Business Taxes

Consultation on corporate capital loss restriction

The Government will consult on the proposed reform of capital loss relief for corporates with a view to introducing a new restriction from April 2020. There is a mix of good and bad news in this proposed change but it has the benefit of achieving greater consistency with how income losses are relieved which in itself is welcome.

The proposed changes would extend the corporate loss restriction regime introduced from April 2017 to include a company’s capital losses.  The new regime, which would apply from 1 April 2020, would mean that the proportion of a company’s annual capital gains that can be relieved by brought-forward capital losses would be restricted to 50%. That is the bad news.

The upside however is that the proposed measures would give companies unrestricted use of up to £5 million capital or income losses each year before the restriction applied.

Whilst the impact is likely to be limited in practice for the majority of SMEs, those companies carrying significant capital losses and anticipating future gains may wish to consider the timing of proposed transactions and the potential impact of any restriction on the use of their capital losses

Off-payroll working in the private sector

Measures are to be introduced to extend reforms of IR35 to private sector businesses from April 2020. Similar changes were introduced in the public sector in 2017 which HMRC claims to have raised £550 million of income tax and national insurance in its first year.

This measure is aimed at individuals who provide their services via a company rather than as an individual via PAYE. HMRC state that their aim is to ensure that “two individuals working in the same way broadly should pay the same income tax and national insurance, even if one works through a company”. This is a laudable aim but the reality is that businesses will need help to interpret incredibly complex legislation.

The policy of charging additional tax and national insurance to individuals who provide their services via a personal services company was first introduced in 2000 and is known as “IR35”. Reforms were introduced in April 2017 which has resulted in those working  for public sector organisations such as the BBC and the NHS paying more tax and national insurance on their income.

HMRC has developed the Check Employment Status for Tax (CEST) tool to help businesses determine whether the new rules apply to a particular contractor or engagement. However, this is still a subjective area and it is not always easy to identify whether a business is caught by these rules.

HMRC has announced that these measures will not apply to the smallest 1.5 million businesses, but precise limits and thresholds have not been announced.

Tax incentives for capital expenditure by businesses

The Budget announcements contained some good news for businesses investing in non-residential buildings and structures.

First of all the chancellor announced a welcome increase in the Annual Investment Allowance (AIA) from £200,000 per annum to £1m per annum for the next two years.  Although the £200,000 can be a generous allowance for smaller businesses, the new allowance of £1m opens this up to larger investment in new plant and machinery and technology in order to improve outputs, with the expectation that this will have a knock-on effect on growth.

Research has shown that in the last ten years growth in UK Manufacturing has been limited to 1% - 2% per annum, as opposed to 4% - 5% in the years leading up to 2008. One contributing factor to this has been a lack of investment in innovation and new plant and equipment, hence being slower to adopt new technologies to improve efficiencies and processes.  The AIA goes hand in hand with R&D (Research and Development) tax relief, both of which should stimulate innovation and thus growth in the economy.

The raising of the limit to £1m means that significantly larger amounts can now be invested in new technologies and equipment that will attract up-front relief and should stimulate investment in that area.  Prior to this, the balance of any investment of over £200,000 would receive tax relief over a much longer period. Businesses need to take care however that the new allowance does not take effect until January 2019 so businesses who will exceed the current allowance might actually gain from delaying expenditure, depending on their exact plans, so do take advice!

And new non-residential structures and buildings will be eligible for a 2% straight-line capital allowance (called a “Structures and Buildings Allowance”) where contracts for physical construction works are entered into after 29 October 2018.

At present, companies account for the depreciation on buildings and structures, but do not receive any tax relief on this expenditure. The intention of this new relief is to stimulate investment in structures and buildings that are intended for economic activity. The relief will be limited to the original cost of construction or renovation, relieved across a fixed 50-year period, regardless of ownership changes. It should be noted that this relief is available for both UK and overseas structures and buildings, where the business is within the charge to UK tax.

It should be noted that SBA expenditure will not qualify for AIA, and is therefore an additional allowance.

This new relief is good news for those constructing buildings and structures for their businesses. It provides relief on costs that previously would only have been obtained upon the sale of the property and as such provides a tax benefit ongoing from investment in business premises.

The good news is partially offset by the reduction in the rate of capital allowances available through the special pool writing down allowances (which applies to “integral features” within buildings, such as heating and water systems). This has been reduced from 8% to 6% which will still give a full tax deduction for such costs but in future over a more extended period.

A disappointing result is that once the increased AIA expires in December 2020 these changes overall may well have the net effect of slowing down tax relief for investment in business infrastructure.