Budget 2017: Corporation tax, business rates, digital economy, VAT

Budget 2017: Corporation tax, business rates, digital economy, VAT

How did the industry react to Budget measures addressing corporation tax, business rates, the digital economy, VAT, and more?

Budget 2017: Corporation tax, business rates, digital economy, VAT

Chancellor Phillip Hammond finally delivered the hotly anticipated Autumn Budget with a promise to “look forwards not backwards.” To achieve this the Chancellor introduced a range of measures and tax reforms aimed at cultivating innovation and supporting businesses.

There are some of the key measures announced in the Budget:

 Investment and R&D

 The Budget outlined several measures to foster innovation and support tech businesses. This included a promise to invest over £500m in a range of initiatives including Artificial Intelligence, 5G and full fibre broadband.

The Chancellor also announced that the government will allocate £2.3bn for investment in R&D, and increase the main R&D tax credit from the current 11% to 12%.

Hammond explained this is: “Taking the first strides towards the ambition of our Industrial Strategy to drive up R&D investment across the economy to 2.4% of GDP.”

David Woodward, R&D Tax Partner at KPMG, commented that increasing the R&D Expenditure Credit “means that, net of corporate tax, the government will contribute £10 for every £100 of R&D expenditure by business.”

He added that this coupled with the £2.3bn of investment is a “welcome surprise that will send a very positive signal that the UK is an attractive place for innovation.”

Tom Byng, head of R&D Group, MHA MacIntyre Hudson noted that SME R&D tax relief benefits did not increase as well, this being “the first time since RDEC’s introduction that the two have not been increased together.”

He added: “Given that SME relief is currently capped by EU state aid rules, and was at its maximum level compared to the RDEC, it leaves space for the SME scheme to grow in the future.”

Enterprise Investment Scheme (EIS)

 As part of the government’s ‘Action Plan’ to unlock over £20 billion of new investment in UK scale-up businesses, the Chancellor announced the government is: “doubling EIS investment limits for knowledge intensive companies, while ensuring that EIS is not used as a shelter for low-risk capital preservation schemes.”

This will refocus investments from ‘low risk’ structures to innovative companies, according to Hugi Clarke, Director at Foresight Group.

Clarke added: “Importantly, the changes leave the unique tax advantages of this vehicle in place. An EIS remains attractive to those investors who can take advantage of the tax benefits and accept the associated risks.”

“The ability to access 30% income tax relief, 40% IHT relief and up to 28% CGT deferral while enjoying the potential for significant upside compares favourably with ISA and pension alternatives and will continue to be an attractive part of a diversified portfolio.”

Business rates

 Hammond also announced the plan to switch business rates from RPI to CPI by two years, to April 2018, heeding recommendations of the CBI and British Chambers of Commerce.

In his response Jeremy Corbyn accused the government of borrowing this policy from Labour’s manifesto.

While ACCA and AAT welcomed the move, including the reduction of the revaluation period to three years, Toby Ryland, corporate tax partner at HW Fisher & Company called the change a “classic sucker punch”.

He explained: “Initially businesses will see rates rise more slowly, but before long they’ll be paying more as revaluations will happen every three years rather than every five.”

Brian Palmer, on the other hand, suggested the more frequent revluations would “help SMEs budget more effectively for their future financial security.”

Multinationals in the digital economy

 The Chancellor outlined tax reforms to address perceptions that multinationals do not pay their fair share of tax.

He explained: “Multinational digital businesses pay billions of pounds in royalties to jurisdictions where they are not taxed, and some of these royalties relate to UK sales.”

Therefore, from April 2019 the government will apply income tax to royalties relating to UK sales when those royalties are paid to a low tax jurisdiction, even if they do not fall to be taxed in the UK under our current rules. This is expected to raise £200m annually.

Hammond also announced the government’s plans to quash online VAT fraud by making all online marketplaces jointly liable for VAT, ensuring that sellers pay the correct amount.

Jim Meakin, head of tax at RSM commented on the boldness of this move: “What’s interesting is that the UK is seeing itself very much as a thought leader, diverging from the international approach by proposing new solutions for taxing businesses that derive most of their value from user activity on their platforms, for example social media companies.”

Furthermore, the Chancellor announced a review of how the tax system addresses the digital economy, due to conclude in early 2018.

 VAT

 The Chancellor noted that UK VAT rates are by far the highest in the OECD, and acknowledged OTS findings that this “distorts competition and disincentivises business growth.”

Despite this, Hammond said the government intends to maintain the current VAT registration threshold at £85,000 for two years.

ACCA welcomed this decision, explaining: “The current VAT threshold at £85,000 is set appropriately for UK small businesses with the imminent introduction of Making Tax Digital.”

Indeed, any changes to the VAT threshold would complicate the first intake of businesses into Making Tax Digital, which is set for April 2019 for businesses with turnover above the VAT threshold.

Brian Palmer, tax policy expert at AAT commented: “Frankly, it would have been odd timing to make major reforms to VAT – it is, after all, governed by European legislation and as such will likely be further reviewed after our March 2019 withdrawal from the EU.”

Corporation tax

 The Budget reaffirmed the government’s long term phased reduction of corporation tax, but the Chancellor noted: “there is a case now for removing the anomaly of the indexation allowance for capital gains – bringing the corporate system into line with personal capital gains tax.”

Therefore, he pledged to freeze this allowance so that companies receive relief for inflation up to January 2018, but not after.

Dipan Shah, head of London private business at PwC, commented: “Freezing the indexation allowance will discourage the use of companies as an investment vehicle. It might be a small change but it has a potentially large impact for most investors.”

Toby Ryland of HW Fisher & Company added: “The changes to the way Corporation Tax is charged on capital gains will prove a long-term cash cow for the Treasury.”

He explained that from January businesses will no longer be able to “deduct the influence of inflation from their capital gains, driving up their corporation tax liability and hitting property companies especially hard.”

James Hender, partner and head of the private wealth group at Saffery Champness commented that this change will “start to align personal and corporate tax rules.”

Tax avoidance

No doubt under pressure to take action following the release of the Paradise Papers, the Chancellor also promised a raft of anti tax avoidance and evasion measures to be introduced, which are “forecast to raise £4.8 billion by 2022-23.”

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