ICAS reacts to the tax measures in the March 2020 UK Budget
The team at ICAS responds to the tax measures in the March 2020 UK Budget.
Overview
Charlotte Barbour, Director of Taxation, said:
“There has been considerable uncertainty in recent years, for businesses and individuals, following the outcome of the EU referendum and the prolonged Brexit process. The recent election of a new government has ended one phase of Brexit, with the UK formally leaving the EU at the end of January 2020. However, it has not ended uncertainty as no agreement has yet been reached on the precise nature of the UK’s future relationship with the EU. Added to this are the immediate challenges of coronavirus – the new Chancellor has plenty to contend with.
The Chancellor’s speech had significant commitments for additional spending to address the costs of coronavirus and, longer term, on infrastructure across the whole of the UK.
Spending needs to be paid for, and we note that the government has committed to not increasing the main revenue-raising taxes. The result will be tax changes at the edges that lack transparency – and increasingly complex and lengthy tax legislation, which makes it harder for taxpayers to understand and comply with their tax obligations. Some honesty and transparency around the need to pay for public services would be helpful.”
COVID-19 response
David Menzies, Director of Practice, said:
“While the package of temporary measures announced by the Chancellor to offset the business impact of coronavirus are to be welcomed, the timing of access to the measures may have limited impact for many small and medium-sized businesses affected. Many of the measures announced do not address the short-term cashflow implications for business which will be crucial to business survival.”
“Businesses will initially bear the cost of additional SSP with the government to work with employers over the coming months to set up a repayment mechanism. Access to the Coronavirus Business Interruption Loan Scheme will take time to apply for and may well require business plans and cashflows to be prepared as part of the application process, causing delay. Perhaps most beneficial will be access to HMRC’s Time to Pay arrangements; however, the effectiveness of this will very much depend on the flexibility and policy approach which HMRC will apply to requests.”
Personal taxes
Susan Cattell, Head of Tax Technical Policy, said:
“As expected, following the announcement in the 2018 budget, the personal allowance remains £12,500 for 2020/21. This applies to the whole of the UK. The point at which people start paying the higher rate of tax (40%) also remains at £50,000 for 2020/21 – for England, Wales and Northern Ireland.
Income tax rates and thresholds on non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament. The 41% threshold remains £43,430 for 2020/21.
From April 2019, the Welsh Government sets a Welsh rate of income tax for non-savings, non-dividend income for Welsh taxpayers – but has chosen not to increase rates for 2020/21.
As announced in January, the threshold for employee and self-employed National Insurance Contributions (NICs) will be increased to £9,500 from April. The government clearly intends this measure to assist lower paid workers, although it will also benefit those with higher earnings. The government estimates that around 1.1 million people will be taken out of paying Class 1 and Class 4 NICs entirely. It also notes that this is the first step in meeting the government’s ambition to increase the threshold to £12,500. However, Scottish taxpayers in the income bracket from £43,430 to £50,000 will still pay a NIC rate of 53% on that part of their income (because the upper limit for NIC remains linked to the UK income tax higher rate threshold).
The annual exempt amount for Capital Gains Tax increases to £12,300 for individuals and personal representatives and £6,150 for trustees of settlements for 2020/21.”
Entrepreneurs’ relief
Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes), said:
“Reform to Entrepreneurs’ Relief (ER) has been widely anticipated as a follow-up to the Conservative manifesto promise to review and reform this relief.
A recent National Audit Office report highlighted the £2.2 billion cost to the relief in 2018-19, coupled with its limited impact on decision making, adding further likelihood to the idea that reform was waiting in the wings.
The measure announced in today’s budget reduces the ER lifetime limit from £10 million to £1 million. This is billed as leaving 80% of businesses unaffected. It will however mean a comprehensive review of succession planning is needed for businesses. For those affected it will have a major impact on the tax cost of business disposal.
The new limit applies to disposals made on or after 11 March 2020.”
Pension saving and retirement
Christine Scott, Head of Pensions, said:
“ICAS notes that the Chancellor has made several changes to the taxation of pensions at the edges but with no overhaul of the modified EET approach currently in place (whereby contributions are Exempt from tax when one pays into a pension, Exempt from tax on investment income and gains within the pension arrangement, and Taxed when paid out as retirement income).
We welcome the ‘call for evidence’ on how to address the different outcomes for lower earners, depending on whether their pension schemes use the relief at source or net pay method of tax relief. We also welcome the changes to the pensions tax rules intended to address problems for NHS staff, including senior doctors.
The reduction in the Bank of England’s base rate is not good for savers whose pension pots have already been hit by stock market falls currently viewed as temporary. Low interest rates have obviously had a major impact on the purchasing power of Defined Contribution (DC) pension savings over the years. However, this ‘short term’ blip may impact on people's retirement decisions. We may see people who were looking to retire hold off doing so until the value of their pension pots start to recover.
More broadly, ICAS is of the view that any overhaul of pension tax relief needs to fit with the government’s overall objectives for the UK’s pension system. Short-term tinkering, generally speaking, has long-term consequences so if pension tax relief is to be reformed, the reforms really need to be enduring.”
Employment taxes and taxable benefits
Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community), said:
“Additional support for workers and employers affected by the COVID-19 coronavirus extends to employed, self-employed and gig economy workers. SSP will be payable from Day 1 for all those advised to self-isolate and a sick note can be obtained from the 111 service. Benefits payable to self-employed and gig workers will be payable from Day 1 instead of Day 8. In addition, the Universal Credit minimum floor will be temporarily abolished and there will be no need to attend Job Centres in person for a temporary period. To help SMEs, businesses with fewer than 250 employees can reclaim the full amount of SSP paid out in the first 14 days of an employee’s sickness absence.
The National Living Wage will see a 6.2% increase to £8.72 per hour from April 2020. By 2024 the government has set a target that the National Living Wage will reach two-thirds of the median level of earnings.
Finally, in a measure designed to support the employment of veterans, employers will pay no NICs for the first year in which they employ a veteran in their first year of civilian service. A full digital service will be available to employers from April 2022; however, transitional arrangements will be in place in the 2021–22 tax year which will effectively enable employers of veterans to claim this holiday from April 2021.
VAT
Jan Garioch, Indirect Tax Committee member, said:
“The Chancellor announced that VAT on sanitary products, the so-called tampon tax, will be abolished from 1 January 2021. The ambition to make this cut has existed for some time, but an EU rule prevented lowering VAT below the 5% reduced rate before the transition period for leaving the EU ends on 31 December 2020. VAT will also be removed on digital publications of books, magazines and periodicals. This is another cut which has long been championed as the previous VAT treatment was seen as a tax on learning. Again, EU rules prevented any widening of the UK’s derogation on zero rates.
Other than the above, no change has been announced to VAT rates. Prior to the budget there had been speculation that a temporary VAT rate reduction could be made to support the economy during the period that the COVID-19 virus adversely impacts it. The Chancellor has decided to leave rates unchanged at present, but it is possible it could be revisited in future as reduction in VAT rates can provide a mechanism to boost the economy and support individuals regardless of their income level.
ICAS welcomes the announcement that Postponed VAT accounting (from 1 January 2021) is to change the time when import VAT is due to HMRC, providing an important cash flow advantage to businesses across the country that are integrated in international supply chains as they adapt to the UK’s position as an independent trading nation.”
Raising standards for tax advice
Charlotte Barbour, Director of Taxation, said:
“There were a number of comments and recommendations in the recent Loan Charge Review conducted by Sir Amyas Morse including the following recommendation: the government must improve the market in tax advice and tackle the people who continue to promote the use of loan schemes, including by clarifying how taxpayers can challenge promoters and advisers that may be misselling loan schemes. There should be a new strategy published within 6 months, addressing how the government will establish a more effective system of oversight, which may include formal regulation, for tax advisers.
The Review mentioned that government action and changing public views of tax avoidance meant that what might once have been considered acceptable tax planning is now seen as unacceptable tax avoidance. This was reflected in changes to the Professional Bodies guidance, Professional Conduct in Relation to Taxation in 2017. The revised guidance makes it clear that ‘Members must not create, encourage or promote tax planning arrangements or structures that (i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or (ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.’
However, it remains the case that anyone can give tax advice, so we welcome the Budget announcement that the government will publish a call for evidence in the spring on raising standards for tax advice. This will seek evidence about providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the government’s efforts to support those standards, in order to give taxpayers more assurance that the advice they are receiving is reliable.”
Owner managed businesses
Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes), said:
“Turning to corporation tax, the current corporation tax rate is maintained. The previously promised fall to 17% from 19% is put on hold. In a welcome easement, pre-2002 intangibles are to be brought within the Intangibles Fixed Asset rules from 1 July 2020, bringing a measure of simplification.
The Structures and Buildings Allowance rate increases from 2% to 3% from April 2020 and larger businesses will benefit from a 1% rise in Research & Development Expenditure Credit (RDEC) to 13%.
As previously announced, for PSCs, the IR35 private sector rules, designed to collect the 13.8% employer’s NICs will add to costs, and bring uncertainty over who will bear the economic burden.”
Making Tax Digital
David Menzies, Director of Practice, said:
“The future of Making Tax Digital looks as though it is unlikely to be expanded beyond VAT in the short term. The government will publish an evaluation of the introduction of Making Tax Digital for VAT, along with related research but crucially the Red Book contains no further detail on proposals for MTD beyond that.”
HMRC preferential creditor status
David Menzies, Director of Practice, said:
“The government has confirmed its intention to provide HMRC with preferential creditor status in business insolvencies. It has however delayed the implementation of this from 6 April 2020 to 1 December 2020. While the Chancellor stressed on several occasions throughout his speech that the government had listened to the experts in response to certain policies, it is disappointing that the expert advice of ICAS and a range of other organisations has not been heeded. The government has been warned of the danger of this move which is likely to restrict access to funding for UK business, or increase the cost of funding for business. At a time of great uncertainty for the UK economy as a result of coronavirus and uncertainty of a trade deal at the end of the Brexit transition period, this is a retrograde step for both business rescue and business growth.
The preferential status will only apply to taxes collected and held by businesses on behalf of others i.e. VAT, PAYE income tax, employee NICs and Construction Industry Scheme deductions. It will not apply to taxes owed by businesses themselves, such as Corporation Tax and employer NICs.”
Large corporate taxation
Susan Cattell, Head of Tax Technical Policy, said:
“The Chancellor has confirmed that the introduction of the UK Digital Services Tax (DST) will go ahead from 1 April 2020. This is despite opposition from the US – there were reports earlier in the year that the US government had threatened retaliatory tariffs if it proceeded. The details are complex but essentially DST will be a 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users. The government has repeated its commitment to remove the DST once an appropriate international solution is in place.
Large companies, which have already had to get to grips with the hugely complex restrictions on the use of carried forward income losses, which took effect from April 2017, will not welcome the confirmation that the corporate capital loss restriction (announced in the 2018 budget) will go ahead from 1 April 2020. This will restrict the proportion of annual capital gains that can be relieved by brought-forward capital losses to 50%. There will be an allowance giving companies unrestricted use of up to £5 million capital or income losses each year.
The Chancellor also confirmed that the headline corporation tax rate will remain at 19% from April 2020, rather than falling to 17%. However, on a more positive note, large corporates will welcome the announcements of the increase in the Structures and Buildings allowance from 2% to 3% and the increase in Research and Development credits (RDEC) from 12% to 13% – both taking effect from April 2020. The government also announced that it will consult on whether expenditure on data and cloud computing should qualify for R&D tax credits.
Other announcements worthy of note for large corporates included:
- Intangible fixed assets: relief for pre-Finance Act 2002 assets. The government will introduce legislation in Finance Bill 2020 to allow all pre-Finance Act 2002 intangible assets acquired from 1 July 2020 to come within the intangible fixed assets regime, subject to certain transitional provisions in respect of related party acquisition costs.
- Large business notification: from April 2021 large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. The government states that this measure will draw on international accounting standards which many large businesses already follow. The government intends to consult on the details of the notification process.”
