Image credit: REUTERS/Phil Noble
Again, a mixed bag. On the one hand, practitioners welcomed the introduction of a relief for the cost of goodwill and reforms to the taxation of intangible fixed assets. On the other, the introduction of a cap on R&D relief was disappointing. The shift from an extension of royalties withholding tax to an income tax on non-UK residents on income from intangible property was also noteworthy.
(For Practical Law commentary on measures relating to IP, media and R&D, see Legal update, Autumn 2018 Budget: key business tax announcements: IP, Media and R&D).
Read the reaction to the Autumn 2018 Budget from industry leading tax practitioners:
Zoe Feller, Bird & Bird
I was surprised by the volume of technical announcements, given the apparent paralysis of government during the Brexit negotiations. The Digital Services Tax had been long expected, and feels like a challenge to other G20/OECD countries to agree a new way of taxing the tech behemoths (especially given the relatively low amounts of revenue expected to be raised).
The capital loss restrictions will, however, be a real revenue raiser. The changes to the intangibles regime will be of significant interest to our clients, especially the proposal to align the degrouping rules with the capital gains regime. This is something we have long been lobbying for as there is no economic reason for the rules to operate differently for tangible and intangible assets, and will actually make a real difference on group reorganisations. It would also be fantastic to see the stamp duty and SDRT regimes aligned, but I can see this slipping down the to-do list after the consultation period closes as other changes with greater revenue impacts take priority.
Mat Oliver, Osborne Clarke LLP
It’s good to see that some, albeit limited, reform of the intangible fixed assets rules are now taking place. The de-grouping charge rules for intangible fixed assets have been an anomaly since the rules were changed for capital gains tax purposes so it is good to see that these rules are being aligned. Secondly, re-instating relief albeit in limited form for acquired goodwill is also welcome news. However, for both proposals we are awaiting further details so it is not entirely clear how they will operate.
James Ross, McDermott Will & Emery UK LLP
The digital sales tax for tech organisations will grab all the headlines as once again the UK jumps the gun on a BEPS-related reform (as it did with diverted profits tax): but the scope of the charge is drawn very tightly, and the financial limits are relatively generous. It will hit a small number of the larger tech companies but appears pretty inconsequential for the wider economy: a reform to make a political point rather than to reshape the tax system for the digital age.
The aligning of the intangible fixed asset degrouping rules with the capital gains rules will simplify M&A structuring considerably. Many will also welcome the plan to reintroduce some form of amortisation relief for acquired goodwill, which seems to recognise that the summary abolition of relief in 2015 rendered the UK less competitive than other jurisdictions. Whilst we await the detailed plans, it is good to see the government taking a more considered approach in this area than it has done previously. It is a shame, however, that the OTS proposal to haul stamp duty on shares into the 20th century (if not quite the 21st) appears to have disappeared without trace: the existing rules could not be a better example of a regime that is crying out for simplification.
The tightening of the criteria for entrepreneurs’ relief comes as no great surprise, given the amount of planning that has been going on in this area.
David Ward, Johnston Carmichael LLP
The budget includes one important measure from an R&D tax relief perspective: the re-introduction of a cap on the amount of R&D relief available to loss-making SMEs. It’s worth remembering that there had previously been a PAYE/NIC cap on payable R&D credits for loss-making SMEs, but this was abolished in 2012. The original cap was more restrictive, being based on the claimant company’s actual PAYE/NIC liabilities, rather than three times those liabilities, as is now proposed. However, the original cap was abolished following government consultation, in a move that was welcomed as a positive step to improve the competitiveness of the UK tax system for R&D and to reduce the administrative burden for companies in making R&D claims.
With that history, it’s disappointing to see the re-introduction of such a cap. However, it’s clear from the budget papers that this measure is being made in response to identified abuse of the payable credit by some companies, including a number of high value fraudulent claims. The government notes that fraudulent companies do not typically employ many people or pay much PAYE or NICs (as you might expect), and so this measure should help in targeting these fraudulent claims. However, the question is whether it will impact some genuine commercial companies with UK R&D activity.
Whilst staff costs will form the largest component of most R&D claims, a number of claimant companies in the start-up stage (i.e. start-up tech and life sciences companies) may have relatively low employee costs. Some key personnel may not be on the payroll in the early stages or may be remunerated through share awards. However, these companies may be incurring other types of eligible R&D expenditure, such as on specific R&D activities that they subcontract out, or materials consumed in the R&D work. Genuine commercial companies are not the intended target of this measure, but without a “motive” test to restrict its application to artificial arrangements, they may be caught nonetheless.
Read more on the Autumn 2018 Budget
Further analysis on the key areas:
