Skip to content
Thomson Reuters
Autumn 2018 Budget

Autumn 2018 Budget: Other business measures

Image credit: REUTERS/Phil Noble 

Also of significant interest were the changes announced to entrepreneurs’ relief, in particular the introduction of a new requirement of beneficial entitlement to 5 percent of distributable profits and net profits on a winding up, and the extension of the required holding period from one to two years. For companies with private equity investment in particular, the ramifications are significant and entirely disrupt current and commonplace planning techniques. To add insult to injury, the changes were announced with immediate effect and appeared under the banner of ‘unfair outcomes’, purporting to address ‘misuse’. Those who prefer clarity in tax planning, rather than subjective moralising, may justifiably take offence at this.

The announcement that the government will introduce with immediate effect is a general ‘market value’ rule for stamp duty on transfers between connected persons has also raised eyebrows, with concerns over potential collateral damage. As ever, the devil will be in the detail of the legislation when it appears.

(For Practical Law commentary on these measures, see Legal update, Autumn 2018 Budget: key business tax measures: owner-managed business and Stamp duty and SDRT on shares and securities, respectively.)

Read the reaction to the Autumn 2018 Budget from industry leading tax practitioners:

Barbara Allen, Stephenson Harwood LLP

For a brief moment, it looked like the Chancellor was going to announce the death of entrepreneur’s relief. Thankfully, he didn’t, but two new aspects have been introduced to the criteria to qualify for entrepreneur’s relief. One relates to the changes to the five percent economic interest test and the other relates to extended qualifying period. Of the two, the most relevant for share plans will be the longer qualifying period—which is currently twelve months, but will become two years.

For EMI options, this means that there will need to be a two-year gap between the grant of options and the sale of any shares acquired on the exercise of those options in order to benefit from entrepreneur’s relief. Changes to the five percent economic interest test should not impact EMI options as, currently, there is no requirement for shares acquired on the exercise of EMI options to meet the five percent test.

The main drivers behind the changes are to close abusive structures and to ensure entrepreneur’s relief is available to those that have “a true material stake in the business”. What it means in reality is that businesses will need to plan further in advance of a sale than they do at the moment. EMI remains an attractive offering despite this change and arguably delivers the most generous treatment of all the tax-advantaged share plans.

Also tucked away in the budget papers was an announcement relating to the tax treatment of termination payments. Whilst it had previously been announced that employer’s national insurance contributions would be payable on termination payments made from 6 April 2019 in respect of amounts exceeding £30,000, the Budget indicates that these reforms will now only take effect from April 2020—a welcome announcement for employers.

Brenda Coleman, Ropes & Gray LLP

The changes to the qualification requirements for entrepreneur’s relief may have a significant impact on some managers who will find that they no longer meet the requirements for entrepreneur’s relief for disposals after Budget day. As well as extending the period of time for which a relevant shareholding must be held from 12 months to 24 months, the shares must now also beneficially entitle the holder to at least five percent of the profits available for distribution to the equity holders of the company and on a winding up of the company, to at least five percent of the assets of the company available for distribution to equity holders.

Whether they meet the new criteria will need to be assessed on a case by case basis. In particular, in the private equity context, the impact of institutional investors’ holding of preference shares/loan notes alongside ordinary equity and the rights attaching to hurdle shares will need to be considered in the context of the availability of profits for distribution to the equity holders of the company.

One disappointing aspect is that the new rules do not grandfather existing arrangements. Perhaps this is because arrangements with anomalous economic rights which qualified for entrepreneur’s relief appear from the Press releases not to be considered to have been within the spirit of the legislation. However, HMRC have previously accepted (in the context of DOTAS) that such arrangements can further the commercial interests of the company.

As a result, managers who have previously rolled over a holding of shares in respect of which the ER qualification criteria were met into a new shareholding should therefore consider whether to elect to trigger a disposal on that exchange of shares or loan notes in order to claim entrepreneur’s relief. The election must be made on or before the first anniversary of 31 January after the tax year in which the reorganisation occurs.

Tim Crosley, Compass Group PLC

I was hoping to see more on the proposed ATAD-related changes to Chapter 9 of the CFC rules announced rather out of the blue in early July this year. It seems we will have to wait until 7 November, but at the moment I’m sure I’m not the only one who is struggling to reconcile the tenor of the current Chapter 5 SPF guidance with the statement in the July press release that “we do not expect that these changes will have a significant impact on the application of the UK CFC rules”.

How has it taken 10 years to change the conditions for ER on share disposals so that five percent really does mean five percent? Yes, this was a ‘loophole’, but one that has been well understood by and seemingly tolerated by HMRC for many years. In some circumstances structures were used to correct some of the anomalies which have arisen from the ‘cliff-edge’ nature of the five percent requirement (there is some recent reform here too of course)—and labelling the measure now as counteracting ‘identified abuse’ (with no grandfathering for existing structures in place) is a bit rich.  There will be some difficult conversations to be had here.

Finally, let’s talk about an ‘unfair outcome’ (sigh – why do we need another useless phrase like this?). Introducing a restriction on the use of brought forward capital losses to bring them ‘into line with the treatment of income losses’ forgets a basic point—capital losses and income losses within a trading business are different beasts. Significant disposals of capital assets within a trading business will typically be sporadic and whether these assets realise a gain or a loss can be driven by external factors outside of the control of the business, and may well not be linked to the overall health or stage in the life-cycle of the business. So, whereas the trading loss restriction may, overall, be a timing difference for a business which is returning to profitability over time, the restriction on capital losses will give arbitrary results and may well in practice become an absolute cost. How is that a fair outcome?

Caspar Fox, Reed Smith LLP

The lack of a five percent economic requirement for entrepreneurs’ relief has always felt incongruous. So that change is not surprising from a technical perspective, and it makes the use of EMI options even more attractive where available. However, I was still not expecting that change or the extension of the share-holding period to two years. There have been concerns about the cost of the regime, but I was under the impression that the government had got comfortable with its scope. That impression was strengthened by the most recent amendment to the regime being a favourable one—to address the cliff-edge effect of dilution below five percent.

By contrast, the announcement of a digital services tax (DST) was well flagged in the press. The Chancellor has stated that the tax will only apply “until an appropriate long-term solution is met”. Presumably this means a true global solution? If so, expect the DST to stay on our statute books for a long time to come: a true global solution will not exist without the US, whose mindset still seems to be that a digital services tax is an attack on US multinationals.

The decision to reinstate HMRC as a preferred creditor in an insolvency is a notable move. Limiting this status to taxes collected by businesses on behalf of other taxpayers feels logical, but even this partial reinstatement will not be welcomed by other creditors such as banks or trade suppliers. Hopefully this is not a sign of the government positioning itself for fall-out among businesses from a disorderly Brexit.

James Hill, Mayer Brown International LLP

The new digital services tax and the much-trailed changes to off payroll working in the private sector (bringing the private sector into line with the public sector) are amongst the headline grabbers. But there are numerous tax rises, many of which are framed as ‘clarifications’, which are likely to have a material impact on transactions and structuring. Managers in private equity backed companies will now likely struggle to get entrepreneur’s relief, putting an end to the common share capital structuring to ensure five percent votes and capital even where the economic interest was significantly below five percent. The changes to the tax on offshore receipts related to intangibles and UK sales are also noteworthy. It’s not all bad news though—the changes to the intangibles degrouping rules and are particularly welcome.

Colin Kendon, Bird & Bird

After years of expanding entrepreneurs’ relief in order to encourage businesses to locate in the UK, the Government decided to make it less attractive presumably on the basis that whilst not actually bad it is clearly now not quite so good.  The new two-year holding period for disposals after 5 April 2019 may result in more share sales being deferred using put and call option arrangements so as to allow sellers to qualify. The more significant change under the guise of ‘avoidance’ was the new five percent economic test with effect from Budget day which will now make it impossible to structure share-based awards to employees with a less than five percent economic interest so as to qualify for ER. Another solution would have been to simplify the legislation by removing the five percent test completely so as to align the tax treatment of shares sales with business assets.

Daniel Lewin, MJ Hudson

The government delivered its UK Budget for 2019 on 29 October 2018. Placed against the continuing uncertainty of Brexit and the difficult domestic political climate, the Chancellor sought to demonstrate government support for UK business through a raft of mostly smaller measures. For asset managers, it was a largely uneventful budget with a handful of changes potentially affecting portfolio companies and EIS funds.

Large technological multinationals were at the receiving end of several headline grabbing changes, most notably the introduction of a two percent digital services tax in 2020. However, the elephant in the room was undoubtedly reserved for Brexit—the Chancellor informed the House that a further budget may be required in the Spring depending on the outcome of the current negotiations. How that would affect this Autumn Budget is anyone’s guess.

Karl Mah, Latham & Watkins

This year’s budget marked the ‘end of austerity’, though the soundbite had little consequence in the context of the tax measures that were announced. It soon became clear that increased spending would be covered by the proceeds of Philip Hammond’s unexpected fiscal windfall, rather than any fundamental shift in tax policy.

A noteworthy announcement from a tax practitioner perspective was the introduction of an interim Digital Services Tax—an obvious revenue raising option for the Chancellor given discussions at EU level, and it will be important to compare the UK and European approaches once more detail has been published.

Entrepreneurs’ Relief conditions were also tightened to lengthen the requisite holding period and impose an additional requirement to be entitled to at least five percent of the distributable profits and net assets of the relevant company, changes which will have an impact on existing deal structures. Interestingly, Philip Hammond indicated in his speech that these changes were an alternative to abolishing Entrepreneurs’ Relief altogether: perhaps a coded message to Tory voters that a Labour administration might not have been so sparing. Speaking of messages, there was one that came across clearly in the Chancellor’s remarks—there is a desperate need for certainty in these uncertain times. Given Philip Hammond’s pledge to ‘take whatever action is necessary’ if Brexit negotiations fail, and the possibility of a Labour government, tax policy in the Spring Statement may look completely different.

David Milne QC, Pump Court Tax Chambers

The most interesting  proposal of those planned to be effective in 2019 is, to me, the measure to apply an income tax charge to royalties etc received in low tax jurisdictions in respect of intangible property, to the extent that those royalties etc are referable to the sales of goods and services in the UK; in the event of non-payment by the non-UK resident entity, it is promised that there will be powers enabling the collection of the tax from connected parties. This, if it works and is at a sufficiently high rate, should be welcomed by UK businesses who have long been undercut by unfair competition.

This is part of a series of measures (in particular, the Diverted Profits Tax, changes to the definition of ‘permanent establishment’ effective from 1 January 2019, and the new Digital Services Tax promised for 2020) aimed at multi-national groups which have long used, as standard, a variety of arrangements such as the Double Irish and the Dutch Sandwich, and special deals on the low taxation of royalties in Luxembourg and elsewhere, to keep their European tax down.

Of course, many will say that these measures are not just ‘interesting’ but ‘brave’, because most of the multinational groups concerned are based in Silicon Valley: we can confidently expect angry tweets from the White House promising dire retribution very soon!

The hope must be that the rest of Europe will soon implement similar proposals which have been put forward by the European Commission: and even that the OECD will bring forward its own measures to solve the tech company problem (and that pigs might fly).

One measure for which HMRC have been pushing for some time is the restoration of the Crown’s ‘preferred creditor’ status in insolvency proceedings, including bankruptcy. This will apply to taxes collected and held by businesses on behalf of other taxpayers, such as PAYE, VAT, employee NICs and CIS. Many companies and individuals have been using the insolvency process to escape tax debts. Although there are provisions dealing with directors of insolvent companies, there seems to be little at present to control this behaviour by individuals, who are normally discharged from bankruptcy after 12 months.

Jaspal Pachu, Freeths LLP

It will be interesting to see how the changes to the minimum qualifying period for Entrepreneurs’ Relief affect behaviour in relation to shares acquired (and EMI options granted) more than 12 months before, but less than two years before, 6 April 2019. Query also how the changes to the Entrepreneurs’ Relief “personal company” test will affect EMI options (which do not currently have to satisfy the requirements of section 169S(3) TCGA 1992). Assuming they do not, EMI options (for companies and individuals that qualify) will remain attractive. The proposed consultation on the introduction of a market value consideration rule for stamp duty/stamp duty reserve tax for connected party transfers is also interesting (and has existed for some time in the case of SDLT) but may adversely affect bona fide reorganisations where the strict conditions of the existing reliefs are not satisfied. Query also whether such a rule would apply on a liquidation of a subsidiary holding shares/securities (generally, subject to the operation of the “debt as consideration” rules, it would not for the purposes of the SDLT market value rule by virtue of the operation of section 54(4) of the Finance Act 2003).

Andrew Prowse, Fieldfisher LLP

The biggest tax-raising measure was the anticipated extension of the ‘off-payroll working’ rules to the private sector. Putting the onus onto the payer will encourage compliance and caution—there will be little to gain and much to lose by getting the analysis wrong.

The extension of the qualifying holding period for entrepreneurs’ relief to two years was unexpected. Whilst in most cases in won’t make a difference, any share restructuring will need to be planned well in advance.

More troubling is the change, effective from Budget Day, to the entrepreneurs’ relief personal company test, requiring a beneficial entitlement to fivepercent of the distributable profits and of net assets on a winding up, which is ‘characteristic of true entrepreneurial activity’. The use of the equity holders definition in these conditions, throughout what will become a two-year holding period, may be challenging and produce unexpected outcomes. The Government’s figures suggest precious little tax will be raised. The behaviour of some who, according to the government, have misused the relief may change, but it will leave other “true entrepreneurs” scratching their heads.

The arbitrary large tech tax may have taken headlines, but the expected tax take from the pithily-named new tax on offshore receipts in respect of intangible property held in low-tax jurisdictions, effective from 6 April 2019, is about the same, now to be a tax on the offshore entity rather than collected by withholding tax.

Finally, to end on an upbeat note, there was good news in the long hoped-for alignment of the IP degrouping charge rules with those for chargeable gains, so that SSE may eliminate IP degrouping charges.  We can expect to see more sales effected by a business hive-down to and sale of a newco (notwithstanding the partial reinstatement of tax relief on acquiring IP rich businesses).

And, just like the Chancellor, I haven’t used the B word….

Martin Shah, Simmons & Simmons

The extension of the scope of PE definition under domestic law was part of its package of measures targeting multinational businesses. The government’s concern is that multinationals have taken advantage of the exemption for auxiliary and preparatory activities by splitting their activities between related companies or locations, with a view to minimising their UK tax footprint. Surprisingly, given the strength of the tax avoidance rhetoric used in the release, the government costs the Exchequer impact of these proposals as negligible, which no doubt reflects the low value attributable to the (future) non-exempt functions that will be included within the UK PE. However, despite this apparent limited impact, the government is keen to emphasise that the new measures will be an additional aspect for HMRC to consider when undertaking its annual Large Business risk review.

Simon Skinner, Travers Smith LLP

This year’s budget, while on its face including a number of positive moves suggesting HMRC are listening (intangibles degrouping charges being exempted where the SSE would have applied for a CGT disposal; offshore royalty withholding tax not being a withholding tax and having a number of useful exemptions)—includes a number of measures which will cause additional pain, especially to SMEs.

  • To make the ER changes to the ‘personal company’ tests without warning, and applying them to disposals from Budget day, under a banner of ‘abuse’ or ‘misuse’ is, frankly, outrageous: HMRC discusses this planning in the DoTAS Guidance, and the OTS brought it to their attention a number of years ago.  This is a policy change—and that’s fine, but don’t label it as abusive planning.
  • The suggestion that ‘directors and others involved in tax avoidance’ may become liable for unpaid tax is deeply troubling, given the flexibility HMRC apply in determining avoidance. It’s to be hoped that this measure is appropriately contained to more egregious behaviour.
  • In a number of other areas, we get increased complexity. For example, market value imposition for listed shares transferred intra-group seems fairly narrow—but requiring market value for all (listed or unlisted) share transfers between connected parties will be a nightmare, with no real justification.
  • And DAC6 (the EU DoTAS rules) powers are in there. I wish I had more optimism for good sense there.

Ray Smith, Clyde & Co LLP

The Chancellor’s pre-Brexit Budget was all about ‘length’ (80-minute speech), ‘largesse’ (£30 billion of increased public spending), ‘leaked announcements’ (£20 billion for the NHS, extending IR 35 to the private sector, a new Digital Services Tax, business rates cuts, and increasing the personal allowance and higher rate threshold), ‘lavatory gags’, and a “leap to the left”.

There were though still a few surprises, such as the temporary increase in the annual investment allowance, a tax on plastic packaging, and restrictions on capital loss carry forward.

On a positive note, the Chancellor has ‘listened’ to industry in a number of areas. No increase in IPT; delaying the IR 35 measures until April 2020 and exempting small organisations; deferring the Digital Services Tax until April 2020 to allow more progress by the OECD and G20 recognising that a coordinated international response is the best option, and limiting it to large groups (annual revenues exceeding £500m) to protect start-ups; and ignoring calls to attack “fat cat entrepreneurs”, choosing instead to tighten up ER in a sensible way (extending the qualifying period to twoyears and introducing an economic ownership test).

This Budget is a major change in direction, and leap to the left. The huge increases in public spending; reforms to Universal Credit; increases in the minimum wage; abolishing PFI, and effective tax cuts, have meant the Chancellor could steal Labour’s thunder by announcing “austerity is over” and the Tories are now “the party for the many and not the few”.

Finally, it all depends on Brexit. The Chancellor has warned that if there is a no deal Brexit there may be another Budget and new tax and regulatory measures to protect the economy and allow the UK to compete more with the EU.

Michael Thomas, Pump Court Tax Chambers

The interesting point about this Budget is that it may provide some clues as to where HMRC sees the action as taking place both now and in the immediate future. The changes are pointers to where HMRC may seek to attack. Unsurprisingly, offshore avoidance is clearly a top target—and, for example the changes to Diverted Profits Tax show this is being actively deployed. For individuals the rules on entrepreneurs’ relief have been made slightly more restrictive. The new tax on plastic packaging with insufficient recycled content is a very welcome introduction.  The proposed one percent SDLT surcharge for non-resident purchasers seems pointless given that the current rates are so high already.

Eloise Walker, Pinsent Masons LLP

Death and taxes are famously inescapable. Certain US companies hoped to escape digital services tax, but alas in vain. Anyone in the business of search engines, social media platforms, and online marketplaces will not be feeling happy, especially at that two percent rate. They will be trying to work out how a ‘safe harbour’ alternative can possibly work, and how they are going to split out revenues to which the new tax does apply from those to which it will not.

However, the prize this Budget for “most aggravating proposal” must surely go to the changes to Entrepreneurs’ Relief, the worst part being its immediate effect which kills stone dead tax planning so common in the private equity world it barely counts as “planning”. The new test won’t be as simple as HMRC think to apply—what will happen in the typical waterfall where your rights kick in only once certain thresholds are passed? Expect lobbying soon.

A close second prize must be the news that HMRC are having another go at the old abolition of Crown Privilege—it does not extend to corporation tax but putting VAT, PAYE income tax and employee’s NICs, and CIS ahead of other creditors in corporate insolvencies from 2020 is bad enough. They gets points for ‘spin’ though—a nice bit of veiled bank bashing in there under the banner of ‘Protecting your taxes’.

In good news, many had to repress the urge to cartwheel down the corridors at the proposed reforms to the corporate Intangible Fixed Assets regime (with effect from 7 November 2018), notably the revision of the de-grouping charge rules so that no charge arises where it is a share disposal that qualifies for the substantial shareholding exemption. Hopefully this will mean no more having to explain the artificial distinction between pre and post 2002 IP assets whenever anyone does a hive down and sale.

Read more on the Autumn 2018 Budget

Further analysis on the key areas:


Outcome: Spring 2021 Budget—Practical Law’s summary Spring 2021 Budget—Practical Law’s predictions Autumn 2018 Budget: Employment Autumn 2018 Budget: don’t let tomorrow’s grey clouds spoil today’s blue(ish) skies Autumn 2018 Budget: IP, Media and R&D Autumn 2018 Budget: Property, Energy and Environment Autumn 2018 Budget: Digital Services Tax Autumn 2018 Budget: Finance and Financial Services