Budget Highlights

This note highlights some key points from the Budget which we think will be of interest to our clients.

Corporation tax

The corporation tax rate is to be reduced to 17% in 2020 (rather than 18% as expected). There will be significant changes to the use of losses, which will increase flexibility for smaller companies (in particular by removing the requirement to stream losses).
However, new restrictions will prevent carried forward losses from offsetting more than 50% of profits above £5m on a group-wide basis, which is likely to have a significant cash-flow impact for any business expecting to make greater use of carried forward losses.

New restrictions on interest expenses for larger businesses (£2m or more net UK interest expense) will apply a fixed ratio rule to prevent profit shifting, in line with OECD recommendations. Larger companies with substantial gearing will need to consider the detailed rules, which may make exceptions for commercially necessary high gearing.

Entrepreneurs’ relief (reducing CGT to 10%) is extended to cover long term investors in the equity of unlisted companies, offering a boost for business angels.

Companies which exploit IP may need to consider the new royalty withholding rules, patent box changes and amendments to the R&D tax credits regime.

Employment tax and incentives

The CGT rate reduction (to 20% higher rate and 10% lower rate) is good news for non-tax-advantaged employee incentives (unless you hold carried interest, which will remain taxable at 28% or 18%). However, a new lifetime gains cap of £100,000 for Employee Shareholder Shares effectively kills that method of incentivising senior management.

The announcement of a charge on loans paid through disguised remuneration schemes which are still outstanding on 5 April 2019, and the removal from November 2016 of transitional relief on investment growth for schemes that settle, will likely accelerate the careful unwinding of many EBT arrangements – entered into quite properly and before the introduction of the disguised remuneration legislation – where those involved have chosen not to take up the EBT settlement opportunity.

The change to the intermediaries rules for off-payroll workers in the public sector demonstrates further creep away from the original principles of IR35. It’s to be hoped that the digital tool being developed to help public bodies to determine the IR35 position of their contractors will be more even-handed than HMRC’s existing employment status indicator, as it is clearly intended to be referred to by private sector contractors as well.

From April 2018, termination payments in excess of £30,000 will attract NICs in the same way as they are currently charged to employment income tax.