Spring Budget 2020 - a balancing act in a time of change
Chancellor Rishi Sunak faced a huge challenge in today’s Budget. As well as delivering his first Budget Speech only four weeks after being appointed Chancellor, he needed to support the economy in the face of the threat of Covid-19, invest heavily in regions away from London, and prepare for the end of the Brexit transition period.
Tax measures were not the crowd-pleasing highlight of this Budget, but some important changes are being made which will affect the UK tax landscape for years to come.
No change to tax rates, or to allowances or thresholds
While the headline rates of income tax and corporation tax are not changing, the effective rate of income tax will increase for all income tax payers, as the personal allowance, and tax band thresholds are not to be increased next year, not even in line with inflation. Corporation tax will remain at 19% for at least the next two years. Of some comfort for employees will be the increase in the threshold for employee NICs to £9,500.
The likelihood of the UK becoming Singapore-on-Thames, with very low tax rates for business, seems remote at present. Indeed, tax rates at more or less their current level appear to be “baked in”.
“Change in our economy, change in our public services, change in the cost of living, change in our economic geography. This Budget delivers on that change.”
Entrepreneurs’ relief
The reduction or removal of entrepreneurs’ relief was widely trailed prior to Budget Day. In the event, the Chancellor has decided to retain it but reduce the amount of capital gains to which it can apply, from £10 million over an individual’s lifetime down to £1 million. So it is still useful for small business owners, and particularly minority shareholders, but its benefit is limited, effectively, to £100,000 of tax.
Of more concern is the use of anti-forestalling rules to counteract efforts to ensure that disposals were made before Budget Day. Many business owners who took sensible measures to make use of their entrepreneurs’ relief in full accordance with the law as it stood yesterday will be aggrieved that the tax treatment of those measures has been changed retrospectively.
“... we shouldn’t discourage those genuine entrepreneurs who do rely on the relief”
Other Measures for Business
A range of other significant announcements were made:
Infrastructure investment is to be incentivised through, among other measures, an increase in the rate of capital allowance for investment in structures and buildings from 2% to 3% with effect from 1 April 2020.
Investment in technology is also being incentivised through an increase in the rate for R&D tax credits from 12% to 13%.
Business rates have been slashed for 2020 for smaller businesses in the retail, hospitality and leisure sectors, which are likely to be particularly affected by the covid-19 virus. Businesses in these sectors occupying properties with rateable values of £51,000 or less will pay no business rates, while businesses which already qualify for exemption from business rates will receive a £3,000 cash grant.
Despite rumoured pressure from the US, the Government is pressing ahead with the introduction of a digital services tax. Businesses which generate revenues in excess of £500m from search-engines, social media or online marketplaces will be liable to pay 2% of their annual UK-derived revenue, with effect from 1 April 2020.
The changes to the IR35 rules for contractors will go ahead as planned with effect from 1 April 2020. These rules require large businesses to account for employment taxes on payments to certain contractors engaged through personal service companies.
A review is to be carried out on the UK funds regime during 2020, to include whether there are targeted and merited tax changes that could help to make the UK a more attractive location for companies used by funds to hold assets.
Finally, in what may be a worrying development, rules are to be introduced to require large businesses to notify HMRC of any tax treatment they apply which “HMRC is likely to challenge”. The Government is to consult on this measure but it is noteworthy that it is included as a revenue-raising measure in the Budget calculations.
If you would like to discuss any of the issues in this update or any other corporate tax issues, please contact Charles Goddard
“The introduction of SBA at Budget 2018 greatly enhanced the international competitiveness of the UK’s tax system”
About the author
Charles Goddard is a tax solicitor with over 20 years' experience of advising on the corporate tax aspects of a wide range of corporate and financial transactions. His clients range from multinational blue-chip institutions to private individuals.
Find out more about Charles and our corporate tax advice and consultancy services for business.