On Wednesday 11th March 2020 the newly installed Chancellor, Rishi Sunak, delivered the UK’s first budget of the new decade and the first of the Boris Johnson government. Understandably Covid-19 took centre-stage, with the NHS receiving an open-ended funding promise of “whatever it takes” to cope with the pandemic, which was complemented by a range of provisions to support individuals and small businesses. The Chancellor was keen to emphasise that the first post-Brexit budget was about “getting it done”, delivering on the election promises with huge investment in infrastructure and public services. A number of commitments were made in Conservative Manifesto and these formed the basis for the tax announcements. However, there was little discussion on funding and the potential implications of the substantial borrowing required to meet the proposed expenditure.
During the speech asset managers are likely to have been focused on their portfolio, rather than read through the detail released. Market movements were in full swing following the interest rate cut announced earlier in the day by the Bank of England, as such we summarise below the main tax changes that are likely to impact the industry.
Triple Tax Lock – Boris Johnson’s guarantee on the first page of the Conservative Manifesto stated: “We will not raise the rate of income tax, VAT or National Insurance” and as promised he delivered. Corporation tax was also kept at 19% as previously announced, stepping back from the previous government’s hopes of reducing it to 17%.
Asset managers will welcome the stability provided, particularly given the current climate of uncertainty, but precisely how long-term funding will operate with the Chancellor’s hands tied on his biggest revenue generators will concern many. The four headline taxes make up 71% of the project tax revenues in 2019/20. With the world economy on pause and government spending on the increase again additional borrowing looks inevitable.
The above diagram shows the composition of UK tax revenue for the year 2019-20[1].
Entrepreneur’s Relief (ER) – As the name suggests, ER provides entrepreneurs with a lower 10% rate of Capital Gains Tax (CGT) on the disposal of certain ‘trading’ business. This was previously limited up to £10m of eligible gains, but the Chancellor reduced this to £1m with immediate effect – cutting the potential relief for each individual by £900k. It has been long speculated that ER will be abolished altogether, so the fact it remains in some form is welcomed.
Asset managers have often benefitted from the relief, most commonly when owners dispose of part of their business to a third party (often a bank or other financial institution). However, in practice such deals are typically structured as a function of revenue flows meaning future receipts were not eligible.
Research and Development (R&D) – The Chancellor made several announcements around R&D relief increasing the R&D Expenditure Credit (RDEC) available to large companies claiming a tax refund from 12% to 13% from 1 April 2020. It was also announced that the government will consult on qualifying costs for R&D, addressing areas such as data and cloud computing where the present guidance and legislation is restricted in places. The re-introduction of a PAYE cap on the payable tax credit in SME R&D schemes has also been delayed to April 2021. Again, all these measures were featured in the Conservative Manifesto.
Asset managers invest increasing amounts of resource into technological advancement and in many cases this investment underpins their investment strategies and internal infrastructure, accordingly seeking to claim R&D relief is increasingly common.
Tapered annual allowance for pensions – The Budget announced an increase in the two tapered annual allowance thresholds for pensions by £90,000 each. This will bring the new ‘threshold income’ limit to £200,000 and the new ‘adjusted income’ limit to £240,000. As the annual allowance (i.e. the maximum amount of tax-relieved pension savings that can be accrued in a year) tapers down from £40,000, this increase means that from April 2020-21, the annual allowance will only begin to taper down for individuals with an ‘adjusted income’ over £240,000. While the designated limits for threshold and adjusted income have increased, the minimum level to which the annual allowance can taper down has reduced from £10,000 to £4,000. This reduction will affect individuals with total income (including pension accrual) in excess of £300,000.
Asset managers are likley to have taken the sensible step of maximising pension contributions historically, however the increased relief at lower levels will benefit the rising stars of the future and mid-tier staff. In any case seeking the advice of a pensions specialist is always recommended to understand the interaction of the rules year-on-year.
Asset holding companies in alternative fund structures – The government announced that it will undertake a review of the UK funds regime during 2020 and consider targeted policy changes in relevant areas of tax and regulation to ensure competitiveness of the UK regime. To initiate this review, the government will undertake a review of the VAT charged on fund management fees and has also opened a consultation that seeks to gather further information to explore the attractiveness of the UK as a location for the intermediate entities through which alternative funds hold fund assets. The consultation that closes on 20 May 2020, acknowledges certain provisions including withholding tax on corporate interest and the hybrid mismatch rules as hinderances, when competing with other locations.
Asset managers will welcome this news, however the industry has long been promised a UK fund environment capable of competing with the likes of Cayman, Ireland and Luxembourg. Regardless of progress, convincing investors that they will be immune from future political movements is probably the bigger long-term challenge.
Off-payroll working (IR35) – As previoulsy announced, the widening of the IR35 rules to place PAYE responsibility on the end client comes into effect from 6 April 2020. Medium and large businesses will need to assess the application of the rules where they have workers providing their services through an intermediary and pay the applicable tax direct to HMRC.
Asset managers who are impacted should urgently risk assess contractual arrangements with a focus on IT contractors and consultancy arrangements where a personal service company (‘PSC’) is involved to ensure compliance.
Tackling avoidance and evasion – It was announced that from April 2021, large business will have to notify HMRC when a tax position they have taken is likely to be challenged by HMRC. This policy measure is drawn from international accounting standards that majority of large business already follow. Details on the notification process will be included in a future consultation.
In their endeavor to tackle tax avoidance and tax evasion, the government also announced that it is investing heavily in additional compliance officers and new technology for HMRC. This will enable HMRC to reduce the tax gap through additional compliance activities and expanded debt collection capabilities which aims to increase tax revenue by £4.4 billion up to 2024-25.
Asset managers are likely to come under even greater HMRC scrutiny as a result. Transfer pricing is increasingly seen as a risk area and HMRC have built up an array of tools to support them in recent years. Enquiry activity around salaried / mixed member rules and the application of the disguised investment management fee (DIMF) legislation also continues to increase. Some managers may be presented with material and unexpected tax bills with the associated interest and penalties. Prudent advice is that asset managers should revisit their structure and operating models as part of a regular tax risk assessment.
Other tax changes
- The NIC Primary Threshold and Lower Profits Limit for employees and self-employed individuals respectively, will be increased to £9,500 from April 2020.
- From April 2021, zero emission vehicles will also be able to benefit from first year allowances and ultra-low emission vehicles with emissions up to 50g/km, will be able to apply the main rate writing down allowance (WDA) of 18%. The special rate WDA of 6% will apply to higher polluting cars with emissions above 50g/km.
- The structures and buildings allowance rate will increase from 2% to 3% for qualifying investments to construct new, or renovate old, non-residential structures and buildings from April 2020.
- Employment allowance will increase from £3,000 to £4,000 from April 2020.
- The CGT annual exempt amount will be increased to £12,300 for individuals and personal representatives, and £6,150 for trustees of settlements for the period 2020 to 2021.
- A 2% Stamp Duty Land Tax surcharge will be introduced for non-UK residents purchasing residential property in England and Northern Ireland from 1 April2 2021.
- Several Business Rates cuts were announced, including an increase to the Business Rates retail discount to 100% in 2020-21. The Autumn Budget will consider further reforms to the business rates system.
- Finance Act 2018-19 introduced a targeted market value rule to prevent the artificial reduction of tax due for Stamp Duty or Stamp Duty Reserve Tax on share acquisitions when listed shares were transferred to a connected company. The 2020 Budget extends this rule to unlisted shares as well to further prevent tax avoidance. The government will also ensure that legislation is amended to prevent double tax charges arising from certain company re-organisations.
- Following the response to the independent Loan Charge Review published in January 2020 the government will legislate to take further action against those who promote and market such tax avoidance schemes.
- The tax treatment of LLPs has been updated to ensure they are treated in line with other partnerhips, by adding clarity to the legislation but not creating any new or additional obligations or liabilities.
- A number of further measures relating to pre-2002 intangible, capital loss restrictions and non-trade loan relationships have also been proposed.
The next version of the Finance Bill 2020 will be released on 19 March 2020 and will include further details on the legislation applicable from April 2020 and other changes previously announced.