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Compliance

UK Budget 2018: A Budget for Britain's Future

Posted on 14 Nov 2018

On 29 October 2018 Philip Hammond presented what was billed as the UK’s last Budget before Brexit. Ten years on from the peak of the financial crisis the mood was optimistic and the message was simple: austerity is coming to an end, the government is investing in the future, but discipline will remain. However, the door was left open for another review in the Spring so we may well get another round of updates before 2019/2020.

The key highlights for the asset management industry are summarised below:

Entrepreneurs’ Relief (ER):

The chancellor resisted calls to abolish ER and reiterated the government’s intention to retain the relief that encourages investment and growth in the economy. However, from April 2019 the minimum qualifying period will be increased to 2 years, and the 5% test will be tightened up to include rights over capital and net assets. How this translates into partnership structures will be the main concern for asset managers as the LLP structure remains the firm favourite in the industry. Additional detail should be provided in the Finance Bill 2019 next week.

Profit fragmentation:

Whilst this measure didn’t feature in the speech it was hidden in the detail reiterating the proposal made last year. From April 2019 the government will introduce targeted legislation that aims to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. The taxable UK profits will be increased to the actual, commercial level. Asset managers are already subject to the Disguised Investment Management Fee (DIMF) legislation that operates in broadly the same way, however these new rules impose a disclosure requirement that could highlight weaknesses in historic structures and further raises the compliance bar for asset managers.

Offshore receipts from intangible property:

From 6 April 2019 new rules will impose a UK income tax charge on non-resident owners of intangible property that generates income referable to the sale of goods or services in the UK. Following a consultation earlier in the year the government is making changes to broaden the income in scope to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties. Asset managers exploiting offshore intangible assets will need to review the legislation carefully to ensure longstanding IP, investment management and distributions agreements are not impacted. More detail will be required before a considered assessment can be made.

Intangible fixed assets regime:

From April 2019 the government will seek to introduce a targeted relief for the cost of goodwill (the amount paid for a business that exceeds the fair value of its individual assets and liabilities) in the acquisition of businesses with eligible intellectual property. This could be an important relief for asset managers seeking to grow through acquisition or seek external capital investment. With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.

Personal Service Companies (IR35):

The restrictions placed on public sector organisations preventing them engaging individuals via personal service companies will be extended to the private sector from April 2020. It is proposed that small organisations will be exempt to minimise administrative burdens whilst support and guidance will be provided to medium and large organisations ahead of implementation. This could have a material impact on asset managers that use IT contractors / consultants imposing additional PAYE requirements and NIC.

Digital Services Tax (DST):

From April 2020 a new 2% tax on the revenues on digital businesses will be introduced targeting social media platforms and search engines. Limited to businesses with global profits in excess of £500m it will apply to revenues from activities that are linked to the participation of UK users, subject to a £25 million per annum allowance. It is acknowledged that both the G20 and OECD are already in discussions to reform this area of taxation so the government will only apply the DST until an appropriate long-term solution is in place. The introduction of this measure perhaps signals a failure in the Diverted Profits Tax (DPT) previously dubbed the ‘Google Tax’ – however the DPT rules still appear to be alive and kicking after they received a few technical amendments today. Asset managers with portfolios containing such online platforms should note the global step change in the taxation of these entities and the digital economy.

Annual Investment Allowance (AIA):

From next year the 100% tax relief available to businesses on the acquisition of certain fixed assets will be temporarily increased from £200k to £1m for two years. This will be offset by the reduction in the capital allowance special rate from 8% to 6% applicable to integral features and certain cars to more closely match average accounts depreciation. Asset managers scheduled to make significant capital investments should ensure they fall within the relief.

Personal Tax Allowances:

The Budget delivers the government’s commitment to increase the personal tax allowance to £12,500 and higher rate threshold to £50,000 in April 2019, a year earlier than planned, cutting taxes for 32 million people.

Trusts:

The government confirmed its intention to publish a consultation on the taxation of trusts in the near future to make the taxation of trusts simpler, fairer and more transparent. Asset managers are reminded that outstanding loans from offshore trust structures that were used as remuneration vehicles will automatically become taxable to income in April 2019 under the disguised remuneration rules.

The next version of the Finance Bill 2019 was released on 7 November 2018 and includes further details on the legislation applicable from April 2019 and other changes previously announced.

Author: Michael Beart (FCA) | Partner | Larkstoke Advisors LLP

About Larkstoke Advisors

Larkstoke Advisors was founded by Michael Beart (FCA), a chartered accountant with over fifteen years’ experience advising the asset management industry on UK tax matters as both a professional advisor and in-house specialist.

Having worked with many of the leading names in the industry, he is equally at home working with entrepreneurial start-ups as he is with FTSE 100 multi-nationals. A technical commentator, he has published work in the AIMA Journal, Bloomberg Law, HFM Week and the Hedge Fund Law Report.

Contact Laven here for more information.