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Autumn Budget 2018 – Impact on businesses

Temporary increase in the AIA
Legislation will be introduced in Finance Bill 2018/19 to temporarily increase the annual investment allowance (AIA) limit to £1,000,000 from 1 January 2019 for two years.

Transitional rules will apply where a business has a chargeable period that spans either of:

– the operative date of the increase to £1,000,000 on 1 January 2019, or
– the operative date of the reversion to £200,000 on 1 January 2021.

Capital allowances for structures and buildings
The government will introduce a new Structures and Buildings Allowance (SBA) for new non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of two percent on a straight-line basis.

Businesses that incur qualifying capital expenditure on structures or buildings used for qualifying activities will be able to claim the SBA over a 50 year period to encourage investment in the construction of new structures and buildings and the improvement of existing ones. The SBA will be allowed as a deduction from profits at an annual rate of two percent. The relief will be available to businesses chargeable to income tax and companies chargeable to corporation tax.

The 2% writing down allowance will be at a flat rate, calculated on the amount of original construction expenditure. There will not be a system of balancing charges or balancing allowances on a subsequent disposal of the asset. Instead, a purchaser will continue to claim the annual allowance of two percent of the original cost. This is intended to ensure that the cost of construction and renovation will be relieved over an average life of buildings. The amount eligible for relief will not be increased where a structure or building is purchased and where it has appreciated in value as this does not represent the cost of construction.

Relief will not be available for structures or buildings where a contract for the physical construction works is entered into before 29 October 2018. For speculative building and those structures or buildings constructed ‘in house’, relief will not be available where the construction activity began before 29 October 2018.

Anti-avoidance rules will apply to prevent manipulation of these rules.

Further details of the new relief can be found in HMRC’s technical note Capital allowances for structures and buildings

First-year allowance for electric charge-points
The 100% first year allowance for expenditure incurred on electric charge-point equipment is to be extended for a further four years. The allowance will expire on 31 March 2023 for corporation tax purposes and 5 April 2023 for income tax purposes.

Capital allowances: clarification of allowances for costs of altering land
Finance Bill 2018/19 will include provisions to clarify which expenditure on altering land may qualify for capital allowances for the purposes of installing plant or machinery. Allowances are intended to relieve the cost of altering land necessary to install only plant or machinery eligible for capital allowances. They are not intended to relieve the cost of altering land to install assets (most buildings and structures) that are ineligible for capital allowances.

This change will have effect for claims on or after 29 October 2018.

Ending enhanced capital allowances for energy and water efficient plant and machinery
The lists of energy efficient and environmentally beneficial technologies and products which are eligible for first-year allowances (also known as Enhanced Capital Allowances (ECA)) are being updated.

In addition, the first year allowance for products on the Energy Technology List (ETL) and Water Technology List (WTL), including the associated first year tax credit, are to end from April 2020 onwards. The first year allowance schemes currently allow 100% of the cost of an investment in qualifying plant and machinery to be written off against the taxable income of the period in which the investment is made, improving cash flow for businesses.

Capital Allowances: Reduction of rate of special writing down allowance
The rate of writing down allowance on the special rate pool of plant and machinery will be reduced from 8% to 6% with effect from 1 April 2019 for corporation tax and 6 April 2019 for income tax. For businesses whose chargeable period spans the applicable effective date, a hybrid rate will have effect for unrelieved expenditure in the special rate pool. The hybrid rate will be based on the proportion of a chargeable period falling before the change date and the corresponding proportion falling after the change date.

UK property income of non-UK resident companies
From 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax, rather than being charged to income tax as at present. This change will align with the end of tax year 2019/20 on 5 April 2020.

As part of these changes, a non-UK resident company:

– will not have a disposal event for capital allowances purposes (which could, for example, apply on transition to the new regime) and its income is neither taxed twice nor falls out of account – its expenses are relieved only once
– will not need to notify its chargeability to corporation tax in cases where its only UK income source is its UK property business provided that UK tax deducted at source from its rental income fully satisfies its liability to corporation tax on the profits of that business

There are also a number of transitional provisions so that a non-UK resident company:

– can carry forward any existing income tax losses to be offset only against future UK property business profits chargeable to corporation tax
– cannot deduct amounts on derivative contracts that are referable to the period before commencement, and which would not have been relievable under the income tax rules (for example, because they are capital in nature)
– can apply the Disregard Regulations (SI 2004/3256) to hedging derivatives with certain modifications to ensure the rules apply appropriately.

Change to the definition of permanent establishment
Currently, a non-resident company is liable to UK corporation tax only if it has a permanent establishment here. Certain preparatory or auxiliary activities, which are normally low value, such as storing the company’s own products, purchasing goods, or collecting information for the non-resident company, are classed as exempt activities and do not create a permanent establishment. A tweak to the existing legislation is designed to ensure that foreign businesses operating in the UK cannot take advantage of those exemptions by splitting up their activities between different locations and related companies.

Legislation has been included in Finance Bill 2018/19 to deny exemption from permanent establishment to a non-UK resident company for these activities if they are part of a fragmented business operation, for example if:

– that company, either alone or with related entities, whether foreign or UK, carries on a cohesive business operation, either at the same place, or at different places in the UK
– at least one of them has a permanent establishment where complementary functions are carried on
– the activities together would create a permanent establishment if they were in a single company.

This change will have effect for companies from 1 January 2019. Where an accounting period straddles that date the provision applies to that part of the company’s accounting period that falls after that date.

Corporate capital loss restriction
The government will legislate in Finance Bill 2019/20 to restrict companies’ use of carried-forward capital losses to 50% of capital gains from 1 April 2020. The provisions will include an allowance that permits companies unrestricted use of up to £5m capital or income losses each year, meaning that 99% of companies will be financially unaffected. A consultation paper was published on 29 October 2018 and draft legislation will be published in summer 2019. An antiforestalling measure to support this change will have effect on and after 29 October 2018.

Preventing abuse of the R & D tax relief for SMEs
Finance Bill 2019/20 will introduce a limit on the amount of payable tax credit that can be claimed by a company under the Research & Development (R&D) SME tax relief. The limit will be set at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period. The change will have effect for accounting periods beginning on or after 1 April 2020. Any loss that a company cannot surrender for a payable credit can be carried forward and used against future profits. HMRC will undertake a consultation on this proposed change.

Digital Services Tax
From April 2020, the government will introduce a new 2% tax on the revenues of certain digital businesses which derive value from their UK users. The tax will:

– apply to revenues generated from the provision of the following business activities: search engines, social media platforms and online marketplaces;
– apply to revenues from those activities that are linked to the participation of UK users, subject to a £25m per annum allowance;
– only apply to groups that generate global revenues from inscope business activities in excess of £500m per annum; and
– include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins.

The government will consult on the detailed design of the Digital Services Tax and legislate in Finance Bill 2019/20.

Retail Gift Aid reducing the frequency of letters to donors
The government will introduce a change to the Retail Gift Aid scheme from April 2019, relaxing the requirement to issue letters annually to donors. Charities will be able to choose to issue letters once every three years rather than every year, where a donor’s total donations in a tax year are worth less than £20.

Increases to charities’ small trading exemption limits
The small trading tax exemption limits for charities that apply to trading that does not relate to a charity’s primary purpose, are to be increased from April 2019. The new limits will be as follows:

– annual charity income under £32,000: maximum non-primary purpose trading is £8,000
– annual charity income between £32,000 and £320,000: maximum non-primary purpose trading is 25% of income
– annual charity income over £320,000: maximum non-primary purpose trading is £80,000

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