Analysis of Brexit-related measures in the Budget

David, 

Please let me know if you require anything different from the below analysis. 

Regards, Julian

Analysis of Brexit-related measures in the Budget

The government will strengthen its investment links with global partners to encourage additional inward investment, including becoming a European Partner to the Institutional Investor Roundtable that brings together leading global investment funds.

To provide enhanced support to UK businesses, the Department for International Trade will expand their network of advisers in Europe.

The government is committed to supporting the UK’s fast-growing and innovative firms to secure the external finance they need to invest and grow. As the UK leaves the EU, it continues to actively explore options for a future relationship with the European Investment Bank Group (EIBG). However, if no future relationship with the EIBG is in place before the UK leaves the EU on 29 March 2019, the government will provide the British Business Bank with the resources to enable it to make up to £200 million of additional investment in UK venture capital and growth finance in 2019-20.

The government is seeking a deep and special relationship with the EU, encompassing economic and security cooperation. The government is confident of getting a good deal but has a responsibility to plan for all scenarios, including the unlikely event no mutually satisfactory agreement can be reached with the EU. The government, led by the Department for Exiting the European Union (DExEU), continues to refine these plans ahead of March 2019 and has published a series of notices so that businesses and citizens are prepared.

To support these preparations, the government has already allocated £2.2 billion to departments and devolved administrations. At Autumn Budget 2017, the government set aside a further £1.5 billion to be allocated for preparations taking place in 2019-20. The budget confirms an additional £500 million of funding from the reserve for 2019-20, meaning the government will have invested over £4 billion in preparing for EU exit since 2016. This funding will help departments manage pressures and contingencies arising from EU exit preparations which fall in the 2019-20 financial year, as well as ensuring that the UK is prepared to seize the opportunities available when we leave the EU.

The government is providing £500 million of additional funding for departments to prepare for Brexit for 2019-20. This is on top of the £1.5 billion already announced for that year.

The government will provide an additional £200m of funding to the British Business Bank to replace access to the European Investment Fund if needed.

Extracts from the Red Book:

3.14 Short Term Business Visitors (STBVs) – Following a consultation on the tax and administrative treatment of STBVs from overseas branches of UK headquartered companies, the government will widen eligibility for the STBV Pay As You Earn (PAYE) special arrangement and extend its deadlines for reporting and paying tax. This will reduce administrative burdens on UK employers with effect from April 2020.

3.21 The government is committed to creating a tax system which secures business investment and the location of business activity in the UK. The government has already ensured the UK is a prime location to invest, from cutting the corporation tax rate to 19% and legislating for it to fall to 17% in 2020, to supporting the creative sector through tax reliefs which have helped to make the UK one of the best places to produce film and high-end TV programmes in the world. The Budget builds on the UK’s competitive tax regime by supporting business investment, ensuring that tax paid is fair and responds to the challenges of the new economy. Technology is changing many aspects of the economy – including the vehicles we drive – and the government is considering how the tax system will need to adapt to manage those changes.

3.22 Annual Investment Allowance (AIA) – The government will increase the Annual Investment Allowance to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020, to help stimulate business investment. (20)

3.23 Structures and buildings allowance (SBA) – New non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018. This addresses a significant gap in the UK’s current capital allowances regime, and will improve the international competitiveness of the UK’s tax system. Further information on this measure is available in a supplementary document published alongside the Budget. (21)

3.24 Capital allowances special rate reduction (8% to 6%) – From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to more closely match average accounts depreciation. (22)

3.25 Entrepreneurs’ Relief: minimum qualifying period – To support longer-term business investments, from 6 April 2019 the minimum period throughout which the qualifying conditions for relief must be met will be extended from 12 months to 24 months. (56)

3.26 Digital services tax (DST) – From April 2020, the government will introduce a new 2% tax on the revenues of certain digital businesses to ensure that the amount of tax paid in the UK is reflective of the value they derive from their UK users.

The tax will:
• apply to revenues generated from the provision of the following business activities: search engines, social media platforms and online marketplaces
• apply to revenues from those activities that are linked to the participation of UK users, subject to a £25 million per annum allowance
• only apply to groups that generate global revenues from in-scope business activities in excess of £500 million per annum
• include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins

3.27 The government remains committed to G20 and OECD discussions on potential future reforms to the international corporate tax framework, and will only apply the DST until an appropriate long-term solution is in place. The government will consult on the detailed design of the DST and legislate in Finance Bill 2019-20. (53)

3.28 Corporate capital loss restriction – To ensure that large companies pay tax when they make significant capital gains, the government will bring the tax treatment of corporate capital losses into line with the treatment of income losses. From 1 April 2020, the government will restrict the proportion of annual capital gains that can be relieved by brought-forward capital losses to 50%. The measure will include an allowance that gives companies unrestricted use Budget 2018 45 of up to £5 million capital or income losses each year, meaning that 99% of companies will be unaffected. The government will consult on the detailed design of this change and legislate in Finance Bill 2019-20. The measure will be subject to anti-avoidance rules that are to apply with immediate effect. (55)

3.29 Amendments to reform of loss relief rules – With effect from April 2017, the government reformed the rules on how carried-forward corporate losses can be set against taxable profits of a company and its group members. The government will make amendments to the loss relief legislation to ensure that it works as intended and prevents relief for carried forward losses being claimed in excess of that intended.

3.30 Intangible fixed assets regime – In early 2018, the government reviewed how the tax treatment of acquired intangible assets could be made more competitive and administrable. Following a short consultation, the government will seek to introduce targeted relief for the cost of goodwill (the amount paid for a business that exceeds the fair value of its individual assets and liabilities) in the acquisition of businesses with eligible intellectual property from April 2019. With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.

3.31 Hybrid Capital Instruments – Certain corporate debt instruments (known as hybrid capital) have some equity-like features. The government will introduce new rules for the taxation of such instruments, to ensure that they are taxed in line with their economic substance, taking into account new Bank of England requirements for loss absorbency. The new rules will also eliminate mismatches between the tax treatment of instruments used to raise funds externally and those used to lend funds internally within a group. The rules will cover issues by companies in any sector and replace current rules covering regulatory hybrid capital instruments issued by banks and insurers.

3.32 Offshore receipts in respect of intangible property (previously Royalties Withholding Tax) – As announced at Autumn Budget 2017, the government is introducing legislation in Finance Bill 2018-19 to tax income from intangible property held in low-tax jurisdictions to the extent that it is referable to UK sales. This measure will come into effect from April 2019. Following consultation, the government is making changes to ensure that the measure is effective, appropriately targeted and robust against abuse.

These include:
• collecting the tax by directly taxing offshore entities that realise intangible property income in low-tax jurisdictions, rather than through applying a withholding tax
• broadening the income in scope of the measure to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties
• introducing a de minimis UK sales threshold of £10 million, an exemption for income that is taxed at appropriate levels, and an exemption for income relating to intangible property that is supported by sufficient local substance
• anti-avoidance provisions will apply from 29 October 2018 to counteract arrangements entered into with a main purpose of avoiding a charge under this measure

3.50 Carbon price support (CPS) – The price of EU Emissions Trading System (ETS) allowances has risen significantly over recent months, raising the Total Carbon Price (currently made up of the EU ETS price and the CPS rate). The government will freeze the CPS rate at £18/tCO2 16 for 2020-21. From 2021-22, the government will seek to reduce the CPS rate if the Total Carbon Price remains high. (64)

4.37 In 2019, the government will introduce changes at the UK border to enhance the experience for business and leisure travellers to the UK. As part of this, citizens of the United States, Canada, New Zealand, Australia and Japan will, by next summer, be able to use the e-passport gates at UK ports, significantly improving the flow of passengers at busy airports such as Heathrow. Businesses will be able to become customs trusted traders (including ‘Authorised Economic Operator’) in half the time it currently takes, as part of the UK’s aim to be at the cutting edge of global customs administration. HMRC will implement the improvements within 2 years.

3.51 Carbon pricing following EU exit – The government continues to plan for all scenarios as it prepares for EU exit. In the unlikely event no mutually satisfactory agreement can be reached and the UK departs from the EU ETS in 2019, the government would introduce a Carbon Emissions Tax to help meet the UK’s legally binding carbon reduction commitments under the Climate Change Act. The tax would apply to all stationary installations currently participating in the EU ETS from 1 April 2019. A rate of £16 would apply to each tonne of carbon dioxide emitted over and above an installation’s emissions allowance, which would be based on the installation’s free allowances under the EU ETS. The government is also legislating so it can prepare for a range of long-term carbon pricing options.

3.52 Climate change levy (CCL) – The Budget sets the CCL main rates for 2020-21 and 2021-22 and continues with the government’s commitment to rebalance the main rates paid for gas and electricity. The electricity rate will be lowered in 2020-21 and 2021-22. The gas rate will increase in 2020-21 and 2021-22 so it reaches 60% of the electricity main rate by 2021-22. Other fuels, such as coal, will continue to align with the gas rate. The discount for sectors with Climate Change Agreements will change to reflect the change in CCL main rates. (60)

3.53 Enhanced Capital Allowances (ECAs) – The government will end ECAs and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List from April 2020. These ECAs add complexity to the tax system and the government believes there are more effective ways to support energy efficiency. The savings will be reinvested in an Industrial Energy Transformation Fund, to support significant energy users to cut their energy bills and transition UK industry to a low carbon future. (43)

3.54 Enhanced Capital Allowances (ECAs) for electric vehicle charge points – The government will extend the ECA for companies investing in electric vehicle charge points to 31 March 2023. This will help achieve the government’s ambition for the UK to become a world-leader in the ultra-low emission vehicle market.

3.75 Consequential minor amendments to tax legislation to reflect EU exit – The government is responsible for preparing for all possible outcomes to EU negotiations. This power will allow the government to make small, essential changes to UK tax law to maintain the effect of tax legislation if the UK leaves the EU without a deal. Changes made under this power will maintain current operation of the tax law in essential areas, including changes in line with no deal legislation in other parts of the law.

4.44 Access to finance and EU exit – The government is committed to supporting the UK’s fast-growing and innovative firms to secure the external finance they need to invest and grow. As the UK leaves the EU, it continues to actively explore options for a future relationship with the European Investment Bank Group (EIBG). However, if no future relationship with the EIBG is in place before the UK leaves the EU on 29 March 2019, the government will provide the British Business Bank with the resources to enable it to make up to £200 million of additional investment in UK venture capital and growth finance in 2019-20.