incentives and R&D reliefs) are intended to remain in some guise post-Brexit (the omission was particularly noticeable in a Budget that focused on investment and enterprise in SMEs).
While the Budget has offered some answers, such as confirmation of the VAT threshold and the continuation of ER (albeit with additional qualifying conditions), it has also raised further questions about how the proposals announced in this Budget will rank with tax considerations arising from Brexit, in addition to how many of Monday's Budget proposals with an implementation date of post 29 March 2019 will in fact go ahead.
Associate Kirsten Banks contributed to the writing of this alert.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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