Digital services Tax
The UK government is taking a unilateral stand in relation to digital service providers by introducing a new 2% digital services tax that will apply from April 2020. This measure is being introduced in advance of an international solution.
The government recognises that some search engines, social media platforms and online marketplaces derive substantial revenues from activities (e.g. advertising) that are linked to the participation of UK users. In an effort to ensure that this new tax catches the tech giants but doesn’t impact the tech start-ups, it is intended that the new tax will only apply to groups that generate global revenues from in-scope business activities in excess of £500m per annum. The first £25m of UK revenues will be exempt from the 2% tax.
It is intended that there will be a safe harbour provision that will operate to provide an exemption or relief for loss-making companies and those businesses with very low profit margins.
The government intend to legislate in Finance Bill 2019-20 following a consultation on the detailed design of the tax.
Changes to intangible fixed assets regime
As part of its plans to reform the corporate intangibles regime, the government has announced that it will partially re-instate relief for acquired goodwill in the acquisition of businesses with eligible intellectual property. It is proposed that this measure will take effect from April 2019.
The government has also announced changes to the de-grouping charge rules in respect of intangible fixed assets created or acquired on or after 1 April 2002. The intention is to align the de-grouping rules for intangibles with the equivalent rules for chargeable gains to ensure that a charge will not arise where a share disposal that qualifies for the substantial shareholding exemption triggers a de-grouping event.
The changes to the de-grouping rules will have effect in relation to de-groupings occurring on or after 7 November 2018.
Corporate capital loss restriction
Currently, companies can use their carried forward capital losses to offset 100% of a chargeable gain. From 1 April 2020, the use of carried-forward capital losses will be restricted to 50% of chargeable gains in excess of £5 million. This measure is subject to an anti-forestalling rule.
A consultation paper has been published and draft legislation will be published in summer 2019.
Entrepreneurs’ relief has been restricted to ensure that it is only available for “genuine entrepreneurs” that have a material economic interest in the business.
Assuming that all conditions for the relief are satisfied, entrepreneurs’ relief operates to apply a 10% capital gains tax rate when an individual makes a qualifying business disposal, namely where an individual disposes of their business or of shares in their “personal company”. In order to be a “personal company” an individual must own 5% of the shares in the company and be entitled to 5% of the voting rights. The individual must also be an employee or director of the company.
For disposals on or after 29 October 2018, the individual will only qualify for entrepreneurs’ relief if they are beneficially entitled to 5% of the distributable profits and 5% of the company's assets available for distribution to equity holders on a winding-up.
Prior to 29 October 2018, in order to benefit from entrepreneurs’ relief, the individual must have held 5% of the ordinary share capital (by reference to the nominal value) and 5% of the voting rights for at least one year up to the date of the disposal. For disposals on or after 6 April 2019 the individual must have satisfied these conditions for at least two years.
These changes won’t affect individuals who have acquired their shares under an EMI scheme.
Off payroll working in the private sector
New private sector off-payroll rules will be introduced from 6 April 2020 to ensure that these align with the public sector rules. The responsibility for deciding whether IR35 applies, and deducting any tax and NICs due, will fall upon the organisation, agency or other third party paying an individual’s personal service company and will no longer fall upon the individual. The changes will only apply to medium and large sized businesses. The change will come into effect from 6 April 2020.
Offshore receipts in respect of intangible property
This was initially proposed as an extension to the royalties withholding tax to payments to low (or no) tax jurisdictions by non-UK residents who make sales in the UK without a permanent establishment. However, following concerns raised during the consultation process, it is now proposed that a 20% income tax charge will be directly imposed upon certain non-UK residents on income from intangible property that is referable to the sale of goods or services in the UK, regardless of whether there is a UK taxable presence.
It will apply to payments to entities in a low (or no) tax jurisdiction with whom the UK does not have a double tax treaty that includes a non-discrimination article. The measure will capture income from both related and unrelated parties.
It will not apply to businesses with UK sales below £10 million, or to income that is taxed at appropriate levels (i.e. at least 50% of the UK income tax charge that would otherwise arise under these new rules) in the foreign jurisdiction. In addition, it will not apply to income relating to intangible property where there is sufficient local substance.
The measure will take effect from 6 April 2019, with an anti-avoidance rule that applies from 29 October 2018.