Spring Budget 2017—Business and Enterprise

09 Mar 2017

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This analysis is part of the Lexis®PSL Tax team’s summary of the Spring Budget 2017. Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.

Tax treatment of appropriations to trading stock

In order to address a perceived unfairness in the tax code that can be exploited for avoidance, the government is removing an ability for businesses to convert capital losses into trading losses with immediate effect.

Where a capital asset is appropriated to trading stock, there is a deemed disposal for CGT purposes at market value. Currently, however, businesses can elect for an alternative tax treatment which can be particularly advantageous where a capital loss would otherwise have arisen on the deemed disposal. In such a case, the effect of the election is to reduce the allowable loss to zero and to increase (by the equivalent amount) the market value of the asset which can be brought into account as expenditure in computing trading profit. Effectively, such an election converts what would be a capital loss into a more useful trading deduction that can be offset against the total trading profits of the business.

Draft legislation released alongside Spring Budget 2017 (together with an explanatory note) removes the ability to make such an election where an appropriation to trading stock would give rise to a loss for chargeable gains purposes, meaning that an allowable loss is crystallised when the appropriation takes place and remains within the chargeable gains rules. This change has effect for appropriations to trading stock made on or after 8 March 2017 (ie the date of Spring Budget 2017). This measure will be included in FB 2017.

Similar changes are also being made to the equivalent rules relating to assets within the charge to the annual tax on enveloped dwellings (ATED), with the result that the current ability to make an election in respect of the non-ATED related part of any loss is removed. Again, the change has effect from 8 March 2017.

In both cases, the ability to make an election where an appropriation to trading stock would give rise to a chargeable gain is unaffected by these changes.

See: Spring Budget 2017 (para 3.45), OOTLAR (para 1.24) and TIIN: Corporation Tax and Income Tax – Tax treatment of appropriations to trading stock.

Quarterly reporting—deferral for small businesses

As announced at AS 2016 and published in draft on 31 January 2017, FB 2017 will include measures forming part of the government’s ‘Making Tax Digital’ initiative. These include digital record keeping, changes to when and how businesses record accounting and tax adjustments, and a requirement to provide HMRC with summary tax data on a quarterly basis.

At Spring Budget 2017, the government announced a one year deferral for the implementation of these measures for unincorporated businesses, and landlords, with turnovers below the VAT threshold. This means that only:

businesses, self-employed people and landlords
with turnovers in excess of the VAT threshold, and
that pay income tax and Class 4 NICs

will be required to start using the new digital service from April 2018. This change will be made in regulations. There will also be a number of changes to the primary legislation in FB 2017, including new provisions to replicate existing income tax compliance powers so that they apply to the new digital requirements.

The measures generally take effect from Royal Assent (expected July 2017).

See: Spring Budget 2017 (para 3.39) and OOTLAR (para 1.47).

Simplified cash basis for unincorporated businesses

As previously announced and as part of tax simplification, the government is simplifying the cash basis for calculating taxable income. The cash basis allows small businesses to be taxed on the basis of receipts less payments of allowable expenses. The measures include:

increasing the general entry threshold to £150,000 and the exit threshold to £300,000 with effect from the tax year 2017–2018
simplifying the rules on capital and revenue expenditure from April 2017 (although 2017–2018 profits can be calculated using the old or new rules), and
extending the cash basis to unincorporated landlords with receipts of £150,000 or less from 6 April 2017

See: Spring Budget 2017 (para 3.40) and OOTLAR (paras 1.44 – 1.46).

Patient capital review

The patient capital review was launched by HM Treasury and the Department for Business, Energy & Industrial Strategy (BEIS) in January 2017 and forms part of the government’s consultation on building a modern industrial strategy. The terms of reference for this review did not previously include consideration of the tax measures linked with patient or long term funding for growing businesses, but the Chancellor today announced that the consultation to be launched in spring will extend to consider the tax reliefs aimed at encouraging investment and entrepreneurship. The announcement does not identify specific reliefs, but it is assumed that it would cover some or all of: EIS reliefs, SEIS reliefs, VCT reliefs, entrepreneurs’ relief and investors’ relief.

The final recommendations from the review will be presented to the Chancellor ahead of Autumn Budget 2017.

See: Spring Budget 2017 (para 3.13) and OOTLAR (para 2.5).

Research and development (R&D) tax review

Following a review of the R&D tax regime, the government will:

make administrative changes to the R&D expenditure credit (see Practice Note: R&D expenditure credit) to increase certainty and simplify claims, and
take action to improve awareness of R&D tax credits among SMEs (see Practice Note: SME R&D relief—tax credit)

See: Spring Budget 2017 (para 3.12) and OOTLAR (para 2.13)

Future developments

Lease accounting changes: HMRC published a discussion document in autumn 2016 on options for reforming the tax treatment of plant and machinery leases in light of the new International Accounting Standards Board leasing standard, IFRS16. The government has now announced that it will take this proposal forward with a consultation in summer 2017, with the intention of making legislative changes that will maintain the effect of the current rules. See: OOTLAR (para 2.12)

Measures pre-announced

The following corporation tax measures were previously announced and will be implemented unchanged, or with the minor changes described:

Non-resident companies chargeable to income tax and non-resident capital gains tax: as announced at AS 2016 the government will consult on the options for bringing non-UK resident companies within the charge to corporation tax. The Spring Budget 2017 announcement suggests that the consultation will be limited to non-resident companies that are currently subject to income tax on their UK taxable income and to non-resident capital gains tax on disposals of UK residential property. See: OOTLAR (para 2.19)
Corporation tax: reform of loss relief: as announced at Budget 2016 (see News Analysis: Creating a flexible loss relief regime), legislation will be included in the FB 2017 that will provide more flexibility on the types of profit that can be relieved by losses incurred after 1 April 2017 and also restrict the amount of losses than can be carried forward to 50% (of profits above £5m) from 1 April 2017. The draft legislation published on 26 January 2017 will be revised to include provisions for oil and gas companies and contractors. See: OOTLAR (para 1.17)
Clarification of tax treatment for partnerships: at AS 2016 the government announced that it would legislate in FB 2017 to clarify and improve certain aspects of partnership taxation (including legislation to ensure profit allocations to partners are fairly calculated for tax purposes) (see News Analysis: Splitting the pot—clarifying the tax on partnerships). Draft legislation was expected in early 2017 for consultation. The government has now announced that it intends to legislate in FB 2017-18. See: OOTLAR (para 2.3)
Patent box-cost sharing arrangements: as announced at AS 2016 and included in draft FB 2017 (clause 24), the government will legislate to ensure that a company entering into a cost-sharing arrangement is not disadvantaged, or advantaged, under the revised patent box rules introduced in Finance Act 2016. Following consultation, the legislation will be revised to narrow the definition of cost sharing arrangement and to better align payments. The provisions have effect for accounting periods starting after 1 April 2017. See: OOTLAR (para 1.22)
Substantial shareholding exemption (SSE) reform: as announced at AS 2016 and included in draft FB 2017, FB 2017 will remove the investing company requirement within the SSE, and provide a more comprehensive exemption for companies owned by qualifying institutional investors (see News Analysis: Draft Finance Bill 2017—substantial shareholding exemption). Following consultation, amendments have been made to the legislation in draft FB 2017 ‘to provide clarity and certainty’. The changes take effect from 1 April 2017. See: OOTLAR (para 1.16)
Northern Ireland corporation tax: as announced at AS 2016 and included in draft FB 2017 (clause 25 and Sch 9), changes will be made to the Corporation Tax (Northern Ireland) Act 2015 to open it up to all SMEs trading in NI to benefit (and prevent abuse); minor drafting improvements will be made. See: OOTLAR (para 1.18)
Venture capital schemes: as announced at AS 2016 and included in draft FB 2017 (clauses 15–17), the government is introducing three changes to the EIS, SEIS and VCT regimes, as discussed in News Analysis: Streamlining the tax-advantaged venture capital schemes and has confirmed it will be publishing a response to the Consultation on streamlining the tax advantaged venture capital schemes advance assurance service after the Budget. See: OOTLAR (para 1.5)
Social investment tax relief (SITR): Aas announced at AS 2016 and included in draft FB 2017 provisions published on 26 January 2017, the government has confirmed it will be making amendments to the SITR scheme to target the relief on younger, higher risk activities and to deter abuse. See: OOTLAR (para 1.4)
Museums and galleries: as announced at Budget 2016 and included in draft FB 2017 (clause 22 and Sch 8), a new tax relief will be introduced with effect from 1 April 2017, minor amendments will be made to allow for exhibitions which have live performances as part (but not the main focus) of the exhibition. See: OOTLAR (para 1.20)
Grassroots sport: as announced at AS 2015 and included in draft FB 2017 (clause 23), a new tax relief will be introduced with effect from 1 April 2017, minor amendments will be made to extend the meaning of ‘sport governing body’ to include its 100% subsidiaries. See: OOTLAR (para 1.21)