As the new UK Government will be formed by the Conservative party with a significant majority, its policies will set the tax agenda for 2020 and the following four years. This article summarises their main proposals.
In Finance Act 2016, the rate for corporation tax for 2020/21 was set at 17%. As this rate has been set in legislation, it is the rate (excluding the UK banking corporation tax surcharge of 8%) that companies must use for their deferred tax calculations for their annual accounts. However, during the election campaign, the Conservative party pledged to set the rate for 2020/21 and the rest of the new parliament at 19%. Therefore, once this change is enacted, businesses will need to revisit their deferred tax calculations.
The Chancellor is expected to stick to the existing plans to introduce restrictions to payable R&D tax credits from April 2020 to reduce the scope for tax avoidance by SMEs. However, Conservatives have pledged to increase the value of the RDEC for larger companies from 12% to 13% and review the project qualifying criteria to establish if it can be widened to include R&D on cloud computing and data. They also made a commitment to increase relief available under the new structures and buildings allowance to 3% a year. Both of these changes are likely to take effect from 1 April 2020, although the new rates may just be introduced from the date of the proposed post-Brexit Budget.
The Conservatives pledged to carry out a ‘fundamental review’ of the business rates system. No desired outcome was stated, other than to reduce the burden on businesses, and no timescale was given for the review. However, they do propose an interim step of further reducing business rates for retail businesses, as well as extending the current discount arrangements to “grassroots music venues, small cinemas and pubs” – precise details of the interim steps are expected to be confirmed in the Budget.
The Conservative party manifesto also confirmed its commitment to introduce a Digital Services Tax (DST) from April 2020. Although a Budget is planned for ‘later’ in February 2020, it is not clear whether or not there will be enough time to finalise the necessary legislation to implement this new tax for the 2020/21 tax year. It is also possible that the tax may yet be abandoned during negotiations for a post-Brexit trade deal with the USA.
The Conservative party manifesto also contained a promise not to raise the rate of VAT during the next parliament.
During the election campaign, all three main parties promised to review the impact that the IR35/off-payroll labour changes for private sector businesses will have on contactors and gig economy workers from April 2020. Given that these changes were longstanding Conservative party policy, it is perhaps unlikely that they will be abandoned completely. However, delaying the changes until 2021 or committing to a ‘post-implementation review’ of their impact may feature in the Budget. Similarly, the outcome of the (disguised remuneration) Loan Charge Review by Sir Amyas Morse is expected to be published either before or at the 2020 Budget. Again, for the Government to abandon this tax enforcement action seems unlikely, but the Chancellor may announce much more flexible payment terms for individuals facing the charge.
The promise to ‘get Brexit done’ was central to the Conservative’s election campaign and they plan to organise a Parliamentary vote (as quickly as possible) to pass the withdrawal deal already negotiated with the EU. If passed, this would mean that the UK would officially leave the EU during 2020 (the intended date is 31 January) with a transitional period operating until 1 January 2021 - ie most operational laws and cross-border arrangements would remain in place until that date. During 2020, the new Government will aim to negotiate a post-Brexit trade deal with the EU that will take effect from 1 January 2021. However, some uncertainty will continue: in the election campaign, the Prime Minister promised not to extend the transition period beyond 1 January 2021 so, theoretically, there may be a ‘no-deal’ Brexit at that point if a trade deal has not been agreed. Alternatively, with a substantial parliamentary majority, an extension to the transition period may be possible if a post-Brexit deal takes longer to agree.
Read more on current cross-border issues:
Cross-border VAT changes within the EU from 1 January 2020
Although the Conservative party has committed to end freedom of movement on Brexit day, under the transitional rules, subject to certain “tougher UK criminality thresholds at the border”, EU citizens would be able to come to the UK to live and work here without any formal application process. If those individuals wish to remain in the UK after 31 December 2020, they can apply for “temporary leave to remain” in the UK which, if granted, will allow them to continue living and working in the UK for 36 months from the date it is granted. From 2021 onwards, the Conservatives plan to introduce a points-based immigration system post-Brexit, but have no targets on numbers.
Despite the NIC changes for individuals, the Conservatives pledged not to increase NIC for employers and, to help small employers, they also plan to increase the NIC Employment Allowance from £3,000 to £4,000 – probably from April 2020.
Employers should be preparing for a significant increase in the National Minimum Wage (NMW) from April 2020. The Conservative party has pledged to increase it in stages to £10.50 over five years – this equate to a 5% increase from April 2020 and each subsequent year of the parliament.
During the election campaign, all the main parties proposed changes to capital gains tax. Although the Conservative party proposals were the least radical, it should be remembered that there are changes already in train from 6 April 2020 to tighten the capital gains tax reliefs available on selling residential property and trigger earlier payment of any capital gains tax due.
The Conservative manifesto did make a pledge to ‘review and reform’ entrepreneurs’ relief (ER) from capital gains tax. It stated that “We also have to recognise that some measures haven’t fully delivered on their objectives": recent research by the independent Institute of Fiscal Studies found that low rates of capital gains tax may not be cost-effective in terms of encouraging business investment. While it is perhaps unlikely that the valuable ER rules will be repealed immediately, there may be some interim changes to the rules announced in the Budget, pending the outcome of a more fundamental review during 2020/21.
The Conservatives intend to raise the annual NIC starting threshold for employees from £8,863 to £12,500 over the next parliament, with an immediate increase to £9,500 from April 2020: this will give a cash saving to employees of £104 (or around £85 taking inflation into account). The rates of NIC are to be frozen for the duration of the new Parliament. The Prime Minister also made an election commitment not to increase income tax rates during the new Parliament.
Past political controversy over pension tax relief perhaps influenced politicians not to make specific commitments on the topic during the election campaign. However, because of the impact the Annual Allowance charge is having on senior NHS clinicians, the Government has already announced temporary measures to ensure that where they take on additional hours, such individuals would not lose out overall. The ‘quick fix’ compensation arrangement announced during the election campaign is unlikely to be sustained for the long term, and a review of the underlying rule is likely to be announced in the Budget as it can trigger tax charges for many workers in the public sector (and private sector).
In common with the other main parties, the Conservatives pledged to maintain the state pension triple lock.
The new Conservative Government intends to introduce a 3% surcharge on Stamp Duty Land Tax for non-UK resident buyers of UK residential property. On tax avoidance, they propose a new package of measures including doubling the maximum prison term to 14 years for individuals convicted of the most serious types of tax fraud and creating a new HMRC Anti-tax Evasion Unit.