Phil's Blue Planet - Autumn Budget 2017

At Claritas Towers this afternoon, we’ve been Floundering around for a witty nautical theme or a Killer one Liner for our Budget commentary.  Whilst there was a welcome Ray of sunshine for the building industry with a focus on easing the growing housing crisis, parliamentary mathematics and the need to protect against Brexit related shocks meant that we were unlikely to see a fresh Wave of tax changes today.  However, given the Boat load of changes we’ve seen in the first two Finance Bills this year, today’s lack of excitement was exactly what was needed for overworked tax advisers and our creative department has been put back in its Plaice.

By the time you read this, tonight’s news headlines will have been written so we’ll once again focus on the Quay measures affecting our clients and professional contacts. The changes that we want to make you aware of concern:

  • Capital gains for companies;
  • Improvements to research and development tax relief;
  • Changes to company car taxation in light of the emissions scandal;
  • Yet another refocusing of the tax efficient venture capital and enterprise investment schemes;
  • Speedy implementation of changes to the UK’s international tax treaties in light of the OECD’s Base Erosion and Profit Shifting project; and
  • A consultation on a welcome relaxation of the conditions for capital gains tax entrepreneur’s relief.

Capital gains for companies

What the measure is

Companies pay corporation tax on their capital gains on the sale of assets such as buildings and investments.  However, indexation allowance means that the base cost of those assets is uprated for inflation so that tax is not paid on gains Sole-ly caused by inflation.  In what seems to be a cynical move to bring companies in line with individuals in the interests of “fairness”, indexation relief will be ended from 1 January 2018.

What this means for you

Companies will now pay tax on gains even when an asset’s value only increases because of inflation.  In an era of low inflation, this may not matter too much but it will have a significant impact on companies who hold assets long term or if inflation were to increase in future.  Unfortunately, it is not easy to see how companies will mitigate this additional liability, although it should be factored into decisions around leasing or buying certain assets.

Research and Development tax relief improvements

What the measure is

Large companies undertaking R&D on their own account and SMEs undertaking grant funded or subsidised R&D are able to claim a cash payment (the Research and Development Expenditure Credit or RDEC) from HMRC equal to 11% of their qualifying expenditure. This will increase to 12% for expenditure incurred after 1 January 2018.

What this means for you

Whilst unlikely to close the productivity gap with France, Germany and the USA on its own, this will have a small benefit for many of our clients.

Company car tax

What the measure is

This measure increases the percentage used to calculate the taxable benefit when a diesel car (not  a hybrid) is made available to an employee for private use.  It applies to vehicles registered on or after 1 January 1998 which either have no verified Nitrogen Oxide emissions value or have an emissions value in excess of the Real Driving Emissions 2 (RDE2) 80mg/km standard. The measure will have effect from 6 April 2018 and is clearly a response to Fishy emissions data produced by car manufacturers.

In these cases the diesel supplement used to calculate the company car benefit charge will be increased from 3% to 4%. The maximum level of the appropriate percentage for cars including any diesel supplement will remain at 37%.

The diesel supplement will be removed altogether for diesel cars which are certified as meeting the standard.

What this means for you

The changes will affect individuals who drive a diesel company car where the car does not meet the RDE2 standard. The government estimates that there are 800,000 individuals who drive diesel cars who will now pay more tax as a result of the increase. However, within a few years, most affected drivers are likely to have an opportunity to choose new cars which are not subject to the supplement. This will be something to consider when choosing your next company car as the Tide is clearly turning.

HMRC currently expects the IT changes required to deliver this measure will cost businesses in the region of £1.1 million.

Investment in the “Technological Revolution”

What the measure is

To be at the forefront of what the Government calls the technological revolution, companies and individuals using EIS and VCT have been provided with new incentives to invest in Knowledge Intensive Companies “KICs”.

The annual limit on EIS relief that an individual may claim is increased from £1m to £2m, provided any amount above £1m is invested in KICs.

The annual limit on EIS and VCT investment that a KIC may receive is also increased from £5m to £10m.

What it means for you

Access to capital for KICs at the early stages of growth is key to the future of these companies but equally, carries a lot of risk. Therefore, the extended reliefs via EIS and VCT are welcome.

However, as with all these rules, the devil is in the detail and careful attention should be given to HMRC’s definition of KICs!

Venture Capital Schemes – Risk to Capital

What the measure is

The Government has introduced yet another condition for companies and individuals using EIS, SEIS and VCTs.

The new condition essentially denies relief where the investment is made for tax motivated reasons without putting capital at risk.

This is the case where the tax relief provides most of the return for an investor with limited risk to the initial investment and we suspect that the target of the measure is asset backed investments.

The new test is a “reasonable” view test, i.e. whether the investment has been structured to provide a low risk return.

What it means for you

Clearly, Mr Hammond is concerned investors are taking advantage of the reliefs with little risk to their investment.

Therefore, before an investment is made, another principles based test must be satisfied to determine the “genuine” nature of the investment.

An Investor will have to self-certify the conditions are met and HMRC have made it clear that they will not provide assurance where investments appear to meet the new conditions.

Multilateral Instrument

What the measure is

The reports produced by the OECD/G20 Base (Bass?) Erosion and Profit Shifting (BEPS) project included a number of recommendations for changes to double taxation agreements (DTAs). These included minimum standards agreed by countries participating in the BEPS project in relation to preventing treaty abuse and improving dispute resolution.

To ensure that these changes are made to DTAs as soon as possible, a group of over 100 jurisdictions have drawn up the Multilateral Instrument or MLI. The text of the MLI was adopted in November 2016 and has now been signed by over 70 countries, including the UK.

In order for the MLI to modify UK DTAs, it must be given effect in UK law. This measure ensures that the existing powers for giving effect to DTAs in UK law can also be used to give full effect to the MLI.

What this means for you

Whilst this is a technical measure to amend the UK’s powers to give effect to international arrangements relating to the relief of double taxation, international groups may need to consider their legal structures to ensure they are not Swimming against the Tide.

Entrepreneur’s Reliefs’ (“ER”)- consultation

What the measure is

The Government will consult on how access to ER is maintained for shareholders with a 5% shareholding who are diluted by the issue of new shares to external investors for the purposes of raising funds.

We have seen a number of cases where this has caused problems to existing shareholders. This is particularly evident in businesses in their growth periods where key management are an essential asset.
So, despite the continual nervousness surrounding ER at Budget time, this seems to be a welcome loosening of the Jaws.