There were few tax announcements, largely based on existing consultations: those that seek to raise revenue do so in areas where corrective action was necessary; whilst the relaxation in Capital Gains Tax (CGT) Entrepreneurs’ Relief offers a welcome support for entrepreneurs who want to stay in their businesses and develop them long-term but may have been discouraged by the risk of forfeiting their Entrepreneurs’ Relief (ER).
For more details on changes impacting you, follow the links below:
Banking entrepreneurs’ relief when new investment dilutes a shareholding– “immediate” action means wait until next year
Shareholder/directors or employees of trading companies can face a tough decision when they have grown their company to the point where it is ready to take the next step and needs new external investment. The danger posed is that the company may raise so much additional investment that the owner-managers who currently qualify for entrepreneurs’ relief (ER) by holding ordinary shares (entitling them to at least 5% of both the voting rights and capital value) risk losing their ER, worth a tax saving of up to £1m.
This may have a number of negative consequences as the owner(s) may decide to:
- not grow the company further by seeking new investment;
- sell up completely, denying the company the benefit of their accumulated experience;
- attempt to grow further using only their own resources and perhaps borrowings, a risky strategy in a time of transition; or
- restructure the business under a new holding company in order to claim ER under the restructuring provisions, paying CGT reduced by ER on shares exchanged for new shares where the gains held over are not realised immediately and may never be if the company encounters adverse trading conditions.
The Government’s proposed solution to this difficulty is to allow those employee/director-shareholders who attract new investment in
their companies but in so doing fall below the magic 5% threshold to ‘bank’ the ER on gains that have already accrued at that point and pay the tax when they eventually dispose of their shares, always assuming that ER still exists then.
Taxing the digital economy
An updated position paper has been published on taxing digital businesses that derive substantial revenues in the UK as a result of the active participation of users based in the UK. For example, this would cover digital businesses such as social media platforms and online marketplaces. Whilst the UK Government would like to see an international consensus on how digital businesses should be taxed, it has reaffirmed that it is willing to take unilateral action if need be. The position paper makes suggestions as to how the current international framework could be updated so that profits can be taxed in these situations, even where the business has no or little physical presence in the country. In recognition of the fact it might take some time to make changes at an international level, a revenue based tax is proposed as an interim solution. At this stage, all we have is the concept: we have will have to wait for further detail in the future. However, this is a nettle the UK Government appears to be determined to grasp.
Security deposit legislation
Where HMRC consider there to be a serious risk to the revenue it may require a security deposit to be provided. A consultation document considering the extension of the securities deposit rules to Corporation Tax (CT) and Construction Industry Scheme (CIS) payments sets out further detail on both the detail, to give rise to draft legislation in the summer and to come into effect from April 2019, and the broader proposals to tackle “phoenixism” (to be the subject of a separate discussion document).
The proposals in the document appear to be a modestly targeted extension to the existing securities deposit arrangements. Guidance, whilst a poor alternative to well drafted legislation, is likely to be an understandable consequence of the complexity of individual circumstances of those potentially within the scope of these proposals.
VAT and other indirect taxes
Building on recent measures to tighten up on the portion of the VAT gap arising from online market activity, there is a further consultation and call for evidence. The consultation looks at the practicalities of implementing a split payment method of collecting VAT directly from payments made through online market places. The call for evidence seeks to examine how online platforms can assist their users meet their tax obligations.
Following on from the Office of Tax Simplification’s review of VAT and the negative effect on business growth of the impact of VAT on those businesses reaching the VAT registration threshold there is a call for evidence on what the problems are, and how administration around the VAT threshold might be amended to lessen these problems.
There is also a call for evidence on how VAT and air passenger duty might impact the tourism industry in Northern Ireland.
Playing a long game
Today’s announcements aren’t all we have to look forward to: there are more consultations, calls for evidence and reviews by the Office for Tax Simplification in progress and we can expect more announcements between now and the Autumn Budget.