Tax Insights – January 2020

24th January 2020

The practice of tax law is always interesting but no more so than at the present time. A new government, Brexit, no publication of a Finance Bill in 2019 and no Autumn Budget in the pre-election period means that there is little certainty around which of the tax measures announced in the last year will come into effect in 2020. It has also made predicting the budget very tricky indeed. Which of its tax pledges will the Conservative Government implement in the next budget?

Certainly an interesting time, which is why we have put together a newsletter on Tax Insights.

This article leaves the predictions to others and focuses on those measures which have been announced and which we have every expectation will be implemented in 2020. Our look ahead in 2020 does not go into the detail of each and every measure, but if you are interested in a particular aspect of our summary, please do get in touch with either corporate tax partner Cathy Bryant or stamp duty land tax specialist and associate John Shallcross.

Business Tax Insights

The Digital Services Tax (DST) which was announced in the 2018 Autumn Budget and which is the cause of recent controversy at Davos, comes into effect on 1 April 2020 under current plans. DST applies to social media platforms, online marketplaces and search engines with a global revenue of £500 million or more on a group-wide basis. You will recall Chancellor Hammond’s comments that this would be a stop-gap arrangement to enable the UK to tax these businesses where they create value in the UK but have no physical presence in the UK. This is in advance of the international tax rules being amended to enable this to happen across jurisdictions.  In light of France putting their DST on hold and the OECD calling for a unified response on a digital tax, it remains to see how the Government will respond to the calls to delay the implementation of the tax.

1 April 2020 will also see the introduction of a restriction on the use of carried forward capital losses and it means that only 50% of net chargeable gains can be set off against any carried forward capital losses. The limitation is subject to the allocation of a group’s £5 million deductions allowance. The measure is an extension of the existing corporate income loss restriction regime to capital losses.

In an effort to prevent the abuse of the relief provided by the R&D Tax Credit regime, the repayable tax credit will be capped at three times a qualifying company’s PAYE and NIC (both employer and employee contributions). Note that the cap is based on the total of the payroll and not limited to just those employees involved in R&D work. Legislation on this is yet to be published so although it is intended to be effective from 1 April 2020, this measure may be slightly delayed.

On the property front, non-UK resident companies who do not have a permanent establishment in the UK and who derive income from UK property will be subject to corporation tax with effect from 6 April 2020.

In an effort to combat “missing trader” fraud in the construction sector, a domestic VAT reverse charge is to be applied to specified construction services with effect from 1 October 2020. This measure was delayed from 1 October 2019 following some heavy lobbying by the sector. The effect of the charge is to require the recipient of the services to account for the VAT paid on the services. It is business to business charge so that where the supply chain ends with a person, for example, the reverse charge stops with the last business in the chain. Certain services are exempted from the charge.

Employment Tax Insights

The biggest change for the sector in 2020 is the extension of the off-payroll rules to the private sector. Already in place in the public sector, the rules will apply where an individual provides services to an end client through (most likely) their personal services company and, if it were not for the contract between the end client and the personal services company, the individual would be deemed to be an employee for tax purposes. In these circumstances, the end client will be obliged to deduct and pay over the relevant tax to HMRC. The rules do not apply to companies within the small companies’ regime. Although the implementation of the rules is under review by the Government, it is anticipated that the rules will be implemented on 6 April 2020.

6 April 2020 sees the implementation of the new Class 1A employer NIC charge on termination payments (the first £30,000 being exempt) and on sporting testimonials (the first £100,000 being exempt). No employee NICs are payable on these payments. The reporting of Class 1A NICs must be made in real time.

Avoidance, Compliance, Disputes and Investigations

In a hard hitting anti-abuse measure, directors and other persons involved in tax-avoidance, evasion or phoenixism can be served with a joint liability notice by HMRC, making them jointly and severally liable for the tax liabilities of a company if there is a risk that the company may deliberately enter insolvency. The joint and several liability measure will apply from the date Royal Assent is given to the Finance Act 2020. HMRC is also introducing secondary preferential creditor status for specific taxes owed by a business in insolvency. This measure will apply from 6 April 2020.

More commonly known as DAC 6, the regulations implementing the disclosure of cross-border tax planning arrangements are due to take effect on 1 July 2020. The regulations require UK intermediaries to report to HMRC cross-border tax arrangements which show certain hallmarks. The information received from these reports will be shared with tax authorities in the other tax jurisdiction. Intermediaries include those who design and market cross-border arrangements as well as those who provide aid, assistance or advice in respect of such arrangements. In some circumstances the taxpayer will be obliged to make the report.

Stamp Duty Land Tax for Non-UK Residents

The Budget on 11 March 2020 is likely to say more about the proposed 3% extra SDLT for buyers of residential property who do not count as UK resident. It is possible that it will be brought in with immediate effect as the proposals are well advanced, with an earlier version (which had suggested a 1% surcharge) having been subject to consultation up to May 2019. The rules for individuals are on their face quite simple: if a buyer has spent fewer than 183 days in the last year in the UK then the new 3% surcharge would apply, though a refund would be available if they spend 183 days or more in the UK in the 12 months following the purchase. There are plenty of complications though, such as for purchases by companies or by trusts. There is a fuller explanation and an example in a piece posted on 25 November 2019 on John Shallcross’ SDLT Case Notes.

This bulletin has been co-written by Cathy Bryant and John Shallcross.

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