At the time of writing this article (December 13, 2019) we wake in the U.K. to a new Conservative government with a sizeable working majority. Boris Johnson’s so-called gamble has paid off and the pound is soaring, as is the Financial Times Stock Exchange this morning. As we head towards what now will look to be a fairly bullish exit from the EU, only time will tell whether that positivity remains!
Turning to tax, what do we think this means for U.K. taxation in 2020, and what other significant events might have an impact on the tax landscape in 2020?
First of all, it is worth focusing on some of the key Conservative Manifesto pledges.
Rates of Tax
The Conservatives made pledges on corporate and income tax. The current rate on corporation tax is set at 19%. The Conservatives had intended to further decrease that rate to 17%, but, however, have stated that further reduction will not take place. That said, 19% is still a fairly attractive rate, particularly if the EU proceeds with introducing a common corporate tax rate in the coming years, which appears to remain a goal of some members.
The Conservative Party have given a commitment not to increase income tax rates and so the current rates of 10%, 20% and 45% look set to remain, at least for some time. They have also stated that they aim to increase the base limit rates for National Insurance to 9,500 pounds ($12,400) in the immediate term with further plans to align the rates to the basic rate of income tax at 12,500 pounds. This will give some financial relief to people in the lower income levels, but will also reduce complexity by having one common lower rate below which neither income tax nor National Insurance applies.
The Home of Entrepreneurship
There was much comment in the Conservative Manifesto about the entrepreneur and supporting investment and the tech sector. The Manifesto pledged to increase research and development (R&D) relief from the current 12% to 13%: we await more detail on this as there are in fact two R&D relief schemes in the U.K., one for small and medium-sized enterprises and one for large companies, so it will be interesting to see whether both schemes are enhanced.
Also, given that the U.K., like many countries, also has a patent box scheme to charge reduced rates of corporation tax on relevant income from patents, it will be interesting to see whether any enhancements are given for that scheme at the same time.
The Manifesto also raised the prospect of reforming the current Entrepreneurs’ Relief (ER). ER allows those who qualify (in general owners of trading businesses or 5% shareholder/directors of trading companies) who make disposals of all or parts of those businesses to have the resulting gains taxed at 10%, as opposed to the general current highest rate of U.K. capital gains tax of 20%.
What the Conservatives mean by reforming ER will be watched with much interest. Given that when ER was introduced it replaced Retirement Relief, one wonders whether they will wish to look at whether the replacement will be more focused on “retirement events” than day-to-day transactions as such, but no indication has been given that is the thinking.
Amendments have been made to ER in recent years to counter various tax planning mischiefs, for example in relation to goodwill, and so it may simply be something less radical. ER is a much-used relief for entrepreneurs in the U.K., so the reform will be very much watched with interest.
Interestingly, there is reference to helping workers in the “gig economy.” There has been a significant rise in the U.K. (as in many other countries) in self-employment, with people often working from home or out of technical hubs located in serviced offices. The resulting reduction in employees suffering tax deducted at source via the “pay as you earn” system will place significant pressure on government tax receipts.
There are already plans to extend the U.K. off-payroll rules (which place obligations on the payer to check the status of genuine self-employment) to the private sector from April 2020. Possibly the Conservatives are looking at some alternative approach to the off-payroll rules. This will also be watched with significant interest.
In the last decade we have seen much work undertaken by governments in developed countries and beyond, working closely with the Organization for Economic Cooperation and Development (OECD) and UN, to counter international and domestic tax evasion. The U.K. tax gap over that time has reduced from around 40 billion pounds to 35 billion pounds, which would suggest it is going in the right direction.
As with all announcements relating to fiscal matters, the Conservative Manifesto contained further commitments in this area.
The maximum prison term for serious tax evasion has increased to 14 years. We saw the announcement in 2013 of a five-fold increase in criminal tax prosecutions.
There is reference to a new Anti-Evasion and Avoidance Team. As HM Revenue & Customs (HMRC) has not long restructured its Fraud Investigation Service (FIS) it is unclear what this new team will look like. Perhaps it will be a new team within FIS rather than yet another more significant restructure, which could have negative effects. The author would suggest HMRC needs a period of consolidation rather than further change.
The answer may lie in reference to some sectors mentioned for special attention; construction, tobacco, insolvency and audit—the latter catches the eye. Will this be a new HMRC audit process?
Digital Services Tax
The Conservative Manifesto also confirms it will continue with the introduction of the U.K. Digital Services Tax (DST).
The DST will seek to tax social media, search engine and online marketplace companies, 3% on relevant income above 25 million pounds where the gross worldwide receipts are over 500 million pounds.
The DST is the U.K.’s response to the ongoing search to increase the levels of tax paid by the large tech companies, many of which are located in the U.S. Many European countries have also taken their own unilateral action or have their own plans, including France, Italy, Belgium, Poland, Hungary, Spain, Austria, and Czech Republic. Turkey also has its own plans. These countries are proceeding in this way as the OECD seeks to secure a more coordinated approach by way of its recent Pillar 1 and Pillar 2 proposals.
The recent flurry of activity between the OECD and the U.S. administration, including the U.S. Secretary to the Treasury Steven Mnuchin’s letterof December 3, 2019, shows that the matter is at least at the top of the International tax agenda. Whether the U.S. response is a hiccup or something more serious is yet to be seen, but one would hope that a sensible compromise can be found in 2020.
The OECD’s current proposals have been fairly well documented. Pillar 1 and the ”Unified Approach” essentially look to identify non-routine (what non-routine is has yet to be agreed) profit on activities in market jurisdictions. Where such non-routine profit exists, this will create a new nexus providing taxing rights to the market jurisdiction. An agreed formula will potentially be applied to calculate the liability in the market jurisdiction.
Pillar 2 seeks to ensure that branches and controlled foreign companies pay minimum levels of taxation and provides the tools to both tax, or reduce, deductions and also a “switch-over” approach allowing countries to move from an exemption to credit approach when providing relief from double taxation.
The unilateral action proposed by the various countries is particularly concerning as in many cases, the nature of the DST is such that will not be creditable against companies’ corporate tax position in their home country of residence.
Clearly, the new nexus approach and a part departure from the arm’s length principle is a fundamental shift in the international tax model. Indeed, this is, at least in public, the U.S.’s concern, as included in Steven Mnuchin’s letter.
We all watch with great interest, as many aspects of the OECD proposals could have implications for many companies beyond just the large well-known tech businesses; many countries are looking, or have already, introduced some sort of digital tax proposal.
We may also see more activity towards the wider regulation of crypto assets in 2020. 2019 has brought a number of clarifications, from both regulators and fiscal authorities. In the U.K., the Bank of England and Treasury provided more clarity as what sort of assets fall into the regulatory space, particularly those relating to securitization or where the assets are being promoted as Investment opportunities.
The EU 5th Anti-Money Money Laundering Directive comes into force from January 10, 2020, which will be transposed into U.K. law, and it is proposed that crypto to fiat currency money exchanges and wallet providers will be included within the “obliged entities” rules. This will require those organizations to collect relevant know your client (KYC) information on the underlying beneficial owners, and will go some way to making such investments or holdings transparent to the authorities.
Whilst some may see this as anathema to the whole concept of crypto assets, it will open the door to more traditional investors and entrepreneurs to participate and increase their stake. We are already seeing banks looking to start to offer their own exchange services, and expect this to gather pace. With that, the writer would expect the wider opportunities in areas such as fintech and wider digitalized businesses to start to look at crypto assets and tokenization aligned with distributed ledger technology and smart contracts to become more and more mainstream.
Finally, as the U.K. looks to leaving the EU, and given the Conservatives’ commitment to entrepreneurship, one wonders whether the Conservatives will look again at some of their relatively recent taxation policies, which seemed to be at odds with their Brexit intentions. In 2015 they significantly changed the rules for the taxation of asset managers, and in 2017 they changed the non-dom rules, to treat any U.K. resident non-dom as taxable on worldwide basis when they have been resident in the U.K. for 15 out of the previous 20 years, or were born in the U.K. with a U.K. domicile origin.
These policies, along with their continued tweaking of the property market where U.K. real estate is held by nonresidents, have all led to a significant number of entrepreneurial individuals leaving the U.K.
Whilst the Brexit policy would appear to be, at least in part, aimed at reducing immigration, the wider Conservative commentary on such matters would appear to point towards their wanting these people to come to the U.K., do business and create jobs. The aforementioned policies would seem to be at odds with that policy.
2020 looks likely to be an extremely interesting year. We expect to see the Conservatives driving ahead with their Brexit plans, armed with a very strong mandate from the public. It will be particularly interesting from the author’s perspective how those policies interact with wider taxation policy. Happy New Year to one and all!
Gary Ashford is a Tax Partner at Harbottle & Lewis LLP. He is also a Council Member of the Chartered Institute of Taxation and Vice President of CFE Tax Advisers Europe.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners