UK Budget 2020
Japan tax newsletter 13 March 2020
UK Budget 2020
The new UK Government's first Budget was announced on 11 March 2020 with the aim of providing "security today" and "prosperity tomorrow".
The nature of the economic challenge posed by the COVID-19 outbreak was a focal point of the Budget. The Chancellor announced extraordinary measures representing £7bn to support the self-employed, businesses and vulnerable people which is on top of a £5bn emergency response fund. Those measures are in addition to plans to provide an additional fiscal relaxation of £18bn to support the economy this year. The March Budget will be followed by a Spending Review (to be concluded in July) and another Budget, probably in November 2020.
There were a significant number of measures intended to support small businesses in the UK which are unlikely to have a significant impact on Japanese groups. For large Japanese multinational groups operating in the UK, some key tax highlights of the Budget include:
Corporation tax rate
It was confirmed that the rate of corporation tax will remain at 19% from 1 April 2020. This measure (cancelling the previously enacted rate reduction to 17%), will be made under a Budget resolution. As such, it is substantively enacted for UK GAAP and IFRS purposes on the passing of the resolution, although it will not be enacted for the purpose of US GAAP until Royal Assent. The rate should also stay at 19% for the following year.
Taxation of the digital economy
The Government has confirmed it will introduce a Digital Services Tax (DST) in the UK from April 2020. It will continue to participate in discussions on future reforms to the international corporate tax framework and will dis-apply the DST if an appropriate international solution is put in place.
The DST will be set at 2% of UK revenues and will apply to businesses that provide a social media service, search engine or an online marketplace to UK users. These businesses will be liable to DST when the group's worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users.
Research and development
The rate of research and development expenditure credit will rise from 12% to 13% from April 2020. The Government will consult on whether expenditure on data and cloud computing should qualify for R&D tax credits.
Large business notification
From April 2021 large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. This policy will draw on international accounting standards. The Government will consult shortly on the detail of the notification process.
Intangible Fixed Assets
Legislation will be introduced in Finance Bill 2020 so that for intangible assets not within the charge to corporation tax prior to acquisition, there will be no need to consider whether the intangible asset is a 'pre-Finance Act 2002' asset. However, the tax treatment for pre-Finance Act 2002 assets already within the charge to corporation tax prior to 1 July 2020 will be preserved. Certain transitional rules may apply from 11 March 2020.
Corporate capital loss restriction
The Government will go ahead with introducing a new corporate capital loss restriction that will restrict the use of carried-forward capital losses to 50% of the amount of annual capital gains. This will have effect from April 2020 and the amount of the annual deductions allowance, covering capital or income losses, will remain as £5m. There will be an anti-avoidance provision as well as the legislation of the anti-forestalling provision introduced on 29 October 2018.
The rate of the structures and buildings allowance (SBA) will be increased from 2% to 3% with effect from April 2020. The allowance provides relief for eligible construction costs for new non-residential structures and buildings, incurred on or after 29 October 2018, on a straight-line basis. There are also technical changes which have effect from 11 March 2020 which among other items are intended to prevent double relief when research and development allowances are available, allow relief for the first day that a structure or building comes into use and apportion expenditure for which an allowance can be made on a just and reasonable basis.
Surcharge on banking companies
Draft legislation has been published to introduce a new adjustment to profits for the purpose of the surcharge which applies to banking companies, including building societies, within the charge to UK corporation tax. Currently the effect of elections to transfer allowable losses from a non-banking company to a bank is disregarded where they are used to reduce future chargeable gains. The amendment extends this disregard to transfers of such allowable losses used to reduce in-year chargeable gains. The amendment has effect for allowable losses deducted from chargeable gains accruing on or after 11 March 2020.
UK funds regime
A consultation has been launched to explore whether changes to the tax treatment of companies used by funds to hold assets could make the UK a more attractive location for these companies. This is an initial component of a wider review of the UK's funds regime, which the Government will undertake during 2020. The wider review will cover direct and indirect tax, as well as relevant areas of regulation with a view to considering the case for targeted policy changes. It will also consider the VAT treatment of fund management fees and other aspects of the UK's funds regime.
Postponed import VAT accounting on EU and non-EU imports from 1 January 2021: The Government has confirmed that from 1 January 2021 (ie the end of the Brexit transition period) registered businesses will be able to account for VAT on goods they import from all countries, including the EU, on their periodic VAT return. Confirmation that call-off stock legislation will be introduced: Where businesses transfer stock to customers in other Member States, the legislation (already published in draft) will enable businesses to delay accounting for VAT until the stock is called off. This will remove the need for the supplier to register in the Member State of destination. The measure has effect from 1 January 2020.
Overall the focus has been to provide reassurance regarding the economic uncertainty that the COVID-19 outbreak brings, make what increases the Treasury can to keep the UK attractive for investment and R&D, while preparing for Brexit in the context of indirect taxation. EY can provide assistance to Japanese businesses in assessing the impact of these proposed changes on their operations, as well as supporting our clients who would like to contribute to the various consultations that have been announced.