MJ Hudson’s Response to the Chancellor’s Budget

The Government yesterday delivered its 2018 Autumn Budget. Set against the continuing uncertainty of Brexit and the difficult domestic political climate, the Chancellor sought to demonstrate Government support for UK business through a raft of mostly smaller measures. For asset managers, it was a largely uneventful Budget with a handful of exceptions affecting fund portfolio companies and EIS funds. Large technological multinationals were at the receiving end of several headline grabbing changes, most notably the introduction of a 2% digital services tax in 2020. However, the elephant in the room was undoubtedly reserved for Brexit – the Chancellor informed the House that a further Budget may be required in the Spring depending on the outcome of the current negotiations. How that would affect this Autumn Budget is anyone’s guess.

The following note provides a brief overview of some of the key changes relevant to the asset management sector.

Entrepreneurs’ Relief

Entrepreneurs’ relief saw three modifications:

• For share disposals from 6 April 2019, the minimum period for which the qualifying relief conditions must be met will be increased from 12 months to 24 months.
• Effective yesterday, claiming shareholders must be entitled to at least 5% of both the distributable profits and the net assets of the company. Previously, the ownership requirement was limited to 5% of the ordinary shares and voting rights of the company, but no economic rights. This change will be unwelcome to investors in certain portfolio companies.
• Following on from the Spring 2018 consultation, revised legislation has also been published to enable individuals to crystallise a capital gain and benefit from entrepreneurs’ relief where their shareholding was at least 5%, but is diluted to below such level because the company engages in equity fundraising for commercial purposes. It is proposed that the gain can be frozen over at the 10% entrepreneurs’ tax rate and payment delayed until after an eventual sale of the company. The purpose of the measure is to incentivise entrepreneurs to stay involved in the business while attracting necessary growth capital.

IR35 and Personal Service Companies (PSCs)

Following on from similar changes to public-sector bodies in 2017, new IR35 rules will from April 2020 also apply to the private sector. The principal change is that the responsibility for determining employment status and tax collection – and therefore the tax risk – moves from the PSC, as is presently the case, to the business engaging the individual via the PSC. The measure will only apply to medium and large private sector businesses; however the definition of exempt small businesses is not yet known. This change is likely to prove unpopular with UK business.

EIS knowledge-intensive funds

The Government confirmed that it will legislate to reform HMRC approved EIS funds with effect from 6 April 2020.

This follows an announcement in the Autumn 2017 Budget and a consultation in early 2018 concerning the creation of a new EIS fund structure designed to increase the flow of capital to knowledge-intensive companies. Under the proposals, new funds will be required to invest a minimum of 80% of their capital in knowledge-intensive companies. Funds will have two years to invest (half of which must be invested within the first 12 months with the balance being held in cash). Investors will be able to set relief against their income tax liability in the year before the fund closes.

Draft legislation will be published for consultation in summer 2019.

Intangibles

The Government announced a targeted relief (deductions) from 6 April 2019 for the cost of goodwill acquired through the purchase of companies that hold eligible intellectual property.

Separately, the Government will enact new anti-avoidance legislation in 2019 to tax profit from intangible property held by companies in low-tax jurisdictions where the profit is effectively generated through the provision of goods or services in the UK. Under the measures, HMRC will tax the offshore entities directly at 20%. While aimed at the technology sector, and subject to a £10 million UK de minimis sale threshold, it is still unclear whether the measures could, for example, apply to UK based quant fund managers with offshore IP. This should become clear when the draft legislation is published.

Countering profit fragmentation

The Government has confirmed that it will enact legislation preventing UK taxable businesses from avoiding UK tax by arranging for their profits to accrue to offshore entities with lower tax rates. Broadly, the measure is aimed at the diversion of profits to low or no income jurisdictions for tax reasons, where the profit was generated through an individual’s earning capacity in the UK. The draft legislation, which was published on in July 2018, will have effect from 1 April 2019 for corporation tax, and from 6 April 2019 for income tax and class 4 National Insurance contributions.

Limiting the use of R&D tax relief for small and medium-sized enterprises

Legislation will be introduced in Finance Bill 2019 to restrict the amount of payable R&D tax credits (which are popular with tech start-ups) that a qualifying loss-making SME company can receive for a tax year to three times the company’s total PAYE and NICs liability for that year. The Government will consult on the measure, which will apply from 1 April 2020.

Stamp Taxes

The Government announced a consultation for 7 November 2018 on applying stamp duty and stamp duty reserve tax to the market value of unlisted companies where they are transferred at an undervalue or gifted between connected parties. This change could potentially affect a large number of transactions, including pre-sale company restructurings. However, detail is awaited – including whether certain intra-group exemptions remain available.

The Autumn 2018 Budget was uneventful for the most part. We hope that 29 March 2019 will not change this.

Please contact Daniel Lewin, Partner (Tax) if you have any queries regarding this write-up.