Autumn Budget analysis for quoted companies

The Chancellor delivered his second Autumn Budget to Parliament on 29 October 2018, outlining a range of tax and financial measures. With the Government already having pledged to end austerity, the Chancellor had to loosen the purse strings in his Autumn Budget.

We have summarised the most noteworthy announcements concerning capital markets.

Changes to Entrepreneurs’ Relief (ER)

ER is an attractive tax relief. It allows an individual to benefit from a flat 10% tax rate on disposals of certain business assets. The Government has introduced two important changes to ER.

From 6 April 2019, the minimum holding period for all such disposals will increase by 12 months to two years, with an exception for businesses that ceased prior to 29 October 2018. We welcome this change as a longer-term involvement would be more indicative of genuine entrepreneurial activity, which in turn promotes sustainable business and economic growth.

Under the second measure, which is effective immediately, an individual disposing of shares in their personal company will only qualify for Entrepreneurs’ Relief if they are entitled to 5% of the distributable profits and net assets of a company – in addition to 5% of share capital and voting rights previously required.

Rise to Annual Investment Allowance (AIA)

In order to help stimulate business investment, the Government will increase the AIA to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020.

This dramatically reverses the previous cut in the incentive. Although the maximum amount of the AIA was temporarily increased to £500,000 in the 2014 Budget, the 2015 Summer Budget set the AIA permanently at £200,000 from 1 January 2016.

This latest about-turn will provide significantly faster tax relief for plant and machinery investment between £200,000 and £1 million, helping businesses to invest and grow.

Reduction to capital allowances special rate pool

From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6%. Businesses will thus continue to receive full tax relief to reflect the depreciation of plant and machinery assets, but over an extended timeframe. 

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 will address a gap in the current capital allowances regime and improve the international  competitiveness of the UK’s tax system.

The aim of the SBA is to relieve the costs of physically constructing new structures and buildings. This will encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity.

Changes to corporate capital loss relief

The Government is proposing to harmonise the tax treatment of corporate capital losses with income losses from 1 April 2020.

As the proposal stands at the moment, the relief for brought forward capital losses would be restricted to 50% of the annual capital gains that can be relieved by such losses. The measure includes an allowance that gives companies unrestricted use of up to £5 million capital or income losses each year, meaning that a large proportion of companies will be unaffected.

The aim of the proposal is to ensure that large companies pay tax when they make significant capital gains.

Digital Services Tax

The Chancellor has made good his promise on leading the reform of international tax systems and how they should apply to the digital economy. Targeting ‘global giants’ and ensuring they contribute to a ‘fair and sustainable’ UK tax system, the new Digital Services Tax is the first step towards wider long-term global tax reform.

The announcement of the new tax is not unexpected; it follows the Government’s position paper last year on corporate taxation and the digital economy, as well as the EU’s proposals published in March 2018. The Government’s position paper recognised the need for a temporary measure, such as a revenue-based tax. Frustrated by the slow progress towards reaching a global agreement on how to tax digital businesses, the Chancellor has now confirmed the Government’s commitment to introducing a 2% tax on the revenues generated by large digital businesses from April 2020.

The new Digital Service Tax will be narrowly targeted to search engines, social media platforms and online marketplaces that are linked to value generated by the participation of UK users. It will only affect large businesses generating global revenues in excess of £500 million a year from the targeted activities. There will also be a £25 million annual allowance for taxable revenues linked to UK users.

Safe harbour provisions will be included to ensure that the introduction of the new tax does not adversely impact start-ups. These will exempt loss-making businesses and give relief where the activities generate very low profit margins.

Get all the latest information and analysis on the 2018 Autumn Budget here.

If you'd like to discuss the impact of these changes, please contact Yuri Hamano.

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