Budget 2018: AIA and ER business tax reliefs extended
30 Oct 2018
Targeting business growth, the Chancellor announced increases to business tax reliefs to stimulate investment and innovation in the Budget, with the annual investment allowance hiked and entrepreneurs' relief retained although the qualifying rules have been strengthened
30 Oct 2018
The annual investment allowance has been increased on a temporary basis from £200,00 to £1m, until January 2021, a measure which will cost over £1bn over the two-year period.
Following strong lobbying against a possible abolition of entrepreneurs’ relief, the Chancellor Phil Hammond committed to retaining entrepreneurs’ relief, admitting that he received strong lobbying over the subject.
However, he tightened the rules stating that beneficiaries of entrepreneurs relief would have to be involved in the business for a minimum of two years in order to meet the qualifying criteria.
To support longer-term business investments, from 6 April 2019 the minimum period throughout which the qualifying conditions for relief must be met will be extended from 12 months to 24 months, ‘to stop abuse of the system and ensure it is used properly’, Hammond said.
Alex Henderson, tax partner at PwC, said: ‘Tucked away in the Budget detail is a significant change effective immediately to entrepreneur's relief which will affect smaller employee shareholders. Under the change the relief which is worth up to £1m on the sale of qualifying shares will be more narrowly targeted at employees who have at least a 5% stake in their company's profits and net assets; those who own less will not receive any relief.
‘The aim is to make the relief more targeted on those with significant stakes as being more entrepreneurial but it risks creating two tiers of employee shareholders which could have an overall disincentive effect for the business as a whole.'
Entrepreneurs’ relief gives a capital gains tax charge of 10% on qualifying disposals rather than the usual 20%, and has been a costly relief, costing around £2.5bn a year.
Patricia Mock, tax director at Deloitte said: ‘A tightening up on the rules relating to entrepreneurs’ relief will apply from 29 October 2018 to those who dispose of shares in a company where they have a shareholding of at least 5% and are employed or hold an office in the company.
‘Until now these conditions have had to be met for at least one year prior to disposing of the shares in order to claim the relief. This holding period will be increased to two years for disposals from today. Additional tests have been added in calculating the 5% holding, to ensure that relief is only available for true economic holdings in the company. The tests will now need to be met in respect of entitlement to assets and profit shares as well as number of shares and voting rights.’
This measure is estimated to raise around £1bn a year once the change takes effect.
Introduced with immediate effect from 29 October are two new tests concerning entrepreneurs relief relating to the definition of a ‘personal company’, requiring the claimant to have a 5% interest in both the distributable profits and the net assets of the company. The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be due.
Legislation will be introduced in Finance Bill 2018-19 to add two new conditions to the definition of an individual’s personal company in section 169S(3). Both conditions, as well as the existing ‘share capital’ and ‘voting rights’ conditions must be met. The new conditions require the individual to be beneficially entitled to at least:
- 5% of the company’s distributable profits
- 5% of its assets available for distribution to equity holders in a winding up
- References to the company include any other company which is a member of the same group.
Another measure announced is a targeted relief for IP (intellectual property) rich businesses. The IP-related tax relief follows a consultation earlier in the year on creation of a fund structure within the Enterprise Investment Scheme for investment in innovative knowledge-intensive companies. Through this relief, a minimum of 80% of funds raised must be invested in KICs, reducing the risk of inadvertent non-compliant investment threatening approved fund status.
The new approved fund structure will be rolled out in April 2020 at the same time the current approved fund structure is withdrawn, avoiding complication, the Treasury confirmed.
The new permanent structures and buildings allowance will provide billions of pounds of relief for firms investing in new buildings - businesses will be able to claim capital allowances on the construction costs, including land alteration and improvement cost, of all new, non-residential structures and buildings.
New non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018.
This relief will cost the Exchequer £790m over the current parliament until 2021/22, with further impact over the following two-year period equivalent to £1.06bn until 2023-24.
There will also be cut in the capital allowances - from April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to more closely match average accounts depreciation.
A new non-residential structures and buildings was also introduced, which will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018.
This addresses a significant gap in the UK’s current capital allowances regime, and will improve the international competitiveness of the UK’s tax system, the Chancellor said.
The Chancellor also announced a PAYE restriction on SME R&D tax relief which though designed to prevent abuse of the system.
To stop abuse of research and development (R&D) tax relief, from 1 April 2020 the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.
The government stated that ‘this will ensure the relief is robust against identified abuse, including fraud, following the prevention by HMRC of fraudulent claims worth £300m’.
The government plans to issue a consultation on this change.
Mark Tighe, CEO of Catax said: ‘This sends out a negative message to SMEs that wish to innovate and benefit from the tax relief. This anti-avoidance rule will impact genuine claims made by technology start-ups where their payroll costs are low.’
Entrepreneurs’ Relief minimum qualifying period: Budget 2018 issued 29 October 2018
Report by Sara White