Draft Finance Bill 2019-20—Tax analysis

Tax analysis: The government has published draft provisions to be included in Finance Bill 2019–20 together with accompanying explanatory notes, responses to consultations and other supporting documents. This analysis brings together the key tax provisions by topic and explains the changes being made.

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The government has published draft provisions to be included in Finance Bill 2019–20 (FB 2019–20) together with accompanying explanatory notes, responses to consultations and other supporting documents. The consultation on the draft legislation will run until 5 September 2019. FB 2019–20 is expected to be introduced to Parliament in autumn 2019 (after the Budget) and to receive Royal Assent in spring 2020.

The majority of the provisions were previously announced but there were some new announcements relating to:

The following provisions apply with immediate or retrospective effect:

BUSINESS AND ENTERPRISE

Digital services tax

As announced at Budget 2018, and following a government consultation on the detailed design and implementation of the rules that ran until 28 February 2019, FB 2019–20 will include legislation introducing a new 2% tax on the revenues of certain digital businesses.

The new digital services tax (DST) is being brought in pending reform at the international level to ensure that the amount of UK tax certain large digital businesses pay is reflective of the value they derive from the participation of their UK users. The government has made it clear that the DST is intended to be a temporary measure and has confirmed its commitment to the ongoing G7, G20 and OECD discussions on potential reforms to the international tax system, which is currently perceived as incapable of taxing these still relatively new forms of business effectively.

The DST will be payable annually and will:

  • apply to revenue earned from 1 April 2020 by businesses providing the following to UK users: search engines, online marketplaces (with an exemption for financial and payment service providers), social media platforms and any associated online advertising business—any revenue connected to the business activity will be within the scope of DST regardless of how the platform is monetised
  • only apply to groups with global revenues from these digital activities of more than £500 m a year, of which more than £25m is derived from UK users—revenue is derived from UK users if it arises from a UK user (ie someone normally located in the UK) using the platform or, in respect of advertising revenues, if the advertisement is intended to be viewed by a UK user
  • treat 100% of the revenue from a transaction as being derived from UK users where one of the parties is a UK user, but reduce this to 50% where the other user is in a country with a similar tax to DST—this is intended to prevent double taxation
  • apply a tax rate of 2% to revenues derived from UK users, subject to an allowance for the first £25m
  • include a safe harbour provision to ensure the DST does not have a disproportionate effect on certain businesses with low operating margins, and
  • be reviewed in 2025, together with a review of progress made in international discussions on the future of corporation taxes

For background on the DST and commentary on the government consultation on the design and implementation of the proposed rules, see News Analysis: Exploring the consultation on the design and implementation of a digital services tax.

The government has published a policy paper, draft legislation, explanatory notes and draft guidancetogether with the outcome of the previous consultation. HMRC will publish updated guidance later in 2019.

Corporate capital loss restriction

As announced at Budget 2018 and following a government consultation that ran until 25 January 2019, FB 2019–20 will include a measure to restrict companies’ use of carried-forward capital losses. These will be restricted to 50% of the capital gains arising in an accounting period, subject to an allowance (a ‘deductions allowance’) permitting unrestricted use of up to £5m of capital or income losses per year.

The new restriction will not apply to in-year capital losses—these will continue to be available to be offset in full against capital gains made in the same year.

As a result of the previous consultation the government has decided to implement the new restriction by incorporating it within the rules on the corporate income loss restriction (CILR) introduced from 1 April 2017 (see Practice Note: Corporation tax loss relief for carried-forward losses). The £5m annual allowance in the CILR will be amended so that it includes capital as well as income losses. Mechanics such as the definition of a group and the method for allocating deductions allowance between group members for the purposes of the new rules will therefore follow the existing provisions in the CILR. The targeted anti-avoidance rule applying to the CILR will be extended to cover the new capital loss rules.

Companies will be able to access the full £5m deductions allowance where they have one-day accounting periods, including where this happens as a result of the provisions affecting capital gains of non-residents that were introduced in Finance Act 2019 (FA 2019) (see Practice Note: Non-residents and tax on chargeable gains from 6 April 2019—gains and UK immovable property—Compliance—filing and payment window).

The new restriction will not apply to:

  1. the offset of Basic Life Assurance and General Annuity Businesses (BLAGAB) losses against BLAGAB gains
  2. ring fenced allowable capital losses arising in certain UK extraction activities of oil and gas companies
  3. real estate investment trusts (REITs) where the capital losses are attributable to property income distributions

The measure will apply to carried forward capital losses that are used to offset gains accruing on or after 1 April 2020. Anti-forestalling measures were announced at Budget 2018 and took effect from 29 October 2018, to prevent companies from artificially accruing capital gains before the new rules are due to come into effect. The anti-forestalling provision is expressed as a purpose test and comes into effect where a company enters into arrangements on or after 29 October 2018 with a main purpose of securing a tax advantage by reason of the capital loss restriction not having yet come into effect.

For information on the original consultation, see News Analysis: Budget 2018—corporate capital loss restriction.

The government has promised ‘detailed guidance to assist companies’, and is still considering whether to include specific provision for insolvent companies.

The government has published a policy paper, draft legislation and explanatory note together with the outcome of the previous consultation.

Changes to protect tax in insolvency—HMRC to become preferential creditor

As announced at Budget 2018 and following a government consultation from 26 February to 27 May 2019, FB 2019–20 will, with effect for business insolvencies (whether of a company, an individual or a partnership) that commence on or after 6 April 2020, make HMRC a secondary preferential unsecured creditor (moving HMRC up from a non-preferential unsecured creditor) in respect of income tax, employee National Insurance contributions (NICs) and student loan repayments collected through PAYE, construction industry scheme deductions, VAT and any penalties or interest arising from such taxes. The amendments will be made to the Insolvency Act 1986, the Bankruptcy (Scotland) Act 2016 and by regulations (although a draft of the regulations has not yet been published).

The rationale for the new rule applying only to these taxes is that, at least according to HMRC, these are taxes that are paid by customers and employees and are only temporarily held by a business and should (as intended) fund public services rather than be used to satisfy other creditors. Taxes which are the liability of the business itself (principally, corporation tax and employers’ NICs) are not included within the new rule and in an insolvency these taxes will still rank equally with other unsecured creditors.

The most contentious point during the consultation process was the commencement date of the new provisions. Some respondents to the consultation argued that the new priority rule should only apply to tax debts which arose after 6 April 2020. Some also argued that the rule should only apply to debts which were less than 12 months old. HMRC has rejected both of these proposals. The legislation will apply to all business insolvencies which commence on or after 6 April 2020 regardless of when the debt was incurred. There will be no time limit on the age of the debt which will fall within the new rules.

For information on the original consultation, see News Analysis: HMRC’s new preferential creditor status—impact on insolvency practitioners.

The government has published a policy paper, draft legislation and explanatory notes together with the outcome to the previous consultation.

Share loss relief and relief for loans to traders

Share loss relief (in section 131 of the Income Tax Act 2007 (ITA 2007) and section 68 of the Corporation Tax Act 2010) allows capital losses which arise in respect of shares to be set against income providing certain conditions are met (see Practice Note: Share loss relief on disposal of shares). Relief for loans to traders (in section 253 of the Taxation of Chargeable Gains Act 1992) provides capital loss relief for loans to traders that cannot be repaid, again subject to conditions (see Practice Note: Relief for losses on loans to traders).

On 24 January 2019, the European Commission published infringement decisions (see: EC fact sheet, section 15) stating that both provisions constitute unjustified restrictions on the free movement of capital, as current legislation effectively restricts relief to UK businesses.

FB 2019–20 will widen the share loss relief rules so that the relief can apply to shares in a trading company that carries on its business anywhere in the world, while relief for loans to traders will apply to borrowers resident anywhere in the world.

Both changes will have retrospective effect to the date of the publication of the EC infringement decisions on 24 January 2019.

The government has published a policy paper, draft legislation and explanatory notes for the share loss relief measure and a policy paper, draft legislation and explanatory notes for the loans to traders measure.

Income tax relief and the enterprise investment scheme approved knowledge-intensive fund

As announced at Budget 2018, FB 2019–20 will amend ITA 2007, s 251 which deals with approved investment funds for enterprise investment scheme (EIS) purposes. Going forward, such funds will be required to focus on investing in ‘knowledge-intensive companies’, as defined in ITA 2007, s 252A.

The draft legislation gives such funds a longer period to invest fund capital—50% of funds must be invested with one year of fund closing and 90% within two years, whereas currently, 90% must be invested within one year.

An investor in an approved fund can offset EIS income tax relief against income tax liabilities in the tax year before the fund closes, or in the tax year before that.

Subject to state aid approval, these changes will take effect from 6 April 2020.

The government has published a policy paper, draft legislation, explanatory notes and draft guidelines.

Income tax and corporation tax rules for spreading transitional adjustments on new lease accounting

FB 2019–20 will include provisions to ensure that the spreading rules contained in schedule 14 to the Finance Act 2019 (FA 2019) apply to all lessees adopting IFRS 16 for any period of account. FA 2019, Sch 14 amended existing tax rules so that they continued to work as originally intended from the date when lessees were required to adopt IFRS 16 (the new accounting standard for leases).

The measure will apply for periods of account beginning on or after 1 January 2019. This is the date on which entities applying IFRSs or FRS 101 are required to adopt IFRS 16.

For the background to this provision, see News Analysis: Legislation day: Draft Finance Bill 2019—Business and enterprise: Accounting changes for leasing.

The government has published a policy paper, draft legislation and explanatory notes.

EMPLOYMENT TAXES

Off-payroll working in the private sector from 6 April 2020

As announced at Budget 2018, the government is pressing ahead with its plans to apply to private sector clients (other than those which are ‘small’), rules which will require such clients to operate the UK ‘off-payroll working’ rules in Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and related NICs legislation. Until now these rules (IR35) have only applied, outside the public sector, to the intermediary (usually, but not always, a company) which provides the services of the relevant off-payroll worker to the end client. The revised rules will now require, where they apply, the end client to assess whether the worker would be an employee if that person were working directly for the end client, instead of being contracted to work for the intermediary. Shifting the IR35 exposure so that it falls on the end client creates a significant extra compliance burden for those using services provided by workers who act via personal service companies and other intermediaries.

In March 2019, a consultation document was released regarding a number of related matters (such as the meaning of a ‘small’ business for these purposes and improving procedures for determining the tax status of workers, which is a very fact-sensitive question). Where a ‘small’ end client engages a worker, responsibility for deciding whether the IR35 legislation applies and, if it does, for paying the relevant income tax and NICs in respect of that worker’s activities, will remain with the intermediary under the original IR35 rules.

This measure will take effect from 6 April 2020.

The government has published a policy paper, draft legislation and explanatory notes together with a detailed outcome to its March 2019 consultation.

ANTI-AVOIDANCE

Tax abuse using company insolvencies

As previously announced and following a government consultation from 11 April to 20 June 2018 and the summary of responses published on 7 November 2018, FB 2019–20 will enable HMRC to issue joint liability notices to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for the tax liabilities of a company (or to make members or shadow members jointly liable for the tax liabilities of a limited liability partnership (LLP)) where the company or LLP is subject to, or there is a serious possibility of it being subject to, an insolvency procedure (including liquidation or administration).

The new measures will apply in three circumstances.

The first is when the company/LLP has entered into tax avoidance arrangements or engaged in tax evasive conduct.

Tax avoidance is defined by reference to various anti-avoidance rules, including (but not limited to) the general anti-abuse rule (GAAR), ie arrangements in respect of which a final counteraction notice has been given after considering the opinion of the GAAR advisory panel, DOTAS arrangements in respect of which an accelerated payment notice can be given under section 219(5) of Finance Act 2014 and arrangements in respect of which a follower notice has been given and not withdrawn.

Tax-evasive conduct is defined as (i) giving deliberately false returns, claims, documents or information to HMRC, (ii) or deliberately withholding information with the intention of causing another person to give HMRC any false return, claim, document or information and (iii) deliberately failing to comply with an obligation to notify a liability to tax (as required in Table 1 in para 1 of Schedule 41 to Finance Act 2008).

The second is where the company has incurred a penalty (or is subject to penalty proceedings before the First-tier Tax Tribunal (FTT)) under specified tax avoidance provisions, such as the GAAR, DOTAS or the facilitation of avoidance or evasion rules.

The third is where there has been repeated insolvency or non-payment of tax. Broadly, this is defined as two or more instances where a company (or a related company) has gone into insolvency in the last five years and where there were unpaid tax liabilities of more than £10,000 and where that unpaid liability exceeded 50% of the amount owing to creditors.

HMRC can use the new power in cases where a company/LLP is subject to an insolvency procedure (including companies/LLPs which have been wound up or struck off) or where there is a serious risk that it will be subject to such a procedure. A notice can be issued to any person who is or was a director (including a shadow director) or a participator of the company, or a member or shadow member of an LLP, and who was responsible for the company’s conduct, enabled or facilitated it, or benefited from it.

Where a joint liability notice is given, the individual and the company/LLP are made jointly and severally liable for the debt, unless the company/LLP no longer exists, in which case the individual is wholly responsible for the debt (along with any other individuals that have also received a joint liability notice). There is an appeal mechanism against a notice issued under these provisions.

The above measures take effect from Royal Assent to FB 2019–20 and apply to tax periods ending, and to facilitation penalties determined and issued, after that date.

For information on the summary of responses (published on 7 November 2018) to the original consultation on tax abuse and insolvency, see News Analysis: Exploring HMRC’s response to their consultation on tax abuse and insolvency.

The government has published a policy paper, draft legislation and explanatory notes.

Stamp taxes on securities—extension of market value rule to transfers of unlisted securities to connected companies

As announced at Budget 2018 and following a government consultation on aligning the stamp duty and SDRT consideration rules that ran from 7 November 2018 until 30 January 2019, FB 2019–20 will extend the market value rule for stamp duty and SDRT purposes to transfers of unlisted securities to connected companies (ie where the transferor is (or is the nominee for a person that is) connected with the transferee company) but only where some or all of the consideration consists of the issue of shares.

Unlike the market value rule that applies to transfers of listed securities to connected companies that was introduced by FA 2019, ss 47 and 48, this extension of the market value rule to transfers of unlisted securities cannot apply where no consideration is given at all. It can only apply where consideration is provided and it includes an issue of shares. Unlisted securities is defined as those securities that are not listed securities (within the meaning of that definition as it is used for the purposes of the market value rules in FA 2019, ss 47 and 48).

HMRC has also published a summary of responses to the consultation. In that response, HMRC states that at this time it will not be taking forward any of the other proposals made in the consultation. Consequently:

  • it will not extend the market value rule (for listed or unlisted securities) to connected party transfers where the transferee is not a company (see paras 42 and 45 of the summary of responses)
  • it will not align the definitions of consideration for stamp duty and SDRT (see paras 53 and 56 of the summary of responses), and
  • it will not align the stamp duty and SDRT rules on contingent, uncertain and unascertained consideration (see paras 66 and 71 of the summary of responses)

The extended market value rule will apply for stamp duty purposes to instruments executed on or after Royal Assent to FB 2019–20 and for SDRT purposes to agreements to transfer that are made (or that become unconditional) on or after Royal Assent to FB 2019–20.

For information on the original consultation, see News Analysis: Exploring the stamp taxes on shares consideration rules consultation.

The government has published a policy paper, draft legislation and explanatory notes (clauses 1 and 2)together with the outcome of the previous consultation.

Stamp taxes on securities—amendments to FA 1986, s 77A

Although not pre-announced, FB 2019–20 will make amendments to section 77A of Finance Act 1986 (FA 1986), which disqualifies certain arrangements from the stamp duty relief provided by FA 1986, s 77.

FA 1986, s 77 provides relief from stamp duty for instruments transferring shares in one company (the target) to another company (the acquiring company) where the acquiring company issues shares as consideration for the transfer to all the shareholders of the target company. FA 1986, s 77A prevents the relief from applying where arrangements are in existence at the time the instrument is executed for a change of control of the acquiring company (referred to as the ‘disqualifying arrangements’). The FB 2019–20 changes will ensure that stamp duty relief under FA 1986, s 77 can still apply if the person who obtains control of the acquiring company has held at least 25% of the issued share capital of the target company at all times during the period of three years immediately before the time when shares are issued by the acquiring company. The aim is for this change to prevent a stamp duty double charge from arising in respect of partition demergers (see paras 30 and 35 of the summary of responses to the consultation on aligning the stamp duty and SDRT consideration rules).

The measure will apply to instruments executed on or after Royal Assent to FB 2019–20.

The government has published a policy paper, draft legislation and explanatory notes (clause 3) and provided some commentary in its summary of responses to the consultation on aligning the stamp duty and SDRT consideration rules.

Technical and procedural amendments to the GAAR

As announced at Budget 2018, FB 2019–20 will include some technical and procedural changes to the GAAR, in particular introducing a new ‘protective GAAR notice’ to replace the existing rules on provisional counteraction notices (PCNs). The changes were not the subject of a previous consultation.

Under the existing rules, if a taxpayer appeals a PCN, HMRC has 12 months to complete certain procedural steps, otherwise the possibility of a challenge under the GAAR is lost. HMRC has seen cases in which taxpayers and advisers have deliberately withheld information so that HMRC has been unable to decide whether to proceed with a counteraction under the GAAR within the 12 month window.

The new protective GAAR notices will operate in broadly the same way as normal enquiry notices and will enable HMRC to carry out enquiries beyond the current 12 month limit. A protective GAAR notice must be given within the normal assessing time limit, but once it has been issued there will no longer be a time limit for HMRC to complete its enquiries. The removal of the PCN rules will also remove a potential anomaly whereby if HMRC decided not to (or was unable to) pursue the GAAR, it was arguably prevented from recovering the tax using non-GAAR technical arguments.

Minor changes are also made to the mechanics of pooling notices (including to the definition of ‘equivalent arrangements’) and binding notices to ensure that they operate in a way which is consistent with the new protective GAAR notices. In addition, a change is made to the way in which the 12 month period for assessing GAAR penalties is defined, so that it begins to run once any adjustments under the GAAR are final.

The changes will take effect from Royal Assent to FB 2019–20, although a protective GAAR notice cannot be given if a PCN has already been issued.

The government has published a policy paper, draft legislation and explanatory notes and a detailed technical note on the measures.

INTERNATIONAL

Deferral of corporation tax payments on EU group asset transfers

Earlier in 2019, the FTT ruled that the corporation tax rules regarding gain deferral on the transfer of capital assets and intangible fixed assets within a corporate group should be partly disapplied under EU law principles in relation to certain transfers to EEA-residents (see News Analysis: First-tier Tribunal relies on freedom of establishment to partially disapply UK rules on tax-free intra-group transfers (Gallaher Limited v HMRC)). This decision is under appeal but its current effect is to create, in some cases, an outright exemption from UK tax, rather than a mere deferral. This was never the intention of the legislation. A key reason for the FTT decision was that it felt unable to ‘read in’ to the existing UK legislation a mechanism for paying UK tax on the intra-group transfer on an instalment basis.

FB 2019–20 will include provisions that remedy this lack of an instalment payment mechanism.

These changes will have effect from 11 July 2019 for transactions occurring in accounting periods ending on or after 10 October 2018. Its existence will make it much harder for other taxpayers to run the arguments which have so far prevailed in the case referred to above.

The government has published a policy paper, draft legislation and explanatory notes.

PRIVATE CLIENT

The government has also published measures relevant to private client practitioners. These include:

For analysis on these provisions, see News Analysis: Draft Finance Bill 2019–20—Private Client analysis.

WHAT WAS NOT PUBLISHED?

In the written statement to Parliament by Jesse Norman MP (The Financial Secretary to the Treasury), it was confirmed that the government:

  • remains committed to reforming the penalty regimes for late filing and late payment across taxes (see: Tax penalties, interest and time limits—overview), and
  • is continuing to consider the responses submitted to the consultation on hidden economy conditionality (which proposed making compliance with certain tax obligations a condition of holding some licences, and introducing checks on applicants’ tax-registration status as part of licensing processes)

with the aim of dealing with these at a future fiscal event.

The government is also continuing to consider the responses to other consultations (such as the consultation on an SDLT surcharge for non-residents, see News Analysis: Reforming SDLT—the government consults on a non-UK resident surcharge) and will respond in due course. For more on the status of existing consultations, see: Tax—consultation and legislation tracker.

Filed Under: Finance Bill

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